Why you can draw inspiration from RJ, but shouldn’t copy him

The sudden passing of self-made billionaire investor Rakesh Jhunjhunwala (RJ) at 62 have seen a spate of articles in the media praising his investing prowess. These tributes, from investors who personally knew or closely followed RJ’s investment moves over the years, offer interesting insights on how a young Chartered Accountant starting off with a modest sum of ₹5,000 or so in the mid-eighties, managed to amass a portfolio valued at over ₹31,000 crore currently.

Whenever a star investor like such as RJ passes on, personal finance writers and investors try to distil investing lessons from their career for retail investors to follow. But for me, the main message from the interviews and tributes on RJ is that, while we as retail investors can draw inspiration from him, we would be unwise to believe that we can copy his investment moves to get to his level of wealth.

Leveraged positions

Those acquainted with RJ have said that one of the key methods by which he managed to create a portfolio of over ₹31,000 crore was his audacity and sheer risk-taking ability. In an interview with iThought Advisors, veteran investor and educator PV Subramanyam recalls how he and RJ as young CAs spotted the Tata Power stock trading at a high dividend yield, at about the same time. While Subramanyam bought 50-100 shares of Tata Power to benefit from this, RJ borrowed money to take on a leveraged position amounting to several thousand shares in the same stock. But he was a responsible risk-taker. RJ’s calculated bet was that his dividend receipts from Tata Power would more than cover his interest outgo.

In his interview to Moneycontrol, Ramesh Damani, a close friend of RJ’s recalls that early in his career, when RJ didn’t have much of his own capital to deploy, he wouldn’t hesitate to raise borrowed capital to acquire large positions in the stocks he took a fancy to. But he took on leverage when his market view was bullish and stayed off when it was bearish. These tactical calls would be very difficult for either retail investors or professional fund managers to replicate.

Using borrowed money to build an equity portfolio worked for RJ because of his exceptional ability to gauge market direction and ability to spot winners. For a retail investor with less-honed stock-picking skills, building either a trading or long-term stock portfolio out of leveraged money would be the road to ruin.

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Trading and investing

RJ was one of those rare people in the markets who was equally at ease both trading and investing in stocks. In the eighties and early nineties, RJ would acquire both short and long positions in shares on the Calcutta Stock Exchange. These successful trades generated a sizeable corpus that he later deployed in long-term equity bets.

Damani in his interview remarks on RJ’s uncanny ability to predict bull phases in the Indian markets, whether it was in 2003, 2008 or even recently in March 2020, which made him a profitable trader. He observes, “To be a trader, you have to have an extraordinary ability to understand where the market is going. I think that was a God-given ability he had. The second thing, of course, is that these guys are beasts of the market. Rakesh was 24x7 in the market. He’d go for his morning walk and discuss markets, he’d come to the ring to discuss markets, he would have lunch and discuss markets, he’d go for a drink and discuss markets. Trading is an obsession. It cannot be done in an intellectual manner.”

RJ’s trading mindset and obsession with all things equity played a big role in his success as a long-term investor too. When his bets failed, he would be quick to admit to the mistake, unwind the position and nonchalantly brush off the losses to initiate his next position. When he saw a stock idea working, he wouldn’t hesitate to double, treble or quadruple his holdings at much higher prices.

But very few retail investors can either bring this passion to markets or be adept at both trading and long-term investing. It would be best to decide early in your career what your temperament is best suited to, and to stick to it.

Investors who bought into RJ-stocks such as Delta Corp, DHFL, Jaiprakash Industries or A2Z Infra Engineers and made losses can perhaps vouch for this. While RJ may have bought these stocks as a short-term punt or sold them quickly when they didn’t work, retail investors coat-tailing him would have held on until the damage was done.

Concentrated bets

Along with stock selection and a long-term approach, risk management is an important attribute for retail investors in equities. But details of the equity holdings of RJ and his associates from publicly shareholding data, make it clear that he didn’t adhere to too many rules on portfolio construction or concentration. A Business Line analysis shows that RJ and his associates held 32 stocks with a combined market value of over ₹31,000 crore, based on June shareholding data. Just three stocks Titan Company, Star Health and Metro Brands accounted for nearly 67 per cent of the total value of over ₹31,000 crore, with Titan alone at 35 per cent.

RJ’s portfolio composition indicates significant concentration risks. But owning such a concentrated portfolio would be highly risky for ordinary investors with less conviction and lower hit rates on their stock bets. SEBI after all caps the individual stock exposures in diversified equity funds at 10 per cent and sector exposures at 25 per cent and that would be a good risk management strategy for retail investors to follow too.

Management connect

All storied investors in India and abroad, whether it is RJ or Warren Buffett, have easy access to company managements, which not only helps them gain unique insights into businesses, but also gives them the necessary clout to influence corporate actions, if they so choose. When a shareholder of RJ’s stature seeks a management meeting or poses questions in an investor call, he’s bound to receive a response that a retail investor can seldom hope to glean. In the Indian context, despite SEBI’s stringent insider trading laws, news of impending corporate actions often makes the rounds of the investing community before it gets into the public domain.

Goliath investors such as RJ also have dedicated and highly skilled professional teams that identify possible investment candidates and present them with all the facts they need to take big bets. If you have a full-time job outside of the markets though, this kind of due diligence is difficult to do. Nor can you track markets 24/7 to swoop in on attractive entry or exit points in a stock.

Overall, retail investors can draw inspiration from RJ for his unwavering faith in equities, his passion for equity research, his ability to take both profits and losses in his stride and his sheer audacity in weathering volatility. But the methods he used to build his Rs 31,000 crore portfolio is certainly not for ordinary mortals.