Masterclass with Super Investors
Ramesh Damani is a veteran broker at BSE. He is an investor, investing in the Indian and US stock markets, primarily through his proprietary portfolio. He is also the Chairman of Avenue Supermarts Ltd. (DMart). Let’s now see what the author has extracted from his interaction:
Ramesh Damani’s early life:
Ramesh Damani was born in the city of Hyderabad and was the son of a stock market investor since the 1960s. Since the early days of his childhood, he developed the habit of reading the international press. He went to California for his MBA in the year 1977.
Ramesh Damani shares an interesting story of how his father’s interest in the stock market in such early days (in the 1960s Indian stock market was barely recognized). In the year 1977, George Fernandes, the Industry Minister back then, passed a law that MNC companies need to dilute their stake, i.e., become listed entities in order to do business in India. This led to many companies like Nestle, Colgate, Glaxo, etc., diluting their stake to the Indian investors at very low prices as there was not enough liquidity at that time period. This got Damani’s father rope in a good quantity of these MNCs at relatively lower prices.
So how did Ramesh Damani start investing in the Stock Market?
Damani once got a call from his father, telling him that he would receive USD 10,000 (INR 80,000 as per the conversion rate during that time) on one condition that he had to invest the entire amount in the US stock markets. Additionally, he was told that if he lost the money there would be no punishment for the same, while in case he earned, he would be allowed to keep the entire amount. This was a win-win for Damani. This push introduced him to the world of stock markets and prepared him for his journey to Dalal Street.
But the going was not that simple. In about six months into his investment career, Damani is said to have lost the entire USD 10,000. This was despite the fact that the US stock market was in a bull run. This made him realize the first mistake, never let formal education (MBA in his case) lure you into believing that you can win the stock market game.
In 1988, Damani came back to India with his wife and son and became a member of BSE. In those days, a BSE membership used to cost about 6-7 Lakhs. However, for Damani, who was living the mechanical life of a coder, this was a small cost in order to change his life.
The transition of Ramesh Damani from a broker to an investor:
This was because of the fact that brokers during that time earned a mere 1-1.5% brokerage, while proprietary investors like Rakesh Jhunjhunwala, Radhakrishna Damani, and Nimish Shah (who all were his friends) were making a fortune with a 100-200% returns.
As an investor, Damani had some serious stock gains in Infosys (500x) and CMC Ltd (40x). Both these investments were possible as Damani has a tech background (as he was a coder in the US) and hence understood the value of technology companies, especially the Indian outsourcing market.
Ramesh Damani's first big investment- Infosys
Damani reveals that though he was confident of the Indian IT story and Infosys’ fundamentals, he could not bet a huge amount. However, the success of Infosys, which went up 500x, made him realize the importance of betting big. He rectified the mistake in CMC Ltd. where he bought a huge stake in the company which rose from mere ₹20 to ₹800 in just a year.
When and why did he sell Infosys?
Damani sold Infosys in the year 2000. He accepts that he is very skilled in picking the top and the bottom of the markets. He was able to recognize that the bull market was over or nearing its peak and hence was able to exit at 8000-10000 levels which were near its high of 13,000 in that year. However, he cautions investors of one thing. In a bull market, valuation (PE ratio, etc.) should seldom be a reason for selling a stock. Infosys at 8000 was trading at a PE of 70-80x, however, still it went to 13,000.
What is his portfolio construction strategy?
Damani is not focused on any theoretical way of portfolio construction. He accepts that when the tech boom ended in the year 2000, 95% of his portfolio was allocated to tech stocks.
Now he reveals that his portfolio construction strategy changed post -2000. He looked for mega themes. Therefore, post the end of the bear market in the year 2003 he went to load up McDowell and United Breweries and some PSU stocks. He was less concerned about the PE of the stocks he bought, but rather valued it via looking at the current market cap of the stock and the market size opportunity.
How did he handle the urge to sell a 100x stock?
For this, Damani points out a simple hack, “Look at the market size of the opportunity”. In the year 2003, you could buy 10-20% of the liquor industry in 100 cr or two flats in NCPA in Mumbai.
Which one was better?
He says, “A true fundamentalist will figure the equation out, without even knowing the time frame.” This means that a fundamental investor might not know the timing of the Indian liquor industry growing to the size of the US or UK. However, he/she can guess the opportunity size and if it is big enough, it commands heavy investment.
Another thing that has helped Damani a lot is having a good network of people. This helped him build conviction in many of his own stock picks.
How does he generate stock ideas?
Well, Damani does not use screeners, etc. However, he reads a lot which helps him understand and find mega trends. He advises us to read Financial Times or the Wall Street Journal. In blogs, he recommends thebrowser.com and longform.org. He typically looks for companies under the 5000-crore market cap.
He not only analyses and tracks the Indian companies, but would also compare them with their foreign parent or competitors. He also reads about 100 annual reports in a year.
He tries to meet at least one manager in a month. These are the management of companies that he is researching about or holds some position. He analyzes the body language of the management and checks the credibility by looking at the history of their promises and actual deliveries. He also judges the management on the basis of how they talk when the stock market is up and how they respond to investor queries when the stock is in a downtrend. He likes that management who have hunger and passion for building businesses.
When does he sell stock?
There are two times when he sells a stock:
- When he thinks that the bull market is getting over.
- When the valuations are extreme.
He explains a disciplined approach to selling. He was propagated by legendary investor Chandrakant Sampat. He says, fixing a period from today by which you feel that the market is going to reverse its trend, i.e. it is going to fall. Say, six weeks from now; he will sell 1/6, i.e. ~ 15% of the total position in the stock (which is either overvalued or wants to exit anyways as the market is turning) per week. Also, fix a time to sell. Say, every Wednesday at 10:15 am. This will help to get over the bias of timing the market.
The same is true in case you want to start buying post a bear market.
A good method to recognize the top and bottom in a market is by looking at how the stock price is reacting to the news.
- In a bull market, even negative news will lead to higher stock prices.
- In a bear market, even very positive news will lead to lower stock prices.
The catch here is to look at a group of selected stocks, rather than looking at the index on the whole.
What is his advice to new investors?
- Don’t take leverage.
- Save about 20 Lakhs by the age of 30 and start investing by this age. Concentrate on doubling money every 3-4 years (18-24% CAGR). This will make you wealthy.
- Read a lot. Every successful value investor reads a lot. Damani himself devotes 4-6 hours each day to reading. Try to become a little smarter each day.
- Interact with a group of like-minded people. Networking plays a huge role in long term wealth creation.