What was Rakesh Jhunjhunwala’s strategy for picking stocks with very high returns?

To the people who followed his portfolio, Rakesh was categorical. “You cannot make money on borrowed knowledge. Please understand what I’m saying and my thought process instead. Let me give you an example. I bought Sterling Holiday Resorts at 75 rupees. The stock immediately went to Rs 120 and now it is languishing at Rs 80. Those poor people have lost money. I personally have a five-year or seven-year time horizon, you haven’t. I have a risk appetite that is much larger than yours. Don’t try and do what I’m doing,” he told the interviewer at ET Now on October 2, 2012.

Consistency is key in the investment world and it comes only with one’s conviction. “Rakesh would never shy away from sharing his stock ideas with others. This is even when most of us, including RK Damani and Nemish Shah, would tell him not to. He would offer stock tips to even those who would come to him at Geoffrey’s, where he would often go to hang out after market hours,” says Rakesh’s trader friend.

Rakesh Jhunjhunwala called himself an open book. He couldn’t have changed his character. He anyway knew that just knowing the stock idea was not enough. When to exit is equally important. The person who has suggested the stock idea will most likely make the smart exit, but he won’t come back to tell you to do the same. This is the reason why investing on borrowed knowledge doesn’t work. Sometimes Rakesh’s views wouldn’t gel with his friends RK Damani’s or Nemish Shah’s, but he would stick to his thought process. He would never get influenced.

Every Jhunjhunwala follower wants to learn how he picks his stock bets. This is what he has to say about it: “Stock market investment cannot be taught. It has to be learnt.” It’s not that he has never discussed his stock-picking mantra. It’s about how well you receive the crux of it – more importantly, how you are going to practise it.

There are six aspects which, according to Jhunjhunwala, should be followed to pick multi-bagger stocks:

Keep an open mind

Be receptive to what the world is showing you. By “keep an open mind’, Rakesh means that one has to observe their surroundings. Some of the great stock ideas come when you least expect it. Your observation about how everyone is using a certain technology, product or service and which listed player is behind it can help you land great stock opportunities.

Opportunity

Second, one needs to assess the market opportunity as to how big an opportunity the company is looking at as its market size grows. The opportunity and market size should move in tandem. This is what provides a long runway for growth. There has to be a big change or a turnaround happening. The greatest wealth is earned when change happens, Rakesh would say. The business model should have entry barriers.

Corporate governance

Corporate governance is about the management and how someone runs their company – their behaviour with their staff, vendors, distributors and others and their behaviour with money. Are they running their business with frugality? One needs to look into this stuff. A hard-working and honest management is important. Rakesh excelled at studying people and betting on them. Why he loved Tata Group stocks was only because of the sheer integrity of the management.

Competitive ability

The company must have something superior in terms of competition against its peers, be it the brand, technology or capital. It should be a market leader.

Valuations

Finally, there is the price at which you are buying it. Even a great company bought at the wrong price (high valuations) will hurt your returns. So, price is important. Learn to value a company. Read valuations.

Constant monitoring

Even though a long-term investor, he would keep monitoring how his portfolio companies were performing. He would often turn up in investor calls to quiz the management about the business prospects or other actions. If he felt the initial thesis was failing or the business model hadn’t turned out the way he anticipated, he would prefer to sell his stakes.

When exactly should one sell an investment? Let’s hear from Rakesh himself: “As far as selling goes, I sell if a better opportunity comes along that will give me more value for money from what I am getting now. I will sell when I feel the stock has peaked or the business opportunity has peaked out. Selling should be an independent decision. It shouldn’t be linked to how the stock market is doing. Don’t flower your weeds and cut your roses. Maine kasam khayi ki nuksaan mein nahi bechunga ki is bullshit (I have sworn that I won’t take a loss and sell – this is bullshit),” Rakesh points out in one of the TV interviews.

Excerpted with permission from The Big Bull of Dalal Street: How Rakesh Jhunjhunwala Made His Fortune, Neil Borate, Aprajita Sharma, and Aditya Kondawar, Penguin India.