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May 15, 2006, 07.

20 PM | Source: CNBC-TV18
Invest money you can forget: Bhansali
Currently, people are exuberant and are buying anything. Every
price is justified on the street. Now is the time to be even more
vigilant about choosing the right stock. Vallabh Bhansali guides you
through the street.
Today, its all about how to go about choosing the right stock. It
seems simple but that's what investing is all about, at the end of
day. Chairman of Enam Financial Consultants, Vallabh Bhansali has
been doyen of our markets for many decades now.
He has distilled his experience of all those years in the market, for a
lay investor and explains, step-by-step, the basic principles of
choosing the right stock. As things go, currently, people are
exuberant and are buying anything. Every price is justified on the
street. Now is the time to be even more vigilant about choosing the
right stock.
Excerpts from an interview given to CNBC-TV18
Q: Do you think investing is a very complex business
because thats where a lot of people stop, they say its not
for me. I can at best go and put money into mutual funds or
is it at some level, it can be simple enough thing if you have
the basic financial knowledge?
A: I would say that it is simple and complex. It depends on your time
and determination to get into the process of investing. Those who
are absolutely clear that they dont have the time, its all right for
them to go to mutual funds.
But for those who enjoys the process and therefore will make the
time, I think its not really more complex then, you know, learning
how to drive a car for example. At a certain level, investing is not
only a profitable proposition, its extremely satisfying, and a rather
simple one.
Q: A lot of investors somehow, dont get the sense of buying
into a business, a stock almost seems like a coupon with a

price tag attached to it. How important is it to realize that at


the end of the day, even if you are buying 100 shares, you
are buying into a basic business? Is that realization very
fundamental?
A: I think it is. I think the fundamental flaw that I find in peoples
thinking is that they always talk that the market is making money.
Actually, the market doesnt make any money. Market is a
marketplace. It is the companies that is really making money and
are you aligned with the company? The moment you think of
aligning with the company, you would start thinking there is a owner
- a shareholder is primarily the owner of the business. Whereas,
most people think of their ownership as an illegitimate kind of
relationship with the company - that while no one is looking, I will
buy some shares and sell it off and get out of it and be very happy
about it.
That is not what investment is about. Investment to me is almost
like a character thing, that you think you deserving everything. You
do not hope to reserve what you do not deserve. And you do not
deserve anything extraordinary unless you have done something
extraordinary. So most people think that I must find the easiest way
to get the most difficult thing, which is disproportionatary returns in
life. I think that doesnt work for me. I dont think that is possible.
Q: But do you find there is enough information going around
in the system? Lot of people seem to say, where will I get all
this complex information from?
A: In todays time, where every information is on the companys
website or the stock exchange's website, that's a poor excuse. The
second part is that a price is always not higher or not lower because
of certain assumptions about it. Typically, a value investor wants to
buy cheap and if something is cheap, there is negative perception
about the whole thing. There are times when the whole market is
negative. That time, investing is the easiest. Also, you must have
conviction, you must do enough homework to realize that what is
being perceived negatively, is not being done correctly. Moving onto
the second step - do you understand time? Now, this is the most
difficult part, that human beings cant handle time. So when I say I
will invest today and hope to make profit after 6-12 months, that is
too long for most people. So that I think is another fundamental
issue with people. They want to see returns, the stock goes up the

next day, they think they have made the right decision. That cannot
work.
Q: Do you set benchmarks for yourself? Is it wise to do that
or do you say that I am buying into this business for the next
2-3 years till the fundamentals of the business change, I will
ride it. Whats the good time parameter to keep in mind, as
a frame of reference when you are buying into a business?
A: First, if I am talking of benchmark, I look at the data and then I
look at the benchmark. What other benchmarks are available? If I
put money in a savings account, Ill get 3%, if I put money in a fixed
income security, I will 6%-7%. So I am trying to beat that return. So
as long as my business is based on a market capitalization, and is
producing a return, which is better than this return, I would want my
profits to run.
The other element that I will have to look at is, is there safety in
doing this? Say for example, the same could happen in a roaring
market like today. It simply means that the safety that you have, in
investing in a market like this, is limited. Are you aware of that risk?
Thats about it, otherwise you could invest anytime. If you have a lot
of safety, you can wait longer. Only if you buy cheap, you can wait
for a long period of time. If you dont buy cheap, most sensible
investors dont want to buy anything unless they think its quite
cheap because they are not in it for a small return.
Q: But whats the right thing - to go in with a preconceived
notion of time or a preconceived notion of what could be the
real value of the business?
A: What Michael Mobius has taught to the world is that, everything
is probabilistic, there is no certainty. So you would start with a
timeframe. You think that this will happen in two years. But even if it
does not happen in two years, maybe it will happen in three years;
maybe it will happen in four-years. Do I still have safety? And thats
the time thing I was talking about. The ability to handle time is very
important in investing.
Q: You are saying leverage is a bit of poison, which can make
you take wrong decisions sometimes?
A: Leverage and investment just cannot go together. Investing is
clearly about how to invest savings and there are enough gurus who

have taught us that you should invest only that money, which you
can forget because you cannot control time. You have an estimate of
visibility of triggers or value emergence. But you have to have the
psychological comfort -that I can wait, that I dont panic
unnecessarily and that after all the world is too uncertain, life is too
uncertain to really be sure that this will happen in two years. Even if
it happens in four years, as long as I am not going to be worse off, it
is alright.
Q: Give some examples, where you might have had 2-3
beggar but you held on and finally you made 7-8 times the
money?
A: Bharat Electronics is probably the only stock, I recommended in
public. This was after 9/11 and the stock was at Rs 65. At Rs 65,
what was the economic proposition? The economic proposition was
in that Rs 65, the company had cash of Rs 40. You could get the
whole business for Rs 25. The P/E was 2.5 times.
It was a globally competitive business, it had a record of growth, it
had very good margins. Now a stock like this, because it was trading
earlier even lower at Rs 65, you start worrying oh I am doubling my
money, I am tripling my money. But if I look at my value
benchmarks, I said 2.5 times is a great business its too cheap. Its
so difficult to build a business like this and therefore you go on, it
doesnt matter. Rs 65 becomes Rs 100, 150 or Rs 300. I just look at
my valuation, I said this valuation is still cheap and so the stock can
go onto Rs 500-Rs 600.
Q: What tells you, that this is a good business to buy into?
A: I think people have this myth about value, growth, brand,
commodity etc. I dont think investment has got anything to do with
it. Investment is clearly about 'when I know that over a period of
time what I bought cheap, will become precious,' you can look at
anything. So I would say that there is something called starting
points and anything could be your starting point. As Peter Lynch
taught, you could look at a great brand, you could look at your wife's
shopping basket and she what she's buying. So it could be a brand,
it could be change in the business, that you read about in the
newspaper. You could find some extraordinary results, you look at a
company that belongs to a prominent business, which has a track
record of creating value for shareholders. So it could be anything as

long as it is cheap. So what you are looking for is a cheap stock. The
moment you look at a cheap stock, you want to test it. So there
could be a starting point, which is cheap but it could be in any of the
categories and then there are the testing points. And the world must
distinguish between the two, that just because you have a good
starting point, you cant go ahead and buy it, you must investigate.
Q: The price must be right otherwise there is no investment?
A: And it right only in relation to its test. So what are the tests?
There is predictability of earnings. You have profitability of business.
You have transparency and management character. You think you
find out whether the company has cash-flows. There are lot of
businesses, which grow but put all that profit back into inventory
and debtors. There are businesses, which will generate the money
but to remain competitive, they have to keep on re-investing. This is
not such a great thing.
So you look at whether the company will release cash for
shareholders. It may not distribute because the business is so good
that they want to re-invest and the classic example was Microsoft. It
had free cash-flow but they never gave dividends for 20 years.
So the starting point is find a cheap stock. It could be any category,
micro-category, good management, bad management etc, these
things dont matter. Then I have my testing points, whether this
business has growth, the management can be trusted reasonably,
that the margins can be expected to be sustained and I have a
certain amount of visibility of business.
Q: But what was the driving force at Rs 25 for Pantaloon?
Were you buying a promise of a business, which would
become manifold in the future, or were you principally
buying the safety of the price at Rs 25?
A: If I were buying only the safety, then there are so many cheap
stocks to be bought. There is no safety in the numbers. For example,
the price could have even been Rs 250. As a lot of people found it
attractive even at Rs 250. You understand the features of the
business. The feature of the retail business is that you buy on credit
and sell on cash. So it doesnt require much capital. You dont have
to own the real estate as long as you chose the real estate correctly.
You look for a management that understands all this and says yes

we know how to locate a store, we know how to buy on credit and


we know how to promote a retail store. Thats about it.
Tags Enam Financial Consultants Vallabh Bhansali value investing
investments stocks mutual funds shareholders fundamental issue
market capitalization Michael Mobius benchmarks valuation Peter
Lynch business brand profit inventory Microsoft dividends cash-flow
credit
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