chandrakant sampat Interviews

Guruspeak

Ever thought that taking sound investing decisions is actually a social service to the economy and the nation at large? It was during a chat with India’s leading investment guru Chandrakant Sampat that this point came to the fore.

Taking sound investment decisions and following up with the management on the quality of earnings and productivity ensures that effective utilisation of resources takes place. This is Sampat’s way of seeing that wealth gets created in the economy and that the nation’s resources are well used. In this context, investing becomes a very important aspect for a nation. Also, for individuals sound investing decisions hold the key to prosperity and therefore must be taken seriously. Heady days such as these have a tendency to create euphoria induced blindness that lead to sane people taking wrong decisions and destroying wealth.

Intrinsic value

It is at this time when we can look up to investment gurus and take some lessons from them. Benjamin Graham could easily be the pioneer in building a systematic investment thought. Graham brought management techniques to stock valuation when the market mantra followed by all and sundry was "buy high sell low."

According to Graham, investors should look at investing from a ‘businessman-like’ perspective. This was the same tenet followed by Warren Buffett, who once exclaimed that he was 85% Benjamin Graham. This is how investing differs from gambling or speculation.

For this, investment gurus like Sir John Templeton and Peter Lynch also advocate the need to understand businesses and how they grow. And there are different approaches. For example, Peter Lynch would have a bottom-up approach, where he would isolate sound businesses and work upwards to check for the future growth potential. The search for the investment gurus has always been intrinsic value. Graham puts it succinctly, “Invest based on arithmetic and not optimism.” Investors need to understand business earnings. Incidentally, Graham has been a pioneer of sorts in the field of corporate governance as well.

Varied approaches

“Investing is not a very exciting process. It has been glamourised,” says Bharat Shah, CEO and managing partner, ASK Raymond James, one of India’s leading portfolio management service firms. "It is a discipline and one needs to follow it with rigour”, he adds.

Easily the father of stock valuations, Benjamin Graham articulated elaborate mathematical models to capture the intrinsic value of a company. Graham, through his book, The Intelligent Investor, set out the philosophy of investing and lead to the development of investiment thought. — Benjamin Graham The investment guru’s wisdom and canniness is best displayed in his license that reads “Thrifty.” The guru’s strong consideration for money is best exemplified in the fact that he is only going to bequeath a fraction of his $40+ bn net worth to his children. — Warren Buffett Considered as a pioneer in the mutual fund industry, Bogle has been instrumental in introducing the first S&P 500 index fund-- the Vanguard 500 Index, in 1976. Famed for his a low cost and maintenance fund ever, he rejects “today’s emphasis on witchcraft and mystery” in investing. —John (Jack) Bogle Known as the world’s most exceptional mutual fund manager, Lynch is often referred to as a chameleon, an apt description for the guru’s adaptability to whatever investment style. He has been one of the first pioneers to uncover hidden gems such as Dunkin' Donuts, Pier 1 Imports and Taco Bell. — Peter Lynch More identified as a hedge fund guru, Soros' expertise has far exceeded from currency speculation to a principal investment advisor for the Quantum Fund, which is recognized for having the best performance record of any investment fund in the world over its 26-year history. — George Soros A remarkable pioneer of the global mutual fund industry and a philan-thropist, Templeton has led the charge for teaching investors to explore the world for great investments. Investing overseas was virtually unheard of until investors caught on to Te mpleton’s strategy. In 1987, he founded the $1/4 billion John Templeton Foundation. — John Templeton

While bringing in the rigour, investment gurus develop their own yardstick of ascertaining value. And most of the time, it is based purely on the ability of the company to generate earnings growth over a sustained period of time. Warren Buffett usually looked at the 10 years' corporate history of a public company to invest in that company and would discount the future earnings to arrive at the current intrinsic value.

John Templeton screens for stocks with positive earnings growth over the last 12 months and over the last five-year period. Beyond an overall growth figure, individual investors, he believes, should look at the year-to-year trends, since long-term growth rates can easily mask the variability and risk of the underlying figures.

Lynch, on the other hand, uses several techniques to isolate value. He believes that stock prices cannot deviate long from the level of earnings, so the pattern of earnings growth will help reveal the stability and strength of the company. Ideally, earnings should move up consistently.

He is also a strong advocate of using the simplistic price earnings ratio. Lynch reckons that the price-earnings ratio should be looked at as a relative to its earnings growth rate: companies with better prospects should sell with higher price-earnings ratios, but the ratio between the two can reveal bargains or overvaluations.

A price-earnings ratio of half the level of historical earnings growth is considered attractive, while relative ratios above 2.0 are unattractive. For dividend-paying stocks, Lynch refines this measure by adding the dividend yield to the earnings growth (in other words, the price-earnings ratio divided by the sum of the earnings growth rate and dividend yield). With this modified technique, ratios above 1.0 are considered poor, while ratios below 0.5 are considered attractive.

How much debt is on the balance sheet? A strong balance sheet provides manoeuvering room as the company expands or experiences trouble. Lynch is especially wary of bank debt, which can usually be called in by the bank on demand.

Most importantly, all the gurus advocate the need to know the management, the people behind the company. The values people have and what makes them tick and their commitments. It is important that investors not get carried away by sleek-looking and glib-talking promoters.

Diversification

Harry Markowitz was the guru who formalised and mathematically expressed the need to create a diversified portfolio, while conventional wisdom had already made popular the need to not keep all eggs in one basket. At the same time, investment gurus also believe that over-diversification can create new headaches.

Peter Lynch, in his book, advises, “Do not diversify simply to diversify, particularly if it means less familiarity with the firms. Invest in whatever number of firms is large enough to still allow you to fully research and understand each firm. “

For the need to reduce risks in investing, Buffett, who usually has only a handful of shares in his portfolio, also coined the term “moat”. The moat is “something that gives the company a clear advantage over others and protects it against incursions from the competition”.

On the other hand, Graham uses an example for the term, “margin of safety.” In his seminal book, The Intelligent Investor, he stresses the need to have a safety margin. Modifying the example, we can take a share investment that is yielding 10% earnings. For example, company A is earning Rs 100 per share and is selling in the market at Rs 1,000 per share. If the rate of return on government bonds is 5 , then the share is yielding annually an excess of 5%.

Over a period of ten years, the excess yield will total about 50%, which, in Graham’s opinion, may be enough, if the share investment was wisely chosen in the first place. Of course, the total margin of safety will fluctuate depending upon the quality of the share investment.

Graham believes that with a diversified portfolio of 20 or more representative share investments, the 'margin of error' approach will, over time, produce satisfactory results.

Timing the market

Several investors usually wait for the right time to buy or sell and then keep waiting for that window of opportunity to emerge. Several studies have shown that it is truly difficult to time the market. One of the most famous studies was done by Ibbotson Associates and covered a 40-year period considering the US equity markets.

What they found was that a fully invested $1,000 became $86,550, but if you missed the best 1% of the time, you ended up with $4,492. Another study by the University of Michigan covering 30 years confirmed that being out of the market for the best 1.2% of the time, profits lost was 95%.

The reality, gurus reckon, is that the market tends to go up in short bursts, which usually happen before the timers can jump back in. No one rings a bell when the market is ready to reverse direction. According to the gurus, the biggest risk of market timing is being out of the market at the wrong time. Market fluctuations don’t cause loss; investors cause loss when they panic and sell.

This can be best exemplified by Sir John Templeton who bought $10,000 worth shares in all the companies listed on the New York Stock Exchange that were trading below $1, when it was announced that Hitler had invaded Poland. There were 104 such companies available. Panic set in and prices tumbled. Later on, when sanity came around, Templeton made money in 100 of the 104 companies, selling them at around $40,000.

It is this need to not get confused by hype and hoopla around the market that makes Sir John a legend. He beat the street again when he sold out technology shares in 1999-00 when rest of the world was busy buying them. Templeton jocularly says in many an interview, “I have put these philosophies into a simple statement: help people. When people are desperately trying to sell, help them and buy. When people are enthusiastically trying to buy, help them and sell.”

The other key investment philosophy of Sir John is his emphasis on flexibility. This, Sir John built over by years of knowledge building and consistent analysis and review. Flexibility is a defining characteristic of George Soros; the whole idea is to be mentally alert and neither be complacent nor be wedded psychologically to the stocks and securities in one's portfolio.

Investing, therefore, requires a level of alertness and consistent knowledge building as opposed to rumour mongering or tip-based speculation. While the latter is a dangerous activity investing is about wealth creation and nation building.

In the words of Peter Lynch, “When you invest in stocks, you have to have a basic faith in human nature, in capitalism, in the country at large, and in future prosperity in general.”

Chandrakant sampat Rediff Interview

Legendary Indian investor Chandrakant Sampat fears that the rapid change in technology may spell doom for the capital markets in a few years.

But two other astute investors from Generation Next beg to differ. Their view, essentially, is that as long as capitalism survives capital markets can never die.
Chandrakant Sampat is known to be one of the most successful investors in India [ Images ]. Starting  from scratch, Sampat's obsession with wealth, coupled with a strong dose of patience and precision, has helped him build a fortune in the Indian share market. But these days, he isn't touching equities. Not that he is tired of making  money. "The risks are too high," says Sampat.
And he is not referring to the Sensex plunging below the 3000 mark, or corporate earnings deteriorating over the next quarter. He is worried about something more  substantial. Something most people would not even care to think about at this point of time.
His pessimism arises from two counts. The first one relates to the state of the Indian economy and thereby, the fortunes of the corporate sector. The second and the more scary one has to do with global trends in business.
Sampat's concerns about the Indian economy relate to the growing fiscal deficit. If it continues to compound at the rate of 11 per cent per annum (as has been the case in the past decade), it will cumulate to -- hold your breath -- about $1 trillion by 2010.
The other concern is with the state of the Indian corporate sector. With 80 per cent of the 6,000-odd companies listed on the stock exchanges having negative EVA (economic value added), there is a paucity of worthwhile investment avenues, he feels.
The bigger bombshell is this. The accelerating rate of innovation threatens the survival of capital markets.
According to Sampat and several other eminent thinkers and researchers globally, innovation is resulting in shorter business cycles which means shorter life-spans for companies.
In order to survive in the rapidly innovating world, companies will have to generate cash flows to compensate for the high-risk of being thrown out of business quickly.
In other words, they will have to make enough money in order to ensure that they are able to establish themselves all over again in case there is any development that radically alters the way their business is conducted.
This, he says, will not be restricted to the technology sector alone.
The kinds of technology that are likely to come in the next few years may bring about changes beyond one's imagination right now.
This phenomenon, Sampat says, will only mean that there will be lesser or no scope for capital formation. The moot question then is, can capital markets survive?
If money continuously moves in favour of the in-thing, what will happen to obsolete businesses or companies that are stuck with obsolete technology? What happens to the $25 trillion of market capitalisation that global markets boast of today?
Sampat is 74, and has been managing investments for nearly five decades. Given his vast experience and spectacular success with stocks, not even the best fund manager can dismiss his argument without giving it a second thought. For, in a domain that is half science and half art, experience really counts.
But Sampat says the rules of the game are changing. "Experience is not an asset. The future is going to be entirely different and the past can provide little clue about the future," he states point blank.
Having said that, he refuses to provide any cue on what investors can do to get the best out of stocks over the long-term. Instead, he touches upon some scientific theories and concepts that can be applied to the world of finance to fathom out the mystery.
What investors should do
America is way ahead of India when it comes to technology. Not surprisingly, a lot of serious thought has gone behind formulating investment strategies for the technology business, and ways to cope with innovation.
In the middle of the technology boom in December 2000, Michal J Mauboussin, investment strategist at CSFB, had prepared a report on ‘innovation and markets.'
The report observed that economic long waves -- economic booms that result from the launch of general purpose technologies -- are coming at faster and faster rates, suggesting that industry and product life cycles are shortening.
As a consequence, corporate longevity is on the wane. The average life of a company in the S&P today is less than 15 years; dramatically less than half of that a century ago. The declining competitive advantage periods, even as economic returns for the market leaders in knowledge industries soar, meant that traditional multiple analysis was useless.
Mauboussin said: "An accelerating rate of innovation shakes the investing process to its very roots. It forces us to revisit deeply-held beliefs about portfolio diversification, appropriate portfolio turnover, sustainable competitive advantage, competitive strategy analysis, and valuation metrics."
As part of the overall strategy to deal with innovation, the report pointed to some general steps as well as specific recommendations for stock picking.
The general steps included:
Re-assess diversification: Here is the conundrum. The increase in company-specific volatility suggests that a portfolio must be larger to be fully diversified than in the past.
On the other hand there appears to be a higher incidence of winner-take-most outcomes in various industries. In which case you must concentrate your bets on the winner. Balancing diversification with winner-take-most markets is a major challenge.
Update valuation tools: Our accounting system was essentially designed 500 years ago to track the movement of physical goods.
It is grossly inadequate to reflect today's economic realities, which include a surge in intangibles, employee stock options, and greater real option value. Applying historical P/Es to the today's market in nonsensical.
This is by no means a justification for valuations. It is simply to stress that investors cannot intelligently judge current circumstances with outdated tools.
Update mental models: Most investors grew up in a world dominated by tangible capital. The world is rapidly evolving to one based on intangible capital.
While the laws of economics have by and large not been repealed, it is important to recognise that properties and characteristics of intangible capital are different from tangible capital.
Accordingly, investors need to update mental models to deal with the new sources and means of value creation.
The report suggested the following steps for individual stock picking:
Avoid the twilight: It is often hard for market leaders to stay on top for long since there are a number of factors working against them.
First, the stock market tends to build lofty expectations for growth and earnings. Market leaders feel the pressure to deliver against those expectations and hence tend to rely heavily (and perhaps too long) on their current technology.
Second, many innovations come from small companies with limited bureaucracies and a strong mission. This is not to say that market leaders cannot stay on top. But for that its managers have to be hugely adaptive.
Furthermore, since stock prices react to changes in expectations, there must be room for upward revisions. Essentially, it is important to be wary of current market leaders, especially those with sizeable market capitalisations. These companies are often the most vulnerable to future innovation.
Find the future: Investors must isolate those companies that represent the next generation. Here, the focus is on finding the next disruptive technology. We like the strategy that Geoff Moore and his co-author suggest in the Gorilla Game.
They recommend owning all companies that are potential winners in the gorilla game (winner in the winner-take-most market) and paring back all holdings, except the gorilla as it emerges.

Chandrakant sampat Interview  at capitalideas online

Starting almost from scratch, simply by picking stocks and companies for investment, Chandrakant Sampat has amassed an enormous fortune. He is often referred to as guru, at least by all of us here at \'Capital Ideas Online\'.

    A fitness freak at 70, his daily routine includes running a mile a day "in less than 8 minutes" he hastens to add. As if that is not enough, he goes and pumps iron at the Hindu Gymkhana, after that \'8 minute\' ordeal. Gulp!

    He comes across as being obsessed with money making, but don\'t be fooled by that façade, he is amongst the most objective and emotionally detached persons you are likely to meet in a life time. And that includes detachment with money. His emotional intelligence especially his ability to defer gratification is probably his most important strength. He leads a spartan lifestyle, usually travels by \'bus\' (public transport), and doesn\'t bother to own an office. "All you need is a cheque book and a pen", he says.

    An autodidact, he is openly abhorrent of the educational system in this country, and is often cited as saying "knowledge is that which liberates and not captivates". That in fact is a translation of one of the shlokas from the great Indian epic, \'The Bhagwad Geeta\', so many of which he recites verbatim. "Markets and mistakes are the best education. The conventional education just closes the mind", he declares.

    The one man who has had a lasting impression on him is none other than the greatest management theorist of all time, Peter F. Drucker. "If we achieve profit at the cost of downgrading or not innovating, they aren\'t profit. We\'re destroying capital. On the other hand if we continue to improve productivity of all key resources and our innovative standing, we are going to be profitable. Not today but tomorrow. In looking at knowledge applied to human work as the source of wealth, we also see the function of the economic organization", he resonates Drucker. Taking a clue from Drucker, every company is measured on a rigorous scale of productivity and innovation before forming a part of his portfolio. And it just doesn\'t end there. Every constituent in his portfolio is continuously challenged. Any stock that fails to measure up well against his metric, is given the boot. He gets every rupee to sweat for him.

    He seeks continuity amidst discontinuity and chaos. "Coke and Gillette have been around for many many years, and they are likely to be around for many more. I can\'t say that with any degree of certainty for technology, where the rate of obsolescence is very fast, where things change at warp speed". He is inclined to invest in businesses with sustainable cash flows, which he calls as \'The Inevitables\'.

    His favorite quote, "No one is resource poor. We are all imagination-poor. We have no courage to dream" - Professor C. K. Prahlad. With evangelistic zeal he tells anybody who cares to listen, "De-bureaucratize the whole process of Foreign Direct Investments (FDIs) with only one condition, the Multinationals who seek entry into this country must get themselves listed on the Indian bourses. Imagine Microsoft India Ltd., Coca Cola India Ltd., Intel India Ltd., being traded here! Not only will this bring in US$ 80 billion of FDIs annually, but the stakeholder wealth/capitalism that ensues will actuate a virtuous circle where ideas create wealth, wealth creates consumption, consumption creates new ideas, new ideas create new wealth…"

"To be a good investor all one has to do is dream", he muses.

Chandrakant Sampat has been called:

India\'s Best Investor(s) (Business India)

...at 70 amongst the biggest and most respected investors in Mumbai… (Sucheta Dalal, Indian Express)

He can be reached at sampat@capitalideasonline.com

Chandrakant sampat Interview at The Hindu Business Line

Mumbai, Sept. 21 Surrounded by books and periodicals at his Worli apartment bedroom, Chandrakant Sampat hardly looks like one of the most successful investors in the country. But they don’t call him “The Warren Buffett of India” for nothing. Starting from scratch after quitting his family business in 1955, he has been investing in equity for more than four decades, carefully picking stocks of companies like HUL and Nestle.

He has built a massive fortune and now has just 30 per cent of his money in equities. “There was a time when I was 70 per cent into the (equities) market,” he says, shaking his head. “Times have changed.” Of late, the veteran has turned bearish and has put most of his money into cash and cash equivalents.

How have the times changed? Globalisation makes the difference, he says. The mid-fifties, when he started investing, was the ideal situation; the capital market was ruled by one entity, the Controller of Capital Issues. “He decided what price the company should go public; if a foreign company wanted to be operational in our country, they had to share their equity with the public. And there were no merchant bankers. Investing was very simple then,” he reminisces.

minimal living

Chandrakant Sampat defies the archetypical image of the really well heeled. He shares the spartan apartment opposite Mahalaxmi Temple, near Haji Ali, with his wife; his daughter is away in America. He takes a BEST bus everyday to his Nariman Point office and is a fitness freak. If you are around Marine Drive sometime mid-afternoon, you can spot an eighty-going-on-sixty-year-old jogging! He also pumps iron, does a bit of yoga and then continues his favourite pastime … reading.

And, he follows a very simple diet. “I have not eaten sugar, fatty foods or salts in the last 50 years! I just have my salads, bananas and sprouts”. But being a Gujarati, doesn’t he miss the good ol’ Gujju food? “I pity those who have to eat that everyday!” he chuckles.

For a man who has been active in capital markets for more than half a century, Chandrakant Sampat seems to hate them now. “When Tony Blair stepped down as the Prime Minister, he remarked that if asked ten years back who were the real terrorists, he would say the Irish. But now he’d say Al-Qaeda. If you had asked me a while back I would have said Al-Qaeda too; but now, I would say the real terrorists are the financial markets”. Authority without responsibility equals terrorism, he asserts.

Golden rules

What are Chandrakant “guru” Sampat’s secret to good investing? Pat comes the answer: Invest in a business you understand, the company should have either zero or very little debt, the share should be available at a P/E ratio of 13 to 14 times the current year’s earnings and lastly, it should be available between 3.5 and four per cent yield. “It is that simple!” he says. This is all he does, he says, no more research. Follow these golden rules, and you can be as good as him, he concludes.