How To Invest - Raamdeo Agrawal

Notes from “How to Invest”, Interview
Series by Shri. Raamdeo Agrawal to

Bloomberg Quint
Venkatesh Jayaraman (@VenkateshJayar2)
Please visit my landing page https://www.linkedin.com/pulse/my-notes-
compilation-value-investing-venkatesh-jayaraman/ for more such
presentations, notes and compilations on topics related to Personal
finance and Value Investing.
DISCLAIMER
• Ignore any script names…these companies are not investment
recommendations from me nor Mr. Raamdeo Agrawal
• Focus on picking the concepts and bigger ideas, that will help in your
Investment learnings/Journey
• Rather than fish, focus on how the fish is being netted
Contents
HOW TO INVEST IN EQUITIES – SERIES 1: POWER OF FOCUS ........................................................ 1
HOW TO INVEST IN EQUITIES – SERIES 2: POWER OF COMPOUNDING ........................................ 7
HOW TO INVEST IN EQUITIES – SERIES 3: POWER OF QUALITY ...................................................14
HOW TO INVEST IN EQUITIES – SERIES 4: POWER OF PRICE ........................................................19
HOW TO INVEST IN EQUITIES – SERIES 5: POWER OF VALUE MIGRATION ..................................24
HOW TO INVEST IN EQUITIES – SERIES 1: POWER OF FOCUS

Date : 17th October, 2017
Location / Channel : Bloomberg Quint
URL / Source : https://www.youtube.com/watch?v=ZN9jlWIrOxw
Duration: Approx. 51 minutes
‘Best performance stock in the 1 year’ measures the price performance. Investors don’t know what
the prices is going to do. The stock does not know that we brought it. Focus on value and change
in price is reflection of value. Don’t focus on price, instead chase value. Change in value is reflected
by change in price. Our work is to figure out companies that have value X today and 10x, 100X in
a couple of years. Price is what you pay, and value is what you get. World is busy looking at the
prices very few guys focus on value. Stock market is a funny place where you can buy Rs.100 worth
@VenkateshJayar2 Page 1 of 30
stock for Rs.5 or sell an Rs.5 item for Rs.100. Maximum buy for Rs.60 and definitely not more than
Rs.100. To do this investor must follow certain principles. There could be different investment
philosophies Value or growth or penny stock… all are focused on identifying value or gap between
price and value. Price is everywhere, but value needs to be figured out. There are various ways to
value a company. MOSL uses QGLP. Some uses insider information and others do side car
investing. Irrespective of style of the game is fining the value for the price.
Q: Why is focus so important?

Understanding value of a company is very important. How to understand value? But there are
around 4000 companies in the market. Getting value of even 100 companies is also tough. One
can find it somewhere, but might not go deep enough. We have to beat the market. Market
continuously price what is comes know. We have to be ahead of the market. This is possibly one
by going deeper into the particular company. We can go deeply into a very few companies. In stock
market there are very few good or great companies. Times is the best friend of good companies
and equally big enemy of bad companies. Infosys can be seen as an example of good company
(6000 times since 1993) and Kingfisher as bad company in this context. So, it is important to focus
on a very few companies and know very deeply about it to the extent that after the management
we are the ones knowing enough about the company.
For those few great companies, we must go deep and understand about it to the extend, that after
management we must be the persons who know most about the company.
Q: How do you know if a company is great?

Business are meant for making money. It is a money making or cash flow machine. Business are
interaction of capital provided by outsider and the entrepreneurship provided by management.
These two things come together to exploit a business idea or opportunity. If it is successful, then
the magic happens. If they are not successful, then the magic happens in reverse side.
Figure out which company is going to make lot more money. Based on evidence of past (5 year or
10-year record). Look at data and understand the business and management competence.
Business are of three types i.e. Good, Great and Gruesome. This classification was from Berkshire
Hathaway Annual Report of 2007 (Page 6-7). This is the best line written ever. This must be
downloaded and read atleast 50 times. Every time you read, we get some takeaway. Those two
pages are amazing.
The first thing is figure out the company is good or bad. Don’t look at the price, it comes last. But
people start with price, which is the whole problem. First assess the value. This starts from the
assessment of the underlying quality of business.
• Great business grow at 25, 30%. They virtually need no capital. E.g. Google, Microsoft,
Nestle, Indigo, Asian Paints etc. Such companies are only 10% of the index i.e. 400-500
companies.
• Good business grow well, but need capital.
• The remaining 3500 companies are gruesome. 90% of companies are bad for long term
investors.
At the next level figure out the quality of management of these 400-500 companies. List this, we
pass different filters to assess the value of the company.
Power of focus: Don’t have a portfolio of 100 stocks. Have a focused set of few stocks. In 1995 RA
used to have around 225 companies for his 10 crore portfolio. After interaction with Buffet his life
changed. He also read the book “Warren Buffer Portfolio” and all his annual letters. After this the
first thing that RA did was to clean up his portfolio form 225 stocks to 15 stocks. Earlier these 225
stocks was tracked in 4 sheets of excel. By the time he was in the 2nd sheet, he was mentally tired
and never completed all the four sheets. One needs to have a few companies possible. Some old
investors have only 3-4 companies in their portfolio.
If it was his money, RA would go only for 4-5 stocks. But using client money, he has to get the
power of diversification. Beyond 15 stocks there is no benefit of diversification. 15 stocks 92% of
diversification and any further increase give only incremental benefits (But draw huge amount
time All over the world the rich guys are one stock guys. Only Buffett has a portfolio of companies
and businesses. (My additions: RA quotes Amazon, Facebook as one stock guys. But Anchor diverts
saying that those are business)
Q: How to identify a great stock at the earlier stages and invest a good % of our money? How could
one know about HDFC in the early stages and make it a part of the focused portfolio?
HDFC is the easiest case. In 1996 the entire bank was available for less than 1000 crores. RA had
brought a good number of shares for Rs.40. Identifying the amount of allocation is the trick.
Everyone needs to find their way, for MOSL it is QGLP. When buying such stocks in the early stages
one may not find too many friends and we feel lonely. All will discourage your pick. That is the
reason why the stock would be so cheap. If people know it is good, then more people buy the
stocks and bid it up. The key is that you know something about the business or management that
others don’t know. The business is known to everyone but the competence of management is the
biggest dark horse.
Q: If people had a high concentration on Pharma, the portfolio would have collapsed. How would
focused portfolio strategy help in this scenario?
Such a portfolio could have been built at the peak of the pharma book. If the portfolio was built
10 years back, then it would have gone up by 200 times before coming down by 30%. After such
a correction also, investors have money to the extent of 20 times. This appears to be a hypothetical
question to dig answers.
Q: How do you hold on to your stocks for a long time – When every other new idea sounds just as
promising as the stocks that one hold?
The question is of having 10 stocks in a portfolio, then there is a new idea which is equally
promising.
We spend almost 90% of our time on stocks outside our portfolio. First thing is to have a portfolio
goal i.e. Make 25% for the next 3 years (Double the money in 3 years). If the portfolio itself is
promising, do not fish for new stocks. But if some terrific stock is available at a crazy prize, then
you must find some money within your portfolio to buy that stock. Despite all the good things…
one or two ideas are always way out. Liquidate them to invest in the new idea. In the case of MOSL
35 portfolio, there is maximum 25 stocks to serve as buffer for additional stocks. Finding the stocks
is not a issue, but finding the money is.
Q: RA is underweight of economy facing stocks. What if the cycle turns?

We are extremely focused on what we do. His goal is 25% and the portfolio should have that
potential. Can’t believe that because economy turns off his portfolio gets bypassed. Good business
may have two bad years out of 10 years. That is the kind of business that MOSL has in its portfolio.
Bad business are good 3 years and bad for remaining 7 years. Those kinds of stocks are to be
avoided. In a good economy every tom and dick will do good. Buy stocks that will still do good in a
bad economy. That is a good business. Cyclical companies don’t get the valuation that a secular
company gets.
(Not clear what the viewer means by economy facing stocks… Construction company?)
Q: Is the value of some of the NBFC a concern?

We don’t want bad quality NBFC. We want good ones with terrific management. But the good
ones are pricey. There is a value migration from PSU to private sector. Economy is growing at 7%
and banks are growing at 12-14%. Imagine the opportunity when the 2/3rd market guy becomes
1/3rd. For people who can perform, the opportunities are very high. This is not for 1 or 2 years, but
a decadal opportunity. In the current situation high growth of 1 or 2 years is priced. But the growth
of even 3 years is not priced. In focused investing the focus should be on a good company and not
bad ones. In good quality secular companies, in case of change in tide, the investor has lot of time
to pull out money. It does not drastically come down. If the expected growth does not happen,
sell it and pick the next stock from your list. Churn is unavoidable. Out of 20-30 companies, 5-6
ideas turn out to be wrong and will go out.
Q: What is the next value migration according to you and how could one benefit financially from
that?
Value migration is a very powerful theme. Try to understand about it from YouTube videos, listen
for 30 minutes and you are the master. Value Migration is the business moving from outdated
model to a new one (or new technology). A few examples:
• Wired to Wireless phone
• Public to private banks
• Software development moves from Boston to Bangalore
• India after US has the largest number of FDA approved centres
The guys who are masters and identify early will make a lot of money. The main purpose of
migration is for better margins. If the margin is same for Bangalore and Boston, why would it be
outsourced. Such a migration is currently happening in the financial sector, i.e. State-owned banks
giving way to NBFC and private sector banks. This is a decadal opportunity. HDFC has a share of
6% and SBI has around 22%. If these switches, the opportunity is huge. Similar situation happening
in telecom also. BSNL used to have 7000-8000 crore profit. This place was taken by Airtel. Now
another level of migration is happening from cellular to IP based. If you are right in your call that
a particular company is a disruptive and going to make money, go and buy some.
Q: What is the general portfolio strategy for a small retail investor. How many stocks should one
have in his portfolio. What should be one maximum allocation towards a stock in his portfolio?
Small investors have a lot of options. From 1987 to 1994 investing was done without knowing
anything. But RA was thinking that he knew everything. Apart from passion and information, what
is needed is the framework. One may have all carpentry items but to make a chair, craftsmen skill
is required to make a chair. So we need to get the right frame work. Try the framework in a few
stocks. Unless you feel like putting at least 10% of your portfolio in a stock, don’t invest. Pick up
10 stocks and allot 10% for each stock. Build you skill set to have the confidence to put 10% of the
portfolio money in a single stock and then monitor it.
If you are successful, this 10% will become 15-20%. This approach is much different from starting
with 2% and gradually increasing the allocation. Start with 10% on day one. A similar case with
Buffet when he had invested around 40% in a single stock. RA never started more than 2-3% in
any stock. But because of growth it increased to 15-20%. Mind tend to focus where the allocation
is more. If a person has 100 crores and investing a token amount of 25 lakhs will not make any
different even if the investment grows. Because of the high allocation, mind will push you to get
deeper into the stock. Maintaining this discipline is very important. You may get 1 or 2
punishments.
Q: Based on Margin of Safety, how do you decide when to exit a stock partially or completely?
Selling part is not a big deal. There are 2-3 hard core principles in selling.
1) You are fundamentally wrong. This is difficult to accept and many people don’t. But when
the stock goes down drastically market will make us accept 😊. It is a situation where all
facts have gone wrong, many things have drastically changed in 6 months. That situation
we have to correct the portfolio.
2) Some changes in the company in the form of diversification that was not anticipated. They
put 100-200% capital in a new venture.
3) Portfolio goal is 25% and if the stock runs down to such a level, that is almost impossible
to get 25% then start cutting the allocation and move to another new stock. This is not the
same in ever case. If the growth is at 30-40% and the stock is very expensive then RA still
sticks to that stock. Remember not to come in front of a speeding car. India is in such a
condition. Don’t come in front of equity markets, it will kill you if you try too much timing.
Q: This speed will continue irrespective of what happens in political front?

Politics is a separate altogether and if the company is showing growth everything will fall in place.
For one seller there will be 10 buyers. Earlier India had the scare of foreign selling. But now these
are balanced by DII buying. We are entirely in different times. Don’t care about who is buying or
selling. There is a buyer for every seller and vice versa. Figure out where is the value and which
company is creating more value. If the company is broken and not making the money, RA does not
care even if the whole world wants to buy it.
Q: What are the five must screen criteria for selecting investment stocks?
Key financial ratios from the 3 financial statements. Look at the last 10 years and until date. This
will give a impression of how the company has conducted itself. Does it have any unique selling
proposition and advantage? That advantages must be reflected on ROC. If some company is
earning 30% year on year, then they must be doing something unusual. Start building knowledge
about the company:
• What are its raw materials?
• what it does?
• Competition - How would the competition be? are the competitors Chinese?
• Size of the opportunity
o Is it a growing of shrinking opportunity?
o Is it a global or local opportunity?
o If the business is going to be bigger and larger?
• Figure out what is going to happen in the next 15-20 years
• Would there be substitution? – The five forces come into picture
In liquor business people are not going to drunk digitally. No substitute for liquor so far. In such an
unchallenged territory are they doing well? Finally build your projection for the next 3, 4 or 10
years. Based on the projection build the value in mind. Would the company make a Lakh crore by
that time? Is that company available now for 2000-3000 crores or 10000 crores. After studying
the company well allocate 10% of your portfolio and allow the money to grow well.
Q: How to select the right AMC?
Look at the investment philosophy or the fund manager. See their presentation and are you in
agreement to what they say? All are smart in talking these days, but that is not going to help. See
how he has performed in the past 3-5 years. If the performance is good, then he knows how to
negotiate with the changing markets. Choose 3-4 of them to get power of diversification in case
one guy does not do well.
Summary… RA met WB in 1994, wishes that he met him 10 years before to get the benefit of
compounding.
HOW TO INVEST IN EQUITIES – SERIES 2: POWER OF COMPOUNDING

Date : 24th October, 2017
URL / Source : https://www.youtube.com/watch?v=GIZdWfDo7LE&t=818s
Duration Approx 57 minutes
Compounding helps to create substantial wealth in your portfolio if you have the patience needed
for long term investing.
Compounding in real world of business works in a non linear fashion. RA never thought that
compounding had any relation with stock market. RA got these insights from Chandrakant Sampak.
He said that the full market is about compounding and growth. When doing compounding the
calculation becomes fuzzy i.e. 100, 110, 121, 133, 146 and so on. The natural mind is not designed
for this compounding and difficult to think deep into future. Bloomberg estimates are only for 2
years and that is also 90% wrong. If the Bloomberg consensus is not right, how can the market be
right? That is where the understanding of the company of what it will do in 5-20 years becomes
important. Buffet thinks of perpetuity. Compounding is a way to think about the future of the
company
The concept is very simple, it is ‘Interest on Interest’. In Simple interest change remains constant,
but in Compound interest the multiple remains constant. In real life the situation are big more
tricky… Companies don’t growth at round numbers 10%, i.e. Eicher grows by 40%. One cannot
make a calculation of 80% for 3 years.
Rule of 72. Find the CAGR by using 72/Number of years for making money double. Alternatively
find he number of years taken to double the money by using 72/CAGR. At 25% returns, money
takes roughly 3 years to double. The same rate when extended…
• In 10 years, it becomes 10 times

• In 40 years, it becomes 10000times
This is how wealth is made and 1 Cr, becomes 1000 Cr.
Uses of compounding:
1. Financial Planning in achieving goals
2. Valuation of stocks and
3. Calculating the performance of financial products over different periods of time (IRR)
1) Finance Planning
All have aspiration to become rich or plan their retirement. None has job for ever. Also one has to
maintain the same or better quality of life after retirement. How to provide the money for 30 years
after retirement when the accumulation has stopped.
How much can one save in 30-40 years of their service, so that they can run the next 20-30 years
post retirement in the same life style. One could even life up to 100 years due to advance in
medicines. How do you provide for these 30-40 years? Financial planning becomes extremely
important.
There is always inflation. A lakh today may not have the same purchasing power at the age of 65.
Invest in such a way that the returns beat the inflation. A very rich guy needs to jus preserve the
purchasing power. He could focus only on 5% returns. Someone like Azim Premji or Ambani needs
to just preserve the capital.
Assessing future needs and judge the required compounding rate will help in financial planning.
One can figure out the monthly savings needed to have the required corpus at the time of
retirement. You can plan your future and be much better as there is always a margin of safety.
Even poor people can have a wonderful life if they plan it well.
2) Valuation of Stocks
Bloomberg give only 2 years of estimates. Where will an investor find the details of vast universe
of companies of what money they will make in the next few years? Investing is nothing but the
present value of all future earnings. There are two dimensions.
1. Estimate of future earnings

2. Estimate discount rate
Using both values we can estimate the present value. Bloomberg estimates are for 2 years,
whereas the life of the company is way above. With the market at P/E 25, the life we are taking
into account is 25 years. How to estimate the earnings for 25 years into the future. Atleast once
should estimate 10-15 years and compounding comes into picture.
A investor could assess that a company would earn 25% for the next 10 years. HDFC bank has
grown at 30% over the last 21 years. If the earning today is 100 then the 10th year earning could
be 1000. Stock is available today at 20 PE. In the 10th year the PE is only 2.
Try to figure the expectation built in the price. In casino we clearly know the risk reward ratio:
• If you win, you get double

• If you lose you get nothing
• What is the probability
But in stock market how do you know, how much money you will make or make that money at all.
We also do not know the probability. But the good thing is that you never end up losing 100% in
the stock market. Compounding helps to know the odds and pay off. There are three facts:
1. Estimate the market returns (Bloomberg) – This company can grow at 25% for the next few
years
2. You own estimates based on understanding of the business – Differential view, this
company can grow at 35%
3. Facts – As the time passes what actually happens
Market may estimate a return of 25% and you could be confident of 35%. After one year you will
come to know, if it was 35%. In that case Market will start recalibrating the price. After the first
year the market could give a valuation of27%. When the performance repeats, it is accorded 30%
and gradually it may over shoot to 40%. At that point of time, your opinion is still 35% you go and
sell the stock.
If one can find such a compounding machine, one must allocate hugely 10%. This is inline with
Power of Focus. But in investing all are intermixed i.e. Quality, Focus, Price and Growth. In
compounding one aspect is the rate and other is the longevity of the rate.
Longevity is invisible and also an assumption. Say Nestle is 60 PE and will have a growth of 8%
indicates that it will have this 8% growth for the next 50-60 years.
Of the three facts mentioned above, we as investors must be smarter than the other 2 to make
money.
3) Internal Rate of Return
A individual investor could earn 25% for 3 years. But a MF could boast of 40% for only one year.
He will not say the period whether it is for 1 year. We must be smart to ask the 3 Year return. Then
one can see who is superior or inferior. Rakesh Jhunjhunwalla could have done 30-35% in the last
30 years. Warren Buffet could have made 28%. Believe in compounding and make it happen at an
earlier stage.
Compounding is the 8th wonder. Those who understand earn it and those who don’t pay it.
Q: Which is the most important variable in the formula of compounding and why?
Both Returns (R) and Number of Years (N) is important. Which one is bigger
• 25% for 10 years and

• 40% for 5 years
If a stock has a growth only for 5 years then demand a higher rate or returns 35%. This 35% is not
double of 25. But the end result after 3 years is double.
• 25% after 10 years = 10 times

The market is very fuzzy. If a company can 10x in 5 years and 100x in 10 years go and figure out
the price.
Q: When we shift our funds to different schemes how do we get the benefit of compounding. (i.e.
Readjusting the portfolio every 3 years, how to get the benefit of compounding)
Assume a portfolio mix of:
• Debt 50% giving 10% returns and

• Equity 50% giving 20% returns.
The blended rate could be 15%. Within that 50% the investor shifts funds. But 90% of that money
he will make because of allocation into equities. This is bit tricky. After a few years, equity doubles
and debt remains the same. Then the equation could become D-35% and E-65%. To maintain 50%
one could re-adjust the portfolio.
As a starter one should go for a Balanced fund or go entirely into equities. If one is at the age of
25/27, they need to remember that India is at its best. The worst of poverty and political alignment
is behind. Markets still can come down by 10%. There is always a volatility in either directions. That
is nature of markets. If you are young, go all out into equities.
Q: How do you stay patient in order to reap the benefits of compounding when the stock does not
move for long.
• Patience is a required virtue of compounding
• Timing is a friend of good companies and enemy of the bad
• The company in which we are invested must be good
• In 20% compounding the calculation is point to point and not 20% every year
• Don’t worry if the performance is not good for a year or two
• There is a lot of misunderstanding on CAGR, thinking that the stock moves the same pace
Year on year
• It is like a mix of Sprint and Marathon. Keep moving, best when times are favourable
• When a business is started there are two compounding:
o Compounding of Knowledge
o Compounding of money
As the business started the founder learns more and more. This knowledge compounding helps in
compounding the capital. He is ahead of the competition and the sprinting starts. At this stage the
company goes from nowhere to 30% growth. Then there is a relaxation for 2-3 years (Marathon
Phase) again after that with the lot of additional knowledge the sprinting starts again.
Compounding of knowledge working on compounded capital work. When these two things come
together, compounding of earnings happens. The stock prices also grow.
All entrepreneurs make 30% compounding. Ramdev has achieved 58% compounding in 30 years.
As the base becomes bigger and bigger the rate of compounding comes down. There is always
glass ceiling. Nothing can go to the sky.
How magical can compounding be? Do you own numbers, of how much you started and what you
hold today
Q: How to apply compounding on sales, when the management themselves does not know at what
rate it will grow
• Management and market may not know
• Our estimates must be better than market estimates
• But by chance, your knowledge of the business could be good, you can see the future of
the company
• Two aspects – Quality of Business and Management are important.
o Management themselves does not know how good or bad they are. But as an
analyst we can know how the management of the competition is.
o Business can be great, good and gruesome. Nearly 90% of the companies are
gruesome.
In the competition landscape for liquor companies, only 3 companies are there for the entire
population. An analyst has knowledge about Macro, Competition landscape, quality of business
etc. With all these aspects they can put their numbers.
Great companies are around 300-400. These companies are 60-70% of the market cap. Every
investor knows which these good companies are. How to get better returns.
• Bringing focus and discipline

• Investment is not a gold medal race
• Here both you and I can win
• One need not be envious about other performance
• Markets rewards everyone, Not that the winner takes all
Q: Should I invests thought SIP and expect the returns of compound or invests lumpsum amount in
stocks.
For people who are starting to invest… go for SIP with well managed funds.
1. Selection. Stocks or Mutual funds.

2. Allocation: How much of money in the three Mutual Funds
3. Monitor: Must be continuous. Even in good companies, it is important to monitor the
performance. Only by superior monitoring can one have a superior performance.
How to identify structural changes in sectors for our holding to compound and do you allocate
weightage for stocks in the portfolio?
Everyone wants to identify the next compounder. I have done 21 studies for that. The idea is to
find compounds that are reasonably priced. Existing known compounders are crazily prized. For
this one has to know the industry, quality of management and business, competition, substitutes
and how the business would be in 10-20 years.
Q: Companies are doing buy backs and paying dividends? Is it wise to investing them back?
One time dividends are very heavy as in the case of Infosys. Check if at the current prices Infosys
is a good buy. If you are holding the company for 10-15 years you know well the future of the
company. If it compounds, then go ahead and buy more. You can put the money back in into the
stock or use the capital for diversification.
Q: Would you prefer a company which does not give dividends but reinvests the profits in the
business or the one that gives regular dividends?
Business compound because they re-investing in the company. Payout or not depends. If there is
no good use of capital, it is better to pay out.
Dividend Payout / Re-invest?

Need to know there is the re-investment. An undergarment business grows at 35% and re-invest
in their own franchise or expand their capacity, then prefer re-invesment.
This is a Hypothetical question with lot of factor and cannot have a blanket rule.
Q: Does the power of compounding work only in growth phase of a company? What do in bad results
hold and pray for next quarter or exit?
If a 10% decline is expected as part of a broader plan, due to shutdown, it is ok. It is like a blip in
the whole story. A company grows at 25% for the first 10-15 years after which it goes at 8%.
Q: Being a young investor, should I take the money out and hunt for next compounder?
Investor needs quality and growth. During initial phases, a company grows very high. But a
company cannot keep on growing this way. After 15 years, it grows at 7%. The company is still
compounding at a lesser rate E.g. Infosys. Then check, where is the valuation? Is it still at 30 PE?
With dividends, the return could be 12.5%. Are you a wealth preserver? Then you are still happy
with it. But if you have an appetite for 25%. It all depends on portfolio objective of 12.5% or 25%.
For a person with PF objective of 12% Infosys still work and for a person with PF objective of 25%,
it does not work.
HOW TO INVEST IN EQUITIES – SERIES 3: POWER OF QUALITY
Date : 31st October, 2017
URL / Source : https://www.youtube.com/watch?v=tF3vR9AswII&t=2184s
Quality Matters and Not Quantity.

Business is a capital input-output machine. The power of compounding and focus could be only as
good as the management. Quality has two faces: Business and management. Every business is a
capital input output machine. Based on business type, they can be classified as good, great and
gruesome. Accordingly, a 1000 crore could become 1200, 1400 or 800 crore. If the quality of
business is fantastic you don’t need 1000 crores to make 1000 crores. When a terrific business is
run by a terrific management, we get a terrific stock. IT has been a wonderful business for the past
20 years. By 1990, there was around 100 software companies across the cities in India. But only 4
survived. All were having same opportunity, client, rates and other resources. The business was
fantastic i.e. With Indian cost and American value. The margins were good but management was
not. The quality of business comes out when a good business is run by a good management. It was
difficult to figure out the trend in 1993 when Infosys came out with IPO. Good business lasts a very
long time and does not close in one or two years. But they run for 10-20 years.
Many business last long. But how does an investor differentiate between wheat and chaff. Good
business earn significantly above cost of capital, irrespective of cycle. A secular growth company
could have a log in growth rates with growth coming down from 25-10%. But cyclical business go
down to 1/3rd and again start the journey up. This is the difference between secular and cyclical
business. Cyclical is a not a bad thing, but investing into it is more challenging.
Secular Business: Market discount heavily the long term future. We could buy at higher price. First
2-3 years the returns could be less. Markets discount heavily the long term future. After 3-4 years
the company appears to be reasonably priced. Asian Paints was a terrific company. It was at PE 20
against the market PE 12, which RA felt was higher. It was indeed expensive at 20 PE in the initial
years. When missed at PE 20, it gradually became 30-45. This is what happens in quality
companies. If Raamdeo Agrawal could have lived with 1 year low returns, then he could have made
money in rest of the 20 years. It is very easy to convince that a particular stock is cheap. But it is
very difficult to convince yourself that a company is a great company. The real Margin of Safety
lies not in the price but the quality of the company. A quality company can give astronomical
returns. HDFC had a journey from 800 – 5 Lakh crores. It is nearly 300 times in 20 years.
Warren Buffett wants to buy a business which even an idiot can run. Is that different in India?
Running business all over the world is same.
Which company in US would be a buy, if Raamdeo Agrawal could buy?
Google and Master Card when it got listed. Berkshire Hathaway was given a pass, as there was a
growth of around 5%, which was against his portfolio objective of making 25%.
How can you measure Quality parameters, which are qualitative or quantitative?
Good story and good numbers must be there. If there is a good story check the numbers, or if the
number of terrified, try to find the story. If one is not there, the other is of no use.
Quantification:
• RoE, RoCE on quarterly basis available (The minimum cut off is 15%)
• Any company that makes more than 20% then something is going on there.
• RoE should not be fluctuating
Quality Factors
• Large profit pool

• Size of opportunity
• Competitive landscape
• Nice opportunity
• Favourable demand supply
• Healthy RoE
99% of companies die in 5-10 years. Only 1% of the companies survive. After this period, the
company makes money for the first time with a Return on Capital of 15%. That is the time we must
catch the company. Next 10-20 years belongs to the company. This is when the company enjoys
profitable advantage. We need to have such companies in our portfolio during this period.
RoE of 20% is a good starting point. The next would be to check, how fast the company can collect
money. If the company is making profit, is it because of the industry or there lies any specific
advantages. If there is less than 30 days collection period sustained over a period of time, then it
means that the company is a franchise. Then check the OCF/FCF. With all these then check the
growth number. Growth comes in two ways:
• Tail wind in Industry

• How much Market share
If you are competitive, then you can go from 2 to 20% of market share.
What is the opportunity is priced to perfection?
Priced to perfection for the next 20 years? In 1991, 20PE for Asian paints appeared to be priced to
perfection. Raamdeo Agrawal never brought Asian paints. The price to perfection is a factor of:
• What is my cost of money
• How long am I seeing in future
• Return requirement – 25% for Raamdeo Agrawal
A guy from Japan is happy with 5% returns. This is roughly 20% of Raamdeo’s expectations. Market
is far more global than ever. Market will have huge impact due to cheap money chasing stocks.
Why Quality is first in QGLP and what is the weightage in the overall formula?
In QGLP everything is sequential. Even if Brahma, Vishnu and Mahesh are running a useless
business then there is no use. It should be a terrific business with a terrific management. This Q
part is close to 80% of the analysis. One of the biggest advantages in the market is that 99% of
people are chasing prices through charts, but only 1% are chasing value. Value is not written
anywhere and is in the minds. A Japanese estimate of value is different from that of RA, because
the cost of money is different in both the cases.
Differences in quality of management or business can create or destruct wealth. Quality is never
an accident, but an outcome of intelligent effort. The main job of a successful management is to
deepen the moat. This moat allows you to be the last to die. In capitalism all moats will be attacked.
Attack comes from substitute or a new comer. If the moat is deep, then the competitor has to
work very hard to break the moat. A new entrant cannot enter so easily. Keeping the new entrant
outside is the real game.
Quality is a subjective term. How do you decide what is a quality stock. In investing, do what you
understand. In Technology it is difficult to see 5-10 years into the future. But the younger kids can.
Do you take your sons advice to invest in Technology?
Don’t take any ones advice to invest my money. One needs to do ample research to determine
the quality. There could be two scenarios:
• A business with high understanding and low returns – Preferred

• A business with low understanding and need someone help giving high returns - Ignore
Do you measure quality of a company by its financial strength or return and capital ratios or
competitive strength?
The best biscuit is XYZ, and you are also consumer of the biscuit. How many players are
there…These are all stories.
Maruti is 50-60% of Indian market share. The next 2 and 3rd players have 10-12%. India has a huge
demand for cars. There is an ultimate growth market for cars in India. This the story part, now
check the numbers. Both must match. Story might be fantastic. But if there are no numbers, it will
fall off. Market is a slave to numbers. Story might be fantastic, but if there is no number, the story
will fall off. One must buy quality business at tough times (E.g. Demonetization). If the market gives
you an opportunity to buy a quality business at tough time. But one should buy in tough time only
after understanding the business. Also demonetization was a perceived tough time.
Highlight the demonetization phase in the below chart.
Raamdeo Agrawal shares his personal experience of Maruti Suzuki IPO. He was at Hotel Taj
attending some meeting. The adjacent meeting Mr. Suzuki was talking on the IPO meeting. His
analyst at that point of time had sell. Raamdeo just went to see how the Japanese speak English.
It in fact took lot of time for him and his analyst to understand the opportunity.
What are the standard parameters to choose a quality stock?
Start from story or number. If there is no story going, do the screeners. Example: Raamdeo hears
about Emami has a terrific company. On checking he finds that Emami collects is payment in less
than 30 days. So, from here, on curiosity he check the collection time of other Pharmaceutical
companies. He found another company that does the collection in 10 days. He found this very
different and spoke to the management. The management said that they don’t have debtors but
an advance collection of 15 days for their products. (A classical case of starting with some stock
and ending up picking a bigger winner, by comparing the different companies in the industry)
One can pick up companies with competitive advantage in “Terms of Trade”. Very few exploit this
parameter. Look for highest ROE, margin companies or expensive products.
Big brokerages speak to management. But how about small investors judge the quality of
management?
Management always tell good things (not bad things). Management conduct con-calls and all sorts
of questions are asked and the transcript available in Bloomberg. The entire Q&A asked by analysts
to the management is there. There is nothing left for small investors to ask. If we read that properly
and understand that would suffice.
A good and bad vada pav have the same cost. But after eating a good one we go for second one
and take a parcel to family as well.
Other option is going to Tier 2/3 cities where distributors sit. Check how desperate the customers
are to take the product. RA does that during his visits to native. We can physical see if the business
is happening or not. We can feel the quality of business and management. If you sit and see 10
guys throw the product on face you know what is happening.
PSU Banks: Charlie Munger says that the only way that a bank can go wrong is by bad underwriting.
Whether it is private or PSU. If you do good underwriting, you go to the sky. How to avoid bad
loans? If government can form a committee and find a way to avoid bad underwriting then the
problem would solve.
How important is the management’s effectiveness?
Both Quality of Management and Business are important. If there is monopoly in business then a
mediocre management is ok, as customer does not have any other options and need to buy this
company product. Top quality managements are needed in a competitive environment. More the
competition, more is the importance of management. As a example… a particular electricity
company provides power to city of Mumbai. Where as in AMC business, customer can move out
just with one signature. Three things are needed for management:
1. Competency – No dearth. The management must have hunger and energy.
2. Integrity – This is a problem and the most important and
3. Passion
One easy way to check integrity is if the taxes has been paid. It is the easiest to cheat the income
tax department. If this has been done the basic level of integrity is passed. If they cheat
government, they will cheat the minority shareholders. Check how they behave with the
employees and suppliers.
Which company you prefer? One with independent board or a promoter driven. Does it make a
quality difference?
Prefer companies that make lot of money without using any money. If it is promoter driven, need
to check what is the next line of succession. There are very few professionally management
companies. The professional management gives longevity to the franchise. If managed by
entrepreneur it ends with that person.
What quality stocks are left with fair value after 2014 Rally?
SEBI will kill me 😊 if I talk this. People are looking for cheaply priced high quality stocks, which is
not easily available. There should be margin of safety in quality, price and growth. Look at value
and not price. Look at the story…story and number could be with you, but price would be against
you.
Q: Which is preferable?
• Good Business, Average Promoter

• Average Business, Good Promoter
Good Business is non negotiable. But that does not mean that you go behind a bad management.
Look for good business by good management.
Understanding valuation is one aspect. Market is competitive. But avoiding overpaying is
important.
HOW TO INVEST IN EQUITIES – SERIES 4: POWER OF PRICE

Date : 7th November 2017
URL / Source : https://www.youtube.com/watch?v=_nnyVkL72CY&t=8s
Stock market sees price and not value. Value is in our minds. It has three dimensions:
1. Value in the mind of Buyer
2. Value in the mind of Seller
3. Value in the future – True value
Who is smart here? Who understand better wins. Price is not a rocket science. It is readily
available. QGL is a estimate of value. First find out the value and then look at the price. Not other
way round. Most don’t estimate the value. They look only at the price.
Value at times is far below price. Following practical situations arise:
• If you don’t buy the price moves up

• If you buy, you are afraid.
How RA values companies?
• Look what is the story:

o A guy comes from a small village in Karnataka and goes to IIT
o Works in a company and then opens a company
o A company was opened 10 years ago and today it is going good
o He must be a hungry person.
• Then is the industry attractive? Is it paint, liquor company? No judgment about the
company, but about the industry.
• What unique strategy does the company has? Many don’t have a strategy (Low cost, Key
differentiator, Value proposition for the customer etc.)
• Check is the story of the company matches with the KFR – Key Financial Ratios
• Check 5-year history of KFR
• Every company has a cycle:
o Company struggles for the first 5-7 years
o If they survive this phase, they emerge as a successful company
o We look for very successful companies
• Numbers cannot lie. Look at the terms of trade
• Once all this is done, then go to the management. Listening to management in their own
office is a different ball game. Sometimes they are busy and don’t talk.
Real Life example. Eicher
• RA was in a morning walk. A automotive dealer friend has a story about trucks.
• It was 30 Crore worth equity company, Balance sheet had a huge amount of cash. Nearly
half the market cap was in cash. We cannot get a deeper value than this. But there was no
volumes.
• He had requested for plant visit, which was granted a year later.
• The stock price was 3 times by then (Rs.1800).
• They brought at the range of 2000-2800.
• The research coverage was very thin.
• The truck story did not happen, but the bike took up.
• They had projected as a 60L or 1L crore company.
• If that does not happen, it will minimum double in 5 years (with 15% returns)
• The bike demand shot up suddenly and it became a 80-90K crore company
• This is a lucky stroke – Where the purpose for which the stock was purchased did not turn
up. That might happen as Part 2 (i.e. Truck story)
We are investing into future. Current prices are the summation of all earnings into the future. So,
we need to figure out as to who is going to make a lot of money. You can only make that much
money the company makes. Again, we must be the first to figure it out.
How understand what future earnings growth is discounted in the current market price of stock.
This is called expectations built in, and the most difficult part
• If something has grown up by 4-50% in the last 4-5 years, then we should be very careful.
• Are they making money for the first time?
o Eicher motors when RA brought, it was making money for the first time
• Check the immediate past and industry outlook.
• Car has a huge future outlook – lot of cars to be sold.
• Consume companies made lot of money in the past. Bigger money is waiting to be made.
• Market works on rear view mirror.
• They see what the company has done in the past 5-10 years and extrapolate into the future
i.e. Same amount of money will be made in future and hence the value.
• Example: Mcap is 1L Crore, earnings is 5000 Crore. The PE is 20. Can this company make
1L Crore as profit in the next 7 years? The current profit of 5000C must grow at 20%
compounded to achieve this. 20% compounding brought at 20 PE. Summation of
compounding
• Current price says that this company can grow their earnings by 20% in the next 7 years.
That would leave 15% on the table. You may think that the company is going to grow at
40-50%. But market thinks as 20%. If you are right, then you are sitting on a Multibagger.
• The three facts now again come here (1) Buyer, (2) Seller and (3) Future / Truth.
• If buyer thinks that there would be 40-50% growth and turns out to be right then his money
doubles in 3-4 years.
• Understanding what market is expecting is extremely important.
How to identify the price is too high? Which parameter to look to justify the price?
Do you know more than the market about the future of the company? This is the fundamental
starting point. You must know the strength, longevity of business and management. Terrific
business run by a terrific management. Then the underlying business is going to explode.
A business and growth are good. Market believes that the current PE is high. Do I get out of the
company?
• These are practical issues.

• If not in the portfolio and not comfortable to buy, do not buy.
• If you have in the portfolio, do not come across the speeding car.
• A lot of wealth has been lost in accurately value a growth company. (Reference Book:
100:1). You don’t know how long the company is going to grow.
• Say you buy a company at 60 PE. The company grows at 40. After 5 years the PE comes
down to 10 or 15. It is dirt cheap.
• It is a game of opening PE, closing PE and earnings growth.
• Even after 5 years if the PE remains 60, then you get the entire 40% which is doubling every
two years.
• These kind of companies do you understand the maths and confident about growth of the
company
In investing you cannot make money by not looking at the value. Then you have to be lucky. Many
people chase only price and don’t see what is underlying happening. This is where the problem
lies. Sometimes we may buy a company at a early stage and sometimes at a later stage.
There are 4 phases returns during investment (1) Very High, (2) Very Low, (3) No and (4) Negative
returns. We will get a mix of all 4 during this journey. But people want only high return which is
not possible.
Anchor was showing 3 years chart of Symphony and that there was no returns…
Symphony 10 Year chart shows that people have made tons of money where the stock went by
100-200 times. You are only showing 3 years return to scare the people.
In a high PE situation if the growth does not materialize, then there is a good chance of losing
money.
Buying at the point of maximum pessimism
This is true value investing. But market has no way to figure out what is going to happen in 3-4
years down the line. Market is made of people like us. Buy a dollar for 50 cents. There are some
practitioners who have made lot of money, but that is not RA style of investing. One needs
unlimited patience.
Best PE and PB for Indian Market. Does that Buffett (It was actually Benjamin Graham) multiplier of
22.5 hold good?
• First decide how much returns you want to make

• As the return expectations go higher the stock has to be brought cheaper. Stock will
eventually to where it has to go.
• An INR 100 stock after 5 years should be INR 500 for getting 25% compounding. But if the
expected return is 35%, I have to buy the stock still cheap. Not at 100, but at 50. Because
the stock has to go 10 times in 5 years to make this 35%.
• More return is better, but less is not good.
Q: In a secular top class quality stock brought at high P/E, drop despite reported good earnings can
we hold for 5-10 years?
• Don’t come in front of speeding car.

• One must buy high quality secular companies and sit tight.
• Price drops are very healthy sign. Good stock has to drop. Then only the crazy guys sitting
will exit… and the rational guy comes and buy at rational prices.
• Good stock does not mean that it will not correct. Good stocks also will correct.
Airtel Bharti
• RA read about network business from Michael Moubossin
• RA had a feel that telecom was a network business and a place tomake money.
• In 2002, Mobile phone was launched in India and Airtel was launched with INR 45 with a
market cap of 8000 crores
• It was growing nearly at 100% and RA calculation was that it would become a 28,000 crore
company in the next 5 years
• He had brought 1.25L shares and based on others had sold 1L shares and left with 25,000
shares. He had again brought them.
• At time of launch of Reliance CDMA mobile, RA was worried…but was confident as GSM
was used world wide.
We see a stock today at x price and after a few days see going up to 2x. Because of which we do not
further buy again.
This is not correct. Forget the past, see what a stock is doing today and expected to do in the next
5 to 10 years.
There are many India growth stories around different industries i.e. Entire Ceramic industry or
sanitary industry is only X Crores. Is this a good starting point?
• Check how is the industry structure

• Check the story. PM says that wants that every Indian household must have a house. This
does not mean that every construction company is going to mint money.
• There will be competition
• Every story is right… but will it make money?
• It there is one house producer, then he will make a lot of money.
How would you justify an expensive price paid for a company having longevity, but growth rates are
gradual? E.g. Insurance (Q by Contrarian EPS)
• RA understanding of Insurance is bit low

• Insurance may growth slightly higher than GDP (10-11%)
• Like banks, the Insurance industry also lies in two buckets i.e. Private and PSU
• There are different categories of insurance. In Life insurance, LIC has still 50% of market
share. This is due to the government guarantee that come with LIC.
• Business is moving to private companies which may grow at 12-15%
• Within that top 2-3 private companies may grow at 20-25%
• Among this look for who is the best
What about an industry that does not have a gradual growth rate, but stagnating around 10-12%
and price is high?
Castrol gives 10% returns with dividends. It is perfectly ok, if you want to beat Fixed deposit. But
not helpful if you want to make 20-25% returns. Be clear in what you want, so that you can say
‘No’ to a few things.
Key Books / Learnings
In 1980s minds was very clean. Today there are too many contents on Internet and Blogs.
Berkshire Hathaway Annual reports gave a lot of insights and changed his approach altogether.
1. One up Wall Street – This is a book on common sense investing. Do not bet against India.
You have to be a optimist to come to the market and make money. That is the first
requirement, even before you look at the stock. Be an optimist to make money in India.
Next 30 years will be exciting. We will soon have $100 Billion companies coming from India.
It is possible that in his life time he could see Trillion dollar companies.
2. Common Stocks and Uncommon Profits – Helps to have a framework and structural
thinking. Scuttlebutt lessons are timeless. Before investing, one must know how the
company is making money. Every business does not do well in every country. Infact this
book is to be read even before the BRK Annual reports
3. Intelligent Investor – Read the one page introduction by Warren Buffett. Two chapters
carry very important message
a. Chapter 8: Stocks are nothing by pieces of business
b. Chapter 20: are the important relating to Margin of Safety
4. Expectations Investing – Wonderful concept
5. Competitive Advantage by Michael Poter – It is about competitive strategy and Mother of
all books. (Listen to the YouTube videos by the Author). This book talks about Five Forces
and strategies. Many companies don’t have a strategy.
6. Snow Ball – One can realize what it took for Warren Buffett to go from 0-1000 dollars.
Infact he read a book for earning that $1,000.
7. Value Migration – Must read. The good thing is that the book is not popular
HOW TO INVEST IN EQUITIES – SERIES 5: POWER OF VALUE MIGRATION

Date : 31st May 2018
URL / Source : https://www.youtube.com/watch?v=l49lruHqhCY&t=8s
Duration: Approx 48 minutes
Learning process is constant and evolves constantly.

Source of Information: YouTube one can get videos (45:11 minutes duration) on Value Migration
by Adrian Slyworzky in the 1980s. Presentation also exists which his director happened to see in
one of the forum and said that value keeps shifting, but was not able to get the grip of the concept.
• This concept is good. If it is applicable at every point of time. This book was written in 1990
and still valid.
• This concept happens all over the world in all business…that is why we see new business
and companies coming up
• This is a very powerful management concept, but can be powerfully used in investing
• Value – Consider the Enterprise Value (EV) of the company.
• Value keeps shifting in the same business from one bucket to another.
• Investors feel happy that their investment became 10x or 100x. But little do they know that
it will again go to 10x.
• A very few global majors are 50, 60-100 years old.
• As an individual investor, I can buy any company, any quantity at any time. Selling also goes
in the same way.
• Definition by Author: The flow of economic and share holder value away from obsolete
business models to new and more effective designs that are better able to satisfy
customers most important priorities
• There are different kinds of Value Migration (1) Global and Local (2) Large and Small.
• There are three points in Value Migration (1) Value Inflow, (2) Value Stabilization and (3)
Value Outflow.
HDFC is part of private banks towards which value was moving from PSU. These PSUs all put
together are making losses. HDFC started in 1996 as a 1000 Crore company and has been growing
at the rate of 25%. After the entire migration is over, there is some stabilization for a few years
with some 5-7% growth and further growth is difficult. Then a disruptive person comes with some
ideas such there is no bank branches needed. If HDFC bank is not able to harness the new
opportunity then the value outflow starts.
Business design and not technology is the key driver for value migration. Is technology embedded
in the Business design?
Technology has always been disruptive. The first migration is from Cart to Car in 1905. This was
due to technology (Which is mostly the disruptor). By 1920 there is no horse carts. This is one of
the largest value migration.
Airline: Value migration from full service airline to discount service airline.
Businessman must identify
• How I want to serve my customer?

• Who is my Customer?
• What is my Value Proposition?
• How I am going to make money out of it?
The business design goes to analyze how to achieve this. This actually done before starting the
business and then actual goes out executing it.
In broking there are new generation brokers. In 1985 when RA started his career, there as no
competitors… all was done by paper works and was extremely inefficient. In places like Jaipur the
price of the stock used to come after 2 days. When we place order, broker would buy and inform
after another 2 days. Customers wanted quick and honest execution. MOST could impart
professionalism and honesty. Paper to on-line came because of technology. The traditional
brokerage model would have 5-7 family members with some support staff. Now the offices are
completely different. The customer need is same, but Business model of broker has undergone a
major change. Business has exploded in this process. During his times the trades were around 200
crores per day. Today it is 20 Lakh crore per day and the cost had come down, volumes have
expanded. The game is now completely different for the same need of the customer.
How can the investor detect value migration? How to figure out the stage of value inflow?
• Market share movement

• Innovation and leadership
• Customer satisfaction score
Look at the existing players how well they are doing. Is there value inflow or outflow? Observe the
market cap movement. Private sector bank in aggregate is their market share going up or down.
Banking needs for the people are the same. What are the people expectations of who should
provide the service? The person who is most efficient?
Business design of PSU - HR Policy and entrepreneurship is not there. Their competitor adopted
technology much earlier and came out with a far more efficient model.
How to identify stage of Value Inflow? In the same industry are new guys coming. Is his business
model different from existing guy?
In broking Zerodha has come with 0 brokerage model with a message that they can make money
without charging the customers. Now the value migration situation exists. They can do business
and make money without charging the customer. But if successful or not need to be wait and seen.
But more than stock trading there is much more like advice hand holding etc. rather than just
trading. There is where the difference comes in.
How about innovation, leadership and customer satisfaction? Are there Indian examples?
Gujarat Ambuja – Innovated transporting over ship instead of road and reducing the cost. The
company became the lowest cost producer and highest cost seller in Mumbai. They had a fantastic
branding, low cost and high quality. They ended buying ACC (The then giant) in 2003-04. Reduced
cost through a small innovation.
How to determine if value migration is mature and what is the trigger?
In India, economy is growth at 7-8% and the stabilization period is much longer.
Inflow phase: Top / Bottom line growth, RoE and FCF
Mature phase: EBITA 20-18% but not going beyond 21. Not bad but stabilized. Total profits are
more or less the same.
Finally it topples off.. May be there is a transition sometimes. Infosys is a massive value inflow from
500 – 2.5 Lakh crores. Right now is in a stabilization phase struggling with a growth of around 5%.
World is going digital. RA sense is that they get a 2nd phase of value inflow. Customer requirements
are changing. Whether they will meet the requirement of not is not clear. That will be clear (Value
Inflow) only when the numbers come.
How would you identify for a sector being at cliff and going to fall down or move to next phase of
inflow?
Results are one pointer to show if there is Inflow or Outflow or stabilization
From the numbers go back to board room for discussion and talk to the company, current and ex-
employees, competition etc. to find what is happening.
RA does not know IT or all other industry. But from the numbers we can see that something crazy
is happening.
From the numbers of PSU banks, is it already clear that value migration has already happened and
there is no point of no return? Is their migration from private to smarter NBFC?
Banking space is very large covering all sort of wants (Car, Trucks, Home, Education etc.) covering
a range of customers from individuals, corporates and even Governments. It is a base model where
they want to fund some needs, like some companies go for only vehicle capital loans that is the
business design.
For PSU, the owners of the banks must make changes. The business design has to be redesigned
to gap the deficiency. There should be changes in terms of HR Policy, Technology, Compensation,
Surveillance and how to punish. NBFC license criteria is different and has lot more fear from the
regulator constraints/RBI. Value can migrate from parts of bank to well managed NBFC and vice
versa also can happen. HFC is domain of specialized NBFC. Nothing stops a bank from doing it.
Bajaj finance in consumer loans gives Banks a run for their money and grows very rapidly.
Are we in a Value Inflow stage for NBFC? (But not in stability)
India has a long run. NBFC is still not in stability but Inflow phase. As a box NBFC is still clubbed
with private sector banks
Lindy effect: Refers the book “Skin in the game” by Taleb, by seeing a show successfully for 25 days
we cannot predict that it will last for 200 days. Extend this theory to companies. Those which are
successful keep winning.
The sense is that successful companies are going to be more successful in India. Ride the successful
companies till the data shows outflow. Don’t worry too much about the phase and during
stabilization you can take a call. When there is value inflow, don’t come in front of it.
Is the potential of bigger value migration lies in Chor management to good guys?
This will be best for the country. Noose is tightening around all crony capital guys. NCLT is
happening. Trouble is for bad guys. Earlier you could buy any one signature. Now auditors are
lifting hands that they can’t audit accounts. Companies are now afraid if auditions will sign or not.
So, they are forced to do things rightly. Nothing becomes 100% pure or right. Even a 70-85%
change is best for investors.
The entire capital market runs on the signature of the auditors and there is a lot of responsibility
on them.
GST – Business will be in books and corporate tax will go up. These are revolutionary times and
must not be derailed. If the numbers are better it is good for the enterprise itself and then the
minority share holders, government and whole country benefits.
How the auto stay so long in value stability or inflow phase?
Hero – Competitor for Bajaj, while Eicher is created as a cult. Hero has been close to customer,
honest, cost conscious/process, spend lot on R&D, good marketing and scale driven.
In 1995: Scooter was 100% market share, but in 2005 it is 100% motorbikes – Classic example for
value migration
Honda broke with Kinetic and launched Activa
• Phase 1: Migration from Scooter to Motorcycles: 100%

• Phase 2: Motorcycles to Scooter (33%) remaining is bifurcated
Market kinds: Cruise, premium, traditional bike, scooter and cars.

Next migration will be from 2 wheelers to cars. In few years’ car production would be more than
2 wheelers. Even though Ola comes the fact remains that more number of cars is needed. The
question is whether the car is sold to owners or rental companies.
PART – 2 Video on Value Migration
Value inflow into Aviation Sector
• Crude prices are temporary blip

• Unique passenger would be 10-20 million because same passengers travel frequently
• 20 million out of 1300 million, who are yet to fly
• If there is one Vada pav and useless still the owner can make money if there is no
competition
• A similar situation of food priced in theatre and stadium
• There is second level of valuation migration within value migration
• Level one is migration from rail to Air and within aviation from full-service airline to
discounted airlines
• Check the number of players in aviation
• Within this who is the best and getting market share, how fragile is the business model and
management
• When you have a antifragile business and management, you sit on a multi bagger
Staple Space
• HUL has been continuously in Value Inflow and stabilization phase

• Not much disruption in the sector – We need to wash clothes and our body. There is not
digital way of doing it
• The market size of consuming population is growing
• HUL knows whom to sell, what and when to sell
• They make steps ahead of trend
• They invested in the past and now pay off is coming
• Distribution network a moat – Online is picking and will this disrupt others? RA answers…let
is be demonstrated, not to worry about something that has not happened.

How To Invest - Raamdeo Agrawal

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Notes from “How to Invest”, Interview

Series by Shri. Raamdeo Agrawal to

HOW TO INVEST IN EQUITIES – SERIES 1: POWER OF FOCUS

Q: Why is focus so important?

Q: How do you know if a company is great?

Q: RA is underweight of economy facing stocks. What if the cycle turns?

Q: Is the value of some of the NBFC a concern?

Q: This speed will continue irrespective of what happens in political front?

HOW TO INVEST IN EQUITIES – SERIES 2: POWER OF COMPOUNDING

• In 10 years, it becomes 10 times

This is how wealth is made and 1 Cr, becomes 1000 Cr.

1. Estimate of future earnings

• If you win, you get double

3) Internal Rate of Return

• 25% for 10 years and

• 25% after 10 years = 10 times

Assume a portfolio mix of:

• Debt 50% giving 10% returns and

• Bringing focus and discipline

1. Selection. Stocks or Mutual funds.

Dividend Payout / Re-invest?

Quality Matters and Not Quantity.

• Large profit pool

• Tail wind in Industry

• What is my cost of money

• A business with high understanding and low returns – Preferred

• Good Business, Average Promoter

HOW TO INVEST IN EQUITIES – SERIES 4: POWER OF PRICE

• If you don’t buy the price moves up

How RA values companies?

• Look what is the story:

Real Life example. Eicher

• These are practical issues.

• First decide how much returns you want to make

• Don’t come in front of speeding car.

• Check how is the industry structure

• RA understanding of Insurance is bit low

HOW TO INVEST IN EQUITIES – SERIES 5: POWER OF VALUE MIGRATION

Learning process is constant and evolves constantly.

• How I want to serve my customer?

• Market share movement

• Phase 1: Migration from Scooter to Motorcycles: 100%

Market kinds: Cruise, premium, traditional bike, scooter and cars.

• Crude prices are temporary blip

• HUL has been continuously in Value Inflow and stabilization phase

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