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Thoughts on Markets and Life : Chandrakant Sampat

Chandrakant Sampat known to many as the

Warren Buffett of India is regarded as a veteran
stock market investor.

He was a first-generation investor, who began

investing in shares in the late 1960s. But his
portfolio got a big boost only after
multinational companies operating in the
country were forced to list on the stock
exchanges from the mid-70s onwards.

He began accumulating shares of blue chips like Hindustan Unilever, Procter &
Gamble, Gillette (then Indian Shaving Products), and Colgate, from the time they went
public.

Consumer goods firms dominated his portfolio all throughout. He had three main
parameters in mind while looking to invest in a company. Minimum capital
expenditure, at least a 25 percent return on capital employed (RoCE), and a record of
paying generous dividends

He stayed invested in his favourite companies like Hindustan Unilever and Gillete for
so long that after the dividends and bonus shares, his average cost of acquisition
came to a few paise in many cases.

Following article covers some of his thoughts on life and wisdom on investing.

His Investing Philosophy

“Pick up good companies with good managements when their share prices are at an
eight year or 10-year low. Alternatively, if you still want to do something, buy good
companies that are 40 per cent lower than their 52-week high.

I will buy only those companies that are in a business that even fools can understand,
have very little debt, have free cash flows or do not have much capital expenditure,
which is nothing but deferred cost”.

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Value Investing Checklist:

1) A business that you understand

2) Zero or very little debt
3) ROE/ROCE of 25 to 30%
4) Available at P/E of ~14 or less
5) Dividend yield of ~4% would be an icing on the cake

On Capital Allocation

“Capital allocation is the most important part of a business. Ultimately it is the use of
capital and innovation that give you the value of the company and not the markets. I
want companies with minimal capital expenditure. They should be able to grow with
minimum cash. All excess cash should be paid out to shareholders.
People say you need cash for a business. On the other hand, I look for businesses
that require minimal capital, more of innovation and productivity.”

On Concentrated Portfolio

“In the strategy that I follow, I don’t cover more than ten companies in my investment
portfolio. If you spread it out, so many of them will go wrong and very few will come
right. So, it will be squared out. But if you are in eight-ten companies, even one giving
you everything, will cover your wealth”.

“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”.

On Significance Of Innovation

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 are not profit. We are 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.
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In looking at knowledge applied to human work as the source of wealth, we also see
the function of the economic organization”, he says, resonating with Drucker.

On Mutual Fund managers chasing momentum

Today, mutual fund managers are rewarded on the basis of their performance and
not on the basis of value. This triggers them to chase momentum and not value.
Chasing momentum is nothing but gambling. You must remember that a history of
good dividends is more valuable than how quickly the share price has gone up in
the last few months.

On Accelerating rate of technology threatening capital markets

Another major global trend that he was worried about was the accelerating rate of
technology that was threatening the survival of capital markets. According to him,
technological innovation was resulting in shorter business cycles, which were
leading to shorter life spans for companies.

He believed in order for companies to survive this technology boom, they needed
to generate cash flows in order to ensure that they were prepared for any new
development that could alter the way businesses were running.

This, he felt, would leave lesser or no scope for capital formation as money would
be used only for new technology and companies that were stuck with outdated
technology would fail to survive. This, he feared, could lead to a debacle for the
capital market in the future.

On spending habits of Young Generation

Due to the rising Credit Card Culture Of youth there are only accrued costs not
incurred.

I don't have any accrued cost not incurred. Younger people have tremendous
accrued cost not incurred. Are you saving enough to take care of this? If you are
not, you are not getting any remuneration, you are losing, and so is society.

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On Fitness and Diet

For him physical fitness was one of the top priorities. He was a regular jogger and
extremely health conscious human. Moreover, he followed 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”.

On Conventional Education System

He was openly repulsive of the educational system and was often cited as
saying “knowledge is that which liberates and not captivates”. That in fact was a
translation of one of the shlokas from the great Indian epic, The Bhagwad Geeta,
much of which he recites verbatim.

On inflation and Frugality

The big issue today is inflation. In my view, frugality can beat all inflation. I still don't
own a car, I don't have a mobile. Ours is now an economy based on waste. If you
change that, other factors will correct themselves.

On Being Discipline

"To be a good investor all one has to do is dream." However, to give those
castles in the air a concrete foundation, an investor has to be wide awake, especially
in troubled times.

It's human nature to follow the herd; when the Sensex hits an all-time high, even
those who have no idea of a share storm the market. During a bear phase, there's
invariably a stampede to exit.

Apart from the dream, you require discipline. You also need to be prepared for
change—and agree to alter your strategy to suit the changing times. Stock market
behaviour has a lot to do with the factors that it depends on, be it the economy,
liquidity, news, business cycles, even sentiment.

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On Valuations

“I don't believe in valuations. I follow a migrationary path for the companies I invest
in. We must be able to visualise the future. Take Gillette for example. Twin blades
constitute mere 10% of the Indian market. Bangladesh has 33% penetration. If India
catches up with Bangladesh, Gillette will be a Rs.15,000 crores company having a
net profit of Rs.2200 crores. At 40 times discounting, that is Rs.27,000 per share.

That is the migration path that a valuation cannot show. In 1979, Hindustan Unilever
was a Rs.140 crore company. In 2013, its sales were Rs.27,000 crores. Again, only a
migrational thought process would have shown that and not a valuation.”

Towards the end of his journey

Towards the latter part of his investment journey, he became bearish on the stock
market and kept most of his wealth in cash or cash equivalents. “There was a time
when I had 70 per cent of my net worth invested in equity. Times have changed,” he
said.

He had deliberately stayed away from investing in the stock market as he grew
critical of the policies followed by global central banks that had led to the rise in
asset prices. He was also unhappy with deteriorating corporate governance
standards of Indian firms.

His pessimism was also due to the fact that he wasn’t confident about the state of
the Indian economy and thus, the fate of the corporate sector. He was worried
about India’s growing fiscal deficit and felt that there was a scarcity of worthwhile
investment options as many companies listed on the stock exchanges had negative
EVA (economic value added).

He died at the beginning of 2015 aged 86.

He is said to have mentored Mr. Radhakishan Damani and several other

marquee investors.

We will cover all of them in upcoming parts of this series Thoughts on Life and
Markets.

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