Buy And Hold: The Best Way To Make Money

Arun Kejriwal, Founder, Kejriwal Research & Investment Services, in a free-wheeling interview with Saikat Mitra, roots for the old school of thought for investing in the capital markets, as he speaks of value creation in India.

Arun Kejriwal 
Founder,
Kejriwal Research & Investment Services

There are more than five thousand companies listed on the Indian bourses, there are only a handful of them that have created value, why do you think this is the case?

Well, a part of the answer is given by you when you say that there are only a handful of companies that have created value. There are three factors that can be attributed to this. Firstly, we have to look at the aspect where the promoters and the companies are going the easy way out by manipulating share prices. It has always been said that the listed shares are like currencies, which can be used to benefit the shareholders and the company or vice versa. We are finding that more and more people are finding it difficult to use this currency for the betterment of the shareholders. 

Coming to the question of value creation, when the company thinks of running the business in a fair way, then value creation happens. Let me give you one classy example, the erstwhile Hero Honda has been a perfect example where the company has created wealth for investors for the last 25 to 30 years. But when they had a split with the Honda Group, some sort of greed crept into the minds of the promoters’ family. This was something that went against the benefit of the shareholders. At the end of the day, the promoter has to understand that he is also a shareholder and not above anyone. What happened with the company is that there was a hue and cry regarding the break-up. To manage the situation they have to divert their attention rather than doing something concrete. So this is the perfect example where you have a company that has been a great value creator but had to go in a damage repair mode and in this transition they lost the respect of the shareholders.

If you are asked to write a book on value creator or value destroyer, which topic would you choose?

To answer this question, if I choose to write on value destroyer, my work will be a lot easier. But, if I have to write on value creator, then the work will become harder. But as the saying goes ‘to create is difficult as it requires hard work and destroying is easy, as it takes one mistake to destroy what you have created.’ So, let me give you some examples. We have some people in India who have created a name for themselves, who have been in the limelight and done things for the betterment of the shareholders. We also have a flip side to this. We have value destroyers like SKS Microfinance, the company that has come up with an IPO at around Rs 1100 went up to Rs 1500 and then it came down to double digits. We have seen how the promoters were fighting and also heard that the company that has a core competence in microfinance is going to sell mobile phones and provide gold loans. When this core competence is washed away, there is very little left in the company.

Out of dividend and capital appreciation, which one would you put more emphasis on and why?

If you want to earn money by investing in securities, it can only happen when the company does well, which will in turn push its share prices upward. Some companies do not deliver dividends on a regular basis. This is because they want to completely re-plough the money into capex. This does not mean that the company is not rewarding investors. They have to retain earnings to invest in the capex of the company. To answer your question, dividends play an important part, but it cannot be the only source of income if you are investing in equities. Capital appreciation is equally important.

What is the ideal rate of dividend payout?

A good dividend is around 15 to 25 per cent of earned profits.

Do you feel that the introduction of new products like derivatives have helped in creating wealth for investors or is it the old school of thought that is still creating value? 

Let me put it in this way; in the last many years, I do not remember too many people who have made money in the markets by trading. For every one trader I can give you four investors who have made money in the markets. The reason for this is that an investor does not speculate the way that we see today. The investor is not bound to play derivatives on a daily basis. But the old tradition of buying shares and holding on to them continues. Nothing can be better than the buy and hold concept. I do not think that this is going to change even in the next twenty years. 

So you believe that the old school of thought is still the best way around?

Certainly, money can only be made in that way. 

Do you think that FIIs have played an important role with regard to creating value in the Indian equity markets?

Let me twist this question. There is no doubt that FIIs have played an important role in the Indian market. But whether they have played an important role in terms of value creation is a debatable issue. Why? We need to look at the broader aspect of this, FIIs were controlled by the very own people that have been present in the Indian equities market. Today, almost all the global players who are operating in India are Indians who are managing these FIIs. We have found so many companies that have gone bust, where value has been destroyed, were invested by FIIs first, followed by the Indian public, thinking that they are smarter than us. It is too late when people realise that the golden path they were pursuing is nothing but a mirage. However, it has to be remembered that this is not the case with all the FII investments that have happened in India. They have brought in value and there are instances where the presence of FIIs has improved the efficiency of the company to some extent, like in terms of corporate governance. But overall, it is a mixed bag when we refer to FIIs in terms of value creation.

There has been a handful of investors who have benefited or created value from the equity markets. Others were left with nothing. Is there any regulatory change required for value creation to be uniform?

If I understand your question correctly, what has happened is that the way of investment has undergone a sea change. I come from the old school of thought and have been investing in the markets for the last 30 years. It is where we have learned that till the time the company is delivering and does not become bad; do not exit simply because you are in profit. You have to ride the profits. In today’s scenario, what is happening is a lot of churning that is happening. You buy today and you sell after seven days. It is nice to remain invested in a company that you understand. 

Going forward, five year down the line, if you want to bet on three sectors, which would those be? Can you throw some light on this?

If you are talking about India and you do not mention infrastructure then there is something wrong with you. If we look back 10 years, the development in this sector has been bad. Keeping this in mind, what I can say is that growth is bound to come in the infrastructure sector. We are performing very badly on this front. However, with the elections due in the next 12 to 14 months, there has to be a focus on infrastructure. When you are giving me a five-year horizon, if infrastructure development does not take front seat then only heaven help our next generations. The next one is the consumer sector. We certainly have a higher disposable income and a growing demand from tier II and tier III cities will further add fuel to this sector.