This one mathematical formula big bull Rakesh Jhunjhunwala held while investing in stocks
- His interest in stocks and trading perked up when he was a young child. He used to listen to his father and the latter's friends discuss the stock market. He found the stock market very intriguing because prices used to fluctuate and he wondered why that happened.
Rakesh Jhunjhunwala, the veteran investor, is no more with us. He took his last breath in Mumbai's Breach Candy Hospital this morning. Rakesh Jhunjhunwala was referred to by many names like 'Dalal Street's big bull' or 'market bull' or 'big bull' or 'market mogul' and even often called 'Warren Buffett of India'. There was a reason why he achieved such prestige references. He was the testimony of success from stocks. He was called a stock market investor with a Midas touch. He was idolized by many investors holding the same dreams of becoming millionaires or billionaires from equities. But just like every success story has a formula, and a background, Jhunjhunwala also had one. He had one mathematical formula that helped him identify his stocks and the majority of them have given strong performance.
Jhunjhunwala began his investment with ₹5,000 in stocks when Sensex was just at 150. His first stock was Tata Tea in 1986 when he was in his college. His net wealth skyrocketed to more than $5.8 billion crore on a real-time basis, according to Forbes.
His interest in stocks and trading perked up when he was a young child. He used to listen to his father and the latter's friends discuss the stock market. He found the stock market very intriguing because prices used to fluctuate and he wondered why that happened.
In 1984, Rakesh took the challenge of making a career by investing and trading in stocks. During this time, he completed his Chartered Accountant (CA) study. The formula didn't magically come to Jhunjhunwala, he had to focus and study stocks and markets intensively. He had to do a lot of in-depth study on stocks as they were his livelihood.
He eventually was introduced to a simple mathematical equation. He told in an interview with N Mahalakshmi formerly an editor at Outlook India, "I was introduced to a simple mathematical equation. Earnings per share (EPS) x price-earnings ratio (PER) = price. It was apparent that when both the variables determining price, that is, EPS and PER gain, the stock prices explode."
In the interview, he revealed that in stocks 'all profits arise due to certain prevalent factors which are dynamic in nature." During his analysis he realised, that rather than trying to project absolute profitability, he decided to understand the reasons and circumstances that give rise to these profits.
According to Jhunjhunwala, EPS are very specific to each company, while the PER was dependent on various factors which included both internal and external of the company.
He stated in the interview that EPS depended upon three factors - accounting policies followed, cash profile of the profits, and, return on capital employed, that is efficient use of capital. Meanwhile, he explained that internal conditions which help in determining PER are reward records, predictability of earnings, risk model, perceived growth opportunity, and perceived integrity of the management.
He had said that in order to predict future EPS and PER of a company, there was a need to understand real-life business.
Further, in the interview, he said, the prediction of EPS was mainly "science and partly art". However, this was not the case with PER predictions. He stated that PER is art with every little science.
He had described PER as "like cooking and sex, it cannot be taught, but it has to be learnt." He admitted further in the interview that "understanding/predicting PEs is the most difficult of all and the most critical factor to successful investing."
As per the big bull, the ingredients of successful investing were in locating gaps between current expectations and future likely performance which provided him favourable odds as an investor.
Earnings per share (EPS) is one of the important factors that indicate a company's profitability. EPS is a common metric and helps in showing how much money the firm makes for each share of its stock. The figures are calculated by dividing the company's net profit by its outstanding shares of common stock. Generally, the higher the EPS number, the more profitable the company.
Price to Earnings Ratio (PER) is one of the critical metrics that help in understanding whether a stock is cheap or expensive. They also help in understanding the future price levels of stock. This metric is one of the most popular factors for the valuation of stocks. It is a ratio of the share price of a listed company to its earnings per share (EPS).
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