Veteran investor Rakesh Jhunjhunwala is no more with us. He breathed his last at Breach Candy Hospital in Mumbai this morning. Rakesh Jhunjhunwala was known by many names like ‘Dalal Streets Big Bull’ or ‘Market Bull’ or ‘Big Bull’ or ‘Market Mogul’ and even often referred to as ‘Warren Buffett of India’. There was a reason he gained such prestige references. That was proof of success from the stocks. He was called a stock market investor with a Midas touch. He was idolized by many investors with similar dreams of becoming a millionaire or billionaire from equity. But just like every success story has a formula, and a background, Jhunjhunwala had one too. They had a mathematical formula that helped them identify their stocks and most of them gave strong performance.
Jhunjhunwala started your investment with 5,000 inches shares When Sensex was only at 150. In 1986, when he was in his college, his first stock was Tata Tea. According to Forbes, his net worth increased to over $58 billion on a real-time basis.
His interest in stocks and trading grew from his childhood. He used to listen to his father and later friends used to discuss the stock market. He found the stock market very complicated as the prices fluctuated and he wondered why this happened.
In 1984, Rakesh took up the challenge of making a career by investing and trading in stocks. During this time he completed his Chartered Accountant (CA) studies. The formula didn’t magically come to Jhunjhunwala, he had to focus on stocks and markets and study them deeply. He had to do a very thorough study on stocks as they were his livelihood.
Eventually he was introduced to a simple mathematical equation. He said in an interview with N Mahalakshmi, former editor of Outlook India, “I was introduced to a simple mathematical equation. Earnings Per Share (EPS) x Price-Earnings Ratio (PER) = Price. It was clear that when both Variable pricing, i.e. EPS and profit per share, causes stock prices to explode.”
In the interview, he disclosed that ‘all profits in stocks are generated due to certain prevailing factors which are dynamic in nature’.” During his analysis he realized that, instead of trying to project absolute profitability, he Decided to understand the reasons and circumstances that give them the increase in these profits.
According to Jhunjhunwala, EPS was very specific to each company, while PE was dependent on various factors which included both internal and external to the company.
He said in the interview that EPS depends on three factors – adherence to accounting policies, cash profile of profits, and, return on capital employed, which is efficient use of capital. Meanwhile, he explained that the internal conditions that help determine PER are reward records, predictability of earnings, risk models, perceived growth opportunities and perceived integrity of management.
He had said that in order to predict the future EPS and PERs of a company, there is a need to understand the real life business.
Furthermore, he said in interviews, the prediction of EPS was primarily “science and partly art”. However, this was not the case with forecasts per se. He said that PER is an art with every little science.
He described PER as “like cooking and sex, it cannot be taught, but has to be learned.” He further acknowledged in the interview that “PE is the most difficult to understand/predict and is the most important factor for successful investing.”
According to Big Bull, the content of successful investing was finding the gap between current expectations and potential future performance, which offered him favorable prospects 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 to show how much money a firm makes for each share of its stock. The figure is 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 important metrics that helps in understanding whether a stock is cheap or expensive. They also help in understanding the future price levels of the stock. This metric is one of the most popular factors for valuing stocks. It is the ratio of a listed company’s share price to its earnings per share (EPS).
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