Sunday, August 2, 2009, SHYAMSCOLUMN.COM <http://shyamscolumn.com/> A story for every investor… Here is an interesting article, which I feel every stock investor needs to read and probably keep it framed on the wall. It’s a fine example of one man who lost almost everything, but kept walking due to perseverance. It’s also a story about what not to do while investing....
Published in Economic Times, Aug 2, 2009 (Written by Harsimran Singh) “When my father died last month, I discovered he used to support four poor kids, with his meagre government pension,” a mellowed Lemon Tree Hotels owner Patu Keswani, recounts, sitting in his plush Okhla office, in South Delhi. The IIT-IIM alumnus, was almost broke in 2001, when he lost all his life’s savings (Rs 97 lakhs out of Rs 1 crore) in the stock market. The 50-year old CMD, who now owns 11 hotels with a revenue of over Rs 103 crore, wants to adopt 5,000 poor children in Delhi and 3 MCD schools and venture into corporate social responsiblity aggressively. “It’s not how much you donate, but how much it can make others happy, which counts,” says a calm Mr Keswani. The man who used to run the entire Taj Hotel chain as the Chief Operating Officer, till 2001, is a changed man now. “I used to be arrogant earlier. But life has made me realise that arrogance and haughtiness, is a mark of low self confidence,” he says. “Politeness makes good business sense, especially in an industry like ours,” he adds, puffing out smoke rings from a cigar and sipping his favourite ginger tea, even as Pavan Ahluwalia, son of Planning Commission chairman Montek Singh Ahluwalia, looks on. While I listen to Mr Keswani’s trysts with destiny, the Stanford educated Pavan listens intently, as he waits for a business meeting with him. “Let me show you something interesting,” Mr Keswani says, excited like a child. He pulls out his desk drawer, and from a maroon velvet coated box, out he flings out a Cartier watch. “It was 1998. One evening we three friends were sitting in the Taj President, Mumbai. All of us had decided to retire at 39 years. A sum of Rs 5 crore, we all agreed, was good enough to retire. But all I had was Rs one crore in savings, which I decided to invest in stock market, to see if I can make more,” he says. Under the advice of Mumbai based XYZ Securities (we decided to keep the name confidential), he invested all his money. But after a year, one crore was wiped out, reduced to just Rs 3 lakhs. He was gifted the Cartier watch by the owner of the brokerage for being a ‘valuable customer’. “Suddenly after a few months, the watch stopped working. I showed it to the makers and they told me it was a fake. It was not losing Rs 97 lakhs, but the fake Cartier watch, which hurt me more.” But Mr Keswani has since learnt to take things in his stride. He has also started to believe in coincidences. Once, roaming on the Candolim beach in Goa, he was awestruck by a dilapidated resort hotel. A few minutes later, he got a call from a friend who told him that a property was for sale on the same beach. It was the same hotel. The next day, Mr Keswani bought it for Rs 3.5 crore, by paying Rs 10 lakh in advance. The next month, he sold it for Rs 5 crore, making a cool Rs 1.5 crore profit and buying more land. He now has in his kitty about 22 plots. The Goa hotel buy, reminds him of his IIT days, when he bought his first motorcycle for Rs 2400. “Being a government servant, I could not ask my father for a bike those days. So, I paid Rs 200 for the bike in advance. The rest (Rs 2200), I arranged over the next 30 days, by winning bridge games at Gymkhana Club, near Prime Minister’s House, in Lutyens Delhi.” Interesingly, the B.Tech. in Electrical Engineering from IIT-Delhi, thinks that all IITians are a ‘bunch of sad guys.’ “I scored 95% in mathematics in my first semester in IIT, but got a C-grade. The only way I could manage an ‘A’ was by getting 100%! So I decided to aim for a B grade. I enjoyed all four years at IIT, playing snooker, bridge and biking all over,” he adds, as he glances at the cute animal cartoons hanging on the wall. His 11-year old daughter, acts as part time interior designer for Papa’s office, as she keeps on churning out new drawings for his office. She also acts as a business advisor as Papa’s new Economy Hotel Chain’s name—Red Fox has been suggested by her. The first two Red Fox Hotels (in Jaipur and East Delhi with 300 rooms), will commence operations by end 2009. Red Fox Hotels is also developing three more hotels aggregating 550 rooms in Hyderabad, Delhi and Gurgaon which will be operational by 2012. Talk about competition, and Mr Keswani blasts the business strategies of most hotel chains in India. “By 2012, Lemon Tree Hotels will own and operate 20 hotels aggregating over 3,000 rooms with 4000 employees across 16 major Indian cities. We want to own over 2% of all hotel room inventory in India.” But talk about charity, and the history enthusiast, says he wants to open a social trust now, even as he recounts conversations about life over the past two years with his late father, as he battled with liver cancer. “I want to open a trust,” he says exemplifying Alexander the Great. “Alexander had told his grave men not to embalm his hands, and keep them open to signify that he took nothing. I plan to do something similar by entrusting wealth to a social trust, when I’m gone,” he adds. - The End - Few Lessons for Investors (in no particular order and by no means comprehensive) – by yours truly 1) How to invest in stocks? Just like how porcupines mate…”very carefully”. 2) Two rules for stock investing (Warren Buffett) #1 Don’t lose money #2 Don’t forget rule no. 1. 3) Never invest lump sums in equities in one go…you may also lose it in one go. 4) If you are new to stock investing…invest in small lots for the first few years 5) Do not put all your eggs in one basket…diversify between stocks. 6) A ‘balanced-diet’ is not only good for physical health but also for financial health…invest some money directly in stocks, some in mutual funds, some in bonds, some in FDs, some in real estate. 7) Invest in stocks of “good” companies (my past articles offer some insight on this aspect). "It’s only when the tide goes out, you see who’s been swimming naked" – Warren Buffett. 8) Do not invest in companies that carry high level of debt (loans). Zero debt companies are the safest. Some sectors are inherently risky due to high levels of debt – such as real estate, infrastructure and banks. Be extremely careful while investing in these sectors. 9) Invest in companies that have long track record…longer the better. 10) Don’t blindly take advice or “recommendations” from stock-brokers. 11) Don’t invest in stocks for the wrong reasons…e.g. in the height of the bubble for fear of being left out. 12) Don’t expect more than 15% returns p.a on stocks. The lower your expectations, the safer the stocks that you will invest in. 13) People do become overnight millionaires, just that they lose such millions soon enough. 14) Don’t invest in a hurry. 15) Stock investing is for the long term (5 –10 years) by its very nature…desire for quick short term returns can lead to loss of principal. 16) Systematic investing in stocks (directly or through funds) helps ‘beat’ inflation and meet long term goals – such as child’s higher education etc.., but as you near the goal – you need to start withdrawing portions of the money and invest in fixed return instruments to ensure capital protection. 17) If you need money for some event within the next 3 years, it’s better to take that money out of the stock market and invest in fixed return instruments. 18) For novice investors, Mutual funds (not NFOs, but funds that have been around for atleast 5 years) or Index funds (e.g. NIFTY BEES) offer a safe alternative. 19) Watch the P/E (price to earnings) ratio of the Index before you invest (> 24 or 25 is danger) (again…more on this in my previous articles) 20) Stocks quoting at extremely high P/E ratios carry similar risk…because you are paying for future earnings which may or may not materialize. 21) Acquire and constantly update the knowledge required to make and monitor investments. 22) If you are investing directly in stocks…do some homework – check out their products, talk to customers, employees to get a better sense of the company. 23) If you don’t understand what the company does…it’s better to stay away from the stock. 24) If you are too lazy, not interested or don’t find the time to monitor your investments - FDs, post office schemes, PPF and other fixed return avenues are better options, although they may not offer much in terms of returns after you subtract the effect of inflation. 25) If you plan to start investing in stocks for the first time, it’s safer to do so after a big crash, because the worst may be behind you. 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