an article from the economic times dated 08.09.2007
cheers,
jdm.
Return of The Reclusive Value Investor
Damani Is Back But Can He Recreate His Magic?
Santosh Nair MUMBAI
MARCH 2007. Investors were jettisoning Tata Steel shares on worries that the company might end up with too much debt to finance its acquisition of Corus Steel. The stock was down nearly 20% from its high of Rs 519 touched on January 29, two days before Tata Steel won a long bidding war for Corus.
Intently studying the stock from his trading screen on the 9th floor of Dalamal House in Nariman Point was 54-year-old White & White (one of the many names this legendary investor is known by on Dalal Street). He sensed too much pessimism. He had been steadily gathering shares of the steel behemoth in small lots over the past month.
He was convinced it was time to take the plunge. Mr White & White ordered his dealers to double up their purchases. His voice was calm as ever, though this was his first big bet since his return to the stock market in early 2007 after a sixyear hiatus.
Successful speculator
SOON, data showed Tata Steels cost of debt for the Corus acquisition would be lower than market fears. The fortunes turned and the stock touched a new high of Rs 622. Radha Kishan RK Damani, stock market icon, had hit it off again, like an old hunter returned to the jungle. The reclusive investor, always dressed in white and white (hence the nickname), had seen an opportunity in the chaos and make a killing.
Successful speculation is just one facet of Mr Damani, who shuns publicity despite his formidable reputation. He had actually earned his name as one of Indias finest value investors and built his fortune by identifying winners among MNC stocks during the late 80s and early 90s. His modest appearance can be deceptive. Mr Damanis net worth is an elusive figure, but some market players put the number at Rs 5,000 crore. His holdings are spread across a range of companies from 3M India to Samtel India and he typically holds less than 1% stake.
Old-timers still remember his big bang victories on the bourses, but Mr Damani quit the markets suddenly in 2001 to dabble in Indias nascent organised retail industry. Over the next five years, he built the D-Mart chain and gained respect as an entrepreneur. But one day in February, just when folks had begun to forget his influence over the stock markets, Mr Damani resurfaced. The question now in everybodys mind is whether he will regain his old touch.
To answer that question, one must probe the man and his investing style.
The man with the Midas touch
Mr Damani started his career as a trader in ball bearings, far from the battlefield of bulls and bears. Following his fathers death, he shut shop and joined his brothers stockbroking business, inherited from their father. Just 32 and lacking knowledge of market dynamics, Mr Damanis only asset was his keenness to learn.
He was not a value investor to begin with; he began his career in the stock market as a speculator, says a Damani watcher.
Mr Damani was quick to realise speculation was the not the best way to grow capital. Inspired by the legendary value investor Chandrakant Sampat, he started playing for the long term. Often, his strategy was simple. When he bet on Indian Shaving Products Ltd. (now Gillette), his reasoning was: People will shave no matter what.
It took Mr Damani some time to gain a foothold, and several of his initial bets flopped. But he steadfastly refused to follow the herd, and concentrated on evolving trading strategies of his own. Gradually, he began getting his calls right, and within the next couple of years he had joined the ranks of the big boys on Dalal Street. Few players possess the kind of patience he does. But when he was convinced about any stock, he would buy his desired quantity in one sweep. And if he felt that a stock had run its course, he would dump his holdings at one go, says an associate.
Also noted was his promptness in cutting losses. Unlike many other players, ego would never get in the way of his booking losses, says the associate. Mr Damani himself once said: Cutting your losses is like performing a surgery on one arm with the other; painful, but it has to be done, otherwise the arm may have to be amputated.
Mr Damani likes to keep a low profile. He is not very articulate and does not communicate much, but he is a great listener. He patiently hears out everybody and never scoffs at any ideas. It is a different matter that at the end of it all, he would back his judgment and instincts, says the associate.
All along, Mr Damani made some great calls both on the long and short sides of the market. Yet, many players viewed him as a bear rather than a bull. In India, anybody who is skilled at short selling is frowned upon, the general perception being that short sellers destroy value, says a close friend of him.
His limited circle of friends is said to include Dalal Streets latest cult figure Rakesh Jhunjhunwala. Often, the market believed they hunted as a pair. Even if one of them was active at a counter, broking circles would say GS-Rakesh was in it.
A string of successes notwithstanding, it was the epic battle of 1992, in which he emerged victorious, that would mark Mr Damani as a stock market legend. It was the battle with the Big Bull, Harshad Mehta.
Reining in the Big Bull
The flashy Mr Mehta shot into prominence thanks to a daring rally that lasted the better part of 1991, only to eventually fizzle out in April 92. Mr Damani, on his part, was bullish on the market only till February 92. Even as the Big Bull was pumping up the shares, Mr Damani began to go short. He reasoned blue chips had already run up a lot and fundamentals no longer justified the rally. What Mr Damani had not bargained for was the seemingly limitless supply of funds to Mr Mehta. The market kept rising, but rather than cutting his losses, Mr Damani rode on his conviction and doubled up his short positions. The market took off vertically between February and April, and RK was trapped badly, recalls a veteran broker. His losses were huge, and if the rally continued for a few more weeks, he may even have had to shut shop.
But then, it emerged that Mr Mehta had been siphoning off funds from the banking system and using them to buy stocks. When the scam got exposed, the market went into a tailspin. Mr Damani not only regained the lost ground, but walked away with a tidy profit.
Mr Mehta was to lock horns with Mr Damani once more in 1998, but this time with fatal consequences for the Big Bull. Mr Mehta now focused on three stocks BPL, Videocon Industries and Sterlite. The prices of these shares touched dizzy levels even as the broader market fell. It was as though Mr Mehtas picks were defying gravity.
All the time, Mr Damani was biding his time on the sidelines. A disciple of the old school of investing, his assessment was that the stock price had run far beyond fundamentals. At the time he thought was right, he started building short positions. Prices continued to climb and he had to square off some initial positions at a loss. But soon, signals came that the Big Bull was having trouble financing his positions. And Damani moved in for the kill. He simply doubled his short positions, under the weight of which, the market caved in.
Panic set in. The prices of the three chosen stocks plunged 60%. Some brokers say exchange authorities even tried to bring together Mr Damani and Mr Mehta for a compromise but the talks failed. It would be wrong to say that RKs call was motivated by a desire for revenge, says a market watcher who once worked with Mr Damani. It was all about the price.... He would have short sold those stocks irrespective of whoever had a bullish view on them, he says.
When Mr Damani came to know that some small shareholders were left with positions they could not exit, he covered up a part of short positions by buying shares from these investors at a negotiated price. This was not the first time he had done such a thing. In the early 90s, Mr Damani had accumulated a pile of ACC shares. When a payment crisis loomed, Mr Damani responded to a request from authorities and offloaded a part of his holding at a discount. He was among those probed by regulators for suspected price hammering, but was eventually given a clean chit.
Towards the fag end of 1998, overall market sentiment began to improve. Before long, the market was in the grip of a bull run led by technology stocks, which would peak out in February 2000. RK continued to trade, but those close to him say he had already begun scaling down the number and size of his bets. Was he preparing for a self-imposed exile from the market beginning somewhere in 2001 for the next few years? Friends say he was always passionate about retailing, but there were other factors also that influenced Mr Damani to retreat from Dalal Street?
After the stock market crash of 2001, bear operators were again under the regulatory scanner, the allegation being that they had colluded to hammer stock prices. Needless to say, Mr Damani also figured on the list of suspects. Like any other operator, RK made most of his money being on the long side of the market, says a broker who knows Mr Damani for long. He had a finger on the pulse of the market and would not hesitate to sell short if the situation called for it. Unfortunately, his short (selling) calls attracted more attention than some of his long (buying) calls, he says.
Some players say that Mr Damani found himself a bit out of depth during the technology boom of 1999-2000. He stuck to the classic rules of trading, short selling shares that he felt were over valued and going long on the under valued ones. But stocks from the sectors that he had an sound understanding of cement, automobile, steel etc were out of favour. Technology was the buzzword at the bourse, and irrespective of whether those companies were making money or not, investors were falling over each other to buy into them. And Ketan Parekh had now taken over the reigning Big Bull, and carved out a reputation for himself as a champion of new economy stocks. Mr Damanis old school strategies did not work well for him in this period.
The comeback
If anyone had not noticed, Mr Damanis right calls on Tata Steel and State bank of India made them aware of his return to the stock market this year. But this time, it has been a mixed bag of hits and misses, circles close to him say. Over the last one month, he has been as successful or unsuccessful as other players in his league, says a Damani watcher.
It may be premature to judge the old fox when the markets have not shown a clear trend.
