In March 2011, in an interview with Ramesh Damani, ace stock picker Rakesh Jhunjhunwala spoke about his first big punt, the people who trusted him with their money when he was just starting off, and how being part of a joint family helped him survive a difficult phase in the stock market.
Jhunjhunwala began his career in the stock market in 1985 after becoming a Chartered Accountant. Although his father supported the decision, he did not provide any financial assistance to him.
"He (Jhunjhunwala's father) told me 3-4 things that are the basis of my career today," Jhujhunwala told Damani in the interview.
"He (Jhunjhunwala's father) said don't go to any of my friends, don't ask me for any money, don't ask anyone for any money and don't forget your word is your bond. You have a house you can live here, you are a CA and you can earn Rs 15,000-20,000 a month, you can look after yourself so be fearless. He morally encouraged me," said Jhujhunwala.
His brother too was a Chartered Accountant and put one of his clients in touch with him. She was quite well off and was looking for some good returns on her money.
Bank fixed deposits used to pay about 10 percent at the time, and Jhunjhunwala offered to give her 18 percent return on her capital.
"She asked for a security against the money. I said I have no security. I had just Rs 5,000 in the bank —something I had saved during my articleship (a three-year practical training phase that allows students to work on real assignments). So I told her that what I can do is, you give me a cheque of Rs 1 lakh, I will give you a security after 15 days, then you give a cheque of Rs 1.50 lakh, again I will give you security. After some persuasion, she agreed. So that is how I got first Rs 2.50 lakh," Jhunjhunwala said.
Then, there was a gentleman named Mendoza. "Even today I pay him 24 percent interest. I still have his money with me. He had given me Rs 5 lakh. I went to his house to give him some security against the money, but he refused to take it. I told him 'Mr Mendonza, you have no idea what you are doing. I am in the stock market.' But he said Rakesh, I trust you."
Using the money raised from the two clients, Jhunjhunwala bought Tata Power at Rs 150 per share.
"There was some talk that (power) companies were getting a fixed return in accordance with the Electricity Act. There was also talk that they will link it to the amount of power generated. In those times, the percentage of capacities that was used was far lower than today. Tata Power's capacity utilisation was 100 percent, so the company benefited and the rate of return was fixed to the capacity utilised. And there was good yield too. I bought it at Rs 150 and they used to give dividend of Rs 18," he said. The dividend helped Jhunjhunwala cover a part of his interest costs.
Even as Jhunjhunwala was good at identifying stocks for long term investments, he wasn't making enough money. To make matters worse, there were two years when there was almost no movement in the market.
"I tried approaching my family for help. My father stuck by what he had said earlier. And although he did not help me financially, it was critical that I lived in a joint family. I got married in 1987; I had no income, and I had 2-3 bad years in the market. I did not lose money, but I didn't earn much either.
"Since my father was looking after the house, the kitchen, I did not have any problem. Suppose I was not living with my father, I would not have stayed in the market... I had no savings, I would have had to take up a job," Jhunjhunwala recalled.
This situation made Jhunjhunwala realise one hard truth of investing as he elaborated, "I realised that the passport to growth is capital and no father is going to give it, no father-in-law is going to give it. That capital had to come from trading."
Later, Jhunjhunwala got a good tip from a friend in 1989. "I had a friend, Mr Bajaj, who was very bullish on Sesa Goa. Iron prices were fixed annually... the price had been enhanced for the next year and the stock was still available at Rs 27-28. That was the first punt of my life… I bought 2.5 lakh shares of Sesa Goa at Rs 27-28, then I bought another 2.5 lakh shares at Rs 35-36. Over the next six months, the stock price went up to Rs 65," Jhunjhunwala recalled. The rest, as they say, is history.