You have always said that the definition of a good business is that it should serve a purpose. It should solve a problem. It should be scalable and it should be run by good guys. So, which are some of the businesses you think are built to last business. One of the lovely books you have shared with me built to last. Let us apply that in real life.
Yes, I think clearly you want cash flow, and the way the capitalistic cycle works is that all business go bad after a period of time. You remember Eastman Kodak. The market for photography has exploded, yet Kodak which is the most well-recognised brand name in photography has imploded, it is no longer even traded out there. They did not see the change coming. So, people who think of themselves very narrowly perhaps tend to get defocused. So, you do not think of yourself as being in the railroad business or the airline business but in the transportation business. You do not think of yourself being in the movie business or the television business but think of yourself as in the entertainment business. So, you want to find businesses that have a broad application and have good cash flows to support the yield and you buy them cheap. I think one of the big myths about this bull market that started was that a lot of people started deposing the theory that we only buy quality and we only buy quality at any price, that is a big myth out there because everything has a price especially the market is known to weigh a price for everything.
So, you obviously want to buy a great quality business but when it is available attractive price. So, the stock market is a great discounting mechanism. It discounts everything at a price and you find a bargain, you can get on and step onto it. So do not make that mistake of saying I only want.
I mean to give you an example companies as the quality of Lever and Infosys did not give returns for 10-10 years to investors because if you bought them at the wrong price. So, buy it at the good price. So, a good business at a great price held will almost certainly make you money.
Why do stock markets follow a cycle? There was a time which was a couple of years ago quality at any price it really worked. Now, PSUs have made a comeback. There was a time when TMT did rather well. There was time when real estate stocks were doing very well. Why does it happen?
It is the nature of the business. It is the nature of the beast if you will. One thing I always tell to explain to people is distinguish between risk and volatility. Risk is a chance of you permanently losing capital and you cannot afford to do that. Volatility is the nature of the beast. As you said we are down 1000 points the other day. And think of the other way around. If you told me when COVID started the next four years there will be two wars going on globally, COVID would ravage all the continents, India would go through its own cycle of so many problems, you would not have taken the bet that would be 3x up, but the fact is the index is 3 up. So, market rewards the patient investor, the good investor and businesses find a way to be resilient and come back and I think that is what they are doing. I think this is, of course, a multitude threads in this but one of the threads, of course, is the great growth of the middle class that I told you that is powering up.
Buffett often talks about what he called the ovarian lottery that he was lucky that he was born to white parents in America. I think this generation of Indians should feel very lucky that we are at the right place at the right time.
So, I am going to take the clock really forward, we are in 2024, let us say in 2040 Dalal Street would be there. I am sure we will be interacting with you. What kind of India do you envisage because with each cycle the market cap construct of the market changes. What was blue chip that is no longer the blue chip. What was blue chip in 1995 is no longer the blue chip of 2020. How do you see the construct of the market changing in next 10 years?
Well, it is very difficult. I mean every bull market provides its leadership like I said. We do not know what the next bull market will be like.
But there is one thing I do believe that the capitalist system translates or transmits between fear and greed, that people are going to be afraid to buy stocks and people are going to be rushing to buy stocks. And when they are fearful, we want to be stepping up to the plate and buying and putting our capital to work because at the end we have a deep belief in the abiding nature of capitalism in India and when people are very hopeful and extraordinary jumping on to buy stocks, probably we will book some profits out there. But I often say there are three Ds that are powering India are what I call democracy, demographics and digitisation. India is a young country. While China is going to lose 400 million of its population by the next 20-25 years, India is going to gain 400 million, that is equivalent of creating a US or Europe in India. So, demographics India is in a sweet spot.
So, demographics is almost destiny in economics as I say, so that will happen. Democracy, I mean America is still litigating the 2016 election or some say even the 2000 election. Who won it? Was it Bush or was it Gore? Who won Florida? They do not know.
And in India we have elections, results come in 12 hours, people accept the results and we move on out of that. So, I think democracy is enshrined in India. I think people are now seeing the advantage of that. When you go to capitalistic system, you can have major companies like Alibaba, one day by the wrath of a bureaucrat completely assigned to the dustbin, whereas in India the democracy is slower but it is more jurisprudence going on out there, so that is always good out there and so you put democracy, demographics, digitisation.
When Neil Armstrong had gone to the moon and I was a young kid of 12 years old, he said this is a small step for man but a huge leap for mankind. I think digitisation is India’s huge leap. What has happened allowed us to transform a chronically under infrastructure country to a well beautiful infrastructure because you rely on digital.
So, whether it is UPI, Aadhaar, biometrics, pay electronically, UPI that is transforming the nature of economics and how we are doing business and that is still under appreciated. So, I think that is one part that is helping the domestic economy, this digitisation. The other part is that a lot of home mortgages for example, loan processing, airline ticket processing, Google Maps all are coming to India to be done by boys in the offices in Hyderabad and Bangalore and Pune and Nagpur as you say and that is an extraordinary revolution. They are getting good pay jobs. America just reported 3.5% unemployment rate. They do not have people at $20 an hour minimum wage. Here you can pay them $20 probably a day and probably less than that and get a very high-quality workforce. Cost of telecommunication is zero, cost of office space is pretty attractive in India. So, this business will boom in India.
So, I think the third leg of this three-legged stool, democracy, demographics and digitisation is what is propelling this long-term story out of India.
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