Hailing from Chennai, Rajiv Khanna studied engineering at IIT Madras and worked at two companies before setting up his own business. His venture, Kwality Ice Cream, became profitable and was sold to Hindustan Unilever. The money he received from this became the seed capital for his investing journey.
Khanna is known to be a media-shy person and one who prefers to keep his investing style to himself. But he opened up about his investment journey and style at the recent Tamil Nadu Investor Association’s (TIA’s) annual ‘Bullet Proof Investing’ seminar.
“He has been a secretive investor for a long time,” said Rahul Goel, former chief executive officer of Equitymasters.
Here is a summary of what he said:
Investment journey
He first bought shares of Satyam, the company known for carrying out India’s largest corporate fraud until 2010, before the dotcom bubble. He candidly told the audience that he bought Satyam because his neighbor’s son worked there and he thought it was an interesting company.
As the internet boom was in full swing, he made a lot of money on Satyam and a few other tech stocks. But when the mania finally ended and the dot com bubble burst, he lost a lot of money on these investments. Nevertheless, he had made some money at the end of the dotcom crash.
This allowed him to continue to invest through the next big rally of 2003-07. The same thing happened. He made a lot of money but also suffered some losses when stock markets were hit by the global financial crisis in 2008. He pared some of his gains during this downturn but was profitable on a net basis. Also, in 2016-17, Khanna did extremely well as mid-cap and small-cap stocks shot up, but again lost a bit when the cycles turned.
Fast-forward to the covid-19 pandemic, and Khanna says he sold out early as he panicked. He sold a large chunk of his portfolio around March 2020 and was not quick to re-enter when the markets rallied subsequently.
“I told them (his friends) that the world was coming to an end, the apocalypse is here,” Khanna said at the TIA seminar, recalling the time when markets started to recover in April 2020. He said he invested heavily in gold and in China as he thought their valuations were attractive.
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Investment strategy
Khanna said he has a portfolio of 500 stocks. Every day, he looks at the 30-day daily moving average (DMA) of his holdings and whenever a stock moves below it, he sells the position. He holds on to stocks that are trading above their 30-day DMA. He said this filter will allow him to exit the market before the current euphoria in small- and mid-cap stocks ends.
He also said that until 2018, since there was no capital-gains tax, he could enter and exit stocks in the short term without worrying too much about taxes. That changed in 2018 and he began setting off his short-term capital gains with long-term capital gains. However, Khanna is worried about the income tax department classifying his trading as business income, which cannot be adjusted against capital gains of subsequent or prior years (inter-head adjustment is only allowed in the same year).
Khanna’s solution for this has been to invest in mutual funds. That’s because when a mutual fund does the same thing – selling or investing – it does not have to pay any taxes. Taxes are paid only when the mutual fund unitholder redeems his or her units.
Khanna said he bought a mutual fund with a low amount of assets under management but did not name the fund. Although he’s moving some of his money to mutual funds, he said he’s not fully into it as he thinks the vast majority of mutual funds practice buy-and-hold investing. He categorised this in cricket parlance as a Test match, but said what he is really after are the ones that can play T20 matches – that is, buy and sell rapidly to gain alpha.
Schemes run by Quant Mutual Fund have some of these characteristics. These funds actively buy and sell stocks (evident from high churn rate) and also have relatively a small corpus compared to other funds.
A case for active investing
At a time when active investing is rapidly losing ground to passive investing, Khanna made a strong case for the former. He said, “There’s a general view that he (Warren Buffett) preaches buy and hold. It’s partly true and partly not true. If you go through his stock holding period, the average holding period is six months. His portfolio turnover is fairly high. It used to be even higher when he started out. Now that he manages a large portfolio, it has come down.”
“Also, in a recent article, he says you give me $100 million and I will give you 50% CAGR. He himself acknowledges that active management is far better than passive management so long as you have a small portfolio,” he added.
Khanna said his investing style most closely matches that of Peter Lynch. “He had something like 1,500 stocks and over 15 years or so, managed to deliver about 24% CAGR (compound annual growth rate). He’s one of the best fund managers we’ve had and even his portfolio turnover ratio was really high – about 300% per year,” he said.
“Once in a while, you will come across a special situation where you are reasonably confident. You must make use of it and hit a six when the time comes,” Khanna concluded.
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