This mathematical formula great bull Rakesh Jhunjhunwala kept while investing in stocks

Rakesh Jhunjhunwala, the veteran investor, is no more with us. He breathed his last this morning at Breach Candy hospital in Mumbai. Rakesh Jhunjhunwala was known by many names like ‘The Big Bull of Dalal Street’ or ‘Market Bull’ or ‘Big Bull’ or ‘Market Tycoon’ and even often called the ‘Warren Buffett of India’. There was a reason why he got such prestigious references. He witnessed the success of the actions. He was called a stock market investor with a Midas touch. He was idolized by many investors who had the same dreams of becoming stock millionaires or billionaires. But just like every success story has a formula and a background, Jhunjhunwala too had one. He had a mathematical formula that helped him identify his stocks and most of them have performed well.

Jhunjhunwala started his investment with 5,000 in stocks when Sensex was only 150. His first stock was Tata Tea in 1986 when he was in his college. His net worth soared to over $5.8 billion in real time, according to Forbes.

His interest in stocks and trading was sparked when he was a small boy. He used to listen to his father and his friends arguing about the stock market. He found the stock market very intriguing because prices used to fluctuate and wondered why this happened.

In 1984, Rakesh took up the challenge of making a career in stock investing and trading. During this time, he completed his studies in Accounting (CA). The formula did not magically come to Jhunjhunwala, he had to focus and study stocks and markets intensely. He had to do a very in-depth study on the populations since they were his livelihood.

Finally it was entered into a simple mathematical equation. In an interview with N Mahalakshmi, formerly editor of Outlook India, he said, “I was presented with a simple mathematical equation. Earnings per share (EPS) x price-to-earnings ratio (PER) = price. It was clear that when both determining variables price, i.e. EPS and PER earnings, stock prices explode.”

In the interview, he revealed that in stocks “all profits arise due to certain prevailing factors which are dynamic in nature.” add to these benefits.

According to Jhunjhunwala, EPS is very specific to each company, while PER depended on various factors that included both internal and external to the company.

He stated in the interview that EPS depended on three factors: the accounting policies followed, the cash profile of profits and, the return on capital employed, i.e. the efficient use of capital. Meanwhile, he explained that internal conditions that help determine PER are reward records, earnings predictability, risk model, perceived growth opportunity and perceived management integrity.

He had said that to predict a company’s future EPS and PER, one needed to understand the real life business.

Also, in the interview, he said, predicting EPS was mostly “part science and part art.” However, this was not the case for PER predictions. He stated that PER is art with every little science.

He had described PER as “like cooking and sex, it cannot be taught, but must be learned”. He further admitted in the interview that “understanding/predicting PEs is the most difficult of all and the most critical factor in successful investing.”

According to the great bull, the ingredients of successful investing were locating the gaps between current expectations and likely future performance, which provided him with favorable odds as an investor.

Earnings per share (EPS) is one of the important factors that indicate the profitability of a company. EPS is a common metric and helps show how much money the company makes for each share of its stock. The figures are calculated by dividing the company’s net profit by its outstanding common shares. In general, the higher the number of EPS, the more profitable the company.

The price-to-earnings ratio (PER) is one of the critical metrics that help understand whether a stock is cheap or expensive. They also help in understanding future stock price levels. This metric is one of the most popular factors for stock valuation. It is a relationship between a listed company’s share price and its earnings per share (EPS).

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About the Author: Chaz Cutler

My name is Chasity. I love to follow the stock market and financial news!