Drawing on decades of market cycles, the ace investor, speaking at the Mint Money Festival on 14 February in Mumbai, argued that compounding on a larger base, deeper participation and improving corporate profitability could make the coming decades disproportionately rewarding for patient investors.
Below are edited excerpts from the conversation.
Tech accounted for nearly 30% of the index and drove the most wealth creation over the past five years. With many tech stocks now underperforming, how do you see the sector?
Until 1994–95, India didn’t really have a technology sector. Infosys’ IPO in 1993 struggled. Then Y2K happened (year 2000), and the world turned to India to solve its software problems. Over the next 25 years, cities like Bangalore, Noida, Hyderabad and Chennai grew on the back of this opportunity.
Technology services have enjoyed a long phase of prosperity. Now we may be entering phase two.
As Jensen Huang of Nvidia says, AI changes the task, not the outcome. Coding time may shrink from days to hours, but the number of projects could multiply. If there are one million projects today, there could be ten million tomorrow. Capacity expands, and so does demand.
Companies like Infosys and TCS remain relevant. There may be adjustments over the next year or two as AI evolves, but their capabilities are growing.
At the moment, the sector is facing headwinds. In business, sectors move through headwinds and tailwinds. Banking currently has tailwinds; IT has headwinds. Active investors may choose to stay underweight. Passive investors will naturally reduce exposure relative to the index.
The tech companies in the US contribute 25-30% of the top tech companies. Does India’s lack of IP-based tech giants limit our ability to create mega companies?
It doesn’t matter. America doesn’t have two-wheeler companies worth $100 billion, but we do. Every country creates wealth in its own way.
The stock market reflects the present value of future corporate profits. Mauritius can’t build Nvidia; it sells hotel rooms. We need to focus on what we are good at.
India has flat land, sunlight, and strong agricultural potential. We don’t need to copy America, we must create wealth our own way.
Since 2008, market cap-to-GDP ratios have risen sharply. The US is at 2.6 times GDP. How do you interpret this? Where do you draw the line on valuations?
Our latest wealth creation report is just about this–how the world is becoming wealthier.
There are two things in markets: price and value. Everyone knows price, but very few understand value. Value grows steadily at 20-25% annually in strong businesses. Price is noisy; it can go up 50% or down 30%. For example, SBI’s value may grow at 15-17%, but its price has moved 50% in a year. That is noise.
The wealth machine creates a wealth effect. As wealth rises, people consume more, such as on expensive weddings, luxury homes. Gains spill into gold, silver and land. When one land deal happens at a higher price, the entire village is repriced.
The US at 2.5 times GDP is not necessarily overpriced, as its corporate earnings are strong. If America is at 2.5x of GDP, India at 1.3x is not expensive. The world is interconnected.
In the last five years, India has created huge wealth in the markets, yet we haven’t seen much capex. Is this market wealth actually fueling the economy?
Let’s look at where wealth will be created in the next five years. India reached a $1 trillion GDP in 2007, with a market cap roughly equal to GDP. Today, GDP is $4 trillion, and the market cap is $5 trillion. Over the next 17 years, GDP may grow from $4 trillion to $16 trillion, a fourfold increase, driving massive demand across sectors.
For example, car production, which was under a million in 2007, is around 5 million today. When GDP doubles, production won’t just double; it could triple or quadruple. Political and economic managers need to minimize disruptions, such as geopolitical events, wars, or crises, to allow this growth trajectory.
But this ‘paper money’ is concentrated in the top 5% of the country. How will the remaining 95% of the population, who have limited access to wealth-building opportunities, actually grow rich?
When you are poor, wealth creation starts in the real economy. When I started in 1987, I worked 12–14 hours a day, six days a week, to accumulate my first crore and it wasn’t through the stock market. As people become wealthier, their portfolios can surpass the size of their business.
Currently, India is a poor country; 95% of people must work hard. The 5-7% who are rich, including shareholders and family offices, drive the wealth effect. In the US, 55-60% participate in the markets, so the US economy runs on the wealth effect. For example, in the US, when the Dow or NASDAQ rises 15-20% on $70 trillion, about $7–8 trillion is created, and 10% of that is spent, which results in contributing to GDP growth.
Many Indian economists underestimate this ‘wealth effect’, which explains why quarterly GDP projections often miss the mark. As stock market wealth grows, it translates into real-world spending and economic growth.
How should investors build a long-term roadmap to benefit sustainably from the next trillion dollars of wealth creation?
If you look at the past 30–50 years, India’s economic and market evolution has been steady and methodical.
The problem is that investors are in a hurry. They aren’t satisfied with doubling their money every five years. If that were the goal, they could simply buy an index and earn 12–13% over time. Instead, they want to double their money every year, and if that happens, they want to do it in six months. That greed eventually leads to losses.
Recently, everyone was talking about gold and silver. When losses come, the noise will shift elsewhere. If you don’t understand an asset, why chase it?
The market compounds at about 15%. Earning 15% doesn’t require brilliance. But earning 18% on large sums needs real skill. Earning 25-30%, as Rakesh Jhunjhunwala did, requires exceptional insight and discipline.
Set realistic expectations. Few economies compound consistently. The US grows GDP at 4-5% and market cap at about 7%. India, in dollar terms, has compounded GDP at 9% over 25 years, and market cap at 14%.
You are fortunate to have access to such a market. Patience and not chasing extremes are the keys.
