There’s an old joke about a stock analyst and a Wall Street broker going to the races. The broker suggests putting $10,000 on a horse. But the analyst isn’t convinced: He says he wants to understand the horses and do a risk analysis before investing any money. The broker tells the analyst he’s too theoretical and bets on the horse. He ends up making a killing. “What’s your secret?” asks the analyst. “Simple,” says the broker. “I have two children, three and five years old. I added their ages and bet on number nine.” The analyst was stumped: “But three and five is eight.” The broker’s response? “I told you, you’re too theoretical. Didn’t I just show you that experimentally my calculation is correct?”

Jokes apart, money-making isn’t everybody’s cup of tea. And nobody knows that better than Raamdeo Agrawal, the 59-year-old joint managing director of Mumbai-based Motilal Oswal Financial Services (MOFS). Agrawal moved to Mumbai three decades ago to take the chartered accountancy exam and had no links with the city’s elite broking club. But with a combination of street smarts and tenacity—and perhaps a little bit of luck—he and his business partner, chairman and managing director Motilal Oswal, built one of India’s largest independent stock broking companies. Today, MOFS has a million clients under its belt and a market capitalisation of nearly ₹13,000 crore. Last year, its revenue rose 44% to ₹2,984 crore from ₹1,922 crore in the previous year, while profit leapt to ₹541 crore from ₹360 crore during this period. “I had no knowledge of research or investing but had a thesis that if you buy a good business you can make money. It worked and I have been hooked since,” says Agrawal.

He still remembers his first investment in a construction company, Cemindia, way back in 1980. Agrawal bought the stock for ₹15 and later sold for ₹55. It wasn’t just an off-the-cuff investment: He says he pored over a company balance sheet he got from a roommate who worked for Cemindia’s auditor, and then took a call to invest. He had clearly found his calling. Seven years later, he teamed up with Oswal, who lived in the same hostel, and bought a Bombay Stock Exchange stock broking card. By the early 1990s, Agrawal and Oswal had expanded their broking and equity-related research business and had multiplied their ₹15 lakh investment to ₹30 crore during the days of the Harshad Mehta boom. Their investing mantra was simple: Do a lot of research, focus on small- and mid-cap companies, pick out good stock investments early, and stay invested for the long term.

Navin Agarwal, managing director at Motilal Oswal Financial Services
Navin Agarwal, managing director at Motilal Oswal Financial Services

But competition has been nipping at Agrawal and Oswal’s heels. In some cases, they’ve been overtaken by younger rivals. For example, IIFL Holdings already has a market capitalisation of more than ₹21,800 crore. Another competitor, Edelweiss, has a robust investment banking business and is valued at ₹28,874 crore.

MOFS has pulled out all the stops to keep pace. It might have built its reputation and fortune in stock broking, but over the years its business has gone way beyond. Today, it is a diversified research-backed financial services group with six subsidiaries spanning equities and commodity broking, distribution of mutual fund products, asset and wealth management, private equity and now, even home loans. Markets clearly have complete confidence in them: The company listed in 2007 and its five-year returns stand at a whopping 1,132%.

It hasn’t been an easy ride. Their decision to get into the mutual fund business in 2008 didn’t get off to a flying start. When Oswal ventured into mutual funds, he thought he could put several of his firm’s skills to use simultaneously. He could use the research to buy stocks, his broking to trade the stocks he recommended and get more from the same set of clients by having them invest in his mutual funds. It took the group a while to break into the mutual fund space and even today it has just a 2% market share although its total assets under management are ₹ 33,000 crore. But there’s enormous room for growth as the equity markets bug is still relatively nascent in India compared with the U.S.

Both Agrawal and Oswal have invested all their personal wealth in MOFS mutual fund schemes to demonstrate how much they believe in what they do. They have six funds spread across the small-, medium-, and large-cap segments: Their flagship Motilal Oswal Focused 25 Fund has delivered annual returns of 18.8% over the past five years, outperforming the BSE’s 15.8% during this period. “We are profitability-led in our asset management business, keeping our focus to a few funds unlike others who launch numerous funds,” says Oswal.

Like most big investors in India, Agrawal too draws inspiration from billionaire investor Warren Buffett who he met in 1994. He calls Buffett his guru and swears by his investment philosophy. He has a picture with Buffett, taken long before the selfie era, prominently displayed in his office where he sits in front of a large monitor keeping tabs on stock quotations and trading numbers. Since 1994, Agrawal has regularly attended Berkshire Hathaway’s iconic annual Omaha meeting, described as the Woodstock for capitalists, where thousands of financial advisors and investors gather over three days. “In those days, phones were so expensive. I used to land up at the New York airport and wait for the host to come and pick me up. I now wonder how it all happened,” says Agrawal, sitting in his Mumbai office with a pile of investing books around him.

The annual trips, which have almost become a pilgrimage for him, aren’t just a vacation or a chance to schmooze with the investment community. Agrawal has been using key takeaways from the annual Omaha jamboree and combining them with the company’s deep research to put together a highly-regarded annual wealth creation report since 1996. Many consider it the gold standard for such reports. Not surprisingly, if there have been hits, there have been misses, too. While some of the group’s picks such as Hero Honda, Sun Pharma, and RBL Bank had investors laughing all the way to the bank, there have been some wrong bets too. For example, they recently recommended Manpasand Beverages, but the stock tanked.

The vagaries of the stock market made Agrawal and Oswal understand that diversifying into other areas was inevitable. Two decades of wearing their investors’ hat made them realise that their fortunes were squarely tied to the market. And markets are unpredictable: So, when Indian markets boomed in 2003-07, their company did well but, subsequently, after the Lehman crisis in 2008, its market capitalisation whittled down to ₹1,000 crore in November 2008 from ₹5,500 crore in January 2008. In fact, when they arrived at their swank new headquarters in Dadar in 2009, there were questions about their survival.

It’s only after 2013, when the market picked up, that its stock went up again. That was when MOFS decided to spread its risk and get into the home financing business. There was pushback from Agrawal, but he came around eventually. Oswal’s logic was to increase business avenues so that the company had stable revenues even if stock markets were weak. “Our broking business and mutual fund business need very little capital and, therefore, we decided to create a business that could put the cash we generate to good use,” says Oswal. “At the core, we were an investing firm and we didn’t want to diversify for the sake of it.”

They had two options: They could invest in several small housing companies or they could create their own company. Oswal decided to build their own company, Aspire, as he envisioned low-cost housing finance as a long-term opportunity in India. He invested ₹100 crore initially and was willing to commit another ₹300 crore if business picked up. The stock market welcomed the decision. Two years after Aspire was launched, the MOFS stock leapt from ₹ 350 in June 2016 to a high of ₹1,585 in January. Analysts even attributed a third of the company’s valuation at the time to the housing finance business.

Aspire seemed to be having a dream run until cracks began to appear early this year. An increase in bad loans from the business hit MOFS hard, and the double whammy of demonetisation and the goods and services tax also affected business badly. MOFS realised it had grown its loan portfolio quickly, a mistake newbies in the business often make, especially if it drives up stock market valuation. Instead of setting up a network of agents to spot homebuyers and give them loans, MOFS bought a part of its loan portfolio from another housing finance company. The move gave it scale and heft, but also created its own set of problems: It found itself saddled with higher-than-expected delinquent loans in housing finance which spooked investors. For the year ended March, Motilal Oswal’s profits were suppressed by the nearly`₹30 crore provisioning in the Aspire business. But Oswal is unfazed: “Whatever has happened is only a temporary blip and we will correct it.” Recently rumours surfaced of a split owing to differences in investing the firm’s cash in Aspire but the founders denied it. “I can’t think of splitting with Motilal,” Agrawal says.

Their vision takes them far away from the stereotypical image of a stock broker as someone pounding his fist and yelling “sell, sell, sell” on the stock market floor. The risk-taking investor in Agrawal is always hungry to make their money work to make even more money. So, much like his role model Warren Buffett, he too has gone down the road of buying out large stakes in companies. Agrawal and Oswal set up Motilal Oswal Private Equity (MOPE) in 2006 as they realised that small- and mid-cap companies would be significant beneficiaries of India’s growth story. MOPE manages $570 million and has raised three growth capital funds and three real estate funds. It generally targets the consumer, financial services, healthcare, and industrial sectors; and prefers to enter as a substantial minority shareholder in companies exhibiting superior growth.

The firms it has invested in include food company Cremica, Parag Milk Foods, and Cycle incense brand maker N. Ranga Rao & Sons. Over the past few years, MOFS has also invested in the finance sector. In 2013, it invested ₹20 crore for a 35% stake in AU Small Finance Bank and ended up cashing out ₹5,000 crore in less than five years. The firm has also bought big stakes in RBL Bank, Dewan Housing Finance, and Gruh Finance.

Agrawal is bullish about the stock market because of India’s economic growth, but the broking business may be under threat from a new breed of companies—discount brokers. Unlike MOFS, discount brokers charge a flat fee for every trade compared with 0.5% of the traded value by bigger players. But MOFS is undaunted. Its managing director, Navin Agarwal, says their clientele has been built on the back of equity research advisory and customer support that discount brokers cannot afford. “The equity cult is just about starting in India and 60% of our broking trades already happen through a digital interface where we match the newbies,” he says. “So there is a long way to go for full-fee brokers like us.”

(This article was originally published in the September 2018 issue of the magazine.)

Follow us on Facebook, X, YouTube, Instagram and WhatsApp to never miss an update from Fortune India. To buy a copy, visit Amazon.