Market veterans, directors of broking powerhouse Motilal Oswal Securities, Raamdeo Agrawal and Motilal Oswal sat down with Akash Prakash, Fund Manager and CEO of Amansa Capital to discuss the journey of our markets from the pre-reform era to the current style of investing.
Below is a verbatim transcript of the discussion.
Q: One can outline three distinct phases in the last 25 years. In the first phase Motilal Oswal (MOS) was born in 1987 till reforms took hold and Manmohan Singh said that we need to do some fundamental activities to open up the economy during 1987-1992. When you look back it was a period of great chaos, there was open outcry, physical delivery, lack of regulation, disclosure and there were many things that are very different from what we all know and accept and take as natural today. The second phase was from 1992 till the beginning of this decade which was marked by a sea-change in many areas where we had a world class stock coming up, the NSE. Birth of market regulator, Sebi, opening up of the economy and importantly we became outward looking. With world-class settlement system which changed the way exchanges worked; volumes and the ability for people to believe that the market was a safe place. Finally, in the third phase we saw foreign inflows coming in a big way and maturing of the efforts like top quality research and the best practices of the western world being adopted. We saw also the impact of technology what it can do for this industry and we had in 2007 at the end of 2007 a global event that had significant impact on financial markets around the world. So, if you look back and you go back to that first phase – the 1987 to 1992 phase, what are your takeaways from that period? How do you think, what did you do then that was different from what you did subsequently and what you would do now?
Raamdeo Agrawal: In 1987, the so called information arbitrage between this firm that came into existence because there was a difference in stock price of 10% different between Mumbai and Ahmedabad. This was the spot market difference which was prevailing at that point of time.
I could enter into the ring find out the price of some new IPO, like United Phosphorus or any other company and if it is Rs 40 then Zaveri bhai, brother of Moti, he could buy the whole lot of shares at Rs 35-36 and sell the next day.
Q: You are suggesting there was a free lunch then which doesn’t exists now?
Agarwal: The market efficiency gap which was present that time is clearly not present today which is a big difference in last five years.
Second, that time information available was limited with no TV, internet or books and limited information was available from news papers. Basically, only balance sheet was available. Firstly, the company will send the balance sheet after six months and then even if you read the balance sheet after 15 days and even then if one go and buy the share one could make money. This type of opportunity that was available at that time.
Q: There is a much more slow leisurely approach to investing. You did not have to be with the moment?
Agarwal: Research was not so organized. At that time many people did not use to read the balance sheets and take fundamental call.
Q: Interestingly, at that time do you think research had greater value then or greater value now? Did it give you a greater edge in those days?
Agarwal: Clearly, it gave a much greater edge.
Q: Now top quality research is available with most talented analysts who are hard working, doing right things, have state of the art knowledge, but it is a paradox isn't it that sometimes when you look back the value of research then and now, even though the research may have been very crude and elementary probably had more economic value in stock selection then than it does now? Would you agree with that proposition?
Agarwal: Yes. Earlier, the basic data even with the simple return on equity calculation was an insight to somebody. Now with the electronic databases everything can be computed online. So clearly there is no data arbitrage present.
Q: Anything else that is significant, that stands out in your mind about that period and succeeding periods that you would like to draw upon?
Agarwal: Earlier markets were very unsafe.
Q: Do you think that there has been a fundamental change, which has had a significant impact on how people invest in investor’s expectations in that period and investor expectations today?
Agrawal: That time markets were absolute cash market. Phatka andd Badla was not part of the general life. We use to provide that service, but it was a very minuscule portion of the entire operations. Buying and then transferring the share used to take 3-4 months so for making money, one or two year holding period used to be common phenomenon.
Q: Is the 21st century investor obsessed with multi-baggers; I didn’t know that phrase between 1987 to 1992?
Agrawal: Actually, all the multi-baggers were produced then.
Q: Do you think that there is something in that?
Agrawal: Today return expectation is very intense and much more calculated then it was earlier. Earlier it was very simple.
Q: How do you feel that investing and research has changed form 90s to till date. Do you think some of the things that have taken place actually need to be reviewed and we need to go back and think about doing it differently?
Prakash: Today's market is far deeper. When we started investing in 1993 or 1994, there was Morgan Stanley on the one side and UTI on the other. So, there was no depth beyond that as there was no private sector mutual fund industry.
So, any trade you had one of these institutions on one side. I think today the depth and breadth of institution is far deeper. You have private equity, very short-term proprietary arbitrage, best investment banks, proprietary traders, long-only mutual funds, hedge funds, private equities and sovereign wealth. So, I think the depth and the time horizon of the investors that all types of investors today, as oppose to 1993-1994 when there were a very few investors, so that’s a positive.
In those days
Q: Investing hasn't changed in the last 15 years. But what think something which none of us foresaw in the early years was the element of what you would call activism was implemented by Chris Hohn of TCI to one of India's largest companies The ideas of alpha and portable alpha. The idea of relative value to which a lot of research is dedicated nowadays to pair trades which was never seen in the 1990s. How do you look at all these things and how does it actually affect the way in which you look at investing going forward?
Prakash: Activism is something which I believe too. Obviously the type advocated by Chris Hohn is where you take stake in one specific company and then pursue success. I think what is going more important, is that given the share holding structure of Indian companies, there are a lot of companies where the entrepreneurs are having a free lunch. They are doing what they feel like.
Q: This is a recurring theme now, ‘The fee lunch’ theme?
Prakash: The lunch changes. So you are going to see a lot issues which maybe initially led by the FIIs but will eventually be joined by the domestic institution too. There are already signs of it and I hope that will continue. They have bigger issues because some of the sources of capital come from the same organization so they have more difficulty in participating in institutional activism. But I do believe that the time has come for investors to get together.
If institutions get together and begin to ask questions I think a lot of entrepreneurs will find that the appointment of relatives on the board with no qualification will become difficult. I do believe that the time is ripe in
Q: What needs to be changed in the manner of investing going forward?
Agrawal: My sense is that there has been a lot of investing in this last five-to-six years. The excesses of first decade would have to be undone unwind completely in the second. One’s portfolio has to be extremely focused, the process of investing has to be very well defined in an environment when the economy and the market is slowing down.
Q: Is buy-and-hold investing dead?
Prakash: No, I don't think it is dead. It depends on the tenure of capital. So if you have a long-term stable capital, buy and hold by definition is not going to work because you are matching assets and liability. And it is very difficult to get long-term stable capital. So, I think if you don’t have long-term stable capital and given investors expectations and I think that’s very tougher to buy and hold.
Agrawal: It depends on the type of capital you have. But it is buy-and-hold that makes money. And that's not the only form of investing or making money, but this form will definitely make significant amounts of money.
Q: Anything anyone would like to add based on what we have spoken about before we wind up?
Agrawal: I would like to say that in the last five-to-seven years at some point of time
Q: So it's a countdown to zero?
Agrawal: My sense is that last 25 years has been very challenging for the country. I think next 25 years will offer even bigger opportunities.
Q: So, you are very hopeful that we are headed for a much better and bigger and brighter future?
Q: Akash, you share this optimism?
Prakash: Partly because we manage money. So, we have to share the optimism, but I think our generation is actually very blessed.