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Asit Koticha says there is no substitute for understanding and knowing the companies or sectors one choses to invest in.
Managing Director at ASK-Raymond James, Asit Koticha says that he's learnt from experience that trading entails speculation and speculation does not leave much room for profit margins because you pay a high price for correctly timing stock movement. He added, that while timing is of essence when investing, it does not work well for speculative positions.
Excerpts from an exclusive interview given to CNBC-TV18
Q: When and how did you first get interested in stocks?
A: Actually speaking, it's a bear market which brought me in. My father used to invest in the stock market and he was a hardcore believer in equity. But in the mid-70s, around very rough patch in the market, that time he lost considerable value on his portfolio and that jittered him. Around that time, I had just joined college and he got so frustrated with the stock market. He told me to just go to the market, talk to the broker, sell off all these investments and put this money into fixed deposits.
Q: Was Mahendrabhai Kampani at JM Financial the first person you worked for?
Q: When you started as a trader, were you an active trader?
A: I used to trade along with investment ideas. In investing, I was much more disciplined, much more focused. But trading happened just as a side activity.
Q: But at the end of the day, one makes money in the trading part of the activity?
A: Sometimes yes, sometimes no. But I think in 1999, when I evaluated my portfolio. There were two observations I could see. One, I did not make a lot of money in trading because some did extremely well and some did horribly. So that was when I thought that this is not paying, while in investment I made a lot of substantial profits and I could retain them. The second thing was that, with short-term fluctuations in a leverage position or in a forward position, I had to pay the margins, I had to pay the differences and for short-term fluctuations I had to sell some of my gems.
Q: You were the first person perhaps on Dalal street to turn bullish on cement.
A: I was one of the early ones because the stocks were available at throwaway prices. Something like Madras Cements was available at Rs 300-Rs 400 when equity over capital was Rs 3 crore. 100 paid up shares and the market cap was Rs 12 crore and they had 18 lakh tonnes of cement and was one of the best management companies and at highly profitable locations.
Q: Were you the first to predict a coming boom in ACC?
A: Absolutely, I think ACC was one where I took a forward position. Madras Cement used to be my investment position and ACC was my forward position. Now in investment, when you go wrong or for a time being you are going wrong, it doesn't hurt you. At the most you sacrifice some of the returns while in the forward position, every fortnight you pay badla. For a short-term fluctuation you have to pay the difference and for ACC, the experience was not very good.
In fact, when I took my first position, ACC's price went up substantially in the first few days only. But later on it corrected and it remained there for a long time and my badla cost was going up, my interest cost were rising and my purchase cost was rising. So in the end, I didn't make the kind of profit that I would have made. For a short-term fluctuation I had to sell a lot of Madras Cements stock, which was a classic gem, and fortunately I had a substantial position in Madras Cements but I had to sacrifice quite a good portion of it for paying the difference.
Q: Did the ACC experience make you stay away from trading because you had learnt an important lesson?
A: Absolutely. I made two observations, which were that you don't make enough profits in speculations because you pay a very high cost on timing and while timing is a good friend in investment, it's bad in speculative positions.
Q: In 1992, did you sense a scam in the making?
A: Lot of people were raising that kind of alarm. Lot of industrialists were also raising the alarm, that from where is this money coming in from, but we never realized.
Q: Warren Buffet talks about a circle of competency, about having some sectors that you like. Did you follow that philosophy? Did you invest in areas where you were comfortable or across sectors?
A: In the early days of my life, I had read a book on growth phase. As defined in that book, growth phase was any company or any sector which goes through a substantial change and which has a substantial impact on the profitability and where the valuation goes up.
Q: You missed the rally in Infosys, Wipro and Satyam, was it a trying time for you?
A: This was very trying period because we were focused on the entire economy, especially in small and mid-cap companies and all of those companies went through a very rough patch and the market ignored them. The market rather focused on technology companies and here we were not in the IT companies, which was a very difficult period.
Q: Give us some recent example where you saw sectoral changes happening? Was it in banking or steel?
A: I think the steel industry went through a very rough patch. With almost 5-7 years of falling prices, lack of enough demand, no capacity coming up. It was a typical business cycle value, where you see that a lot of the companies go into losses after such a long rough patch and when demand revives, you will see steel prices as well as steel stock prices going up. But the main thing is that you have to understand those cycles very well - that at what phase the cycles would turn down or where do you see the signals.
A: You can't beat Nimesh on numbers. He is so perfect in arithmetic, he knows his company very well. He would go through the annual report minutely and he will develop his understanding, meet the people and would argue to a great extent even with the management because he knows his numbers. And Radhakrishnan, his mind used to work in compartments, he used to speculate with one and he used to use another compartment for investment. Both compartments are absolutely separate.
Q: Which style do you follow?
A: I think one develops their own style. In my investment philosophy, I would say that I always try to look at the companies or the sectors which are going through those kind of changes and what impact it can have over those companies in the near future.
Q: Who is the global investment giant, who has influenced you?
A: I think Warren Buffett. Hee is the ultimate in the investment business.
Q: What would be your advice to the people who want to make a career in the investment business?
A: You have to develop your own understanding about the companies and do your homework. Second, you don't have to be greedy in this market, I mean, as Buffett puts it, "you have to be fearful when others are greedy and you have to be greedy when others are fearful."
Q: The logic being that even at 18% compounded interest, you will make a huge sum of money at the end of your career?
A: Absolutely. You don't have to aim at very extraordinarily high returns but even if you make good returns, you will be able to reach your goal steadily. Know your business, know your investment, that is the one major thing.
Q: The ability of the management, is that important when you are a strong numbers person?
A: I am very sensitive to management. A particular trait is they have to be fair to all stakeholders and wherever we see any stakeholder has taken advantage of, or has been treated unfairly, I am very sensitive to it.
Q: You are also very sensitive with regard to management issues, to the companies in the South. You tend to prefer them as opposed to say companies in the East or North India?
A: I think in the earlier days, I would say so because a lot of these companies were managed conservatively but more than that, I think they were lesser known, lesser researched and that is why the valuations were available to our advantage. But later on, I would not say so because now most of the companies are known and well researched, as well as they have high debts and what we have also found was that they are not very investor- friendly.
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