One of India's ace market experts, Saurabh Mukherjea, head of equities at Ambit, has penned down Gurus of Chaos, a book on India's top money masters
It is a distillation of the wisdom of seven of India's top money managers. and also begins with a powerful analysis of the Indian equity markets. Sample this: over the past 20 years, 80 percent of Indian stocks have failed to give returns better than the average inflation rate which has been 7 percent. However, a minority of 20 percent of the shares have given returns above the nominal gross domestic product (GDP) growth rate of 14 percent. So the task of money managers in India is a tough one: to sift from this massive bundle of 6000 shares and choose that 20 percent, which will give returns. One small error and he picks one of those 80 percent, and his returns suffer.
Who are gentlemen who have passed this test? Saurabh picks seven outstanding money masters who have lived through the chaos and mastered it: Sanjoy Bhattacharyya, formerly CIO of HDFC AMC; Alroy Lobo, CIO of Kotak AMC; Akash Prakash formerly of Morgan Stanley but for many years now running his own fund Amansa Capital; S Naren, CIO at ICICI Prudential AMC; Sashi Reddy of First State Stewart, Manjunath who started at Canara Bank and became a trusted advisor of big Asian hedge funds; and one CIO of an iconic fund who wishes to remain anonymous.
In an interview with CNBC-TV18's Latha Venkatesh, Mujherjea, along with two of the money masters mentioned in the book (Bhattacharya and Lobo) talked about how to make money in the Indian markets, how to avoid the extremes of greed and fear and how to find and stick with sustainable value.
Below is the transcript of the interview on CNBC-TV18. Q: What according to you makes fund management so treacherous? You have given us those numbers but can you tell us what are the big challenges that fund managers face in India? Mukherjea: The first challenge in our country is the incredible polarity in companies. There is these 80 percent of the market, the vast majority of the market where the returns are so poor that in real terms your money actually shrinks in size if you invest in these stocks. So, it is a small minority of stocks that you have to find to invest in. The second challenge which is again very peculiar to India is that amongst the world’s large stock markets we churn the most. So, if you began a decade with 50 stocks in the Nifty, by the end of that 10 year period half of them will be gone. So, that is what a 50 percent churn rate is quite remarkable for a large stock market. The third issue which makes money managers lives very difficult is that we are the least liquid of the world’s large stock market. So, polarity of returns, high churn rate and low liquidity. Q: Low liquidity means you have a bad stock and you are stuck with it, even correcting your mistake is horrendous? Mukherjea: Absolutely, the literal act of buying and selling itself is a demanding task in our country. Q: Exactly how much of quantity of work is needed and what according to you, you would look for when you research? Lobo: I think the first thing to look at is taking a strategic view on companies, taking a strategic view on sectors not only for the next one year but for the next 10 years. That requires a lot of in-depth analysis. Lot of ground work has to be done before you initiate coverage or even take position in a particular company because that is what builds conviction. Once you do that ground work, you know exactly how to play the particular stock or sector. It takes a long time to get control over dominance of a sector. I would say minimum about three to four years to just understand the dynamics of any sector and every year you are learning in the sector. I can’t say even now that the markets don’t surprise me; they do. So, it is a learning experience. We need to also be humble in the market to accept mistakes and every mistake should be looked as a stepping stone to correct and evaluate your investment philosophy. Q: Are these lessons something you can learn from management books or from financial management books? Is this like a return on investment (RoI), return on capital employed, are these the numbers to be employed or is it something beyond that? Reading the notes to accounts, trying to make a connect with the P&L and the balance sheet and then going behind that to the character of the businessman himself? Bhattacharyya: You spoke about whether we get the best sort of training for being investors from conventional education? My answer to that, having now done it for so long, is no, actually it is a huge handicap to do an MBA. It is a huge negative. Not only is it not neutral I think it is a massive negative. It puts into your head at a very impressionable age bunch of really third grade ideas. For instance and I will give a very simple one, which 99 percent of people still believe, that higher risks lead to higher returns. It is absolute hogwash. It takes a long time to realise that the smart guys are the ones who take low risks. So, lower risks lead to higher returns. If you examine portfolios of fund managers across the world who have succeeded, funnily they are all low beta portfolios; most of them. It is amazing, but no one seems to learn from this.
Q: Let me come to the whoop and wharf of the book, what exactly are the qualities that a fund manager needs?
Mukherjea: At a very practical level the literal concepts of finance that we just discussed a few minutes ago, things like RoC, cash flow, that basic education in finance is necessary. As we know it is not just an MBA, there are several courses that one can get that from, several good books that one can get that from.
What has fascinated me and the reason I wrote this book was what I found was that the psychological traits, the behavioural traits of great fund managers tend to be very similar and they tend to be around immense amounts of curiosity. Great fund managers are very curious human beings, they tend to read a lot, they are very inquisitive, very questioning, very sceptical in their mindset. Allied to that is this calmness of mind, calmness of character and predisposition which allows them to take a much more rationale view of the markets rather than swaying with greed and fear like the rest of us do.
Perhaps the third and final aspect which I have tried to highlight in the book is what I call 'iconoclasmo contrarianism. This ability to look at the world and take an independent view of the world rather than swaying with the breeze, it is a quite unique trait.
If you ask me what is the single trait of great investors is their ability to take a differentiated view of the world and an independent view of the world at a time when everybody else is running helter-skelter is probably the single most defining trait of a great fund manager. This set of characteristics is what makes a great fund manager. The basic knowledge of finance is given thankfully to a lot of us but very few of us are able to rise to this level where our brain functions in this differentiated manner.
Q: Since you agreed so vehemently with Saurabh when he was speaking, how do you keep away from this extremes of greed and fear because selling a long with the crowd and buying along with the crowd comes without any prodding, it just comes naturally to people.
Bhattacharya: It goes back to the realisation that if you want to do well here you can't cheat on yourself. In other words you can't do a review and else does and expect to be better than them. There is a wonderful book I read many years ago which said the market cannot beat the market. So, if you are the market, if you are doing what everyone else is doing then how are you going to do better? So, once that sort of sinks into your head then you begin to ask yourself what is it that I can do as he said differently that may give me a chance to do better than my peer group?
Just to add to what Saurabh said -- I think all of what he said I totally endorse -- but my personal learning and what I have also observed by having the good fortune to have met a lot of high quality people in this industry, I think three or four other things also to my mind are very important.
The first and to me the most important which stands out and you see it in every guy who has really done well humility. The market punishes hubris, arrogance very cruelly. If you don't have genuine humility it doesn't matter when you come a cropper, you will come a cropper. Some come a cropper quicker, some meet their fate later but humility I think absolutely basic.
Then 2 or 3 other things, one, which is very important and very simple and everyone can do it is be patient. Power of compounding is one of the most powerful things in investing. You sell too early because fundamentally most of us are very impatient. We can't bear to do well in a sense.
Latha: What according to you, would you want to add to the qualities of a fund manager and if you want to develop a little more on this courage to be a contrarian?
Lobo: One is of course hard work because you definitely need to spend lot of hours evaluating a company. You have to be a continuous learner in the market. You just can't assume that you know the company and stay off the radar with the company for a long period of time. If account manager takes leave for a long period of time, for example for six months he is already obsolete in the market. So you need to be in constant touch with the market.
Second is humility and I would like to endorse that because the market teaches you a lot of lessons but more important is to stick to an investment philosophy. Most of the returns which good fund managers tend to make are returns which are in good quality companies which they have held for long period of times.
Trading in and out, you may gain sometimes, you may lose sometimes but if you are holding a company you may have cycles but with the secular growth of the companies upwards you can really see the benefits of compounding and all these 100 companies which I talked about they have compounded not only in 15, 10, 7, 4 years consistent returns. So it is not like a one year story.
So when you are looking at a stock, looking at a sector you just can't take a one year view, you need to take a much more longer term view and that is how you are basically able to generate superior returns which is away from the general pack in the market.
Latha: I suppose choosing a company should also be like choosing a friend. It should not be a company whom you are ashamed to be seen with in public.
Bhattacharya: I just want to add one thing very quickly because what Alroy said is really important. He spoke about it and to my mind all of what he said really is about discipline and there is something, which a lot of people have said that it really helps if you are going to make a career as professional investor to remember this but it is very difficult, you ask this question what gives you the courage to be contrary and in my view this is it.
Focus on the process, don't worry about the outcomes, too many of us as investment managers are just obsessively concerned with outcomes. Once you manage to get your mind away from outcomes but you are very disciplined and you are very determined to do what you believe is necessary to invest in a purposive manner which is what they call process, you will do well and this is true across most things in life incidentally, not just investing.
In Hindu philosophy it is called 'Maya'; the obsession with the outcome, the attachment with the outcome. So, in investing once you get around that Maya you are fine and then you just need to do what works for you and that needn't be the same for Saurabh, it needn't be the same for Alroy but you do what works for you and you do it honestly and consistently and that is it.
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