In his book The 7 Habits of Highly Effective People, Steven Covey mentions that effective people are not problem-minded, they are opportunity minded. They feed opportunities and starve out problems. Sushil Bhagat (@niftylife1) is one such successful professional.
An investment banker for the most part of his professional life who later went on to become a CFO, Sushil Bhagat's positive approach to life has shaped his move to the markets. He is among the few market professionals who are equally at ease at picking fundamentally strong companies and trading the options market.
At this year’s Investor Carnival held at Goa, Sushil Bhagat could be seen helping other traders and investors and aslo sharpening his table tennis skills.
A voracious reader whose subject of interest covers mythology, anthropology, and of course, finance, Bhagat listens to music from across the globe and finds them meditative.
When he is not reading or participating in the market, Sushil Bhagat is actively involved in what he calls the art of giving. A trustee of Lokhit Trust, he is involved in causes like education for the girl child, providing not only education but life building and financial independence skills. Taking a holistic approach for the betterment of life the NGO is also involved in Water conservation, vermiculture projects, toilets and benches.
In an interview with Moneycontrol, Sushil Bhagat talks of his corporate life and approach to investments and trading.
Q: From investment banking to the corporate world to markets, can you walk us through your journey.
A: I have been a banker by training and have worked for 20 plus years with three different banks, mostly on investment banking. After that I worked as group CFO and/or Director Finance with three different corporates, where I was involved in dealing with large infrastructure projects, cement, steel plants among others.
By qualification, I have done my Physics honours from Delhi University and post-graduation from FMS (Faculty of Management Studies) Delhi.
My first job was with SBBJ (State Bank of Bikaner and Jaipur, now merged with SBI), which was more by design as compared to the moves in the latter part of my career. I joined SBI group as a Probationary Officer (PO) and after completing their mandatory training, I landed up in their credit department.
From the credit department, I moved to the merchant banking division, which, by the way, was the first of the many pleasant accidents in my career path. The credit head handpicked two of us for heading the merchant banking bureau. The other person did not take it but I considered it an opportunity to learn and grabbed the opportunity with gratitude. And from then on, I never looked back.
As luck would have it, the government announced a new policy permitting private banks, and UTI announced the first such bank under the policy – UTI Bank, which I joined.
We struggled through the formative years with fee income barely around Rs 3 lakh per annum and not even covering the annual mandatory fee of Rs 5 lakh. But by 2007, which was year I quit, UTI Bank touched a gross income of Rs 150 crore.
Then in 2007, on account of an accident in the family, I had to choose between an investment banking career in Mumbai or take care of the family in Delhi.
I chose to go back to Delhi.
An opportunity of working with Wachovia, among the leading US banks, for its structured asset finance, opened up. The focus was on investing equity or its derivatives into Indian infrastructure companies. However, as equity investments became a costly product in the post-financial crisis era for American banks, I decided to part ways with Wachoviain 2009 to remain market relevant.
Since then I had changed three jobs as Director Finance or Group CFO in different companies mainly in the infrastructure space.
As for my exposure in the stock markets, it started pretty early with my stint in SBBJ. Some of my juniors there were sub-brokers and would try to teach me about markets. I was not so impressed in the early days and took my own time before I decided to get my feet wet.
Q: What were some of your initial experiences in investing?
A: One of my first exposure was based on news of some Bombay brokers and subscribing to the rights issue of Tata Steel. After some initial setbacks of investing in stocks based on ‘market calls,’ I decided to do my research before investing.
My stint in the credit department helped me in understanding annual reports and financial numbers as well as various businesses and business groups. My strategy for a long time was passive. Along with the quantitative research what has helped me is the ‘feel’ or the non-quantitative factors of investing.
Take the case of Axis Bank, where I was working. I started acquiring Axis Bank at Rs 21. Even though I had ESOPs (employee stock options) I added more to the investment. I continued to buy Axis Bank at lows even when others including some of my colleagues were selling it. I had faith in banking and it is a reflection of the economy. I have been holding Axis Bank for long. Even now if I sell them, I would buy them 20 percent lower.
Among the success stories was Venky’s in 2002. Being in investment banking and interested in numbers, I noticed that eggs were very costly as compared to pulses. Later on, data showed that the production of pulses would be low, and soon enough, the prices of pulses started to rise again. At the same time, egg and chicken prices were still causing the gap to shrink. My presumption was that consumption pattern would soon change as pulses prices kept on rising. The premise turned out to be true and Venky’s was a six bagger in a few months.
Among the failures was Vardhaman Acrylic, which was hit by a sudden change in import duties. Zicom was another miss. Here though the thesis was correct – there was an increase in the popularity of digital security but somehow the company did not update itself, got into governance issues and hence did not perform.
My interest in economic numbers has paid off more often than not. Those numbers reflect the undercurrent of what is driving the economy. It is only when it is reflected in corporate numbers that everyone catches a whiff of what is happening. This also helps you predict the larger variables e.g. interest rates, currency movements.
A thing I learned pretty early on was that one cannot be right all the time. If you play your cards right, you would do well 60-70 percent of the time. I keep that as my benchmark and that is what I tell the people I mentor.
This was also the time when new instruments were introduced in the market and I was quick to adapt them to my overall investing and trading. I was learning by actually practising them and that is how I like to mentor new investors and traders.
I strongly believe the market is not about bookish knowledge. Learning about psychology and market psychology is equally important.
Since then, I learnt by practising and that is also how I like to teach. Whenever someone asks me to recommend a book, I tell them to make a trade. That’s the fastest way of learning as you can relate with what you trade. Markets and life are the best teachers, keep on observing and you will learn faster. Books and peer learning does wonders to your trading only if you practice.
Q: Now that you are away from the corporate life — how do you plan your day? Do you miss corporate life?
A: Do I missing corporate life? Not at all, I am enjoying the freedom and versatility that trading and investing offers me. It is almost like self-actualisation.
At any given point, I have a few tools or trading systems to develop or test. In short, my plate is rather full.
My day starts with calls with my friends who are fund managers or investment bankers across the globe. Between 5 – 8 am India time is the best time when you can speak to anyone in the world. The guys in the US are having their dinner and the ones in the East are reaching their offices. I talk to them to exchange information and ideas.
But when the market opens, my biggest concern is about protecting my capital. I take the market one day at a time. These lessons that you learn are from failures and not from successes.
I have a process of reviewing my trades which I do one day in a month where I go through all my trades for the month to see what went right and what went wrong.
Q: How do you invest?
A: My investing approach has always been top-down. I look for sectors that I feel would benefit going forward. Within that sector, I then look for value drivers and value creators. Every sector has a secret sauce which I try to pick. My training as a risk officer helps me here. If I like what I see and the sector and companies are transparent, I would further investigate.
Money can be made in quality stocks also and that is my hunting ground. I create models on the stocks that I pick and monitor them regularly.
I monitor my investments regularly by attending conference calls and tracking the companies closely. I am out of them if there is any sign of trouble such as auditors comment, governance issues or any such sign of trouble.
One aspect where I am cautious and give extra attention to is the non-quantitative side of stock picking. Quality of management is extremely important for me. I would like to know what is driving the promoter, his succession plan,and whether he empowers his management team. My experience and network help me in this aspect of investing. This is extremely important when you are picking a small or mid-cap company. In such companies, I end up researching them with a fine comb.
Valuations weigh lesser in my approach of investing. If other financials are in place and the company’s prospect support it, I will not give too much weight to valuation.
I come across people who like to buy a stock that is in single digit. Their logic is it has fallen enough there is little to lose. I have seen 7 out of 10 such stocks go down to Rs 1. But if you are buying a good quality stock, which you intend to hold, there is lesser chance of you losing your capital.
Most of my investments are for the long term. I keep them as collateral – as a margin to trade options with. I cannot overemphasise the quality of the stocks I choose for investments.
Q: Very few investors are adept at trading, how do you manage both and how do you trade?
A: I believe you have to be an all-rounder in the markets as in cricket. I normally use this cricketing analogy that as a batsman you should be able to play a whole variety of strokes. You cannot say that you will only play the sweep shot at every ball. You would have to adapt to the situation and play different strokes according to the merits.
Similarly, while trading, you should be flexible to move between different strategies as per colour of the market. One day you may be bullish, the next day you might bearish. The number of options derivatives provides for any outlook, positive, negative or neutral. It is a complex but highly underrated aspect.
Trading teaches you humility. You need to use stop losses and exit from positions that are not working and lighten your position rather than sit on it.
I mainly trade in the options market. In the current scenario, 90 percent of my activity is in the options market. For trading, I use technical analysis as a validation tool rather than a predictive one.
In options trading, I consider open interest as a god. The open interest shows the market philosophy. I deploy various strategies to protect my capital and my investments and try to maximise my returns. I evaluate the risk-reward of the outstanding position every week if not more frequently to plan.
As a passive investor, I could make between 1.5-2 percent every month. I have set a target for myself that as an active trader. If I am not able to double that return then I am wasting my time.
When I started, it looked like a big task, but now I can confidently do it. I divide my capital into different strategies.
The most basic strategies that I do are covered calls (selling call options of a higher Strike Price of the underlying shares) against the stocks that I have. Over the years I have used covered puts as well to my advantage. In this method, if the stock I have covered is about to touch my price target level, I write puts, bringing down my entry price.
When I am taking a covered call or covered put trades, the strikes are selected carefully considering the support and resistance levels. If the stock moves up sharply I can sell the stocks I am holding while exiting the setup. These should be seen as reducing the losses or increasing profits in stocks you hold. Sometimes I combine the covered call and covered put by selling strangles (simultaneously selling call and put options).
When I take these trades I set it up so that the potential Return on Investment (RoI) of 8 percent at the entry point and usually end up making around 5 percent at exit. At the portfolio level, they account for 1.5-2 percent return.
The other trade I take is a strangle on the Nifty which is normally 7-9 percent wide. These are high probability trades where the market may test one leg of the strangle probably one time in a year and you end up making money in the remaining eleven months. Even in the month where the market may test an extreme one can adjust and come out safely. Typically after days of entering the trade I add another leg to further improve risk reward from the setup.
Here the two legs of the strangle need not be equidistant. If the market is looking weak I will keep my put strikes slightly further away. I move the strikes or exit the structure when the one of the option loses 80 percent of its value. This adjustment increases the return from 2 percent to 3 percent and reduces the risk. While I am holding the strangle positions in index options at any given point, additional return is generated by scalping on a day-to-day basis. This is done through at-the-money (ATM) options based on charts, OI, PCR and momentum indicators. This marriage of day trade with directional trade is rather profitable.
Then, there are special occasion trades. Like the one where I did well was when there was rumours about Kotak Mahindra Bank acquiring Axis Bank in mid-2018, and Uday Kotak was going to make the announcement in a press conference. Volatility went through the roof ahead of the press conference. I used an hour available for charting scenarios and decided it was suited to write a strangle on Axis bank.
I initiated a position in Axis Bank by selling their call and put a two-strike away from the market price (a strangle trade) for a price of Rs 100 a pair. Within minutes of the conference starting it was clear that Kotak Bank was talking about its new product. The value of call and put fell immediately and I made Rs 80 a pair in an hour.
Such topical announcements keep on coming in the market giving a good opportunity to trade. There are occasions when the result is so obvious that you can trade with naked long options as in the case of Yes Bank where I regularly traded the opportunity by simply buying puts over last few months.
I also take momentum and swing trades, but only in Nifty by looking at the charts and open interests.
Q: What are your plans going forward?
A: I believe technological disruptions will change the way markets operate. This means that traders like me will have to keep reskilling and remain alert to emerging risks and shifts in patterns. This sounds like the holy grail, but the idea is to work out trading systems so that one's capital remains protected under all circumstances. The goal, therefore, is to keep learning and that includes new technologies.
Another interesting observation is that teaching others and discussing with peers aids learning. I have introduced many young friends to equity markets and would like to scale up this. My belief is that most professionals during their working career spend all of their time on the job and neglect their savings. If they spend some time on their investments, their returns could be as good as second salary over a few years. This financial nirvana isn’t impossible. This investing literacy will be helped if elite investors and traders will take this mentoring to masses rather than restrict it to classes.
Lastly, while I am managing my family's capital for the time being, I am currently evaluating options to manage third-party capital.