Ashvin B. Chhabra, President, Euclidean Capital has written a book, The Aspirational Investor: Investing in the pursuit of Wealth and Happiness.
Investors should distinguish aspirational portfolios and those which are about returns and safety, says Ashvin B. Chhabra, President, Euclidean Capital told moneycontrol.com on the sidelines of CFA Institute's 6th India Investment Conference.
He has written a book, The Aspirational Investor: Investing in the pursuit of Wealth and Happiness.
His advice to investors is that if they want to take concentrated bets rather than diversify, then they should have some edge that justifies the risk they are willing to take.
Edited excerpts from an interview with moneycontrol.com
Q: What is your view on what successful investing is about? Is it the ability to identify multi-bagger stocks?
A: What I have tried is this concept called goals based investing, it is not new, but I have been doing it for 20 years. And part of the goals says what are my goals with the money and how much for safety and how much for market and how much is aspirational which is a very important piece.
So, the market portfolio is not about getting a ten bagger. The market portfolio is about getting market return with a little more if you are lucky, a little less if you are unlucky or skilled. It will not make any big difference in your life. It is a way of storing value that keeps up the society. And when everybody is going well, you will do well, everybody is doing badly, you will do badly. So, the structure of the market portfolio is you must diversify, even if you like a stock, you buy a little more, but that is it. And when it becomes overweight in your portfolio, you rebalance.
Rebalancing is actually counter-intuitive because you sell what is doing well and you buy what is doing badly. But over the cycle, you end up buying low and selling high, which is what you want to do.
In order to get the 10 bagger, which is wealth creation, you can't do it in the market portfolio. You have got to think about your aspirational portfolio and ask yourself, do you actually know something? Do you have technology, do you understand and you know something, in the legal sense? Do you have an edge where you understand certain companies better, you are willing to work harder than other people, identify it and willing to risk that capital and then, there it is concentration and leverage.
Q: What is your take on the debate on diversification versus concentration?
A: The aspirational portfolio is all about concentration and leverage. In the aspirational portfolio you should be prepared to lose all of it. It is only useful if you have some advantage. But don't put concentration leverage in your market portfolio because that will destroy you.
Q: Aspiration is certainly not to lose but to gain.
A: Right but it is not one way. You should be prepared to lose all of it and start again. So, you need the other two because you prepare for the worse, if you are good you do well, if you make mistakes and lose it you must start again. That is why you can't get completely wiped out. So, it is sort of making people informed that the markets are not stable things where you say here is the cash flow, here the company is going to do fine because even with good management there is country risk, look at what is going on in the energy sector. So, you cannot control these things.
Q: What should an investor keep in mind while building an aspirational portfolio?
A: You cannot build an aspirational portfolio being a passive investor because that is your market portfolio. An aspirational portfolio is you are an entrepreneur. So you must be able to find some risk capital that if it gets wiped out, you don't get wiped out completely.
You don't want to live your life and not have done the aspirational goals but the other is mixing up the two thinking the aspirational portfolio will get you rich. So you have to do this concept called risk allocation. How much in my safety, zero return. How much in my market, market return with lots of fluctuations and specially in emerging economies even more because you are depending on what is going on in the US, there is often a disproportionate effect of China, there is disproportionate effect of money flows. So short-term and medium-term is only if you have a tactical edge.
Most investors do not, professional money managers may. A good example is look at the energy sector getting destroyed. Every industry that has oil as an input is much more profitable than they were before, but the stock price today is not reflecting it. So even though the market might be crashing today, long term you have a tremendous boom; you are making money because you are paying less for the input.
So that is why you must understand, are you in for the short-term, are you in for the medium-term, are you in for the long-term? There is a disconnect between GDP and the stock price and the clarification then allows you to have the right strategy.
First Published on Jan 22, 2016 10:15 am