Medicine world teaches how to play stock markets: Ridham Desai

His market analyses are taken seriously and it seems that one can take a leaf out this Morgan Stanley executive's book to get serious about fitness. In an exclusive and unplugged conversation with CNBC-TV18's Anuj Singhal, Ridham Desai of Morgan Stanley reveals that he is a fitness freak and that his colleague Chetan Ahya and wife pushed him into a fitness regime.

Desai says that people struggle to find motivation to exercise regularly and that he was a very lazy guy until last decade. He adds that body weight shouldn’t be used as a metric to determine one’s fitness. "Body weight has very little to do with fitness," he says.

His fitness tip — don't go to the gym to burn, but to build your body.His belief, that markets are like medicines and that one should learn from medicines and aply to stocks, has a distinctive approach. Not just this, he calls psychology to be the most important factor that's played out during trading by an individual.   Furthermore, he admits that he is a music enthusiast and loves all genre of music. He, however, accedes to that fact that he doesn't understand the music his children or some of his younger colleagues listen to. Desai adds that he is a fan of rock music and that he fell in love with a little-known Canadian rock band Rush. "Listening to the band has boosted my IQ," he says.Desai believes that the band's drummer Niel Peart is a voracious reader and he brought his knowledge to the band's lyrics — be it current affairs or philosophy. This has in turn boosted his IQ, he says.Among Indian singers he says he is a fan of Kishore Kumar.Below is the transcript of Ridham Desai’s interview with Anuj Singhal on CNBC-TV18.Q: This year it has been different, at least this year the monsoon looks like we are well on our way to have a decent monsoon this year, at least looks like that?A: In December I moved aggressively on rural stocks and the reason was one of the outcomes of having listened to Red Tide was I became big follower of climate change. So, see how things connect up and I have been a follower of climate change and I have been reading about climate change and I have been reading about the factors that drive the south west monsoon. It was way back in December that it became kind of not apparent but the possibility that we may actually get a good monsoon.Q: Reading and all it helps in stock markets so you can’t say you are not sure.A: It certainly helps and I think the guru of this is Charlie Munger who says that to win in a stock market you need a multidisciplinary approach. You need to have knowledge about varying subjects from psychology to physics and I think that this is a great illustration of the multidisciplinary approach that Charlie Munger who is for those who don’t know, Warren Buffett’s famous or less famous partner has always espoused.Q: Let us talk about the other big passion of your life. You are a veracious reader and this brings me to the Morgan Stanley Summit that you had and after that fun closing bell that we had, we had a one hour discussion on books and you have classified your books into four categories. Take us through that and how that has impacted your own investment decisions?A: I think people get intimidated about reading and that is why I think we should not intimidate people. Even I was intimated by reading and I was not a natural reader. I didn’t like to read; I read only to the extent to what was required. However, going beyond that, again requires a bit of a push. I think there is one push that I can give the viewers of this show which is that you can make money out of reading. So, maybe that is an interesting thing.So how do you make money out of reading? If you want to make money then you categorise your reading into four compartments. The first one is the obvious one which is read about investing. The challenge here is that reading about investing will not make money for you. It will just make you appear smarter to the rest of the world; it is not actually going to make you money. Making money requires other type of reading.You need to read about climate change if you have to make money and anticipate the rains not about investing. There are two books that I would recommend that people read simultaneously or back-to-back to understand this statement which is read ‘Value Investing’ by Benjamin Graham and then read ‘Common Stocks And Uncommon Profits’ by Philip Fisher. They are completely contrasting books which suggests totally opposite approaches to portfolio management.Graham as everybody knows, Warren Buffett’s guru and professor, is a value investor, believes in buying stocks that are trading deep below fair value with a huge margin of safety. Philip Fisher on the other hand who was a very successful investor, arguably one of the most successful investors of the last century, invested only in growth stocks and he pays lip service to valuations and his point on valuations feels like it is trading too rich then you may want to avoid it but don’t get scared by a multiple on a stock because invariably for a growth stock, the growth is not fully priced in and there is always money to be made and don’t get frightened by a 30-40 percent fall in the price of a growth stock because that is an opportunity to buy, so, totally contrasted with Benjamin Graham.When you read these two books, you will realise that whatever you know about investing is wrong or right as the case maybe.Q: Your approach is in between right, growth at a reasonable price?A: My approach from a professional standpoint, I have to recommend to my institutional clients who generally have a 12-18 month time horizon. They don’t have the time horizon of Benjamin Graham and Philip Fisher and I think that is what has happened to the current investing environment which is that stocks are long duration assets. You have to own them really long-term in order to extract returns from them. When I say long-term, I think the minimum investing period is 10 years.However, your channel will shut down if you talk about only 10 year investing and a lot of professional mandates out there will not work out because people want results faster. I would recommend that people buy stocks for 15-30 years and just not worry about them on a day-to-day basis but that is from a personal perspective. From a professional perspective, I have to watch for the rains, I have to watch for cycles in investing because the market moves from value to growth to value, it moves from quality to junk to quality.We know that in the long run quality works the best, we know in the long run that reasonably priced growth stocks work for the best but there will be periods and fairly protracted periods in the market when they will not work and if you are a professional in this industry that is enough for you not to have a job. So, you have to be realistic.Q: That is financial investing books, what else?A: Yes that is one category which will not help you make money but will help you understand how people invest and may be you can decide based on your temperament what philosophy you want to follow. Value investing requires a very deep degree of patience, you have to wait on the sidelines forever for value to emerge and then you may have to wait on the sidelines for a long time for that value to be captured into the share price. So, temperaments are different for different types of styles.The second category I think is history. People underestimate the power of history in investing. The competitive advantage, you started at the outset talking about success I think one of the factors which I would put my success down to is that I came into this market in the mid 80s. I have 31 years of Sensex chart in my head and that is such a big and unfair competitive advantage I have over all my sell side competition who have not been in the markets that long and for them to love through that entire 30 years is not possible. You can read as many books as you want but I have lived through those 30 years. So, I have very good memories of the IPO boom of the mid 80s, of the crisis that we had in the late 80s and early 90s, of the reforms that happened and I can a some point tell you all the stories about how things changed.In 1992, this was just before the market peaked out, March of 1992 when the Finance Minister was delivering his Budget and he said something about the cement sector and there were 50 or 60 people crouching on a glass table at my then brokers office. So, there is a glass table pretty big in size and 60 people crouching on it and there was a lot of excitement, stocks were up a lot and suddenly the table broke, it crashed and the brokers reaction was what was the last stock that was mentioned on this table? Somebody said XYZ, he picks up the phone calls his jobber and says go and buy 5 lakh shares of that because this is a very good omen- glass has broken. I have lived through that type of bull market.In fact I keep telling people that, that bull market never came back. The 2003-2008 bull market is pale in front of the 1991-1992. In that period of 9 months the Sensex went up 5 times. There were stocks which went up 100 times in 9 months. So, that type of a bull run we didn’t see. I think history plays a very important role and reading about history I think is crucial.I attend a lot of events and interacted with a lot of people even in our investor summit where a lot of opinions were expressed about the technology disruption that the world is going through and how that is going to disorient existing businesses and how scared you should be about buying traditional business models that are not aware of these technology disruptions.If you are a student of history you will know that at every moment of time in the last 500 years we have had a technology disruption. There is nothing unique about this technology disruption compared to the horse carriages of New York city in the late 1800s when Ford was going to put his car into the market place or the changes that happened in the 50s and 60s when America got its telephone and television revolution, we have had successive period of technology changes. So, history is very important to understand the context of current changes and how relevant they are.  The third category I think maths and science that will be less appreciated by your audience why you would want to learn math and science, but I think maths had got a huge amount of connectivity with the stock market. I am not going to delve in details, but just one simple thing so the biggest success formula in the market is compounding, so Charlie Munger's says that the secret of making money is compounding. If you compound at 10 percent a year, what you will have at the end of the 10 year is remarkably big, compared to what if you just received 10 percent return every year.Compounding is a concept that comes from maths not from finance and it comes in an Euler's formula. It is a magical formula, but forget about that formula just think about E which is the base to natural logarithm and replace I and pie, I is imagery number, but replace I and pie with R and T; R is your rate of interest and time is the time for which you earn that interest with that formula you can calculate the compounded gains on any principal amount in an instant. It comes from math. It doesn't come from financing and likewise with science, I think the world of physics and biology. In fact on science I written an essay that the stock market doesn't resembles physics and math at all. Physics is governed by law and math is abstract is governed by laws, so at every point and time you will feel gravity, there will be no violation of that law at the gross level. It resembles more closely biology or medicine to be more precise and medicine is essentially there are some universal principles but every patient is unique and every patient has to be treated in idiosyncratic fraction by the doctor looking at him. You cannot put medicines into algorithm and that is exactly what the market is. You can't put a market into algorithm, but of course lot of people in the tech world have told me I am totally wrong. Every stock requires idiosyncratic application of your knowledge and skills and what works for one stock doesn't work for another. It is like medicine, so I think the markets are like medicines, there is lot to learn from the medicine world and to be apply to stock market.   Q: And the last one?A: The last is I think psychology, the most important one because I think dealing with the market and it is a very mundane and very well rehearsed phrase you have to deal with fear and greed, but I think there are two more emotions you have to deal with, which is envy and boredom. So most of the mistakes people make is out of the envy that the other guy has make so much money and you end up making mistakes and most of the action that we take in the market comes out of boredom, so because you are so bored you trade. That trading is very expensive, it is very expensive and it cost you all the returns in the world and envy is also very expensive. In fact, I think these two human emotions are more crucial than fear and greed.Q: So what’s the best book on psychology that you have read?A: I don’t know best book, but the two books that stand out to me one is Thinking Fast and Slow by the guru master Daniel Kahneman who won a noble prize for his pioneering work in the area of psychology. It is a very hard book to read. It is very detailed, it is very big but if you want to learn it in the stock market context than there is nobody better than Charlie Munger and Charlie and fortunately for us all of us has not written a book, but something has gone and written a book on Charlie Munger and it is called the Poor Charlie Munger’s Almanack, the wit and wisdom of Charles T Munger. It is a coffee table book. The last chapter of that book deals with human misjudgement and psychology and you may not want to read the rest of it, but just read the last 20 pages. It’s an incredible amount of insight into human psychology.

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