Buffetts Secret Strategies Applying His Wisdom In India

TITLE: GoKSENit2kc CHANNEL: Unknown DATE: ---TRANSCRIPT--- I wanted to start with going deeper into understanding what compounding really means to you. Albert Einstein had very rightly said that compound interest is the most powerful force in the entire universe. So what happens when you apply such a powerful force to knowledge building you become a learning machine and if you look at all the successful people in the world all of them embrace this attitude of lifelong learning. So that was the approach. Your interactions with Mr. Warren Buffett also because you know it’s not like too many people have the privilege of being able to interact with him but I still went ahead with sending him the manuscript of the book along with a very heartfelt note talking about you know the objective behind uh this particular book. I think the core message of the book which is compounding really resonated a lot with Buffett. Basically Buffett stands for compounding and Charlie Mang stands for lifelong learning. So when both these elements came together I think that is what really made Buffett write such a nice uh words of praise for the book and then we were also talking about you know how India has multitude opportunities whereas in the US you know it’s mostly focused around max 7 one very unique statistic about India is just look at the last decade 103 of the BSC 500 companies have become 10 baggers so one out of every five companies in India has given you almost a,000% return in the last 10 years no other stock market in the world comes close to this level of wealth creation for investors So India is a great market for active stock pickers. What are some of the things that you are personally very bullish about or which you think are very contrarian and not fully discovered yet? Gold is as a neutral reserve asset as people try to diversify out of the dollar into gold. I think gold financers in India especially I think they are in for a very good time ahead. You don’t think are investable but might be very hyped up in the media or might be the talk of the town right now but you don’t see the long-term future or prospects there. Investing is always bottom up. So you know even though I mentioned defense a short while ago. Hello and welcome everyone to the India opportunity show. I’m your host Shrishi. I’m thrilled to welcome Mr. Gotham Bed on the show today who is an internationally acclaimed author of the book called Joys of Compounding which has become a modern-day classic and is rooted in timeless wisdom from the greats such as Buffett Mer and many more legends. Gotham’s journey is nothing short of unconventional. From doing night shifts at a hotel to now managing capital of investors in the US, he’s built a career on Pers principles thinking, voracious learning and humility. He’s a practitioner of value investing and lifelong learning and a powerful advocate of discipline and delayed gratification. In this conversation, we go beyond investing. We talk about mental models, habit, and the frameworks that you can apply in your daily life to become a better thinker and decision maker. Hope you enjoy watching. Hi Goautam, welcome to the India opportunity show. Such a privilege to have you here with me here today. Thank you Shishri for having me on the show. Thank you for making time on a Sunday and driving from Noa just to be here for the show. Um Gotham you know you are an author of an international bestseller, a big name in the value investing world and you truly embody and live um the joy of compounding in many different ways. Um I wanted to start with uh going deeper into understanding what compounding really means to you and how you’ve applied it in your life before we start diving into timeless principles and frameworks etc. This is where I wanted to start the conversation. Sure. So you know the subtitle of my book reads as the passionate pursuit of lifelong learning and Albert Einstein had very rightly said that compound interest is the most powerful force in the entire universe. So what happens when you apply such a powerful force to knowledge building you become a learning machine and if you look at all the successful people in the world shishi all of them embrace this attitude of lifelong learning. So that was the approach and the attitude which I wanted to bring out to the value investing community through this book that treat this as a way of life. Basically you know value investing is not just about stocks and business fundamentals. It’s something much more deeper. It’s more about living a life which is aligned with your value system and helping others and uh that leads to a very fulfilling life. So basic that is where the real power of compounding lies in my view. It’s not just wealth creation that that is just one aspect. It’s about thinking long term, embracing a long-term mindset, ignoring all the short-term noise and becoming a more calm and rational person. That’s what basically the book is all about. Yeah, let’s talk about ignoring the hype and the noise because you know we were just talking about how the younger generation has lost patience in a big way, right? And how do you truly reap the benefits of compounding if you don’t have patience in life? So, how have you inculcated patience over over this period? Well, Shishri just with regards to investing, patience with good quality businesses having growing earnings is the key to investing success. This is something which all of us know. But how do we embrace that long-term mindset to ignore the short-term noise? It’s by focusing on the two to three two to three key variables that really matter to an investment situation. So if you look at any business listed in the market, you end up figuring out that at the end of the day, it’s just two or three key variables which drive the bulk of the returns or the growth of any business. So if you just keep a razor sharp focus on what really matters rather than the short-term noise or short-term disruptions which will not really matter in the long run, that is how you’re able to keep a focus. You have to separate the long-term signal from the short-term noise. And you do that by embracing inactivity and devoting more time to reading, learning, and improving your thinking. That’s basically the way to know have a long-term approach to investing. Yeah, absolutely. And you know I do want to digress a little bit and talk about your interactions with Mr. Warren Buffett also because you know it’s not like too many people have the privilege of being able to interact with him or even receive letters from him like you did in your case. Uh what do you think triggered his uh response to you or what do you think you did right to be able to hear from him? Well, uh when when Colombia Business School publishing offered me a publishing opportunity with them, it was like a dream come true for me because as you know all value investors have a dream of working with Colombia someday. That is where value investing discipline originated from. Benjamin Graham used to teach investing at Colombia. Warren Buffett learned from Ben Graham at Colombia. So it was always a dream to get published by Colombia someday. So when they offered me the publishing opportunity with them, it came with one big caveat and one big condition that you have to get a formal approval from Warren Buffett for including his copyrighted content from a shareholder letters in your book. And I my response to Colombia at that time was you know it’s nearly impossible. Why would he approve my request? He must be receiving hundreds of such requests every year. Yeah. But I still went ahead with sending him the manuscript of the book along with a very heartfelt note talking about you know the objective behind uh this particular book. Now I think the core message of the book which is a compounding really resonated a lot with Buffett. Basically Buffett stands for compounding and Charlie Mer stands for lifelong learning. So when both these elements came together, I think that is what really made Buffett write such a you know nice uh words of praise for the book and that really changed the trajectory of the jaws of compounding from there. Yes, we will definitely include a picture of the note which I saw on your Twitter as well. But uh tell me you know you’ve been to several Omaha meetings and you were talking about Burkshshire like being in a 40,000 environment with like-minded people almost feels like a cult. Um it’s truly you know one of those places and experiences that even I would love to experience but tell us more about that experience. How has it been for you? I’ve been going to the Burkshire annual meeting since 2016 and like you rightly said you know more than the annual meeting it’s it’s more like a festival for bal investors every year. It’s like an annual pilgrimage where we go and get to interact with many like-minded people because you know our balvesting community is very niche and very know uh eclectic and very limited around the world. So to come at a single location where you have thousands of like-minded people, it just gives you a different kind of high and you get to when you’re meeting and interacting with like-minded people then you realize that okay you know you’re not the only person who’s you know very different than others there are many people who are thinking just like you and you basically get to learn and grow together. So it’s a great experience going there every year. Yeah. So now coming back to the topic that we wanted to dive very deep into value investing that you were just talking about. Um tell us about your journey in terms of becoming a value investor because I know when you started out you did make some risky investments and I think that’s everyone’s journey when they start but let’s talk about your journey and share it with the audience. So like most new investors in the stock market I was also attracted in the stock market out of sheer greed during the final euphoric phase of a bull market. In my case it was the 2003 to 2007 bull market in India. I remember I had bought a stock uh named Ispat Steel in January 2008 and a mutual fund called Reliance Power Sector Mutual Fund in late 2007 because both of those investments belong to the hot and fancy sectors of power and steel at a time. Yeah. And both of them had recently appreciated sharply in a very short span of time when I first noticed them. So I went ahead with investing in them without paying any regard to their valuations or business models and I eventually paid the price. Both those investments crashed 70 to 80% within 12 to 18 months of my purchase and I had successfully gained admission into the stock market by paying my tuition fees. And what was the lesson learned from that experience? It was that recency and vividness biases are very powerful but highly costly behavioral mistakes. Recency bias is all pervasive in a world when we where we tend to extrapolate the recent trends into infinity but we end up forgetting that the entire world is cyclical. It’s all full of ups and downs. Whereas vividness bias basically means you know amplifying a certain event in the media or through graphical means and which catches our attention and we get swept swept away in the short-term noise without realizing what we need to focus on which is the long term. So these were the two big learnings for me from that experience to avoid these two biases. Now I was working with City Bank and Deutsche Bank for the first seven years of my professional investment banking career as an investment banking analyst in Mumbai, London, Hong Kong. But despite the bad initial experience in the stock market, my interest and curiosity about the stock markets remained very high throughout the first seven years of my professional career. And one fine day I came to the realization that hey I just have this one short life to live my dream and I’m not going to waste any further time doing something that I’m not truly passionate about like Steve Jobs has very rightly said that to do truly great great work you have to love what you do. So I was so keen for a career shift or a industry shift that I relocated to the US in 2015 without any job in hand. My one of my relatives who was a US citizen he sponsored my green card. I was under the impression that since I’m a CFA charter holder and this particular degree is highly valued in the investment management industry, I will easily land a job you know on the stock market side but as you know life is not a bed of roses for those trying to carve their own destiny. Yeah, I got rejected in the first three stock market job interviews in the first 6 months of reaching the US and but I did not give up because I was very firm and adamant that I’m not going to go back to my previous field of work of investment banking where the presence of purpose incentives constantly led to incentive cause bias and conflicts of interest and did not suit my personal nature. At the same time, I ran out of I ran out of whatever little money I brought with me from India and uh to take care of my living expenses in the US, I did not want to sell a single share from my portfolio of Indian stocks because I did not want to interrupt the process of compounding. So, I took up a minimum wage job as a front desk hotel clerk in San Francisco where I used to work in the graveyard shift for more than 15 months. For those who uh the audience who are not familiar with the term, that shift refers to the one which runs from 11:00 p.m. at night to 7:00 a.m. in the morning. It’s brutal because you don’t get to sleep. It was pretty tough. So even though it was a big struggle for me you know intellectually, physically, culturally and emotionally today in hindsight I highly value those days of my life shi because for the first time since the beginning of my busy professional investment banking career I finally got time for myself to read and learn and this was the phase in my life when my learning curve really took off from a very tiny base. The pace of work at the hotel from late night to early morning was pretty slow. Yeah. And I made full use of the free time to read every single blog article published on blogs like safarves.com, funuprofessor.com, microcapclub.com, basitinvesting.com and janna wordpress.com among others. And the passionate pursuit of lifelong learning had finally begun. So you know that is basically when I when my foundation in the value investing discipline really started getting built over those 15 months at the hotel and after that is when I got to experience the power of compounding knowledge and action because you know I used to apply to a minimum of three jobs every night to for a stock market job every night in the hotel. So as you know every time we take out the time to fill out the job application attach a resume and every time we click the submit button there is so much hope attached behind every single application over those 15 months I’d applied to more than 1300 stock market jobs 1300 Wow. So to be rejected more than 1300 times and still keep on going is only possible if you’re truly fiercely committed and passionate about what you want to do in life. I was receiving a lot of interview calls for investment banking jobs which which would have had very high dollar salaries but I was very clear I want to work on the stock market side. This is public markets is what I love and I’ll be patient about it and luck chance serendipity and randomness. I’ve always played a big role in various aspects of my life till date. Uh one fine night during November 2016, I was just during the course of my routine online job search. I hit the quick apply button on a job on LinkedIn and wonder of wonders I was called for the job interview and that too for a senior role in an investment firm. And this was the phase in my life when I realized the power of compounding knowledge and action because all those hundreds of hours I had spent for the last 15 months at the hotel had now built a strong intellectual foundation for me in investing. This is what I was lacking during the first 6 months of reaching the US. This time I was able to ace all the three rounds of my job interview because you know as you know self-confidence come you know body language derives from confidence and confidence comes from knowledge. So I landed the role of a portfolio manager of global equity strategy with Summit Global Investments in Salt Lake City, Utah in US. They’re a very big mutual fund company there. And it was like a dream come true for me because never in my wild this dream did I imagine I’ll become a portfolio manager straight away. I thought I’ll start off start off as a junior analyst then work my way up to analyst then work my way up to senior analyst then assistant portfolio manager after 13 14 years. But this is a classic example of how compounding works. The power of compounding is backloaded. Thomas Edison has very rightly said that many of life’s big failures are people who did not realize how close they were to success when they gave up. So never give up because you never know when you’re going to hit it big in life. So that was basically you know how I got started with my portfolio manager job in the US and uh you know I worked there for 4 and a half years and having you know accumulated a decent sum of savings and through investing uh in the Indian stock markets. I quit that job in July 2021 and uh started work on obtaining the regulatory licenses for setting up my India focus fund in the US and we launched the fund to the public in middle of 2022 and went live on 3rd October 2022. So that’s the story behind uh how I got to lead Stella Wealth Partners India Fund in the US. Wow, that’s so amazing to hear Gotham because you know to go from doing graveyard shifts to doing it over 15 months applying for 1300 jobs getting rejected and then becoming a portfolio manager and then again leaving that to start your own. So there’s so much to unpack there but um tell me about uh the resilience that was required and what did you do differently in those three interviews uh in after that 15 months of rejection that made you land up there and then what was the final motivation for you to give up on that job and move to like your own fund at that point. So see like I mentioned just short while ago that you know it’s all about passion basically when you are truly passionate about something that is the inner strength of your passion for investing. is what will carry you through the know periodic uh periods of pain and suffering. That is what exactly happened with me as well. Even though I was getting you know offered many high dollar salary investment making job interviews but I did not appear for them. I was very clear I want to get on the public side gain experience and enjoy my work on a daily basis. So that was basically how I got to develop the resilience. It was through sheer passion. If you asked me to do it today again today probably I would have a difficult time replicating what I did that time. But I think you know again I was very lucky to you know land the job that I did and things eventually worked out worked out pretty well from there. Yeah. And then here I think also I would love to understand because you know when you’re a portfolio manager and that to a US-based mutual fund like you said then your geography is also I guess at that point US focused right but then you cho chose to focus on India which is what we were talking about before we started recording as well. Tell me more about you know choosing the market and geography because a lot of people in India would assume that you know investing in the US is the real deal whereas you know we both disagree with that fundamentally. So would love to go deeper into your thinking about the India opportunity. I worked as portfolio manager of global equity strategy at semit global investments where I was tracking global markets with a primary emphasis on the US market. But during the course of those 4 and a half years, India as a geography, as a country, as a stock market very clearly stood out to me in terms of the plethora of high growth opportunities and I’ve been investing in the Indian market since late 2007. So I had, you know, many years of experience. My heart, soul, and passion always lied in the Indian equity market. So I used to, you know, work from 8:00 a.m. to 5:00 p.m. every day in the office job. come back home and then between 7 to 10 I was writing the book and I was after writing the book at 10 completing by 10 p.m. I used to start tracking the Indian market. So the passion and drive was always there. It was just a a matter of waiting for the right time to build up some credibility in the industry and build up a large pool of savings because you know when you’re leaving behind a well well-paying job you know you have to you know be absolutely certain that you know now you can consider yourself financially independent and that you do not need to depend on a regular salary income to take care of your all your expenses. So I think once those building blocks are in place that is when I decided to actually take the leap of faith and start my own India focus fund and I would not change a single thing of what I do every day now because I truly love what I get to do every day. Yeah. And then we were also talking about you know how India has multitude opportunities whereas in the US you know it’s mostly focused around mag 7. Uh let’s talk about that because I would love for the audience to hear that example that you shared with me. So one very unique statistic about India Ashishi is that in the last if you just look at the last decade 103 of the BC 5 private companies have become 10 baggers. So one out of every five companies in India has given you almost a,000% return in the last 10 years. No other stock market in the world comes close to this level of wealth creation for investors. So India is a great market for active stock pickers and unlike the US where you have just seven stocks driving bulk of the returns and the S&P and the NASDAQ here you have a hundreds of companies which are which have got the potential of creating a lot of wealth for yourself and your clients. So know that stint in STI global what it did for me was it helped me this know single down and focus on the one key market that I wanted to concentrate on for the rest of my investing career which is India. So that clarity of mindset came while I was working for those four and a half years there and a lot of people talk about diversification geographical diversification at that you what do you think about that it’s very very important because as of end of December 2024 while the US was just 25% of global GDP but it was 67% of global market cap which means that two out of every three dollars in the the world were invested in the US so basically many you know institutions basically are overly concentrated in one single geography. So now you know as US exceptionalism comes to an end and people start diversif diversifying out of the US I think you know non-aligned countries like India especially will be a very big beneficiary even if even if we can get just a few percentage points of that global asset allocation I think we’re in for very very large FINRO in India yeah because you know I think we make about 3% of the global equities market cap um as someone who sits out of the US and is has an India focus. What do you think the US sentiment has been towards this shift which is happening because there is uh like you know it’s uh there are winds of change in the air where you know the world order as we knew it is changing. The US is under massive debt and you know there obviously political geopolitical tensions all around the world. Um so there are winds of change and everything seems to be favoring India but like as someone who sits there would how do you think the sentiment is changing? The trend is changing rapidly. It is in fact in dollar terms in US dollar terms the US market has been among the worst performing market this year because many of the foreign currencies like the euro and Japanese yen and Swiss frank they’ve appreciated significantly versus the dollar. So the dollar has depreciated significantly against those currencies. Look at the Swiss Frank for example. There’s got a 20% depreciation versus the US dollar in the last 12 months. M so you know foreign investors are feeling the pinch because in US dollar terms they’re really facing a setback from the US USD currency depreciation that’s why sentiment is now shifting rapidly that’s why you’re seeing a flow towards emerging markets precious metals and non USD denominated assets that shift is already underway so I think you know we at the very early stages and you know India being again being a very high growth country will definitely attract capital from global asset allocators going forward yeah and what are the risks that you foresee because you know sometimes living in India you also feel like you know you were feeding into the same echo chambers and everyone is so bullish about the India opportunity at large the show also called the India opportunity you know so a lot of people will also think that you know this is a sure shot which is going to happen but what are the potential risks that you foresee one thing I’ve learned over the last 20 years of investing is that in investing there’s no black or white investing is not a deterministic game it’s all about shades of gray same thing with India as country nothing is perfect you know we have many big big risks which lie in the Indian market for example geopolitical risk is one of the biggest is recently we were on the verge of war with one of our neighbors and you know it got we got a ceasefire but if that war had prolonged and become something bigger then you would have seen a flight of foreign capital from the Indian markets and one more big risk in the Indian markets which global investors often think about is the political stability risk right now you have a polit stable uh political regime at the center but in the past when you had coalition governments that time policy and decision-m was very very slow and reforms you know used to you know happen at a snail pace if in the future you know you have again a you know very fragmented coalition government at the center that again may lead to valuation degrading for India so political stability risk and geopolitical risk these are the two big risks that uh you know all the global asset allocators consider when they’re looking at India yeah because it’s absolutely crucial as an investor to be very mindful ful of uh the risks that you underwrite as well right you know you can be very India focused but you have to keep these risks in mind because they are very uh real risks as we just live through one cycle but um you know coming back to some of the timeless principles because my intention with this podcast especially sitting with you was to focus on the timeless principles that you’ve covered in your books and focus on the real value investing wisdom which you know a lot of the people who’ve just entered the markets maybe around the pandemic or after uh haven’t really lived through you know the pain of losing uh big chunks of money because what we’ve seen is a joy ride so far right like we have had corrections but 30 40% is still not close to some something like you would have lived through during the financial crisis um let’s talk about some of the timeless principles that you think you have benefited the most of in terms of value investing well there are three timeless principles of value investing and all three of them have been espoused by Ben Graham in his book the intelligent investor First principle is to look at every stock as part ownership in a business. A stock is not a ticker symbol flashing on the screen or a price which is just going up and down. We’re actually buying a stake in an actual business. So, you know, like bottom has very directly said, I’m a better investor because I’m I’m a businessman and I’m a better businessman because I’m an investor. So, you have to take an ownership mindset when you’re investing in a publicly listed company. You have to look at the valuations. You have to look at the people behind the business. You have to look at the balance sheet, the working capital, the cash flow, all the basic hygiene factors have to be considered before you make the investment. That’s the first principle. The second principle is that of Mr. Market. So you know the mark the public markets contrary to private markets are highly ine no inefficient some of the time. It’s efficient most of the time. But there’s a sea of difference between know saying that the market is efficient most of the time and the market is efficient all the time. There are periods or occasions when value gets completely dislocated from price. Price basically does not reflect value in the business and Mr. Market is a manic depressive. Sometimes is he’s very very joyful and he’s you know and the stocks are selling at very expensive valuations. Sometimes Mr. Market is very fearful and he offers you pieces of ownership in a business at throwaway valuations. So incult inculcating the patience to patiently wait for the opportunity to present itself is what distinguishes great investors from good investors. Most investors have this urge of doing something all the time. Yeah. But this is not a place where you know where you have to strike at every pitch that is thrown to you. You have to just patiently wait and wait and just when the right opportunity presents itself that is when you make a significant allocation. That the second principle and third and most important principle is that of margin of safety. When you’re buying a piece of a business, do not just buy it at any exorbitant valuation. The price also has to make sense because a great business is not necessarily a great stock. So you have to distinguish, you know, what is embedded in the current stock price of the company versus what the ideal valuation should be. So that is basically how you make use of these principles and come to a sound investment decision. Yeah, absolutely. Let’s talk about you know some uh examples also because you know uh while people understand these principles or might have theoretical knowledge about it but how to apply it in your investing world really makes all the difference right um so we don’t have to take specific names if you’re not comfortable or maybe you know if it’s in hindsight you can talk about some examples but would love to learn about some of the opportunities that you personally tapped into at throwaway valuations which you might have benefited a lot from so I’ll talk about a past investment ment which I had made in June 2022 and this was and this was June 2020 and this was a stock named Rajatan global wire basically the business it was so between 201819 and first half of 2020 the Indian auto industry was in a down cycle and investors attention on the entire auto sector was very low so there was this micro cap company called Rajatan global wire which they basically make bid wire for tires it’s a critical input in the tire making process and the stock was available at a trailing P multiple of five times on depressed earnings. So it was not a case of you know having a low P multiple on cyclally peak earnings. Here you were getting a company at a P multiple of five on depressed earnings and you could buy as much stock as you wanted because investors were not interested to buy any auto or auto related stock at that particular point of time in 2020. And when the auto cycle recovery eventually took place over the next 2 years because of earnings growth and valuation rerating the stock of Rajasthan Global became a 20 bagger for me in just two years. Wow. So basically this is a you know example of you know applying value investing principles that you are able to buy a good quality business with a decent balance sheet good operating cash flow high instead of ownership at a throwaway price. So that’s basically how you make the and multibaggers generally take place the very big multibagars generally take place after the bare market because that is when you get good quality businesses that throw throw away valuations in normal markets you’ll get compounders but the really big multibagers you find only after a bare market. Yeah I think you know um Mr. Sanjay Bhachara who I hosted on the podcast. He was like I pray for a for an event like a financial crisis to happen again uh so that I can become like really really rich right so uh a lot of people don’t understand this mindset because they’re like you know you’re an investor in the markets what will happen to your portfolio if it sees a 70 80% drop and you know do you even have the appetite to be able to live through that kind of a cycle but um what is your mindset now when you’re dealing with a bare market um you know what is your position sizing how do you think about it where do you try to find opportunities. Uh let’s talk about some of the tactical tips that people can actually implement and use. Sure. So the biggest lessons of investing are often are always from a bare market and those lessons bear fruits for a lifetime for all investors. So in my second book the making of a value investor about a bare market talking about investing. I’ve talked about some timeless lessons which a bare market gives you. The first big lesson which I got to learn from my seniors and colleagues during those uh two years of 201819 in India was that India will continue to grow at a steady clip. Nifty stocks may compound their earnings at 10 12%. But there will be a handful of small cap and midcap stocks which will grow their earnings per share at 25 to 30% for the next 3 to 5 years. They’re bound to create wealth for you in the long run. So what you need to do is you need to have the conviction to back them and then simply wait for the cycle to turn because just like bare markets are not forever, bull markets are not forever and these things often just take place in cycles. What you need to do is buy into these high growth companies during a down cycle then patiently wait for the sentiment to improve. That basically how you make the big money. The second big learning which I got from my colleagues and seniors in that bare market was sanity will eventually prevail like it always does after every bare market. In the middle of a bare market or a market crash when all hope is lost and it seems that nothing will improve ever that is when you need to look at stock market history and understand that over the last 40 years in India every fall in hindsight has been a buying opportunity. Yeah. So that is the you know big picture thought which you have to keep in mind. You have to have conviction and belief in India’s entrepreneurs India’s business ecosystem. You look at all the big investors of Dal Street. All of them have got this one single thing in common. They all believe in India as a country that whatever happens India will do well. That is what helps them stay the course through all the ups and downs in the market. That is the thinking we need to inculcate as investors. That’s the and basically in bare markets like we were asking about allocations because you’re able to get good quality business at throwaway prices at very cheap valuations in a bare market. your portfolio becomes more concentrated with concentrated bets of probably 10 15 stocks only where you can have 8 to 10% allocations in individual stocks because in my second book I’ve talked about this that many investors talk about stocks and buying decisions rarely does anyone talk about allocation but the great investors if you see it was their was there a sizable allocation to their big winners which made them really rich. Yeah. Yeah. So you do have to this is something which you get to learn with and appreciate with the passage of time after your portfolio reaches a certain size that you know allocation is what really got me here. Yes absolutely. In fact even Mr. Romesh Damani who I had the privilege of hosting spoke about exactly this that you know he identified a lot of companies right very early on but the reason he regrets sometimes not taking the big bold bets or backing up the truck as he calls it is because his position sizing was off and now he’s trying to change that you know in his uh life and investing wisdom but uh you know position sizing and allocation also people don’t understand very well and since you want to talk about it I would want to go a little deeper in that aspect uh Because you know a lot of people in especially this kind of market cycle where things are rallying up like in India also we are going through a massive bull rally right now right uh people some people are saying that you know build your cash reserves and like wait for the cycle to turn etc. So how does one navigate these kind of cycles of environments where you know everything looks like it’s on a very positive trajectory so where is the correction happening how do you prepare for that to happen and how much cash should you be holding while you’re going through this? Well you know I think uh you know like Mr. Go Parik has talked about this in the past. He’s a very legendary investor on the last street. And he often talks about the importance of cash and how it gives him bare market buying power. So it’s not a bad idea to hold 5 to 10% cash in your personal portfolio or your fund portfolio at all points of time. But as regards position sizing or portfolio allocations, now I size individual allocations in my fund portfolio according to my evaluation of potential risk with the largest positions having the least likelihood of permanent loss of capital coupled with above average return potential. I initiate new positions with a weight between 3 to 5%. And sometimes the exceptional opportunities may get a gate of even up to 10% at cost in the beginning and I then sell down to my sleeping point if a single position becomes a discomfortingly large percentage of my portfolio by value because individual position sizing is important not only for its impact on portfolio performance but also for one’s mental peace of mind. Absolutely. I also tend to average upwards if the management executes above my expectations and one should have higher weights in businesses with high longevity, good growth prospects and prudent capital allocation. As May West has very aptly said, too much of a good thing can be wonderful. So bet big on your best ideas. And what are the fundamental metrics that you’re looking at when you know when uh for the shore short bets that you’re talking about where you know things are definitely on like you know you’re betting 10% of your portfolio in that sense. uh what are some of those metrics uh that you would be looking at in terms of filtering out? I’ll give you I’ll explain this with the help of a actual case study from my India fund. I think that’ll help uh the audience understand when to really bet big on an opportunity. Generally this exceptional asymmetric risk reward opportunities arise from such special situations. It can be a de merger, it can be a merger arbitrage or it can be a management or promoter change. So in March 2023 uh you had a company named Arti Pharma Labs which was spun out from RTI industries and you know because Arti Pharma Labs was a pharma company because it was a small cap company whereas RTI industries was a midcap and chemical company what happened was you ended up with force selling. So basically all the funds which were midcap focused they were not allowed to hold a small cap stock in their fund portfolio. So they started dumping the stock of artifs. Similarly all the chemical oriented funds because they were not allowed to hold a pharma stock in their uh funds portfolio they also started selling at the same time. So shortly after listing the stock of Ri farmeral labs fell more than 40% and it came down to a trailing pre multiple of just 12 times. Whereas there was another group company of the Arthy group called Arthy Drugs that was into more of Bul drugs and commodity commodity Palmer that was trading at a trailing team multiple of 22 times whereas a more higher quality business because of for selling was available at 12 times trailing earnings. So this did not make any sense. So this was a case of you know where I use first principle thinking or the principle of inversion to basically understand what can a stock not be worth. We often talk about what a stock is worth but if you invert it and just think what a stock cannot be worth once you once once you’ve established a floor price for a stock the website takes care of itself. So basically I made that uh stock of Arti Pharma Labs the largest position in my India fund with a weight of 8%. The stock has already given more than 250% returns in the last two years. So that is basically how you really capitalize off its opportunities. That’s fantastic. Any other examples where you might have started with a smaller allocation but you got conviction over a period of time to build up there like you know where you said you started with 3 to 5% and maybe built positions there. This happened with Bajash Khan. Basically it was a stellar outperformer during the small cap midcap crash of 2018. So I bought the stock in 2018 and you know I the management kept on executing well above my expectations. So I kept on adding more and eventually made it it came to almost 10% allocation the March 2020 but then covid hit. Yeah. And then there was a big crash in the you know stock of Bajash Finance. It fell 65% from the peak of but that’s also a company that you know Bajash Finance is like a darling favorite of Dalal Street right like that’s also a company which is often always argued that you know it’s always richly valued but I think co was the only time where you know you could have gotten it at a reasonable price. Yeah. So that was a company that you started buying through co and then built on. I was building on it through 2018 19 and early 2020. When it started falling after co I did not add to my position actually uh reduced my position by more than half because you know you want to add to positions when the fundamentals are improving because you know because it sometimes for things to get clearer and for the fundamentals to improve it can take a very long period of time also. So you do not want to end up with you know your capital being stuck you know just out of hope. You have to keep rotating into more higher better opportunities from time to time. Yes. Uh let’s talk about that aspect also because you know while everyone focuses on the buying aspect, I’m also very curious to understand the selling frameworks that people like you have in their minds. Uh so when do you ident when in your mind do you think the selling opportunities emerge or when do you start tapering off uh the allocations in your portfol? There are three big triggers. First one is obviously obnoxious valuations. For example, the moment a stock, you know, starts trading at a P trading P of more than 100 times, that means a lot of the future growth is already embedded in the current stock price. So that’s a trigger for, you know, starting to trim or completely exit a position. Second exit trigger is, you know, any corporate governance issue or bad capital gross capital misallocation by the management. That’s also a trigger for an for an exit because investing is all about the trajectory of the return on capital employed. basically you know if the margins and the ROC of the business is on a upward trajectory the company will keep on getting rerated upwards but if the ROC in margin is expected to deteriorate or weaken going forward then you’ll experience valuation der rating so these two triggers are also there for an exit and third trigger for an exit if you find a far superior opportunity compared to what you hold in your current stock portfolio these are the three triggers yeah and you spoke about three uh major special situation cases right like mergers and acquisitions or like uh some transition happening in the promoter management. Um any other examples that come to mind where you know you spotted the opportunity very early on or during the special situation case? Yes. Um oh there are so many. So I’ll talk about a merger arbitrage situation. So in uh late 2020 late 2022 there was a stock called equidas holding. Basically you know the equidas holding and equidas small finance bank were about to get merged together and there was a merger arbitrage discount of know for certain number of shares of uh equidas holding you would get a certain number of shares of liquid small finance bank and at that particular point of time based on the stock price of both the companies there was a 15% merger arbitrage on the table the merger would get completed in the next 6 months at the same time the banking industry was undergoing a tailwind and undergoing a upcycle and the stock of small finance bank was also So available at a very cheap valuation of just one and a half time one and a half times price to book. So all the elements were there in place for you to make a very to invest in equit holding and the holding company which was going to get merged. So you get upside from the merger arbitrage discount. You get upside from the banking industry tailwind. You also get upside from the potential valuation rating of the underlying business which is getting merged. This is equid smallized bank. So when you’re investing in these merger arbitrage situations, you have to have a favorable view on the underlying business, the primary business which is underlying. So basically that is when these uh merger arbitrage investments turn out to be very very profitable. So the next special situation I would like to talk about is that of promoter or management chains. So we there you get potential big big multibagers. So few years ago the Murugaba group basically took over CG power. Yeah. at I think 12 13 rupees per share and that stock went up more than 50 times in just a few ways time there. So when you’re investing in promoter or management chain situations, the ideal situation is one where the underlying business is of a good quality or the underlying asset is of a good quality but it’s being badly mismanaged or just you know there’s a lot of lowhanging fruit in terms of low margins or inefficiencies which the new promoter can basically take care of and start you know that is when you get the delta or the big percentage changes in your profitability. That is how you get the big multibaggers in promoter management change situation. The big multipackers do not take place when the promoter management change is happening in a business which is already being run very well. The big multi packagers take place when the business being acquired was not being managed properly because investing is all all about delta the rate of change that’s what we need to focus on. H any other examples like when it comes to rate of change uh applying rate of change uh to your core investment philosophy because uh you know there are so many businesses like in this uh mergers and acquisitions case also there might be delays uh that might happen you know a merger might not happen in the foreseen time that it was decided to happen at or like the person who’s coming in charge in terms of a promoter change which is happening they might not execute as well as one would hope right so there are things that can still go wrong even if you find like a ripe opportunity and it doesn’t turn out the same way. So how do you notice these rate of change uh opportunities and then also where are you discovering some of them because you know while in hindsight I can know like all these opportunities were there but how do you find it while before it’s about to happen I’ll talk about you know you mentioned that uh some cases do go wrong so we have got many examples of you know these things going wrong as well so for example India boo’s real estate is a prime example and the embassy group was going to take over India boo’s real estate and there was going to be a merger it took a long long time for that particular thing to happen impact That was the example I was thinking about in my mind also. But yeah. Yeah. So basically you know so that’s why you know when you are investing in these special situations you basically are you should be aware of the base rates of success or potential for delays or some mishaps happening. That’s why you diversify. You do not just place all your bets in one single company. to basically diversify your bets and when do you when do you understand when to bet big but no you basically bet big when know when in case of merger arbitrage situations for example know if the business being merged is not of strategic national importance for example if it does not belong to telecom or defense there’s a reasonable chance that the merger will go through so you basically you know size your bets accordingly and if the incoming promoter or the new promoter has got a very solid strong established track record of wealth creation for example the Murugapa group I mentioned that is when you gain much more confidence that you know the chances of them not being able to execute is very low so that again influences your position sizing so I think you know I’m I always prefer takeovers by promoter groups rather than takeovers by private equity because private equity in many cases are very short-term they basically trying to take over a business turn it turn it turn it turn it around and then clip them to the next buyer yeah whereas promoter or family groups have got a much more longerterm mindset when they’re taking over a business those are the situations I prefer. Okay. And uh you know here I think we can also talk about some of the frameworks that you know might have evolved for you over a period of time because like we said that you know every value investor has their own journey. So what has your personal journey been in terms of evolution? What are you doing differently today than the Gotham like maybe 20 years ago? So my investment philosophy has significantly evolved over the last two decades with time and experience in the markets. Initially I started off by reading the intelligent investor by Ben Graham. So I started off by investing in low price to earning low price to book stocks. Then I read about Boron Guffett, Charlie Mer, Phil Fischer and I gravitated towards quality stocks at reasonable price. But today my investments you know cover you know multiple aspects of the investment universe including cyclicals commodities special situations like de mergers management change and merger arbitrage in because no single strategy works all of the time and in every kind of market. Yeah. And to be able to generate alpha for yourself and your clients you need to be able to hunt from within different areas in the market. And over the years I’ve come to realize just why this is so critically important. It’s because there is always a bull market taking place at all points of time in some specific sectors of the stock market. So you need to have a broader value approach to be able to participate in these you know cyclical tailwinds in different industries from time to time. Yeah. Like Mr. Manish Chokani who we both know uh said on the show that you know it’s a great cycle for hard assets. So anything with hard assets will keep going up and we’ll see the rally across. uh what are some of the things that you are personally very bullish about or which uh you think are not are very contrarian and not fully discovered yet? I think precious metals is one which is not being talked about too much in the current stock market. But I think gold is fast know taking taking knowh cementing its place as a neutral reserve asset you know as people try to diversify out of the dollar and into gold I think gold gold financers in India especially I think they are in for a very good time ahead you know that is one spot which is less talked about right now but I think there’s got a lot of potential going forward and the other themes you know like honestly in India most of the the good themes are already well discovered and well talked about in the media so you have got financialization of savings, branded discretionary consumption. You’ve got AI, you know, AI plays like power, power our ancillaries, data centers. You have a very big trend uh which taking place in the world in the form of weight loss drugs or GLP1 drugs. So you have a few listed companies to take advantage of that particular mega trend as well. And with so many geopolitical tensions taking place in the world, defense you know for the first time is looking like a decadal opportunity because now the US wants not only the European allies but the Asian allies to also up their spending on defense to 5% of GDP. So know like I mentioned investing is all about catching the next big trend. So these three trends AI, power and defense I think are supposed to create a lot of wealth along with gold financers. I I would love to go deep into all three that you talk about because defense, you know, has seen a significant rally, right? And some people would argue that, you know, we’ve already lived through the rally because we did go from like just a billion dollars in market cap to now where we are suddenly and you know Mr. Ram Damani also he’s been very bullish about the whole defense sector and he was on TV talking about this opportunity even five six years ago. Um but now a lot of people feel that the theme has already played out. Uh especially after the war and you know the budget announcements people think that you know that see that theme has already seen a massive rally. Uh so where is your head at currently? Literally every 100 bagger first became a 10x and then went another 10x from there. So you know even though you know many of these stocks have become 10x we have to just focus on you know what lies ahead. So investing is a probabilistic bet on what lies ahead in the future. You know there’s no point looking in the rearview mirror and investing. Now many you know of the biggest winners in the stock biggest winners in the stock market always tend to look expensive because you know they tend to hit their all-time highs just after a market correction or after a bare market. That’s why many investors shy away from them. But the market the collective wisdom of the market is far bigger than any one single individual. If the market is telling you that you know this is you know where the money flow is going all the smart smart money is flowing then we have to respect the wisdom of the market and also try to study deeper instead of just you know shallow statements like this has gone up so much so it can go up more we have to focus on you know where the thrust of the government is because after co governments across the world over have become very powerful they are dictating you know where the flow of money is going for both from public side as well as private side. Yeah. So if the thrust of the government is on no uh embolding defense in the in the country know who are we to fight the mega trend I think it’s better to be on the right side of the big train rather than try to fight trains in the market that’s basic know you don’t want headwinds you want to invest in businesses with tailwinds and the blessings of the government and that is how you make the big money in the market so I think you know avoid know any anchoring bias because you know you’ll never you know many investors who have seen low prices in the past they’re unable to buy the same stock at a higher price in the future because they become anchored to the low price of the past. But you cannot buy today’s stock at yesterday’s price. You have to look at the current valuation and whether the growth prospects of the next five years justify you making the investment or not. Yeah, I think you’re referring to a personal conflict that even I have because you know I bought into some defense companies but at the current prices even then you know I would be breaking my personal frameworks of like you know what the fundamental metrics should look like right and I think because you’re also a value investor let me ask you this then are you breaking your discipline in terms of you know ignoring some of the metrics when you find such high uh rate of change opportunities in that sense so one key investing principle which many investors misunderstand in today’s world is that They mistake value investing for valuation investing and they end up investing in value traps. So that is what you want to avoid. Value investing is not about cheap valuation companies. It’s about getting more value for the price being paid with the lowest amount of risk. That is what actual value investing means. Yeah. And you know when you you talked about you know are you breaking up principles. No. So basically how do you determine the margin of safety or any an investment. Here I’ll refer to two white papers for your audience. The first white paper is titled what does the price to earning multiple mean by Michael Morrison. The second white paper is called the P ratio a users manual by Apoch Investment Partners. Once you read these two white papers you can arrive at the fair or justified P multiple for any listed business in the world because you’ll realize that the justified P multiple for any business is determined by a interplay of return on invested capital and the expected growth of the business. So if you’re able to buy a stock at less than the justified T multiple and over time you benefit from the earnings growth plus some valuation rating but if you buy a stock at way above the justified T multiple based on this entropy of these two factors then over time you will get some returns from earnings growth but you may have some valuation D rating so that will neutralize your investment. So the the trick here is to buy stocks at you know at or below the justified uh P multiple and then just wait and from my experience of the last 20 years in the Indian market I’ve realized that as long as the company is growing very fast the valuations don’t come down the valuation goes from reasonable to expensive to super expensive to absolutely expensive and then once the growth starts decelerating sharply now again when does the valuation derating happen in a stock year if the uh deceleration or slowdown in growth is gradual and slow slow paced then the valuation derating will also be gradual but if a company which is growing at 35 40% suddenly start says that it’s going to grow at 15 20% only then the valuation derating is rapid you end up with you know you can end up with permanent loss of capital so the trick is to distinguish about you know the pace of uh you know earnings growth deceleration that will help you time your exits properly yes I think this is great advice because you know a lot of the times even in our comments we often read that you know people are talking about themes which have already played out and you know how can you invest in defense now etc because this was a common uh debate which is happening in the comment section after the after Mr. Ram Damani’s episode because everyone was like this is already richly valued. So you’re not talking about something that we can actually benefit from but you know what you’re saying gives people a way to think about these things very differently and apply it in their lives. Uh but uh also talking about power and AI as the themes very curious to hear your take on uh both because Mr. Sanjay Bakshi Pandu professor um you know he spoke about how power and you know India can’t benefit India can’t grow without uh fossil fuels right and he thought he thinks that you know that is a sector which is really really underestimated right now and will perform really well what are your thoughts broadly around I think one good way to play the AI boom is no we have to understand you know the ancillary plays or you know what are the proxy plays to play this you know the pick and shovels like we call them so you know power ancillaries like transmission and distribution generation companies and and also AI you know data centers consume a lot of water so water treatment capital good companies they are another you know way to particulate in the AI boom so basically what what’s going to happen in this particular industry is AI ultimately will become very commoditized and you know you you’ll see a lot of you know uh lower margins among the you know the primary AI players but the ancillary companies or the ones who provide the pitch and shovels to these industries that is where you can see a lot of growth so you know data centers is know power ancillaries I know also these water treatment or water related companies I think that is also where you’ll see a lot of growth in the AI space so would you be investing in those uh companies right now like are there any uh sectors uh that emerge specifically for you so in our in our stellar partners India fund and in complete circles stellle PMS we have invested in uh transmission and distribution place and we have also invested in a few water treatment companies I think these two sectors have a lot of growth ahead of them because of the simple the sheer growth in AI infrastructure being put across the world I think next decade looks very very promising they are fairly valued on a current year basis but if you simply take a long-term view I think you know the returns from you know year two to year five we can compensate you for the low returns in year one I think that is you know again this is time arbitrage when you take a long-term approach basically you know many investors let’s just focus on the next quarter or two quarters you simply elongate your time horizon and have patience the returns from year two to year five compensate you handsomely for the know returns in year one. But that but that’s something which most investors are not willing to put up with because everyone is caught up in instant gratification. Yeah. And gamification of the trading apps has made it even worse, right? Because on like a swipe of a phone you can buy any company or exit any company. So it just makes it so much harder to be long-term uh truly long-term. So like going back to that like also in terms of idea discovery uh you know like there are sources like value picker etc. whether one looks up to but what have your sources of um ideas been so far like you know where are some of the best ideas coming from is it a lot of inner work reading all of that or is it through uh interactions with peers etc it’s a very exhaustive list and I would like to share some of the items from that list with your audience so every sing corporate announcements so every single day I go through all the filings on the bomb stock exchange and uh you know look for you know potential new developments and sources of ideas so I go through the M&A deals, joint venture announcements, any corporate announcement about any expansion. For many investors, it’s a very tedious boring task. But for me, it’s like an intellectual treasure hunt wherein I may strike gold at any point of time. I also go through the press releases, investor presentations, annual reports of companies, the conference call transcripts of companies. I also go through to develop industry level knowledge. I also go through draft red herring prospectes. Initiating coverage reports of companies are another great source for getting industry level information. A less talked about but very good source for I generation is uh know going through the top five holdings of fund managers on PMS Bazar website. You login on the website is free and once you log in you can actually go through the top holdings of fund managers whose investment philosophy you like and admire and respect. That’s another good source. You can also you know use screening tools like the jouri finance screener.in that’s another good source. You have you know forums like value picker where you can you know have lot of idea generation taking place daily interactions with peers and colleagues in the industry is another good source go through management interviews in print and digital media that’s also another good source for idea generation so there’s a plethora of sources you know and if you go through so many sources resources on a daily basis throughout your career how can you not be simply flooded with good opportunities all the time be it a bull market or a bare market in life business relationships or investing nothing will work nothing will work unless you do Yeah. And there is no reason for anyone to settle for an inferior track record in a marketplace like India which is filled with companies having great fundamentals because the person who turns over the most rocks wins the game like Peter Lynch said. So just turn over as many rocks as you can and eventually you’ll come across a great opportunity. That’s amazing and that’s a very exhaustive list that you’ve given our audience but uh how much time do you spend doing that? uh you know because it does take a lot of work to be able to go through all of the exhaustive lists that you just shared. Um so how much time do you spend in calculating this on a regular bas on on the weekday classes? Yes. Amazing. No wonder you have such great ideas and obviously a lot of rich information that you know floods your head and always prepped with ideas. Then how are you how often do you act in terms of making investing decisions because you know as um a great investor you don’t need to act very often you need to act a few times but get it right like you know Warren Buffett famously says that you know he must have had like out of his entire career maybe 12 investment decisions that he got right um so how do you think of uh making the bets when you do the idea behind doing all this exhaustive research every day is not to actually act necessarily act or buy a new talk is to build up a bench or a gate or a watch list of great ideas. Basically what happens in India is sometimes some adverse industry level development takes place. Sometimes a promoter related development takes place. Something or the other goes wrong with some or the other company you’re investing in. So it’s very important to be ready with a watch list of great opportunities which you can basically recycle the capital into. That’s the whole idea behind doing all this research on a daily basis. I want to have 10 to 15 high potential opportunities ready with me on a regular basis at all points of time so that you know in case uh I need to sell a certain stock for my fund portfolio or the PMS portfolio then at least I have a ready replacement with me. And then uh you know also applying this uh from your book in terms of joys of compounding how uh how does your personal portfolio differ from your uh PMS portfolio? So managing public money for for a fund or a PMS is vastly different from managing money in your personal brokerage account because when you’re managing public money you have to pay attention to two key things. The quality of the business that you’re investing in that is non-negotiable when you’re managing public money. The second big thing you have to focus on when you’re managing public money is that you have to also look at the trading volume liquidity in your personal capacity. You can invest in illquid macro caps also. But what happens when when you’re managing public money is you have to also look at whether the stock is liquid enough so that in case something goes wrong you’re able to at least exit that position for the clients. So these two things you have to focus on a third most important if you’re looking to build a no uh enduring investment enterprise over the long run the process which you follow has to be replicable repeatable and scalable. You know you have to if you basically want to leave behind a legacy you want to focus on something which is easily replicable. So that these are three things the process the trading volume liquidity and uh the quality of the business that you’re investing in these are the three differentiators for you. So after all these years what is your process now? Process is very well defined now shishi. So basically you know at st level partners India fund and at complete circles level PMS the investment philosophy is built on two key pillars. First one is variant perception. Second one is long-term structural trends. Variant perception is uh basically refers to situations where you get earnings growth along with the return on capital imped ROC expansion that leads to valuation V rating and you can end up with multibaggers and there are basically varian perception comes from having a differentiated view on the short to medium-term trajectory of a business. There are multiple catalysts of vain perception. Number one product and exchange into a high margin category. So what happens in this if a company is venturing more into value added products and margins expand then net profit grows at a faster pace than revenue growth that’s the first second uh you know uh there’s operating leverage which can come from having high unutilized capacity just at the beginning of an industry upcycle third one is deleveraging as debt goes down interest cost goes down net profit goes up market cap goes up also because debt is a part of capital employed as debt goes down your return on in capital employed automatically goes Fourth uh very perception catalyst industry cycle shift. As an example, since middle of 2020, the residential real estate cycle in India turned around and we had many multiaggers from the real estate and building material space. Fifth, government regulations. So basically any favorable regulation from a regulatory body that can also be a catalyst for multibaggers. So in March 2020 to22, the RBI relaxed the norms for micr finance companies and uh many micr finance companies you know became multibaggers from there. Sixth uh variant perception trigger is improvement in asset turns. Basically there are two sources for ROC expansion. One is improvement in asset turns. Second is margin improvement. And between the two I prefer the former because high margins tend to attract competition. You can get this information from management some conference calls. What is the expected turnover on the fixed asset capacity? And then you can make a decision accordingly. Seventh trigger for varying perception working capital improvement. Basically if the company is able to negotiate better terms of trade with its suppliers and customers then the working capital cycle gets shortened and because working capital is a part of capital employed your ROC expands and there also you get valuation rerating eighth trigger for varian perception corporate actions like demergers promoter management change merger arbitrage and diver of a lossmaking or non-core business unit four additional triggers so you have many triggers for varian perception now let’s talk about long-term structural trends that is where we concentrate the bulk of our portfolio. Long-term structural trends are found in industries with a very favorable structure. They’re organized like a monopoly or a duopoly or an oligopoly at best and they are characterized by some form of an industry tailwind event. They have consistency and predictability of cash flows. So you can have visibility for many years ahead. They are also characterized by value migration. So in India for the last 30 years we have had value migration from public to private unorganized sector to organized organized sector and uh you know there are multiple structural growth plays in the Indian market which is available today including financialization of savings the GLP1 drugs you know defense you have the artificial intelligence AI related plays you have housing finance companies gold financers multiple structural growth ways are available so basically in our funding PMS what we do is we have 70 80% % of the fund this long-term compounders structural growth place and 20 30% of the portfolio is in uh this variant perception tactical place to generate alpha for clients. Got them? I think that’s a very good exhaustive list of frameworks for people to think about when choosing which sectors to apply to invest in. But let’s also talk about the sectors that you won’t touch or you don’t think are investable but might be very hyped up in the media or might be the talk of the town right now but you don’t see the long-term future or prospects there. Well, investing is always bottom up. So, you know, even though I mentioned defense a short while ago, but there are many defense companies with very large order books but history of very patchy or bad ex execution. So, you do not want to just uh you know, invest in a company just because it belongs to a hot theme or hot sector. You have to evaluate the business bottom up. At the same time, avoid commoditized sectors where competition is intense because competition acts as friction for value creation. That’s the mantra for good, you know, investing. So, Warren Buffett has often taught us that the key to investing success is now how is not how fast an industry is going to grow. It’s about assessing the in competitive advantage of individual businesses within the value chain of a particular industry and investing in businesses where there is supply side dominance or dominant market share. Why is that so important? Is because after every passing industry crisis, these you know strong players capture market share from their weakened competitors and this market share capture as a source of great shareholder value creation over time. So you want to invest in businesses which are you know having an kind of a monopoly in the industry. For example, aviation previously was non-investable but now you just have one effectively just one single player which is ruling the show in the Indian aviation industry. So now it has become very attractive. This is not a stock recommendation but just to illustrate that you know you want to move your capital to industries which are becoming more consolidated from fragmented. So basically you know commodity industries or highly competitive industries businesses which require a lot of uh capital capital guzzlers those industries also you can know avoid and deeply cyclical uh industries and companies is also something you know that long-term investors should ideally avoid. Yeah. Can you give us some more real examples? uh you know companies not companies but like sectors that you wouldn’t want to go deeper into for example sugar and tea for example then you have many listed stocks from both these spaces but they subject to so much government regulation and control that you cannot really make sustainable wealth from these two sectors sugar and tea stocks for example and then you know again you know metal metal stocks for example are deeply cyclical so you know they will look cheap optically cheap on a price to earning basis when they’re enjoying cyclally peak earnings but that’s the worst time to invest In such kind of companies, you want to basically invest in those uh deep cyclical during the industry down cycle after checking the company’s balance sheet whether the whether the debt is manageable and if the company’s generating decent operating cash flow even in a down cycle and those are the kind of companies you want to back with your capital. Most of the time the investors enter these deep cycles just at the peak of an industry upcycle because they extrapolate because of recency bias the recent high profitability in margins into the future and that is when permanent loss of capital takes place. So deep cyclicals, commodities, illlquid macro caps with no track record of you know uh execution and the and commoditized industries. I think these are the areas where you basically want to know avoid putting your client’s capital because investing is a negative art. Knowing what not to do is far far more important than knowing what to do. So basically so bored again I’ll quote him again here because he’s got so many gems on investing. So you know he says that there are no you know uh brownie points for extra levels of difficulty in investing. You know you don’t this is not an this is not a Olympic game right you want to basically step over one foot hurdles rather than seven foot hurdles but because so many of in the finance world and come from very you know uh good academic backgrounds and we are so intellectual we just get into a intellectual ego fight when you get when we’re investing in a business we want to solve complex problems we want to get into complex investment situations and then try to make money of them to feel good about ourselves but if you see the great investors are one who embrace simplicity both as a way life and in their investment decisions. The lesser number of moving parts that you have to deal with in an investment situation, the better off you will be in the long run because you know that you know reduces the chance for unforced errors. The more decisions you have to make, the more the chances of errors. So, you know, you want to basically you know get into as many long-term opportunities as you can and avoid you know these statistically cheap lowquality stocks because you have to keep recycling them again and again in a short span of time. Yes, absolutely. And I think that’s a fantastic example that you gave also because u you know there are lots of people who just read Warren Buffett’s quotes etc and think that they can apply them and appreciate them but then the same people will also then go and do a lot of theme um uh investing or like you know investing in preIPO uh stocks or in the unlisted space or like you know IPOs um specifically. So what do you think about that kind of behavior? Because in India we are also seeing a frenzy in IPO opportunities. Yesterday only I posted about how India is experiencing an IPO boom where I think in 2024 there were 327 IPOs that happened in India which was globally number one and uh you know everyone talks about how in India there’s not enough capital movement but you know whereas in the US it was 33 billion or so India was very close to it like 20 billion uh dollars in terms of market movement so you know that’s a big shift which is happening in India there’s a lot of frenzy around IPOs how do uh think of of situations like that. Again comes back to my point about people preferring more complex situations or exciting situations over the obvious. So I’ll I’ll give a simple example here. So uh the IPO of HDB financial is about to hit the market very soon. Yeah. And the you know the price brand which is being talked about is already at a significant discount to what the stock is trading in the unlisted market almost 70% discount. Right. A very big discount. Right. So basically the unlisted market is fraught with such dangers. the IBO might get may get either called off or it may get listed at a far lower valuation than which you have invested in the private markets. And when you’re investing in the private markets, you generally don’t get a absolute bargain of a deal which you can get periodically in the public markets. It’s a far more easier game in my view to play. So, you know, and instead of making life much more unnecessarily complex for yourself, I think it’s much more easier to play the public market game than the private market game. And the word which you use frenzy. Yeah, value investors are very wary and cautious of that particular term. Wherever there’s frenzy in the particular theme or sector, that means a lot of capital is flowing into into that particular industry. What does that signify? In increased competition and increased capital leads to lower returns on capital over time. Yeah, that’s a recipe for valuation derating because more competition is coming in the industry. So we want to basically go into places where capital is flowing out of the industry and the industry is becoming more consolidated rather than where there’s frenzy in a particular sector. You just have to be very careful. In fact, this I can apply to even what’s happening in the AI world in the private space, right? A lot of money is flooding into consumer applications or you know the applications as is in today’s time period. But a lot of them will get easily replaced because the advancements that we seeing in AI will not um you know benefit these companies which might currently be benefiting from the situation. Whereas the picks and shovels approach that you spoke about that those are no-brainers. But you know I don’t see enough capital going there versus you know all the capital is getting flooded into some of these hype companies which sometimes don’t have a business model or revenue model or don’t even know when they’ll monetize but the capital is just driving the growth right so uh in private versus public because you know I have that lens of being privy to what happens in the private space also I feel like a lot of misallocation of capital is happening just following this AI hype cycle right absolutely correct because you know this pixel shovel plays are not glamorous Yeah, people always want the hot glamorous next big thing. That’s why they get attracted to such place. But I think you know investing by nature is very boring endeavor. Boarding is good in investing in my view. Yes, absolutely. And you know coming back to your book because I think uh we both bonded over how some of the life principles that we share are very identical to what we’ve covered in the book. I would love for you to share some deep insights with the audience in terms of um how they can enrich their lives by applying some of the lessons that you talk about. Rishi the core lessons of the key essence of the joys of compounding is that the best investment you can make is an investment in yourself. The first chapter of the book I state that today after having successfully achieved financial independence through my passionate pursuit of lifelong learning I can happily uh say that I’m a better investor because I’m a lifelong learner and I’m a better lifelong learner because I’m an investor. So you know at the same time the lessons in the book are not restricted to only about money. This is because you know compounding does not apply only to money. social and intellectual capital also compound. Investing in yourself, in your relationships and in your understanding of the world pays massive dividends over time. This is the big message I want I want readers to take away from the book that you know just don’t focus on one aspect of your life. Have a holistic approach to various aspects of your life. That is you know how you live a very know existence of fulfillment and happiness. Yes, absolutely. And you also spoke about good karma and you know how much uh love and affection you are receiving as an author now you know that you didn’t envision that you know would come your way but obviously compounding has reaped its rewards even for you. So because you’re such a living embodiment of compounding I would love for you to share with our audience some of those examples which you know have really meant a lot from you after the after becoming a published author. So you know you mentioned two very important words good karma. So I’ll elaborate a bit on them because I’m a very firm believer in this the power of compounding goodwill. So in my view uh shushi good karma simply me I’ll simplify it for everyone. Gur karma simply means being a nice and helpful person and helping others unconditionally. So you know I have benefited greatly from this particular practice in my life and I’ll share two personal examples you know with you. So let’s uh the first person I would like to refer to is a person named Shan Iings. He’s basically the co-founder of the intelligent fanatics project in the US in the macro capab space. And by 2018, I had basically, you know, built up a decent following on Twitter. Sean Edings, my colleague, he had a small following. So I used to code tweet him a lot, retweet his content, share helpful articles with him from time to time. And in late 200 in uh April 2019, Sean sent me a DM on Twitter saying that you know Gotham you know me and Ian Castle another big name in the macro testing space in the US. We both were scheduled to have our book signing at university in Omaha during the Bureau meeting next month but due to some last minute uh you know issue we are unable to make it. Would you like to take our place at the table at university? So then basically he introduced me to Jim Ross. So he’s Jim Ross is the manager of the Omaha airport bookstore and he’s the organizer of that book signing event at Kraton University. So you know basically you know I got in touch with him I shipped the books there and uh you know basically know this was one simple example of you know how just know helping some helping someone in the past basically ended up you know helping you in the future in the future as well. The second uh example I’ll give is you know from know the self-published edition of the joys of compounding. So in late 2018, I sent the uh manuscript of the Josa compounding to two publishing houses in the UK. Both of them came back to me with the feedback that you’re trying to be too too bold, too over ambitious. You’re trying to do too many things with one single book as a first- time author. You should just play safe by going this conventional route of you know just writing a simple book on investing uh principles. But I was very firm and adamant that I have got very high conviction in my body of work and I’m going to publish it as it is. So I ended up self-publishing the joys of compounding and I sold that self-published edition for zero royalty. I paid for the entire cost of marketing, production and distribution from my own pocket. At that particular point of time, the only idea was to, you know, help as many people as possible and to give back to the investing community from whom I’ve gotten to learn so much over the years. And I thought okay, I’ll maybe attract a few like-minded people into my investing circle. And even if the book sells a few hundred copies, I you know, and influences some people positively, the book will be worth the effort. Never did I imagine that, you know, the book would sell the self-published book would sell so well in US and Canada. Now let’s uh come back to May uh 2019. So Jim Ross the uh Omaha bookstore guy and the organizer of the creatin university event. He called a Miles Thompson of Columbia Business School Publishing in New York saying that Miles you have to fly down here to Omar. There’s you know there’s something special happening here. There’s this author I’ve never heard of before but his book is flying off the shelves. You have to come and meet this guy. So Miles Thompson flew from New York to Omar to meet me at trading university and offered me a publishing opportunity with Colombia there instead. So I speechless and numb for a few minutes unable to digest the magnitude of what had exactly happened. This is one more example. So when I sold that book for zero royalty that time I had no idea that know that the book will sell so well in in US Canada and that I will get an opportunity from Colombia. But again this comes back to the point that when you help others unconditionally the universe works in such a way so as to come back and reward you back multiple times over and this is just two instances so many there are so many examples from from my life that I’ve believed now that this is the way to live a very happy and fulfilling life. This is the way to go. Absolutely. And you also spoke about stokism and we connected over gratitude as well. How has I love that word how has that helped you in your life? Gratitude is the most effective way to find contentment. That’s basically you know there’s a section on compounding positive thoughts and the joys of compounding where I’ve talked extensively about the importance of gratitude because you know in any whether you’re in any position in life you know any situation in life there’s always something to feel grateful about. So in the US you know uh and India as well basically every day I have what I call a gratitude journal. There are basically three sections which I fill up every morning and there are two sections which which I fill up every uh night in that gratitude journal on a daily basis. The first section in that gratitude journal is three things that I’m grateful for today basically and then the second section is what would make today great and the third section is two positive affirmations. So basically every day I make two positive affirmations to myself and at night basically there are two sections you know three good things that happened today and uh what did two things that I learned today. So when you do this practice for the rest for the rest of your life and when you refer back to your gratitude journal, you’ll end up feeling grateful for so many things that you take for granted on a daily basis. When you see what’s happening around you and around the world, there are hundreds of things to be grateful about on a daily basis and that just keeps you very happy as a person. even just waking up every day you know or being able to land after a flight uh like after the recent incidents such things that we take for granted on a daily basis which is why I have the reminder that I do uh on my arm but um you know we’ve spoken a lot about your um experience with uh you know the fund um sorry we’ve spoken a lot about your external western influences like Warren Buffett, Charlie Mango on your investment philosophy but uh can you take some examples closer to home of like Indian investors who you personally admire and who you’ve looked up to as mentors. So there are so many Mr. Ramdewal, Mr. Romesh Damani, Mr. Utal Sid from Red Enterprises, Mr. Manish Shukhani, there are so and Mr. Sanjay Batara whom you had you on your show in the past. There are so many great investors to learn from and all of them you know many of them have got very different investing styles but the end result was you know a great success. So this again brought out to me the fact that there’s no one single route to heaven in the stock market. There are multiple roadways to heaven here. So you know don’t get boxed into one single style. You can basically keep evolving over time and uh you know just keep learning from everyone. I think you know it’s very important to learn from you know other people’s successes but even more important to learn from other people’s mistakes. So how do you how do you do that? You can basically look at books, experiences, people everything can be a learning opportunity when you have the right mindset. So if I talk about books, you can read books like big mistakes by Michael Batnik. You can read books like confessions of a stock market wizards by Safi Anand. You can even read my second book, The Making of a Value Investor, which what a bare market taught me about investing in which I’ve talked about the multitude of mistakes I made uh during the bull market of 2014 to 2017 which came to bite me in the bare market of 2018. That’s about books. Now vicariously learning from the experiences of other investors is another very good technique to learn from other people’s mistakes. So you have got all these investors you know for example Sanjay Bachari often talks about how he sold Asian fields too early. Yes. No then you know Ramal also talks about a few of his mistakes. Mr. Romesh Dami talks about not allocating enough to a great opportunity. There’s enough you know experiences to learn from. If you are just a humble person and humility is the key to you know lifelong learning you know without embracing a sense of humility you will not be able to you know succeed in this endeavor because when you look at all the great investors and the kind of mistakes if Rakkesh Jimala has got a titan and a loopin and a crystal he also has a Dan housing and a toz infra or other know duds as hell. So you know these things just keep your mind in perspective and keep you humble and you just want to you know keep this stock market is the ultimate humbling machine in my view. I mean if you’re not humble then be ready to be humbled sometime in the future. Yes. In fact, it’s so uh funny that you mentioned some of these names because I’ve had the privilege of hosting a few of them on the show and the more I meet people like those, the more I appreciate how humble they are because you know you might meet people who’ve been investing for 3 to 5 years and they are so confident about you know whatever their portfolio allocation is whereas when you meet these kind of greats and the legends of the last street then you truly appreciate how humble they are, how grounded they are and you know maybe that’s the reason why they are successful as they Because you know uh it truly takes being humble to get you very far in life especially if you truly value the joys of compounding and things like that right and living through those timeless principles. Absolutely. Because the those investors like which you mentioned have they’ve lived through multiple market cycles. They are not the postcoid investors who have just seen an upcycle with periodic corrections. They’ve actually been through bare markets which have lasted for multiple multiple years. So you know they are the market has basically you know told them that you know there’s the good times do not last forever neither do the bad times last forever. So they are you know they are able to keep their mind in perspective and just appreciate what the market gives them. Yeah. And who’s had the most profound influence on your investing style? There are three uh you know very you know big influences on my investing style. The first one is Joel Greenblat. He wrote a book called you can be a stock market genius which focuses specifically on special situations. that gave me a lot of expertise in investing in spin-offs, merger arbitrage and other special situations. The second uh investor who had a very big impact was Terry Smith. He wrote a book called Investing for Growth that taught me how to invest in highquality businesses for long-term wealth creation. And the third influence was from a person named Edward Chancellor. He edited a book called Capital Returns which taught me how to utilize the capital cycle theory and invest in cyclical businesses for tactical alpha generation. In fact, I’m reading that right now and he talks about consolidation especially after market cycles etc. And I love that insight that you shared about aviation because it clearly matches that example and that’s what I was also thinking about when you were talking about it. Um when uh you know you um I found it really special that um your tagline for the fund is uh generating generational wealth for investors. Uh what does that line mean to you? Generational wealth basically you know means that you know you are investing in a very sustainable long-term manner without you know paying too without paying too much heat into the short run and you know you are basically leaving behind a legacy for your next generations to take over basically you are bu building something which is sustainable replicable repeatable and which is not just short-term fleeting in nature I think that is what generational wealth basically means most investors we were talking about this before the show that many of the successful investors on Dharas sheet multiplied their money initially in cyclicals and commodities and special situations and later on they compounded in quality. So I think that is basically how generational wealth is created over time in the stock market. more power to you on that mission Gotham and I think you are doing a tremendous job and thank you so much for coming here today and sharing these timeless principles and frameworks because um I think whatever you’ve shared is actually very very um tactical and people can actually implement it in their daily investing lives and also broadly in their investing broadly in their lives as well. So thank you so much for taking time out to be with me here today. Thank you so much. This was fun. Thanks. It’s not every day that you get to sit across from your icon and ask them all the questions that you wanted answers to. And that was the day for me today. If you enjoyed watching this episode, please remember to subscribe to our channel so that you get notifications every time we drop another one. [Music]