The Psychology Of Compounding How To Lose Less And Earn More Ea Sundaram

Having seen market cycles over 30 years, boom, bust and all of it, what is that one core principle that has stood the test of time for you?

It is the principle of not being bothered too much about how much money somebody else has made. How do you find ideas in today’s time in terms of price discovery and finding the right opportunities? There is no fixed rule here. Ideas can come from anywhere. It can come from a casual conversation. It can come from a shopping experience. It can come from one of our brokers who are on our parent. It can come from one of our own people analysts. So it can come from anywhere. But the important thing is that we weigh it against the mandate of the product. That is very important because everywhere there’s news about okay you should buy this and defense is rallying or different sectors are rallying and everyone’s trying to time the market but what you saying is very contrarian. So I want people to understand this deeply. I would classify investment styles into two broad categories. One is trying to achieve investment success by doing the right things. The other method is trying to achieve investment success by avoiding the wrong things. Yes, it it does sound very simple but I assure you it is not easy. The fourth factors are these. Don’t buy measurably weak or deteriorating businesses. It is easy to identify them. Don’t buy any company where the management of the company has shown a tendency to go against the interests of minority shareholders. Don’t buy at exorbitant valuations. In other words, don’t fall for hype. And fourth is what we earlier discussed. Don’t be bothered too much about how much money somebody else has made. In my opinion, this is the root cause of all problems. So, when do you decide when to sell? Hello and welcome everyone to the India opportunity show. I’m your host Trishi. And today, I’m thrilled to welcome one of India’s most respected investors, Mr. EA Sundaram. He has spent over three decades in the public markets across institutions, mutual funds, and family offices and currently serves as the CIO of Bugle Rock. He’s built his reputation by following a simple strategy which he calls common sense investing, focusing on governance, avoiding mistakes, and letting compounding do its magic. What I admire about him is not just his track record like he avoided the IT boom in 1999, infra, midcaps in 2017, and NBFC’s in 2018, but also his philosophy and contrarian thinking. EA brings a rare ability to connect temperament, discipline, and spirituality to the craft of investing. This conversation isn’t about chasing the next hot stock. It’s about frameworks and timeless principles that will stay with you for decades. Hope you enjoy watching this fantastic conversation with a market veteran and stalwart investor. Thank you for tuning in today. Good afternoon, EA. Welcome to the India opportunity show. Thank you for joining me here today. Thanks for inviting me. You know your journey has been truly legendary in the stock markets. I I a lot of people have so much respect for you in terms of your approach to investing uh because you’ve truly focused on first principles thinking uh and your approach as you call it common sense investing in um a big way and uh I really wanted to get your insights out to our audience today because I think this level of insight and in-depth thinking is lacking from uh the audience in general. So we would love to go deeper into understanding market cycles, how to think about emotional regulation as you go through bus and boom cycles etc. And you’ve lived through so many of it. So starting from you know having seen market cycles over 30 years boom bust and all of it what is that one core principle that you have taken away or has stood the test of time for you? Condensing 30 years into one sentence. Okay. Uh I think it has to be this. It is the principle of not being bothered too much about how much money somebody else has made. Um comparisons generally in this field don’t help. It’s my observation that um an investor left to himself or herself is happy with a 15 to 16% rate of return from India stock market. But that is until he or she sees that the neighbor has made 30%. You know, it’s not always the right thing to do. There are normal circumstances where these things don’t matter, but situations aren’t normal always. And what I think drives this also is the uh the premium that the industry places on being the best or somewhere close to being the best. The best is considered superior. It’s easy for a investment advisor or for a wealth manager to push a product that is close to the best because it is it doesn’t take much effort and that as I told earlier in normal circumstances it doesn’t matter but there are times when it becomes dangerous especially in a raging bull market if we try to be the best and we can be the best only by being overweight on stocks or sectors that are already dangerously overvalued. That’s not a good thing. So if if there’s one principle which I want to stress is not being bothered about how much money somebody else has made because that is the root cause of the problem. Yeah. Definitely seeing other people’s returns affects you more psychologically than you know seeing the growth in your portfolio sometimes because I think that goes into tapping into a human insecurity right like uh you always want to excel and outperform but uh you’ve always had this discipline of being very focused and um sometimes even disagreeing with the consensus and believing in contrarian investing uh which is that one belief that you still hold today which most people would disagree with you. See, it’s like this. It is, I think, very important to be consistently good. There’s no doubt about it. But it is not at all important to be the best. And as I as I I think it’s an extension of the previous point also the best sometimes can be achieved only by taking crazy risks, especially when the markets become frothy. And markets are frothy know more frequently than we are we are comfortable with. If they become frothy then we tend to ignore the entry price. When we are bullish about a stock or a sector and when the entire mass of investors is bullish about a stock or a sector, the entry price is ignored. And when the entry price is ignored, purchases are made at crazy valuations. And we have seen repeatedly that this doesn’t work because it leads to suboptimal results later on. So I think this one point is this. It is important to be consistently good. It is not important to be the best. This is one principle that I have learned the hard way. How did you arrive at it? There are two events that I think led to this. Um I think it was between 1996 and 2000 that period was we were also wet behind our years you know at that time the first was the 1995 to96 IPO boom all many of us will remember the hersad meta boom of 1992. After the Harshad meta boom, there was an IPO boom in this country and we as a set of young portfolio managers we also bought a into a lot of IPOs. It was quite easy to make money for initial few months and then after that what happened was when the market slumped we were left holding a set of completely illquid names. And that was one lesson that I hoped I’ll never forget in my life. And I would like to believe that I have not forgotten that lesson. That lesson number one is never buy junk, measurable junk in the portfolio. Even if it came dirt cheap, it doesn’t it simply is not worth it. The second big lesson happened in

This was the technology boom. You remember that technology boom, the new economy boom as it was called at that time. Only three sectors participated in that in that uh in that boom. The the information technology, telecommunications and entertainment. These were called the new economy sectors and everything else was derided as old economy. Now our team I was working for a company called Zurich Asset Management at that time. It was a subsidiary of Zurich Financial Services. They had an Indian subsidiary in calendar year 1999. The fund that we ran generated 160% return. But it was still not considered good enough because there were people who had taken an even more aggressive position in technology stocks or the new economy stocks and had given even 250% return. So that is the time that this sunk in. This this thinking sunk. If 160% is not going to satisfy the investor community, nothing will ever satisfy because there is no such thing as enough money. Whatever returns we generate, there’ll always be somebody who will be willing to take a higher risk in a bull market and give higher returns. So competing on the basis of high returns alone for an investment product is a dangerous concept. That lesson was learned in 1999. So these are the two important learnings that uh hopefully will always stay with me.

That’s really profound. But if you think about contextualizing it in today’s time because you know last year I think India had maximum number of IPOs any country ever had across uh globally right so maximum number of IPOs happen in India. Do you think and we had just come out of a raring bull market also you know 30 40% irr in most people’s portfolio uh just for the last two three years and then if you think about it now for the last year I think Chris Wood’s greed and fear letter said that it’s been the worst performing market since 1996 how do we contextualize it in today’s time uh in terms of where we are in the market cycle so that the audience can also contextualize it in today’s time See, uh, usually I don’t look at the market as a whole because it it it makes little sense to me because the market has never been a single monolithic entity. Most people equate the expensiveness of the market to the expensiveness of the index. The index is only one part of it. There are parts of the market that are expensive. There are parts of the market that are not expensive. Even when the index is at a peak, I can give you several examples. If you look at two or three massive bull runs that we have seen in this country, the most important ones are the 99 2000 new economy boom, the 2007 real estate and infrastructure boom, 2016 midcap boom, 2018 NBFC boom. Okay. And there there are several and now more recently the postcoid boom as I call it in 99200. These three sectors were raging but everything else that was called old economy was cheap. Even when the index was at a peak in 2007 real estate, construction, infrastructure, power, these were all very hot sectors. But FMCG was cheap, automobiles were cheap, pharma was cheap at that time. You know, it’s good thing that WhatsApp didn’t exist in those times. So I’m sure companies like Hindustan Uni Lever or Proctor and Gamble would have been subjected to a lot of memes in those days if had they been there. In 2016 NBF’s no sorry midcaps and small caps just rage but it was cheap. Infosys was available at a P multiple of 12 and a half. DVS Laboratories was cheap. So my point is even in today’s market there are several stocks that are cheap. So my point is instead of looking at the market as a whole, it doesn’t make sense to me. It it it’s important to look at companies and stocks individually. I think that’s what makes sense. So I I think I’m what I’m the point I would like to make is there are opportunities in any market environment, but it’s important not to look at expensiveness of the index and come to a conclusion. That’s the that’s the good point. Yes, I think that’s a great takeaway and you know because most people chase right stock at the right time but you’ve focused on subtraction in the equation and that uh you know has helped you develop an edge in compounding uh in my opinion. So how would you say that subtraction or elimination has helped you? Because you know every where there’s news about okay you should buy this and defense is rallying or different sectors are rallying and everyone’s time trying to time the market but what you saying is very contrarian. So I want people to understand this deeply. Let us understand the differences between these two approaches. See there are I would classify investment styles into two broad categories. One is trying to achieve investment success by doing the right things. The other method which is equally effective by the way is trying to achieve investment success by avoiding the wrong things. There are crucial differences. The first important difference is that in the in trying to do the right things we have to contend with literally hundreds or maybe thousands of variables. Usually the thought process is like this. First you identify which sector is going to grow the fastest. Within that you identify which company will grow the fastest. Estimate the profit margins of the company. Estimate the earnings growth of the company. Estimate the impact of the competitor’s moves on this company’s profitability. Look at interest rate cycles. Have a view on interest rate cycles, commodity cycles, currency fluctuations, political trend. That’s inevitable in today’s conversation. people you are to predict how many seats uh this group you know NDA will win or UPA will win and adjust the portfolio accordingly. Look at geopolitical trends. You know, how do we stop the Ukraine war? When will it end? Look, you look look at Israel and Iran conflict or Israel and Hamas conflict valuations, fund flow, FI flows or domestic institutional flow and so on and so forth. And finally also you have to have a view on how much of all of these things is already reflected in the price. Now all these factors are beyond any individual’s control. We can’t control it. You and I can have a very intellectual sounding conversation about how exactly we should stop the Ukraine war. But the fact is that neither of us has a clue. And it is my belief that nobody has a clue. Okay? So that’s one important thing to understand. There are factors in investing which are external which are not in our control. The second important point to remember is that there is an army of people hundreds of portfolio managers and thousands of analysts all of whom who are armed with degrees from fancy universities. Everybody has an MBA and a CFA or a chartered accountancy and CFA and they have all come from top universities. Everybody has access to Bloomberg terminals. Everybody has access to modern computerized databases. Everybody reads the same annual report. Everybody reads the same analyst meet transcripts. Everybody watches the same TV channels. Everybody watches reads the same newspapers and magazines. So my point is that it is in today’s comparative age it is impossible for any single person to claim superiority in terms of information availability or analytical abilities. It is not possible. It is not sustainably possible. So there is some other method which is what I think make more sense to me. The other method is just identify the factors that cause permanent damage in a portfolio and stay away from them. If you carefully see these, there are only four factors that cause permanent damage and all four factors are 100% in the control of every investor. So I think it makes logical sense to me that rather than focusing on the hundreds and thousands of variables that we have no control over, let’s focus on the four factors that we have control over. So that that that makes more sense to me. And and by the way, it is not a bad method to invest. It it works equally well. So I I think uh that’s my reply to your question. H it’s truly about um adding removing complexity from the equation and making it as simple as possible. You make it sound very easy. Let’s talk about the four factors that um you care about. See, yes, it it does sound very simple, but I assure you it is not easy. The four factors are these. Don’t buy measurably weak or deteriorating businesses. It is easy to identify them. Don’t buy any company where the management of the company has shown a tendency to go against the interest of minority shareholders. Don’t buy at exorbitant valuations. In other words, don’t fall for hype. And fourth is what we earlier discussed. Don’t be bothered too much about how much money somebody else has made because in my opinion, this is the root cause of all problems. If if in a in a you can see this we can see this ourselves in a bare market if you go and ask the average investor he or she would say I’m satisfied with a fixed fixed deposit plus a few percentage points return the same person will be unhappy with a 50% return in a in a bull market but clearly 50% is not sustainable so I am saying that if we bother too much and the root cause of this is being bothered about how much money your neighbor has made. So if we have if we stay away from these four errors, if we have a process to reduce the chances of these four errors, I think we are enhancing our chances of success. That is the that is the method that I I I follow. Can you share an example where avoiding a mistake uh helped in better wealth creation for you rather than a brilliant move? See, by following this method of avoiding mistakes, the focus is not on making more returns. The focus is on losing less. And this point may sound less glamorous, but it’s actually very very important because when you lose less in one cycle, you have more capital to compound for the next cycle. It’s it becomes very important. So it it it is sounding less glamorous, but I assure you it is as important as making more money. So that’s the focus. If by following this method, you don’t make more money, you lose less in a in a bare market. So uh because you know obviously Warren Buffett always says that I only have two rules. One, don’t lose money and never forget rule one. Um I think that truly matters when you’re playing the long-term compounding game. But you know, we were just talking about how some of the new market entrance have shorter time horizons and they don’t always look at it with a long-term lens. Can you share your framework about how to think about long-term wealth creation rather than focusing on you know quick bucks or short-term thinking that people there are different kinds of uh you know participants in the market there are people and I I think it’s very important for an investor to be clear about what time horizon that he or she is comfortable with and it is not uniform I personally speaking I may be a person with a 3 to 5 year or longer time horizon. There may be another person who has a time horizon of a few weeks. Now if that person and I get into a conversation about what is a better stock to buy, it will be a never- ending conversation because but both can be right. What I’m trying to say is it is important to ourselves come to a conclusion of what time horizon we are comfortable with and not deviate from it. And and if you want to diversify beyond this, you give it give the money to somebody who follows a different style because I don’t think investing styles are funible. If I am a long-term investor, I should not attempt to be a trader and vice versa. So if I want to participate in the trading uh you know or me or any other investor who wants to participate in two different styles, it is better he or she allocates the money to two different professionals who are following two different styles. That is what is important. It’s it’s if I attempt to be a traitor, I’ll be a disaster. So it’s uh if somebody else has a shorter time horizon, I don’t I don’t look down upon it. It’s just that I’m incapable of it. So I will not attempt to do it. I guess leaning into who you truly are as an investor, knowing your own true nature and saying it’s very important for everybody to find their own space. And you know you’ve been a witness to so many market players over the years you know 30 years in the markets. What are some of the mistakes that you see even experienced investors repeat repeatedly uh because I’m sure you know the every uh cohort has uh people repeating the same mistakes and as someone who sees that from a ringside view lens uh how would you define what are the biggest mistakes? I can think of three readily. One is the uh you know the attempt to time the entry and exits at least it doesn’t work for a majority of people. I I concede that maybe a small proportion of people can do it. Uh but that would be a microscopic uh minority and and let’s not fool ourselves. All of us belong to the majority. So that’s uh that’s that’s a truth. See, let’s understand this. Timing the market means that we have to correctly predict how these hundreds of variables will all move. Macroeconomic factors, political factors, you know, things like the pandemic, you know, all these things we’ll have to we’ll have to contend with. And we also have to contend with how lacks and millions of investors will react to all of these factors. So it is it is beyond my comprehension of how anybody can predict consistently correctly predict how the market will move. So this is one mistake I think even experienced people fall for. The second one is I think being giving less importance to how much optimism and how much pessimism is already built into the stock price because too much emphasis and I I I would say that this is the you know one sadness I have about this industry. Too much emphasis is given to the intellect part of investing which is important. I’m not saying no. It is and intellect part is usually about the external factors in investing. Studying economic trends, studying corporate trends, studying the profitability and comparative position of the company, studying the valuation. All of this is important but it’s also important to assess how much of how much optimism is already built into the stock price or conversely in a bare market how much pessimism is is built into the stock price because this is an very important variable which is ignored in either a roaring bull market or a roaring bare market. So that’s the second one. The third one would be you know um again it’s it’s about trying to be the best. I think that’s I can’t emphasize that point often enough. It is important for a portfolio manager or for an individual investor to be consistently good. It is simply not important. And in fact, it is dangerous to attempt to be the best because the best under certain circumstances can be achieved only by taking crazy risks and that should not be ignored. So I think these three errors uh you know I would advise against anybody doing these things. Yeah, those are definitely things to keep in mind. But you know a lot of family offices, HNIs, promoters and investors end up watching the show and I wanted to ask you from the perspective of a family office maybe planning to deploy say between 200 to 500 crores. Uh what is the mistake checklist that they should go through when making these allocation decisions? Wow. 500 cr. If you’re talking to somebody with investable funds of 500 crores, that person will be in the top 0.05%. 05% of the population. So um it is true that I have managed portfolios for people of that kind and I what I’m saying is on the basis of my observations of how they think and um there are certain needs that these people have. First of all, we have to recognize that people like these with such levels of financial affluence have a wide variety of choices. Not just in India, they have investment options all over the world. So they have, of course, they have choice of various kinds of mutual funds, uh you know, private equity funds, angel funds, uh commodity funds, alternate investment funds, cryptocurrency and whatn not, real estate, precious metals and all that. and of course overseas products also. So whatever investment proposition that we give them or whatever they are contemplating to invest should be measurably different from what they are already getting in other products. So the overlap between products should be as minimal as possible. That’s one. Secondly, a person of this kind and this is again my observation does not invest to get rich because he is he or she is rich already. Their primary concern has been this I have made my money the hard way. I don’t want some smart elect portfolio manager to come and destroy it. So of course they want a decent return but they don’t want their money to be subjected to unnecessary levels of risk. So they want a logical investment process and a process that promises them a decent rate of return without subjecting their money to unnecessary levels of risk. At the same time, any product that they evaluate should be different from what measurably different from what they already have. These two things are important. The third thing is there are buckets even within the same asset class of equity. There are products which are invested for a one to twoear time horizon. And there are products that are invested for a 3 to 5 year time horizon. There are products that are invested for creating a capital for the next generation which is 10 years and beyond. So I think it’s important not to mix up these buckets and and allocate capital efficiently across these three buckets and choose managers who follow the these three different styles and stick to them uh through thick and thin. I think that’s that is what I would uh and of course a portfolio manager is actually one small part of the overall scheme of things. Somebody who has 500 crores I bet has figured this out for themselves. Yes, for sure. A lot of them end up having their own research teams as well. Uh let’s get a little lower in this segment. I would say say between 10 uh kores to 100 kores. Uh the do the rules fundamentally change this rules don’t change. I think the the it’s important to to to understand there there are a few rules here for everybody. Number one, be comfortable about the time horizon that that we we we most like to be in. That’s that’s one thing which I I think we discussed in the one of the previous points. The second is being clear about what we know and what we don’t. It’s very important. See, of course, we should make an attempt to know. We should make a diligent and reasonably good attempt to know if it’s a new technology or so on and so forth. But beyond a reasonably diligent effort, we still can’t understand it. There is no point in pretending to be intelligent. It’s okay if we don’t invest in it. It’s fine. And and I have observed this. It is possible to make very decent money with mundane, simple, boring businesses and it is possible to lose a lot of money in cutting edge technologies and I I’ve seen several investors do that. So what is important I think Warren Buffett calls it the circle of competence. He has also said that it is not important how large that circle is but it is very important that we know where the boundary lies. So if I if I understand a particular industry, I should restrict my investments to that industry. If I don’t understand it, first I should make an attempt to understand it. If I still don’t understand, I have no business in investing in it. It’s as simple as that. So I think the these are important things for whether the investor is a 100 cr investor or a 10 crore investor. These two things are important. Being comfortable with the time horizon and being comfortable with the kind of industries we choose to invest in. here I would love to ask you because I’m sure you interact with a lot of family offices often you know people in my generation second and third gen like myself uh tend to go for private pocket investments uh there is a separate allocation carved out for startups uh and I’ve seen this behavior shift or happen over the last four five years you know after the pandemic it’s accelerated even where a lot of domestic capital has started carving out allocations say even 10 to 15% % it used to be single digits before but now it’s increasingly uh become a part of the pie. Um how do you uh advise people to think about broad asset allocation and portfolio construction? See it’s a I think uh the important thing is to have a a synchrony between the risk takingaking ability the risk taking willingness and the asset allocation that’s what is important. So um beyond that I think it’s a in private equity really I’m not the person to to advise any family office because my entire career has been in the public markets. So it’s uh uh I can I can speak with uh with confidence about the public markets. Private equity the asset allocation is entirely up to the individual’s choice or the family’s choice. And you know we were talking about uh people tracking global trends what’s shifting in the macro picture uh geopolitical tensions. A lot of people you know are betting on some of the things to happen like you know currency fluctuations commodity prices etc. But you’ve stayed far away from all of that. Um what is uh what has helped you in that regard or have having stayed away from the macro does it help you uh staying more focused and grounded in one sense? See it’s it’s not that these are unimportant. It is just that these are beyond any individual’s control. I can I I I keep repeating this because I think it is important. See almost the entire focus of the mainstream media and and not just mainstream media even if you look at evening conversations about the stock market anywhere in the country look at the kind of discussions that will happen. This is my observation and I’m sure you observe this too. The discussion will be about which stock will go up. It will be about when it will go up, which sectors are good for investment, are large caps better or midcaps better or small caps better, which will do better over the next several quarters, you know, how when will interest rates speak out, what will the RBI do? What will, you know, the Fed do and so on and so forth. commodity cycles, currency fluctuations, geopolitical risk, all of these things are important. But none of these are in our control. And this is my, as I told you earlier, my biggest, if I can call it a crib or my my complaint or sadness is that the external factors or the intellect part of investing get the attention it deserves. But there’s something else beyond this which is something within our control that building a sound temperament for investing does not get the attention it deserves neither in the mainstream media nor in any ordinary conversations across the country but it is equally important. So focus on things that are in our control. Ultimately as an investor what can we control? We can control what we buy. We can control how much of it we buy and we can control at what price we buy. Beyond this there’s really nothing that we can control. Yeah. So if we are focusing on the important parts about what is in our control I think our results are better and beyond a you know very intelligent sounding discussion a discussion about the Ukraine war really doesn’t help. That is that is my experience. Yeah. It’s not that it’s unimportant. It is just that you and I can’t do anything about it. So let’s focus on the things that we can do something about. Yes. Absolutely. And you call your style of investing common sense investing. Uh if it’s so common sensical, why is it so rare? See, I think the reason is this. This is my observation. It’s it you can dispute me if you want to. It’s because the industry has been primed to do something doing something right. That’s that’s been the majority of discussions in this environment. If somebody comes and says don’t do something, it sounds conservative, right? Yeah. It doesn’t sound intellectual. Okay. And it sounds less newsworthy. So I think that is the reason why these things are given less importance but I assure you it is not less important and by following the style you don’t make less money you make as well as the other styles but it’s just that it’s a it it calls for a different time horizon it does not call for superior intelligence it calls for a different time horizon let’s let’s understand this if we are to if we are to analyze this what is the purpose of of the capital market. Let’s go to that basic level. The capital market’s purpose is to reward efficiency in the use of capital or conversely punish inefficiency in the use of capital. Now, if you are to be in sync with this basic principle, there are two things that we can do. One is choose companies that efficiently use their capital and we can establish that by looking at the track record or the prospects etc. Secondly, use our own capital efficiently by not overpaying for what we buy. If you want to buy a good asset and you don’t want to overpay for it, let’s remember that a good asset is available at a reasonable price only when it is not very popular. When you and I can see the profits booming, the rest of the world can also see. And when the rest of the world is excited about the stock, it is not cheap. And when we buy when it is not cheap, you don’t make that much money. I can give you any number of examples. So the idea is you buy a good company when it is unpopular and a good company is unpopular only when it is going through a period of difficulty. So I am happy to buy a good company when it is going through a period of difficulty after satisfying myself that there is nothing fundamentally wrong with the company’s long-term ability to compete in the marketplace. That’s very important. If it has a terminal difficulty, obviously we not want to buy it. But if if it’s going through a a difficulty which we believe and which we can establish through our research that it’s a temporary difficulty, it’s perfectly fine to buy it at that time. But this calls for a slightly longer time horizon because just because we buy it, it need not turn popular the next day onwards. And there’s no such rule which says that a stock should turn popular the moment we complete our purchases. Conversely, it can turn more unpopular after we begin to buy it, in which case we should be prepared to buy more of it. So, I never buy in one installment. I always buy over several installments. And usually, my average purchase price is lower than my first purchase price. So, I I buy over several installments. All it calls for is a longer time horizon. It does not call for superior intelligence or superior clairvoyance or anything of the kind. It just calls for a longer time horizon. That’s all. Any examples that come to mind? Obviously not any recent ones u but any past examples that you can share to make it more real for our audience. Okay. Past example I can share. Um I want to disclose this uh this company is still in our I have bought it in 2012. this company called Indra Press Gas and it it went through a bull cycle and then again it it the last three years it has been a slump so I have again bought it again I still hold it so I want to make a disclosure that it is still part of our portfolio and it is disclosed through our newsletters and all that in 2012 what happened was the regulator at that the PNGB the petroleum and natural gas regulatory board they brought out a an order saying that the final selling prices of gas for city gas distribution companies should be under price control. The stock very sharply fell. It’s interesting you know in 2012 April I think this order came within 3 or 4 days the company filed a writ petition in the Delhi High Court. The Delhi High Court’s judgment came within 2 months. It’s a very categorical judgment and I would that that order is still available. The Delhi High Court’s verdict is still available on the website of the Delhi High Court. It’s available for all to see. There are two interesting points which which were there in the Delhi High Court. One that the PNGB order was ultravirus the PNGB act itself. The PNGB does not have the power to regulate prices. That was one. Secondly, it said that price control is essential only in in times when there is a restrictive trade practice and that is not the case in the present instance. It was categorically mentioned in the judgment. So when the Delhi High Court order came then it the case went to the Supreme Court and it it went on for two years there. But those two years were a very good time to accumulate the stock because we took a call that a categorical judgment of the Delhi High Court like this is unlikely to be overturned by the Supreme Court because there was no ambiguity at all in in the in the judgment. Secondly, there was a news item at that time which said that the council for the PNGB had submitted an affidavit to the court. This was a news item in one of the newspapers that they were no longer interested in controlling the final selling price of gas. This was enough for us to build a decent polish and when the Supreme Court order also reaffirmed the high court’s order, the stock shot up but we had to wait for two years. So that’s an old uh you know case of Indra Pasta gas where there was an opportunity like this but recently also we have started buying Indra gas for quite different reasons. very interesting you know I and I would love to understand if you remember from that time what were some of the psychological factors at play for you because I’m sure you know while the verdict is there there was still uncertainty people must be doubting your decision and a lot of external noise around it right so what were the psychological factors for you there are two things that are important here first of all you take care to see that you don’t buy a weak weak company see it is said that investing is a journey through uncharted territory. If it is a journey through uncharted territory, it is better to have strong companions. What are the strong companions? I’m talking about the quality of the business, the quality of the balance sheet, the the friendliness of the management towards minority shareholders and the price at which you’re buying. These are strong companions. So if you pay attention to these, you have less blood pressure really. M so if I stick to businesses that are strong which are capable of competing very well in the marketplace where the long-term ability to compete has not been eroded but some short-term doubts or apprehensions are plaguing the minds of the investment community that’s an opportunity when there is a mismatch between reality and perception and when perception is much weaker than reality that is when you get an entry price. Now, am I right all the time? No. Nobody’s right all the time. There will be mistakes made. But as long as the mistakes are two or three out of 10, I’m okay with it. And it’s it it happens in any style of investing, not just necessarily in contrary investing. Any style of investing, if two out of three will not work out the way we want it. uh if the price doesn’t move immediately, I have no interest in the price moving immediately. I buy with a 3 to 5 year time horizon. So even if they don’t move within one or two months, I’m perfectly okay with it. The important thing also is to communicate this to the person who has written the check because it’s not enough if I’m convinced the I’m I’m having a fiduciary responsibility for something else, somebody else. So that person also should be convinced. So the the way to do it is make it clear to that person, whoever the client is, that this is the style we will follow. And there’ll be times when it’ll exhilarate you. There’ll be times when it’ll frustrate the hell out of you. And prime him to be prepared for this sort of uh you know thing. And and the second thing is we don’t we are not disappointed for one reason because we have not bet on a weak company. All companies are market leaders with strong balance sheets with strong track records of profitability and and cash flows. It is sometimes that the market doesn’t agree with our hypothesis. That is why we we we have to change the portfolio but otherwise it’s fine. So this method is not superior to the other methods available nor is it inferior. It is just different. So what the client gets is he gets a he or she gets a portfolio that will enable them to sleep peacefully at night. And it’s believe me it’s very important for a family office kind of investor. Secondly, he or she gets a portfolio that is measurably different from what they get in a mainstream investment product. So it’s important to say this upfront to the client and also periodically reaffirm to the client that we are indeed doing what we said we would do. And it’s also important that we don’t position ourselves as the one-stop solution for all the equity needs of the client. We are not. We are meeting one part of the client’s requirement. Certainly, he or she should go for other kinds of you know buckets as I as I mentioned earlier. So this is the proposition. there’s a lot of value alignment which is required with your clients right when you’re pitching these kind of products because you know when uh I’m sure and this must have happened in your real life experiences where people are like you know this other PMS or this other product has delivered x returns compared to yours uh why aren’t you able to keep up with them and I’m sure these kind of discussions keep cropping up because these are discussions that even I’ve been privy to um how do you guide people to think about value alignment. If everybody needs to give the same kind of returns all the time, everybody needs to have the same portfolio. If everybody has the same portfolio, everybody will rise together and fall together. That is not in the client’s interest. I think it is important that the trajectory of returns is different for each product because that is when you know that the products are different. If the portfolio is different, the trajectory of returns earned will be different. See one simple example people talk about deviation from the index right? If you want to beat an index you cannot mimic an index. So if you if you have a portfolio that is different from that of the index there’ll be deviations. Sometimes the index will do better than you sometimes you’ll do better than the index. So it’s important not to it is important to stay the course. That is what is important. So as I said earlier the client should choose three or four or five products within the asset class of equity so that they are different from each other. In one year maybe this will do better. In another year maybe this will do better. In third year this will do better. But all three are good. So if one underperforms in one year it is not necessarily bad. Yes. Yeah, I agree because you know a lot of the times people have different expectations from different products. Uh what would you say are realistic expectations to have from the equity class overall? It’s a long-term it has been in sync with the nominal GDP growth of the country plus or minus 1 or 2%. So if the nominal growth of this country is expected if if we think that this country is capable of growing at six between 6 to 6 and a half% on a on a sustainable basis in real terms we are talking of between 11 and a half to 12% in nominal terms the stock market index will grow at 11 and a half to 12%. You can add about 1% for dividend yield. So this is what we can expect if this country is capable of growing at 6 and a half% in real terms. I don’t think that’s an unreasonable expectation. But there are times when it when it’ll go much higher. There are times when it’ll it’ll be depressed like we saw between 2020 and 2024. The nifty itself grew by 25% compounded. That is clearly well above average. So there should be some mean reversal which is what we are seeing now. Yeah. So I don’t I really don’t know how long this mean reversal will last. But the other point which I earlier said was the index is only one part of the whole thing. There are parts of the market that are expensive. There are parts of the market that are cheap. So the index is just one indicator of the overall market. It it unless you’re an index investor, you should not bother too much about the index movement. I think it’s very important that you’ve conveyed the realistic expectations to have from this asset class because a lot of young entrance in the market think that 30 40% kind of irrustable. Uh but you know when you think about realistic expectations obviously you must also be looking at where are the best places to get your ideas from and where can you potentially get ideas from. How do you think how do you find ideas in today’s time uh in terms of price discovery and finding the right opportunities? There is no fixed uh rule here. Ideas can come from anywhere. It can come from a casual conversation. It can come from a shopping experience. It can come from one of our uh brokers who are on our panel. It can come from one of our own people analysts. So it can come from anywhere. But the important thing is that we weigh it against the mandate of the product. That is very important because and best idea we don’t know if it is a best at the time of purchase. It turns out to be best later on. So it’s at the time of construction of the portfolio. We just have to see whether it it fits the mandate of the product, whether the the fundamentals justify its inclusion and whether the price justifies its inclusion and is it superior to the one that we already have because usually it’s a running portfolio and if some new idea come we have to weigh it against what we already have in the portfolio. So that is what is important. The where the idea comes from is less important. It’s it’s very important though to weigh it against the mandate of the product and see if it ticks the boxes. That’s that’s uh where I would place more emphasis. And when you think about position sizing uh you know you said that you know you build up positions as companies are on a decline sometimes even how do you decide between 50 bips allocation versus 500 bips or do you have that level of conviction to go and take a large position right away? Uh it’s like this. I never buy more than it’s an internal discipline that is followed. There’s nothing perfect or uh there’s no single best rule for everybody. I don’t buy more than 10% in any single stock. I don’t buy more than 30% in any single sector. And we have the discipline of keeping the portfolio with a minimum of four non-correlated sectors at all points of time. And um there is a emphasis given on the liquidity of the stock. So it’s the last thing that we would want is our clients to be stuck with a set of illquid names that they cannot sell in a bare market. So we look at the average traded volume of the stock in the stock exchange over several months and the liquidity provided by that stock should be large enough for us to feel comfortable that we can completely sell that position in its entirety within five to six trading sessions. That’s an important consideration. So the position sizing is a function of four or five things. Number one is how competitive is that company in its own business. How strong is it and how sustainable we think that position is? That’s one important consideration. Second is what are the growth prospects? I when I say growth, I’m not interested in predicting the earnings growth with millimetric accuracy. That’s not my intention. But I should be confident that the ability to grow exists whether uh both in revenues and in net profit terms. We should be confident that the net profits and revenues of the company will be substantially higher over the next 3 to 5 years compared to what it is today. And please note the time horizon 3 to 5 years. I am not interested in the next one or two quarters. I’m interested in the next 3 to 5 years. And any diligent research will give us a reasonable idea of this. Third is what sort of people are running the company and that is one of the reasons why I insist on buying only companies with a long track record. I am not an early stage investor. So I don’t buy anything that does not have a track record of it. A track record will gives me confidence. It gives me confidence on two counts. A long track record means that the company has been through at least one full cycle. So if it has gone through a cycle, it has gone through a difficult period. And if it has gone through a difficult period, I’m confident that the management would have learned something valuable during that difficult period which they are unlikely to have learned from any MBA school because a difficult period is the best teacher in life. So I want companies to been through at least one difficult period and a 15 20 year track record gives me that confidence. Finally I have to look at the price. The price is the last filter. So I don’t want to overpay but I want to restrict my choice to companies of this kind. Right? So there are some strict parameters we have for valuations and and uh we we don’t want to buy simply because it came cheap. We want to buy a good business at a reasonable price. So given a choice between a a good business at a reasonable price and a mediocre business at a bargain basement price I’ll any day choose the formula. M well I don’t mind paying more slightly more for a highquality business but I c I am I refuse to pay an exorbitant price for any company. So these are some of the filters that we follow right. Can you quantify how you look how you think about highquality businesses like in your mind what is the definition the first and it’s it’s important that these are also measurable because I may claim many things but for a client or for a wealth advisor it is important for them to verify that what I’m claiming today and what I’ll eventually be doing is one and the same thing and for them to be able to verify the parameters should be verifiable. So number one is the track record. I don’t buy anything that has a track record of less than 15 years. I as I told you I am not an early stage investor. So I don’t attempt to be. I want companies that are well established. Number two I want a minimum size of operations and minimum size I have defined as 500 crores of revenue. Okay. I’m talking of manufacturing and non-financial side. For financials we have a different set of parameters. Number three is that we look at the return on capital employed and the ability to generate free cash. These are both measurable indicators of how good the business has been. So we want companies with consistently high return on capital and consistently high the consistent ability to generate free cash flow. Free cash flow is more important than reported net profits because net profits can be adjusted with clever accounting. You cannot adjust free cash flow. If you have free cash flow, it tells you two things about the business. Number one, the figures are more believable. Number two, the company is living within its means. So I admire both families who live within their means and companies that live within its means. So essentially for a family, the ideal thing to do is that the total expenditure including EMI payment should be lower than the inflow for the month. Same principle applies to a company. It’s okay, perfectly okay if once in a while the company borrows to fund a capex program. It is perfectly fine. But I am not a fan of companies that constantly require external capital to fund their own growth. Something that we avoid. Similar set of criteria are there for financial services companies. You know, we look at return on assets, we look at return on equity, we look at cost to income ratio and and we insist on a longer track record for a financial services company and and we look at the NPA levels and these are some of the parameters for the financial services companies. So companies that qualify on these parameters and we run through the entire set of companies in the database, companies that qualify on the parameters will qualify for the investment universe. H the investment universe is a set of acceptable names and presently it has approximately 210 companies. So out of about 5,300 listed companies in India 210 qualify and the portfolio will be built out of these 210. So we pick and choose we have a portfolio of 25 names and it’ll be from this list of 210. Now we began by saying that we want to avoid the mistakes and one mistake is buying into a weak business and no company that qualifies on these parameters can be called a weak business. That’s one thing but it’s also important that we place some space for exceptions because some cyclical businesses will strictly not qualify on these parameters. But if it’s a strong company in the cyclical business, I don’t want to miss that opportunity. For example, I can give you about 3 years ago, we bought this company Larsson and too low. By no means it is a weak company, but it does not qualify on these parameters of high return on capital or free cash flow because it happens to be in a cyclical business. But if a strong company in a cyclical business is available at a very good price, we should make some space for exceptions. So we have a small space for exceptions also to to fit in this parameter. One other example I can give you during the COVID time we bought State Bank of India. The State Bank of India is is not a weak competitor but it was available at that time at a very attractive valuation even though it did not qualify on the parameters that we have set for ourselves. So to accommodate exceptions like these exceptions are also strong competitors. It’s just that we need to uh you know make some space for them because why? Because it is important that while it is important to be disciplined in investing, it’s also important that we don’t get too dogmatic. There should be some element of flexibility in equity investing but with a strict limit of what the total exceptions will be and done. Each exception is done with our eyes open and these are some of the names which I spoke about. But everything that we have spoken so far, we have only spoken about the past track record of the company. While it is important, it is not sufficient. We have to satisfy ourselves about the prospects this company has and for that any diligent research will give that information. As I told you, I’m interested in finding out whether the company’s comparative position is intact and is expected to remain intact in the foreseeable future. That’s my the thrust of my research. Secondly, I’m interested in knowing whether the company retains its ability to grow. It need not grow in the next one or two quarters but it should retain the ability to grow and ability to maintain its market share. The third point is about the management and the only way we can judge management is to look at the track record. There’s really no other way. The track record gives us important clues about capital allocation. U whether they have destroyed return on capital, whether they have unnecessarily diversified. Have they been consistent about their dividend policy? Have they been transparent in meeting the investment community during good times as well as during bad times? Because several companies are more than happy to meet during a good time, but they are remarkably close mouth when it comes to a difficult time. So I would much rather appreciate a company that is willing to discuss the problems with the investment community, what problems they are facing and what they intend to do about it. So even if they don’t succeed in all of their plans, it is the transparency that is attractive. And finally uh are they rooting profitable businesses through unlisted entities and not through the listed entity. These are some of the red flags that we would seek to avoid. Finally it comes to the price. As I told you I am not interested in buying something simply because it came cheap. I don’t want to be you know this value investing has got a very missed uh very wrong connotation. People believe that value investing mean you should not buy anything above 9p or something like that. That is not value investing. Buying junk for a cheap price is not value investing. You have to buy something of quality and not overpay for it. That’s what is value investing. So I am not interested in buying a junk stock because it came cheap. And a good company is available at a decent price only when it is going through a period of difficulty. There should be some doubt, some apprehension, some fear about the company’s immediate future. We are happy buying in such conditions. So this is these are the checklists that we follow. Here I would love to ask you because you know there have been news cycles about different companies like you know um I can take an example like Adani group just went through this new cycle of you know going through a turbulent time with coming out in the clear. Um a lot of people would have said that you know that was a good time to invest uh because now they’ve emerged out of it. But how do you differentiate whether what a company is going through is temporary and something that they can come out of versus permanent damage? See, it’s a there are two or three things that we stay away from. Highly capital intensive businesses. We generally avoid generally avoid highly cutting edge technologies. we tend to avoid because these things change very fast and it is not necessary to to make money only from these things. You know I have seen really very boring businesses generate a very good very good return provided they are bought at a good price. I’ll give you one example. Four years ago was anybody recommending public sector shares? No. Only Rakkesh Janjan was recommending public sector shares. But today public sector is the darling of everybody when the price has already gone up 10 times. M. So the point is every sector, every company goes through a trough. So if only we have that time horizon that is long enough. If we get over this anxiety of making money the moment we buy that share. If we give up this one thing, there are opportunities available. So the focus is always on why the stock should move. The focus is never on when it should move. Yeah. And sometimes we are lucky the market agrees to our point of view within a few months time. Sometimes we have to wait for more than a year or maybe two years. Sometimes we are proven wrong. But that is true of any investment style. It is not just only with contrary investing. Any style has this uh you know ratio. M here there I think this would be an interesting time to discuss when you decide when to sell uh because you know sometimes uh the market might not agree with you for a very long time a year two years um valuation thesis etc there are things that you will start questioning right uh so when do you decide when to sell it’s an important question there are only four reasons why I sell a share the first reason is the assumptions with which the share was bought in the first place become invalid. Something will change. So, but thankfully this has been a very infrequently used reason in my career. Very very rarely I use this. But I will sell if I find out that the assumptions have gone all right. I will sell irrespective of whether I’m making a profit or a loss at that time. That’s no doubt about it. The most common reason to sell a share is it has gone well beyond what I think it is worth. This is the most common reason to sell a share. The third reason is an opportunity that did not exist earlier suddenly becomes available and it is superior in our judgment. It is superior to the one that is already in the portfolio. Then I will switch from A to B. M the I may buy company A because company B which is a comparable company was very expensive at that time after several months company B becomes much cheaper or some other company comes on the horizon which was which was not available at before it becomes on the comes on the horizon and it is cheap is better than the one that we already have then I’ll switch from A to B. The last reason is when the client wants a redemption either a full or a partial redemption in which case I have to sell. So these are the four reasons we used to sell a share. Your other question was how long will you wait? I have a waiting period of 3 years and two conditions are important. The stock should not have given any returns for 3 years and the fundamentals should not have improved. If the fundamentals have significantly improved and still the stock doesn’t move for 3 years, I’ll still hold on to it. Would you buy more? I’ll buy more if the fundamentals improve. But if both these conditions are satisfied fund even if they don’t deteriorate even if they don’t improve and the stock has remained stagnant for 3 years I’ll replace it with something a well I think it’s important to have a balance between idealism and pragmatism. Yeah. Yeah. because you know since you mentioned the PSU stocks you know I also invested in uh some of the names that you mentioned um SBIRA bank etc because the thesis there always was that you know ICICI bank had a comparable portfolio to what SBI or KRA bank had but you know the valuation wise there was a huge differential so when you’re looking at opportunities like this where you know it’s kind of it’s visible in the numbers but like it just takes so much time like it took almost 3 four years Just put it two more than yeah two years. Yes. Uh so you know at that point one starts questioning their conviction their belief or you know you’re also questioning of uh yourself about the opportunity cost. Speaking of see let’s discuss the first point first. The fundamentals were constantly improving in state bank. It was there for all to see. State Bank of India’s market share between 2010 and 2020 on almost all parameters on housing loans on car loans on personal loans on corporate loans it was rising the market share was rising state bank of India the NPA levels were falling in 2018 the NPA level was 5.3%. In 2020 the NPA levels were 2 something% I don’t remember exactly now somewhere in the mid 2.6 six or something somewhere 2.3 2.4 somewhere around that time. So NPA levels are falling, market share was rising and they had greater market share in the new age banking, internet banking and mobile banking. Their market share was more than HTFC bank and ICA bank. They had a biggest branch network, 20,000 branches, 50,000 ATMs and one out of four Indians were customers of the bank. One out of four Indians and we are talking of 130 cr people. All the state governments, all the central government departments, police forces of all states, army, navy, air force, paramilitary forces, all the accounts were with state bank of India. They had a large and successful mutual fund subsidiary. They had a large and successful insurance subsidiary and the stock was available for z.7 times book value which was at a multi-year low. I had no clue when it will reverse but that pricing was so attractive that and we were not betting on a weak bank. The argument if you remember about four years ago was that p public sector as a whole was losing to private sector in terms of banking business. Yeah, that was the argument. Yeah, but it was not true for State Bank of India. So that’s the you can’t paint everything with the same brush and that gives an opportunity. the perception was weaker than reality. So that gave an opportunity. Are there any non-negotiables that you’ve you have as a list in your mind when it comes to sizing and liquidity? I don’t buy anything less than 3% or lowest I go is 2 and a half%. Because having a quarter% position in a portfolio makes no sense to me. So even if that stock quadruples in price, it doesn’t move the needle in terms of the overall returns of the portfolio. So you have to build a decent position and as a measure of risk control, I don’t go more than 10% in any single stock. H one more thing is I don’t believe that a portfolio should consist only of the best ideas and best ideas are usually defined as the one where the portfolio manager thinks that the maximum money will be made. I deliberately manage the balance the portfolio with a mix of fast growing businesses and blue chip stalwards secular growth companies and cyclicals. So it should deliberately be a mix because the portfolio construction is all about balance. It is not you you shouldn’t have you shouldn’t skew the portfolio too much to one side. So that’s that’s my way of looking at it. M over the last few months uh or rather year a lot of investors uh you know came out and spoke about how they were holding large portions of cash in their portfolio. They had major cash reserves and they were waiting for corrections etc to step in. In your mind when is holding cash actually a discipline or is it like you know how do you think about cash reserves in your portfolio? Cash is always a residual asset. I don’t prereddecide that I want to hold this much cash. It’s a function of the extent of opportunities that are available and as you have already discussed the opportunities are not a function of the level of the index. You have seen this repeatedly in I even if I am it’s a repeat I want to say this once again. In 99 2000 the index was at a peak but FMCG and old economy stocks were all cheap. In 2007 the index was again at a peak at that time. Pharma automobiles FMCG stocks some companies like Page Industries and Aisher Motors they were all cheap. In 2016 midcaps and small caps were roaring. It was cheap. farmer was cheap. 2020 2021 there were so many uh high quality stocks which were high ROC stocks which were roaring but ITC was cheap, State Bank of India was cheap. Even today there are several that are not expensive. I am saying that excuse me given this condition having a fixed idea of what cash we will hold doesn’t make sense to me possibly there are times when I’ve been 99.5% invested during the covid time I was fully invested I never go to 99.5% but that was an exceptional period usually I have about 6 to 7% in cash. I think that is more than sufficient. Um the other question you had was about um non-negotiable. Non-negotiable. I think governments is is non-negotiable. Corporate governance is non-negotiable. M and one more thing is highly capital guzzling companies. I really stay away from companies with very fickle demand trends where the demand fluctuates violently I will stay away from and as I said very new age businesses very cutting edge technologies where the technologies change rapidly I tend to stay away from. You mentioned a couple of uh sectors which were cheap in different years. Uh what would you say for is true for today in 2025. So what’s looking cheap to you? Most of them are in our portfolio right now. So you don’t want to just broader sectoral themes not asking for specific names. I have a decent exposure to consumer discretionary spending stocks. I have some two or three private sector banks which I still think are reasonably priced. I have some insurance stocks which are which are you know I think quite reasonably priced. Um utilities I have one or two which are which are reasonably priced. So these are some of the names which are there at this with the portfolio and you know because this show is called the India opportunity and I know you are a believer in the India story. Uh what gives you what excites you about the next decade in terms of investment opportunities. So I I still think that you know consumer spending is is is not just a lull that we are going through. I think for the next couple of decades consumer spending and both FMCG and and consumer discretionary spending will continue to see a strong demand in this country. I think the GST reforms are a reflection that is one that is one important catalyst. Um I think the the multiplier effect of the various infrastructure you know projects that have happened over the last four five years will definitely help. Um I I also think that the PLI scheme targeting selected industries has been a success. We have seen remarkable success in in mobile phone manufacturing. I’m I’m sure there are other things that are also coming up. So these are some of the things that I make me feel bullish about the country. Are there any risks that you foresee that could potentially derail the India growth story? I am a bit worried about the um slower pace of job creation. that’s something that uh can derail especially in a in a country like India where uh there are very large number of youngsters you know I think more than 50% of India is less than 30 years old so uh it’s vitally important that they are gainfully employed and and that is uh one thing that uh you know I think uh is still not happened to the extent that we think it should happen and With AI coming into the picture, I think job loss is a real insecurity that a lot of industry. Yes. I’m I’m not an expert on that field, but I keep reading about what sort of potential job losses can happen in which sectors. We try to stay away from uh you know the vulnerable sectors to the extent possible. But there are some sectors where AI will will not have such a big impact and we have decent exposures come some of those companies. Is that something you actively think about like making your portfolio disruption proof? We have to we have to because it’s a you know in in in if there are you know mundane things like mundane jobs like you know low-level coding etc which I think is a more vulnerable part we try to stay away from such industries because it’s a it’s an important technological uh change. Uh there may be a a good deal of hype in it. I also happen to think that there’s a gold deal of hype in it but it is disruptive. I can I I can foresee that it’ll be disruptive. So we have to be careful. I can’t predict exactly what will happen but I can prepare. So um I have I have I think to the extent possible we have ring fenced the portfolio to to avoid such industries. And lastly you know your thoughts around uh you know all this geopolitical tension which is happening around the world. there’s a change in world order there and there’s a change in supply chains that have existed till now um you know there’s a new relationship uh that India will explore in terms of uh establishing new supply chains so there will be sectors that benefit from this kind of uh growth and also um FII flows that happen in this industry so are there any themes that you broadly think will benefit in terms of a structural shift that might globally investors I not generally I I don’t you know as I told you I don’t place too much uh emphasis on geopolitical analysis because it is really beyond my paycheck. Um I I would rather focus on companies that have the ability to withstand any storm even if that storm does come. That’s the focus. Mhm. So I tried to explain in metaphors you know a portfolio manager I think is similar the job of a portfolio manager is similar to the job of an architect. You know if the client wants you to build a house next to the seashore and doesn’t want to be affected by the tsunami. The architect’s job is not to predict when the next tsunami will come. The architect’s job is to build a house that is strong enough to withstand a tsunami even if it does come. Similarly, my job is not to predict how the geopolitical scenario will will move. My job is to build a portfolio that can withstand a shock even if it does come. So I’m confident that we are doing that. So uh that’s the idea. So can I predict all these things? No, I can’t. I don’t even attempt to. You know, every answer that you’ve given me has such a strong connotation of an internal discipline that can only come from years of, you know, training yourself at it because it’s so easy to get carried away by external narratives, the noise in the market. But, you know, I know that internal dashboard and internal being true to your internal nature is very important to you. I would love for you to share your framework in terms of how you built this internal discipline over a period of time. so that our audience can also benefit from it. Yeah, as I told you there are four or five points which are important. The first one is being comfortable about what time horizon that we are really comfortable and each person has to search this for themselves. There are people who are comfortable with a one week time horizon. There are people who are comfortable with a 10ear time horizon. There is no perfect answer to this. What is comfortable for that person? he or she has to search for himself or herself and then stick to it. Excuse me. The second thing is being clear about what we know and what we don’t and sticking to companies that we understand, the businesses that we understand. It’s perfectly okay if we miss an opportunity. It’s much better than losing money permanently. Losing an opportunity doesn’t matter at all. If one goes, another one will come. But if money goes permanently, it will not come back. So it’s important to remember this. And there are 5,300 or 5,400 listed companies in India. I’m talking only of listed space. We need 25 to build a portfolio. So we’ll find out 25. No problem. Third is being careful about what we buy, how much of it we buy and at what price we buy. All these are important because you can’t pay an exorbitant price for even the best business in the world. So and finally the first point that I raised, don’t be bothered about how much money somebody else has made. Up to a point competition is good but beyond a point competition get destructive. So it is important to to stick to what our investment goals are and then don’t deviate just because somebody else has made more money or claims to have made more money. I’ll give you one example. My late father in the last 10 years of his life he invested only in bank fixed deposits. He didn’t trust the investment abilities of his son. He was happy with it. 7% 8% return from bank fixed deposits at that time. If I had gone and told him no on a riskadjusted basis, you know, you should do this and do that and get higher returns. It would not have worked for him. He knew what he wanted. He knew what he did not want. and he was happy with the returns. That’s what matters, right? So it’s it’s what matters to us. We have to decide and stick to it. Let’s not be guided by what somebody else is doing. I think if you were to ask me for an internal conditions checklist, this would be it. Because you often say that salvation lies within. What are some of the beliefs uh that have served you well to be able to stick to this kind of discipline? because it’s not easy you know it takes a certain level of uh courage but like soft courage it’s not visible to the world but it takes a lot of hard work to stay true to your inner work um that has to be done over a period of time I I think I partially answered this in one of the previous questions there are two katharic experiences I went through one was between 95 and 97 that IPO boom where we also made a lot of mist we had an anxiety to prove to the world that we are more intelligent than everybody else and we bought a lot of junk in the portfolio and that we took more than two years to clean the junk from the portfolio because we were stuck with a lot of illquid names. The resolve came at that time that after that junk will never be part of the portfolio. It is simply not worth it. Even if it came free, I don’t want it. The second was about the 992000 new economy bull where if we gave 160% return in 1999 I don’t mind sharing it at that time that fund was called Zurich equity fund today that fund is called HTFC flexi cap okay it has got I would think about 82,000 crores of assets under management it’s one of the most popular funds of the country in those days it was called the Zurich equity fund you managing it as a 160% in one year did not satisfy the investment community. That is when it sunk in because there is no such thing as enough money. There is none. So it’s much better to be consistently good rather than attempt to be the best because the best is a it’s a transient position. It’s futile trying to be the best because the best is is is not a sustainable position at all. But being consistently good is a sustainable position. If if I think if I can give this one takeaway from this podcast, it will be this. Being consistently good is far more important than trying to be the best. You know, success breeds a lot of ego and losses can crush confidence. Wait, what you’re talking about is uh you know having equinimity of the mind and not letting yourself get affected by both sides, right? Because 160% returns can’t satisfy investors and maybe losing money, losing money will obviously bring out the worst reactions. So how do you come back to this economous position in your mind? Constantly remind oursel of the mandate that the products are supposed to deliver. See, it has a I think the portfolio manager’s primary job is to be faithful to the mandate of the product. It is not to show off his or her intelligence to the world. That is not what they’re there for. The portfolio manager is supposed to take care of somebody else’s money and in accordance with the mandate of the product. So, periodically reminding ourselves of the mandate of the product is vitally important. Second vital importance is in communicating this right from the signing time to periodically to periodic intervals to the client that we are indeed doing what we said we would do. So it’s it’s it’s important that there is a there is a match between a congruence between the ability of the portfolio manager and the interests of the client. And this has to be reinforced with constant communication. M that’s and I have observed this some clients are insistent on frequent meetings in the first one or two years after that they see that we are just doing the same thing that we said we would do and they let us be after that. So it’s it’s been our experience like that. So you could say that we are boring but consistency is boring and one of the important features of portfolio management is to be consistent. I don’t mind being boring. You’ve said it a few times now that you know no money is enough. What does enough money mean to you now after so much time in the markets is money is important for everybody in money is important for everybody but uh there are things that are also important beyond money. So I think a combination I think a successful life is a combination of a good health, combination of a good family, a good circle of friends and money to meet your everyday needs. I think beyond this and and what what you can your surpluses you give away to people who are less fortunate than you. This is what matters to everybody. So I think it’s I think a combination of all of these things is in my opinion what makes a successful life. If there’s one rule that you would want your children to inherit uh about wealth creation or investing, what would that be? I think they should realize that spending less is equally important to making more. Yeah. Because this generation needs a reminder of that, right? I think it’s important. Yeah. Because uh constantly I think the spends on experiences, travel, all those things have gone up. There’s nothing wrong with that. is just that it has to be in proportion to the money that you already have. You know, it should not be disproportionate to that. That’s very important. And my last question, you know, uh as investors, it’s very important to have um strong opinions but loosely held as we call them. Have there been any beliefs that you believed for a long time but have abandoned later in life? Something that you’ve changed your mind about? Yeah, in the see I was not born with this investment philosophy. We changed because of the experiences that we had, the knocks that we suffered and also because of the um the good fortune of meeting some very good quality investors along the way. I think the experiences of 95 to 97 of 99 2000 and then of 2007 and then the layman crisis all of this has has molded our investment thinking I think it’s important that in an investor’s journey he or she should go through at least three or four bull and bare markets that’s when the thinking will really uh you know get refined so that is one thing and I’ve been fortunate to meet some very great investors. I would be gratefully recollect my meetings with the late Chandraand by Sat. I think he’s a he’s a person who has influenced a great deal of my thinking and not just as an investor as a as a human being you could look up to him. So he’s that kind of a person. Uh that’s one and of course I have several people I there are too many to recount is a you know I have I have been fortunate enough to work with people like Sanjay Bhachara I have worked with Prashant Jane and Chandesh Nigam as a team um I’ve learned a lot from people like Vinote Sati like Nimisha Duresha there’s so many of them I’ll be I’ll be missing out on several of them. So I don’t want to complete the whole list. So it’s uh and there are some good books we read along the way. We have been fortunate enough to read some good books at the right time. These have bolded our thinking. So it is not as if that you know right from the time I graduated I have been a investor of this kind. Nothing of the kind. Mistakes along the way we change. So that’s that’s how it is. Yes. U thank you so much for taking out the time to be with me here today. I think this was uh a fantastic episode with very rich insights and very profound insights also because it’s so um easy to get carried away in the external noise but your conversation is a reminder to keep coming back to your true core and identifying what works for you as uh and identifying what your true nature is which is why you know when we discussed having this conversation the emphasis that you wanted to put on the internal work was so important to me as well because I think these are timeless principles and evergreen dream content which you know the audience will always appreciate. So it was truly a pleasure hosting you today. Thank you and I’m grateful for inviting me to on on your podcast. Thank you. Thank you. 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. 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