Hedge Fund Manager Mark Sellers on Becoming a Great Investor

http://www.nasdaq.com/article/hedge-fund-manager-mark-sellers-on-becoming-a-great-investor-cm863289

Hedge Fund Manager Mark Sellers on Becoming a Great Investor

October 22, 2017, 12:11:07 PM EDT By Alex Barrow, GuruFocus

This is a killer talk I came across from hedge fund manager Mark Sellers, speaking to some Harvard MBA kids on what it takes to make it in markets. Regardless of whether you consider yourself a trader or investor, Mark's "seven traits" apply.

First of all, I want to thank Daniel Goldberg for asking me to be here today and all of you for actually showing up. I haven't been to Boston in a while but I did live here for a short time in 1991 & 1992 when I attended Berklee School of Music.

I was studying to be a jazz piano player but dropped out after a couple semesters to move to Los Angeles and join a band. I was so broke when I lived here that I didn't take advantage of all the things there are to do in Boston, and I didn't have a car to explore New England. I mostly spent 10-12 hours a day holed up in a practice room playing the piano. So whenever I come back to visit Boston, it's like a new city to me.

One thing I will tell you right off the bat: I'm not here to teach you how to be a great investor. On the contrary, I'm here to tell you why very few of you can ever hope to achieve this status.

If you spend enough time studying investors like Charlie Munger ( Trades , Portfolio ), Warren Buffett (Trades, Portfolio), Bruce Berkowitz (Trades, Portfolio), Bill Miller, Eddie Lampert, Bill Ackman (Trades, Portfolio), and people who have been similarly successful in the investment world, you will understand what I mean.

I know that everyone in this room is exceedingly intelligent and you've all worked hard to get where you are. You are the brightest of the bright. And yet, there's one thing you should remember if you remember nothing else from my talk: You have almost no chance of being a great investor.

You have a really, really low probability, like 2% or less. And I'm adjusting for the fact that you all have high IQs and are hard workers and will have an MBA from one of the top business schools in the country soon. If this audience was just a random sample of the population at large, the likelihood of anyone here becoming a great investor later on would be even less, like 1/50th of 1% or something.

You all have a lot of advantages over Joe Investor, and yet you have almost no chance of standing out from the crowd over a long period of time.

And the reason is that it doesn't much matter what your IQ is, or how many books or magazines or newspapers you have read, or how much experience you have, or will have later in your career. These are things that many people have and yet almost none of them end up compounding at 20% or 25% over their careers.

I know this is a controversial thing to say and I don't want to offend anyone in the audience. I'm not pointing out anyone specifically and saying that you have almost no chance to be great. There are probably one or two people in this room who will end up compounding money at 20% for their career, but it's hard to tell in advance who those will be without knowing each of you personally.

On the bright side, although most of you will not be able to compound money at 20% for your entire career, a lot of you will turn out to be good, above average investors because you are a skewed sample, the Harvard MBAs. A person can learn to be an above-average investor. You can learn to do well enough, if you're smart and hardworking and educated, to keep a good, high-paying job in the investment business for your entire career.

You can make millions without being a great investor. You can learn to outperform the averages by a couple points a year through hard work and an above average IQ and a lot of study. So there is no reason to be discouraged by what I'm saying today. You can have a really successful, lucrative career even if you're not the next Warren Buffett (Trades, Portfolio).

But you can't compound money at 20% forever unless you have that hard-wired into your brain from the age of 10 or 11 or 12.

I'm not sure if it's nature or nurture, but by the time you're a teenager, if you don't already have it, you can't get it. By the time your brain is developed, you either have the ability to run circles around other investors or you don't.

Going to Harvard won't change that and reading every book ever written on investing won't either. Neither will years of experience. All of these things are necessary if you want to become a great investor, but in and of themselves aren't enough because all of them can be duplicated by competitors.

As an analogy, think about competitive strategy in the corporate world. I'm sure all of you have had, or will have, a strategy course while you're here. Maybe you'll study Michael Porter's research and his books, which is what I did on my own before I entered business school. I learned a lot from reading his books and still use it all the time when analyzing companies.

Now, as a CEO of a company, what are the types of advantages that help protect you from the competition?

How do you get to the point where you have a wide economic moat, as Buffett calls it?

Well one thing that isn't a source of a moat is technology because that can be duplicated and always will be, eventually, if that's the only advantage you have. Your best hope in a situation like this is to be acquired or go public and sell all your shares before investors realize you donit have a sustainable advantage.

Technology is one type of advantage that's short-lived. There are others, such as a good management team or a catchy advertising campaign or a hot fashion trend. These things produce temporary advantages but they change over time, or can be duplicated by competitors.

An economic moat is a structural thing. It's like Southwest Airlines in the 1990s, it was so deeply ingrained in the company culture, in every employee, that no one could copy it, even though everyone kind of knew how Southwest was doing it.

If your competitors know your secret and yet still can't copy it, that's a structural advantage. That's a moat.

The way I see it, there are really only four sources of economic moats that are hard to duplicate, and thus, long-lasting. One source would be economies of scale and scope. Wal-Mart is an example of this, as is Cintas in the uniform rental business or Procter & Gamble or Home Depot and Lowe's.

Another source is the network affect, ala eBay or Mastercard or Visa or American Express.

A third would be intellectual property rights, such as patents, trademarks, regulatory approvals, or customer goodwill. Disney, Nike, or Genentech would be good examples here. A fourth and final type of moat would be high customer switching costs. Paychex and Microsoft are great examples of companies that benefit from high customer switching costs.

These are the only four types of competitive advantages that are durable, because they are very difficult for competitors to duplicate. And just like a company needs to develop a moat or suffer from mediocrity, an investor needs some sort of edge over the competition or he'll suffer from mediocrity.

There are 8,000 hedge funds and 10,000 mutual funds and millions of individuals trying to play the stock market every day. How can you get an advantage over all these people? What are the sources of the moat?

Well, one thing that is not a source is reading a lot of books and magazines and newspapers. Anyone can read a book.

Reading is incredibly important, but it won't give you a big advantage over others. It will just allow you to keep up. Everyone reads a lot in this business. Some read more than others, but I don't necessarily think there's a correlation between investment performance and number of books read.

Once you reach a certain point in your knowledge base, there are diminishing returns to reading more. And in fact, reading too much news can actually be detrimental to performance because you start to believe all the crap the journalists pump out to sell more papers.

Another thing that won't make you a great investor is an MBA from a top school or a CFA or PhD or CPA or MS or any of the other dozens of possible degrees and designations you can obtain.

Harvard can't teach you to be a great investor. Neither can my alma mater, Northwestern University, or Chicago, or Wharton, or Stanford. I like to say that an MBA is the best way to learn how to exactly, precisely, equal the market return. You can reduce your tracking error dramatically by getting an MBA.

This often results in a big paycheck even though it's the antithesis of what a great investor does. You can't buy or study your way to being a great investor. These things won't give you a moat. They are simply things that make it easier to get invited into the poker game.

Experience is another over-rated thing.

I mean, it's incredibly important, but it's not a source of competitive advantage. It's another thing that is just required for admission. At some point the value of experience reaches the point of diminishing returns. If that wasn't true, all the great money managers would have their best years in their 60s and 70s and 80s, and we know that's not true. So some level of experience is necessary to play the game, but at some point, it doesn't help any more and in any event, itis not a source of an economic moat for an investor.

Charlie Munger (Trades, Portfolio) talks about this when he says you can recognize when someone gets it right away, and sometimes it's someone who has almost no investing experience.

So what are the sources of competitive advantage for an investor?

Just as with a company or an industry, the moats for investors are structural. They have to do with psychology, and psychology is hard wired into your brain . It's a part of you. You can't do much to change it even if you read a lot of books on the subject.

The way I see it, there are at least seven traits great investors share that are true sources of advantage because they canit be learned once a person reaches adulthood. In fact, some of them can't be learned at all; you're either born with them or you aren't.

Trait #1

Is the ability to buy stocks while others are panicking and sell stocks while others are euphoric.

Everyone thinks they can do this, but then when October 19, 1987 comes around and the market is crashing all around you, almost no one has the stomach to buy. When the year 1999 comes around and the market is going up almost every day, you can't bring yourself to sell because if you do, you may fall behind your peers.

The vast majority of the people who manage money have MBAs and high IQs and have read a lot of books. By late 1999, all these people knew with great certainty that stocks were overvalued, and yet they couldn't bring themselves to take money off the table because of the institutional imperative, as Buffett calls it.

Trait #2

The second character trait of a great investor is that he is obsessive about playing the game and wanting to win.

These people don't just enjoy investing; they live it. They wake up in the morning and the first thing they think about, while they're still half asleep, is a stock they have been researching, or one of the stocks they are thinking about selling, or what the greatest risk to their portfolio is and how they're going to neutralize that risk.

They often have a hard time with personal relationships because, though they may truly enjoy other people, they don't always give them much time. Their head is always in the clouds, dreaming about stocks.

Unfortunately, you can't learn to be obsessive about something. You either are, or you aren't. And if you aren't, you can't be the next Bruce Berkowitz (Trades, Portfolio).

Trait #3

A third trait is the willingness to learn from past mistakes . The thing that is so hard for people and what sets some investors apart is an intense desire to learn from their own mistakes so they can avoid repeating them.

Most people would much rather just move on and ignore the dumb things they've done in the past. I believe the term for this is repression.

But if you ignore mistakes without fully analyzing them, you will undoubtedly make a similar mistake later in your career. And in fact, even if you do analyze them it is tough to avoid repeating the same mistakes.

Trait #4

A fourth trait is an inherent sense of risk based on common sense.

Most people know the story of Long Term Capital Management, where a team of 60 or 70 PhDs with sophisticated risk models failed to realize what, in retrospect, seemed obvious: they were dramatically over leveraged. They never stepped back and said to themselves, "Hey, even though the computer says this is ok, does it really make sense in real life?"

The ability to do this is not as prevalent among human beings as you might think. I believe the greatest risk control is common sense, but people fall into the habit of sleeping well at night because the computer says they should. They ignore common sense, a mistake I see repeated over and over in the investment world.

Trait #5

Great investors have confidence in their own convictions and stick with them, even when facing criticism. Buffett never get into the dot-com mania though he was being criticized publicly for ignoring technology stocks.

He stuck to his guns when everyone else was abandoning the value investing ship and Barron's was publishing a picture of him on the cover with the headline "What's Wrong, Warren?"

Of course, it worked out brilliantly for him and made Barron's look like a perfect contrary indicator.

Personally, I'm amazed at how little conviction most investors have in the stocks they buy. Instead of putting 20% of their portfolio into a stock, as the Kelly Formula might say to do, they'll put 2% into it.

Mathematically, using the Kelly Formula, it can be shown that a 2% position is the equivalent of betting on a stock has only a 51% chance of going up, and a 49% chance of going down. Why would you waste your time even making that bet? These guys are getting paid $1 million a year to identify stocks with a 51% chance of going up? It's insane.

Trait #6

Sixth, it's important to have both sides of your brain working, not just the left side (the side that's good at math and organization.)

In business school, I met a lot of people who were incredibly smart. But those who were majoring in finance couldn't write worth a damn and had a hard time coming up with inventive ways to look at a problem. I was a little shocked at this.

I later learned that some really smart people have only one side of their brains working, and that is enough to do very well in the world but not enough to be an entrepreneurial investor who thinks differently from the masses.

On the other hand, if the right side of your brain is dominant, you probably loathe math and therefore you don't often find these people in the world of finance to begin with. So finance people tend to be very left-brain oriented and I think that's a problem. I believe a great investor needs to have both sides turned on.

As an investor, you need to perform calculations and have a logical investment thesis. This is your left brain working.

But you also need to be able to do things such as judging a management team from subtle cues they give off. You need to be able to step back and take a big picture view of certain situations rather than analyzing them to death. You need to have a sense of humor and humility and common sense. And most important, I believe you need to be a good writer.

Look at Buffett; he's one of the best writers ever in the business world. It's not a coincidence that he's also one of the best investors of all time. If you can't write clearly, it is my opinion that you don't think very clearly. And if you don't think clearly, you're in trouble. There are a lot of people who have genius IQs who can't think clearly, though they can figure out bond or option pricing in their heads.

Trait #7

And finally the most important, and rarest, trait of all: The ability to live through volatility without changing your investment thought process.

This is almost impossible for most people to do; when the chips are down they have a terrible time not selling their stocks at a loss. They have a really hard time getting themselves to average down or to put any money into stocks at all when the market is going down.

People don't like short term pain even if it would result in better long-term results. Very few investors can handle the volatility required for high portfolio returns.

They equate short-term volatility with risk. This is irrational; risk means that if you are wrong about a bet you make, you lose money. A swing up or down over a relatively short time period is not a loss and therefore not risk, unless you are prone to panicking at the bottom and locking in the loss.

But most people just can't see it that way; their brains won't let them. Their panic instinct steps in and shuts down the normal brain function.

I would argue that none of these traits can be learned once a person reaches adulthood. By that time, your potential to be an outstanding investor later in life has already been determined.

It can be honed, but not developed from scratch because it mostly has to do with the way your brain is wired and experiences you have as a child. That doesn't mean financial education and reading and investing experience aren't important.

Those are critical just to get into the game and keep playing. But those things can be copied by anyone.

The seven traits above can't be.

Interview of Ramesh Damani & Hiren Ved

https://in.finance.yahoo.com/news/domestic-liquidity-real-stay-agree-081233554.html

Domestic flows have kept markets buoyant for the last few months as money coming in from foreign portfolio investors ebbed. This domestic liquidity is real and will drive the stock market going forward, well-known investor Ramesh Damani and Hiren Ved of Alchemy Capital, one of the country’s largest portfolio managers, said on BloombergQuint’s special show Saal Mubarak.

Here are edited excerpts from the interview,

What’s the underlying tone of the economy?

Ramesh Damani: The undertone of the economy is one of hope and optimism. Since the Modi bull market began three years ago, it has been hope, it clearly hasn’t been on earnings. But I think as Peter Drucker taught us once, culture eats strategy for breakfast. I think what we are learning is that liquidity will always trump valuations. Liquidity is the mother’s milk of a bull market. You can’t fight the feed as the old saying goes. The money that is pouring in from domestic investors has been igniting a rally. Now we are coming to a critical juncture in this market. We are going to see the base effect of demonetisation within the next two quarters or so. If earnings don’t come through, the market could be in a spell of trouble. But so far, the market is driven by liquidity and hope that things are going to get better. There are things that are getting better, not in every respect, but in some respect. There are long-term gains to have from demonetisation and the Goods and Services Tax.

Can The Rally Sustain?

For the broader economy, there are two views. An equal number of people saying things are looking ominous and an equal number are saying things are looking rosy.

Hiren Ved: As stock market investors, we are blessed that we get to see the more organised sector, which is listed. Demonetisation, GST and the crackdown on black money has given a body blow to businesses essentially run by the cash economy, evading taxes. Those businesses are being impacted. People get confused when they look at stock market valuations.

Having said that, all recoveries are usually uneven and never broad based. It is typically one or two things that drive the economy. It’s not that all the four engines are firing together. For example, it’s consumption and government expenditure in our case, and not private spending. When these one or two things pick up and gather momentum, the rest of the economy hums together. We could have argued that part of the price-to-equity re-rating in the market was because the cost of capital fell by 200-250 basis points. When Modi came in 2014, the 10-year bond yield was 8.8 percent which is down to 6.6 percent. So you could argue that there is some lift to the PE. But the rest is liquidity and optimism that growth will come back.

If for the second half, earnings doesn’t come through (hopefully they will) then people will question the rally.

One of the reasons we are seeing the selling by foreign portfolio investors in the last few months is because they have options. India had a massive premium; people were overweight by 750 basis points on Indian equities versus the benchmark which is down by 300 basis points. FPIs say that we will go elsewhere where the risk-reward is better. But the Indian retail investor is discovering the joys of investing in SIPs and in stock markets, the joy of equities.

We are lucky that we have come thus far without any earnings growth. But we can’t count on that for too long.

Key Risks For India

What worries you the most about India in the global backdrop? What are the key risks that will haunt us for the next 12 months?

Ramesh Damani: Global markets are making new highs and there is a sense of fear in the marketplace among commentators. And that’s a good sign. As the market climbs the wall of worry, it is good. I don’t see people complacent anywhere. The biggest risk is that the market is complacent about geopolitical risks.  What happens in North Korea, we can’t quantify. We can quantify other markets in terms of how GDP is growing or how inflation is rising. But what is happening in North Korea, we can’t quantify. Fed has already indicated it will raise rates further. The markets has discounted that.

But the thing that will keep me awake in 2017-2018 and beyond that are geopolitical risks. There is a man who is particularly unstable in America and one doesn’t know what will be launched there. If you ask me what keeps me up at night, it’s that.

And dealing with an equally unstable man in North Korea as well.

Both of them were probably twin brothers at some point in life. It’s not good for financial markets. What’s surprised me is that market has ignored this. It has totally ignored North Korea. Even the Korean market is making fresh highs as we speak. It seems that the market is sleepwalking into that crisis. If something triggers for the worse, that could not be a happy situation.

Is there a chance that global flows come back to India?

Hiren Ved: Global flows came into the debt market in India as yields were very high. In the equity market, India has been always been an overweight in many FPI portfolios. Foreigners were very worried about demonetisation. They thought this will dent earnings. Post demonetisation, markets have just taken off. They took a call that we are overweight, the earnings story is not coming through, so let’s reduce our overweight stance in India for a bit.

Simultaneously, we have seen a massive rally in commodities. Countries like Brazil, Russia rose to new highs after a long time. In some of these countries, valuations were cheap and people thought there were opportunities. They [foreign investors] said we like the long-term India story but we will wait; make money elsewhere and come back at some point. India will remain a favoured market but it is just one of the places where you will stay overweight. The Modi trade started three years ago and people have been waiting. When the money will come back, I don’t know. But we are beginning to see that selling is ebbing a little bit. Whether foreigners will come back with a gusto or wait for a real correction is anybody’s call. But no one is complaining because locals have stepped in with gusto.

Ramesh Damani: There is nothing global emerging market guys are more scared of than being under invested in rising markets. So this will continue. Trust me they will be back and that will lead to a bubble some time down the road. The domestic liquidity is not a flash in the pan event. This time it is for real.

There is reason to believe that domestic liquidity will be able to support this market and the IPO market for some time to come.

The Emerging Themes

What do you think the story is for next 12 months? Do the expensive names continue be sought after or do you see markets start bargain hunting in pockets which so far have not delivered in a big way?

Hiren Ved: One of the reasons FMCG gave returns in the mid 80s and 90s was because HUL was compounding profits at 25-30 percent. Markets love growth with good RoCE (return on capital employed). So, if you have sectors and companies delivering constant growth, in the short to medium term at least, market overlooks valuations. People argue that HDFC Bank was always expensive, but the fact is it kept compounding at 25 percent a year.

There are very few companies with such stable compounding over a long period. So they will get a premium. What that premium is depends on interest rates and liquidity. We used to think that 4 times price-to-book is expensive. Today the dynamic has changed. Probably, 6 times price to book is the norm for high quality financials. So who is to decide? It’s the broad wisdom of the market which together decides.

On whether money will go down, there is already smart money which is going down and bargain hunting in reasonable valuations and trying to bet on turnarounds that are happening, because the economy will heal over time. Typically, what happens is that the quality [stocks] will either under perform or move sideways for a while and money will go to other end of the spectrum, what we call as the have-nots. Within the have-nots, you have to differentiate between companies which have broken balance sheets and companies which have good balance sheets. The first order will where the balance sheets are good and there was no misallocation of capital but there was no revenue momentum. But now, because of either external opportunities or because the companies themselves are doing something, you will see the revenue growth coming in and that’s where the big money is going to be made. The fact that the small and mid-cap indices continues to outperform the large-cap index, some of that could be fluff, but it’s been happening for a long time.

Small and mid-cap indices have been outperforming since 2014. We are in the fourth year of the bull market in small and mid-cap stocks.

Portfolio Approach

Would you be chasing companies which are expensive but show promise of growth, or companies which are not showing earnings growth but could show promise?

Ramesh Damani: The biggest threat to global market is the onslaught of technology, what is happening with automation, internet, robotic intelligence. India as a consumer doesn’t understand that. Because I am a domestic focused investor, I want to make a portfolio that is somewhat insulated against technology taking jobs away from manufacturing and other businesses. The four areas I came up with:

Real Estate: Property has some immunity from technological threat

Airlines: I don’t think the hype will take off so soon

Food and liquor businesses, quick service restaurants will do well

Gaming and entertainment

People come to India for its 1 billion consumers, and not for the infrastructure or steel play. They come for the consumers. That’s the centerpiece of the portfolio I am suggesting to you. I think they are insulated technologically. And I could use the Warren Buffet test for this. If I buy a basket of these stocks and go away for ten years, I am confident it will be better as opposed to buying a steel company or an oil marketing company. I am constructing a portfolio that tries to mitigate the risk of technology over-running these businesses.

Are you looking at things that are doing well internationally and therefore could have an impact in India?

Ramesh Damani: Let’s talk about the gaming sector. Across Asia - if you look at Japan, Singapore, Malaysia, Cambodia, Philippines - gaming is big because international tourists want that industry out there. India has so far been resisting. But we are at the cusp of change. It might happen in six months or a couple of years. But the casino business will change over time in India. It’s a hugely lucrative business.

The odds always favour the house and the PE multiples are always the sexiest in the market. While I can’t time this, I am sure that over the next 5-10 years, if India wants to be an international destination, spirits and gaming sectors will do well.

Let’s look at the urban theme. We have young consumers going to work. We have women working for the first time. Cleanliness standards required, AC comfort required. Look at the quick service restaurants. These guys are selling burgers for 30 bucks or fries for 20 bucks, it's so cheap.

As inflation comes in and the purchasing power kicks in and as people want to eat more outside the home, quick service restaurants will do well.

I can’t tell whether these themes will do well this quarter or the next. But over 5-10 years, the compounding effect will be huge. I am suggesting that if you are young and starting a portfolio, these are the stocks you could look at. Of course, you look at the FMCG and technology businesses but part of that portfolio could be done in those kinds of businesses.

Clean Energy Push

India has said that by 2050 we want to be a combustion-free country. Can you initiate investments based on that right now?

Hiren Ved: With electric vehicles, I call it version 1.0 investing. When retail in India was new, you could buy any retail stock and you would make money. Today, if you are selling EVs or supplying one small part to an EV, your stock will be up 20 percent. You can’t deny the fact that the auto industry is under pressure but it will adapt itself differently.

You still have to build out infrastructure which will take time. There are a lot of other issues. If you look at roads in India, there is hardly any discipline. So you will not have the self-driving cars. It’s something that you can’t wish away but it is several years before it becomes a reality. You can’t say what happens in California will happen in the streets of Mumbai. It is very difficult to translate that. PEs of auto companies could get compressed for a while because this fear is on top of the mind of investors. Some of these companies will adapt to the new situation.

We own an auto ancillary company which is already supplying tool parts to Tesla. Going by Tesla’s volumes today, it’s not that it will be a big money spinner; it’s more about the mindset. We are positioned such that if this opportunity were to become big, we are there to hitch that ride.

Ramesh Damani: I am on the other side of the fence from Hiren regarding this. We don’t understand the kind of changes that autonomous vehicles will bring. They will change the entire dynamic and that’s the technology threat I mentioned earlier. In the last 30 years, we have seen the incumbent always loses. If you look at BSE and NSE, NSE got market share. 

Look at Polaroid and Kodak which owned the instant photography market. Today they don’t even exist as listed companies. Look where Sony was 20 years ago and what Apple did to them. Typically, incumbents have their heads in the sand to protect their profit pool and are not looking ahead of these markets. I am seeing the same thing. Auto companies margins are so thin, they are not investing. Just as Tesla got market cap bigger than all the auto companies combined in America, the same will happen to Indian businesses. Incumbency rarely win the race. That is what history has told us. If anybody can do it, I salute them because that’s the example of a great management that we should bet on.

Betting On Insurance

Do you think insurance is the space which could be a money spinner for the next 5-6 years?

Hiren Ved: Yes, insurance will be a big sector. I have looked at the numbers and I don’t think that insurance penetration in India is as low as people think. The ticket sizes could increase. For health insurance, we are way behind global standards. Earlier, the way insurance was sold to people was just pushing it down their throats. With digital channels coming into insurance, you will have younger people buying insurance digitally. You could see early adoption as opposed to people buying insurance in mid 40s and 50s. Insurance will be the big sector in India.

We are just seeing the onset of financialisation. Demonetisation had a big role to play because all the deposits that went into the bank allowed the relationship manager to sell some insurance product to his customer because that was a heightened 60-day period where we had a lot of interaction with the bank branch. That will carry on for a long time. A day will come when LIC will get listed and given its size and stature, it will have to be part of the Nifty and same is the case with a few other companies as well.

Near-term valuations are expensive but in the long-term, it [insurance] will be a major sector that will be part of the stock market.

Ramesh Damani: The trick in insurance companies is to find the companies with the float and who can deploy the float successfully ahead of the payoffs. That’s what I would be looking for as an analyst. Insurance will be big, without a doubt. The guys who capture the maximum float and keep investing wisely...that’s the secret of Warren Buffet’s wealth. He can invest his float wisely in stock markets with compounding returns. I think the winner will be there. So, it will be a big sector.

Big Investment Ideas

One theme that each of you believe is not necessarily new but has spent some time in the formative stage and is now ready for takeoff.

Ramesh Damani: Airlines and housing, they will be important sectors. The airline industry is just about bursting through its crackers right now. There are misinterpretations on Dalal Street about what airlines do. They are very competitive businesses. It’s a very profitable business. Given the scare of how many airlines are going bankrupt, I don’t think people will come and spoil the party. For the next 2-5 years, airline traffic will do well. And they have started to do well.

And then there is housing. The first thing we want when we graduate and start a job is a house. Housing is a nice stable sector. The market has a lot of respect for real estate. But some of the listed companies are ways to play that.

Hiren Ved: Logistics will be the one sector with GST out of the way. That sector was young and it always showed promise. Now GST has provided a trigger. If e-commerce has to succeed, you will need to have a strong logistics sector in India. Recently, a large FMCG company went in to the huddle after the BJP came in power in UP discussed its UP strategy. It’s a country by itself, how you get to every nook and corner, how do you distribute your product there. Logistics is where value can be added. The enabler is there, the size and scale is there. The mixing and matching of technologies with the logistics sector, the kind of efficiency that you can unlock this sector is just mind boggling.

Investment Mantra

What is the one key learning of yours that you’d like to leave us with?

Hiren Ved: Never say ‘no’. Stick to the basic principle but have high adaptability and learnability.

Ramesh Damani: Liquidity will triumph valuations. I learned how liquidity is important in the market. But that’s the passing lesson.

But the more enduring lesson is the value of compounding, which liberates, and makes you financially free. If your money doubles every three-four years, after 30 years you will be fairly rich. Understand compounding and the magic of compounding and that’s the greatest advice I will give.

And one tip for all the investors

Hiren Ved: It’s an intellectually stimulating and humbling exercise. Go out and explore the world. But be disciplined. Don’t get carried away. Have rational expectations of returns and think long-term.

There are 2 mega investment themes for next 5-6 years: Saurabh Mukherjea

http://m.economictimes.com/markets/expert-view/there-are-2-mega-investment-themes-for-next-5-6-years-saurabh-mukherjea-ambit-capital/amp_articleshow/60387789.cms

There are 2 mega investment themes for next 5-6 years: Saurabh Mukherjea

By ET Now | Updated: Sep 06, 2017, 12.29 PM IST

Talking to ET Now, Saurabh Mukherjea, Ambit Capital , says black to white and saving themes are going to be the next big thing for investors. Edited excerpts: 

ET Now: There is a stretch on valuations but money is still flooding the markets. You believe that FII selling is due to valuation issues but it is a divide really because FIIs maybe withdrawing some money. DIIs are coming heavily into the market. It is a mixed bag. There is no pocket which is drying up when it comes to liquidity flows into the markets on a broader level. 

Saurabh Mukherjea: Clearly. domestic money has been flooding into the market over the last 12 months and that journey continues. The challenge remains fundamental. It is not evident that even in Q2 or indeed in Q3 this big GDP pickup insight. 

Q3 probably will look better on the GDP growth front because Q3 last year was weak on account of demonetisation but the overall earnings picture even for the current fiscal has once again become fairly grim and that will make it the fourth year in a row where earnings in India, Nifty earnings, Sensex earnings stay in single digit. 

We got a market which is overstretched on valuation grounds. We got financial services stock trading at an all-time high price to books and you really do not have fundamental support for these valuations. I think that has been our house view for the last six to seven months and remains the house view that domestic money continues to flood in but there really is not any fundamental support to the stock market. 

ET Now: Quite a few of fresh papers are hitting the primary market as well. Today you have got two IPOs getting launched, that is Dixon, BRNL, later on of course we know that there is this entire kitty of insurance companies as well waiting to list. Anything in particular? I know you are not going to name stocks but any specific sector that you are looking out for in terms of fresh paper release. 

Saurabh Mukherjea: It obviously makes sense that if you have a market which is stretched on valuation front, it would be a good time to raise money. I would do the same if I needed money. I would go out at a time when valuations were out of whack with the underlying realities. 

From an investors' perspective, what I would say is look for two themes which allow you to play the transformation in India from the black economy to the white economy. There is a bunch of companies which are already listed which will help you play this market share transfer from black to white whether it is in sanitaryware, whether it is in building materials, whether it is in hair oil, adhesives. 

So, the whole spectrum of companies which are benefitting from this black to white journey, one and the second thing I would look for is savings and not so much lending. Lending I think is an overdone theme in our stock market. Valuations are somewhat real for the lenders a formal financial savings theme will run in India for a long time to come. 

People have realised that they cannot really expect to save through real estate and gold and hence formal financial savings will rise rapidly over the next 10 years. Whether it is through life insurer, asset managers, financial services stock broking companies, try to play the savings theme through as many angles as you can. Also, try to focus on the black to white theme which I think is a mega theme for the next five-six years. 

ET Now: Within the insurance sector, earlier there were no options. Now there are plenty of options. SBI Life will go public. HDFC Life will go public. ICICI Pru already has gone public. A couple of general insurance businesses will also go public. So what is the go to space in insurance? 

Saurabh Mukherjea: As these companies go public, what investors will realise is there are broadly three drivers which make an insurer special or mediocre. Firstly distribution, did you have your own branch network which has a proven track record of pushing your product at low cost. Clearly the larger banks have a clear edge there and the economics of pushing your own insurance product through your own branches at scale and at low cost I think is a compelling one. 

The second is when you get the investors' money and how good is your investment management. This is one facet of insurance which I think is under appreciated in India. The insurer has to manage money properly. 

Thirdly, capital allocation. Can an insurer time the cycle? When risk is underpriced, he does not want to be pushing your boat out and taking more risk. You got to pull back on risk when risk is underpriced and when everybody runs away from the market and the pricing for risk runs up, that is when he wants to lend money. I think the life insurance industry in our country is quite large and there is a variety of players who are different in each of these three aspects. 

The good news is the first flush of insurers who are getting listed in India are credible high quality names and this is a potent long-term theme. 

ET Now: Let's talk on the financial inclusion theme. I am getting a sense that it may be a very powerful theme. This is a very well discovered theme. MOSL is a stock which you track as a brokerage and my compliments I think to the first brokerage which came out with a buy report on MOSL even though it is competition. You are able to identify the power of that franchise. Some of the companies like MOSL, Edelweiss, IIFL Holdings, Bajaj Finance they are trading at PE multiples and market caps which are unheard of. 

Saurabh Mukherjea: Yes, they are. Whether it is the lenders or the savings place, the lending place and the saving place, both sides of the balance sheet are trading at unheard of multiples and I do not think it is just the one broker that you mentioned. 

The entire financial services place is on fire. Between the two, the lending space risks are high. The economy is soft. The risks on the lending side are high. The valuations are unsustainable. 

On the savings side, the picture is very different. There is good reason to believe that now that we have fallen out of love with real estate, there is good reason to believe that the amount of retail savings that will come into the stock market will continue accelerating over the next five to ten years. 

I think we are already reaching a point. We are not very far away from the point where SIPs alone could be a billion dollars a month of inflows into the market and even that I think is scraping the surface. We have enough wealth in our country, enough savings in our country to believe that the SIP number can go considerably north of a billion a month. 

In that context of how far we can go on the savings path, how much we can move away from real estate -- whether it is through insurance or through broking or asset management, remember there will be some asset management IPOs as well. 

On all of those fronts, there is plenty of upside in this theme. There are fine credible companies, clean honest companies on the savings theme whether it is insurers, asset managers or brokers, buy them, sit on them for a long time. This is a safe theme which will give you good returns. 

Obviously, there will be ups and downs in the stock market and on those fluctuations, these companies will oscillate but structurally savings I think is the big theme for the next 10 years. 

The lending theme has worked very well for the last 20 years and the last 10 years as well. Savings is where we now shift the focus of the camera in financial services. 

ET Now: You are mildly positive on IT and pharma, take us through your perspective there. What would make you build your conviction to buy IT and pharma when most of the market is wary about the business prospects here? 

Saurabh Mukherjea: Part of it is, when you see a sector getting beaten up on the back of factors which are somewhat noisy, somewhat random, you start believing that there is elements of value in some of the names in the sector. 

Specifically with regard to the US regulatory actions in Indian pharma, I do not think this is sort of structural phase where the Indian pharma companies will keep getting caught by the FDA for regulatory violations. The industry is smart enough. The Indian pharma companies are smart enough to clean up their act on the FDA front and as the clean-up proceeds, the FDA issues will gradually fade away. 

I am not saying Trump will create a transformation in US appetite for Indian pharma but the FDA issues, the suspension of plants and so on those will recede over the next couple of years. 

Therefore in Indian pharma, especially names which have modest exposure to the US and there are good midcap pharma names in our country where no more than say 20 per cent of revenues come from the US -- there is value. Cash generative, high quality franchises, long-term cash generation track record, no more than 20 per cent of revenues, 10 per cent of profits from the US, those names are worth buying. 

Come to Indian IT, we know the story around top line slowdown. We know about how the world is moving to cloud and how Indian companies are not really ideally placed to benefit from cloud but what is also true for these companies is they are incredibly powerful cash generators. 

Some of them are already giving back 80 per cent, 90 per cent of their profits back to the shareholders through buybacks and dividends and in effect becoming 5-6-7 per cent dividend yield place. And when you see a sector with that sort of power on the cash front, the ability to generate a 5-6 per cent dividend yield play, you have to believe that there is at least one or two companies there which can then use that surplus cash flow to reposition themselves. 

My reckoning is that amongst the top four Indian IT companies, at least one play is there which can become a credible dividend play with some growth upside. As we go into a new era for Indian IT where top line growth is lower but the ability to generate EPS growth comes from consistently buying back shares.

A law graduate who fell in love with equities, manages Rs 1250 cr portfolio – meet Porinju Veliyath

http://www.moneycontrol.com/news/business/markets-business/a-law-graduate-who-found-his-love-with-equities-manages-rs-1250-cr-portfolio-meet-porinju-veliyath-2376899.html

A law graduate who fell in love with equities, manages Rs 1250 cr portfolio – meet Porinju Veliyath

MoneyControl  Sep 04, 2017 12:22 PM IST

By Kshitij Anand

A law graduate who found his love in equities back in the year 1990 is now one of the most influential small-cap stock pickers in the country today.

Kochi-based investor Porinju Veliyath's journey from an investor to Equity Intelligence, his firm which managed over Rs 1,200 crore worth of portfolio.

He likes to keep things simple when it comes to investing and does not shy away from investing in uncongenial ideas. He has already spotted many stocks which gave multibagger returns of up to 300 times.

He believes in Value Investing because it is all about Price and Value.

Few stocks which gave multibagger returns include names like Wockhardt (120), Orient Paper (6) Piramal Enterprises (340), Shreyas Shipping (20), Balaji Amines (100), Force Motors (400), Biocon (150) and Jubilant Life (300) are few past wealth creators under his PMS.

FCEL (10), JBM Auto (170), L T Foods (20), DCM Shriram (120), Geojit (32), Federal Bank (45) and TCI (+TCI Xpress) @ 250 are some of the performers he still holds.

Here is an excerpt from his exclusive interview with Kshitij Anand of Moneycontrol:

Your qualification, age, size of your portfolio

A Law Graduate, I am 55 arithmetically – My firm, Equity Intelligence is a SEBI Registered Portfolio Manager since 2003; we manage over Rs 1,250 crore.

At what age you started investing in the market?

I didn’t have any capital to start investing at beginning of my equity career. In fact, it was not a ‘purchase’ that turned out to be a gold mine for me.

It was a ‘sell’ at the peak of 1992 which helped me own a 475 sq ft apartment in Mumbai suburb. I had short-sold SBI Magnum at Rs 165 while its NAV was 32.

The stock peaked out at 180, next day (23 April 1992) and fell sharply. I covered at near zero levels adjusted to the ‘badla’ gains in few months. In a bi-weekly settlement system, you could short-sell any stock and carry forward with the corresponding buyer with ‘white kapli’.

What is your investment philosophy or investment mantra?

‘Keep it simple’ is my investment mantra. I don’t have any hard and fast rules while picking stocks. I am very flexible and open to any ideas which could create wealth, including unconventional ideas. SEBI guidelines is the only ‘rule I follow while picking stocks’.

List of stocks which have already given multi-bagger returns and how much?

There are too many stocks which have already given multibagger returns. Wockhardt (120), Orient Paper (6) Piramal Enterprises (340), Shreyas Shipping (20), Balaji Amines (100), Force Motors (400), Biocon (150) and Jubilant Life (300) are few past wealth creators under PMS.

FCEL (10), JBM Auto (170), L T Foods (20), DCM Shriram (120), Geojit (32), Federal Bank (45) and TCI (+TCI Xpress) @ 250 are some of the performers we still hold.

What do you prefer the most – largecaps, midcaps or smallcaps/microcaps and why?

The size doesn’t matter in Value Investing! It’s all about Price and Value. I don’t care about the size of the company even if the ‘Value’ is significantly higher than the price.

Everyone knows the price; understanding ‘Value’ is name of the game! Every successful investor has evolved a unique style of estimating the value and picking stocks. It is very difficult to explain the process.

Where do you see markets in next 4-5 years?

Equity will continue to be most rewarding asset class in next 4-5 years. Indian economy is at an inflection point with significant structural changes.

The economy is shifting from black to white and unorganized to organized, which will benefit listed companies, as most of them are conducting business in an organized manner.

The not-so-professionally managed companies also will change for the benefit of minority shareholders due to improved governance and embrace of professionalism. After historic reforms like demonetization and GST, there won’t be any incentive to remain ‘chor promoters’, siphon out profits and avoid paying taxes.

Any top bets which could turn out to be a gold mine in next few years?

Our latest picks are GVK Power & Infra, Kaya Ltd, and Emkay Global – Equity Intelligence PMS owns over 5 percent of these companies.

They have many challenges currently and the numbers do not look impressive. We are betting on their potential to create shareholder wealth over next 5 years in the changing economic environment.

Who is your investment guru?

I don’t believe much in Gurus, Gods & Prophets – learning has no limits and it is a continuous process. It is better to keep your eyes and ears open because there are wonderful people around you.

I have been inspired by many personalities (friends & associates) like Uday Kotak, Chandrakant Sampat, Radhakishan Damani and C J George.

I have also been motivated by many ordinary people, my friends & colleagues. Learning is an art; books and Gurus are not very important.

What are your hobbies?

I enjoy farming and spend 2-3 days in a week at the farm. Apart from that, I love traveling too, just came back after a solo-trip to Scandinavian countries.

It is interesting to experience and learn about the history, culture, lifestyle, and economy of different countries. Sometimes you get inspired like the cycling habit of people in Copenhagen.

What books are you reading?

The latest book I read in full was Civil Procedure Code & Law of Limitation, 27 years ago. I have attempted to read many books but failed to go beyond 5-10 pages.

There is a good collection of books at home, as my wife and children read a lot. I read online, have subscribed to Economist but do not remember reading an article in full. Love to write and read on Twitter due to its 140-character limit.