Investing has evolved over the last decade into something of an art: the canvas is complex and finding the right companies, knowing how much to invest, when to plunge in and pull back and maintaining a fine balance of risk and opportunities requires nothing less than an artist’s skill, precision and even creative thinking.
In this episode of “ET Wealth and Beyond”, The Economic Times’ markets editor Nishanth Vasudevan talks to Sunil Singhania, founder of Abakkus Asset Manager LLP and Kenneth Andrade, CIO of Old Bridge Mutual Fund to understand the fine brushstrokes that paint a picture of good investment.
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Investing holds different meanings for different people. For many, it's simply a process of making money for some. It's a lot more philosophical and then there are those who find a spiritual meaning in it. These days, we are hearing a lot about investing, being in art and then there is plenty of debate around that too. We are about to find that and a lot more from two accomplished practitioners in the field of investing.
They need no detailed introduction to the investing community, having managed public money for decades. What these gentlemen buy and sell is watch closely in the market, listen on because this promises to be a great conversation.
I am Nishant Vasudevan, the markets editor of the Economic Times and your host in this episode.
First, I'm pleased to welcome Kenneth Andrey founder and Cio of Old Bridge capital management.
Welcome Kenneth Hi. Not to start with for many people in the investment industry. The the process of investing typically starts with uh with numbers and ratios and spreadsheets and other things for you as an investment practitioner. When does this science evolve to or something like an art.
Well, it's a mathematical introduction at the end of the day and you get better at it after you have been through years of experience with it. Right.
So my investing journey started almost 30 years ago and I've been through a couple of bear market cycles and, and a lot of bull market cycles. Uh and I think experience has taught us everything. So the numbers ratios deductions of how a company will grow, et cetera would be completely meaningless if I haven't gone to see how all of these ratios did, all of these structures did well uh did in the past. So it's just a accumulation of experiences that you have. That is what brought us to this stage.
Uh So yes, there's a science behind it and there's a math behind it. The art comes with experience,
right, correct. Perfect. As a, as a fund manager, as an investor, was there a big turning point in your life that that changed your approach towards investing, you know, that moment of epiphany, you know, where you feel felt that, you know, this is what you know, I shouldn't be doing or this is what I should be doing.
So it was that effective journey in year 2000 all the way from 1997 to 2000 where nothing went wrong. And in 2000 to 2003, everything went wrong. It was that journey between, between buying value,
ok? To believing that growth would uh to buying growth at any price or holding on to growth at any price. And the cycle that came after that, it was a significantly large learning experience and that's what's made me what I am today,
right? Many people in the market will be familiar with your portfolio. Uh They kind of might be knowing your stocks by heart, but very few might be knowing about your stock selection process. Basically, how do you identify a stock? When do you decide to buy it? And how much do you buy it?
Now, it would be helpful for our listeners if you could elaborate with some kind of an example, something that you've done in the past, have you kind of how, how does the entire process work for you?
So, so fundamentally, we try to buy capital efficiency at a price and that's where the art of investing actually goes,
right? Capital efficiency. Everyone knows how a business is managed. Everyone can calculate the Roe and Roc of the business, right? But if the Roc and the Roe or capital efficiency is very high in most contexts or in most environments, you end up paying a, a very large price for it. OK. A great business is always available at a great price. So what we try to do is try and find a great business in an industry which is not doing very well.
The company's profitability is also not great, but it is better than the rest. And that's where we like to step in simply as an investor. What I'd like to see in multiple markets. So that is which company or its stock in a 52 week low. That's my go to place. Ok. So capital efficiency of one of the best businesses in a down cycle is a time where you get it at that at a reasonable price.
Uh That that's a short and the long form of, of what the process is all about.
Uh uh Could you elaborate that, you know, for, in, in, in terms of an example that you know, something has worked well for you in the past.
So let's put a, let's put a case of something that we've done and it's held us in relatively good stead since we started our journey, right? Largest airline debuted at, at the next amount of market cap when the industry had four or five participants at that point in time,
right, a very attractive business, a cost leader, profitable, generating cash flows in an industry which was which you would always find businesses struggle to generate cash flows and then you hit a down cycle this business on every single parameter.
OK. And traded at a valuation which is much lower than we've ever seen it before. OK. And continued its ability to be the cost leader today. The metrics is completely changed. So aviation and in India, India's largest aviation company is today the second largest in terms of market capitalization in the world.
OK. Has got cash on its balance sheet is something that the word and something that this industry has never seen, probably globally, you've probably seen it one or two companies, but in Indian company has that and one of the most important things is the marketplace is completely consolidated.
So you got the price right when you got and and it still holds itself in good stead in in the entire competitive framework in its within its industry,
right? So, so yeah, so everybody focuses on buying a stock, you know, when to buy, when to you know the timing of the purchase, the price of the purchase. But there is very little literature on selling part of it, which
typically tends to be a lot more complicated. How do you think about this entire approach of selling
well, when
an industry does well, the last common denominator in that industry or the smallest company in that industry starts doing extremely well. Now think about it this way when everyone in an industry makes money, you are heading towards hyper competitive competition, right? Because the largest company is investing in the smallest companies investing, which means more capacity is coming in.
Quite contrary to what most investors would like to believe that any industry where everyone makes money is a great place to be in. We hate being in a place where every single participant in an industry is profitable or is making money and reinvesting its money back into that industry. That's our side discipline, quantitatively putting it together
in the, in the recent past. Have you come across any such set up in an industry
which is kind of gone through this kind of a phase and where you felt that, you know, there is going to be a, there's going to be a fair bit of competition and you think that it's a time to kind of move. So
let me give you a sense of what happened in 2006, 7 and eight, right? And you see some similarities of that lay out in today's environment though. What happened in 67 and eight, we had this big boom in infrastructure and every company that was out there was setting up was bidding.
What is
so the higher order book, higher market gap, more ability to raise money, more ability to raise money, higher ability to take more contracts.
Ok. And that became the most inefficient part of the marketplace. At that point in time, capital is usually available. Companies want to say company want to build auto book because the minute you want to build auto book, you're getting market cap. The minute you get market cap, you have to demonstrate the ability to get a higher order book, which is the first structure of deterioration of
margins. When you have deterioration of margin. There's someone who is going to come and be big below your price,
something similar took place. And, and within our portfolios at the asset management company, we we basically build out a structure around pharmaceuticals which are outwardly facing. Ok. And the Indian manufacturers actually consolidated the global space in terms of generic manufacturing.
Ok. That's the consolidation part. What are you seeing bringing is the fragmentation part in the infrastructure, infrastructure business. Now timing this is completely different. Yeah, you you will have to work to see that you do not sell too early into a cycle like this.
Perfect Kenneth. The other question that we have in mind is generally, you know, you are a stock picker and the biases normally tend to be the smaller caps. The general perception over there is that the corporate governance standards are not the best in my in this entire space.
So for you as a fund manager, what comes first? Is it the price or the corporate governance? So
again, the corporate governance can be quantified. OK. Uh Now let me put it this way, take a portfolio in our company
and see if it's attracting the right talent.
OK? And it is getting incremental market share in its industry.
OK? It was attracting the right talent
and it's getting higher market share. Now, how can two of these things be wrong if it's got bad governance?
So when I say you can quantify corporate governance, we can actually quantify corporate governance out there.
Why am I talking about governance in, in a small cap business? Right. So usually when you, when you look at a business in a down cycle or, or you know, in a down cycle and you try to capture a great business in a down cycle, mostly investors, we keep that space because they want industry to well and the company to actually grow well.
And when there is no ownership in that entire business, because going through a rough patch, you usually get them at mid cap market caps, mid cap market caps, right? And I think that's a great entry point for all of us.
So while a portfolio kind of represents a small cap and mid cap is bias, they usually the largest companies in their categories, just they represent their market capitalization because they're going through a weak cycle.
OK? So when we invest, we don't compromise on corporate governance. OK? And we try to find this pricing which you most most often than not usually get it in this space or this these kind of companies. And that's what we, we try to, I try to enable with the process.
Yeah. So Kenneth, you know, investing tends to be, it's it's tricky people kind of, you know, it is subjective,
but according to you in investing, what is the skill that is the most overrated and what is the skill that is the most underrated?
Okay, the most underrated skill I would think is patience.
Ok. Nobody likes to wait on the stock. Uh Nobody wants to buy it at its appropriate time.
Ok. And that's what I think most investors almost always forget.
Ok. And it's happened with me as a beginner investor. I just didn't have the patience to, to wait on a stock or to find it a little cheaper and to understand what makes a good business.
Ok. And I think the most overrated part of investing is gut feel.
OK? Our intuition
because what drives intuition and what drives gut feel has to be quantitative at the back end?
OK. You can't wake up one day and say that
intuitively. I think this company will do well because this is a limited amount of data that I have. So you have to watch a business for an extremely long period of time.
OK. And that will drive intuition,
right? Uh Kenneth, before we wind up this discussion, our listeners would want to get some wisdom from you on some kind of advice from you on investing. Uh If you were to give them one good advice, one solid advice, what would that be?
I think everyone is in the process of finding the next
big winner in the market cycle like this side.
So if you're trying to find a value where it exists, none,
OK. Don't go searching for it. And I think this is very contextual and I learned it in 2017, 18, despite all the years in of, of investing into 2017 and 18, we went into a market cycle where I went looking for value as they exist. Not right. So you want to tread a little carefully, have that patience and the discipline to stay away from things you don't know.
Ok. And, and in a market environment like this, I don't think there's any value that you to search out. Yes, there are businesses that will grow, there are businesses that will keep you safe and there are businesses that will compound capital. They are all out there. So you just have the discipline to wait till it comes to your price.
Thank you, Kenneth. Thank you for talking to us. Thank you for this great discussion. It was nice having you and I'm sure our listeners have benefited a lot from this.
Thanks. Thanks for having me on the show.
Now. I would like to welcome Sunil Singhania, founder of a asset management. Welcome Sunil. So thank you for having me. So, so basically, you know, people know about Sunil Singhania portfolios, about the stocks, you own, etcetera,
but they don't know much about your stock selection process. Basically, how do you identify a stock? How do you buy a stock? How much, how much do you buy? I mean, if it would be nice if you could tell our listeners about this entire process, probably through an example of something how, how a past some kind of a pick.
So when we set up a backers, we had a very, very clear investment philosophy, you know, very quickly I can run you through the investment philosophies of first is we don't allocate, we invest, you know, we are not going to invest in a company just because, you know, you want to have an exposure to the particular sector or something, we would like to individually on merit, look at each company. Secondly, at least from our perspective, we are very, very balance sheet focus. So we don't look at loss making companies. So for us, the return on capital employed is sector.
And therefore, you know, typically we invest only in companies with the Roc or Roe is at least 14 15%. The second important criteria for us is the profit growth. And therefore, typically we look at companies which can double profit ideally in four years, a maximum of five years, which is a 14 to 18% cagle growth. Because you know, if the profits double the value of the business will automatically double. The third thing we look at which is in the current kind of an environment which is, you know, disruptions.
Then the other thing is, you know, the valuation, our view is that the best company is not necessarily the best stock. So if you remember four or five years back, we had come out with a note called bubble in quality and our view was that yes, quality is good. But at what price? So you know, if a company is trading at 7080 P multiple growing at 10%
I don't think that investor is going to make returns out of it. So we are very conscious about the valuations. So I think all said and done, these are the key criteria which we look at recently, we bought an auto ancillary company called sh it was ignored, but it clicked all the boxes, you know, and I think so far touch wood, it's been going very well, very, you know, evaluation focused investment of 24 25% and growing also decent, you know, this is just an example, but I'm just giving a broad perspective of how we look at things
great. So as a as an investor, as a fund manager, what has been the biggest turning point in your life, you know, that is kind of changed your approach towards investing. No, I think two or three things, one is obviously joining a mutual fund and basically, you know, getting into the groove as far as long term investing is concerned. Second, as I said, you know, we all learn from our mistakes. So many times you end up selling early
and those were huge lessons. You know, I think in the case of Bajaj finance, we were large investors. When I was in reliance mutual fund, we made good money, but we sold early and from there on the stock has multiplied 50 times. And I think from a turning point perspective, I think the biggest I would say learning is that if you are investing in equity,
you have to be positive on the economy or vice versa. If you are positive on the economy, then only you should be investing in equities. And I think that is what we have basically tried to do
so beyond ratios and the balance sheets and and you know, the industry prospects. Do you also look at the so the softer aspects in your investment uh checklist? So Nishan in a in a mid size or smaller company, obviously meeting the company makes a big difference in a mid to small size company. The management becomes very important because the second layer and the third layer might be might not be as strong as the top layer.
And therefore meeting companies become very, very important hygiene factors. You know, we do company visits when we do company visits, we come to know, you know how they are treating people. What is the cleanliness? What is the, you know, the whole quality aspect that becomes very important. Obviously, when we go through multiple year balance sheets, you know, they are compliance in terms of taxation.
There any red flags by the auditors. I think those are again, things which we have to basically look at. And more importantly, you know, if you have a history of the company over the last 1015, 20 years, then you know how the company has behaved in different cycles. I think that also helps now. So most investors, you know, at least the people who kind of, you know, who has started off the entire focus is on buying the timing of the purchase, the price of the purchase.
But there is very little discussion on when to sell.
Uh What is your philosophy in this?
No, I completely agree with you. I think uh when to sell, how much to sell, whether to sell food, whether to sell partial is always a concern or a question or uh I would say an uncertain kind of a decision from our perspective. There are three reasons why we would sell a stock first is if we go wrong in our hypothesis, you know, so we invested in a company based on particular assumptions or hypothesis and that is not turning out well,
maybe the sector has gone, you know, worse than what we expected. The company is not performing the way we expected. So I think the earlier you realize and the earlier you sell out, the better, you know, then you should not look at whether you would want to wait for a pop up or not. I think you have to sell second is a lot of times, you know, you go right and the stock moves much beyond what you would expect is to be the fair. Value.
See, ultimately, we are investors, we are investing from a 345 years perspective. But if you feel that, you know, in the next two years, the stock has discounted what you thought was uh possible in 4 to 5 years without any significant improvement in fundamentals, you would want to book profits. And the third important uh decision is, you know, capital is limited.
So if you have something in the portfolio and you come across something else, which is looking much better than what you already have in the portfolio. Obviously, you would like to switch, you know. So these are the three main reasons why we would sell a stock. And what according to you is the most overrated part of investing as a, as a profession and what is the most underrated skill required? I mean, that is not being talked about.
I see one thing is every investor I just said would have a different way of investing. I would say that the most overrated is, you know, trying to figure out when to buy, when to sell on a daily basis. You know, it just adds to the noise, it doesn't add to the returns. I think the most underrated is the compounding effect,
you know, in reliance when I was managing growth fund, we became 100 X in 100 years in sorry, 21 years, but that was a keg of only 20 to 23% which is great. But it doesn't look very big, but when you see 100 X in 21 years, that looks very, very big. I think investors instead of looking at who did the best in the last one year and switching from one fund to the other fund, I think more than that they should find someone who would be very consistent
and we would keep on just adding to the returns. Yeah. Yeah, soon as that's a, that's a great point, you know, to actually, you know, stick to a particular investment and you know, stay with it, you know, so that allowing it to allowing it to compound assets. So before we uh wind up this discussion, you know, our listeners would want to know your some important advice on investing. What would you add?
See, investing one has to be first positive on the underlying country and the and the asset class. So I think if you are positive that India is going to grow from four trillion to eight over the next eight years, then you should definitely invest in equity. Second is, you know, don't try to maximize return every day. I think equity is ultimately investing in companies and your returns are going to be commensurate with the earnings growth of the company.
I think the other thing is you have to give time to your investments. You know, you can't invest for one month, two months and six months and then get scared because of some event uh because then you will be entering at the wrong time and uh exiting at the wrong time. More importantly in this today's world where knowledge and information has become a commodity. I think don't microanalysis, micro analyze everything, you know, something or the other will be wrong in some part of the world.
I think that doesn't mean that you get negative and not disillusioned from investing. I think you have to just look at the broad perspective. And as I said, be confident on the country you are investing on the asset class or you will make money.
Great, great. Thank you, Sunil for joining in. It was great talking to you. I'm sure our listeners would have benefit. No, no. Thanks a lot. And thanks for having me. It was a pleasure sharing uh my experience with your viewers. I hope uh they find it useful. Thank you
with this. We wrap up our episode. The key takeaway from both conversations is that money is not just about getting lucky. It's more about having proper systems in place that need to be followed with a lot of discipline and patience. Thank you once again, Kenneth and Sunil for joining us in this conversation and a big thank you to our listeners.
This episode was produced by Vinai Joshi and the sound was designed by Amrit Regi.
This is your host, Nishan Vasudevan, signing off. Thank you and stay tuned.