When did you start your journey in the stock market? Do you recall your initial years in the market?
I started my journey as a sell side (that is, on the broking side) analyst after post graduation in 1996. Luckily I became a software sector analyst and saw the sector go through a big boom and bust cycle in 1996-2000. As they say smooth seas don’t make skilled sailors so it was pretty useful to go through that cycle. I remember as the cycle progressed how polarised the market became – in our sell side firm the analysts covering technology, consumer etc. were super busy, while those covering metals, industrials etc hardly had any interest from clients – many of them played solitaire on the computer a lot of the time.
What was the first thing you learnt in your initial years in the market?
Being part of a sector which went through a big boom, one thing you remember is the way investors go down the quality curve as the boom progresses. Towards the end of the boom there was massive investor interest in IT companies with questionable reputation, small SAP training institutes, manufacturing companies that were changing names to add ‘Tech’ etc.. So one learning is ideally we should invest in low quality companies when the sector is out of favour and move up the quality curve as the sector goes through an upcycle. The other learning was even the best companies in the sector go to a point of extreme overvaluation and then correct massively. The tricky part is even in these solid companies most of the money is made when they go through the second half of this boom and bust cycle and how to time the exit is a mix of art and luck.
Which was the first bad phase in the market that you remember clearly? How did you navigate it?
The first bad phase in the market when I was managing money was in 2011 which saw the European sovereign crisis and also the Indian economy starting to face macro instability due to inflation and current account deficit. I was handling the PMS division of an AMC. During my sell side stint in 2008 the global financial crisis had seen a massive correction in the markets and one had learnt to respect the global indicators like credit spreads, direction of dollar vs EM currencies etc.. Luckily this learning came in useful while handling the 2011 correction as we made our portfolios a bit defensive before the correction.
Can you tell us one mistake that you remember clearly from your initial years? What are your learnings from that mistake?
In the initial part of my career I was a real estate analyst in the period 2006-07 and one thing we missed is putting out a big sell on that sector near the top. One big reason for this is I believe is sometimes you get too close to the companies and miss the big picture. For cyclical sectors when things are going well there is a lot of positive momentum bottom up – managements are charged up, fundraising is easy, stock prices jump at every corporate announcement. In such times periodically it is useful to look at the sector top down also rather than just bottom up and question valuations, market cap levels, macro issues which may break the cycle etc.
You have been in the market for such a long time now. Were there any bad phases that made you lose your nerve? How did you navigate it?
One of the phases in the market which I found tricky was the cyclical rally in 2013-14 – a lot of the cyclical stocks in the Indian stock market zoomed up which I found surprising as many macro indicators did not support such optimism. The global economy was going through a fairly flattish phase with cyclical stocks not exhibiting any big momentum, dollar was reasonably strong etc. while on the domestic side inflation was an issue – after a long period of high inflation in 2010-13 bringing down inflation expectations in a big economy quickly was looking like a challenge. So while the fund suffered in this period, luckily some midcaps in auto and financials helped us recover as the cyclicals’ outperformance faded out towards the end of 2014.
How do you see today’s market in context of your own journey?
If I look at the period of 1996-2010 for the Indian stock market it was a period of coming to maturity from a very nascent level. Over the last decade the pricing efficiency has gone up manifold as the market has become bigger, more liquid and better regulated. The speed at which information is priced in today is much faster than earlier. Also the number of companies going up, the diversity of business models expanding , the element of technology in business models – all this is making information more complex to process. While human nature will always drive extreme phases of greed and fear in the market which can throw up opportunities, to generate outperformance at scale is definitely more challenging now.
If there is one thing that you would want young investors to learn from your experience, what would it be?
Be like the duck – calm on the surface but paddling like hell underneath. Investing needs a lot of effort in research, analysis etc. but also needs a stable temperament to accept that periodically things will go wrong and to profit from times when the market is in extreme fear or greed.