Archives for April 2015

Highly experienced investor Shyam Sekhar shares his invaluable insights on the process and philosophy of sensible, long-term investing.

Be brave. Take risks. Nothing can substitute experience.” The words of Paul Coelho aptly summaries the journey of Shyam Sekhar. Tossing up between studying economics and engineering, he reluctantly took on the second. After completing engineering, his earlier calling returned. The hunger and curiosity of economics and business took over. Hanging around with fellow investors who shared the same passion, he spent the next few years thinking economics and stocks every waking hour. Equity research in India was an evolving discipline in the early nineties and setting up a research desk was the logical next. But, what made it unique was that he never sold his research. Research was proprietary and used by a small group of investors with shared beliefs and values.

Being an independent thinker with set values and beliefs, Shyam took a conscious decision never to work in any company. Knowing that it made sense not to work in an environment where the values mismatched, he dreamt of building a clean consulting business in investment strategy on his own. But, the nineties were early days. That left him with investing as the only option. So building a proprietary portfolio was the way to go. Researching businesses, spotting opportunities and building portfolios was all he did for a decade.

The dream of building an investment strategy business got anchored in 2003. He started Smartvalue Equisearch private limited as an investment strategy firm. Over the next eight years, he built a professional research and strategy firm with domain expertise in equity research, investment strategy, fund research and investment analytics. The firm is poised to break new ground with ithought, its wealth management division that rolled in 2008 just when the markets bottomed. The dream of building an investor centric business of scale and substance is now playing out.

In this interview with Safal Niveshak, Shyam lays bare his investment philosophy and practices and his big learning and mistakes over the past two decades.

Safal Niveshak (SN): I’ll start with a very regular question about your background, how you got interested in investing and how you evolved over time as an investor.

Shyam Sekhar (SS): I am a graduate in chemical engineering. My family had a small business in chemicals. We used to make paints. We still make paints. After my graduation, I used to spend some time with my neighbour. He was a renowned chartered accountant, M. K. Sudarshan. He got me interested in the stock market. Those days, the stock market wasn’t like these days, when you get live quotes. None of this was there. Stock market was conducted in isolation, just like the courts function. Nobody knew what was happening inside. So at the end of the day’s trade at 3:15 PM, there would be a radio bulletin which gave you the closing prices of the day. That’s all you heard. And the next morning, you had to see the papers which would give you some marker rates. No averages, no volumes, nothing. It gave you a set of trade rates/quotes which would include the low the high and two more sample rates. We got only the rate of Chennai those days. Bombay rates would come one day later, when we went and bought a financial paper which was published out of Bombay. In 1990, Chennai didn’t have a business edition of any newspaper. So we would go and buy, because my neighbour (Mr. Sudarshan) was an avid investor, and everyday he would go and buy a Bombay edition of a paper. So we would board a bus and go to some part in the CBD where these papers would be sold by just one newspaper vendor. I would accompany him during these travels because it was my vacation and I had nothing to do. During these journeys I used to pick his brains about the working of the stock market.

Mr. Sudarshan was not only a Chartered Accountant but he also understood businesses very well. So his investing was based on the understanding of the future of businesses and how it would perform. And he was an avid investor who bought and never sold. This is a rare quality. The more I am in the market, the more I realise that the quality of an investor who buys and never sells is rarest of rare.

To me, at that time, it was very amusing that he never sold actually. And even to this day, when he is no more, most of his shares are still there. His family is still retaining those shares.

Anyways, he used to explain me what each business was and what it did. This created a lot of interest in me. I was reading lot of newspapers those days and that helped me become an avid reader from a very young age. Newspaper reading was one habit which I had acquired because of my interest in politics, and in the stock market.
[Read more…] about InvestorInsights: Shyam Sekhar

Great perspectives on a book that teaches why it all starts with one belief, one thought, one word, one action, one habit, one value, and one step at a time.

Think of the last time you set out to bring about a major change in your life – like losing weight, starting a new project or business, learning how to invest on your own, starting an exercise regime, learning to break an addiction, or building a new relationship.

What did you feel? Exhaustion? Excitement? Fear?

Most people, when faced with change, get so overwhelmed with the perceived enormity of the work required to bring the change that they either don’t get started or give up very early. But there is an alternate way to circumvent our brain’s resistance. The book I am talking about here presents an idea that creates a backdoor entry, a kind of hack for your brain.

This is a small but amazing book written by Dr. Robert Maurer. It was recommended by Prof Sanjay Bakshi in his interview with Safal Niveshak in 2012. The big idea discussed in this book is of Kaizen, which is Japanese for “taking small steps to continual improvement”.

I can almost hear your mumbling, “Another big fancy jargon”. But let me assure you that Kaizen works and I am not telling you this just because I read the book. It’s a powerful idea.
[Read more…] about BookWorm: One Small Step Can Change Your Life: The Kaizen Way

Read about the feeling of psychological discomfort that’s produced by the combined presence of two thoughts that do not follow from one another, and how to overcome such situations.

I am sure many of you have heard the famous Aesop’s fable about the fox and the grapes. If not, here’s the story. A fox sees some high-hanging grapes and wishes to eat them. When it is unable to think of a way to reach them, it decides that the grapes are probably not worth eating, with the justification the grapes probably are not ripe or that they are sour (hence the common phrase ‘sour grapes’).

Every time I hear this story, I laugh at the delusional fox. However, I rarely imagine that a similar fox is inside me also. The fable is a classic illustration of what psychologists call Cognitive Dissonance.

Let’s see what the formal definition of Cognitive Dissonance says –

The feeling of psychological discomfort produced by the combined presence of two thoughts that do not follow from one another. The greater the discomfort, the greater the desire to reduce the dissonance of the two cognitive elements. Dissonance theory suggests that if individuals act in ways that contradict their beliefs, then they typically will change their beliefs to align with their actions.

This is a behavioural bias which evolution has wired into the human brain. In the ancient hunter-gatherer environment, if a man saw something vague it was important for him to get rid of the doubt (whether it was a harmless rabbit or a dangerous panther) immediately. A quick decision was essential for survival. This quality gave an evolutionary advantage to human beings.

But evolution is a slow process and it hasn’t caught up with the rapid changes in our environment. In the modern world, there are hardly any such life threatening situations, but the brain’s hard wiring hasn’t changed much in last few thousand years. So we continue to take decisions under the influence of these psychological reflexes.

One of the best examples of cognitive dissonance that you can see around is people who continue to smoke even after being aware of the harmful effects of smoking. How do they deal with this conflict between what they know and how they act?
[Read more…] about Behaviouronomics: Cognitive Dissonance

Unreasonable expectations cause most people to make terrible mistakes when it comes to stock market investing. We share varied thoughts on what makes for reasonable expectations

What do we want out of life? To be healthy, happy with our families, in our work, etc? What interferes with this? Isn’t it often emotions like fear, anger, worry, disappointment, stress, and sadness caused by problems, mistakes, losses, and unreasonable expectations?

Well, that last one – unreasonable expectations – is what causes most people to make terrible mistakes when it comes to stock market investing.

Consider the period of January 2006 when Google announced its financial results for the final quarter of 2005. While the company reported a sales growth of a whopping 97%, its net profit had surged by 82% over the same quarter of previous year.

Now, you would consider this to be a magnificent quarter, right? Well, investors in Google didn’t! As a reaction to these phenomenal figures, Google’s stock tumbled 16% in a matter of second. Trading in the stock had to be interrupted. When it resumed, the stock plunged another 15%. Absolute panic!

Let’s now head to April 2003, when Infosys had announced its fourth quarter and full year results for FY03. I still remember that day, because I was just a week into my new job as a stock market analyst, and was in charge of handling the software sector, and thus Infosys came under my coverage.

The company had just announced its result for the quarter and full-year ended March 2003. For the full-year, it had recorded 39% and 19% growth in sales and net profit respectively. Now you would imagine that these were pretty good growth numbers, right? I did too. But to my horror, the stock crashed by 37% over the next two days.

Imagine losing one-third of your capital in a span of two days. How would you feel? While I was not an investor in Infosys then, but being new to the stock markets, and in charge of research on Infosys, I was utterly confused, and at the same time, scared seeing such a sharp fall in the stock price.
“What’s wrong with the markets?” I asked my senior colleague. “Infosys has reported such a good result, so why has its stock been punished so badly?”
[Read more…] about Spotlight: Reasonable Expectations