InvestorInsights: Raunak Onkar

Raunak Onkar began his career in the stock market, nine years ago, as an intern at PPFAS Ltd with their institutional sell-side business and later joined the Research Team as an Equity Analyst. Eventually, as PPFAS became a pure investment management firm, he moved on to the buy side. He grew under the guidance and inspiration of his mentor, the late Mr. Parag Parikh, and the CIO of PPFAS Mutual Fund, Mr. Rajeev Thakkar. Raunak is currently the Head of the Research team at PPFAS Mutual Fund.

Safal Niveshak (SN): Tell us a little about your background, how you got interested in investing and writing, and how you have evolved in these fields over the years?

Raunak Onkar (RO): I come from a small suburb in Mumbai and spent a good chunk of my childhood reading books, both fiction and non-fiction. I guess writing emerged as a natural extension from there. I’ve been writing mostly for myself since I was in school.

Later I got interested in computers and technology, and wished to formally train myself in that area. I completed the BSc IT course from the University of Mumbai. Midway, during the journey, I also started to enjoy reading about businesses, entrepreneurs and economics in general. Investing was never the primary focus.

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As I started reading more about investing, I got lucky to have great influences. I think a resource like Safal Niveshak would have been tremendously useful at that time. There was a sudden switch in my mind somewhere around my final year of BSc IT that it would be a good idea to be an investor in a tech company rather than being employed with one. Also, not being great at coding helped me in making that decision.

Most of my initial investment understanding came from self-study and reading investing texts and following the processes of other investors. I personally didn’t have the capital to put up to test my ideas but ended up discussing ideas with a few friends.

My understanding of financial accounting was weak and I was naïve about how businesses really work. So, I felt doing an MBA course would be a good idea. It turned out to be both good and bad, since doing an MBA without having even a bit of real world work experience is an awful way to learn business and management theory. Nevertheless, it was a great decision because it gave me an opportunity to be an intern at PPFAS.
I started off with the Buffett/Munger/Fisher model of investing and did dabble a bit with statistical bargains. The actual process of investing is immensely educational if we are paying attention to why we make the decisions.

I’m still too young in my profession to truly say that I have a very specific style of investing, but I do like to learn from different investment thought processes. Lately my focus has started to move more towards understanding how to manage risk at a portfolio level, which I didn’t think through during my initial years.

SN: When you look back at your own investment mistakes, were there any common elements of themes?

RO: If I must summarise my investment mistakes, apart from using naivety as an excuse, I would say –

• Over-confidence in my ability to predict how the business cycle will do in the future without good data backing it up;
• Too much trust in the promoter/management’s ability. In short, hoping for outcomes rather than assessing how probable the outcomes are;
• Not acknowledging the effect of confirmation bias early enough (not being sceptical enough); and
• Not making room for good and bad luck in business outcomes. Not allowing a large enough margin of safety.

SN: When it comes to direct stock picking, the worst problems investors get them into is by falling into behavioural biases. How has been your experience on this front? What tricks do you use to minimize mistakes of behavioural biases?

RO: The problem with studying behavioural biases is that it gives a false sense of immunity against them. There’s no such luck, I think. In my experience awareness doesn’t guarantee that we will not make the same behavioural mistakes again.

I maintain a strict investment journal of all my ideas, including initial transactions and subsequent transactions. I used to have a short checklist before. Later I came across a very good summary by Michael Mauboussin which added a few more nuances to it. The beauty of this idea, in my opinion, is that it doesn’t lead to analysis paralysis. It still leaves enough room for ambiguity of investment outcome.

I also recently started to monitor ‘fear of missing out’ (FOMO) as an important input before transacting. To control that, I have found that making investment decision when I’m not on any deadline in my personal / professional life helped me a lot in reducing the sense of urgency to buy/sell something. It allows more room to think.

Here’s my sample template, I just fill up this questionnaire and connect this to my Evernote notes about the business –

• What’s the decision (buy/sell)
• What’s the reason for the decision
• What’re the main variables that will affect the decision
• What complications can occur
• Alternatives that were considered but not chosen, and why
• Range of outcomes that can occur in the future
• Financial expectations with a degree of confidence
• Time of the day when the decision was made
• Physical / mental state while making the decision (to control FOMO)

SN: That’s a short but comprehensive checklist. Thanks for sharing! Anyways, what are the most common behavioural mistakes you make? Please explain with real-life example(s) if possible.

RO: I’m a little too obsessive for my own good, about my mistakes. If I must summarise, I would say that I didn’t clearly distinguish between possibility of a business outcome and probability of that outcome. I assumed incorrectly that just because it is possible for something to happen it is most likely to happen. The problem here is, that there’s no clear metric to calculate that. Relying on data and judgement is the only tool I could use.

There was a small cap IT company that sells telecom software and had a major corporate governance shakeup. After the shakeup, the business had stabilised to a minimum operating level. I bought the stock assuming the business couldn’t get worse than this and there was no possibility of telecom operators not requiring the services this company offered. The mistake was to not think through the probability of how relevant will their service be in the customers’ mind. I also misplaced the probability of switching cost for the customers. By the time four quarters had passed, the numbers refused to improve despite the positive management commentary. I sold at a loss of 20%. Lesson learnt and luckily also supported by hindsight was that a 20% loss released my money to be invested in other ideas which ended up earning it back for me.

Another was a macro event error (in hindsight) which led me to believe that the possibility is far worse than the actual probability. Demonetisation caused a lot of upheaval in the market. I had initially made an investment thesis for a concentrated position and nowhere in the negative possibilities had I accounted for an event like demonetisation. The stock had corrected just a bit but I incorrectly felt that having become exposed to my blind spot, I should be more prudent and reduce my position size before the blind spot led to an accident. I did just that without thinking through the probability of the impact of demonetisation on this business over the longer term. In fact, I should have just sat on my hands and not act on the impulse. Instead I sold a third of my position and subsequently all the worries disappeared from the market’s mind, and my mind too. Lesson was that sometimes it’s also important to pay more attention to how the market behaves and try to subdue its influence on myself.

SN: Those were some nice insights, Rauank. What according to you is that behavioural mistake with the biggest impact that’s the least understood or noticed?

RO: For me the answer is obvious. It is Confirmation Bias. We all know how it works but I have found it very hard to turn it off. Recently I read this wonderful book by Aswath Damodaran titled Narrative and Numbers. He draws a clear line between believing in the story and acting on it. I think it’s a very powerful bias which is not necessarily misunderstood but I need to trick myself more often to stop falling for it.

Also, confirmation bias works against us when we think in terms of fear of missing out. In that moment, we just need to get the confirmatory evidence to go out and make the decision, the mind is already made up.

The biggest problem with this bias, in my view, is that it looks like, tastes like, and feels like conviction in our idea which is backed up by evidence. Being wilfully blind to probabilities or not preparing for a worse probability is not an excuse to have higher conviction in our idea.

SN: How easy or difficult has it been for you to change your mind in the past when facts about a certain company changed? Were you able to revisit your decision and change it – like selling a stock earlier then you would have wanted to, because the company did something you did not like? Can you please explain with the help of a real-life example of how you did it?

RO: I have had a mixed experience but the few times this has happened I managed to be decisive and sold the stock when the facts changed.

I’ll list two examples, one where I changed my mind and it was right thing to do, and the other where I didn’t change my mind and it was the wrong decision.

The first example is of a supplementary education company which had an enviable balance sheet and a great local brand. The brand still exists but the balance sheet is not so enviable anymore. There was a sudden change in the state of the company’s financials. I had not accounted for it in my investment thesis because I felt this should have never happened. Also, it could have been mitigated by better financial management in the company. In the past, I had appreciated the management’s business acumen because they had a proven track record and had done well to scale a seemingly tough to scale business. But I thought that some of its balance sheet issues were direct outcomes of poor business judgement which wold have made it difficult for the business to recover soon. So, I cut the entire position when I could.
The second example where a certain mid-size IT company with 60% revenues coming from its parent company, totally flipped 180-degrees on the revenue mix. It resulted in stagnating the company’s growth for 3 years. But I was far more patient and understanding where I shouldn’t have been. I should have sold the entire position off, but the good operating cash flows, increasing dividend and balance sheet strength, goaded me into believing that it was a good investment. Also, it exposed me to a bias in my thinking that if I’ve bought something cheap enough I would believe that a little bit of delay in making the returns is a reasonable price to pay.

The lesson was that if I’m not sure of how long I will have to wait to actually see the business grow again, it shouldn’t have been a tough decision to sell. It is better to re-evaluate and then see at the current price if it still makes sense to invest.

SN: How do you think about valuations? How do you differentiate between ‘paying up’ for quality and ‘overpaying’?

RO: I started investing in 2009, so I truly haven’t seen a huge cyclical downturn where my portfolio has lost 50% of its value just because of a stock market crash. So, it taints my valuation glasses to some extent. Even though I respect the idea of paying up for quality businesses, it is difficult for me to cough up beyond a range of valuation purely based on what I have read about past crashes.

I like Goodhart’s law – When a measure becomes a target it ceases to be a good measure. So, I don’t feel too stuck up about the initial valuation to be paid for the business if there’s a reasonable possibility that the business can grow well and maintain its profitability.

I use relative cash flow multiples, earnings multiples and sales multiples, and balance sheet evolution of businesses to understand how the company is valued compared to peers. The business should be able to earn at least 15% RoCE / RoE sustainably or have actions lined up to improve profitability which have a good likelihood of working. But I don’t put too much weight on the precision of valuation ratios because they’re all subject to mean reversion. I will reserve this response till a sobering experience really teaches me what is meant by overpaying.

SN: How can an investor improve the quality of his/her decision making? Does maintaining a journal help?

RO: It absolutely helps to maintain an investment journal. No doubt about it. The alternative is to be so rational that you’ll have no capacity to lie to yourself. Also, I’m not a huge fan of my own memory of decision making especially if the transaction has happened a while ago. Writing thoughts down before investing or selling helps us in not over criticising mistakes and not over celebrating our good investment outcomes. It teaches us to appreciate the role of luck as well.

SN: With so much noise all around, it’s become terribly hard. With traditional media, TV, bloggers, twitter, etc., there’s so much information flow these days. It can feel overwhelming. How do you go about curating signal from noise?

RO: Deep Work by Cal Newport suggests a lot of great techniques to fight the noise. I think that book deserves a re-read and pick what works for you based on personal lifestyle. I’m not too militant about avoiding social media and WhatsApp completely, but I don’t need it ON when I’m focusing on something or learning about something. If you’re addicted to touching your phone’s screen every minute, treat it like any other addiction and subject yourself to an intervention, if it’s very serious. The problem with modern smartphones is the excellent user interface, which makes us want to go to it again & again. If the UI was bad, we wouldn’t want to touch it or look at it so often.

A colleague of mine recently told me about Simon Sinek, he hires a baby sitter to watch him while he is working so that there’s someone there to ensure he gets his work done.

SN: Now that’s a unique and useful strategy to get work done! Anyways, earlier in this interview, you mentioned that you have started to move more towards understanding how to manage risk at a portfolio level. So, how do you think about risk? How do you employ this thinking in your investing?

RO: I love this line from a Graham Greene novella called – Loser Takes All – “People don’t like reality, people don’t like common sense until age forces it upon them.” I think risk works the same way. Until you make stupid choices you don’t really understand what losing something means. But that doesn’t mean we have to lose it to find out.

I think of risk in the context of a street fight. Both people in the fight are aware that it’s not going to end up in a fatality, a broken bone will end the fight. As long as the loss taken is not fatal, the risk should be tolerated assuming there are legitimate reasons to believe in a successful outcome. The point is to not aim for a loss but you can’t just wish that it shouldn’t happen. So, in that context, I diversify enough (in my view, 20 stocks max) to insulate myself from a fatality. This also includes asset class diversification but 80% of my money at any given time ends up in equity or waiting to go into equity.

SN: If you had just two-minutes to advise someone wanting to get into investing, what would your advice be? What are the biggest pitfalls he/she must be aware of?

RO: On rare occasions when I watch sports, I see that the sportspersons really make it seem effortless when they play their sport. Similarly, in investing, if an experienced investor explains an investment idea, effortlessly in two lines, please be assured that there’s been at least two months’ worth of work behind really understanding it. My school education spoilt me to some extent where the length of the answer in the exam fetched more marks. That’s a terrible incentive. I think summarising intelligently is very difficult because more work goes into it to truly understand and distil important facts.

No advice here, but I keep asking this to myself from time to time –

• Do you really have the time to devote and understand something so intimately that you might dream about it?
• Do you really understand the implication of the decision of not doing something?
• Can you distinguish between facts and opinions?
• Do you deserve to hold this opinion? Have you put the required effort to know the facts?

Lot of business knowledge comes over time by observation and learning from people who know about that business/sector. There’s no direct statistical correlation between how much knowledge is needed and a good investment outcome. We have to form our judgement based on incomplete data and improve it from time to time to complete the picture.

SN: That’s a great advice! Anyways, what are the most important qualities an investor needs to survive the complexity of the financial markets?

RO: Enjoy the complexity and uncertainty. Why should everything be straightforward? The 2nd law of Thermodynamics says that Entropy (disorder or randomness) increases with time. I’ve found that to be applicable in real life as well. If you love to watch the old Western films where the protagonists wander into complex situations and then somehow manage to come out of it alive, is a good analogy. As we learn more about something we start exposing ourselves to its complexity, after that there’s just no choice but to accept it and make decisions while trying to understand it. I think complexity is not a problem for a curious mind.

SN: Which are some of the books, blogs, and other resources on investing, behaviour, and multidisciplinary thinking that have inspired you the most over the years? If you were to give away all your books but one, which one would it be and why?

RO: I think there are too many resources out there on those subjects. Your site, Shane Parrish’s Farnam Street, Morgan Housel and Joe Koster’s Value Investing World are excellent resources.

The one book I would retain is actually a tie between Joseph Heller’s Catch-22 & Tom Wolfe’s A Man in Full. Fiction allows a deep dive into reality like nothing else. Both these authors love reality but also love to tell a good story. Both books exposed me to the fallacies of human behaviour, nature of overcoming our circumstances, appreciating the importance of sanity and rationality, willingness to let go of the illusion of control and the sheer randomness of life.

SN: Hypothetical question: Let’s say that you knew you were going to lose all your memory the next morning. Briefly, what would you write in a letter to yourself, so that you could begin relearning everything starting the next day?

RO: That’s a very good question. I have never had the chance to think about it. Let me take a jab at answering it.

I’d say to myself – “You’ll figure it out. It will need time.” I would let it build from there. Knowing myself, I wouldn’t follow any more specific instructions from a stranger, being too emotionally uprooted due to memory loss and all.

Your question reminds me of a wonderful and important book I read, called Strangers to Ourselves by Timothy D Wilson. It very easily explains how we slowly learn about ourselves by observing the world’s reaction towards our thoughts and actions. Our story that we tell about ourselves is often inaccurate and biased. The book gives a good framework to correct that. Investing gives a very good feedback to us about how we think, act and react. If we pay attention we can learn a lot about ourselves.

SN: Thanks for that recommendation! What would you be doing if you weren’t into investing?

RO: I keep asking this to myself from time to time, as a trick question, to see how much I still enjoy doing what I’m doing. If I ask myself directly if I love what I’m doing currently, I’ll have a huge incentive to make it sound good to maintain the status quo. This way I can keep myself aware of serious alternatives that I can consider if not for what I’m currently doing.

To seriously answer your question, I think I love the idea of writing for a living but my competency runs out too soon. I’ve read far better authors to seriously contemplate competing with them. Retail industry inspires me a lot because in my personal experience I’ve directly seen the effect of retail evolution, small mom and pop stores embracing modern retail tactics and the effect of having money in the wallet when you’re wandering in the aisles of a retail store. That sort of basic decision making fascinates me and having something to do in order to influence that decision making would be a fun job to do.

But interest is not equal to competence, so I stick to what I can do well.

SN: What do you know about investing today, that you wish you had known when you were starting out?

RO: I have this small piece of paper pinned up on a soft board that says in bold, friendly letters – “What do you really know?” I keep it there at eye level to always remind me that humility is an under-appreciated virtue until you fail because of lack of it. Also, humility is the easiest to forget. If I attribute one learning from my professional life which translate very easily to my personal life, it is to appreciate the role of humility in judging every decision, whether to trust a person, to trust my ability to find ideas, to trust myself to do the right thing when something needs to be done.

That small piece of note reminds me to do all the necessary hard work to understand the investment opportunity.

Then if the outcome doesn’t work out, identify my mistake and move on. If the outcome works out, ask “what now?” and see if I can still relate to my initial thoughts on the idea.

SN: That’s brilliant, Raunak. Thank you so much for sharing your insights with Safal Niveshak readers. I wish you all the best for your work and life.

RO: Thanks Vishal! I hope your readers find this useful in some way.

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