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.
For me, reading a newspaper in 20-30 minutes was a natural thing. Even those days, we used to buy all the morning English newspapers at home. And we used to buy even the afternoon newspapers. I would read everything. That habit helped me to read the business newspaper also. It was a breeze. And I liked information and business newspapers offered a different type of information.
Given that I was reading so much, I asked Mr. Sudarshan more and more questions and finally migrated to a point where I asked him where I could invest. He took me to a stockbroker. In those days, you had to wait to meet the stockbroker. He was a very important person. We had to seek his time, go and meet him. He gave us the forms and by the time the account opened, it took me a week or so. And then, I did one trade. I started with couple of thousand rupees and thus it began.
So my getting into investing was not some design, like what a lot of people say today that they have always dreamt of becoming an investor. Today we hear about Charlie Munger and Warren Buffett. Then, we had heard of nobody like that. It just appealed to me that you can invest in any business you like rather than running the one business that you had inherited. That idea was something I was curious about.
I had inherited a business but it seemed to me that it was not such a bad idea to look at other options. Principally, ours was not a business I was very fond of. It had a lot of government interaction. We were supplying a lot to the government and I didn’t like that too much. So I gravitated towards the idea of investing in companies which were run in better spaces, and which were easier to understand. And transaction-wise also it was easier to move capital in and out.
That is how I gravitated towards investing, not because of any vision or anything. Otherwise I would have preferred a career in creative writing or something like that. Investing was nowhere near my thought radar. But once I started doing it, I was more curious to know how this can be done better.
A few markers in my mind at that time triggered that interest. One was my neighbour who was my mentor. I always used to ask him if we could invest in these companies which were run ethically and still made money. So he said, “You have to search, but you can find good businesses, good managements. Sometimes you may slip and fall into wrong kinds of businesses. The challenge is that you have to understand it so well that you avoid that mistake.”
Note that this was the pre-liberalisation period…before 1990. And India was going through one of its worst economic crisis.
I started investing then. I slowly acquired a few stocks. I took away the money that was kept in my name by my father. Usually parents save up some money for some other reasons. They want you to either educate you or help you set a business. In a business family, they think that money would be useful to set up a business. I had around Rs 2 lac with me then. I couldn’t have set up any business with this amount of money. So I thought of trying my hand at investing in the stock market.
My father was appalled that I was going to take money and invest in stocks because in the 90s, unlike now, it was not cool to invest in stocks because stock markets were associated with unethical practices, gambling and it was not a respectable place to be in. So he was not fine with the idea. But my grandfather, who was a first generation entrepreneur, supported me. He wanted me to give it a try. So it was because of his support that I was able to take the money. But I was hell bent on trying my hand at this. The more my father opposed, that became the second trigger rather than some kind of vision or it wasn’t really linked to that. It’s another matter that over the next two decades, my father became the other extreme. He sold other assets and asked me to put that money in stocks, which is again what I didn’t support.
Now, once I started investing, the big challenge for me was to prove that I was good at what I did so that I wasn’t caught on the wrong foot. And my neighbour was always saying that I must not invest without reading the balance sheet. So that was my first training, even as others around me were buying, selling, and trading.
So what I would do is when I wanted to buy a stock I read about it. Without knowing anything I would definitely not buy a stock. Reading was principally about reading annual reports. Those days, annual reports were not available electronically at the click of a button. So we had to find shareholders who owned shares in a lot of companies. I befriended quite a few of them in Chennai. And they held a lot of companies. You would be surprised I knew people who held more than 100 companies in their portfolios. So I would ask them to share their annual reports, and that I would read and return. They were willing to give me the annual reports only on that condition. Some of them actually thought that possessing the annual report was more important than possessing the shares. So I would borrow, read and return. Sometimes we used to take photocopies if it was a very good report. I understood that they were so possessive that if they gave me an annual report, they wanted it the next day or the day after. Thus, I learnt to read an annual report fast. I started developing markers on annual report which I would quickly decipher and made my notes, and then return them. This is how I trained myself. I didn’t have access to big things. Without any annual report I didn’t invest in a company. That was ingrained in me at that time itself.
SN: So, even at that time when you were actually reading annual reports, you had people who were trading in stocks?
SS: Everybody was trading in stocks. Nobody was investing except my mentor and few others.
SN: Do you count this mentorship of your friend a big reason that you got into long-term investing?
SS: I would not have been an investor at all. That’s the first thing. The second thing is that he was a very ethical person. People like Warren Buffett have lived in the developed world, which have been evolved economies. But this gentleman lived in an era where it was fashionable to be unethical and he was completely ethical. So that is something I value very much. In fact, this is something invaluable. He had a methodology to go about being ethical. That methodology was of being thorough in his homework and groundwork. And largely because of him I was able to do it this way.
SN: How has your evolution as an investor been?
SS: Probably it has to do with age. I would rate even the smartest investors, those who are very well read today, as only middle distance runners or sprinters. As I look at the community, people don’t hold stocks for 20 years. I don’t know many people who have held a single stock for 20 years. There are not many people. And then, the most talked about and celebrated people actually don’t hold a stock for more than 3 to 4 years. The best of people whom you regard so highly also don’t own a stock for 3-4 years unless it hasn’t performed and they still have faith in it. That is accidental ownership. That is something that didn’t come easy, because I was also probably a middle distance runner for a very long time.
The idea was to buy and hold for a few years until the story was priced open. So you would have made twice or thrice and sold, whereas the real return starts only then. That is something I think I have learned over period of time and I am still learning. It’s still something that you have to deeply internalize. It’s still superfluous in a lot of us.
SN: Coming to what you said in term of sitting on stocks for long period of time that doesn’t come easy, how can an investor create such a habit?
SS: First, you have to conquer buyer’s anxiety. If you can conquer such anxiety, you will take a decision so slowly that by the time you come to it you are very certain. And once you are very certain, then you will not change your mind. The problem today is that we are in hunt for ideas. All of us are hunting for ideas. “What is new?” “This story is over!” “Next what?”
We are willing to overcome the mediocrity in certain ideas. Either we don’t like the price in some ideas or we leave the great ideas out. Like why did people not buy Titan? For a simple reason that they didn’t like the price. Or any other great stock, like Pidilite for that matter or Asian Paints. Why do people who know these are great companies don’t own them for long periods of time? The issue is price anchoring. We always look for stocks where the price anchoring matches our own willingness to play. That is what I call as buyer’s anxiety.
In this anxiety, our whole selection process gets warped towards companies run by ordinary managements which shine like meteorite. And when you buy a meteorite you want to get off it before it goes away. Therefore you never hold it. It is this mindset which has forced a lot of us not to buy the stocks. We end up buying the meteorites.
I personally think that for many of us, call it ego or mojo, we want to find new ideas. We think our sense of self worth is in the ability to keep on finding great new ideas. That is not what Munger or Buffett have taught us. That is not what any great investor has taught us. Philip Fisher didn’t invest this way. But somehow, I don’t know whether it’s the Indian way, we want to keep coming up with winners.
We are not able to look beyond that. We are constantly looking. Whatever I have read about great investors, is that the masterly inaction they practice had to do a lot with other activities that they did to keep themselves busy. It’s not inaction. It’s action outside of investing. There is so much action outside of investing – reading, understanding, and thinking. The intellectual pursuits basically dominated their work. That’ why investing could be left only when it was required. They had to do it only when it was needed. I am afraid that our community of investors is still learning. I don’t think we are there. Therefore this is what makes try to create new and new ideas and it’s like punching that card 100 times. When you punch a card 100 times, 10 times a year, you are bound to go wrong.
We are also fooling ourselves by measuring the money we make. If you bought an Educomp, made 20 times and got out of it, you think, “I identified it, I made money but I am out.” But the fact is that your process of judgement could not zero in on a worthy stock. You are trying to cover it up by financial gratification. This is the issue in India.
SN: One way you mentioned that one can train himself to be a long term thinker and investor is to pursue activities outside investing and not only focussed on investing. Is there some other way an investor can train himself herself to be patient in investing?
SS: One training that I must mention that I got between 1996 and for a very long time that it’s become a habit, was that of pouring over numerous results. This is something I learned from Mr. Anil Kumar Goel, who is a classic Grahamian value investor. Probably I would say he is the Walter Schloss of India. This is because he is not worried about buying businesses which are known to whole world, or already priced out, or are fancy stories, but businesses which have earnings, which are stable, which are predictable and which generate very decent returns on equity and which are mispriced.
In those days, we would pour over 100s of companies to generate a few ideas. We would continuously look at companies. That was his habit which I had the luck to be a part of the process. So we kept on doing the exercise of finding Grahamian opportunities. That is something which gave me enormous training. Because one side I knew how to read, I read a lot. I would read all the papers. Even to this day I read most of the papers. So, if a result came on a particular day, he would go through all of the results within a day or two. During the result season, we would go through all the results and when we liked one result, we would put a marker and then go deeper into that. So we would create a checklist. This is how he would discover good businesses.
I think just going through numbers creates curiosity in businesses so then you pour deeper and try to understand what that business is, who are the vendors, who are the customers, what is the market they are operating in, and what are the alternatives to that product. Unlike others at that time who were sectoral analysts or the so-called specialists in one type of investing, we would see all the results. So that culture of looking at so many companies, I think that was inculcated by Mr. Goel.
He always insisted that if you had to see a result, see it immediately. Don’t postpone it by one day. So I got the ability to come to quick decisions through this process. Nowadays, I don’t see the numbers and immediately jump to any conclusions, unless something that’s very compelling. Like I would look at a company across quarters and then only decide to invest. I wouldn’t buy on the basis of one or two quarters.
I don’t think that many people see all the results. So that is something that was very valuable to me. And applying what you read, what you see in the number, together into a framework and then conceptualizing your ideas is another thing that I learned by looking at so many things.
As far as value investing is concerned, practicing the Grahamian filters on numerous companies threw up a lot of ideas which I thought were fit for Fisher. But looking at the Grahamian filters and practicing of that gave me enormous training I think.
SN: But did you apply the Grahamian filters only in searching for ideas or also in terms of investing?
SS: We used to invest a lot in Grahamian ideas in 2001 particularly. Personally, my investments in Grahamian ideas were not so high. To me, this idea of mispricing gets released very quickly. It’s a question of six months or one year. And after that you have to again find mispricing. And there comes a market when the mispricing reduces significantly. So you don’t know what to do. Over that, I found it more convenient to be somebody who is cut in a Fisher cloth. To me, it’s more natural. By personality I am not attuned to too much change.
SN: And that’s what you practice now?z
SS: Increasingly, yes.
SN: In terms of looking more towards high quality businesses?
SS: It’s not that the companies with Grahamian filters aren’t high quality. It’s just that the gestation periods are short, they give you returns and then you have to do the same things over again 10 or 20 times. Whereas here, in terms of focusing on high quality businesses the Fisher way, you can just do once and keep quiet.
SN: Since you talked about quality business or the Grahamian business which you willing to own for a long period of time, what are the few characteristics that you look for such kind of businesses? What are the key things that the company should pass on for you to consider it for a long time buy hold kind of situation?
SS: My understanding of a great business is – I like Porter framework very much. I had a very early exposure to what Michael Porter said in Competitive Strategy. And I think it’s relevant to this day. It helps you immensely in investing. So to me the quality of a business lies in the structure of the business. I look at the business in the Porter framework first.
The second thing is that I like businesses that have very good metrics on equity. And they are able to earn return on investments much faster. For instance, the payback period of those businesses is not 7 or 8 years, but more in the region of 2 or 3 years. When a company has these kinds of qualities, it has better operating margins. So that is one thing. And because it has better operating margins, it is able to return money so faster. This is something I have observed. It’s not very difficult to find such businesses.
Also, it should be a business that you can’t replace so quickly. It should have a competitive position that is unshakable at least over the medium term. I would definitely look at the management of the company. I would look at how the company is distributing income. That is something which is very important to me. I am very focused on yield, and how much return is coming. If at least the payout is good I don’t mind the yield being marginally low. But I would not go for a combination of low payout and low yield.
SN: In terms of these high quality businesses, lot of people these days use that word called ‘moat’. And they justify any and all kind of valuations this way. What’s your take on that?
SS: Many times, I don’t know about the sustainability of moats, for the simple reason that one of these things gets broke. I’ll give a classic example, a company like Nokia suddenly found no moat. There was nothing to defend that company. Kodak was suddenly without a moat. You may say it’s technological obsolescence, but from that dominant position they were not even able to migrate to a position where they could protect themselves.
Moat is something that is often not interpreted so sharply. Very few businesses have great moats. Not all. And at what price a moat, it’s the second question. Again our understanding of moat is defined by Buffett and Munger. I think we are being very licentious in extending it. Not all businesses have moats that are sustainable. They may have some moats. But are they sustainable moats or transitory? That question you aren’t asking. We quietly sell and go away when we find that what you thought was a sustainable moat, is a transitory moat.
SN: Is there a way to find what’s sustainable moat and what’s transitory? Are there some hints that you get from a company that this moat is depleting? May be loss in market share, something like that?
SS: You can see that the market position will go down. Somebody else will do well where they are not doing. These are all visible. When a company’s competitive position going down, it’s very evident.
SN: Maybe, revisiting the Porter framework will give you answers?
SS: Yes, it will constantly give you answers. Otherwise you don’t have a framework at all. In the absence of any framework, I find that people are referring to each and everything as a moat. I would be a bit cautious in judging a company on the basis of moat. For example, even branding is an instance of moat, like in the case of say Hindustan Unilever. You would have thought that this fairness cream market which they had with Fair & Lovely brand was something which could not be easily broken into. It was a strong branding and market dominant position. You would have thought it as a moat 15 years back. Today everybody is into it. Emami is into it and so many people are into it that you can’t even differentiate between one brand and another. Branding itself becomes generic so what moat we can talk about in such situations?
SN: In such cases, does it create a situation that people aren’t willing to buy and hold for long time, like you said buy and never sell? In an environment where it’s so difficult to find companies that can sustain moats for long term, people have to sell.
SS: It is not difficult. The reason we aren’t able to buy and never sell is that we never keep money ready for the day when those stocks are available for reasonable valuations. So we are perpetually invested. We think that idling money is a waste of time.
This morning, I was talking to a group of investors. We were discussing a company. One of the elderly investors said, “I don’t want to block my money.” And he was invested in a reasonably good franchise business. So he said, “I don’t want to block my money. This stock won’t go anywhere for 2 years.” I asked him, “How many times have you done this before?” He replied, “Never!”
Once you have sold, you are out. The alternative is to have the money ready to buy when it becomes attractively valued. That is also rarely done.
SN: What about management? You also mentioned you look at management. How do you assess management quality?
SS: Dividend payout gives you a certain strong indicator of what sort of management it is. But I often find that our metrics on management – who is a good management – is itself a very debatable point. Is a company which gets mining licenses through bribes, is a company which manufactures a product in conjunction with competition where each one controls how much the other produces and then fixes the releases everyday in the market and then fixes the price and then manages the demand supply unethically and then makes 25% ROE, is it a good management or a bad management? Is that the industry you would invest in?
I would not consider a management which does unethical things to create earnings as a good management. So to me, cement is a taboo industry. It’s an industry which is not run in a way in which an investor who preaches ethics or reads Buffett should invest. In fact, if you say that somebody is a celebrated investor and made most of his money in cement. The celebration should end. If he pays dividend out of that money I am not interested in it.
SN: It’s like a person who steals for you will steal from you.
SS: Exactly, you have said it. I see lot of investors who say I don’t invest in liquor companies, I don’t invest in ITC because they sell cigarette. But I am the biggest investor in cement and I am a very ethical investor. That’s humorous! Who are you fooling? To me, the quality of management has to be consistent. I would think that western companies are much better because you saw what happened in Diageo. They refused to do business. They sold their business in Tamil Nadu and went away because they had some difficulty with it.
Standards of good management outside are definitely higher despite all the problems in those markets. Our standard of good management is somebody who gives you dividend and who delivers stock price returns and ROE. But what costs these returns are coming is something we are not worried about.
SN: It’s the same when people are looking at the returns and not the process.
SS: Yes it’s the same thing. I feel a good manager is somebody whose intentions are right. I think that is something. He should be fair to the customer also. He should be fair to his business also. He should be fair to the state. So, to me, the quality of management is not this myopic thing that we are seeing because we’ve want quick ideas, and we want excess returns. I feel it should be wider.
SN: What about risk? How do you look at risk? Is it a generic definition like permanent loss of capital which Buffett talks about?
SS: I definitely look at risk. I don’t like to lose money. So I don’t mind waiting. Let’s say I bought a stock and there is some cyclical, some change, some environmental thing, something that has happened suddenly that delays my gratification. I am fine with that. But I shouldn’t have a permanent loss of capital. To that extent I always look at risk.
SN: And the biggest factor is the quality of the business and the quality of the management?
SS: Both. First is the quality of business. If the business is so strong that it can be run in some way then even an ordinary guy will run it well.
SN: How do you think about valuation?
SS: Most of the investing in our country is P&L driven investing. You’re looking at earnings and multiples. Right? When do you look at the Balance Sheet? When you want to justify the earnings which are higher then you become Balance Sheet driven. Whereas, to me, you should start at the Balance Sheet. See, if you really want to be invested in a company for 10-20 years, you’ll have to see how the Balance Sheet would change in the future. If you’re convinced that its changes will not be too drastic, then you look at the P&L. It’s the other way round. If you’re able to do that then you’re able to identify your great winners.
If you see why Bosch is trading at this multiple, or many other companies, they are able to take even bigger capital outlays and take back reasonably quick. So you should look at Balance Sheet first. This is how I think one should do. Predominantly our equity investing is P&L driven. EPS, P/E ratio, etc. When you see P/E ratio is high, then you bring the moat in. Certain companies have moat when their valuations go up!
SN: These days, high P/E is what create moats. Higher the P/E, higher the moat!
SS: Yes, that’s my point. Or they are untested moats. Let me put it that way. They may not be moats.
SN: Do you have any preferred valuation framework?
SS: I try to calculate the net present value of next 5-10 years earnings. Whatever good stocks I have picked up in recent years have been based on that. I discount the earnings and compare the valuations. If you are able to show that the business will grow then you are able to buy them cheap compared to future valuations. Let’s say today the P/E multiple is 15x but it may be selling at not a big multiple to sales. But later, because you are discounting future earnings and you have a grasp of what are the future earnings, gradually what happens is that people are willing to pay more. Then your multiple to sales goes up, because of the certainty. Why are you buying Hindustan Unilever at Rs 900 when it was available at Rs 200? What stopped you from buying then? I believe this is because you didn’t do this exercise. You were anchored to the past earnings.
SN: Do you believe in investment checklist? Do you maintain one?
SS: This is a very interesting thing. My ideation part is very intuitive. I start investigating after the ideation. I don’t run a screener or a checklist. Having said that, I learnt a lot from only one checklist – that of Philip Fisher. I think it’s an outstanding checklist. And I think the investment style also suits what I want to do. So that is why I like it. But I don’t refer to it often. I have read it many times over the years but I don’t go over the checklist.
SN: That’s already now probably a part of your mental model?
SS: I don’t know really. But I don’t do it. That’s one checklist that I really do and that’s one framework, whatever Fisher followed. And his type of investing is what I relate a lot, much more than that of any other person.
SN: What about mistakes. Do you see yourself making mistakes? What are the few big mistakes that you made?
SS: I can think of a few. But in recent years I can think of only one mistake. You are talking of buying and then stock going down or…?
SN: Your part of process.
SS: I am a very intuitive investor. I take my areas more by observing and working about and all this. This happened about four years back. Every Sunday morning, I sell my farm produce, which are organic products, on the beach. I go at 4 O’clock in the morning. On one of those mornings, at about 5 O’clock, a lot of bikes were parked there. They were all avid bikers and they were all getting ready to go for a ride. A person was sitting next to me and he was not going. I just struck a conversation with him. And I asked him, “Why aren’t you going?” He said, “Whenever I ride these bikes, I have already had two falls. I don’t want to have another fall.” Then I asked, “Then why are you coming and sitting here when you aren’t the biker?” He said, “I am the CEO of this bike company.”
So I asked him, “I understand your bikes have 6 months waiting period. People are not able to buy and you have set up a new capacity and you are still not able to fulfil the market demand. And for next 4-5 years nothing is going to change.” He said. “Yes, that’s how it seems to be.”
Those 2-4 hours in the morning, mentally, I compartmentalize my life. So what I do there, I don’t carry back. It’s like you go and see a sunrise and come back. It never occurred to me that the interaction that day, I should’ve carried the next morning. I didn’t think about it after that. I just said, “Oh he was a very nice guy and I was very impressed with him.”
All along, I was very bullish on his business. And here there was something that was placed just next to you. The CEO of the company coming and sitting next to you, making a casual conversation. It was a conversation that gave that comfort that there is nothing left to revalidate. But I just passed it. I usually don’t do this kind of mistakes. And this company was Eicher Motors.
SN: Any other behavioural mistake?
SS: I had identified and bought TTK prestige at Rs 20 in the year 2001. I had bought it at Rs 20 because the book value was Rs 120. The IPO price was also little higher than that. Plus there was a good yield. And there was no way I was going to lose money in 2001. It was after the crash. TTK at that time was going through a very rough phase. The reason I bought the stock was very simple. I met an elderly person and she told me that she had a smoker’s lung. I thought what nonsense is this. She said, “Next door to my house, they cook in chulhas. And that smoke comes everyday into my room. And that’s how I have contracted this.”
It struck me that this kind of situation is untenable. That was one thing. The second thing I thought was that the urban Indian woman had no time to cook. She had to go to work. If she didn’t have time to cook, then she would be investing in her kitchen to multitask and do many more things in the same hour. So you can’t do it with one set of equipments. So you’re going to invest in whole lot of things in kitchen, right?
I felt that TTK Prestige, with that kind of brand equity, could easily widen the array of products and they only need to do labelling. Meaning they could get it outsourced, manufactured, many things could be done to have the whole array of products. And the theory was absolutely right. But the company was at that time talking of exporting and they made a mess of it, and lot of things happened, and my stock went from Rs 20 to Rs 80. So at Rs 80 I sold in 2004. In those three years, the company said a lot of things that they didn’t deliver. They always over-promised and under-delivered. So finally I sold the stock. But I am tracking the stock from 2004.
In Tamil Nadu, there was a scheme where they gave a gas stove for every household. And I said, “Oh my God, the smoker’s lung is back.” Then I went back and checked TTK’s price. It was Rs 125. I decided to buy. I gave my dealer a price limit of Rs 125. I didn’t even get 100 shares because somebody else was buying at Rs 127. The game was out. My unwillingness to pay Rs 2 extra – price anchoring – cost me heavy. But it taught me a lot that discipline shouldn’t be confused with price anchoring. So subsequently I have definitely changed the way I buy stocks. Because otherwise I am not able to buy enough. Yes I made very good money in the kitchen theme in the early phase but it’s something that is going to run for 25 years in our country, not three. If you only invest in the three and miss out on the 22, who is to blame?
When I ideated the theme in 2001, I was widely criticized. Everybody, including the people who bought it later and made money, criticized me. When people talk like that you have to keep thinking if you are ahead or you are wrong. It has to be only one of the two things. There should be go-to people for every person, because our biases are not going to stop. Until we are alive, we are going to have our biases. Even for a very large investor, there is an alter ego. You should develop your alter egos.
SN: In general, do you have a specific time you give a stock to perform? Like even when a stock doesn’t perform, you at least hold it for 3 or 5 years?
SS: I have not had that necessity in recent years. I am thankful that I have not had so far but I suspect that in the investments I am making now, I may have it for some time. Some of the stocks that I am buying now may not perform in market. I am ready for such a situation, because of my faith in the basic ideation of the stock.
SN: What’s been the most difficult part of being a value investor that you have experienced?
SS: Migrating from a sprinter to a middle distance runner to a long distance runner is not easy. And if you are a value investor then you are all three. And the aspirational goal of a person, or let me put it this way, my aspirational goal was to move beyond the immediate. That transition has happened very slowly because you have friends who are doing it successfully the other way. They are anchored in that. You are not anchored in that. So that is difficult.
SN: Doesn’t reading newspapers create lot of biases?
SS: No, not at all! I don’t internalise what analysts tell.
SN: So that is a skill?
SS: I internalise all the columns what economists tell. I internalise all the macros. I don’t know what each person thinks on per day. I would note most of the views of people on stocks and you would note from my tweets that I am pretty irreverent about that. That’s my way of telling myself, “Okay, ignore this guy.” No disrespect for them, but it’s only the views.
SN: What’s your take on skill vs luck? How has it played a role in your life? You gave me the example of what you call luck that you found a mentor who advised you right at the start of your career in terms of investing and reading balance sheets.
SS: Luck is very important. My luck is that I never found it interesting to work in the industry, and thus never landed a job. That’s my luck. So I have never worked on the sell side. I have not compromised with the sell side. It’s very easy for a skilled person to think that why don’t I do that also. It was my luck that whatever was my skill I never moved in that direction.
SN: As an investor do you give better marks to luck.
SS: I think luck plays a major part. You need skill but luck plays a major part. I’ll tell you why. You identify a stock with all the skill. Your skill doesn’t change, your investment premise doesn’t change, over decades it doesn’t change. But then it is only when others recognize what you have identified early that broad-basing of ownership happens. You should own the stock adequately enough and continue to own it when that phase happens and I think that is luck.
SN: Then the skill is in sitting?
SS: I’ll give you an example. There was a stock that we bought at Rs 100 and then we bought it all the way to Rs 200, then they gave a bonus and it came to Rs 100. Then it again started going up. Some people bought it at Rs 175 or something and left it. And then one investor came and bought 8-9% at Rs 325. Just one investor. After that, the stock was never at that price. Now I would think that the luck was that fellow came and bought so many shares. If he chose not to buy for three years, it would never have got the price anchoring, never got the P/E multiple, never got the valuation. For what you want the valuation to go, it requires an irrational person to come to play and that is luck. Finding irrational people on your way is what gives you most of the wealth. If everybody is rational there is no wealth to be created.
So if you think it’s only your intelligence, it would be fallacious.
SN: What advice would you give to somebody who is just getting started in investing? What are your to-do and not-to-do lists?
SS: In my mind, somebody who thinks investing is a job would not enjoy it. In investing, it’s for the love of it that does it. Throw your sense of engineering and all. There is no reason you should use all the data. That’s the first not-to-do. To do is throw yourself to everything. Learn about all the sectors. Learn everything. If I am able to form a judgement after that I still look at it. I still look at why people are looking at it. I think you should read without expectation. Today people are reading with motives. I think you should read without motives. Only when you read without motives, you are going to get inspired, you going to internalise something that’s not written in there.
So how do you read what is not written? There is lot that is written, there is lot that is not written. To learn what is not written is more important than internalizing what is written. This is why I find that most of the people who read extensively, they don’t go too far beyond the printed word. You take Warren Buffett. There is more unsaid than said. That’s why you feel Munger speaks a lot more. This is because Buffett doesn’t say anything, whereas Munger says a little bit more than what Buffett says, and thus the anchoring is more towards Munger. They are two sides of the same coin. But Munger is more articulate. Buffett refuses to be as articulate.
SN: What books do you recommend for value investing?
SS: I read a lot of biographies. This is because, in the end, a business is about leadership. If you aren’t able to spot great leaders you aren’t going to spot great businesses. An ideal combination is to have a great business with a good leader or great leader. You must know how to identify leadership. That’s what I think.
SN: Any specific biography that you want to mention?
SS: I would mention the biography of T. Thomas, who was once the Chairman of Hindustan Unilever. That book has taught me a lot more than many other books because it was the first time somebody wrote how rural India is a great market to be understood and about the importance of understanding it. Further it was validated by whatever I read from Mr. Gurcharan Das on the subject. I liked MS Oberoi’s biography. I continue to read biographies. For me it’s more about getting inspired. Jonathan Livingstone Seagull inspired me more than any other investment book, because it said that a seagull could fly high. To me, it is metaphorically somebody who is in the industry, somebody who is not having patrons can also do well in this. That’s what sets you thinking than anything that gives you a checklist or roadmap. For each of us, it’s an individual roadmap.
SN: What are the activities that you do outside investing? I think farming is one that you mentioned.
SS: I am working on some other social causes. I spend more time with children. That’s one area. Within investing I compartmentalize. More than ideation the area that I enjoy working is strategy. When you talked about books, somebody’s writing that I identify with, I see a lot in common with what I like and what has been written by Mohnish Pabrai. I can relate to whatever he has done. Outside of investing, I listen to music. I like to read outside investing.
SN: You have been investing even before the concept of value investing picked up in India. Have you been part of any boom which you participated and it burst like dot com or Harshad Mehta?
SS: Harshad Mehta was too quick. But maybe if at all I participated in something that went down then it was Harshad Mehta. But I had very little to lose at that time. So it was okay. But rest of the booms have been on the other end. Difficult parts for a value investor. We were skeptical on IT from 1998. We were negative on valuations from 1998.
SN: Difficult two years?
SS: Most difficult two years. People were mocking. I was seeing unprecedented arrogance all around.
SN: So what safeguarded you?
SS: Small group of people clinging together. Very simple! Even during 2007-08, the same group helped. You don’t change your friends in the industry.
SN: Well, thanks a lot Shyam for the amazing insights you shared with Safal Niveshak readers.
SS: It was my pleasures. Thanks!