Stock markets are unlikely to hit a ceiling as central banks will keep injecting liquidity in the financial system, according to veteran investor Basant Maheshwari.
“Most markets top off in the absence of liquidity,” Maheshwari, co-founder at Basant Maheshwari Wealth Advisers, told BloombergQuint on the latest episode of the special series Alpha Moguls. “This liquidity is not going to stop in the near future. So, I don’t think the markets are going to top off anytime soon.”
Maheshwari stressed that when assessing the market from a medium-term perspective, investors should look at liquidity levels in the system instead of zooming in on earnings and market value.
He equated the liquidity aspect in a market to cycling, where if you stop pedalling, you fall. That, according to him, is nowhere near happening. “If there’s a cyclist around and you tell them that the moment you stop pedalling, you’re going to fall. Mark my word, he will say: Don’t worry, mate, I’m not going to stop pedalling.”
Drawing on U.S. Federal Reserve’s new approach to inflation, wherein the central bank will allow prices to run over its long-held 2% target, Maheshwari said that higher inflation is not necessarily a bad thing for the markets and liquidity. “I will be greatly happy if inflation hits 2.5% because that would mean there is some demand coming at the end of the game. I don’t think this liquidity is going to stop anytime soon.”
Eventually, he said investors should look at markets from an earnings perspective only if they have a three-year view. “If you have a three-month view, it’s liquidity and if you have a three-hour view, it’s sentiments and emotions.”
Maheshwari echoes a lot of other market participants in suggesting large-cap stocks and market leaders over mid- and small caps. According to him, stock prices are no longer just contingent on earnings but are now slaves to market share.
“We don’t think there is any logic to just find a company because it’s a small-cap or a mid-cap unless it is the leader in its sector,” he said, cautioning against bidding on such stocks compulsively. “If it’s not a leader of that sector, the rally will always be short, it will be truncated. If it is a leader in its space, then obviously you could be very sure that the rally is going to continue for the next 6-7-8 years.”
It’s essential to cherry-pick high-quality stocks while building your portfolio, Maheshwari said. “Concentration with low-quality stocks is a perfect recipe for disaster.”
Maheshwari is bullish on lenders and expects financials to lead the post-pandemic recovery. “We think financials is the way to go,” he said. “I think the biggest rally in the post-pandemic environment will be in the financials.”
Besides, Maheshwari said technology and rural-focused companies will dominate stock indices over the next five years. “Tremendous amount of changes are waiting to happen. If they are executed well, then over the next 18 months the biggest money would be made in these kinds of companies.”
Watch | Full interaction with Basant Maheshwari.
Here is the full transcript of the interview.
I was wondering if you reckon that portfolios would be fine over the course of the next 12-24 months and I’m guessing there would be a lot of global factors and local factors impacting this.
I think everything except the stock market isn’t a problem. There’s a reason why the stock market is doing what it is doing. Ultimately, it’s about money chasing goods. Inflation in stock market parlance means stock prices going up. So assume they were not stocks, they were products and they were commodities and you have too many people with too much cash buying commodities, what do we have? Inflation. So what we are encountering is an inflation in stock market prices. So, I think I have covered all our sins, all our troubles, all our trauma, the worry, the pain and the wounds with lots of dollars. So, if you ask me I think the hope revolves ten thousand miles to the west, than 2000 miles to the west.
In the last 30 years, the world has been in a stubbornly deflationary scenario which shows that inflationary or deflationary pressures could last longer than what all of us want. What’s your sense with this massive amount of liquidity generated and the reason I also asked this question is, in the last six years, we’ve had enough conversations about how at every point of time in those years, the liquidity was much higher and at some point of time we rolled back only to see it go higher and you combat one problem after another. So, what happens over the course of the next four or five years to this liquidity thereby inflation?
So for the last 30 years we saw the emergence of China. China was the chief architect in exporting deflation all across the world. So if you produce something for $1, the Chinese did for 70 cents and they kept seven cents for themselves and sold it to you at 77 cents. Right now you might argue that China is in a problem, so you won’t be buying from China but sooner or later, economics is like water, it finds its own level. I mean how long you can ask people to be patriotic and not consume Chinese goods; whether it’s Indians or Americans or Russians or Africans. I mean, we all live and die for money. It looks so capitalistic, it looks so brutal for me to say this but at the end of the day, who would work 10 hours a day for free? So, who would pay $10 extra just because he thinks that he is a great patriot—whether he is an American or Indian is another issue. Among the liquidity aspect, it’s about a person cycling hard. The moment you stop pedaling, you are going to fall. So you can cycle for the next 10 years, you can cycle for the next 20 years, I can be a great economist, write a thesis and say, the moment it stops, you will fall. So, if there’s a cyclist around you’d say the moment you stop pedaling you’re going to fall, mark my word, he says, don’t worry, mate. I’m not going to stop pedaling.
Is it sufficient to say that it’s almost impossible to guesstimate as to when the music would stop?
It’s very possible. It’s very much possible and I will say it will not stop. There are democracies—every four years he has to be re-elected. If the world were ruled by Genghis Khan or maybe Alexander the Great or maybe the Roman emperors, then you would have said it doesn’t matter, shut it off. But every four years there is democracy. So, there’s an election, who would take the risk of getting order into the system? I think the order into the system would come from the west coast in America. The kind of innovations they do, efficiency will blossom, technology will advance itself and think 20 years from now, will crude still sell at $40? I don’t know, nobody knows. Look at the way Tesla is going in America. So, Tesla I think has 1% or 2% of the market. So, 20 years from now, there will be 12 more Teslas and one big Tesla. Look at the concept they have. If you buy a Tesla car, there’s no maintenance costs. Most car companies make money on maintenance. So, I think innovation and technology are the only two pillars that can help us get over this financial pandemic. Otherwise it’s like the central bankers are wearing masks, the people are wearing masks and we are all having a nice time. But we won’t lift our masks; people won’t put it away so we’re going to be okay.
When I speak to a lot of old timers, people who’ve been around for like 30 years, let’s say and who’ve been moulded in the investing principles so to say, they look at these P/E multiples with disbelief and they can’t digest the fact why is it that these stocks are traded at these levels. There’s a new breed of managers who are saying that I need to move with the times and because of these liquidity issues or liquidity support, this is the new normal. My question to you is because you’re saying that it’s possible to predict that this will not stop, what do you reckon that these new valuation normals might stay for a really long time?
It is not normal, the yardstick has changed. From stock prices being slaves to earnings, stock prices are now slaves to market share. People assume that at some point of time, you will just turn the screw a little harder and make all the money in the world. So I think that’s the big game. If I can get 60% of India’s market in anything, I am willing to go without profits for the first nine years and the 10th year; I want to make everything count.
Let me try and ask you, whatever little I’ve known about you, you run a concentrated portfolio.It’s almost like if your portfolio has 50% of a stock and if that stock does well, you’re home. Have you changed this construct in a post-Covid world?
No, the thesis doesn’t change. So, it’s like in cricketing parlance, if you have a Virender Sehwag; whether it’s a bouncy Perth wicket or a slower turner Sydney wicket- he is going to bat the same way because that’s what’s worked for them. So, even for us that’s what worked. See, if you concentrate very hard you automatically avoid the losers. If I give you a choice, I’d say let’s buy three infra companies and by the way we don’t own infra. So, L&T is one of them, Nagarjuna Construction, Jai Corp is third and let’s take any other. So, you would say, let’s not take Nagarjuna Construction, not Jai Corp so let’s take L&T. Suddenly, through concentration which to the common optical eye, appears a risky venture to somebody who’s been doing this for decades- it appears a great way to reduce and eliminate risk. So, if I give you an option to pick up five banks in India maybe RBL or Axis Bank or ICICI Bank or let’s say HDFC Bank you’d say one minute one HDFC Bank is good enough for me but if I give you an option to pick five banks, you’ll pick all five of them and look at the CAGR in returns over the last five years. A concentrated portfolio doesn’t mean buying the worst business in town. It means choosing the best. So, if you’re at a party, you don’t go around on a buffet table, picking up everything that’s on offer. You look at your spot and focus on it. So, if you like noodles with Manchurian, you fill up your plate with noodles with Manchurian and you’re home with that. So, that is one way of expressing it. So, concentration with low quality stocks is a perfect recipe for disaster and concentration with high quality stocks is going to create volatile returns. But as long as you get home, you don’t care about volatility too much.
The cross question to that is, it would have probably worked beautifully wherein it was possible to predict what the business in the earnings and the market share could look like in a pre-Covid world when the uncertainty was likely less. Is it possible to do the same with as much efficacy in a post-Covid world?
So, I say this for everyone. I say buy stocks in a sense that if your company closes down, India will be in a problem. So we don’t own airlines. If you buy IndiGo; let’s assume that IndiGo shuts down tomorrow. There are 200 more people worrying more about IndiGo shutting down than you. So if you buy, let’s say a PVR and it shuts down- we don’t own it and its not recommended but it’s going to change the industry. So if you’re concentrating, you have to concentrate on companies that if they shut down, the entire country comes to a halt because the problem with concentration is not about making lesser or making more. The problem is about life and death- whether this company will survive or not. So you can’t buy our debt-laden company when you have a concentrating portfolio, you can’t go and buy a company that is running 2:1 debt. For example if you have concentrating portfolios and if you have your investments in Kingfisher Airlines and Future Group or Tata Steel, that is going to be a little difficult but if you’re concentrating and if you’ve got the cream on the top, then I think there is still some hope.
If you are indeed building up your portfolio, do you really build it with that long term a time frame or do you kind of take it a year as it comes or a month as it comes or a quarter as it comes?
There are two definitions of long term. The long term for an investor like us is till we die, we’re going to go into the stocks. The long term with the stock that we own is as long as it continues to deliver. So, if a stock which I have bought; with some thesis and the thesis changes in one week, I am okay selling it next week. For me, it doesn’t matter but, historical evidence has suggested that six to eight years of a company’s lifetime is the best period for you to make money. Let me give you an example.1993 to 2000, Infosys, 1993 to 2000, let’s say Wipro, 2002 to 2008 all the infrastructure companies, all the real estate companies, 2009 to 2015 all the Eicher Motors, Sun Pharma. So, 6 or 7-8 years; that is it. If you have a long term view, then you will pull the entire thing out. For example, page industries from 350 in 2009, it went to say 14,500 in 2015 and from 14,500 in 2015, it’s still at 20,000. So anybody who is doing an 11-year analysis will take out a CAGR and tell you it is still 30%+ CAGR. I am a complete vegetarian but it’s like catching hold of the meat and leaving the bones. So if you take the first 6, 7-8 years of a company’s growth period you will have the meat with you and what is left over are the bones. Somebody will say, even with the bones, the chicken tastes good. So that’s how we look at it.
What do you look at banks and financials, the same way because somehow the high quality financials- HDFC Bank for example is not a 8-year run and is nearly a 15-20 year run and they continue to deliver that 10, 15-20% CAGR and some NBFCs might be in that space as well so would financials be slightly differently viewed?
Over a period of 20-30 years HDFC Bank- I think for the first 6-7 years was growing at 40% then it came down to 30, 30 became 28, 28 become 25, 25 became 22, 22 became 20 and now we say 16 to 18. So, it’s like age on a person. Everybody will age and everybody will die but then the thing is you have to catch these companies in their youthful years and leave them again at maturity.
Plus, there is no need to catch hold of a company and keep it till the very end.
You have to be very opportunistic it’s not like choosing friends for a lifetime. If you find somebody else leave and go to that person.
A lot of questions come around and there are two key aspects. One, the number of traders or fresh people or new demat accounts that have opened up with stocks and ICICI securities and the way the mid-caps and small-caps are flying around, what are your thoughts on these two subjects and if they mean anything for the markets per se?
Basically, most fund managers like us when we miss the rally, we pick out reasons. If you think the retail guy can take up a hundred billion dollar company to a $200-$250 billion company, then I think it’s more power to retail and we should return all the money back and we should ourselves give the money back to the retailers. Markets don’t go up and down just because somebody is buying or selling. The absence of buying and the presence of selling get the stock markets to fall. Similarly, the absence of selling will drive stock market prices up. So I think what you had during the Covid period was the absence of buying; there was so much of fear and negativity created, most of it unnecessarily but that’s another story for another day as somebody would say and what we had was, the prices kept falling. So, at some point the sellers got frustrated and they said we have sold enough; we’ve got nothing more to sell. Everybody would spend 60 seconds on two Wikipedia pages of the Spanish flu and everybody knew how the Spanish Flu went, how the second wave came, how the third wave came not realizing that during the era of 1919-1920 there was no WhatsApp to tell people to mask yourself up, there was no awareness, there was no information flow and I think most of us make the same mistake. The hundred-year-old theory doesn’t work in today’s world because the world has changed, the thoughts have changed, the expectations have changed and more importantly the mind-set also has changed.
Speaking of changes, there are two changes, somehow everybody says- what the West is doing, what Silicon Valley is doing, what those tech giants are doing nobody else is able to emulate. So would you reckon that the lion’s share of the gains could actually be made there or that is not a universal rule and of course I also want you to answer my previous question which is about whether the start of this rally that we’re seeing in mid-caps and small-caps. Does it worry you?
Markets will always move in cycles and mid-caps will go up. For us, we don’t think there is any logic to just find a company because it is a small-cap or a mid-cap unless it is the leader of that sector. If it’s not a leader of that sector, the rally will always be short, it will be truncated, it will meet another uptrend. If it is a leader in its space, then obviously you could be very sure that the rally is going to continue for the next 6-7-8 years. All the examples that I gave you, for example Infosys, Wipro, L&T, Page Industries, Eicher Motors, Sun Pharma- they were all leaders in their space and they could exist and create revenue/returns for their investors over the next 6, 7 or 8 years but most of the mid-caps that come to you right now are there for six weeks or eight weeks or six months or nine months.
I have not seen mid-cap make consistent returns from 2014 to 2020 or from 2015 to 2020, and if it makes consistent returns, it becomes a large-cap. So would you sell your mid-cap because it’s become a large-cap and look for another mid-cap because the biggest gains come when a stock becomes a mid-cap from a small-cap and becomes a large-cap from a mid-cap. So I think there are too many anomalies in this entire theory. About the second part, innovation coming in the West, I think that’s where innovation will come from because that’s where people write checks for you to make losses. I mean who would write a check to you if you say I have a business plan where I want to make losses for the first six years. In the seventh year, I assume that I will have 25% of the market share. I don’t think even parents would write a check to you.
It bothers a lot of people, people hear through articles etc., that all mid-caps and small caps when they start to fly you got to be cautious or when so many retailers get into the investment stream without having knowledge, it is time to be cautious. Do you think so?
Most markets top off because of absence of liquidity. So I think more than the earnings, more than the mid-cap, small-cap, of course it’s worrying. But if there is no absence of liquidity, I don’t think markets are going to top off anytime soon. Jerome Powell said yesterday, I mean he was saying that I’m here writing a check to you till inflation hits 2%. I don’t think inflation is going to hit 2% because inflation is not just about more money chasing goods. It’s also about the demand side. So, I will be greatly happy if inflation hits 2.5% because that would mean there is some demand coming at the end of the game.
So, you cannot look at the entire market with one angle. For example I can give you a theory that if a company delivers earnings, the stock price will go up but companies didn’t deliver lesser earnings for March than they did for June but since stock prices went 50%, 60%,70% down, they recovered back.
So, earnings will support you if you have a three-year view. If you have a three-month view, it’s liquidity and if you have a three-hour view, it’s sentiments and emotions.
You mentioned that the way, the process of picking companies, focusing on market leaders etc., has not changed but have the themes changed at all for Basant Maheshwari before March, post June?
To some extent they have but we are still betting hard on financials. We think financials is the way to go. If you are assuming that financials won’t survive, then India has to become the India of 1997 to 2000 where only three sectors used to do well. One was FMCG, the other was IT and the third was pharma. So basically, when these three sectors do well, you assume that the domestic economy has gone for a toss. So, that time globally we had the TMT boom. So if you assume that autos would do well and you assume that no NBFC would do well, there is some gap in the reasoning power. Autos cannot do well without NBFCs doing well. So two months back, 70 companies were going up but banks and financials were not going up. So, maybe the country was assuming everybody is going to construct his own house with his own money or these companies will sooner or later come back to where they were before. So, you have to connect something that is doing well right now to assume what will do well 2, 3, 4 months down the line. So, looking at all that, I think the biggest rally in post-Covid, post-vaccine and post-pandemic environment would be in the financials, If you assume there’ll be no vaccine, I think, whether you own stocks or you don’t own stocks how does it matter? You’re going to be dead anyway.
Can you elaborate a bit more on NBFCs and then on housing finance.
So two things; housing finance because the RBI has changed the rules the capital adequacy norms have been changed so it’s not going to be so easy for housing right now if you asked me. This is because the amount of leverage you could do with your own funds that has gone down and. I think the entire business of picking up a home and mortgage, people would just defer for a while but that’s for the next one year, if you have a 5-year, 7-year 10-year view, you’re going to go back to the same things. I mean, when you join a weight loss programme, you diet yourself for three months- four months, you can’t do it for 30 years. So, that’s one way of looking at it. About the NBFCs, you just bulldoze the stocks thinking about the Covid provision. I think what’s missing in the analysts mind-set is, what if there is a write-back? So, if I’m a company and I’ve taken a say Rs 200 provision, what if I recover Rs 50 from the client because provision doesn’t mean a bad debt. It just means that I am a little astute, I’m looking forth-coming, I’m a little conservative and these are the provisions that I have taken. So, I think the stock price says that one of these stocks will get a write-back. Let’s see and let’s wait.
Any distinction between the lending and the non-lending financials?
The lending business will do well when the economy recovers because ultimately it’s about how much money has changed. So if I had a mandate to keep financials, I would have sold the lending side and I would have bought the non-lending side thinking that people would go and insure themselves more. So, I read this in some book - they said that if you sell, the terrorist insurance coverage just before you take on a flight and after you’ve taken a boarding pass you would get more conversions than if you would do calling them on a normal evening. So, it is just about that. Covid is gone, I’ve got myself self-insured presumably over the last three months, four months. This doesn’t mean insurance companies won’t do well. They’re one of the best things to own for life but just to create an entire thesis around buying anon-lending business that is not going to help you too much. The market changes so fast that if you keep up with the changes of the market, you keep changing. You cannot change once or twice and then say, I’ve done my change, let the market do what it wants to do. It’s very difficult but if you ask me, the non-lending business is great, you’re going to make a lot of money from there but right nowI think more money is to be made on the lending side.
Can I ask you if you’re doing those changes so much in a portfolio like yours wherein there is so much concentration as well because the market is changing very fast as we see so is the market forcing your hand to make changes, even if you didn’t want to?
So, one change that we made was, we bought liquor companies because we thought the entire country is going for a complete standstill till November and we knew financials won’t be able to survive if there is a second mortgage or a third mortgage. So you go and buy liquor companies don’t look at financials. Even if somebody would have whispered into our ear that the companies aren’t going to go into a lockdown till November, we would have bought the financials anyway but if the entire country was pushed into a lockdown till November, let’s assume, I think even HDFC Bank would have had a problem paying its bills. So we bought a liquor company and in one week, we knew that the Covid numbers are coming down and the government shifted the narrative from lockdown to unlock 1.0. So, when you shift the narrative, you have to move ahead and of course we bought and we sold it in about one week but that’s how you have to move. Then, we don’t need five stocks in a year. For us one or two stocks in a year are enough.
If indeed technology is going to do well, tech enabled businesses are going to do well, what about those businesses which are competing against them? For example, every retail business is now going to be competing against Amazon, Flipkart and JioMart which are all tech enabled. What happens there? Every multiplex business or entertainment business is going to compete against the Hotstars, Amazons and the Netflixes in a big way because movies are now getting released. What happens to all of those businesses? You used to own a couple of them I believe?
We used to own DMart and if we don’t own it right now, we have found better options somewhere else. We have exited DMart in this entire thing because we found better options elsewhere and it’s not economically viable to deliver a 50 kg bag of rice or atta at your house. It’s not economically viable because the courier costs are too much. So, how does this change? So then you’ve got the P/E funded guys over to bleed over the next two three years. There’s going to be a problem because even though you sell cheap, people wouldn’t get into your store. So, DMart again in a 10-year view is going to do great, it’s going to exist and is going to do very well but we found better options for the next one year one and a half years and that’s why we changed. Ultimately, technology is going to take over. It’s about habit. I never used to order so much on Amazon but over the last three months, even if you need a clipper for their nails you just go to Amazon and you order it and you get the best thing delivered in three-four days. So who is going to take all the trouble? I think once these habits change it actually disturbs and disruptive businesses but change is always small. Change is not 50% a year unless it’s a new product altogether. So, there’s a landline and there’s a mobile phone. That change is forceful. That change increases your productivity that change becomes a habit. So, the change of going into a store and picking up a packet of biscuits or ordering it from Amazon that change is discretionary. It’s not that if you don’t order from Amazon you won’t get biscuits at all in life. So, that change is small, that change happens year on year. It takes 10, 15-20 years. I think unless the government stops selling combustion engines, I don’t think the electric car is going to change the world over the next three years but the change is small yet powerful. So, you have to notice change which are really effective, powerful and disruptive and change which is really discretionary. So, when it’s discretionary, it’s like you get enough time to move out.
Somebody was making this point that the Indian government at least has much larger problems in terms of road connectivity etc., as compared to making electric fuel stations. So, don’t bother about electric cars too much. I don’t know what your thoughts are there.
I don’t think electric cars are going to come to India in a big way at least over the next 10 years. I mean, where will you get the charging stations unless you assume that the BPCLs and HPCLs are going to transform themselves into electric charging stations. Plus those cars are not cheap. You cannot sell an electric car at Rs 3 lakh but I still can pick up an old Maruti at Rs 2 lakh or Rs 3 lakh. So, I think it’s also about the price point. If you look at it, I think the top-end segment is going to change. The BMWs and the Mercedes and all the Audis - they’re still going the electric car way but the Marutis are going to run the roads.
If a good business is consistently hitting highs, wouldn’t it mean that, that no it is not necessarily overd but they are doing something right within the business for which the market likes it?
An all-time high tells you that the market knows more than what you do and sometimes the market might get it wrong also.The market might be assuming that it’s going to grow for the next five years, it doesn’t grow for five years and that’s where an investor’s intelligence comes to the fore. He might say, I don’t think this business is going to grow 25% top line for the next five years. Plus, I have realized and understood that things that happen because of government restrictions, don’t take you too far in life. Do you remember three years ago we had that graphite boom where the HEGs and the graphite electrodes - I mean, any day I used to switch on the T.V., they used to be up 10% and 5%. It seems to be at seven up, seven down game at that time but it’s good as long as you can call the number but if you can’t call the number then that is a problem.
Do you make hedges to your portfolio?
Well, hedges cost money. So, if you hedge yourself, you’ll be fine because when the markets fall, you will be protected but hedges don’t come cheap. So, if you hedge yourself for say five years in a row, you would have made more money by not hedging yourself for those five years. But sometimes we don’t look at some data coming at you. For example, the VIX data is one of the most important and powerful aspects. Fundamentalists won’t talk about it, they get embarrassed speaking about it because then it would appear like ‘aap VIX bhi dekhte ho?’ (You watch the VIX too?) So, Indian VIX when it went past 30, that was the time to just say, I’ve had enough of it and I want to get out of it. We knew something was going wrong so we reduced a lot of leverage but did it really act on that? Strangely, these are indications that come to you after the event has happened. So, after this event we’ve learned a lot of lessons. I hope you don’t get a chance to implement those lessons learned.
If you constantly try to think of hedging yourself; aside of the money costs, is it also a mental exercise that are you constantly telling yourself that you’re not sure about your bet and therefore you’re hedging and if you were sure, then you don’t need to hedge because you’ve done your study enough and you don’t have a one hour view or a three hour view. You actually have a slightly medium-term view.
Hedges should always be happening on leverage. So, if you have a capital of say, Rs 100 and your market position is Rs 400, then you have to hedge yourself. But if you have a capital of Rs 100 and that’s what you’re betting on you can’t go to zero. So hedges have to come with leverage. It’s like buying an insurance policy. So, most of us buy insurance but then if you pay too much premium for your insurance policy, if you buy an insurance for everything. For example, if this video were to go off suddenly right now, I have an insurance policy that’s going to give you Rs 2,000 and Rs 2,000 to me also. So, everything costs money. Nothing’s free in this world. So you have to understand what are you in it for because if you hedge yourself consistently, I think hedges would take away 30 to 40% of your gains. Why not buy simple companies like Nestle or Britannia rather than get into the complicated business of hedging yourself so much. Yes, but if you are hedging yourself and if you think that your hedges will make money; for example, if it were March, and I know this Covid is happening so I would go long on FMCG and I would go short on financials. So, if I do all that you need hindsight information. That is not exactly hedging but that is one way of taking two diametrically opposite views. I’ve never seen anybody do that consistently over longer periods of time.
About the mental peace? Is it kind of self-defeating that you constantly think of hedging?
I think you are mentally not at peace and that is why, you are going in for hedging. If you hedge, obviously, it gives you mental peace but then the returns are not worth all that effort. I think hedging is not for retailers if you ask me. First make enough money that you can’t afford to lose then think about hedging.
A follow up to an earlier point that you made and that is how you alluded that in 1997 to 2000, TMT, FMCG and pharma did well. When I look at what businesses are seeing higher consumption; TMT is right up there, Pharma is right up there because of the fear or otherwise and staples or FMCG has done well. So, is there a bit of a loose correlation there or not quite?
Yes, there is. The globe had an economic problem in 2008, in 1997 and in 2020, but the reasons were different. So in 1997 you had the Asian Tigers, who were the greatest of all minds, the guy who actually invented the Black-Scholes formula went bankrupt. As everybody knows about long term capital management- I mean who knew about hedges more than the guy who invented the Black-Scholes formula? He went out of business because there was a complete absence of liquidity. In 2008 and 1997 there were economic problems. 2020 was man-made or God-made I don’t know who made it but there was a problem and this problem is different. This problem was locking all the buyers in one house and locking all the sellers in another house and saying you guys are not going to meet for the next two months. As we set them free, we would know. So, the biggest problem now is if recovery comes through, you would never know whether it’s Phantom demand, whether its Fed liquidity, whether it’s the leader taking away market share and by the time you know it, we would have reached some sort of a top. So I think it’s very difficult to actually become an economist and an investor because economists by nature are pessimists and investors by nature are optimists. So, I read all about economics but I have my own economic theory that “dekha jayega kya hota hai”.
Since we’re on the topic of themes, etc., you mentioned that aside of financials a few other teams you reckon with would actually do well over the course of the next 2, 3-5 year period. Where is your strongest conviction and why, only thematic?
Technology. Anything that can change the world, anything that starts disrupting, anything that starts pushing the normal guy out. Technology is two things. So, for example, if I can have a technology platform where I get all the depositors and all the borrowers together, do I make a threat to HDFC Bank tomorrow? That is the key question and I’ll tell you why because HDFC Bank still has to pay up rental and by doing this, if I get all the depositors and all the borrowers on one table, I cut down operating costs immediately. I cut down the cost of the salesman who goes around pushing my product to the new prospective customer every morning and if I can pass that on, say two percentage points; I suddenly give loans at two percentage points lesser than the market rate and give my depositors maybe a little bit more than what they would have otherwise got. So I think this is just one example - the tremendous amount of changes are waiting to happen. All they need is execution and if there is somebody who can execute that well, then I think over the next 18 months the biggest money would be made in these kinds of companies.
In the financial model, it hasn’t quite happened globally anywhere because even in large tech-enabled countries some of these models have been launched but have you seen evidence?
Alibaba. Tencent.
China, I agree, but non-China, Europe, etc.?
India is going the China way. You are promoting local people ‘aatmanirbhar hai hum’ (we are self-reliant). Outsiders may not come.
In the last Alpha Moguls show with Prashant Khemka, Prashant was saying that Tesla’s robust rise is not unnatural and it is pointing towards something that the market may not be quite thinking out loud. It could be pointing towards the demise of big oil or the demise of certain other industries or the acceptance of a technology which will become really big with time. What’s your sense about this because I can still correlate, people can still correlate some business growth some earnings growth to Amazon to Facebook, etc. Most people find it difficult to correlate it with Tesla. Do you have any thoughts here?
Tesla is great for a country with a market cap of $60,000 but for us, $2,000, we still have time to worry because the minimum price point at which Tesla sells its cars, I don’t think they are going to get too many buyers here. So like I said, in India, we might have all these fancy big names change to electric and they’ve already started doing that in Audi, Mercedes or BMW or Land Rover or Range Rover or Jaguar. They would have to change because nobody would want to buy a 70-80 lakh car right now thinking let’s use it for four years because people would put that off as you’re still worried about how electric cars would come through. When I think if you’re selling Wagonars or if you’re selling an Alto, I don’t think that’s too much to worry about.
Aside of tech-enabled disruptors, are there themes that have taken shape and form in India? I mean. I thought back-end manufacturing, for example, becomes a big theme simply because of this whole Make in India etc. I’m wondering if you believe aside of being tech enabled is there something that has become a pronounced theme?
Make In India right now is more in the mind than on the ground. There are so many pushes like Startup India, Standup India, Digital India, Grow up India and Cool Down India, but they don’t seem to actually gather any momentum.
So, you can encourage Make In India by increasing import duties you can do all that for the next 2, 3-4 or 5-6 months but ultimately, economics will take over. Would you be willing to buy a phone for Rs 42,000 over a phone imported from China you would have had to pay only Rs 35,000 for? I don’t know how many people would do it consistently. Yes, when there is a skirmish at the border, you all get patriotic but over a period of time when there’s shortage on the 25th of every month, we all think ‘thoda paisa bachake chalao’ (save money and use it wisely). So, these things don’t work in the long run but for Make In India it’s not the government but it is so many things to do. I mean, land acquisition is one, labour, the mind-set, the skill set. I mean, I have heard how hard the Chinese workers pay. I think in America most of the Chinese students top their classes all the time so they’re really hard working. So, you can push them just because they’ve got a very unpredictable guy at the top but then economics to be overlooked by patriotism and something else; it doesn’t happen over longer periods of time. Yes, it might happen for a month or two, for a quarter, two quarters or three quarters. I mean the moment a vaccine is identified. So what if there is no Trump after November? By the way, I don’t think Trump is going away. But what if there is no Trump and there is a Biden. What if they just patch up with the Chinese and say, okay guys, you got it wrong and we understand what happened but you should have been a little more careful. Then, the entire theory changes. So I think you have to be with companies where you don’t have to depend on your leaders to actually fight with somebody or your leaders to make up with somebody. Companies have to exist in a free-market environment and that’s what free market is all about. So all the theory is coming but how long it sustains, I don’t know.
The final question which is probably the question on most people’s minds. You kind of mentioned that you will buy companies which are market leaders, but even there, what kind of role would valuations play in your decision making process? I’m guessing you don’t look at P/E right now but what kind of valuations would play what kind of a role?
See, I have not been able to figure out who decides or decides the margin of safety, because the basic theory of and margin of safety changes from person to person. So, I’ve got people who would say dividend yield or purchase price and somebody who is a little more learned, he’d say do a DCF. So, who decides the cost of capital? Most DCF exercises are how we used to solve algebra problems in high school. If we did not know the answer, we’d flip the page over, look at the answer and see whether we can get that answer or not. So if you tell a guy to do a DCF without focusing anything on the target price, I think his target price would either be 50% above the market price or 50% lower. Then he would say, let me change my WACC, let me change the cash flows. So like I said, anything that you can do on Excel is mostly not worth doing because Excel doesn’t capture if your company can increase prices by 10% next month, if your company can increase market share by 10% next month or if a company does nothing but the competitors die away next month. That’s all it is.
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