BQ Edge | Instead Of Chasing Good Stocks, Weed Out The Bad Ones, Says Samir Arora
Samir Arora, founder and fund manager at Helios Capital Management (Photographer: Amit Bhargava/Bloomberg)

BQ Edge | Instead Of Chasing Good Stocks, Weed Out The Bad Ones, Says Samir Arora

It’s a confusing time for investors looking to pick stocks and make money amid uncertainty around the economy and the Covid-19 pandemic. Samir Arora has an evergreen piece of advice: eliminate the bad apples.

“Instead of picking the good stocks, look for the bad stocks and throw them out instead,” Arora, founder of Helios Capital Management, said during a BQEdge webinar. “It is easier to say what is bad and throw it out.”

Arora said in a market of 300 stocks, there are always 80-90 stocks that will outperform the index in any given year. Investors should aim at finding flaws in prospective stocks and whittling down the list until they have a portfolio that is composed mostly of those stocks that are likely to outperform.

“The stocks you own, you shouldn’t be able to point out anything bad about it,” he said. “What’s good about them, is something we all know.”

You have to put bets on the table where you have removed as much uncertainty as possible.
Samir Arora, Founder, Helios Capital

That’s enough to make you money, according to Arora. He explains that using his own math: Over the last 15 years, the entire market is up 579%, or about six times. “Even if you had the 30th best stock of each of those years in your portfolio, you would be up almost 2,298 times,” he said.

Arora acknowledges that the market environment remains tricky right now. “Whether we should be bullish or bearish, we’re confused. It is not a one-way-or-the-other kind of market. You have to maximise returns and minimise regrets,” he said. “You have to choose stocks that you feel deserve to be where they are right now.”

Still, he remains optimistic that the Indian markets will perform well as it has been a “massive underperformer” over the last one year. “I don’t know if India will outperform. But if the world does well, so will India. That usually happens with a bit of a lag.”

Watch the full discussion here

Read edited excerpts of the conversation here:

I’m just trying to figure out, are you trying to second-guess what the macro could turn out and then doing your investing or are you shrugging it off because it’s nearly impossible to predict right?

It’s true that it is difficult to predict but what we’ve done broadly, is looking at stocks. So, first of all let’s say the market is down 15-20% this year at an aggregate level. That looks fair to me from one point of view that in a year,we are supposed to make 15-20%. In theory, and we have wasted one year in terms of the earnings of the market, in terms of earnings that you’re basically trying to shift the year from saying that instead of looking at 21 earnings let’s start looking at 22 earnings. So there should be a penalty for that, and the penalty for that is effectively you’re removing one year from everybody’s life in an economic sense. So that is 15 percent. The market has fallen 15% broadly speaking, so it is right. Now the question is that some stocks have fallen 40%and some have fallen zero and that analysis you have to do that whether they stock that has fallen 40 to 50% basically cut it into two, as if it had only two years of life. Are those companies permanently damaged or at least materially damaged for a number of years so that it doesn’t matter that in year five and come back. So from that angle, we have done it but from a top-down approach, whether we should be bullish or bearish, we say we’re confused.

Just wondering, how do you think sentiment and therefore reactions could be if there is a second wave, third wave? The probabilities I mean there are a lot of questions, so many people on the street as well are talking about that. How do you think the market will react?

I think it will be very negative. Victor [Shvets] was saying we should not worry about the changes but ultimately we’re going to be driven — some people say it’s liquidity driven. If it is liquidity driven, it is liquidity driven. Now you may say the fear is rational or irrational,that the numbers of deaths are few compared to some other disease or some other problem but right now we are gripped by that fear and it cannot be easily conquered.If the second wave comes and in India there is more worry than in Singapore. In Singapore, if you have a problem at least you can land up in a hospital. In Mumbai, the more you read, it becomes so scary that you’re frozen in trying to go out and even be a part of the economy. So I think the only thing is, we’re hoping actually that somebody will find a cure in the next six-nine months, and you will basically go from here to there and there will be some herd immunity. Today,the papers say that the U.S. numbers are actually 10 times higher in terms of the infection or in terms of deaths. Therefore actually the mortality rate ratio is much lower. So in some sense for a few months actually the numbers have been larger than we think that’s good actually, that these guys had the problem and solved it on their own without even realising it. Therefore, maybe they have immunity for a few more months before some cure is found, but what I’m saying is, it’s not a one-way or the other kind of a market. It’s sort of confusing,but other than just maximising returns, you also want to minimise regret; that if it falls, you shouldn’t feel too bad and if it goes up you shouldn’t feel too bad. So you’re broadly in there in choosing stocks which you feel deserve to be where they are right now considering the situation.

A follow-up question, the point is very pertinent that you don’t want to have regrets when you’re investing in the current scenario. So, if you’re a personal investor and let’s say not the support for your investor, would you try and take cash calls in your portfolio, keeping some gunpowder dry because that strategy is futile ever since 9,000, and everybody was saying the markets will again go back.

So, we do it in our long short fund in a similar way that you’re always short something which is similar to an individual who may have cash instead. But I have found taking cash calls, as in you may delay investing your current cash, but to sell stocks; if you otherwise would like them or if they will already be corrected on the basis that they will correct further, we have found that impractical in our long-only products. The reason for that is, when you are anchored to that selling price and you are not able to get back into the same stock if after the event is over, the market has moved on. So in our long short what we do is, we separately short something the portfolio is as it was before and you just lift the shorts and you’re back. So that’s why I don’t like the idea of raising cash. But if somebody is sitting on cash, I don’t see any reason why it should be invested tomorrow morning or Monday morning. That much you can afford to have but the other thing is that what you do depends on what you have done as in, some people are broadly fully invested but they have some extra cash, they have no need to spend or invest it but somebody may be starting for the first time in his life thinking that this correction is a good point for him to start investing because he’s bored of not being able to find other choices of gambling in his life. There may be some stocks that he can try based on perceived beneficiaries or actual beneficiaries of this or relative beneficiaries.

An interesting question that Santosh Kumar is asking, multiple questions but one that stood out was with the IMF downgrade or growth rates, ratings downgrades that come in on India and how much credence do you give to that in terms of impact that it can have?

First of all, this information is available to everybody in the world so it is not that Indians are captive in their own market and can’t meet so they are buying these stocks. So if you look at FII flows this year in Asian emerging markets, the total outflows are something like $50 billion, and India has had only two and half billion dollars. So these other countries with bigger amounts come out of Korea, Taiwan, etc. are like $20 billion each or something. Similarly, last year, India got I think, $14 billion if I remember the total flows into these group of countries which is basically all Asian countries, excluding China. Teetotal was only 24. So when it was coming in, we got 14 out of 24, when it is leaving;we have lost two and a half out of 55. Now that could be because the foreigners like HDFC Ltd. and maybe they like Reliance Industries Ltd. maybe they likethis bag or they like the ICICI bag or whatever they don’t care about the rating. But the point is equity markets have generally not looked at them with that seriousness. One reason for that could be that these things happen, the rating downgrades happen when everybody already knows that the GDP is quite low. They’re always sort of behind the curve because they need to wait for much more formal evidence and then they have to write a report which they are basically selling to institutional guys. So, they want to cross all the T’s and dot their eyes, whereas the market has quickly reacted to it.

Just clarify this for me, almost for the last few years we’ve been talking about how India is a beneficiary of passive flows that go to emerging markets at large. Do you think that is changing now?

Actually no, we’re not a beneficiary of passive flows because our weight in the benchmark is very low. So actually we should be beneficiaries, if there are sort of idiosyncratic flows into our market that somebody wants to invest in India. If you say that we will get flows only from flows that go into emerging markets, then India’s weight it is like 9% or something. So then Korea and Taiwan are much bigger actually Samsung might be bigger than half of India in terms of weight because of free flow factor and all that. For example although this may not be called FIIs, this Reliance money or some other money, this is coming because mostly the sovereign or whoever is choosing to increase allocation to India without necessarily increasing allocation to emerging market or Asia or something. If we get as a proportion of that, we will be left behind because our weights there are too low. So I assume, exactly I don’t know but broadly speaking, by looking at this year’s numbers and last year’s numbers you can see that it is not so much linked to flows into emerging markets. It is separate because out of $55 billion outflow,that might be okay but we didn’t lose. Although in proportion, you may have had similar number if it was exactly that. But last year we were 14 out of 24. Solet’s hope and by looking at these big deals that are happening, any; Unilever deal, HDFC deal all these deals can’t be bought by passive funds because they don’t buy these. All the money that has come into India has come via deals this time. So therefore it must be somebody who has proactive focus on India or at least on these companies.

Do you reckon that it will become bigger and therefore the ticker will keep on attracting individual investments could well be the thing for the next one, two years? Because we’ve seen that with Jio and we’ve seen that as you said with some of the others as well. The bigger fish are getting into idiosyncratic flows.

No, so first of all India’s weight itself is supposed to be increased in the next two three months by thing a percent or so,which is not bad it’s worth $5 billion or $7-10 billion dollars that has been announced by MSCI that before June 30, they will announce the new weights. The only thing is they’d gradually phase it in instead of doing it in one day. The reason why this weight is being increased is because I think in the budget,something was done where our sector weights become 74% or something, some complicated stuff which was basically a twist to play with the MSCI formula but it was well done. The end result of that is that India’s weight in MSCI will go up and it has to be announced in the next few days, but it will not be implemented immediately. So, its market impact may be gradual but basically over some six-nine months, you’ll get additional $8-10 billion dollars, but otherwise India’s story is that the companies that people like are getting the money and therefore they invest they are independent of what is happening to the economy or currently happening to the economy and things like that. So when I was in Allianz and I used to be an Asian fund manager. We used to say for India bearish and overweight. So the idea was that we like HDFC Bank or some other in those days, and but otherwise don’t ask us about India story because there was none at that time. I didn’t say now.

So, Samir Arora in 2020 is bearish and overweight?

I don’t do Asia anymore but I think that India is okay.

Let me let me ask you something that’s in the minds of a lot of people, that if we missed this rally, we were scared and we missed out?

You haven’t and I’ll tell you why because let’s say that you thought the market bottomed on March 23. Let us say you were very smart and you thought that one week before because you do not know exactly so you thought that on March 16, let me invest this money because I will put in one week before the bottom, please check the performance of the market from March 16 it will be up like 4 or 5%. If you say okay after seeing the bottom I’ll invest two weeks later, then it’s a little better than 4%, I think it’s about 9-10. But if you look at it from March 23 low point during the day and say oh my god I was supposed to invest at that point of time, then yeah,then you missed it but life is not going to be programmed so exactly. Broadly speaking, even if you had taken an average of 10 days, it’s not gone because it just went down too fast in the 16th to 23rd days and then went up, but currently if you say right now, if a stock is up 20% last month,should you buy it? No, you shouldn’t buy it; it’ll cool down a little bit. In any case, I always asked how much are you planning to invest? The thing is that people will put 5% of their money in some stock or at some time and say we made20%. I say no you didn’t make 20%, you are 95 of it in cash. You’re fine and you made 20% so you made 1% money. Now I feel better, because we are always fully invested. So, this idea that you will come in but on that part of the investment you want to make a high percentage broadly they lose out on the other 95. That’s what I feel. Nobody will have the guts to put hundred at one point of time if that was the total theoretical portfolio.

Samir, what can make India better? A lot of people say that the Indian government acts only when pushed back to the wall and yesterday I had a guest who was saying that Covid-19 may not actually be the needle on which we have pricked the balloon but actually may be the thing that was required for the government to act in some way.

The thing is that some of these reforms that India needs,does not mean that on day one, or month one they will affect my stock market. You see the difference between saying that what happens to a stock market is linked to reforms is actually, if the reforms are now in sort of implementation phase.So for example, let’s say that in 2008, India did this opening of retail-organised retail. Remember that when Mamata Banerjee walked out of the UPA coalition and all. So that time I think they allowed 51% of that time. Now for a few days or stocks went up, but no foreigner came for 10 years. But then when they come, they may come in 100% private owned or like the Zara company. Some of these things may affect the economy at large, but not necessarily my stock market. So for example if you say that there will be a lot of business supply chain moving from China to India. Now mostly these will be multinationals who will set up their own units in India instead of in China to sell within India. In the indirect sales, it helps my stock market because India will save some dollars and India will create some jobs but it is not that my company that is listed will suddenly benefit from it directly. They will get some of them, that may also happen but what I’m saying is some of these reforms are big picture; you need them for the next five years backdrop but they are not changing the market. If you suddenly say that a lot of banking licences will be given, like it was then it is considered a reform but it hurts my companies,because my company is competing with less competition from banks and now you allowed more of them to come in. So whoever was the existing incumbent company or companies are negatively affected by these reforms in a one to one sense. We need the reforms to create the story five years later that there is more middle-class employment, that some assets have been saved, that we are on this but it’s not that today some stock is supposed to go up or down. If at all one stock here or there, which might be producing some TV or lights and all that or ACs; we have one of those but that will not change India in itself. India will be changed by private companies doing things; private as far as India is concerned. So we can’t from a market point, beyond a point look at it every day and say, this reform is needed. What I think India needs, which in is U.S. is there is the system to accept that corporates are very positive and very good and they are not all cheap, and that we want to save them and help them and go out of their way to help them and we will do whatever it takes to help them but not encourage some fraud or cheating. Trump said that Boeing is an extremely valuable company for the U.S. economy and it is 1% of GDP or something and we will do whatever it takes,they didn’t do anything. They didn’t do anything what is not required, the statement had value. So here we don’t look at them like that we think that these guys have come to exploit the Indian public and I think that is a big picture negative—if you really want to be that big picture which I am not.

Somewhere way back after the budget, when we had a conversation you said that the markets will improve the government starts doing things.

They did because they cut those taxes. So that helped but if you look at it over the last one year. India has been a very massive underperformer, even if you do year to date or one year, I mean don’t compare with Russia and Brazil or some places but even then, Russia may have done better. But, India’s down 17% this year in dollar terms I think MSCI and the world of course U.S. and all are down 3- 4% and Nasdaq is up but emerging markets, Asia and Japan. All of them are down much less but China is up. So India was never underperforming by 10-15% in a year.

You think India can outperform well from here on?

Perform well it can do. It’s okay if the world does well,it will do well. You’ve seen it happen, plus minus with a lag. That’s possible and we are playing on the atom now. So currently the confusion is that whatever opening up in happening in India or in the U.S., you are saying oh we have gone back to 70-80% or 60% or pre-Covid. That is obvious. The question is, 90 to 100 will you go or not, because it’s like saying that I collected 10 instalments out of 12 for my loan. But the profit is in the last instalment till 10 instalments you’re collecting back of your principal if at all, or maybe even till the 11th instalment. So the whole game is the last 10% to say that I’m at 60% and that is great. First of all, if there were three months of lockdown or two months of lockdown, so in theory, even those people who were to buy for those two months should give you double. If you just say that on monthly basis, they are gone back to March. What happened to the April guy? May guy? That will be only half –half to come. So in the first month to get some demand does not show anything for about two-three months later. There’s a pent up demand for three months got channeled into one month or the first month. So in theory, it is only 33% that you are at right now in that sense. If you say that over three months,you have had one month of sale and then one month you’re back to the pre-lockdown.

You’ve lost two months of sales, okay you can say that you can go to a restaurant and eat food, but in consumer durables if you wanted to buy it in April-May you can buy it now also. So things which you could defer because you could go out or whatever, there the demand should be three times.

You obviously don’t know about this, but about 14 years ago, or 15 years ago when I joined this industry as a rookie, you had come to my earlier workplace and you had given an interview and we were in the research team, listening to the interview. After the interview was done, you had a post interview chat with the interviewer and in that you had mentioned that—it was a real estate name—and you said “Mein yeh company isiliye deta hoon kyunki waha peh jaake dekh sakta hoon ki kya kar rahe hai. Building yaha peh khadi hain, rent kitna aa raha hai”.  So, obviously physical verification or being able to interact, etc., gave insight into how you chosecompanies back then. How are you choosing companies right now because it was fascinating for me to hear it then?

Generally, we’ve been doing the same job for so long that actually at the end of the day we have now concluded, we have changed over the years but this line I don’t remember. In general that every year if you look at the top 300 companies of say, as a universe nearly every year 90 to 100 company stocks do very well compared to the index because actually, in theory, half the stocks have to beat the index and half will be beaten but it’s never fully half because sometimes the large caps are moving, because index is weighted with capitalisation. Suppose it was an equally weighted index, broadly speaking, 50% will be done, 50% will be beaten. Actually in theory, if you could say it was stock, good or bad, it should be enough. You should be able to say if it is on this side of the divide or that side of the divide but in reality it is not that simple. If you could say that a stock is in the top one third, not the top company and like many fund managers say that there are only 20 companies worth investing and there are 15 and 20 companies—it is not like that. It’s about 90 out of 300. So just to give you some numbers, if for every year for the last 15 years you just bought the 90th best performing stock, but if you had only the 90th best performing stock each year, the market is up some six times in this period but your portfolio would be 45 times. By owning the 90 of the best stocks, so what we do now is to say that what are the factors that make a stock good or bad? What makes a stock good or bad are first of all, in some cases on the basis of the size or opportunity or the team or whatever, then you can say management, then you can say corporate governance, then you can say accounting, then you can say valuations, some industry characteristics and some triggers, if any. Now the thing is, over the years we have realised just to say what is good. So, what we do is we throw out 210 companies by finding something bad about them rather than finding something good in the 90 companies.

Sometimes we throw out telecom for 10 years the only thing is, it is too competitive. Only last year after 2010 we bought back Bharti Airtel Ltd., after 9-10 years by just saying, out because we don’t want to know if you will be the survivor, we don’t want to know if you are the last man, who will win and ten others will go. We don’t want to look at this whole sector so,out. So, the idea has become that we try to throw as many, and then choose from the 30-40 of them. The idea is that to eliminate bad is much easier because you can look at history you can look at every fraud. Every fraud that has broken out in India or in the world has been known before. Like WireCard, WireCard was known for two years, doesn’t mean you knew it but it was there; Financial Times had done a full coverage, there had been a second audit. We were shorts Satyam and Satyam fell 90% that day, but two weeks before that, they had tried to merge with Maytas and that Maytas deal had been reversed and everybody knew there must be a problem that why the IT guys are buying into the real estate company, and their conference call was very bad and three directors had resigned one week before the scam broke out. Then we shorted. So the point is, every fraud is known. Every history is known, you look at these Indian guys whose names I won’t tell you but they’re only two so everybody knows. Did the crime in India and listed in London. Who goes and list in London if you can list in India? The Indian guys gave higher valuations for every company. So you will know that everybody knows in India that they will not be accepted as IPOs in India so these two big groups, all metal guys they go and get listed in London. So everything is known. You just have eliminate it from your mini universe that is maybe the new way or maybe that was always the way.

Just starting off with one question, it is a pertinent question. When we are talking about the large are getting larger, what’s the role of the other ones because a lot of people are right now talking about very good quality mid caps and small caps might actually play catch up to the valuations of the large caps, so how do you decode?

So in some sense I agree with that because as I say, I think that 90 stocks will do well each year, so I am totally convinced. First of all, actually, half the stocks have to be well because we are only comparing with average and you have to beat that average. I can show you on 50 years of data that large part of the market does well it’s by definition because we are saying that we are comparing with that index of 300 and so 150 would have been a normal but 90 makes it secure. So, definitely 80-90 companies will do well each year. There are bad years but they do relatively well. Most of the years are positive in life so you get much, much higher. So just to tell you, if you have the 30th best stock of each year for the last 15 years, the whole market is up 579% so let’s say seven times it became or 6.8 times. If you had the 30th best stock performed; of each year not the best, you would have been up 2200 and some 98 times. The point is that many stocks do very well for a year or two years and then they go down or they moderate or their returns get dampened over time. So by definition, it’s not only the 10 stocks will do well or 20 stocks will do well. What I have now learned which helps me a lot is that just because I own 30 stocks, does not mean that only 30 stocks are doing well. Three times what I own are going to do well. I am hoping that my stocks are in those stocks, not the other way around. That my stocks are going to do well and everything else is bad. No, some 80-90 stocks are going to do well each year. I hope that out of my 30, 15-20 fall into that 90 and I am set. So therefore we are believers that you should buy new nails, but you should not buy where you know something is wrong or something is super expensive. You should not be able to say what is bad about what you own. What is good about it, we don’t know. For example, we bought Bajaj Finance in 2011. It went up till February 70 times, but on February 11, what did you think of Bajaj Finance? It had nothing in it, but it wasn’t bad. It had a decent management, decent history, the same thing that nobody knew that they will suddenly become these digital distributions and getting loans on one minute and one second thing, we also didn’t know at that time. So the point is, you have to put bets on the table where you have removed as much uncertainty as you can but after that you don’t know and more bets are better than one concentrated bet.

A follow up, these high-quality financial names, some of them have got bad and aren’t inherently placed but the risks of something bad happening because of bad loans or etc. Is that a worry?

It was but no more in the sense that what we are saying is that if the market is down 15-20%, which I was saying and that I accept that as a one-year cost of waiting you can say, then stock that are around 40-50%. I find them very reasonable to look at because I feel that these are guaranteed survivors that they will not be disrupted. Basically their relative position will not be changed and many of these private sector banks are in the 35-40% down category. So we have not sold and actually we bought a little bit more. The other stocks, there are some stocks that are up 20%, like our retailer companies and all that. So, if you have a high P, much is expected of you. It is not enough to say sorry, India closed down. India closed down should benefit you like it may have benefited Zoom or Netflix or Amazon or some gaming company or Activision Blizzard. Then you can say that you can be up in a down market but here we have stocks that because this year, the noodles were sold and this year. They’re not beneficiaries for them to be up in a 20% down market. They are relatively outperformers for the moment, but if you ever assume that the world will be okay in a few months, their earnings also in general are going to be lower because of this quarter being bad, so you can’t just say 2021 is bad; then you move it to 2022, okay move it, but therefore the stock is up 20%. So I like some of the private sector financials because they show a 30-40% down which in one sense means that you didn’t know half the company. Let’s suppose it was 15% down. That means you think that it’s a two-year life of a company one year is bad so 50% gone. So we have not bought a lot because we already had quite a bit, but we haven’t sold and we’ve added a little bit here and there into the proper ones. Now they’re a little better after this month but generally, in this period you understood what I meant.

What’s your view on debt-laden companies, with moratoriums etc., there is a bit of lag there.

That is the issue with these private sector banks why the stocks fell a second time is when the second moratorium came. But now, these guys are reporting that the second moratorium they’re not easily extending, and that the individuals, they’ve also understood that this moratorium is not for free that you’ll have to pay interest, and that the system or the courts are not helping you in any way in that sense. So if you see for the credit card company and other companies they are saying that this month the moratorium numbers are lower than last month, but there is still the question that why somebody knows that the moratorium is not financially benefiting and why are they not paying? For a very few percent they may say they care about liquidity and all that but if there is a risk, there is a risk. So that’s if the stock had been down 5% they would not be as interesting when its 40, you say okay maybe some of them will have this problem. In general for these consumer finance companies and the credit card companies and in general, back to individual loans, the cost of defaulting for the individual is very high. Let us say that over time he has more and more to rely on online purchases and he doesn’t even have a credit card or that he’s been flagged or is defaulted to one bank, the other banks will not give him. If he wants to be a part of the new economy and he has the money, he will pay. If he doesn’t have it because he’s lost his job in between or something, that will happen and you cannot run away from that.

I’m just rephrasing my question is debt bad or debt is okay? In non-banking names, a debt laden company is bad right now?

Debt is bad only if it is not manageable. If it’s highly leveraged it’s not good and it depends on a business also; if it’s a surviving business or a threatened business or even a travel or hotel-- these things where you may have two years or one year of no cash flow or earnings. So this question has no meaning in a general sense, it only has meaning if somebody is over-leveraged and will anybody save him? It depends now.

The sector of the week, month, quarter, and year seems to be divergent in debt. One company’s gone and become net debt free. The second one is kind of there and the third one is heavily indebted. Do you have any thoughts?

The first one I totally like it now because if 10 guys who have 10 times, we’re put in $15 billion in the company and they are all financial investors. So if I bought these 10 smart analysts working for me and they say we are putting in personally, $1 billion each. I’ll say no no, you guys are dumb, you don’t know anything I know something more because you have seen the data and they would have seen actual projection, which we can’t see in outside investors. So, you just ride on that, because the guys are proper guys. In the sense, it is not one or two and it is not strategic, I don’t like strategic guys because their interest can be strategic; as in they want to be in India, they have a 20-year horizon, they want to tell their shareholders that we are in a billion customer economy or something but the financial investor is like me and he’s coming in an unlocked vehicle. Plus, the fact is that for one or two years now, you cannot question the management as to what else they will do because everything we will accept blindly. Overall, my thing is that, I think Idea will survive because the Supreme Court at this moment if you let go of 33 crore consumers in this environment where the guy is willing to pay and something he will pay. So, that is okay.

Are there sectors that you believe that the markets have punished way too much, even at the current juncture or some that the markets are not recognised and multiple people have multiple thoughts there. What are your thoughts?

We have bought two stocks where the stocks are down 40-50% from February, one of them is a hotel stock on the basis that if you are even later, one of that it is a guaranteed survivor. We all know the hotels—it is too big and they are a part of big groups and money will not be a problem there won’t be a new setup. So, after two years or maximum three years, if it can get back to February price I’m okay I would have doubled my money. Another good thing I thought when I bought was that everybody knows that these things are shut down. So, when the results are bad, you can’t say these results are bad. Everybody knows you’re already shut down for the next one or two quarters unlike in some other sectors where you are seeing the earnings will decline 15%, but somebody said, oh it fell 20%, so it’s very bad. In something which is totally sad more or less, what more will you scare me after three months? The other one I was saying is, we feel that some of the problems in HCV (heavy commercial vehicles) and all will not mean that the sales are down 10 and 20%, but maybe down 60-70 to 80%. So, something will be very bad and whether the stock prices are set or not we don’t know but we are not getting away from this so easily as an economy. We cannot get away soon because you’re frozen and even after opening up you’re only going for the minimal possible purchases, you’re spending minimal time in the shopping. Suppose you go to Croma (store) or somewhere to buy a TV or whatever, previously you may have hung around and also bought a charger and also bought some earphones. Now what will you do? You will go by the list that you have and go precisely with that list, if you have a list because you discovered that in the lockdown we need it. So, if you don’t do window shopping, how will you do shopping beyond your pre-lists?

Telecom is an active beneficiary of Covid-19, maybe media is. Anything else? I mean this whole talk and fear and all about the Robin Hood stuff happening a lot of people are talking about that as well.

Talking about that means that those guys are buying those stocks but in the end they will lose because they are just paying the learning fee. So when you come into our market, you can’t be allowed to come in and make money forever. So you will make it for the first three months and you will lose everything and then you would say that this is my learning fee and you will start again. We have paid this so many times and we can let these young people come in and not pay a fee. This is here and in the U.S., U.S. they may have already paid a little bit, because you see the Hertz and all around quite a bit and even the cruise companies and airlines also. So Indians will also pay but in India, they’re not many because this company is not really listed in the paper. So I don’t know which one we really hyped up that way. Indians are more disciplined because they are mathematical and they are numerical.

So, in every crisis and post crisis, there is always a new sector which emerges as the leader and captures the major weightage in the Nifty. What are your thoughts in this regard?

That is not totally true because if I look at it, I’ve been around for the three bull runs. One was the ’90s bull run which ended in March 2000 and the 2001 to 2007 end and then 2008-09 end to now. In all the three private sector financials led. Another thing is many people say this time that pharma because it did badly in the last bull run, will do well this time. But actually pharma outperformed in the last bull run, it only underperformed for the last three-four years out of the eight year cycle. Broadly, the thing is that sometimes, telecom, I don’t think that telecom is because; even Reliance, I’m assuming it’s not to be called a telecom company otherwise it cannot attract the valuation. So, it is trying to do something bigger than that. So in that case, what do I call it? I would say that these things you can’t decide in advance, you will buy companies which you think are survivors of that bear market and that something has not changed to change that and they will come back and then something will emerge but you don’t pre announce it, because nobody knows. The common factors that we found are that the pre-growth sector in the world and in India and if you see the Forbes billionaires list, are always financials, consumer and tech. All the billionaires are from these three sectors. There are no billionaires from cement or chemical and I am broadly speaking, there’s always the tech guy and the finance guys. So, these three sectors are there, and then you add in a few pharma here and there some speciality chemicals and you don’t need the rest of the market. Again, someday one stock will come up but broadly these.

The bucket is big on insurance of course; a lot of people are talking about non-lending financials, any thoughts on the non-lending financials? Insurance, brokerage etc.?

So insurance we generally like because of under penetration. Asset management we don’t like because asset management in India that is, I don’t like because you see the market cap of the Indian asset management companies and compare it to global. In asset management, my biggest problem is that when the cycle is bad, say the market has fallen. Normally we are able to hold on to good companies by saying that even though the stock prices are down, the company is doing well. In an asset management business the revenue itself is driven by the market. As in, equity market fall 20%, in theory or AUM has fallen 20% and maybe you’ll have some redemptions and therefore the equity is the main thing, forget of the debt. The equity AUM will fall with the market and maybe because the market is bad, you will have another 5% fall of because of redemption in a normal steady state. So your profits will fall much more than the market because your top line is falling 20-25%. So, when you are giving very high valuations to a company, you are giving for the fact that in a bad market, I’ll be able to justify you saying, no, my company’s doing well. If that company earnings fall as much or more than other companies. What am I giving 30-40 P for? Plus, there is this natural trend towards low-cost ETFs and exchange funds and index funds which will keep driving down so I don’t like it. People have this theory that penetration in India is low. By the way, you can take any item in India, and penetration will be low. If penetration is not low, then the price will be low. So you can say you want to buy cable TV well, Singapore, the cable bill is $120 in India it is $3. Keep making Excel presentations on how $3 will become $3.2 next month but it doesn’t. So, either our penetration will be very low or our price would be very low and you can make any scenario but they won’t like it because market cap of Indian companies compared to the market cap of Templeton and others with which are easily available and which will be managed in 20, 30-40 times more assets will be two-three times bigger if at all.

One final question: what are the differences in personal finance that you foresee for yourself, if at all because of this, or is there no change at all? The metrics remain the same? A lot of people don’t want to know how are the managers managing their personal finances, I mean, are there changes that they’re making more debt, less equity some gold etc.?

Personally, no change because once you reach the stage, it doesn’t matter. So, the second thing is that for me, I have most of my money in two markets-- one is in our global funds and one is in our Indian funds. For me because I’m sitting here and because we’re a global fund, my allocation to U.S., or global but global it is mostly U.S. is very high. I would think that for Indian investors, they should buy some non-India funds because you can buy them in rupees. You can buy them in a smaller unit as you want but it is not a bad thing to have some money in global equity markets through Indian mutual funds which are already there; through ETFs or through a fund. There is an advantage that in general those stocks are quite good and much better than many Indian stocks but secondly, if the markets were to fall; whenever the markets fall, our currency falls with it. So in dollar terms, you would have effectively $1 investment sitting in India. So I say to the Indian guys, my friends please put 5-10% or more even in non-Indian stocks for which you don’t need to open actually an offshore account for anymore. Now these funds are available in INR but you’re effectively buying a U.S. asset.

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