BQ Edge | Time To Book Some Gains, Says Shankar Sharma
Shankar Sharma’s investment mantra is to minimise losses. A reason why his First Global turned cautious in February when the markets started tumbling. And the portfolio manager remains cautious even now when they have recovered nearly all the losses of the year.
“A dollar or rupee gained does not give as much pleasure as a dollar or rupee lost gives pain,” he said. People have made a lot of easy money and the apt strategy would be to book some of the gains, he said. “Don't squeeze a lemon till it turns bitter.”
India’s equity benchmarks are close to recouping all the losses after the Covid-19 pandemic triggered the worst selloff in global equities in March. Still, there’s uncertainty as India now has the second biggest Covid-19 outbreak after the U.S. and is adding cases and deaths faster than any other nation.
Sharma doesn’t expect a bear market though. Yet, he also doesn’t rule out a sharp correction in the next few weeks. Rising Covid-19 cases and the healthcare challenges and brewing issues between India and China are all stress points, according to Sharma. He sees them as significant risks because of the levels that Indian markets are trading at. “The new traders in the Indian markets may not have seen a drawdown, but I think they will get a dose of similar falls (like the ones that happened in Nasdaq) in the next few weeks.”
Sharma has scaled back on riskier assets, including tech, and his portfolio management firm has shifted towards fixed income and commodity. Small caps in India are a lead indicator of an upcoming correction, he said, even though his firm invests tactically in small caps and thematic bets like active pharma ingredients or bulk drugs.
“We play everything, but we believe in nothing,” Sharma, adding that his firm keeps re-evaluating the investment rationale.
Sharma dismisses the belief in structural stories because of the China Plus One story, he said, referring to inclination among global firms to shift part of their manufacturing outside China. If data shows that companies are getting orders, Sharma said he would be happy to change his belief. “Until then, stories will remain stories.”
Watch the full interview here:
Here are the edited excerpts from the interview:
Shankar, how do you gauge the global situation right now and India within it?
That’s a good question because over the last three-four months all we would hear is how easy it was to make money buying a bunch of tech stocks and when I start hearing stuff like that and of course, we made a lot of money, to be honest with you. So we were very proud of that – our fund is up 54%, from 1st of April up until Aug. 31. When things become so easy and the last time it was so easy I remember was from the third quarter of 1999 until February of 2000, in about six months, I think the Nasdaq doubled from maybe 2,500 to 5,000-5,500. Imagine an index doubling. So this run has been as smooth as that run and you know how that ended, right? So we are very little old in this game so we have a lot of data rightly or wrongly in our heads and we started to worry about it. I’ve been extremely worried and concerned about this easy money that everybody has made in India, particularly in tech. Then the final icing on the cake for me was in the end of August, I think around 28 or 29, I get a WhatsApp message from a friend in Dubai. He tells me that sir, look at my P&L. So I said yes, sure. He shows me a screenshot and he has put in like $50,000 and has made like $110,000. He said, “Sir, I made this money in three days”. And I said, What do you know about options? What do you know about the stock which has options? What do you know about anything? And you are making this money? I think this is done, at least for a while, this seems like a done deal. So, I told my guys, I think this is just out of control, let’s buy some protection and all that as a result of which the Nasdaq has been crushed this month – I think by 10% maybe 11%. Now, we are down I think about at two as of right now because we have diversified, we bought a lot of bonds and bought some cash. But the point is that it has been extremely difficult in the last 10 days or so in Nasdaq, and rightly so it had become too easy. Apple was adding $200 billion to its market cap. I mean, that’s ridiculous, no matter what iPhones have, I don’t know, I still use an Android, $200 billion was what used to be the market cap of the company but now you are adding that in a day. So yes, it has been an interesting last 15-20 days, I don’t think Indians have still understood how markets can, at least the new generation of the last five months. I think they will get a dose of similar falls in the next few weeks.
I just wanted your perspective because you have so much of experience. Every single time that I’ve seen a mammoth rally in a particular theme or a sector, there are pundits coming out and saying that this particular theme is different and you should value it differently, only to find out a couple of years later that it also reverts to mean of sorts. Do you reckon that could happen that this whole cave for tech or some of the other sectors wherein people say, don’t look at the valuations because the way to value this business is separate. Suddenly it’s starting to come for platform businesses as well and all of that might also change or could it really remain irrational, if you will, for so long?
So I’m not a sceptic in the core premise of tech. I’ve been an investor in tech for the last 20 years and thank god that we lucked our way into Amazons and Apples in 2001 and 2002. So I’m not a sceptic and I don’t want to diss them because a significant part of my wealth accrues from having all these companies. So I have a bit of a bias there but that’s not to say that these stocks are again going to be perennially up and more up which is what we have kind of gotten used to. Then we have been told that these stocks at every correction are a buy, that might well be true in some times and it may not be true at different times. I can tell you just this time and people again, if you look at data across the U.S. tech landscape, there are so many stocks—good ones which are down 30-50%. So the headlines don’t capture everything because the index is not made out of many large cap stocks but just short of the large cap or the large cap in the U.S., I mean, it’s been a decimation of a crazy order. I don’t think they are scam businesses but it is just that you’re paying for infinite growth where every business has got finite growth. So I think you should have this perspective that these stocks can fall 20, 30%-40%, there is no law in the world that tells you that they cannot but I think the lock that a lot of large debt has on businesses, it’s a bigger lock in my view than what Coca Cola had on the beverage market or let’s say McDonald’s had on the fast-food market. I think the big lock they have; I always speculate what can change their dominance because the dominance is just all pervasive. So till that that crack happens, they will be good places to put money in but be cognisant that a 30%,20% 50% fall on a broad basis can definitely happen in these companies.
So, how does your view on what the world could do impact your view on India and your investments within India currently?
So, India has been a relatively low key market on a headline index basis. Basically this 40,000-38,000-39,000 range has been there now for at least 12 months now. So we were there in July 2019 and then the budget was presented and it crashed to 30,000-32,000. From there we rallied back after the corporate tax cut was announced. It went back up to the same or similar levels of 38 to 40,000 Sensex and then again in March, we crashed back to the 20s. From there again, we have rallied back but there is no displacement. So we are just going around in circles or up and down but we are remaining pretty much on a headline basis. It’s exactly at the same place where we were 12 or 14 months back. Within that, obviously, some stocks have done phenomenally well and many have not like the banks, for example. My sense is, you are now entering a period when a lot of covers/lids that has been put on banks, and non-performing assets with the moratorium and things like that, I think at some point, that lid will get pried open. What’s going to be inside is not going to be pretty because I am extremely concerned about several facts. Now, I’m always concerned but that’s the nature of this game, you should never ever become complicit. My worst moments have come when I’ve made a lot of money and I’m feeling too good about things and having done this for 30 years, I can tell you that you want to control that emotion. So that emotion started to bubble inside me from August. You have to control because it’s filled with helium, it just keeps inflating. So the concerns for India are genuine and real. They are building up and I don’t think you should just say that nothing will happen, it’s all fine. That is not investment management or investment thinking. You need to be cognisant and then do something to prevent it from hitting your portfolio. I think this bank problem has just ballooned over the last six months. It’s been covered up and papered over. The real economy is going from bad to worse. So, the more and more companies and people that I talk to are far from any improvement. I think you’re still headed down the abyss and the Covid numbers – people might say it’s only 2% fatality rate, I think that is that is being extremely disingenuous. The reality is that you don’t know what the long-term impact of contracting this virus is. You might just feel okay maybe after a week’s hospitalisation or quarantine but you don’t know how this thing pans out. Even if on paper you have recovered, have you actually recovered? So the healthcare challenges will be of a different order. Secondly, as long as the numbers remain at a lakh per day or wherever they are, how do you expect business life and normal life to go back to normalcy? The longer it doesn’t go back to normalcy, the worse is the cut on the economy because these people say it will come back but the economy is exactly like a patient having a severe problem. The economy in the current situation, you just don’t go back to running a marathon. It’s a long road to the recovery if at all you recover. So I am extremely concerned, one lakh – this is something I talk about with a lot of friends. I have no intentions of moving out and what does that tell you? This is a serious, ballooning problem. Then the third point is obviously the Indo-China border issue. I don’t think it should be just brushed away as a nice little walk that the Chinese have come for, to enjoy the weather in summer just before the onset of winter. I think it’s a genuine, serious and real danger. I don’t see any peaceful method of resolving that. I think if at all anything can resolve it, it is only a military response. I think there are significant risks building up in the stock market, particularly because we are where we are in terms of the levels. I’m extremely concerned for sure.
It’s interesting how the narrative has changed. Now, if we dip down to 50,000 cases, people might say, wow, we’ve done so well, whereas 50,000 as a number in absolute terms is just a really large number.
I will say this that the best way to deal with a problem is create a bigger problem because it makes the former look insignificant.
Just a question on mental models. How do you approach those? I had the benefit of our conversation yesterday, which leads me to believe that you are concerned about China and India border issue a lot more but I’m just trying to understand from you, let’s say place Shankar Sharma in July when you were not as concerned about the levels and the conversations that you had but the narrative of how the GDP is not performing, the earnings may dip down again, certain other things that are happening and the market still went up. What’s the mental model when you approach such a situation wherein the news flow around the economy, not necessarily just earnings, is all very bad? How do you then invest?
So for us, the whole strategy, I’ve always said and I always keep telling the younger members on our team is that it is better to give up a part of the gains, especially when you have substantial gains. Like we have substantial gains in India and globally, massive gains –then it’s better to be conservative and let go of a bit of the remainder rather than try and max out a trade to its entirety because there is no way on Earth that you’re going to be able to max it out. The central mantra on which we manage money, I manage my own money, is loss aversion because remember that as human beings $1 or a rupee of profit doesn’t give us as much as pleasure as a rupee of loss gives us pain. So, if you understand that basic psyche of investing, your entire model becomes how do I avert the big losses? To me, the big loss scenario happened in February when it was very clear that there is a major problem building. Let me give you a bit of backup. When we were sitting in February, looking at all the data on Covid and markets, etc., one of the central reasons why we exited a lot of positions on the equity side and a lot of bond or fixed income towards the end of February and beginning of March was apart from all the data, it was also the fact that globally, we were up 40% in 2019. When you have a blowout year like that and it’s not just us, I think most markets were around 25-30%. We did a little better but the point is when you’re coming out of that kind of a year, everybody’s pumped up, everybody’s complacent, everybody’s saying 2020 is going to be even better but the reality is that you rarely get two back to back years of that time. The only time I remember is 98-99 and 2007-2008 and if you see what happened at those two points, right? So I was very concerned that we are all feeling very fat and not so hungry anymore. Then I thought something will happen which will shake our complacence and when the Covid data started to come out from middle of February towards the end, I said, Okay, so now I have my villain. This is it. Markets were anyway poised to go down but we needed a villain to fix the blame on. We have our guy here. That was the trigger. So that’s the mental model that you want to be averse to making big losses. That’s at least the way we approach things, always.
Are you feeling the same right now as you felt in February?
Yes, we are pumped up, we are feeling greedy. We are really too inflated with our own successes, which is largely a fluke. I think that’s usually a bad cocktail. So I’m concerned about myself, I’m concerned about the markets and I am concerned about the young kids who think making money in the market is like a walk in the park.
You have earlier made this point central bankers are a lot more risk in response compared to what they have been. You were alluding that point for value investing but I’m asking you if it makes a difference to the markets as well because every rally is a liquidity driven rally but the nature and the quantum of this pumping up just has gone up manifold. So could that be the backstop to steeper corrections?
Of course, 100%, no doubt about it which is why I said I don’t think tech or global markets are going to become a bear market, I’ve not made that case. But the case I’m making is that a 40-50% rally deserves and merits a 10% or maybe 15% pullback. But when that happens that will look ugly. It’s be very ugly for the U.S., it’s not been so ugly here because we have not risen so much we haven’t fallen so much but when that happens, it will look like a bear market. It may not be and will not be a bear market but a 30% fall for all practical purposes in individual stocks because the headline index falls 10 and many stocks that are popular will fall 30, it will look terrible. It’s not going to be a bear market because at these low interest rates, I do not see the case being made out for any other major asset class. So, there is no bear market coming up but it will look like a bear market when things tumble off 10-20-30%. So that’s my short point. I’m not making a case for a bear market, I am making a case for a significant pullback but hey, God willing, it doesn’t happen, that’s great. We will keep riding it but we should not stop becoming concerned about the markets and about the money that we’ve made because it’s been really too easy.
Are you kind of parking yourself in non-equities in a slightly bigger fashion than what you were say maybe in August?
Yes, very much. So tactically, we have shifted. We do that whenever we see all these things I’ve discussed. So we now have more commodity, we moved the dial a bit, we have more fixed income. We dialled back on tech, as I said with these couple of friends of mine making crazy amounts of money. I don’t want to call them shoeshine boys, they’re very well-off bankers. But frankly they are totally clueless about the option market. So we dialled back on risk, we dialled back on tech which is why we have weathered the last 15-20 days of this massive fall and we are reasonably okay. I think that strategy still needs to be in place. In India, the small-cap is another area where it automatically raises my red flags because each time this group starts to do what it has been doing, we saw that in 2017 right? It was an absolutely mad year, a 60% move in the small-cap indexes and stocks had gone up two-three times. Since then, it has been an absolute disaster of an area and it is forced up now. We have quite a bit of it, we are participating but we are always sceptical participants. So, that’s the other area. So I am concerned about the crazy valuations in small caps. They are just flying off the charts all day long. I mean, there is something called the API trade which I have no idea what the hell it is because these kinds of stories keep floating around. So, we have participated again. Remember that we play everything but we believe in nothing. So, we are right there, we made a lot of money but hey, who knows when from China things will move to India? But it is a good story for now and we are playing it but these stories can sour, right?
While you always say that you are the hare if I’m not wrong, right? You’re not a bull or a bear but a hare, and you are talking about tactical calls but in your own admission, you said that you’ve been an early investor of Amazon, Apple and you’ve probably held those stocks. So somewhere in your portfolio, are there businesses which you may be buying and holding for a really long time?
No, absolutely. So being hare-ish doesn’t mean you trade. It only means you keep re-evaluating everything without being a blind bhakt (intense follower). So, Jeff Bezos has made me a huge amount of money but am I a bhakt? No, I will keep evaluating the guy; every quarter he has to pass the test. If not every quarter, maybe every six months. So being hare-ish only means you are alive and grounded rather than being a bull or a bear that are very fixed, they’re big animals. As I shared that up until Aug. 31, our strategy was very different as compared to what it looks like 15 days later. That’s what I called being hare-ish, and we were on that strategy for a pretty long time. It has worked well for us, we will change direction quickly if things change, which a big bull and a big bear cannot because just the momentum of their mass is so much, they will just keep going down like a train, that is not us.
The reason why I asked that question was that a lot of people have said that because of this whole belief of China plus one or what have you and companies are getting orders as well, there could actually be structural shifts that are probably happening in pharma, specialty chemicals, or maybe even IT for that matter, because of the global tech up move there. So do you believe that these will sustain and therefore even if you have a hare-like behaviour, you might want to not veer out of these themes which are starting to form too much?
So we played this theme for far longer than most people have opened their demat accounts on the show. So we identified the chemicals trade back in 2013. The China shift to India trade and that has been absolutely mammoth. The stocks are up 50-80-100 times in the last seven years, specialty chemicals wasn’t really a hot sector back then. But now it is one of the hottest like tech but we are again on a pure chance – we’re speaking to a company and we get to know stuff and that’s the way it was. So, we are playing it but like I said we play everything and we believe in nothing, we will see it when data accurately changes in favour of India getting all the benefits of all these. Even in the last few years, we have heard a lot of these stories like Make in India and this and that; up to a point stories are great, but sometimes we have to look at the reality.
So I just happened to read one of the comments and that person asked that for a retail investor who’s not necessarily invested in a fund, how does that person take a call of shifting from equities to commodities to some of the other options? What would your advice be?
Look, as a retail investor, you really cannot, you don’t have the tools or the even the time because these things require a lot of time, a lot of things to understand and this knowledge will build over decades, not just by reading a couple of books. I mean, the simplest thing is not to get overexposed in general to one popular theme, be a little careful, keep dialling back on your equities. So let’s say you started with an allocation of 70% to equities and 15% of fixed income and 15% to commodities – just giving a broad number, I’m not recommending this – and because of the price action let’s say the equities have now become 90%. That means it has squeezed out the other two sectors and other two classifications into a very small part of the pie chart, then automatically be rescued by taking some money on the table and redialling it back to a 70. If you keep doing that and keep redeploying that excess money tactically into safer areas and all that, what that will do for you is one simple thing – it will make sure you don’t go bust. It’s back to my same theory of loss aversion. So try to always think where can I lose 50% of my capital. If you see that risk building up, dial back. You don’t have to max out the trade, you don’t have to squeeze the lemon till it becomes bitter. You don’t have to do that. This is not a game of needle point precision. If you do this basic rejigging of the dial, you’re still going to come out far ahead of a lot of other people who are just a one way bet on a particular asset class. Just follow that discipline and then I think you will you still do a very good job.
A throwback that a lot of people would give Shankar just playing the devil’s advocate is that mutual fund managers don’t have the mandate to take cash calls. Now, do you find that a bit of an excuse really but a statement which is not necessarily correct because funds can have choose to do that right sit on some bit of cash as well at a point of time and take a cash call. Any thoughts here?
You don’t have to take cash calls. You can write covered calls, you’re allowed to do that. If you think that the market is going to tank, make covered calls, you’re allowed to do that. So, there are many ways to skin this cat. I mean if you say that you don’t have the mandate then you jolly well go and get the mandate because you chose this mandate, the investor did not choose this mandate. You wrote it in your offering, the document and I will not take the cash call. You should have written it. Don’t make a virtue out of your problem, I mean you have written it, you change it. The point is when you change it, will you be able to implement it. So this regulation thing or my internal boundaries is all very disingenuous.
You’ve spoken in the past about gold. Do you reckon that Indians if they have some bit of gold should hold on to the portfolio or any recommendation about what percentage of the portfolio?
So, percentages are a very different animal. I don’t want to go there but yes we are bullish on gold, we have been bullish on gold. This year itself we have PMS trade equity and a tactical PMS. In the tactical one, we have had I think 20-25% consistently through the year, and on at least Nifty basis, gold has beaten the Nifty hands down this year. I think in the gap of maybe like 20-25% between gold and the Nifty’s performance, we have tactically kept gold and we remain optimistic on gold for the foreseeable future. But then, remember, please take your own counsel and advice. This is our view; we are hares. If something changes tomorrow don’t come and tell me that you also sold me a lemon.