Nilesh Shah says that one has to imbibe discipline to make the right
decision, whenever it's required.
Executive Director in charge of Equity Strategy at Kotak Securities,
Nilesh Shah told CNBC-TV18 that one has to imbibe discipline to make
the right decision, whenever it's required. He also suggested not
putting an emotional attachment to stocks, would help to make rational
calls.
Excerpts from an interview given to CNBC-TV18
Q: While you were young, you wrote an essay called 'Mobilise Resources
for Housing'. So money and management came to you pretty early in
life?
A: Yes, clearly I believe that at the end of it, India is a developing
nation and most of us belong to a middle-class background and money
was a primary requirement or a primary prerequisite for that kind of a
scenario and I guess, if standards of living has to improve, if the
economy has to improve, then clearly prosperity is the answer to that.
Q: Tell us something about your first professional job?
A: Actually, the first part of my career has been in corporate finance
and I think the career in corporate finance laid a very strong
foundation for my career in the investment world. Corporate finance
really helped me to go out, look out for companies, especially
growth-oriented companies, interact with entrepreneurs, interact with
the top management, interact with the middle-level management,
understand balance sheets, analyze them and really take a call,
whether this company deserves the credit which you want to give it.
Unlike equities, debt or corporate finance, the risk-reward ratio is
not that favourable. So you really need to do the due diligence in a
more appropriate manner.
I was investing in a very small way because one didn't have those kind
of finances at that stage, but I think in a very small manner, one was
participating in various IPOs, which came into the market in those
days. In addition to that, the family always had some amount of
ancestral holdings of various kinds of stocks. So probably that was
also some kind of seed capital for me to really invest on my own.
Q: And you made the first decision to sell rather than to buy the family silver?
A: From the ancestral holding, yes. When I just passed out of my
management education and this was in 1992, the first thing that I did
at that stage was to sell Arvind Mills, it was a stock, which was
owned by the family for several decades. The family had a very strong
attachment to the Lalbhai Group. Nothing was going wrong for the
Arvind Mills Group. I think Sanjay Lalbhai was a very adored CEO at
that stage. But somewhere, I really thought that, at that point of
time the stock is definitely overvalued and probably there are many
more better opportunities in the market and I think that prompted me
to sell.
I guess it required nerve to sell Arvind Mills, which was a blue-chip
at that stage, it was like telling somebody to sell HLL 5-6 years
back. But I guess that was a very important lesson in life - that
never be attached to your stocks, never fall in love with them and you
will need to imbibe discipline to take the right decision at the right
time.
Q: The Indian capital market went through a period of great change in
1992, Harshad Mehta boom etc and you were just starting your
professional career at that time?
A: Yes I think that was a very momentous point in my life and career
because in 1992, when I did my management graduation, at the same time
India unleashed reforms under PV Narasimha Rao and Manmohan Singh.
Though of course, you didn't have the kind of council to really say
that 'yes this is going to be the great for the economy'. But I guess,
sitting out there, one could really guess that India is in for a new
historic time.
Q: So you moved into stocks much later in your career?
A: Yes, I think in the mid-90s, the Indian capital market had not
evolved the way it has evolved right now. Ten years back, the scenario
was very different. You had individual broking houses and you had very
few mutual funds. So perhaps, one thought that maybe it's not yet time
to make a career in the capital market and really at that point of
time, one believed that corporate finance is still a better place to
be in.
Q: But you were in apprenticeship, you were reading balance sheets,
meeting corporates and getting ready for a career in the stock market?
A: In the hindsight, yes. But of course at that stage, I wasn't too
sure whether I would come so close to the stock market the way I am
right now and perhaps whatever I did -unknowingly or knowingly in
corporate finance - really kind of laid the basis for a move into the
investment world.
Q: You are at Kotak now and you got your first job running the nascent
portfolio group. What were your thoughts at that time?
A: This was somewhere in mid-2000, after the market crash had already
begun and that's where really, perhaps Kotak as a Group felt the need
to kind of grow the portfolio management business and I was handpicked
within the group to kind of really head this initiative. At that
stage, it was a very nascent portfolio of about Rs 20-25 crore.
Q: Still in 2000, after the great technology meltdown, did you ever
feel that you were in over your head, picking stocks in 2000?
A: Thankfully I joined the portfolio management group after the
meltdown that had already started. So to that extent, I really didn't
have too much of problem of legacy. But having said that, yes, I think
like most funds and most portfolios, I think all the portfolios were
overweight on the technology side of it, and I think the biggest
challenge was how do you cut down your exposure? Even till mid-2001,
everybody still believed that this was the way going forward. So I
think that was really a tough decision at that point of time to make
to cut down the exposure to technology stocks and start looking for
value in the rest of the market, which at that stage, was a very
difficult proposition.
Q: So you essentially told them to sell and get into the old economy?
A: Yes. In fact, what we advised at that stage to a lot of our clients
and in the discretionary portfolios - to reduce the technology
exposure - because valuations were berserk, we were really on the high
side and there was a lot of value otherwise in the market. I mean, if
you look at the PSUs at that point of time or a lot of the old
economy, or banking stocks, I think they were terribly undervalued and
they were probably 1/10th of what the price is today.
Q: But there was contempt for commodities at that time. Did you get a
lot of grief when you made the call?
A: I surely did because it was difficult to present growth in any of
these businesses, which I just mentioned. But I guess nothing succeeds
like success and I think in the first 6-12 months, when those calls
really paid-off, then I think investors and clients really started
following and believing in whatever you were recommending.
Q: When do you come up with this investment philosophy like 'this is
the Nilesh Shah investment philosophy'?
A: If you really look at it, I have predominantly been a
growth-oriented kind of investor. I have always believed in investing
in growth and growing businesses. Somewhere I always find it a
challenge to identify scale driven mid-caps. The real excitement which
you see in identifying a company, which today is probably a Rs 100
crore topline and the immediate question you ask is, in the next 5
years, can this become a Rs 1,000 crore topline company?
Q: But your first call was value because you decided to move from
growth-oriented technology to the value-oriented businesses. So you
have that intellectual ability to shift?
A: I think when the chips are down, there is an automatic mindset
which says that probably now you need to look out for value. But I
guess, when things start really picking up, then I think the growth
opportunities really come and suffice and I think the real challenge
lies there - when things are just turning - to really identify the
next growth stories.
Q: So the first thing to look for is a macro theme, which you are a known for?
A: Yes, I have always believed in a thematic style of investing. I
have always believed that you need to really kind of get the big
picture right and after that it really comes down to bottom up
stock-taking. I think over a period of time, one has identified
several of these thing, whether it's demography or outsourcing or
infrastructure-related theme. These are very durable investment
themes, which I believe will really pan out over the next 5-10 years.
Q: But now you are looking at themes based on hardcore numbers but at
the end of the day you still like to knock management doors and meet
the company?
A: Oh surely yes and I think it dates back to a company called
Pantaloon Retail. I remember the price was about Rs 50 some four years
back, Rs 100 market capitalisation and just about Rs 100 crore sales.
I remember the annual report of Pantaloon saying very clearly that we
are a Rs 90 crore topline company and in the next five years we would
like to be a Rs 1,000 crore topline company and that's something which
I really loved and I went ahead and met the management.
Q: Who would you rate as your investment guru?
A: I have really no investment guru in mind but the person I respect
the most is Warren Buffet.
Q: What have you learnt from him?
A: Two things which are of primary importance and relevance. First, to
really look at businesses from long-term perspective and really
evaluate how businesses will pan out over a period of time. Second is
clearly margin of safety. I mean you buy into something when you have
a very high margin of safety. So these are the two principles, which I
have learnt from him.
Q: How have you applied his (Buffet's) rules?
A: I remember the stock called J&K Bank and this stock was at Rs 50 at
that stage and I saw that the margin of safety was phenomenonal
because the book value of J&K Bank was about Rs 180 a share, EPS at Rs
50, earnings track record for the last five decades, dividend track
record for the last three decades. I clearly saw that, that was one
important case where Warren Buffet's principles were really applied.
Q: What do you do when you make a call and it goes wrong?
A: I think the first thing which one must remember is not to worry too
much about your past mistakes. In the sense, don't just lie low
because you have made a mistake. I think every mistake is an
opportunity. It gives you an opportunity to learn and I think over the
last 3-4 years, there have been enough opportunities or enough number
of times where one has actually made mistakes but at the same time one
has learnt from that.
Q: Do you get out of these mistakes or you wait for the price to come back?
A: I think it's got to be a combination of both. I think if you have
really been just kind of betting on something because of some external
forces - probably some policy initiative, which was expected to happen
but which is not going to happen, then obviously, you need to kind of
really apply your stop losses and exit those positions. On the other
hand, if you believe that this particular investment idea has a value
proposition to offer and you are exiting, then I don't think it makes
sense to exit and kind of get onto the next thing.
Q: How do you know when to exit a stock?
A: I think the best barometer of that is valuation, I think there is
no other substitute as compared to valuation. I think really the
trouble isn't in terms of trying to say what is the right P/E if you
are using P/E as a right tool. Then I think from that point of view,
what is important is to really understand the long-term growth
prospects.
Q: So how do you protect against that?
A: You really need to know what's really happening in the world around
you and especially in the market because that's really what decides
prices on a day-to-day basis. But I still continue to believe that
over the long run, it's nothing but fundamentals which matter the
most.
Q: What do you look for in analysts?
A: I think most of the analysts are well qualified to take up the
positions but I think what is most important, is to really see whether
they have a flair for equities. I keep hearing this argument, that
equity is an art or equity is a science but I believe that it's both
and passion as well. I guess all the analysts have the science in them
but I think it's really the art which you need to look out for. I
think reading The Economic Times is a prerequisite but to identify
opportunities after reading The Economic Times, I think that's really
where the challenge lies and I know for a fact that a lot of my own
ideas have come out of reading the newspaper, magazines or books etc.
Q: But is your life and career proof that it's a road that other
people can travel and you don't need to be a rocket scientist to be
good in the investment business?
A: Oh yes, I clearly reflect on Peter Lynch's thoughts who said 'the
common sense way of investment probably is the best and simplest way'
and I somewhere subscribe to that view -that all it requires is to
have common sense.
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