An MBA does not help an investor

A MBA course does not prepare a person from making mistakes in the
market. It needs more than a course. It calls for an overall
philosophy to invest in good quality businesses only.

A MBA course does not prepare a person from making mistakes in the
market, says Director and Chief Investment Officer of Franklin
Templeton Investments, Sukumar Rajah. It needs more than a course. It
calls for an overall philosophy to invest in good quality businesses
only.
Excerpts from CNBC-TV18's interview with Rajah.
Q: What did IIM-Bangalore teach you?
A: I think it was a total eye-opener - different set of people, the
skill sets for different people with broader skill sets and not
necessarily focused on one particular aspect of the business but with
a broader view. Very bright people from different parts of the
country.
Q: You suddenly switched gears from being a techie to the stock market?
A: I wouldn't call it sudden, I think the reason I wanted to do a
post-graduation in management was to create an ability within myself,
to be a broad manager, taking calls on businesses etc. I think, the
stock market allows people to do that. Ultimately, we are buying
businesses and if we can visualize companies and which areas are going
to create value for shareholders and be a part of that, I think that's
very exciting.
Q: Still in 1990, Dalal street was a backwater. There was no foreign
money coming in, job opportunities were very scarce, manufacturing was
were it was, so why didn't you move into manufacturing, in which you
had some experience?
A: I think the point is, whether in you career or in the stock market,
if everyone is doing something and you are betting on that, probably
you are going to underperform in the longer-term, probably you have to
bet on something, which people don't want to be in. If, you know, all
the talent pool is going to HLL to market soaps probably, if the
better guys are going there, probably you are not going do well in
that job because they are competing against each other and not
creating that much value because there is only so many soaps you can
sell. But if you are going to go into something where there is a lot
of big potential, but it's not the hottest thing at that point of
time, it's like buying undervalued stock.
Q: But wisdom came because you have two decades of experience of
investing in the market. You were fresh out of MBA school and you
figured it out?
A: I think it's not a question of wisdom coming out of two decades. I
think it's a question of having conviction in the basic sciences or
what you are studying. I mean what you are studying and what you are
practising cannot be different.
Q: Take me back to 1990. What was the job market like on Dalal street
in those days?
A: Pathetic, private sector players were not allowed in the
investment-management industry, so I think there was little bit of
liberalisation from being a single player market, with only UTI being
there. I think they allowed some of the PSU banks to set up their own
arms, either to cater to the local money or manage some of the
overseas money in the form of offshore funds. So I think that was the
very beginning stage of  liberalisation, as there were very few
opportunities and you had to go and search for them.
Q: With whom did you have your first job?
A: It was a company called Indbank Merchant Banking Services Limited,
which was owned by Indian Bank. This particular organisation wanted to
grow in several areas, including investment management of offshore
funds. They had advertised for IIM-MBAs, so I thought it was worth
giving a shot.
Q: Did the MBA give you unlimited confidence?
A: Not really. Where the market is involved, I think any person can be
humbled very easily.
Q: So you saw that investing was pretty much at the bottom of the
1993-94 market?
A: Yes.
Q: Did that help you because people were dispirited and you were liquid?
A: Yes I think definitely it was an opportunity in the sense, that
many companies were undervalued at that point of time, whereas at any
other point of time, that might not necessarily have been the case. So
you had an undervalued market, and foreigners were going to come in at
a later point of time and take it up higher. So there was an
opportunity to get out, if mistakes were made.
Q: What was your first bet?
A: I think some of the blue-chip companies like Bajaj Auto, L&T and
some of the smaller companies, which have become very big like,
Infosys, NIIT, Reddy, Ranbaxy etc.
Q: You were one of the first to spot opportunities in that?
A: I don't know whether I was the first to spot, but definitely it was
very early - the  big run happened much later.
Q: One thing which I noticed in your investment philosophy is that you
buy big, you don't buy a few hundred thousand or say a quarter per
cent of a company, you like to buy a sizeable percentage?
A: Yes I think the idea would be to have reasonable stakes in the
portfolio, if you have too small a stake, then I think it will be very
much difficult to follow-up on. At the same time if there are only 5-7
in a portfolio, then it becomes too concentrated and too risky. So the
idea is to have reasonable exposure I think, somewhere between 25-40
stocks in a portfolio, gives comfort to me.
Q: Do you work with a top-down approach, a macro-approach or a
bottom-up approach?
A: By and large, I like a bottom up stock collection process because
ultimately we have to bet on businesses irrespective of whether the
market is doing well or not. Great businesses create value for
shareholders and ultimately it gets reflected. But however at certain
points of inflection, I think it is good to combine it with some
top-down thinking as well.
Q: Do you suffer from self doubt?
A: It's always part of the process because in the initial stages,
especially if you are betting against the market, when everyone thinks
otherwise, obviously there will be always doubt, I think if you are a
good portfolio manager, I think there has to be occasions where you
are going to be wrong as well. If you are going to be 100% right, then
probably you are not taking enough risk. And if you are taking
reasonable risk, it means there are going to be cases where you are
going to be wrong.
Q: But has time taught you to trust your own businesses? Are you now
at the stage in life that you are well tuned to your own instincts and
that you are willing to bet on your conviction?
A: Yes that's true but that doesn't mean that it becomes a cakewalk
because the market is also becoming smarter.
Q: What has influenced you?
A: I think I have been influenced by many people and of course, I
think a lot of what people like Templeton have been saying, is very
relevant.
Q: Conviction without conduct is worthless, I hear that's a favourite
quote of yours?
A: It means that every analyst or portfolio manager has to put his/her
neck on the block, and anyway I think people who take risks ultimately
get rewarded, and if people are taking calculated risks, I think it is
going to pay-off.
Q: But the market can be a fairly humbling place, I mean the guy who
is a superstar tomorrow fades into oblivion, so how do you protect
against that kind of complacency?
A: One of the important reasons why some people fade off is they want
to be superstars. In my view, it is very difficult to be a superstar
quarter-after-quarter or year-after-year because if you are really
betting on businesses, and for these businesses to create value it
takes a certain amount of time. Business managers cannot create value
overnight. The stock market has to recognize the value, if people have
patience, the result will be there. But if people just want to be a
superstar, they probably take some of the shorter term bets.
Q: In the NAV driven, mutual fund business, do you have the luxury of
time, which you are asking for?
A: I hope so. I think so far our investors have been patient.
Q: Because you have delivered quarter after quarter. What happens if
you slip-up, say for three quarters?
A: I think by and large people have been patient. I think the retail
investors are fairly patient. Some of the more momentum-driven people
can be a little impatient - I think that's where the whole
organization and the culture is going to be important - how you sell
the product, what are the expectations and to whom you sell the
product and stuff like that.
Q: Your organization is based in Chennai. Does it help being away from
Dalal street?
A: My department is based in Chennai. I think from my team members
perspective, I think it's good in many ways because if we are really
taking a longer-term view on the company, it really doesn't matter
what's happening on a day-to-day basis.

Q: Two decades into this market, is there any Sukumar philosophy that
you teach your young students?
A: There are two things - one, there is nothing like banking on your
glory. It's more of a team effort, so I think the idea is also to not
only teach others but also learn from others. Various people in the
team, whether it's the more experienced or the people who have (just)
come in, they bring a certain fresh thinking as well. But of course,
it is also important to maintain the core philosophy, which cannot
change overnight. My philosophy would be to invest in good quality
businesses and emphasise that to the other people.
Q: The margin of safety, which Warren Buffet stresses so much on, is
meant to guard against the fact that even good businesses can be
bought at a bad price. So how do you protect against those kinds of
mistakes?
A: I think when we invest in good businesses, we don't necessarily
invest in all good businesses. I think that (margin of safety) is
filter number one to look at good businesses and after that I think
that filtration moves on to various valuation methods to look at what
is the margin of safety. You can do that in two ways, one you come at
a ballpark intrinsic value, and also the more important method is,
based on the current market price, you can reverse compute what is the
growth expectations or what is the expectations of the market and see
whether a company can achieve or they can exceed or they probably will
underperform those expectation. I think in some cases, you have to
look at asset valuation as a backup, just in case.
Q: What is the best education to run a fund?

A: MBA is a useful tool because it gives broad perspective and there
are multiple skill sets that are required, but you don't necessarily
have to be an MBA to be successful. I think some of the qualities are
going to be basic understanding of economies, or how the businesses
work. Also, you should be psychologically fit to be here. If you
cannot take bets, which are going to be pretty contrary, I think it's
very difficult to sustain longer term performance and many people
don't have this quality. They might be very intelligent but they do
fail in the stock market because they want to go with the crowd.
Q: What about the soft skills like character etc?
A: I think character is very important. You need to be a simple person
with a fairly simple lifestyle. If you are here to make big money,
then I think most people with that quality become very short-term
oriented. I think money can be made in this profession, but if that
(money) is the main reason why people are here, my personal
observation is that those people fail sooner than later.
Q: Are you 24x7 stock market person?
A: No.
Q: What's your next ambition?
A: I think basically like companies create EVA, we have to create
certain wealth, which is, what is the amount of our performance and
with how much money can you create that particular performance. That
is the total wealth that we are creating for the investor.