The Indian capital markets have seen drastic transformations over the past 25 years. But then, there are some things which remain integral to making money in markets – depth of research, time horizon and longevity of capital, believe veterans of Indian markets. During the recently concluded Motilal Oswal 8th Annual Global investor conference, four of them – Motilal Oswal and Raamdeo Agrawal of Motilal Oswal Financial Services, Sanjoy Bhattacharyya, managing partner at Fortuna Capital, and Akash Prakash, CEO of Amansa Capital, emphasised the need to take a long-term view rather than looking at monthly or quarterly performance of stocks and companies. Edited excerpts:
Sanjoy Bhattacharyya: If you look back and you go back to the 1987 to 1992 phase, what are your takeaways from that period?
Raamdeo Agrawal: One of the first things which comes to my mind is that in 1987 the so-called information arbitrage, this form came into being because the stock prices were almost 10% different between Mumbai and Ahmedabad. I could go into the ring, find out the price of some new IPO, say United Phosphorus or something, and if it is Rs 40 Jhaveribhai, who is brother of Moti (Motilal Oswal), he could buy at Rs 35-36 whole lot of shares which we could sell next day. So, that gap in the market efficiency is gone.
Second, there was no literature to read. Newspapers hardly covered business, books were not available, internet and cable television were absent. Basically, the thing to read was only balance sheets and even if you read the balance sheet after 15 days (because you have to find it physically after the company has mailed it, which itself was 6 months post year-end) and bought the share, you could make money. It was that kind of an opportunity.
Sanjoy: So it was a much more slow, leisurely approach to investing. You didn’t have to be with the moment.
Raamdeo: Yes. Research was not that organised. A lot of people were not reading balance sheets or taking a fundamental call on companies.
Sanjoy: Do you think research had greater value then or great value now?
Raamdeo: Clearly, it gave a much greater value then.
Sanjoy: Now, top quality research is available, we have some of the most talented analysts available, doing all the right things. But it’s a paradox, isn’t it, that sometimes when you look back that the value of research then, even though it may have been very crude and elementary, probably had more economic value in stock selection then than it does now. Would you agree?
Raamdeo: I would think so. The basic data earlier even with the simple return on equity calculation was an insight for somebody. But now a whole lot of data with the electronic data basis, there is nothing which cannot be computed online. So, clearly that data arbitrage is not there.
Sanjoy: The 21st century investor is obsessed with multi-baggers, I didn’t hear that phrase between 1987-92?
Raamdeo: Actually, all the multibaggers were produced then.
Sanjoy: Do you think that there is something in that?
Raamdeo: I think today return expectation is very intense and much more calculated. That whole thing was very simple.
Akash Prakash: On time horizon. I think this is something true for India which is true globally, which is that there is so much information overload. If I am alluding to now that people’s time horizon has fundamentally shortened, it is not unique to India; it is true globally as well. There is so much information available everyday constantly being bombarded.
This is proven academically as well that holding horizons have dropped dramatically all over the world. Is getting information every quarter or every month or everyday necessarily a good thing? I frankly have my doubts, but I think in hindsight, I would probably be a better investor if I didn’t get so much data.
You can argue you can filter out data and not see it, but in India I find there is a lot of noise because there are 4-5 business channels, there are 5 business newspapers, there is just a lot of noise in India. One of the reasons sometimes I think that it is an advantage being based outside India.
Sanjoy: From the old days, Akash and Raamdeo were two of the finest examples of generalists. People who knew about Indian business and it didn’t matter that they were looking at a steel company or a pharma company or an engineering company. Today, you have these guys who are razor sharp and know a huge amount about very little, that is about one sector. Then, of course, to make up for that you have the strategists, who are very intelligent and they put all of this together. How does this work? Is this a loss in some sense that people don’t have that broader perspective of looking at a business as generalists?
Akash: I always believed in the generalist model that’s the right approach. I think since we tend to focus on India which is itself quite specialised, we don’t think it makes sense to specialise further within that to get into industry specialisation. But then, there are examples of both sides, there are some firms which are very successful being generalists and then there are some being good as specialists.
Sanjoy: Do you think that now in terms of research sometimes people missed the wood for the trees?
Akash: That I totally agree with you. We can come back to the time arbitrage issue again. If someone asked us for limited extent the limited success that we have had historically, it is entirely due to time arbitrage. That if you can genuinely take a 2-3 year view on something and say what is the bigger picture and not worry about the next quarter or the next month or the next 3 months, I think that is a massive advantage which is only in fact increasing.
I think the point Raamdeo has made in the beginning is probably the only advantage left to people like us is time arbitrage because research in the sense of pure analysis is getting commoditised.
Sanjoy: But there is this idea very popular in the United States for sure, this earnings revisions, upgrades, downgrades, driving stock markets and what to buy, what to sell. It strikes at the heart of what you are saying.
Akash: I agree, but if you look at people I have seen who are successful, if you look at the proprietary investors in India, or funds which have been successful. Take Raamdeo’s example of Bharti or our example in Morgan Stanley of HDFC Bank or BHEL or HDFC or Infosys, our classic example, when we used to own 14% of the company. We were able to do it because we said this is the management team, this is the market cap, this is the adjustable opportunity. And if we think that in 3-4 years, this company can become 3-4 times its size, it doesn’t matter what the next quarter numbers are. The caveat to this is that you need long-term stable capital. It is easy for me to say this because I am running proprietary capital.
The reason why our behaviour gets deviant from this is because most of the money in India at least among the domestic mutual fund industry seems to be open-ended mutual funds, transient. If you have transient money it is very difficult to take a genuine long-term view because everyone is measuring you on a month-to-month basis. You have got to move away from month-to-month measurement.
Sanjoy: Is buy and hold investing dead?
Akash: No, I don’t think it is dead.
Sanjoy: Or, it is about to die.
Akash: No, I think it depends on the tenure of capital you have. So, if you have long-term stable capital buy and hold by definition is not dead because you are matching your asset and liability. The problem is that it is very difficult to get long-term stable capital now.
Sanjoy: Do you agree with Akash?
Raamdeo: One is what is the type of capital you have, but what makes significant money is buy and hold. I think that’s the only form of investing,
Sanjoy: Anything else you would like to add?
Raamdeo: I would like to say that in the past 5-7 years, we thought at some point of time that India is really shining. A growth of 9-10-12% was possible and hence, underlying corporates will grow even faster and we will make exponential money, I think that dream was kind of misplaced. Now you have people saying that nothing can be right with India with growth projections being revised downwards. My sense is that even as the past 25 years have been very challenging and yet very exciting and prosperous for everybody, the next 25 will be even bigger opportunity.
Sanjoy: Akash, how about you?
Akash: Partly because we manage money, so partly we have to share the optimism. I still agree with Raamdeo that we have not lost the plot totally; we have the risk of doing so but not yet. But the reality is that what all people have accomplished in the past 5-7 years in India, what they have accomplished, what we were able to do in setting up a fund, it is almost impossible to do that today. Can I get a 5-year capital today? It is impossible.
Sanjoy: I hear the message, Akash. Moti, do you share this optimism because you have two guys both of them fundamentally saying yes, things are a little tough now, but the future is bright.
Motilal: Going forward, I don’t know what’s going to happen next quarter or next year. But look at the fundamentals of the business, and the savings being generated in India, although it has not seen any kind of worthwhile money going to the markets in the past 4-5 years, going by the kind of explosion we have seen in 2002-08, I think it will come back even at a much bigger magnitude. On $2 trillion economy, 30% savings are being generated and when the economy size is going to be even much bigger, the estimates are saying that in the next 25 years, it can be even 10 times bigger from here. Equities and the markets will have to face that challenge of how to adjust to that kind of money coming.
