Just be a Student, not a Guru; while being in Stock Market: Nilesh Shah, MD & CEO, Kotak Mutual Fund

Nilesh Shah, Managing Director, Kotak Mahindra Asset Management Co Ltd., talks about the mistakes that a beginner should avoid while starting their journey in the stock market, what made him stay in the market for almost three decades and his learning from the market among others during a candid chat with Anil Singhvi, Managing Editor, Zee Business. Edited Excerpts: 

Q: Tell us about the initial mistakes - you did while starting investing and working in the market - that beginner investors must not do?

A: Like other investors, my first experience was very bad, as I had to write-off almost 100% of investments. I read in Ramayana, as a child, that stones can float on the name of Ram, but, later after entering the market, I learnt that the stones can float only on Ram's name, not by the name of Ravana. 1991-92 was Harshad Mehta's time when the stock prices of many companies grew in a way as if rockets were tied behind them. It was a time, when we turned up to be a momentum investors and my first experience was that the stocks that were bought today has doubled itself tomorrow and the one bought tomorrow doubled itself the next day and so on. It gave us the courage and we never knew the way the market operates. Initial success misled us a bit and turned us into egotists where we forget the differentiator between Ram and Ravana. With this, we invested in many companies that didn't have fundamentals.  

Q: Generally, small investors buy shares that are available at cheap prices with the hope that they will double but it didn't happen or turned zero making them leave the market. Then what inspired you to be in the market despite your investments turned up to be zero?

A: Firstly, I was fortunate enough that I got a job in the financial services sector. Secondly, I was working with a company, ICICI Securities, that had a joint venture with JP Morgan and thirdly, I was surrounded by colleagues, friends and superiors who were very learned and I still treat them as a Guru of mine. Thus, such conditions were created and the global knowledge that came to me through the joint venture, colleague and my experience made me stay in the market. 

Q: Thus, your first experience was that you felt that you are aware of everything which turned up to be wrong.

A: I had misconception just didn't happen just once in 1991 but have faced it several times in life after which I fell sharply. In fact, I had heard, during my childhood, that even King Ravana's ego can't withstand with him forever but saw it personally on occasions when I got an impression that I am a 'Market Guru' then I fell on the ground in s very short time. So, I have now decided to just be a student of the market, not the Guru. It is essential to have control of your ego and greed. 

Q: Do you think that you learnt almost everything after the first shock in the market or have faced some more jerks from time to time?

A: You learn a new thing every day. We moved on after a disappointing performance of 1991 and looked at the world and understood something. Then there was an environment or the upbringing was such that made us think that everything said by white people {foreign institutional investors (FIIs)) is right. There was a situation in which we stood to talk with them even on the phone. Then in the GDR, we saw that they took the stocks of several companies whose prices did not seem reasonable to us, but, I thought that they are able to see something that is beyond our comprehension. It kept moving and a bit further in 1997-98 when there was a recession, and several white people were saying that India will turn dormant. Further in 2000, we saw Technology Media in Telecom (TMT) bubble was going on and it was an era when the rates were in increasing beyond levels. So from GDR to TMT, we got to know that who is talking is not important but what he is talking is important. It is not so that everything being said by someone above you is right/true, he/she can be wrong. So, these years have given the courage to listen to everyone but do what you feel is good. There is no such person in the market who can tell you what will happen in the entire market in the coming tomorrow. You have to do your own analysis. Thus, listen to all, and do your analysis and take your own decision. Such events gave me the courage to write - with all humility - against Jim Roger's, who is a scholar, view when he gave a sell call on India. I wrote that his opinion was wrong on India and touchwood, I have been right till date. 

Q: Let us know about the new things that you learnt post-Jim Roger event?

A: I came to know the importance/significance of valuation around 2008. It was a time when the market cap of an infrastructure company exceeded the market cap of the entire pharmaceutical sector. It seemed as if infrastructure creation will continue in India and its stocks will continue to perform. So, I learnt the importance of valuation in 2008. There is a saying in the market that price is God and that is right. But, there is a corollary to it and that is 'price is what you pay, value is what you get'. So both these things are true in their itself and I learnt their reconciliation in 2008. 

 Q: There is a fear in the market that the price of a stock falls as soon as an investor buys it and it goes up as soon as he sells it off. Tell us the way to deal with this fear?

A: Acceptance is the only solution to this problem in which an investor should be mentally prepared to face the truth that the rates will decline when he will buy those and vice versa when it is sold. It will not give a shock to him. So, I think acceptance of the reality that it is a market and it will continue to fluctuate and I am supposed to move on my own path. For instance, we never leave the train after the journey starts just because we fear the noise that it makes while starting the journey. Similarly, there are situations where either a new engine is attached to train or additional bogie/bogies are added at the end of the train and for that purpose, the trains move in the backward direction but we don't leave the train just because we feel that the train is reversing itself. You behaved with maturity during the train journey because of the expectation and realisation. Thus, you are just supposed to put the same maturity in the stock market. You may feel the noisy scene and also see a reverse gear when you start your journey here but if continue with the journey then will definitely reach the destination. 

Q: Generally, investors are afraid at the start of the journey and that's why they fear to buy costly stocks priced around Rs1,000-1,500 or above as they lose heavily if it doesn't work and that's why they start their journey with the cheap ones ranging between Rs5-10. So, let us know the way to change this mentality of general people/retail investors who buy such stocks losing their entire money?

A: Before reaching there I would like to talk about the ticket and it is essential to have a ticket before boarding the train. Thus, if you invest after looking at my portfolio then you might be wrong because you are not aware of the weight of my portfolio and the amount that has been hedged and what hasn't been hedged when I have the trading position in the same and when I am investing in it. You may be wrong if invest in accordance with your knowledge about the portfolio of some big/renowned investor. So, you must but the ticket before boarding the train, invest in mutual funds or PMA after paying for it. 

Secondly, almost everyone thinks that they are losing less by investing in a portfolio of Rs10, while heavily in the case of Rs10,000/share. So here comes realisation in the picture that you are at a loss of 100% if you are losing Rs10 in the stocks of Rs10 but you will be at a loss of just 10% by losing Rs1,000 in a stock of Rs10,000. Thus, one must understand that the common sense, which is not easily available is the most important thing. 

It was a time in America when a well know Chief Investment Officer (CIO) took his fund managers to a kindergarten school and asked them to outperform the stocks that these kids will pick. On that, the fund managers said why are you playing with these kids and asked him to bring some good competition for the purpose. But, the CIO said I am very serious and you are supposed to outperform the portfolio of these children. So, the fund managers opened their computers and created a portfolio. However, the children didn't have any such computers so they created a portfolio as per their knowledge. And after a year, the portfolio created by those kindergarten children outperformed the portfolio of the fund managers. 

The mistake was that the fund managers used their brains to select the stocks but the kids took the stocks of the products that they were using like Johnson & Johnson's soap, the product that they were eating and it outperformed. So, you should bring in the easiness and common sense of a child while investing. 

Q: How a person who is not aware of things at the stock market should start their journey here? 

A: First, you will have to decide whether you are Arjuna or Eklavya. If you are Arjun then you will have to learn lessons from Guru Drona and hit the first eye. And, if you are Eklavya then create an idol of Guru Drona and start practising wholeheartedly to learn the art in absence of the Guru. So, this is the path in which the Guru is not present to teach you is a difficult path but your concentration may help you to emerge as a good investor. Secondly, if you don't have enough time to enrol into the institute like Arjuna neither have such a concentration like Eklavya then provide your money to the professional who has emerged as Arjuna or Eklavya and invest in accordance to their suggestion. Mutual funds and portfolio management services can provide you with a tool for investment. If these things are not feasible for you then you will have to look after a Krishna for yourself who can act as a good financial advisor for you who can make you win. 

Q: But there are several people in this Mahabharata of the Market who can put Abhimanyu into the Chakravyuh. How will he come out of the same? So, should he find a way himself to get out of the Chakravyuh or will get Lord Krishna for the purpose?

A: Here you will have to decide whether you want to enter the Chakravyuh as Abhimanyu or Arjuna. Arjuna could not enter the Chakravyuh in Mahabharata but he had to kill Jyadratha and he did it. But, Abhimanyu entered it without knowing the way to break it and come out, however, Arjuna first learnt the art of entering and coming out of the Chakravyuh and had a charioteer like Krishna (Saarthi) who can take you into it and take you out from the same. So, a person/investor should decide on his risk assessment, his strength and weakness. People keep looking at the market, but, I feel the starting point is your investment objective. If I am investing for 30 years, then I have nothing to do with the current market situations as in where the market is going, is it cheap or costlier, as I have invested for 30 years. But, if I am investing for just 3 days, then there is no question of investing in equity, even though the market is growing every day. So always keep the starting point as your strength and your investment objective. Don't keep the market.

Q: Generally, those who are beginning as investors do not know whether they are traders or investors. They start trading while investing and then they turn up to be investors while trading. So, how can a person end this mismatch and recognize himself either as a trader or investor? And, how a person can emerge as a good investor?

A: Trading is injurious for the financial health of an average common man as making money by trading is a difficult task. I do remember an instance in which I met India's most successful trader, I can't name him at present but people know him, at FLAME University in Pune, where a student asked him to tell the art of trading as he wished to become a successful trader like him. To which he said, he could not teach the same to his children then how will he be able to teach him the same. Thus, trading, probably, is destiny. I don't want to discredit traders as they have to work very hard, in fact much more than the investors to emerging as a successful trader. But, I can just say that trading is destiny. 

When it comes to investing than it is very easy to become an investor as it requires three things and they are (i) make regular investment - invest at a continuous pace, (ii) be a long-term investor and don't think of 3 months, six months, a year or three but be invested for 5-25 years and (iii) disciplined asset allocation (the most important factor) in which you can book profits according to the asset allocation when the market is bullish and invest when the bearish market in accordance to the asset allocation. These are the three things which will always help you in making money from the market. 

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Q: But, the problem is people invest more on gold and property as compared to stocks but are tensed about the investment they have made on the equity market. So, suggest that ways to end the stress of equity market?

A: There is a need for realisation. You need to realize the reason that made you a good investor in real estate. It happened just because you haven't tried to sell the flat a day after you received its possession then how can I can emerge as a good investor in the equity market by buying and selling the equities the next day. Someone had made money in real estate just because he researched about the developer before buying the property, looked at his title through his legal consultant and them looked after more than 10 properties - through the broker - before settling down at one. Basically, the person has researched well on it. So, one should perform the same research while investing in the equity market instead of buying them on the recommendation of a friend or a betel shop owner. Thirdly, the person is a long-term investor of the real estate market. Maybe, he opted to buy the property to gift the same to his children. So, the same should be done when it comes to the equity market. Thus, you are just supposed to practice the same that you have tried in the real estate. The resultant of the two will be the same one.