Interviewing a Rich & Anonymous Investor

This guy is financially independent. He prefers that I don’t call him rich. 🙂 Manages an 8-9 figure portfolio for himself and family. Is a full-time investor. Straight talker. Is smart and extremely sensible when it comes to money.

So I decided to interview him.

He agreed to answer my questions but only if I did not disclose his identity. I didn’t see it as a problem. Seemed like a small price to pay for the learnings.

So I will call him Mr. Anonymous Investor (or for simplicity, Mr. Anonymous).

Since I can’t tell anything more about him, let’s straight away get into the questions…

 

Dev – Who are you? Tell us something about your story (obviously without disclosing your identity).

Mr. Anonymous – I am an economics graduate. In my earlier avatar, I have worked in the financial space. My past experience increased my understanding of the business and of course starting capital.

I have been married for 15 years now. My wife is an MBA and works with an NGO. We have a lovely daughter with many years to compound ahead of her.

 

Dev – So how did you become a full-time investor?

Mr. Anonymous – I had a very frugal lifestyle then. My wife was earning and she had some savings thanks to her Dad and her high salary. I thought that I could earn enough from equities for daily chores.

I found investing as very intellectual relative to running own business. Operations eat up a significant portion of the time and effort of a businessman. While business may earn high ROI in initial years, over time it may come down to earning just average ROIs.

So I was of the view that if I could manage to earn above-average returns from equities over a longer time frame, I could probably be as rich as a businessman.

 

Dev – How did you invest when you started (even before becoming a full-timer) and what has changed now?

Mr. Anonymous – I started investing based on the names of the companies and familiarity. I hadn’t mastered the behavioural element required for investing. I used simple and widely visible business to invest in. I missed Infy, Satyam and the likes. (Later I did buy TCS in IPO and kept on adding; I still hold it).

Then I picked up combining Low PE and High ROE strategy.

I gained confidence and decided to shun the job and pick up full time investing. I didn’t have any track record when I left my job. I had no recency bias or overconfidence when I became a full-time investor. I solely believed in my understanding of the business and had a decent starting capital.

 

Dev – What is your philosophy when it comes to money and investing?

Mr. Anonymous – About money, I think people don’t have set goals about why they are saving or investing. Many want to just earn later to park it in bank Fixed Deposits to earn monthly interest income or to buy some Real Estate. I don’t understand this fascination and such comfort. It’s just mental masturbation of bank balance.

I invest for roaming across the globe and retirement. I have achieved my retirement corpus long back.

So currently I am helping many friends and family to invest in equities through index funds at least. I have Gold around 7-10% of networth for currency/govt. risk. Rest is all equities. I am excluding my occupied house from networth calculations.

Further Reading – Using Gold ETFs & Gold Bonds for Long Term Portfolio.

Currently (in early May 2017) I have almost 25% in Liquid Funds due to lack of investment opportunities.

My investing philosophy may or may not suit all investors.

I usually scan companies that are currently undergoing some pains and trade at low multiples on cyclically low earnings. But once bought, I tend to hold them over the long term.

But understanding management is not so easy. It took me 5-6 years to understand various kinds of managers. People often consider management good if he is growing faster than the industry. But I try to see what he does in downcycles. It’s better to assume that almost all managements are frauds at the start. If I like the valuation I tend to take a 3-5% position. If I find management great during the holding period, I increase the allocation. I may pay a higher price also if I believe the management is focusing more on ROE than revenue growth.

Occasionally, I scan what other research analysts are recommending and often get one or two ideas from them. I have benefitted from some advisors and a few MF monthly portfolios. I have subscriptions of a few good online resources. I also follow a few good fund managers of decent and process-driven AMCs.

 

Dev – Concentrated or Diversified Portfolio? Why?

Mr. Anonymous – Ofcourse concentrated 🙂 I tend to hold around 10-14 stocks. But it may happen that two companies are in the same sector; though these companies may not have the same business model even if they belong to the same sector.

But I recommend early investors (typically having 1-3 years’ experience) to practice diversification. Not very large diversification but 20-25 stocks.

You also need courage to hold stocks in bear markets. If you hold 10% in a stock and it tanks 50%, you question yourself and move out at a loss. The stock may stay there for 2-3 years before it bounces back to desired levels.

People really underestimate the emotional effects of drawdown and its impact on long term portfolio returns. Having a diversified portfolio of 20-25 stocks would give you the courage to hold onto your favourite stocks rather than losing patience and selling it all at a loss. This typically happens during market corrections (like in 2005, 2011, 2013, etc.)

 

Dev – Tell us something about your investing home runs?

Mr. Anonymous – Most home runs have happened in asset-light business and secular long term trend. Luck part being that it experienced steep growth during my holding period.

I had one leading telecom company for 5 years, two housing companies for some years, one auto company, one building material and one information services company. All had underpenetrated markets. So long term growth is still there in all of them but it will be slower than the past. Having a potential market is not enough, having the ability to scale up fast is the key. Cadbury and Kellogg’s took years to scale up despite big potential, but some grow very fast which is part luck.

 

Dev – Tell us something about your investing mistakes?

Mr. Anonymous – Mostly asset-heavy and commodity business have given me nightmares (like GAIL, etc.). My mistakes have been buying a metals company thinking that it can manage to turnaround. But commodity cycles may take longer to reverse to the mean.

Also, most asset plays have given me some nightmares. Nowadays I prefer to invest in asset plays only for the short term. If the valuation gap is not closing in say 1-2 years, I move to another undervalued stock.

 

Dev – Do you regret any financial decisions in your life?

Mr. Anonymous – I have been lucky to have made major decisions well. In hindsight, quitting the job and practising full time investing was very beneficial to my family.

I can spend time with my daughter and my wife can continue working in NGO. I don’t like to manage the money of people I don’t know. It becomes difficult to communicate why we are underperforming or why we are not picking stocks now.

I don’t want to slog very hard as I have already reached my goal. I manage many accounts for free. Most of my friends don’t pay me for mutual fund recommendations.

 

Dev – You are a full-time investor. And one of the hardest things to master for professional investors is coming in each day for work and doing nothing. What’s your routine?

Mr. Anonymous – I have rented an office space in my friend’s commercial complex. I typically work from 9 to 5. Sometimes, I prefer working from home. A lot depends on what mood I am in. If I feel like reading books I stay at home, if I am researching a company, I prefer to do it alone in the office.

On a daily basis, I check my watchlist, 52-week losers, 3/6 month losers. I also check the promoter’s buying and selling activity. Every month MFs publish buying and selling reports, I do check once in a while.

 

Dev – How do you analyse businesses worth investing? The process followed and what goes into your ‘Too Hard’ side of the table?

Mr. Anonymous – I don’t usually believe in fancy stories of turnaround or value creation. Why should I take a businessman’s risk when I am not in control of things? I rather stick to established business models which have the ability to come out of temporary stress.

Sometimes, I go through a good fund manager’s monthly report. Most of the time I reject what they are buying. Occasionally, I get 1 or 2 ideas worth exploring.

One such example was Power Grid Corp by a noted fund manager. Though I bought the FPO based on an online advisory’s recommendation, it was that fund manager’s activity that led me to dig more. However, I sold off the stock early as I got another stock idea.

Too hard bucket for me has been asset-heavy business for now. Since the beginning I haven’t liked conglomerates. Conglomerates have weird cash flows structures and promoters pursue their dream/pet projects. I don’t wish to participate in the promoter’s unrelated diversification. If promoter happens to be good, I rather enter later once he proves to be good. People are bullish on Piramals as if he has cracked Real Estate model already. As if he can’t make mistakes. As if he is Warren Buffett. 🙂

 

Dev – And once you have shortlisted the businesses, how do you decide which ones to buy?

Mr. Anonymous – I see 50% upside in the next 2 years before I buy a stock. If it’s a stable business, then I look for 15% 5Y forward CAGR from today’s price. I don’t fantasize multibaggers. I stick to basics and keep finding new ideas.

Multibaggers happen in hindsight. I don’t build stories at the time of buying. While it’s true that 1-2 multibaggers can change your life at the time of purchase but you won’t commit 10% of networth because only in hindsight one would know which one of it was a multibagger.

I rather follow a process which will continuously help me generate above average returns rather than having the anxiety of finding a multibagger every year.

I believe Joel Greenblatt’s Little Book and Pabrai’s Dhandho Investor are good starting point.

 

Dev – How much returns should one expect from equities in the long run? How did you arrive at that figure?

Mr. Anonymous – People should check inflation numbers. Yes, government numbers can be fudged but you can work with proxies. Use 10Y Bond rate of 7% and add to it GDP growth of the country. If we say GDP growth rate is 5%, the average investor would earn 12% CAGR.

But add to it sticking to good companies and pursuing contrarian investing, one can add 2-3% more. This should be the starting point for filtering out ideas.

What I insist most of my friends and followers is to first try to generate market returns for yourself. This will not scare you away from equities.

While returns are important, more important what percentage of assets you put in equities. So index fund will give you courage.

After that, play around with new process on a small portion of your capital. Then slowly move more capital to that process.

Don’t jump into growth or value investing/concentration from day one. While a bulk of the portfolio will be earning some returns from the index fund, you will not have the fear of missing out. It’s ok to miss out 2-3 years of high returns. In 10-25+ years investment horizon, it will be a small blip. Don’t ruin future returns regretting over missed opportunities.

 

Dev – Your message to those who say getting 18-20% returns is easy?

Mr. Anonymous – Most businesses would grow at a nominal GDP growth rate in future. Occasionally one would find a business growing faster than that but again he wouldn’t have full networth in the same.

On top of it, most mutual funds holding 50-60 stocks claim to earn 18-20% which looks impossible unless the economy grows at that pace going forward.

Someone with 10 stocks may as well grow at 18-20% in short-run but over the long term, it will reverse to the mean.

Blow-ups happen! Shit happens! No one is as smart as or as lucky as Warren Buffett, till now. Don’t have the survivorship bias.

 

Dev – How to ‘actually’ be greedy when others are fearful and vice versa?

Mr. Anonymous – First of all one has to realize that he is holding a diversified portfolio of 15-20 companies. Few would definitely drown in next economic slowdown but some would rise.

If most of the stocks are quality (No debt, high ROE, asset light), then a high percentage of the businesses would come out of the economic slowdown. This will give you courage in buying/averaging those shares during market corrections.

I was scared but I did average most stocks in late 2008 and early 2009. I had started buying stocks much before than the actual bottom.

Stocks had fallen 20-30% after my first purchase. I went on to buy Bajaj Auto, HDFC Ltd, LIC housing, TCS, etc. I knew some would not do well. TCS and INFY had gloomy prospects given where BFSI stood in the US then.

But then I wasn’t looking for a winner in every stock. If you look for a winner in every stock, you end up missing most bargains. Most bargains are available due to uncertainty. Uncertainty is the most favourable time to buy. Of course, one may start with just 3-4% allocation and once uncertainty fades out, average up fast.

Same ways, realize that very high growth is not something you should assume over long periods, there will be some exceptions like HDFC Bank or Kotak but I won’t hold on to such stocks if prices factor in very high growth rate. I start trimming the position. Just like buying, I sell too in a staggered manner. If I really like the business I don’t sell out completely and may stick around with 3-4% allocation and later add up when the prices return to normal or bargain levels.

Investors should reverse calculate what growth rate market is assuming. Read Expectations investing by Alfred Rappaport.

If you believe the company can enjoy 30X PE due to growth, take the entire growth period and apply 15-18X at the end of that year’s earnings. Refer to Prof. Sanjay Bakshi’s Relaxo valuation. Very simple way to value a company. This will give you reasonable valuation and reality. Don’t fool yourself with growth assumptions like 25% for 10 years. It isn’t easy and no company can do it.

Also, don’t have a bias for your portfolio companies. Most business would enjoy 14-18x PE only after growth normalizes. For example, if we see V-Guard, Nerolac, Havells, they are being bought as hope diamonds for growth. If I reverse calculate, V-guard should grow at 30% CAGR over next 5 years to justify today’s valuation. Similarly, Dmart and TVS Motors are steeply priced. Most consumer brands including consumer NBFCs are steeply priced. I don’t understand that in an era of low income growth and poor employment how would these companies grow at such high rates for long periods.

So when I say the market is overheated, third-grade SIP sellers get offended and abuse me for timing the market. 🙂 I ain’t timing the market, I am valuing a business and it’s not making any sense.

If you ask your customers to hold on to expensive stocks in the name of not timing the market, you are doing a disservice to them. Why do you even exist if you can’t help move out of pure equity dynamic or balanced funds till the time froth settles? Or simply, even you do not understand valuations or investing.

I was very lucky to have exited significant part of the portfolio in September 2007. Though I missed the BIG rally till Dec’17, I was spared from steep drawdown. That is why I could immediately start buying in mid-2008. Though I was early in picking stocks, I kept on buying till 2009. Luck always favours the brave and prepared. Those with ‘don’t time the market’ philosophy lost many clients during that period. Equity industry has lost those clients forever.

I just hope that period shouldn’t come soon looking at the current scenario, especially in Mid and Small Cap funds. These funds are riskier than stocks. Their price correction happens due to illiquidity rather than fundamentals. And good luck believing that customer will hold on to them during the entire drawdown

 

Dev – As an investor, the hardest thing about investing is to find a balance between 1) riding out periods temporarily unfavorable to your views and 2) realizing your views are wrong and moving on. How should an investor maintain that balance?

Mr. Anonymous – I let it out such frustrations at clubs or twitter 😉 Most of the time, some sector or companies behave weirdly and stock prices go bonkers. I hated Jubilant Foodworks since IPO listing. It went to become large gainer. Now it has corrected a bit. Still a falling knife. Long way to go before the promoter corrects its positioning and branding exercise. The quality of food is bad and competition has increased due to delivery apps.

Similar foolish behaviour is seen in United Spirits. Baseless valuations. All stories. Currently, MFIs and NBFCs are quite buoyant. I hope I am wrong on this call or else many retail customers would burn their hands.

 

Dev – How does a common investor identify his limitations, create a simple mental framework and more importantly, implement this framework to avoid making big mistakes?

Mr. Anonymous – Avoid mistakes should be the core investment philosophy. Stick to asset light business. Diversify because shit happens.

Don’t get excited if the portfolio runs up. 1 or 2 years of run up is nothing if your investment horizon is 25+ years. One of my friend’s brother got very excited looking at 35%+ returns in Feb’16- Mar’17. I had recommended him Quantum LTE and HDFC Equity during that period. Both funds were the worst performers then. It was part luck and some common sense. Similarly one or two years bad performance does nothing to your long horizon. Most of the potential blow-ups are bought during

Similarly one or two years bad performance does nothing to your long horizon. Most of the potential blow-ups are bought during bull market and they actually blow up when markets turn. If you get scared of markets during corrections and can’t think of which stocks to pick, stick to Index Funds. Index Funds inherently follow momentum investing. It will weed out real problematic companies and yield decent returns.

Related Reading: Should I shift from Large Cap funds to Index funds?

Choosing mutual funds is tricky. Fund’s process may be centred around some philosophy. And as we know sticking to one philosophy will not yield good returns every year.

To give you a checklist:

• Diversify between 15 stocks based on quality.
• MF investors should hold 5 funds.
• They can choose an index fund for 50% capital and play around 30-50% capital in various MFs.
• Keep an eye on Index PE ratio Not very reliable indicator measure though but still some thumb rule for the know-nothing investor.

 

Dev – You have strong views against mutual funds. Why? And given that most people are better off not touching equities directly, don’t you think MFs are the go-to option for such people?

Mr. Anonymous – Unfortunately, the MF industry doesn’t work for its unitholders.

Every industry has its good, bad and ugly. But the financial industry has more of bad and ugly. The quality of advisors in India is too bad. Investors should check what qualification they have. Most don’t have experience of understanding investing too. SEBI doesn’t have good certifications. It isn’t strict and extensive. Even a 10th Standard student without experience would clear those certifications. Most of the Advisors are basically mutual fund distributors labelled as advisors.

Talking about AMCs, they are clearly favoring distributor led model. They are not educating investors when to buy and which funds to buy. Most CEOs and Fund Managers keep saying consult your advisors (basically distributors). If that is the case, why in hell are you offering direct plans? Isn’t it your job to educate investor when you have a scheme directly offered to him?

I had seen misselling in 2007 too. A few fund managers were sceptical of valuations in capital goods and infrastructure. Still Infra and Natural resources funds were sold. I have one question for them, if they are reading this blog. If you are really honest, why are you hiding your salaries, your brokerage costs, your benchmark, expense ratios? Most large-cap funds have 30% Small & mid caps. Benchmark is Nifty 50. Why? Within Benchmark, they are not using Total Returns Index offered by exchanges? Holdings in their portfolio throw dividends too (something that can be used to live off dividends in India) Brokerage paid isn’t shown in annual reports. All transactions are shown net of brokerage costs. Why? Am I not suppose to know that you could have spent 1% in NAV to generate just 2% alpha on brokerage cost? What if the brokerage cost is paid to own sister concern to improve its profitability?

If you are really performing fiduciary role better show all these details. If they are talking about good intentions, their actions tell us something else.

 

Dev – Volatility is one of the most recognizable and hated aspects of equity markets. And because of volatility, most investors do the exact opposite of what needs to be done. They buy (on fear of missing out) when markets are high and sell (out of fear), when its low. So how does one start believing and also, convince others about the fact that volatility is an aspect of risk and it is not 100% same as risk?

Mr. Anonymous – Tough question. I believe that no one can do this exactly right all the time. There will be misses.

But you need some anchors. Anchors won’t be perfect but at least better than no anchor. Like your website mentions Nifty PE ratio. It’s futile to buy equities beyond 22X despite a longer investment horizon. That part of capital will compound at a much lower rate. Anchors help in judging future course.

One should have simple thumb rules or mental notes. The note can be as basic as this:

“Market corrections leads to fall in valuations of the company. The business owner will not give up working just because prices have gone down. He will work towards improving business fundamentals and valuations. Markets will eventually move up. Since we are holding a diversified/index portfolio, we don’t have to fear one or two businesses going bad.”

 

Dev – There is too much noise out there. And most of it harms those who use it to make their investment decisions. What are the few factors investors can use to improve their decision making?

Mr. Anonymous – Whatever you see around has a reason for its existence. Media exists for making money from advertisement. They are not for your help but for making money from TRP.

Brokers/MFs exist to earn fees they get and not for you. While people do know that most politicians don’t work for us, they are not able to ignore the noise from media and brokers’ house.

Just like you ignore what Arvind Kejriwal said in the last rally, ignore what stock experts like XXXXX or YYYYY say on TV. They are not your well-wishers. They come on TV to generate large AUM for themselves.

That is the reason I have taken a contrarian stance in my communication too. When everyone is recommending you hunky-dory scenarios, I warn people about RED flags and optimistic projections. This helps them get two viewpoints.

I never see SELL recommendations coming from Brokers or MF sellers. I warn people that markets are turning expensive or junk stocks are getting re-rated. I hope it helps some of them.

 

Dev – What do you find most annoying in the markets today?

Mr. Anonymous – Short term price pop excites people. I wonder what would they achieve based on just 1-2 years of good performance. One needs to have a process.

Returns from the process need not be too great but it can be REPEATED over long periods.

TV/advisory experts talk rubbish about multibaggers stories but later fail to come up with new ideas in subsequent years. Most crucial thing is to earn high returns than one is currently earnings in savings instruments.

Beating-markets comes much later, after you have mastered behavioural and valuation skills.

People are looking for 18% CAGR as if it’s their birthright.

I would ask such people what have you achieved in life, skill or position that you demand 18% CAGR? The ones who are earning are slogging day in day out and brushing themselves with knowledge every day. Even if they earn high returns, most of it will be captured by them only in terms of fees as they have done all the effort.

Why should you earn a lot? Better earn at least market return first then pursue higher returns over years by improving behavioural skills at least if not business analysis.

 

Dev – What are you favorite books on investing, money and psychology / behavior?

Mr. Anonymous – To name a few:

• Value Investing – James Montier
• Competition Demystified – Greenwald
• Little book that beats the market – Joel Greenblatt
• Common sense on mutual funds – Bogle
• Beating the Street – Peter Lynch
• All books by Nassim Taleb and Peter Bernstein
• For Behavioural – Art of thinking clearly by Rolf Dobell and Behavioural Investing by James Montier is good. It’s better to run through the list everytime you are making any decision, including buying a car or a house.
• For generic behavioural – Daniel Kahneman is good.

Other than books, one can read:

• All articles by Mauboussin & Warren Buffett
• I love hearing MIB podcasts by Ritholtz
• Blogs like Base Hit Investing
• Irrelevant Investor
• A Wealth of Common Sense
• Buffett FAQ
• 25iq.com
• Sequoia Fund SEQUX Investor Day transcripts.

 

Dev – Who have been your financial heroes? And what are the most important things you have learnt from them?

Mr. Anonymous – James Montier. I don’t have his track record but his research gives me a very good reality check. Howard Marks for Behavioral Finance.

 

Dev – What is your daily reading list? 

Mr. Anonymous – All pink papers. I skim through each one of them. But this is for someone who is full time investor looking for ideas. I have a subscription to Magzter for all Indian business magazines. I get HBR and Economist physical copies at home. Actually, my wife reads HBR but I like The Economist.

 

Dev – That’s all from my side. Thanks a lot for answering my questions in such detail. It was wonderful to have you share your insights.

Mr. Anonymous – Thanks Dev.