Sunil Singhania, Founder, Abakkus Asset Management, speaks about the lessons that he learned from the equity market in 30 years, ways to create money from the market, need of being optimistic, when and how to invest and opportunities in the market among others during a candid chat with Anil Singhvi, Managing Editor, Zee Business. Edited Excerpts:

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Q: What is the biggest thing that you learned from the market in these 30 years? 

A: The first lesson is that you will continue to learn in the market even after staying here for 10 years to 30 years or more. Every day is new learning here.

The second lesson is that the market is supreme and no one here can claim that I have learnt almost everything and I am a master of the market. As there are possibilities where the person will commit a mistake, which will make him fall.

The third thing that I learnt here is, those who are optimistic in the market can make money, and the pessimist will be at a loss as they are is a habit of finding best opportunities to invest, which never comes.

 

Q: It is more important to know what must not be bought in the market rather than what should be bought. Similarly, if you wait for a time when everything will be right in the market then you will find that the index has reached the 1 lakh-mark. Explain these two things in detail for our readers? 

A: Suppose you have five stocks in your portfolio of which two have performed well but the remaining three were bad then at the end of the day you will end up in an equilibrium. However, in the second case, your returns will be supreme when one of the five stocks has done well and the remaining four have performed moderately.

Generally, you pay more attention to the loss-making stocks of your portfolio and at the same time are not able to sell them, which increases your loss.

So, if 1000 companies are actively traded then you should say no to or avoid some 600-700 stocks with a pledge that you will not have a look on them. This exercise will ease your life and then you can work a lot on remaining stocks. With this, the return in your portfolio - if most of the stocks give moderate returns and one or two turns up to be a superstar - will be the best performing portfolio. It is tuff to do so but I think that is a definite path.

 

Q: It also turns difficult because, at times, the companies that have been removed with a pledge to not have a look on them starts performing better?

A: It is not so. For this purpose, one can design an active portfolio as well as a passive portfolio. Active tracking is required in the case of the active portfolio. In the case of passive - which doesn't mean that you should stop having an eye on them - there can be cases where there can be a change in the fundamentals or outlook or management of some of the companies in the list.

There are a lot of triggers that can bring them into active coverage. But when you make a portfolio, if you can avoid stocks that can bring big losses then you are in a very sweet spot.

 

Q: Generally, people wait for the right time and cost among several other factors before buying the stocks. Do you think that such a situation can be created/comes and stocks will be available at suitable prices when everything is right in the market?

A: No. I have said several times that there are 202 countries in the world and each of them has 200 factors and if you wait for a time when all these 40,000 factors are right then you will have to buy the Sensex at Rs5 lakhs. Secondly, it is not possible that all the factors can be right at a particular time.

At the same time, you will have to track things as you can't ignore them completely like the coronavirus, which is an issue and you can just estimate things, like how big it can be or how soon it can settle down, by looking at the past and tracking the same. So, it is not so that you can just ignore these things but if your conclusion is based on any single factor then you will miss it out. I think the bearishness and bullishness are a combination of factors. One factor can't change the picture like the budget, which is an event and buying or selling the portfolio just based on the budget will hamper your portfolio. Besides, equity is about taking risks and if one doesn't want to take risks then how will you get the returns. Such people should be happy with the government of India's security that provides returns up between 6-7%. Or else you will have to take the risk, which is based on your assessment of the factor, which are playing out and the fundamentals. If you have a look India's performance in the last 25-30 years then you will find that good returns have been earned despite several negative factors. So, optimistic people can earn money via equity.

 

Q: You have managed an equity portfolio of mutual fund worth more than Rs75,000 crore for several years. So, I want to know about your fund managing style and how you make sure that your returns are better than the market? 

A: First make sure to buy the companies that can grow more than the overall basket and those whose profit growth is higher. More profit growth will increase your returns. I am conservative by nature that's why I focus on valuation whenever I look at growth because it has been taught and we have learnt ourselves that with an investment you become a partner of the company. That is what equity investment is all about. It is a case in which someone comes to you to sell the entire company and it has a value that you think that buying it is a profitable opportunity then only you should make an equity investment. Lot of time a euphoria is created which leads to overvaluation of the stock due to some charm in the sector or the company has grown by 30-40% for two years then it is extrapolated that it will grow at the same pace for next 10 years, however, few companies can achieve this fete. This creates a euphoria of overvaluation and avoiding such instances in a long term will be profitable one, however, the situation cab be vice versa in short term in which they keep performing because there is a greater fools theory also which suggest that you can make money if there is someone ready to buy your stocks at valuations that is higher than yours. This doesn't mean that people/investors are fools but you will have to have your focus on a valuation, which will pay off in the long term.

For instance, we released a note on quality in the recent past saying that there is a bubble in quality. And if there is a company that is trading at 80-90 PE (price to earnings), then you can't justify these levels until and unless the company is not growing at 30-40%. If some company is reporting a volume growth of 3-4% then how efficiently it can grow its profit and there will be a level where the efficiency will come to an end and the profit growth will just restrict to volume growth. It will make sense in the long term. So, staying calm in the volatile market is very important and you must derail yourself from your strength. So, if being conservative is your strength and seeing valuation even when there is growth then you should stick to that. Similarly, some investors are good in momentum then they should stick to that, some wants to invest only in stocks that are growing at 50PE then they should stick to that.

 

Q: Thus you will have to identify yourself and the way you want to play i.e. you are a T20 player or a one-day or Test player? 

A: I would like to say that we are Test players and are opportunistic investors.

 

Q: What do you mean by the term opportunistic investor?

A: India is a large country with the number of sectors with high-growth and they are growing at a fast pace. You can't ignore those sectors. But in this case, your investment should be a justified one i.e. if you are paying for 50PE than it will be justified only if it will bring a particular growth in future. For instance, we had a call on spirits and beer company, whose performance has been a mixed one, in which some companies have done well while others have been flattish. But if you have a look at it then you will get to know that 20 per cent of the world population born after January 1, 2020, are Indians and around 90 per cent of them haven't turned 18 yet but these things are socially acceptable, nowadays. So, it is a trend and that's why you can get stocks at higher prices in the domain but you can justify it with high growth. Secondly, when you look at some matured sector then you can get some valuation in it. And in the case of India, you have steel, banks - which are very stable and pharmaceutical sector among others. I would not say that they are valuable but there are times when the value is created in these stocks. For instance, almost every Pharmaceutical companies were running at 35-40PE in 2005-06 because there was a fast-paced growth. Then the US was hit by a slowdown and the FDA increased its surveillance, which acted as a setback for the industry and now several pharma companies are available at 15-16PE. They have changed to be a growth sector from the value sector and you can also get that value in India.

Plus, there are several ups and down specifically in the cyclical sectors. For instance, you get to know that the steel sector stocks are available at the quarter price. So, when you are creating your portfolio and if your views and thought process are clear then you will say that it is okay if the sector is down today but they are survivors and has existed for last 50 years. Its debt-equity ratio and cash flows are under control. Then you will just need an opportunity in a year or two when there is a movement in the sector as it has the capability of providing 3-4 times return to you.

So, when you create a portfolio then try to focus on the growth, valuation and an opportunistic kind of bet of 5-7%. This will help you in creating an alpha.

 

Q: Generally, you have a special insight as compared to the real investors as you interact with the management of the company and able to read the balance sheet with more clarity. So, let us know the process that helps you in identifying the stock that can provide better returns as compared to the market?

A: We have a look at the auction value of the company and is it performing well and can it grow by 12-15%. But there are certain things and if it happens then it will increase its profitability, significantly. For instance, Corporate Banks and the trigger here is the NPA provision, which should either stop or decline and the same has happened in the last two years. So that was an auction value based on which the stock prices of the bank grew by almost 100 per cent if you have a look at the private sector corporate bank. Same is the case of the pharma sector where you are aware of the base level of profit but approval of a product or two can bring a sudden jump, this is auctionability. Similarly, there is a base level growth in exchanges, broking companies and asset management companies. These things have penetration in India when compared to the world and an increase in them has huge auction value because their cost is fixed. So, every additional revenue will add to their profitability. I think, sometimes in some sector, this auctionability can give you very high returns.

 

Q: How you decide to sell the stocks? 

A: Selling is a tougher decision than buying because there are two conditions associated with it and they are:

(i) You sell the stocks out of frustration: The situation arises when you have a view on any stock but it takes time to reach there and we are in a competitive world where we compare our returns with the returns of someone else's return. And I have seen that 99% of the stocks which were sold out of frustration have gone wrong. There is a saying, "The stock does not know that you own it" and that's it is not sure that it will start moving forward when you invest in it.

(ii) Selling early: This is one of the biggest mistakes that did in my life and I have said on different public forums that Bajaj Finance and Eicher Motors which were sold early. These two stocks were bought at a very low market cap but the problem was that we made money quite early. We owned 8-9% stakes in Bajaj Finance and we bought it at a market cap of Rs400-700 crore, which in a couple of years turned up to be an Rs2000 crore market cap and gave us a feeling that a lot of money has been made. Same happened in Eicher Motors, we got a big block in 2008-09 after the lemon and it provided good returns in just 3-4 months after which we offloaded the same.

Now, I have learnt that you should analyse the factors in the same was while selling as it was done at the time when you decided to buy it.  

 

Q: Do you look at any extra factor in stock, while buying it, that can differentiate it from other stocks of the same sector, if yes, then what is that one factor and how do you identify it?

A: There are several types of analysis. Even we have our analysts who keep meeting with the company but at last, you will have to take a call. Any investor buys a stock after researching about it. Thus everyone has researched about it. Trade in the market will need a buyer and a seller, which means both of them have researched about the same and have a perspective about it. Ultimately it will depend on your perspective in terms of quality of the company, growth and sustainability of growth. So, we have developed a framework, named MEET ( Management, Earning, Events and Trends), by committing numerous mistakes in these 20-25 years. M - Management should be strong, E - There should be an earning growth, E - there should not be any setback to Events and T - Trends, which must not face some setback. These are the days when you can't exercise the age-old practice of filling it, forget it and shut it for 50 years because the trends are changing dramatically. For instance, acceptance of the electric vehicles can be a challenge for the engine and carburettor making companies, which may shut down over. So, you should be aware of that. Secondly, timing as you can't time the market but having patience in companies will allow you to buy the shares at your price, for instance, if you would have missed the opportunity to have budget then you get an opportunity to buy them on the day of the budget, when they were almost 10% low. The last is the structure: You may not get the structural stocks, which will grow by 15-20% for the next 5-10 years, at cheaper rates.

 

Q: When such a situation arises when you decide to buy maximum situation? Do you go ahead with the idea when the market is bad or your favourite stock is bad?

A: When it comes to market then no one can say for sure that this is the right time. It happens when you have an opportunity, for instance, it was 2018, just after IL&FS incident, everyone gets a brilliant opportunity to buy stocks in October. Similarly, some two-three months ago the market was very weak. But you can exploit that opportunity if you are a trader and if you have prepared a list of your favourites and can wait for my price or I will buy it now, if a reaction of only 5-7% is expected, as the holding period is 3-4 years. But you have to invest when you have funds to invest and secondly when you are pretty confident and can't see any big crack. So, I have seen that timing doesn't make any huge impact. 

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Q: Any Guru Mantra for our readers who are retail investors on how they can make wealth from the market?

A: Don't sell the winners and don't keep the losers. A fund manager has quoted, "Selling your winners and holding on the losers is like cutting your roses and watering your weeds". So, I would like to say to the retail investors that just because the idea of selling when the stock is bullish and retaining it when they are bearish is full of risk. Secondly, if you are optimistic and confident then you will make money from the equity, just give some time to it.