Face to Face with Aveek Mitra
Aveek Mitra has been one of most admired market veterans. He has been a witness to several market cycles
How your journey began?
I am investing in the market for about 21 years and previously worked in India and abroad in senior positions for about 23 years. Like any average educated Bengali middle-class with no investment culture whatsoever, I waited till the age of 29 to make my first investment which halved in no time! It was made as per recommendation of a reputed broker friend and it was my only savings. I became serious about knowing the field of investment out of desperation to recover my lost capital. But quickly it became a passion in spite of my corporate job. But the investor in me, honed its skill when I started managing real business on my own since the early 2000 as head of a medium sized organization which has grown in size. So, in fact, I worked in a multi bagger company which gave me some real insight about leading a business. Now I am also a full-time SEBI registered investment adviser for last 5 years and run web based advisory.
The best investment advice you would like to share?
To me the big picture is – In spite of everything, Indian economy doubled in last ten years and whether we grow at 5% or 6% or 7% real terms, we would double the economy in next 8 to 10 years. So, the entire Indian market would be double the size than it is today in next ten years. And note, we talk about GDP in real terms, but SENSEX or NIFTY is quoted, corporate profits are quoted in nominal terms. You get your money in nominal terms and it’s your responsibility to protect and grow its value in real terms. I only understand equity investment, so my opinion may be biased, but my advice to young investors would be having faith in India and Indian businesses. There is a synchronized global growth happening after almost a decade and India would be a major participant in global growth due to its size and population this time around. We have many challenges; market may be volatile and also may come down from time to time. But directional uptrend would continue for many years. Directional uptrend is there for last 40 years, so I find no reason why it would be otherwise this time around. Take help of good advice from whomever you feel like and you trust, and who knows investment than blindly following some tip or media news.
Does one need to be a quant whiz or a mathematical genius to be good at value investing?
I don’t really know what exactly “value investment” in today’s context is. There are multiple definitions. To me, generating absolute long-term return on investment year after year, irrespective of market cycle is all that matters. I think a good grasp of finance and accounts is desirable and understanding of the business where one is investing is essential. I think it is ridiculous to think that maths or quant would give an edge in long term investing. In that case, computers / AI / Robots would be beating us hollow very soon. And I am certain this is not going to happen anytime soon. This can help in the decision making manifold, but in no way, take away the job of making “decisions”.
Is “value investing” a good investment strategy for goals like income during retirement years?
As I said I am not very clear of the definition of “value investment” but if that means buying a business either anticipating its future growth or identifying that its present price is less than what should it ideally be then I think it very much sums up all types of investment. Anything else is either speculation or gambling or something, I don’t know about. If we accept the above working definition, then I think it is the only way to increase and preserve your wealth and translate that into income in the twilight years of life. Here the underlying assumption is there would be no war or serious social strife or law and order problem which renders the market non-functional. And I think we can safely make that assumption. And if that assumption fails, all types of asset class would fail. In either case, investment done with prudence and patience can generate inflation adjusted income during retirement years provided you start early.
What do individuals need to learn before they start practicing value investing?
Here I have an opinion; I don’t know how you will take it. I don’t think everyone needs to learn everything. I don’t know anything about the profession of Medicine, Law, Plumbing or Carpentry. If I need help, I go to a doctor, lawyer, plumber or carpenter. Why can’t then I depend on a good investment adviser or a Mutual Fund or a person who knows the subject? No subject can be learnt overnight or without passion. And very few individuals can have the patience, perseverance and most importantly passion to be an investor. In that case it is always advisable to seek help and guidance.
Also, everyone can’t be an investor …. Like everyone can’t be a singer or a painter or a marathon runner. It is better to give it to someone who is better at it than to try it oneself in a mediocre way. Ultimately an investor should look for how much he invested and how much return, he got over 3 – 5 – 10 year period. At most he should measure performance of the manager, managing his money. I honestly think a lay person does a great disservice to himself by trying things on his own. I may be biased here as I run an advisory myself. But it is my honest opinion.
Should individuals modify their investment styles in a bull market and a bear market?
I think it is important to identify market cycles …. It is impossible to forecast precisely, but unless you realize quickly the market and economic cycle you are in and unless you align your investment strategy accordingly, you would significantly lose out in generating the return on investments you expect out of your hard-earned money. Imagine someone invested in IT and Pharma for the last two years as a seemingly good value investment, then possibly he would be repenting today. Conversely, if someone invested in Infrastructure or Metals in 2011 – 2014 periods, possibly he is out of business today! So, in short, to me identifying market cycle as early and as quickly as possible, separates the men from the boys.
Warren Buffett has often talked about “moats” or sustainable competitive advantages. Could you explain this concept?
I think enough is written about it and honestly, I have nothing unique to share. However, I do make a significant distinction between a “moat” and “competitive advantage”: To me moat increases with the passage of time and competitive advantage decreases with the passage of time. To me, the moat is akin a “network effect” or a “positive reinforcement loop”. Take an example of Google or Facebook or Coke — With every passing day it is becoming more and more impossible for competitors to dislodge them. I feel there are very few companies with real “moat” in that sense. Only a structural shift in consumption pattern like preference for healthier food can dislodge Coke or disaffection to engage in meaningless banter can dislodge a Facebook.
Competitive Advantage erodes with the passage of time. Like China had a competitive advantage of a large pool of cheap labor and shifted the entire manufacturing base within its border, but with the passage of time, many factors start playing out like labor cost, environmental cost, compliance cost etc. which is shifting the manufacturing hub elsewhere. Or take the example of Indian IT services companies … English speaking, reasonably educated, cheap white-collar jobs … the mainstay of Indian IT services are facing serious existential threat within a span of 20 years as the arbitrage is going away. So, in one sentence, to me, Moat is synonymous with Network Effect or a positive reinforcement loop and Competitive Advantage is synonymous with Arbitrage Opportunity.
What are the essentials of due diligence when investing in any stock for the first time?
I think promoter quality; nature of business and valuation are three most critical things. You can’t change the promoter and you can’t change the price market is offering you at a point of time. For the first, you need to use your investigation and networking skill and for the second you need to use your discretion of whether to buy or to let go …. I feel I have control only over the price I want to pay. And I feel at any point of time market offers 10 – 15 opportunities to buy at a great value. Don’t look into overall market valuation, look into specific business valuations. In bull market work gets tougher but not impossible or improbable. And business quality is critically important if you are comparing two companies selling at different valuation levels. A commodity trading business would always sell cheaper than a quality consumer brand. I guess all knows it but it is basis of determining business quality in one sentence.
What kind of stocks would you avoid buying because they are riskier?
If I don’t understand the business I don’t buy. If the company has too many subsidiaries, I don’t buy. If I don’t understand the flow of cash within the business ecosystem I don’t buy. All my mistakes happened when I tried to act too clever or too smart. Nowadays I only invest in companies which are simple to understand or where I have access to experts who can make me understand the working of the business or industry.
Could you share some of your mistakes & lessons you learned?
I made several mistakes and even make mistakes now. It is impossible to try to be mistake-proof …. One type of mistake replaces with other type of mistake. When you are aggressive you make mistake of losing money. When you are conservative, you make the mistake of losing the opportunity. I had several mistakes earlier (and even now) of selling a good company early. I think I always have a fear of carrying an overvalued stock in my portfolio. What I realize is an overvaluation for a quality business remains for a long period of time. Nowadays, I am little more cautious about it. But I also realize there is no point in fighting with one’s key weakness areas. I rather try to hone the areas of my strength. So, I always try to seek for companies to shift my portfolio from overvalued to reasonably valued but equally good bets. I am still learning this process.
Which is more useful, earnings yield or P/E ratio?
I have no faith in any ratio in isolation. “In isolation” is the key word. All ratios are useful in a specific context. I generate all possible ratios if required and also have made investments after analyzing a business for just 30 minutes. When you are investing in cyclical you look into PE in one way and when you invest into a consumer durable business growing at 25% but selling at 45 PE in a very different way. PE for a debt-ridden company infra company to be looked into differently in upcycle than in a down cycle. So deciding the context is more critical then if you are in the game you understand what are the things to look for and where to look for it.
With so much publicly available content, the information edge is no longer there. With so many highly educated & smart investors present, the analytical edge is also no longer there. So how can you be confident that your own assessment is correct while the market is wrong?
To me, an investor should have a mix of arrogance and humility at the same time. The ratio is a matter of personal opinion. But unless both are simultaneously working inside you, it’s very difficult to be an investor for a long time. Arrogant to go against the crowd and humility to accept and admit and act quickly if you found crowd is right and you are wrong. It is the toughest mental game. I claim no mastery over it, but I have identified it as the key area to work on continuously and dispassionately.
What are the key attributes of a great investor?
Since I am no way a great investor so I really don’t know. All I know is there are 100 ways to make or lose money in the market. You need to decide how you want to make or lose it!!!On a serious note, an investor can be considered very good if he can generate consistent above average return on increasing sums of money over a long period of time. An investor like me who don’t manage or advise billions of dollars, it is relatively easier as we can get in and out of stocks much more nimbly. Smaller size gives a specific advantage to us and that should be utilized to the fullest. Here we are at an advantage over a regular mutual fund.
For a non-professional investor, what are the most under-valued asset classes and best funds or mechanisms to invest in them with a buy and hold mentality?
The stock market is not gambling den or a path to get rich quick, also not for excitement. It is a place where you can create your corpus depending on your investible surplus slowly over a longer period. And the market would continue to give opportunities to make handsome returns if you are disciplined, hard working and follow a process matching your personality. I earnestly suggest all small investors and savers to participate in the market in a way he is comfortable.