Don't Be A Bull Or Bear, Be A Hare: Shankar Sharma's Investment Mantra

A flexible investing philosophy and developing one's own investment style is crucial for budding investors according to the legendary investor Shankar Sharma.

A flexible investing philosophy and developing one's own investment style is crucial for budding investors according to ace investor Shankar Sharma.

Sharma, Vice Chairman and Joint Managing Director of First Global's investment metric, has been one of India's well known investors with over three decades of investment experience.

In the first part of BOOM's Safe Investor series, Sharma elaborated on his investment philosophy, the challenges he has faced in his career as well as his advice to budding investors.

"My learning over 30 years of doing this is only that you will get hurt in markets if you are rigid in your thinking and in your processes," Sharma told BOOM.

"Our philosophy is neither to be a bull or a bear, but to be a hare. And the hare is always a scared animal. A hare is not big, like a bull or big like a bear. It has no natural inner strength in it. It has only fleet-footedness, a very high degree of ability to change directions, which is really in essence, what our philosophy is," he added.

While talking about the successes of legendary investors like Warren Buffet, George Soros, Ray Dalio and Jim Simons, Sharma emphasised that one cannot be a successful investor overnight.

"Things begin to click when you turn 50-51. I think it's just that the human brain becomes better. If you look at Warren Buffett, his best years were 51-52. George Soros's best years were 51-52. Ray Dalio's best years were around 55-56. Jim Simons' best to started with post 55. You need 20-25 years of data in your brain for you to be able to become a consummate investor," Sharma said.

"The brain needs 25 years of real time data for it to process and become really in tune with the market. You will know all the theory where I'm sitting, I have all the theory, all these books. But now when I read those books, they make much more sense because that time it was theory. So, you know you will need to put in that much work to 10,000 20,000 hours, then the trade, the markets, they begin to talk to you." Sharma said.

Edited excerpt of the interview follow

Govindraj Ethiraj: What has been the most reliable metric for you when it comes to spotting companies or investment opportunities over the last many years?


Shankar Sharma:
So, the most reliable metric is that I have no metric. So, you know, my learning or it was Global's learning as a firm that over 30 years of doing this is only that you will get hurt in markets, if you are rigid in your thinking and in your processes.

And by rigid, I mean, when you have a highly articulated philosophy, a public philosophy. Each time you publicly talk about those things you are in effect giving, giving the structure to your thinking, which, if things change, it's very hard to un-structure that and come out of that kind of framework of it or the rigidity as I like to call it of a philosophy. So, our learning is, and I'll tell you where it started from.

Our learning is to be flexible, and that having actually no philosophy is much better than having a philosophy. So, our philosophy is the lack of one. And we were not born this way, of course, as a firm, and the demeanour of all our people who have worked with us over the years, we have been iconoclast.

So, we are not believers, you know, in the traditional sense that, if a company tells us something, we will necessarily believe them. We have always been taught to question things.

I know it's not right to question anything in today's India. But I mean, that's the way we have been brought up in our education, throughout our lives. There is nothing sacrosanct, you can even question God, and the existence of God. So, our philosophy, the bedrock of it was obviously a lot of learning, a lot of questioning. When we started our careers in the early 90s, markets were just maturing, a lot of thematic used to come out that India is the next great story, and liberalisation will do X, Y, and Z.

And we were in our twenties, we had no other data point. And we tend to believe a lot of those things. Over a few years, we started to find that what is announced, what is professed, doesn't necessarily work out that way. Or what has worked in the markets in the last 6 months, 12 months, 3 years, doesn't mean to keep working.

And in particular, around the Asian crisis time, 97-98, when we found, suddenly, that perfectly good economies like Singapore, Malaysia, Hong Kong, even to some extent Taiwan, Thailand, they just they just went belly up. And we said that we always assumed Asian Tigers were secure, immune to such things, and How come these things have suddenly changed?

That started to plant the seed of not really getting rigidly wedded to a perspective so that you cannot change, things change, things change very rapidly. So, our philosophy and I've always said this publicly, is neither to be a bull or a bear, but to be a hare. And the hare is always a scared animal. A hare is not big, like a bull or big like a bear. It has no natural inner strength in it. It has only fleet-footedness, a very high degree of ability to change directions, which is really in essence, what our philosophy is.

GE: So when you did take stocks, or when you pick stocks, I'm assuming there is some consistency. For instance, let's say HDFC Bank almost 25 years ago, and at a time when no one including, as you said, the managing director of the bank could have bet on the company and thought that it would have become what it is. So, what was driving that?

SS: So, the look, that was a very different thing. And in hindsight, you know, it was just great stuff that you had, you know, India's best banking talent all gathered under the umbrella of a marquee name, like HDFC. He was also an iconoclast, I mean, that's a reason why we have gotten along so well with Aditya Puri for a long, long time, because he also is a plain thinker, straight thinker, straight shooter kind of agrees with us, you know, I mean, the way the way he deals with things.

He used to say foreign banks are overpriced in terms of their services. There is a big space to create a private bank, an Indian bank, which can give that and better services at a fraction of their pricing. And that was the origin model. And so, in a lot of senses, I can take credit for, you know, HDFC Bank back in 1996. But it was a very straightforward trade.

But, you know, there have been many after that, which we didn't conform to an HDFC Bank kind of pedigree. So, we changed fast enough in the IT boom, which we followed just two years after the HDFC Bank report, when suddenly all stocks started to trade at 50-80, 100, 200 times earnings. Infosys was trading, I think at the peak about 300 times earnings. These multiples were unheard of back then, it's still unheard of. But back then, in the Indian of the 90s, they were trading at 20-25 times as expensive as suddenly these companies were at 50-60. And we said that they were too expensive and they should fall and they never fell and they went up 10-20 times. That again taught us the value of remaining flexible.

Eras change, teams change. So, an HDFC Bank was very different but the tech boom was completely diametrically opposite, where all kinds of companies went up not just in India, NASDAQ everywhere, several, several times with no fundamental backing or no earnings backing them. So, you know, we remain very flexible. I mean in health, if your arteries become rigid, you die. In fitness, if your muscles become rigid, okay, you will get a muscle tear, it's the same in investing, you will get hurt if you're very rigid.

GE: But what is the underlying philosophy, Shankar? Whether it's the IT companies, there must be something that you say, 'okay, here is a company that is good, because and I'm not even talking about balance sheets right now. And I'm talking about one is the industry and you select, say spotted an industry, maybe a little ahead of its time, or taken a call on an industry seemingly ahead of its time.' The other is you take a call on the management because the numbers are still to arrive, so to speak. Or the third is that you're just looking at the price. And you're saying that, okay, even if it's high. And I think as you said before, high price stocks always deliver.

SS: Good point, actually, it's all three. So that again, comes back to my point, that we have no rigid silos, in which we will evaluate a company, there are times when we will buy a lot. Like right now as we speak, can't say that all of them will come through in terms of their stock price performance based on the kind of number that was delivered right now that is the estimate.

But for me to say that they will be an absolute certainty for them to get there, I don't know. What the fact is, there is a global move away from terrestrial businesses, physical businesses into digital businesses. In that move. It's a big macro move, we spotted in March, we played it to the hilt, and we continue to play it even now, in that there will be a few winners, but there'll be plenty of losers, but we don't care. We've taken a venture capitalist approach to the listed market for that part of the investing process, that look, this whole cloud is a massive opportunity big, even bigger today than it was in January, we don't know who the winners are going to be. So, there's no point wasting time trying to see company x versus y company. So big top down call, buy them all, don't waste time trying to segregate the winners and the losers, the pack will break away after some time

I'm nobody to make that call today, I can make a call for the big top down sector. So instead of the needle in the haystack, you pick the haystack itself. So that is one approach. The other example is Microsoft. they love it. Okay, especially in the last couple of years, let's say about three years' time.

That's a management call based on what Satya Nadella did on the cloud. So that's a very bottom up kind of a transaction. On the other hand, you have a big, global, macro trade, like an oil trade, which we played in the month of April, okay, which was I think, in the teams, and it's doubled from there. It was completely different. It has nothing to do with Microsoft or the cloud, or an HDFC Bank, or the late 90s tech rally. If I go back to a cricketing analogy, Govind, who is a complete player?

A complete player is a player who can replay shots all around the wicket, he can bat in all conditions, he can bat against spin, you can bat against pace, he can bat in India, you can back in the bat in the West Indies, in Australia, or in England, where the conditions are completely different. That is what a complete player looks like. That is what a complete investor looks like.

Give me any condition, I will at least not lose my shirt. And that hopefully I will come out ahead of even the worst market conditions and that you can only do when you have learned a variety of skills to play in any particular condition because the conditions you cannot choose. What happened in March, who could have forecast that? Impossible? We did pretty okay because in some senses, the danger was building up into protective action. Markets fell a bit, but not as much, we came back.

So those things you will need to do again, this is the 30-year journey in which we started being balanced analysts today we can understand where gold is going to go or where silver is going to go. You need to have understood the entire value chain of investing right from global macro to country bets to sector banks to stock bets.

GE: You mentioned Microsoft and you talked about cloud and cloud was one of the macro trends or the mega trends that was changing in the way computing was happening or people were using the power of computing in a distributed sense. So, Shankar when you look around, we're talking right now, you may be reading a newspaper later, watching maybe television And I don't mean news, but in general, you may be reading. So, the information you consume, whether it's coming from the markets themselves in the form of data, which is numbers, or it could be themes, or maybe conversations that people in leadership positions are having, what are the signals that you're looking for? Or what are the signals that jumped out?

SS: Let me give you the example of Netflix. I spent a lot of time in the US, for some personal reasons in 2010. And Netflix, that time was still a company sending DVDs by mail. And then they announced that they will change it and become a broadband streaming company. And it had, I remember, there were some problems with listing and with the pricing or the bundling, and the stock tanked. And those huge negative publicity around the company and all that, and I'm sitting here and saying, this looks like a no brainer, right? I mean, in 2010, you're sending you know, DVDs physically through USPS seems so 1980s and we just went out and bought it. Something as simple as that.

So, research can many times be very complicated, but many times it can just come down to a very simple thing like that stock is down. And by the way, there was only one game in town, there was no blockbuster there, you could see that streaming was going to be big, you didn't need a genius to figure it out. You went and bought the stock, I think it is up like 30-40 X, maybe more than that if you buy them right now.

So, you know, Amazon was something similar. We knew e-commerce was the thing of the future even back then. There would be bumps, but it would eventually happen. And this was the only game in town about going into bankruptcy or near bankruptcy, turning free cash positive, simple 20-minute analysis when we saw the 10 Q's. I mean, why is everybody so bearish? Because the companies turning free cash positive business, in terms of the business logic is appealing, okay? E-commerce is the way forward, there is a company, which is the only player in this whole sector turning free cash positive. I went and bought it.

So, the clues are all around us. They are, they're all there. It's just a matter of being aware and alive to it. A lot of companies have a lot of stocks, we come up with a lot of detailed work, a lot of detailed analysis, a lot of them will just happen like this, like the chemical strain that we unearthed in 2013-14, which is now the sort of API trade in India. It is something similar to that in China, shipped to India, and that was something similar a company told us. That a lot of pollution in China, in Chinese plants are shutting down and hopefully we will benefit in India's chemical companies. It started from there when we saw the stock price of all chemical companies. They were like at multi-year lows, we said with this catalyst, can they double from here? Yes. Can they triple, maybe can they go 100 times as they have done? No way we have no clue. But something as simple as that. So, this we keep our game fairly wide in terms of the catchment.

GE: I'm obviously trying to glean some direction. Here one critical input in your decisions is very, very careful listening, listening in a very, very broad sense not just through the ears.

SS: Oh yes, very much very much. In fact, let me add one other mental model that we use before going to the listening bit and which is the aversion to loss. We understand as human beings that we don't like losses, nobody likes losses, and if you look at behavioural investing, $1 of profit or rupee of profit does not give you as much pleasure as a rupee of loss gives you pain.

If you understand this one simple thing about human behaviour, a lot of investing changes from there, wherein you tend to therefore, not become overly concentrated in terms of just a handful of stocks, or you don't become concentrated in your thinking that I don't think there is any danger to a particular trend.

Loss aversion is very central to the belief system and our philosophy. And the second is that you play everything but believe nothing. So that's the other thing we will automatically play something but do we become believers in it?

No way, we will never ever become hardcore believers in that. Come into your point of listening. Absolutely. There is so much and in today's world, your search feed of information you can pick up so many things. I'll give you an example. We bought a company called Tractor Supply Company in the US.

Because a friend of mine living in Manhattan said, look, I'm moving up country over this big five-acre farm and I'm going to buy a tractor, build a farm and I'm never going back to Manhattan. I'm talking about the post COVID world.

And so, if this guy's thinking like that, maybe a lot of other guys are. We did some basic research and guess what the numbers on the tractors were just off the charts. We just went and bought it. Something sad basically, we're listening or talking to a friend he was talking about his personal life, he wasn't recommending a tractor stock. But that's how you can get some amazing ideas on this board.

GE: So, would this be not a straitjacket approach, but the traditional Peter Lynch way of investing?

SS: In part you can call it that, but like I said, we have no one silo in which you can place us so we will be a Soros in terms of getting the coal trade right or getting an oil trade, right? And will be a Peter Lynch equivalent in getting these kinds of folksy, next-to-your-neighbourhood kind of place, also, which is what I said that your strike rate will increase dramatically If you bring more and more skills into your investment game. That's the point I'm trying to make. Not at all times will you get the gold rate, not at all times will get the Tractor Supply Company, but if you are able to play the entire value chain you will get your pieces where you can make money, even in the toughest of market conditions.

GE: And when you say skills, you mean, is it the art of picking stocks in a very generic sense or is it looking at the numbers in a more careful way?

SS: I think, you know, a lot of it is numbers. But you know, over time, you realise that your brain is like -- if you go to a national park, any of them with a guide, that guy can spot a tiger, you know, like 50 metres away. And a tiger could be on you five metres away, and you will not be able to spot it because the eye becomes trained. That's what he's doing for a living, you know, eight hours, 10 hours a day. That's what, if you do something that was I can tell you from my personal experience, and I've traded usually throughout my life, except I'm in the last 5-10 years I don't trade because I don't need to trade you know, you're so immersed into that, that the trade will talk to you, it starts to talk to you, it sounds as if I have gone soft in the head but that's the reality.

It's like you know if you're a cricketer, you know, you played for a few years, you kind of know where the ball is going to come, you position a little bit ahead of where the bowler is going to bowl to you because you anticipated. That sense of anticipation you will get and which is why you will never become a great investor, a great trader till you turn 50. The brain needs 25 years of real time data for it to process and become really in tune with the market. You will know all the theory where I'm sitting, I have all the theory, all these books. But now when I read those books, they make much more sense because that time it was theory. So, you know you will need to put in that much work to 10,000 20,000 hours, then the trade, the markets, they begin to talk to you.

GE: And you in a way answered a couple of questions that were coming up and I'm going to come to those in any case, but you know, I was reminded of a conversation with a spiritual guru who said that, you know, do you know how Tendulkar bats? I mean, how do you shut out all the noise, all those you know 30,000 spectators screaming and expecting you're hoping that you will hit a six and then lead the team to victory. It's about concentration. It's about zoning out and creating your own quiet zone. So, I mean, is that what you're talking about?

SS: 100%. I am glad you brought this up. I mean, my biggest investing mistake happened in 2009 April. In fact, I had in January written a piece. And this I'm talking about the 2008 bear market and you're aware that even January, February, March were very ugly months and then from April we went into a huge rally I had written a piece in January 2009 that we are going to see a monster rally coming up sometime this year because that's how much room has been created for the market to rise. And when the time came, I went to a party and I hung out with all my compatriots in the stock market and everybody's very bearish and I came away with my brain totally corrupted. And I missed that whole smoother three months ago, the equivalent of the kind of rally we've seen now, this time and it happened in March, I will not be going to make that same mistake.

So, I remain closeted in my cabin in the office. And we just sat and look at the numbers, look at the data. We didn't talk to anybody. And you know, this has been an incredible journey. Exactly, because of the mistake that I made in 2009 April. So, the lesson is, I actually don't like talking to people and exchanging views. I mean, I found that to be highly detrimental to my own independence of thought. I like the data to talk to me, I like the market prices to talk to me, I don't like human beings talking. So, I just want to shut that out completely. And the biggest mistake I made was when I broke that rule of mine.

GE: Shankar you talked about believing and maybe, as some other people would call, it falling in love with investment. So, tell us about that. How do you not fall in love with investment? Or how do you not over-believe something that you invested in? And maybe you start doing more of that because the stock price has risen beyond obviously what you expected?

SS: Yeah, so like I said, at the beginning of our conversation. So, I started in a Jesuit school. We had an American Priest who was teaching us moral science. So, in class 7th, I remember it must have been 1977, or something. And I had just read the book Exorcist, which came out a couple of years before that. And moral science tells you God is good, God is this, God is that. And I said, wait a second. Father, I have a question. What is it? Look, I mean, I said based on whatever I have learned, worshipping the devil has far more instant rewards. I just finished reading a book and you can throw the bed against the wall, you can make a woman, a little girl into a demon, you can throw people out from stairs, outside the window, praying to God seems like a very vague goal? That there's no assured payoff. I mean, in all reality, in all probability, nothing might happen. You might remain poor. So, I don't understand why are we doing all this? I mean, why not simply worship the devil? Because there it's a very, very predictable outcome. Obviously, there are no answers.

But that's a different point. The point is, as people, you know, we've just been trained to question, so we never ever actually fall in love with something which has to do with money.

And when life itself is transient, no stock can be permanent. Right? The other important thing I'd like to highlight and this is something that I like to say very often, a lot of your investing philosophy will be driven by our own personal experiences in life. Okay, so Warren Buffett's philosophy is very different from a George Soros' system, because Warren Buffett has had the classical gold Middle America kid upbringing, prosperous father, the nice house, a small-town America life. That was like a perfect setting. So, for him, the belief system is that life is always going to be great, which is what he has kept saying it's worked very well for him.

George Soros, on the other hand, escaped from the Holocaust, his father barely made it out, along with the kids. His view of the world is extremely different. So is Andy Grove, who's a Hungarian guy who escaped from Stalin and from Hitler both and remember the name of his book? 'Only the Paranoid Survive.' So fashioned by your own experiences, my father died when I was 17. My life was great. And suddenly life was not so great.

So, I have never grown-up thinking that life is a steady predictable path. And whatever view you take today will remain permanently fixed, or ought to remain affixed to your thinking. Learn to remain flexible, because you know, stuff can happen, which happens in the markets and that thinking itself has helped a great deal in negotiating all these ups and downs of markets with a great deal of safety.

GE: Okay, it seems to me that your or anyone's personal makeup, in that sense, has far more to do with your investing style, then perhaps we think or give credit for?

SS: Yes, absolutely. You're absolutely right. People are talking about philosophies coming out of their readings or education in some form does influence it. I think you're more influenced by our own upbringing and your life's own stories, your experiences. And I as I have said, my personal experience or Soros's personal experience or Warren Buffet's personal experience, have vastly different situations. And that, you know, really and then you find again, investing in.

Have a personal game, you cannot copy somebody else's style and become true just like cricket, you can't copy somebody else's style because you will have to develop your own. So, you know, I have developed my own, but I'm not saying this is perfect for somebody else. A very different approach can, you know can work and there are many paths to heaven in investing.

GE: For those who are watching this, I mean, you know, they may be complete novices, maybe they've done this for a few years. What's your advice? You did talk about the 25-to-30-year learning curve. And that's, that's wise, but there are others, I guess, who want to maybe do it faster, maybe try a different path. One is, of course, they do it and they continue to do it. The other is they go to an expert like you and say, Okay, let me invest in your fund. So, what would you say?

SS: Well, if you can afford to invest in our fund, I mean, by all these, welcome. I mean, I can also tell you one thing, many people ask us that, why did you not do a fund 20 years back, 25 years back, 15 years back, and 10 years back, and I said that we were not ready. It's as simple as that. And I can tell you, somehow, things begin to click when you turn 50,51. I think it's just that the human brain becomes better. If you look at Warren Buffett, his best years were 51-52. George Soros' best years were 51-52. Ray Dalio's best years were around 55-56. Jim Simons' best to started with post 55.

You need 20-25 years of data in your brain for you to be able to become a consummate investor. So, you know, anybody who wants to fast forward that learning, I think it's possible, but not highly probable, you will be good, but not great. But yeah, somebody can come and invest in a fund. And you know, the reason why we are doing it today is that we have figured out with our own money, all the rights and all the wrongs, and today, I don't need to do any of this for money. I do it because I think there is a genuine need for investors to get a better way of investing than what we have been exposed to when I am doing it only when we were convinced that we have the model. And the important thing is important, that traditional model of investing, the Warren Buffett style is dead. It's not coming back.

Today with the amount of data available, you will need to modify your approach to investing and we have done so. And it's only then that we decided to actually put this out to the public for their investment, because earlier privileged information played a huge role in your investing decision. Because managements could tell people something done in private, and it was not even illegal in many parts of the world to trade insider information, or even what was inside information was a vague term, today is no longer the case. Data is freely available. In most part. It's your ability to process the data, which is a constraint. If you can figure that out, I think you can do far, far better than the old foggies who have been doing it the old-fashioned way of the 80s and the 90s.

Second point, none of these greats like Buffett or Fisher or Lynch told us really something valuable. They taught us how to pick a good company or a great company. They never told you the art of portfolio construction. After having done this for 30 years now I begin to understand what you mean by portfolio construction and in a lot of senses it is just like a good cricket team. You need an opener who is aggressive, an opener who is defensive, a solid middle order, you get an off-break bowler, a leg spinner three pace bowlers, in a couple of rounds, all-rounders, then they're never told us how you put together a symphony, an orchestra or a team. They just told us one stop, two stop, three stop -- that's a recipe for disaster. Portfolio construction has been my view any youngster listening to this, focus on buying 25 companies because you have no visibility on which of these 25 is going to become the next Apple or the next Amazon or the next Pegasus. You have no idea, no clue.

So therefore, expand the decision said include 20-25 well-chosen companies, I will guarantee you, 10 years later, you will thank me for this one advice. Don't buy single stocks, buy a portfolio.

GE: When you look ahead now, give us some very good examples of areas, sectors or even companies or individuals that you spotted. And you bet on them in many ways. What is in the listing that you're doing today? What are you seeing today that could potentially maybe interesting, maybe a decade later? I mean, in terms of mega trends, if one may call it that, that's the first question. The second one is in a way linked to this, is that you think that there are still other theories to be found? Or is it going to be for various reasons, more and more difficult?

SS: Second question is easier. We found one in Ashok Soota, in my view, again, is a very old friend, so I'm a little bit biased, but I mean, what he has done the third time over is incredible, I don't think it's got any parallel anywhere in the world. The guy is 77, and he takes his company public, which is his third big app. Setting it up at 70. This is just a mind-boggling thing. It has given us inspiration to all of us who are thinking we're getting too old. And here's Ashok Soota who comes and does it at 70-77.

So, I mean, he and Aditya Puri have been in my view, the two best managers I have ever come across and I dare say you will find very few like them globally in terms of professional managers, or turn entrepreneurs, as Ashok Soota has done now. That answers the second question.

On the first one, I am very clear about one thing again, without any kinds of caveats that you can't have visibility for 10 years in anything. With that, it's my belief that the world today, as we speak right now, is unlikely to become a multipolar world. It will just become a US and China world with the rest of the countries just being strugglers in different kinds of struggles.

You're there for advice as business people investors to really find, you know, companies in these markets, because a lot of the other markets, other countries will struggle. I think this COVID will just drive a big gap between the haves and the have nots in every state of society. And I do not see that changing, be at the country level or at the company level or even in terms of individual prosperity. So, we have to think from that angle, this is a big, big shift. And my view is that companies will benefit disproportionately, then in normal situations.

To give a parting example, if many companies in a business go out of business, in an industry, to the existing players, all that market share comes to them free of cost. In normal situations to buy 1% of market share gain, you would have to spend, you know half of that in terms of your cost. Here you're getting 5% market share free of cost. Imagine what that does to your margins and growth prospects. I think there's going to be a very uneven, unequal world unfortunately, but it is what it is.

Updated On: 2020-12-30T10:19:01+05:30
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