Vetri Subramaniam on the schizophrenic nature of investing

Aug 16, 2023

The very first time I met Vetri, he referred to books he was reading that explained the economic climate. And very matter-of-factly commented that I probably have read them. I decided not to tarnish his impression of me by telling him the truth - that neither had I heard of those books nor their authors.

I must confess that I have always been intimidated by Vetri. Extremely intellectual, his  conversations possess the virtue of reasoned logic. Warm, but distant. So even though I was excited when he agreed to this interaction, I knew it would be a struggle getting him to talk on a personal level. (I leave you to be the judge of that).

This is part of a series where I attempt to understand the behavioural traits and mindset of money managers and investors. At the end of this (slightly edited) transcript, I list the 20 individuals interviewed for this series.

VETRI SUBRAMANIAM is the Chief Investment Officer at UTI Mutual Fund.

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You recently stated that in the world of investing, it is futile to attempt to predict the future. Instead, one should look for things that probably won’t change in the next 10 years, such as self-sustaining businesses.

Apply that to your mindset and tell me what has changed over the past 10 years, and what hasn’t.

If I look at my career over the last 30 years and see how sectors have grown in size and scale, what increasingly becomes visible to me is that it is a function of which company is able to execute well and eventually benefit from that opportunity over time.

The companies which stumbled were those that typically flew too close to the sun, to use an old Greek fable. They took too much risk. They over-emphasized their growth ambitions and possibilities. What they did not focus on was ensuring that they are earning a healthy return on capital (RoC) and whether the business was generating cash on its own.

Around 20 years ago, we would talk about the growth in Retailing. Around 30 years ago, we would have looked at Banking. But if we look at the private banks that started that time, most of those banks have fallen by the wayside. Just a few became successful.

There are many great interesting business opportunities in India but what matters is how well you execute, and execution comes down to those 2 parameters: RoC and ability to convert profits into cash. This is what has shaped my investing belief.

You speak about “flying too close to the sun” and “falling by the wayside”. Can you mention a time when it happened to you and how you coped with it?

Early in my career, it was possible to get swayed by what companies said or did or how they focused on growth. I remember 20 years ago, my conversations with two companies. Both were pioneering a retail business model in India. One was doing apparel-groceries-provisions, the other was doing only private label apparel. Both were contrasts.

One was conservative and going slow. They wanted to understand the model. They wanted to understand the business. They would scale only when they were sure about it. They did not want to take too much risk. The second entrepreneur was always bubbling with energy and speaking about the great opportunity, wanted to grow fast, was fine with committing mistakes and course correcting.

The outcome 20 years later: the second company went bankrupt. The first one, the slow and steady approach, has gone on to create significant wealth for shareholders.

One was the Future Group, the other was Trent Ltd (Westside brand).

Is this why you focus on hardcore numbers? To maintain objectivity and not get swayed by the story or narrative of the founder.

Absolutely. Early in my career I would plead guilty to getting carried away by the narrative.

I find that it is better to let data tell you the story. I have gravitated away from companies that do not have a 3-year, 5-year, 10-year history that I can see. If I can’t see it, I cannot build conviction. This is why I tend to stay away from IPOs. It is too short an interaction with the company and barely any access to data. Studying the 10 years of history allows you to understand the company better.  And when you study that in depth, you can question management better.

I tend to stay away from managements and let my team do that. There is value in meeting company management, but I prefer to get my questions from the data. My team meets the management when required and then we bridge the two together.

If I do not have the data, I am happy to give the opportunity a pass.

Ok, you have data. You have interactions with management. Does gut feel come into play?

100%. Gut feel plays a role whether you are playing sport or in the investing world. It would be foolish of me to say there is no gut instinct.

Investing is a combination of science and art.

Science is how you look at fundamentals. You can be disciplined about it by using a checklist to ensure that you looked at everything that needs to be looked at. The most important part of a checklist is ensuring that you have not missed anything.

When it comes to pulling the trigger and making that decision, there is obviously some level of gut feel involved. Over time, you hone it and trust your gut instinct more.

You always struck me an intellectual. Does luck play a role in your thought process?

Luck plays a role in everything. I am very grateful for all the luck I have had.  We should acknowledge that all the privilege and success that we have had in our life and career is a function of some lucky break we have picked up along the way. A combination of luck, of people who have wished me well at different points of my career, a function of just having been at the right place at the right time and having benefitted from it.

You once said that investors need to manage expectations. How do you manage expectations?

It is a challenge. But fund managers can help shape expectations and do a better job managing expectations going ahead.

Convey your investment process and philosophy very clearly. Data related to this must be available to the public. So that they can track if you are executing what you said you would do.

Be clear about where you will invest, and where you will not invest. This clearly shows the boundaries.

Articulate to every stakeholder – board, investor, internal sales team, distribution partners – under what market circumstances and economic conditions your strategy will do well and not do as well. This requires some experience from fund managers as they go through their cycles of performance and underperformance. On getting impacted, they will be able to better articulate it.

Articulation. Articulation. Articulation. It is the simple way to make sure that your stakeholders understand what it is to be invested in your schemes.

As a money manager, what makes you insecure?

What gives me discomfort is when I don’t have sufficient history or I am unable to discern any pattern from the history.

I don’t have much of a problem in dealing with difficult markets or markets with punishing news, because I find stocks fit into my valuation discipline a lot more. So I find it easy to add when the news is poor but the valuations are giving me comfort.

Where I struggle is when the news flow is exuberant, but the valuations are not giving me comfort. So I am always a bit unsettled when things are going extremely well. I am a lot more at home in a challenging market.

Everyone has their biases. Name me a cognitive bias that you have tackled over the years.

When I started my career, I was a lot more focused on errors of commission. I was worried about buying the wrong business and suffering in a capital drawdown.

Over time, I have come to realise that in equities, the payoff is asymmetric. If you put Rs 100 in a company, you can lose only Rs 100. But the upside can be 3x, 4x, 5x or 10x. So what has really troubled me in my career have been the errors of omission – because a good business did not come into my valuation discipline. That I can still live with. What has pained is when I have let go of a great business way too early. Early in my career I was too worried about valuations. I let go of some of my best investment opportunities too early.

I have had to rejig my thought process to around “once you identify a good company, how do you ride it”?  Mid way through my career I arrived at the thought process of saying that it is important to buy a business at a valuation that gives me comfort but I am happy to own a business if it is doing well, even if the valuations get slightly overextended. However, I cannot ignore risk. So I manage risk by looking at position sizing. I had to build this parallel thought process, which I sometimes think it made me schizophrenic – when you make the investment, you want valuations to be in your comfort. But to get the benefit of those investments, you’ve got to learn to stay invested even when those valuations give discomfort.

Learning how to handle this schizophrenia is what makes for a good investor.

Individuals interviewed by Larissa Fernand for this series:
  1. Prashant Jain
  2. Sankaran Naren
  3. Nilesh Shah
  4. Vetri Subramaniam
  5. Anand Radhakrishnan
  6. Devina Mehra
  7. Saurabh Mukherjea
  8. Raunak Onkar
  9. Samir Arora
  10. Kenneth Andrade
  11. Rajeev Thakkar
  12. Aswath Damodaran
  13. Ian Cassel
  14. Vishal Khandelwal
  15. Sanjay Bakshi
  16. Ramesh Damani
  17. Jim Rogers
  18. Ben Carlson
  19. Mohnish Pabrai
  20. Christine Benz
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