Samir Arora: Passionate about investing, but dispassionate as an investor

On social media, I have always been amused by Samir Arora's wit.

But all through this conversation, I was astounded at how passionate he is about investing. There was just no separating the individual from the investor. The energy, enthusiasm and zest that he brought to this one conversation is probably what I manage to conjure for an entire week.

Samir has distilled years of experience into what appears deceptively simple advice. Pay heed to these nuggets of wisdom, but remember, they are just excerpts from the conversation. I suggest that you listen to the video where he expressively articulates his stance.

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 (edited) transcript, I have listed the 20 individuals interviewed for this series.

SAMIR ARORA is the Founder of Helios Capital.

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#1. Your highest conviction bet need not be the best performer.

It need not be that the highest conviction bet in the portfolio is the best in terms of performance. For example, our number one holding is currently HDFC Bank. It doesn’t mean that we expect the highest possible return from HDFC Bank.

There are two kinds of stocks in anybody's portfolio.

Some stocks you are very confident of a reasonable return, meaning better than the market by 3-4%. They won't be going up 30-40%.

Then there are smaller stocks, newer companies, stocks that just got listed, or old stocks that got hit a lot. But here you just buy 2-3% because you can’t allocate 10% like you do in HDFC Bank.

#2. Never enter a stock assuming that you will hold it forever.

You can hold a stock for a long time, but you can't go in thinking that you have discovered this gem and will blindly hold it for the next 20 years.

When Steve Jobs died in 2011, his number one stock was not Apple. He owned 6 billion or so of Walt Disney, which he obtained from selling Pixar. His Apple holdings were what he got as ESOPs. Did he not know that he was sitting in a company which is going to compound massively? Why did he not switch from Disney to Apple?

Because nobody knows anything beyond a point. How will the company evolve? What will it eventually become?

Aditya Puri worked in Citibank. And he created or helped HDFC Bank grow. Rana Kapoor worked in Bank of America and ANZ Grindlays’ Investment Bank. He was one of the first individuals to get a banking license. But then there is inner motivation, craziness, stupidity. How would anyone have known? Many thought that Yes Bank is the next HDFC Bank in the making.

#3. You must understand the Halo Effect to not be a victim.

The halo effect is when the stellar financial performance is so good that one attributes its golden glow to all other attributes - strategy and execution.

I might have been a victim of this bias in the past. But not in the last 10-12 years. Once you understand the concept, you will not be a victim.

At any point of time, some 20 or 30 stocks would do well. The question is that if they did well for 20 years, at that time (20 years ago) how many stocks were there from which these 20 would have been chosen? How would you have arrived at this 20?

If a company's results are good, it could be due to many things. Maybe when they started, the valuations were low. The competition was less during the period that you're looking at. Or growth was high during this period. Beyond a point, it has no connection that it is now set for life.

#4. Leave certain stocks, but don’t leave the market.

In the market, 7 years could be good followed by one really bad year. Then again it repeats itself. The same cycle continues.

Bad years don't last. You may leave certain stocks, but you don't leave the market. In fact, you add stocks, that’s how you become the number one.

#5. What you own is as important as what you do not own.

I believe more in what I should not own. And what I own is the residual. What I own I can sell in 30 seconds and not feel bad because my conviction is on the other side in what I do not own.

#6. My biggest strength as a money manager is that I am ruthlessly dispassionate.

I have gone from being long a stock to shorting the stock in the same day, after owning the long side for 10 years.

For 7 to 8 years, I was India's biggest mutual fund manager among the new AMCs, such as HDFC Mutual Fund, ICICI Prudential and Franklin Templeton. In all my 27 years, I would not have had a one-on-one meal with the promoter of a company I was investing in. The reason being that I want to be able to sell when I want to sell, and not feel restrained by the fact that I had a meal with him the previous day.

At one time when I was attempting to launch a fund, which never took off. Around six months later, I shorted the very stock of the entity who was to be on my advisory board, This was in 2008.

I am not aligned with any promoter. My advantage over the promoter is that I can walk out when I want. I don’t owe him anything. I don’t want QIPs. I don’t want anchor allocations. I am buying the screen and I will sell when I want to.

I have held many stocks for 10 and 20 years. HDFC Bank is one of them. But I don’t owe them anything and they owe me nothing. Tomorrow if I choose to sell, I am not calling them to inform them and apologise to them that I am selling after all these years of holding on.

My boss is the NAV.

#7. Mistakes happen.

Over the years, we have made mistakes. When starting out, buying companies looking at PE and not balance sheet. Companies where the revenue turned out to be fraud. Amitabh Bachchan Corp which went to zero.

I have survived for 27 years and accepted that there will always be companies that will do very badly. In our presentations, we show companies that have done well as well as those that did badly.

CY22, the market was up 4%. Varun Beverages was up 100%, Indian Hotels up 70%, ITC up 40-50%, Gland Pharma was down 59%, Quest down 35%, L&T Tech down 40%. These are not companies that I own. I am just pointing out the difference in returns in the same year, in the same market. All stocks don’t move in the same direction. That is how you get the average.

#8. In the long run, luck plays less of a role.

An Indian author says that in his life he purchased 20 stocks. If 10 turned out to be good, what does that mean? Nothing. It could be that he got three extra stocks by being lucky. But do it over 27 years and buy 40 stocks at a time, and the luck factor would have evened out.

Nassim Taleb says that Soros could not be lucky, but Buffett could be lucky. Warren Buffett himself says that he had 12 successful decisions that changed his life.

You can't randomly with luck, write a book. You can't randomly with luck, compose music. But randomly, with luck, you can be right or wrong in investing.

Let’s say 1 million people play an investing game, where the decision is to buy or not buy.

In the first round some 500,000 will be right. From these, 250,000 will be right in the second round. So 250,000 would have two rights in a row. This goes on and after five rounds, some 30,000 odd people will say that they made 5 consecutive correct decisions. Finally, some 40 individuals will say that they got 10 right calls in a row. And they are heroes.

But when you make hundreds of decisions, the numbers go down and luck plays less of a role.

#9. Look for Skin in the Game.

Many years ago, before the SEBI regulation, the CIO of a mutual fund said that he does not invest in equities because his business is related to equities, and when equities do well, his AUM rises.

I am THE largest investor in my offshore fund. Most probably, I'll be the largest investor in the mutual fund, at least initially.

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