Kenneth Andrade has scant desire to impress anyone. And in the world of social media, that we all inhabit, it is so refreshing to have such engagements. His authority and authenticity are what stands out. Along with his to-the-point answers (I had to personally request him to "please speak freely".)
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 have listed the 20 individuals interviewed for this series.
KENNETH ANDRADE is the Founder and Chief Investment Officer of Oldbridge Capital Management Pvt Ltd.
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You started off being a journalist. Moved into being a researcher and then a fund manager with an AMC, and now PMS. Is there any investing principle that you once fervently held but don't hold it much sanctity at all?
It's been a long time since I was a journalist.
The progression from being a journalist to an analyst to a fund manager… from being a data-gatherer at the start of my career, to being more intuitive mid-career, to a decision maker… a lot has changed over this journey.
Specially learning not to make the same mistakes again. The more experience you gain, the fewer mistakes you make. There are a lot of things done in the past that you would not want to repeat again.
Name one.
Too many ideas. Get a few data points that you become very, very interested in. Then feel the need for those data points to be a call for action.
Being a journalist and an investment analyst for a publication is probably the toughest job ever. I come from the standpoint that when you have a deadline to meet, there is always something that necessarily needs to be done. Pages have to be filled in a print publication. If it’s the electronic media, you have to have a constant flow of information to talk for an extremely long period of time.
And all data points were a call for action. Not so now. I think that's one significant shift that has happened from the initial part of my career to where I am right now.
You have been influenced by Peter Lynch. His books are your favourites. What were the dominant factors you took from there that shaped your philosophy?
He influenced me in the way I've actually looked at businesses.
There are two things that Peter Lynch got right. His time in the market at that point in time. And his concentration on one segment of the entire economy.
At that period of time, the US was going through that a significant boom in the consumption economy. And a large part of his portfolio was linked to that part of the economy.
He got the segment of the market right. He didn't shy away about migrating from the number of companies that he had in this entire portfolio. When he put it all together, it always started at “I like the opportunity and it was available at a favourable price point”.
He put that into place and then rode the entire cycle with it.
So if you look at the entire process of how he invested in businesses, it is about when you enter, when you exit, and all of that is navigated through a certain segment of the entire marketplace.
I think that's how the investment curve actually worked out and this framework came into place in my mind.
What about his philosophy about knowing the stock that you're buying? He advocated that a lot.
Of course. That goes without saying. Knowing the company that you are investing in is hygiene.
If you don't know what you're doing, then you don’t know how and when to sell out of the business. You necessarily need to know what the business is all about, its strengths, and weaknesses.
In his book, he emphasized that you have to know the company. By the end, I think he had around 1,400 stocks. So that's where I found a disconnect.
No, there's no real disconnect about knowing the companies.
So 1,400 companies are a lot by any stretch of imagination. I know that he's gone through that cycle. When he started building the entire portfolio, it was all in that very one sweet spot. Every single business that he owned was in Financials or the Lending business or somewhat related to the B2C chain.
By nature and by virtue of being around for so many years, the amount of breadth that one covers, knowing the business, understanding the business, what it is about, the company meetings... The depth of the business is covered by the analyst team, for sure.
Then it is about putting it together, and he did a very good job at it.
Your investing process is about identifying where you are at the business cycle and timing it. Spotting a bubble. You don't like leverage. You analyse annual reports. All that is very analytical. Is there a softer part to investing? The gut feel? Has it ever played a role with you?
Of course.
An investment process is knowing enough of information, having all the data, and then taking a decision. Right? You know everything about the business, where it's going to go right, where it's going to go wrong, and you probably get it optimally priced.
But that's never the case. There is X amount of information that is there. There is a scenario that is being played out. And you got to take a decision in that entire process. And I think that's where the decision-making process or the gut feel actually comes in.
Two people can have a very different output looking at the same data. And both use their intuition to get it right. And there’s a probability that you will also get it wrong. That intuition is something that you have to navigate. It comes after looking at multiple data points for an extremely long period of time. So gut feel works. But if you have no data and just have the gut, it definitely doesn't work.
How has your understanding of risk evolved? Have you changed the way you view risk?
Risk is about what you know, and risk is also about what you don’t know.
If you try and take a decision without knowing enough about a particular business, you increase the risk.
And if you know enough about data, and you've got enough of experience dealing with that limited source of data, you refer to your experiences of the past to take a decision.
So there is never a trade that we've ever gone through with zero risk. But you can definitely minimize it. But not having data just increases the risk multiple.
Can you share an investing mistake you made that you really learned from?
Oh, there are plenty.
We came from a phenomenally good 2017 for the equity market in India. Given my style and framework of investing, I stepped in trying to look for value; businesses that are available at an attractive price. That was at a point in time that you traded down the cycle. You went into smaller business trading at a price which deserved to be there. In short, we went into a marketplace looking for value when there existed none.
In my previous assignment, we did get a very large part of our portfolio right. In 2012, we continued to extend our holdings in the segment of the market which was already priced in quite a bit. We got Bata right, Page Industries right, United Spirits right, a host of those consumer facing businesses right. And we continued to tear up on those names. And that's when you have diminished returns. Diminished ROIs on incremental amounts of investment. That's the second thing that we avoid consistently.
When we look for businesses, I necessarily have to look at it optimally. To focus on ROI being equivalent to what you've delivered in the past. And what can get you there.
You got to have the mind frame that you're not going to invest in a business unless you see a reasonable upside that is equal to the ROI that you delivered in the past, and with the same methodology as you've gotten the previous ROI. The minute you deviate from that structure, the returns are extremely subpar.
The media gave you the moniker of the Midcap Mogul. Do you find it restrictive? Does it put unrealistic expectations on you that what you touch will turn to gold?
To be honest, it did bother me for a bit. After that you just get used to it.
Obviously, there are pressures. If you spend so much of time doing what you do, and liking what you do, and if you have a fiduciary responsibility of getting it right, if there is no pressure, there is no result.
But the pressures are not external as much as they are internal. The pressure is not in terms of delivering the return. The pressure is in doing the same thing consistently over multiple time horizons. That's what the pressure is all about. The pressure not to deviate.
The pressure not to participate. I always tell my team that we can’t attend all the happening parties at the same time. You gotta let some go. And we do let some go. If you missed it, you missed it. Move on. The market is a fairly large place to navigate ourselves.
There is a science behind portfolio construction.
You break down the structure of companies from large to small. The probability of making a 10x on a $100 million market-cap business, if everything goes right, is 80%.
The probability of making 4x on a $500 million market-cap business would be about 50-60%.
The probability of making a 2x on a $5 billion dollar market-cap business reduces significantly.
So it's not about it's not about mid or small caps; it is where you have chosen to be. If you want a disproportionate outcome to your entire portfolio, you have a fairly good mix of businesses that you're going to participate with.
We always try and capture the bottom-end of the entire matrix. How do you control risk? If you do not spend enough time with companies in that formative stage – which is what we have done over the last 7 years – we will never capture that opportunity.
That's what we're trying to put at work. It is not about mid and small cap. It is about getting an output which is fair and commensurate with the amount of risk that you're taking as well as meeting investor expectations. This is the pressure that put on ourselves to get the process right.
There is conviction, confidence and arrogance. The three tend to feed off each other, and one tends to conflate one with the other. How do you guard against your arrogance? How do you put your ego in check?
That's fairly simple. You get a bad cycle. You face the investor. Everyone gets grounded.
If I do it on my own money, I have the right to be arrogant because I have no one to answer. But if it's someone else's money, it is a fiduciary responsibility and I have no right to be arrogant about it. I have to get the discipline right. I have to get the journey right.
What if there is a run on your fund? If investors are really unhappy, and they pull out. How do you navigate that mentally or emotionally? Isn’t it natural to panic?
See, investors give you money to take it away. That’s the constant. It is not the other way around. I don't have a right on that money.
The great thing about our job is that you can have steady state assets under management even if there is a withdrawal. You have to work harder for your money to grow. You don't have to work harder to collect the same money. The choice is yours.
How do I reconcile the fact that the investor is going out? If he's made money, it is his to take off the table. If I have delivered 15% CAGR over a 7-year period, when is the investor actually going to enjoy that money? And if I have delivered 5% CAGR over a long period of time, I have no right on it.
What makes you insecure about fund management?
In a market going up, you always have to chase someone else's NAV. In a market coming down, you always have to protect your own.
In a falling market, the insecurity is about not being able to do well because of market conditions. In a rising market, the insecurity is about not coming out on top.
While we oscillate between the two, I would not call it insecurity and one gets used to it.
What is something about your job that you really don't like?
Nothing specific.
But when the outcome is not as planned, then it takes a 2 to 3 year window to renavigate that entire space. The larger you are, the longer it takes to get the cycle back. The smaller you are, the easier to navigate yourself out of it fairly quickly.
It is not something that I don’t like, it is just an enormous challenge, and the journey you learn to go through with.
When you were a journalist, there was a stock market bubble, an IPO bubble. That got you interested in the markets. You were at the right place, at the right time, at the right age. In this thing called life, how do you view luck, destiny, chance?
I was at the right time at the right place. But I wouldn't have been at the right place had I not been trying for a very long time to get there. So where I am currently, is due to putting in enough time to do what I want to do.
Where I joined Sharekhan, from the house of SSKI, it was probably the most respected and renowned sell-side brokerage at that point in time. They were not looking for an analyst. They were looking for a journalist who could analyse. That was pure luck.
But had I not spent four years into publications and freelancing, I would not have been able to be where that job opportunity was and I would have been able to take it further to where I am currently.
As a journalist and part of data collection, I had to go every single IPO that came out. There was not a single IPO or not a single company on the marketplace that we never covered, because there were deadlines to meet and pages to fill.
When you look at the electronic media, where I worked at the back end for a brief period of time, the amount of data feed that has to go in to make sure that the guy facing the audience is talking for an hour nonstop without repeating the same thing, takes a lot of effort. It takes a lot of backend work – what you know and don’t know and packaging it all together.
So that is the breadth that you have to pick up, which I was fortunate to. But when opportunity presents itself, you have to be there. You have to be ready for it. You have to seize the opportunity. You have to have the experience to actually be qualified for it. And that's when luck plays a very important role.
Individuals interviewed by Larissa Fernand for this series:
- Prashant Jain
- Sankaran Naren
- Nilesh Shah
- Vetri Subramaniam
- Anand Radhakrishnan
- Devina Mehra
- Saurabh Mukherjea
- Raunak Onkar
- Samir Arora
- Kenneth Andrade
- Rajeev Thakkar
- Aswath Damodaran
- Ian Cassel
- Vishal Khandelwal
- Sanjay Bakshi
- Ramesh Damani
- Jim Rogers
- Ben Carlson
- Mohnish Pabrai
- Christine Benz
