Rajeev Thakkar on the need to associate with the right people

I have always loved the sincerity of Rajeev Thakkar. And when he answers about the type of people he stays away from, I could see that he does practice what he preaches.

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.

RAJEEV THAKKAR is the Chief Investment Officer at  PPFAS Mutual Fund.

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You have been opening in a fiduciary capacity for around two decades. You once said that a very successful trait of an investor is to be able to recognize when you are wrong and change course.

Can you give me one or two examples where you have changed course? Where you realize something was wrong?

In the initial years, I was driven by the statistical cheapness or the attractive valuation of a particular company, and was a bit lenient on the business quality. Over the years, the realization crept in that if one is holding the stock for a longer period, other qualitative aspects also come to the fore, and one cannot just go by statistical cheapness. So it's a slight shift in the way we look at companies and approach investing. It is not a 180-degree change or something like that, but more of a course correction in that sense.

At times, we find stocks so cheap that even after looking at some of the negatives it still makes sense to invest. But as we lengthen the holding period, the qualitative aspects come to the fore more often.

You mentioned about recognizing where one is going wrong.

In the Indian context, there have been situations where populism takes precedence over business economics. Where a sizable section of the population is affected by a business decision. This could be in the field of infrastructure, edtech, micro finance or healthcare. Where society and the government at large are the policy makers, or even the courts will decide.

It doesn't matter if investors lose some money, so be it. But we will make sure that the common person is not inconvenienced. So to that extent we have been a bit more circumspect about investing in spaces where there could be such interventions.

How do you get the resilience to stand against the crowd, because your investors will walk up to you and say, why aren't you doing this? Why aren’t you investing here?

That keeps happening.

Once a year, every year, we interact with our unit holders. Investors go through the portfolio statement and fact sheet line-by-line. Typically, the questions are around the companies that are not doing well.

If, on an average, you are doing okay, the questions are not that hard. The investors are willing to give you that time, and they realize that it's a probabilistic thing. Not all stocks will do well all the time, so they are a bit lenient in that sense. The difficulty is when a substantial portion of your portfolio is seemingly not doing well.

For us, these problems have been more pronounced in bull markets rather than in bear markets. If you look at the quantitative data for our schemes and the Upside Downside capture ratios, on the upside we do less better as compared to the category averages or the indices, and on the downside we fall much lower. So in very, very pronounceable markets where there is froth and where we are a bit cautious, that’s when investors tend to see the under performance of the scheme.

We communicate to our investors to please judge us over a market cycle rather than over short-term time spans, we explain the rationale behind individual holdings or the rationale behind our cash holding.

It's about the end investor alignment with the advisors and distributors and our own internal team. So if all are in alignment, that gives you the resilience and conviction to stay the course. Otherwise, things become difficult, and people tend to stray.

Does any of it ever give you sleepless nights? I think the bull market gives you more sleepless nights than the bear market.

I don't have a problem with sleep, except when I'm bingeing on OTT content.

As long as the process is fine and things are going normally, I don't tend to obsess too much about scheme performance and things like that.

Firstly, there will be periods where the overall market will not always go upward. It will go up and down and one has to be in there for the long term to get the returns. Secondly, every active strategy will have periods where it will not do as well as the benchmarks, and one has to be prepared for short periods of under performance.

If you understand this before you set out on the journey, you won’t lose sleep.

How do you identify yourself as an investor? Don't you find that these silos of value investor or growth investors too restrictive? It sort of ties up your hands.

Absolutely.

We don't classify ourselves in one particular bucket. At one end we will have tech companies in the US in our portfolio, which typically people classify as very high growth companies. And at the other end we'll have stocks in the mining business, which are very, very mature old businesses, and people don't see much of a growth in that space. So we have all kinds of companies in our portfolio.

We are more in tune with the approach of Buffett and Munger, who say that growth is a component of value. So when arriving at the intrinsic value of a company, you have to factor in growth. Growth sometimes adds to the intrinsic value, sometimes it reduces from the intrinsic value, ironically.

If growth comes at decent ROC, it adds to value. If the return ratios are very bad, and if the company is growing, then, in fact, it destroys value.

Am I right in saying that you're very averse to companies that have leverage?

Largely, yes.

Financials are very leveraged businesses by definition. We have banks in our portfolios, which are leveraged businesses. We have some utility kind of companies which also have leverage built in as part of their business models.

What we guard against are very high leverage in companies where it could pose a survival risk in a downturn. Just to give an example, if one is in a vulnerable sector – such as hospitality or physical retailing – when Covid hits, and they are forced to shut their business for 6 months or 12 months, and unable to repay interest on principle, they could go into liquidation, even though the business is good and well run.

So leverage enhances returns for equity shareholders sometimes and also increases risks in a lot of cases. We are happy to let go of a little bit of return in favour of resilience and in favour of longevity.

In your personal life, are you averse to leverage? Does this thinking fall over into your personal circumstances?

Not so much in terms of my individual finances.

I've had a tiny mortgage loan early in my investing career where it gave me tax breaks and was well within my monthly cash flow. So it was not much of a challenge, financially.

Early in my professional career I worked with the investment bank, which was leveraged and which invested in equity, and in the downturn it had difficulty running ship. So to that extent I've seen at close what leverage can do in a volatile business.

What principle do you believe applies to investing, and can also be applied to your personal life?

Associating with good people.

In personal life, one does not want to associate with cheats or liars, or people who are continuous takers, who make you foot the bill every time you go out for a meal. You want them to be fair in their dealings with you.

I would look for those characteristics in promoters or partners or business managers of the companies I want to invest in. We want them to communicate what is happening in the business with truth and fairness. We want them to share all the relevant information with us. We want them to be paid fairly, not underpaid, but at the same time not over-the-top managerial compensation. And we want them to do related party transactions at an arm's length basis. We don't want them enriching themselves at the cost of minority shareholders. Essentially, the same characteristics you look for in terms of people you associate with in personal life, extends to investing as well.

How important are first impressions to you; in in your personal encounters or when you meet promoters or management?

We try and avoid investing with people who have been around for a very short period of time. The people with whom we typically invest have been around as a listed company or a listed business house for at least 5 years. We don't have one meeting with a new listing, and based on that one meeting and our impression, go ahead and invest.

Also, the qualitative impressions have to be backed by the deliverance of financials over a period of time. Someone may come across as a very impressive individual or have good things to say. But if the P&L, balance sheet and cash flow statements are not saying that, we would stay away.

What is one trait in another that immediately repulses you?

Where people tend to enrich themselves at the expense of others.

I've seen promoters’ lifestyles completely over the top, and the business is either reporting losses or is showing return on capital employed less than what the bank fix deposits give. So if the business is earning, let's say 5%, ROC, but the promoter flies around in a private jet, has a fleet of luxury cars and lives in a mansion, that really puts me off. They are just abusing the trust that minority shareholders have placed in them.

Can you specify one bias you have successfully overcome?

I think I've been able to largely overcome the greed and fear kind of yo-yo.

In our own journey, we have been able to live with underperformance in extreme overheated markets. So this would be in 2017, let's say, the small and mid cap rally, or in 2007 in the PMS days, when real estate, infrastructure and commodities were the odd stocks and they were at frothy evaluations. So that is, as far as greed goes.

In terms of fear, we were able to deploy money in March and April of 2020, when people were very, very fearful. And there was this big worry around Covid, and how that would affect things down the road. So the focus on business valuations and business characteristics and tuning out of the overall macro noise or the environment. I think that is something that individually and as a team, they have been able to more or less navigate over the years.

Has meditation helped you be a better investor?

Absolutely.

When our computer slows down, a reboot helps. The RAM gets cleared and the programmes start running faster.

Meditation enables you to tune out of all the thoughts and focus on simple things like your breath. Just slowing down helps. Once you come out of it, you can think clearly and see things for what they are rather than get perturbed by the various stimuli that are coming your way. It has helped me a lot.

Investing is all about probabilities, you'll agree to that. How do you make sure that the odds are always in your favour? How does luck and destiny play out in your mind?

The framework of Michael Maubbasin in terms of skill versus luck is something we look at. On the one hand is a slot machine or roulette table, which is completely about luck. At the other extreme is a game of chess, which is completely about skill where the better player would win.

Investing obviously falls somewhere in between.

In the short run, over 1 or 3 or 6 months, luck would have a very, very large role to play. There are capital flows in and out, interest rates, geopolitical events and things like that. But over a decade or more, skill comes to the fore, as good luck and bad luck tend to cancel each other out over the long run.

So how do you get probability in your favour?

If you dial down the leverage in the businesses that you own, the chances of being in the game for the long run improve. They company can't be forced out of business because the banks have seized its assets.

The second is the choice of the promoters and managers. If they are competent and they are fair and honest, the odds tend to work in your favour.

The third thing would be the limited competition. If a sector or a business is very, very competitive, then chances of the business going down are high.

These are the attributes of successful businesses and investments. We work on these parameters and try to ensure that on an average, the investee companies in that portfolio will do well for us. Yeah, it's not that all stocks will do well all the time. There will be businesses which don't work the way we anticipate them, too. But as long as on an average we are doing well, we should be okay.

Is there any skill set you're trying to develop right now, or any be able by Bios. You're very focused on right now that you want to own any skill that you want to develop right now.

We are working on developing some tools that can leverage the advances in the field of AI.

Can they throw up early warning signals for the companies where we have investments in? If something is going wrong, can they identify the flaws? Can they highlight some potential investments which are currently not on our radar?

While we are working on these tools, our usual investing process continues to be bottom-up and looking at each business individually.

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