I recently interacted with Radhika Gupta, MD & CEO of Edelweiss AMC. The subject was – how to become a successful investor.
Click here to watch the video of the conversation, or watch below.
Here are the key notes from the conversation. These are not as detailed as what I spoke, but contain the important ideas.
Q. Let’s start with your journey from being a corporate employee to starting your own blog to help investors to write books. How did it all happen?
I have benefited largely from serendipity and good luck –
- The first and last time my ex-employer came for hiring from an MBA college was in the year I was passing out.
- I wanted to take up a job in the forex market but went with equity research as that was the only thing that came my way. And I had promised my to-be-wife that I will take the first job I get so that she is not married somewhere else. That’s why my journey started in equities. Else, I may have waited for a forex job.
- Then, I got into an independent equity research company and not in (the fast-paced, commission driven world of) stock broking, and that laid the foundation of sensible long-term investing.
- That’s when I also came across Warren Buffett and Charlie Munger whose lessons have been the bedrock of my investing and what I teach over the years.
- I left my job in 2011 with some backup savings, but saw a large part of the same disappear due to hospitalisation when my son was born pre-mature. When searching for writing assignments, got in touch with my ex-boss who was then working with Edelweiss, and he offered me a writing role on a retainer basis. That helped me in running my house while going slower and thinking harder on Safal Niveshak.
- I have also been very lucky to have a very supportive spouse who has stood by my side through the downs of life.
- In hindsight, and to an outsider, my journey may seem well-planned though adventurous, I know the amount of good luck I have had on the way. Also because I never had a Plan B, and wanted the Plan A to work, and it did.
The rest of my story isn’t as important, except that I have kept at what I have believed in, without wavering from my path. I have tried to consistently evolve myself, and that has helped too.
Q. What is investing all about?
The general definition of investing is that it’s a process of laying out money now in the expectation of receiving more money in the future. But I think the real definition goes a bit deeper than that. Yes, it’s a way process to postpone some consumption to the future and letting your money grow in a way that it takes care of you when you are not earning any new money.
I believe the real definition of investing is that it’s a tool to help you achieve certain things in life. For me, it serves a dual purpose. One is that it has helped me achieve my financial independence. And second, thanks to that independence, sensible investing has allowed me freedom to pursue things that I love working on in a way that it helps me make my soul grow.
So, whether it is investing using a process I believe in, or writing about investing and decision making, reading and learning, and now also illustrating what I am learning. I am able to do all this thanks to investing my money sensibly over the years.
Q. What is value investing according to you? Does value investing really work in India where most good businesses trade at high valuations yet deliver good returns?
First, what value investing is not. Though it started with Ben Graham’s idea of buying extremely cheap stocks irrespective of quality, it has evolved beyond what we know as ‘statistical cheapness.’
In a broad sense, value investing is the way to identify businesses that are expected to grow and do well over the next few years, and are available currently at reasonable, if not cheap, valuations.
Essentially, it is about finding ‘value’ in a high quality business, where the value from the business and its management would unfold over a period of time, and an investor who has the patience to own for the long term, is likely to benefit.
It is not about buying cheap, or low P/E, or single digit priced stocks. Even a stock priced at ₹1000 or ₹10000 can possess value that sensible value investors are looking for.
But as far as buying high quality businesses is concerned, I think a lot of investors take it too far and pay any price for a stock just because it is a high-quality business. That I think is not rational. You need to pay up for quality but not overpay.
That is where the hard work of being an investor comes in. Like they say, “Value lies in the eyes of the beholder.” You have to possess those eyes that can separate real value from fake.
Q. How useful is behavioural finance in investing and how does one learn and practice it consistently?
Good investing is 99% behaviour and 1% intelligence. And I think once you are past your teens, it’s very difficult change behaviour. But one can still attempt to become just 1% better daily, and that should help a lot over the long run.
Behavioural finance is a vast subject of study, but there are some great resources that one can read to know big behavioural mistakes other investors makes so we can avoid them. Reading works of Charlie Munger, Daniel Kahneman, and Robert Cialdini should help. Plus, there are some great online resources like the Farnam Street blog, James Clear’s newsletters, and Morgan Housel’s articles than can help.
Q. What are some common mistakes investors make and how should they avoid them?
Most mistakes are behavioural, like –
- Impatience, that leads to over-trading and short-term holding periods
- Envying others making money fast
- Making investment decisions to avoid future regrets, like selling good stocks early and holding on to bad stocks forever
I think one way I have found of minimizing these mistakes is by cutting almost all of news and social media, except when I go to Twitter to publish my thoughts and articles. Also, having a well-defined ‘process’ and ‘checklist’ and sticking to them helps in minimizing these mistakes.
We must remember that as humans, we are not wired to make sensible decisions all the time. And so, automating a large part of the decision making through process and checklist helps.
Q. Direct stocks vs. mutual funds. What is needed to invest in stocks and who should invest. And who should go for mutual funds?
I think both fit well in an investor’s financial freedom arsenal. But I think most people are not suited to pick stocks directly, because we are not wired to make rational decisions that intelligent investing requires. Plus, the time and effort required to pick good stocks amidst the busy schedule that people have, renders direct stock picking a tough act. For such people who do not have the willingness or knowledge to pick stocks and construct portfolios well, and also as a way of diversification, I always advice to go with carefully selected mutual funds.
In fact, ever since I started investing almost 20 years ago, I have always invested part of my family money in mutual funds because I believe there are much smarter money managers out there who can handle my money better than me. And so, that’s a way for me to de-risk my portfolio from myself.
So, I believe mutual funds are a great product for retail investors. Just that they need to choose them well, like they think of choosing stocks.
With stocks, again, I believe, not owning stocks and only mutual funds is not a shame. You do not need to own stocks just because your friends or colleagues are doing so. Invest in stocks only if you think you have a nature and skills that are suited for stock ownership.
Q. What is your advice to young investors on starting their investing journey in equities.
The first and most important advice I offer to young investors is to know themselves well. Like George Goodman said, if you do not know who you are, the stock market is an expensive place to find that out.
If you do not have the patience to own stocks for the long run, you should not be picking stocks at all. Of course, one comes to know more about oneself with age and experience, but if you can know the importance of this idea even when you are young and starting out, you should do well as an investor and in life.
Finding the right role models early also helps.
My advice to people wanting to get full time into investing is to not get into full time investing. Sound investing is not a full time activity, unless you are managing other people’s money.
Q. How do you see Indian equities from next 10 to 20 years perspective. Why should one invest in India?
I am optimistic about the Indian economy and well-managed Indian businesses, and so that makes me optimistic about investing in Indian equities from a 10-20 years’ perspective.
However, I am not a believer in the ‘decoupling’ theory that gets thrown around all the time Indian markets rise when global markets fall. India is now a very integral part of the global economy with common supply chains and other connections, and so decoupling is not so easy. And so, even when I believe in the long term India story, I also believe that we will continue to have down cycles that may cause serious wealth erosion for people who do not know what they are investing in and why.
Q. Your book The Sketchbook of Wisdom is packed with 50 timeless ideas for a happy life. Briefly tell us some key takeaways from this book. What are you reading now and some book recommendations that you can give for investors?
Thanks for mentioning The Sketchbook of Wisdom. I think I wrote it for myself and my kids. I love all the lessons I wrote about, but ones that I cherish the most are on equanimity, knowing what we control and what we don’t, and avoiding living a life with self-pity.
I think I learned immensely during the process of writing that book, because I paused and reflected a lot on my own life about how I stood personally on what I was writing. Was I being fake at times? Did I really practice what I wrote? I think I passed those tests and the book turned out well.
As for the books I am reading now, it’s mostly non-investing stuff that I am reading. So, there is a great series of tiny books from the Vietnamese Buddhist monk Thich Nhat Hanh on how to focus, how to relax, how to love, how to fight, how to walk, how to sit, and how to relax. That’s one. Another book that I re-read recently and love is Clayton Christensen’s How Will You Measure Your Life.
For investors, one of the best books I have read in the last two years is William Green’s Richer Wiser Happier. Also, Morgan Housel’s The Psychology of Money and Monika Halan’s Let’s Talk Money are wonderful reads.
Q. You have a podcast titled ‘The One Percent Show,’ and have interviewed quite a few wise people from the fields of investing and business. Among all the lessons your guests have shared with you, which have been your 2-3 personal favourites?
I think I have been the biggest beneficiary of The One Percent Show, not just for the one-on-one conversations with so many wise people, but also for the lessons they shared with me. So, while it is difficult to point out a few lessons because there have been so many, let me still try.
I think one of the best lessons I learned, or maybe relearned, was during my conversation with William Green that went on for three hours. William talked about the idea of playing games that you can win, while accepting your own limitations. He mentioned how, despite writing about investing for so long, he does not have the temperament to invest his own money and so he invests through professional investors who he believes are more capable at this game than him.
Another brilliant lesson I remember the most came from Manish Chokhani in the very first episode that was about the concept of swadharma, or living our lives true to our nature and not how the world wants us to live. I think that again connects well to William’s lesson on playing games you can win, and your lesson on choosing your own battles.
Another brilliant lesson I remember the most came from Manish Chokhani in the very first episode that was about the concept of swadharma, or living our lives true to our nature and not how the world wants us to live. I think that again connects well to William’s lesson playing games you can win, and your lesson on choosing your own battles.
A third big lesson I would never forget came from Guy Spier who talked about compounding personal goodwill, which takes the idea of the power of compounding to beyond money. In fact, he said that money is just a tip of the iceberg of the various types of wealth that we possess, including relationships, health, and time. And that we should focus more on these kinds of wealth than just money.
Q. Your modern day investment icon?
Warren Buffett. He is young and modern too.
Q. Investment advice for a young child?
No investment advice. Just choose your own battles. Money is just a top if the iceberg of the various types of wealth we have. Focus on greater wealth in life, like family. There’s nothing more valuable than a family.
Q. Financial freedom in a sentence?
Freedom to do the things I want to do, with people I want to do, where I want to do, and when I want to do.
Q. Thoughts on influencers?
Avoid, by far.
Avoid, by far.
Q. New age companies that are listing?
Avoid, by very far.
Q. One line advice to financial advisors?
Stay true to what you are, and play the game in the benefit of the person on the other side of the table (your client).
Q. One thing that makes you optimistic about India, and one that doesn’t?
My kids make me optimistic about India, for the kind of people that are growing up into.
As for one thing that makes me not so optimistic, it is the burden of mis-governance and corruption. Once we get over these, there’s no stopping India.
Q. How to get more women to capital markets?
By setting an example. And you, Radhika, are doing that very well.