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Not a fan of new era stocks, I prefer biz that have survived over 20-30 yrs: Vishal Khandelwal, SafalNiveshak

I buy a stock if I believe it will do better 10 years down the line, says Khandelwal.

ET Now|
Jan 10, 2019, 03.00 PM IST
Vishal Khandelwal1
Look for good quality businesses which may not be extremely cheap because good quality businesses do not come cheap. Rather, they may be reasonably priced, even expensive looking, Vishal Khandelwal, Founder,, tells ET Now.

Edited excerpts:

We are talking about outlook 2019 but a good investor, before analysing the way forward, always analyse the way back and then reflect back and assess their mistakes. What has been your basic understanding for 2018 because that was a gut-wrenching year for all asset managers. From gold to oil, from timber to coffee, every asset prices has come down.

We met at the start of 2018 and at that time, nobody saw any risk on the horizon and that actually came to play in 2018 when people were not really looking at risks and instead only focussing on returns.

People were buying anything and everything under the sun. That was a huge mistake and it played out in 2018 very well. We suffered from the “recency bias”. It is something that has happened recently and we tried to play it out. We tried to create pattern from that into future. In 2018, we were suffering from what happened in 2017. After what we have seen in 2018, with so many mid and smallcap stocks ravaged and bad businesses actually being thrown off guard, investors have lost a lot of money. That has become the base now and so people are looking very cautiously. Our brains are not wired to emerge as rational investors. We are behaving the same way ever since. I do not see any changes as far as behaviour is concerned and as far as the way markets move in 2019 as well. A lot of mistakes were made in 2018. It will be better for investors as all of us reflect on the mistakes, try not to make the same mistakes and learn from other people’s mistake.

We are starting the year with some known risks, ie. election, Fed and recognition is also coming that valuations are stretched. The sensible guy would say that this is not the time to buy gold at the price of silver. I am getting good businesses where I am buying gold at the price of diamond. There is a bit of caution this year and that is a differentiating factor.

Look at this. It takes around 365 days for the earth to orbit around the sun once and it has no relation to the financial markets. But after every orbit, we sit down and talk about what is going to happen till the time the next orbit happens. So, risks are definitely on the horizon. Volatility is a very normal thing for stock markets and despite the fact that volatility is normal and we are going to see more volatility this year, I think it is a normal part of being a stock market investor.

But the problem is you always get surprised by such volatility. The valuations are still not really in line with what you expect even as a long-term investor. I remember Charlie Munger who says that if you invest in a business with 6% to 8% return on capital and you pay a very cheap price for it and you hold it for 40 years, you are not going to make more than 6% to 8% rate of return annually. But if you buy a business with around 18% to 20% return on capital and you pay an expensive looking price for it and you hold out for 40 years, you are going to make a lot of money out of that.

The idea for investors for all years and especially for this year is to just keep looking for those good quality businesses which may not be really extremely cheap because good quality businesses do not come cheap. Rather, if they are reasonably priced, even expensive looking, you just buy them and hold them for long term.

That would be consumption right now?

Consumption obviously comes to mind. Then there are businesses where the leverage on the balance sheet may be coming down. They are improving their business per se. Overall for India Inc, the growth has not really happened but there are pockets of small and mid-sized companies which are doing better than what they were doing 10 years back. Look at those opportunities.

When you say reasonably priced, is there a benchmark to qualify reasonable? Eicher Motors came down 15-20%. Maruti came down 10-15%. If any good quality stock comes down 10% and on a long-term chart you will be able to map the kind of cracks that it has seen over a period of time. Is that a good benchmark to go by?

Rather than looking at the return, what is the amount of fall that the stock has seen? I would rather look at it in simple terms and simple parlance. I would rather look at the price to earning ratio for a stock, because a stock which falls from say Rs 100 to Rs 50, may still be expensively priced.

If I were to just give a simple number, PE is not the right number always for stock valuations. If I have to look at PE numbers, I would look at something priced at 30-35 times as expensive looking in this country assuming that the business is very high quality. But a stock, which even after a fall, is priced at 70-80-100 times price to earnings, I am not going to look at it even if the stock has fallen by 70-80%.

One of the greatest companies on earth, Apple, which has a monopoly, cash, no debt and which is obsessed with getting the consumer right, is trading at 12 time. It makes you wonder what is the benchmark for valuations.

No, things are different outside. Even Apple has been in less than 20 price to earnings for a long period of time. Given the fact that we do not have a lot of options to invest in India in terms of quality businesses, Indian companies have been priced extremely high, especially high quality businesses. There is a huge difference between the US markets and the Indian market.

In India you can buy feeder funds now. That means, an Indian retail investor can buy into four, five, ten good companies companies via a good mutual fund portfolio. If you have a basket of five big Indian companies and five big US companies, which way would you do your capital allocation for next five years?

Assuming the valuations are right, I would pick probably two Indian companies and three international companies out there in a five-stock portfolio.

You can look at ten…

So make it four and six.

Four Indian?

Yes, we can always move the number around. Probably, 5 each would be good.

One more followup on that valuation point is HDFC Bank is trading at 4-4.5 times price to book because everywhere the benchmark is not price to earnings. If it comes down to 3-3.5 times, there is also concern on growth slowdown. How do you draw that balance because then you are paying a cheaper price for slower growth?

You are saying the valuations came down because growth is also coming down. In the long term, a stock’s valuation tracks the growth rate. If I am looking at a business where the growth has come down, I am still looking at the point whether the company is recuperating the growth over a longer period of time.

I am not looking at a quarterly or an annual decline in growth rate. I am looking at where this company is going to stand maybe 10 years down the line. I am going to buy the stock if I believe that the company is going to be materially better 10 years down the line.

You will buy at 3.5 times?

Yes, for HDFC Bank, I am not so sure but yes it is a good number.

We will have a big unknown in 2019 and that would be the election outcome. What is that one event according to you which could derail the DII inflow that until now has kept the market intact?

Election is the biggest thing that is going to happen this year and that will drive the domestic institutional money into the stock markets. We saw in 2018 that despite the fact that a lot of FIIs pulled money out from India, a lot of DIIs invested and ended with a 0% rate of return for the Sensex.

DII money in 2019 would be largely dependent on what happens in the elections. Apart from that, nothing is really looking up at this point of time.

HDFC Bank was always expensive and for the quality of management it may remain expensive for a long time. But it has given perhaps the most satisfactory returns on a five, 10 and a 15 year period. On the other side you have got a company like D-Mart, which is expensive and is still giving returns. How does one judge what is right and what is wrong? Some of these are great businesses but price sometimes stops you from buying it. Is that a mistake?

It is a mistake in some sense but we are suffering from hindsight bias here because we are looking at returns from HDFC Bank and D-Mart in hindsight. I would like to bring in Nassim Taleb here who gives an example of a game called the Russian Roulette and he says that this game involves you putting a gun to your head with five empty chambers and only one bullet. Your rate of survival is 5/6 which is 83% on the first shot. The probability of you surviving is huge but what is consequence of you not surviving that shot? You become a statistics, you are dead.

In the same way, when you are trying to have a foresight on stocks, it is not only important to look at the probability of Asian Paints or HDFC Bank being successful in the future because they have been successful in the past, it is also important to look at the consequences of what happens when there is a one year decline in HDFC Bank or D-Mart’s growth rate, or some new competition comes in.

So hindsight is good but having a foresight and looking at probability and consequences is a much more important way of looking at and buying such businesses.

What has worked in the past may not work in the future and the classic example here is that after World War I, dividend investment made a comeback. Buffet brought in this entire concept of moat investing. We had the TMT investing which made a comeback. Ten years ago, which was when China was expanding, companies with high debt and growing order book were doing very well. What could be the outsize theme for the next five, 10 years?

I would stick with businesses that have survived over the past 20-30 years. I am not the kind of investor who is looking at fashionable or new era stocks. Of course, there are a lot of opportunities over there.

What about disruption then?

In which sense?

For example, if some of the great brands just cease to exist?

Yes, definitely. I am looking at businesses which are simple. I remember drawing a household picture for my daughter when I was trying to explain her stocks and we outlined around 50 stocks which we interacted with on a daily basis in our households.

A lot of them were technology in that sense but most of them were not technology. I would still go with businesses which are not prone to disruption. Nobody has any call on what happens in the future. There are so many simple industries that are getting disrupted. But if you stick with businesses which may not be prone to disruption in the future, your risks are taken care of and probably your returns are also going to be taken care of if you buy then at the right valuations.

So not Apple but an HUL?

I would rather put my money on an Apple than on HUL, assuming Apple is a consumer business and not a technology business.

What are you seeing in terms of debt levels and management of debt within the financial sector and some of the utility space? How is the health looking there and are you spotting opportunities?

I do not really understand financials. I stay away from utilities which are regulated by the government. I would not be able to comment on that.

Give me a parting thought, a thought that you have discovered in 2018 as an individual or as an investor and something you want to apply this year?

I turned 40 in 2018 and I realised that after at a certain age in your life, you need to subtract things from your life rather than add things. So 2018 and 2019 is where I want to focus on subtracting more things and this is something which I learned in 2018 when I was turning 40. So focusing more on things which I have already learned, focusing on fewer things and I think trying to do them well is what I would do..

Also Read

If you understand business, go for basket of stocks, else stick to ETFs: Vishal Khandelwal,

Vishal Khandelwal on how to invest in the time of volatility

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