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Shankar Sharma on how not to be a trend follower & other investment mantras

Do not follow a style which is inconsistent with your own personality, says Sharma.

ET Now|
Updated: Dec 03, 2018, 04.04 PM IST
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Shankar Sharma, VC & Joint MD, First Global, tells Ayesha Faridi of ET Now why he is a contrarian investor, explains his preference for smallcaps and how he learnt from his mistakes. Sharma was speaking at the ET Markets Global Summit in Mumbai on Friday.

Edited excerpts:


You have been always known as the one contrarian investor. When Tata Motors’ JLR deal happened, everyone was just thrashing this stock but you were that one contra guy who said I am going to go out and buy Tata Motors.

I did not become contrarian for the sake of it. I was in London and I was living in the Mayfair area and I was going for my evening walk or whatever it is and I came across the JLR showrooms in one of these lanes or wherever it was and I saw the cars and the new models and I said that I have never liked Land Rover. I thought it is a dump boxy old fashioned car being packaged as a very hip product but I like the Jaguar cars.

Then I called my analyst and I said that look what is JLR’s global market share in luxury cars and he came up with some numbers, maybe 1% or something. I said what is with these cars? They can get 2%. So, do the math and tell me what kind of numbers can they deliver and then he calls me back and he tells me that boss I think they are going to make $500 million of profit. I said I will kill you if you get this wrong because they were making a billion in losses. He said come down to India and check the spreadsheets. I came down. I checked that and it added up. So my call was it is going to make a billion dollars in profit and it was making a billion dollars in losses. It actually made more than that. In two years’ time, it was making $2 billion in profit.

That was satisfying and it was a very simple trade. Sometimes, the greatest trades are very simple trade. Not a lot of science goes behind it.

But you have always been that top-down guy? You hunt for these scavenger stories, not Tata Motors but many others?

Yes, it is a more efficient way of doing things. If you get the sector right, then irrespective of what you have bought in that, you will be making pretty decent return. The return on time when you go top down is very efficient, but I do a lot of small caps which is very time inefficient. It takes me several months to figure out one company.

Now I am a little better at doing smallcap investing than earlier because it is a benefit of experience. But earlier, I used to go for top-down as it simplifies a lot of things. It cuts out a lot of the individual stock level noise. Now I do not trade at all. Fifteen years back, I would only trade. I did not even have a demat account. That was my philosophy. Buy and hold does not work. Now I am older, I think it works brilliantly. Investing is a journey in your own personal life, the way you will evolve as an individual.

I always believe that do not follow a style which is inconsistent with your own personality. So I could never be a trend follower. Buying the good companies is not my style. If I start doing that, I may as well quit.

But in 2008 you did right, you did follow the herd and that was one of your biggest regrets?

No, I got the bear market right. I always get bear markets right though I may or may not get bull markets.

Are we in a bear market? We are bound to see one in the next six months.

God has blessed me with only one skill which is how to get a bear market. In 2008, I got it right and the worst mistake of my life was in 2009 January, February, March. Everything that I looked at in terms of indicators was flashing green, screaming a buy and then a well known stock market veteran called me and said Shankar what are you doing? I said nothing. He said come, we are having a party at Jewel of India. So I went there. All our stock market brethren were there and somebody asked me what do you think? I said it looks like the market is a buy or becoming a buy and they pounced on me. They said what nonsense. Oil is going to be like $5 and index, whatever it was 8,000 Sensex or 10,000, is going to be 3,000 and their logic was compelling.

You always said you had a mind of your own, you have never heard anyone or looked up to anyone when it comes to equities, stock markets.

I have no heroes in stock market. I have learnt a lot obviously. Everybody says they have learnt from the greats like Warren Buffett, George Soros and all that. But I do not admire them and I do not think that they are extraordinarily gifted or blessed. I believe it is largely luck that helps you make money in stock markets. Where skill counts is in sports.

So what is your next act?

There are many acts going on. We cannot talk about it. It is premature. But we are not going to just sit around and go into the sunset. Devina (his wife) always tells me at what point do you call it quit? But for me, there is nothing called retirement. I am happy. I still work 80 hours a week, maybe 100 hours a week. I have no time to breathe. I am busy on a variety of things and I just love it.

You have still not reached your penultimate goal on bank ,balance considering that is why you came to the markets?

Last two months has weighed a big dent. So I have to make that up and then we will see.

How big has the dent been? The markets have recovered quite a bit.

I do not trade and so I do not short. If I had shorted it and the market was looking a screaming short in July and I said this market is toast by November. It was toast by September. I got it wrong by two months but it was just a no-brainer. Just a handful of stocks were running up. The smallcaps had obviously crept out after the budget. There was a very narrow bull market but since I do not do that anymore, I could not participate or profit from it. We will all take hits on our portfolio for sure, but we will get it back. I am optimistic.

But your conviction on smallcaps remains, irrespective of how badly you got burnt?

If you are not prepared to lose 30-40% in this game, then you ought not to be in this game and that is a fact. Small caps went up 20x. From there, they have fallen to 12x returns. Why should I be crying, it is still okay.

You almost did, you mentioned it twice without me prompting.

I am saying we made a lot of money. We lost. We had given a bit of the top. It is okay.

So the conviction remains in smallcaps?

100%.

Any largecaps that attract you because it has been such a diverse market? Anything which is looking interesting in largecaps? Are you willing to spread yourself outside the smallcaps which you have been a big fan of?

No I do not buy largecaps because I do not find any intellectual stimulation in them. But I were to buy, a stock like Maruti looks reasonable because irrespective of the problems around auto sales, India is still a hugely under penetrated auto market. I do not know what the data is, maybe it is about 3 crores cars for a 110-120 crore population.

There might be 10-12 crore two-wheelers. It is long way to go. Maruti has corrected 30% and one thing I have noticed is that in a bad bear market, good stocks without leverage typically fall between 30% and 40%. Maruti fits the bill.

And you are still liking the chemical companies within smallcaps?

That has been a just a secular shift because of the China factor. There are so many stocks. Somebody told me just last week and I missed that stock. It was a 50-crore market cap company. Now it is a Rs 1,000-crore company in a matter of one year. I like the entire space for sure.

Also Read

Recovery in stock market will be short-lived: Shankar Sharma

Bring back inflation to fast-track growth: Shankar Sharma

Earnings growth is not your birthright, Shankar Sharma tells Indian investors

Correct asset allocation is 90% of the game, have a foot in every major investible class: Shankar Sharma

Why D-Street calls him Big Bear! Shankar Sharma has an answer

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