GURUS OF CHAOS
Modern India's Money Masters
Saurabh Mukherjea
BS Books/Bloomsbury; Rs 350
Jeeves placed great emphasis on understanding "the psychology of the individual" as he found ways to resolve romantic entanglements for his employer's circle. Saurabh Mukherjea similarly emphasises the role psychological orientation plays in generating consistent, high, long-term equity returns.
The tools investors employ are not rocket science. It takes relatively little time to learn the basics of balance sheet-based research. But even so, while many people know the standard methods, few manage to beat the market.
The ones who do beat the market may differ in their focus, and in the weight they place on specific ratios. For example, some are value investors looking for a margin of safety, others seek growth, others look for businesses with "moats" of competitive advantages and so on.
But they all have certain psychological traits in common. They have the ability to be contrarian and think independently. They exhibit patience, confidence in their own judgement and, counter-intuitively, a lack of greed. (Quite a few play contract bridge, though proficiency at this fascinating game may not be necessary or sufficient to develop investment skills.)
India is an unusual market and presents its own difficulties and the book is built around an India-focus. A brief prologue is followed by five essays, each of which centres on the interview of some individuals classified as a "modern Indian money master".
The interviewees are Sanjoy Bhattacharya, the founding chief information officer (CIO) of HDFC Asset Management; Alroy Lobo of Kotak Asset Management; Akash Prakash of Amansa; Sankaran Naren of ICICI Prudential Mutual Fund; Sashi Reddy of First State; B N Manjunath, former advisor to Ward Ferry; and the unnamed former CIO of an "iconic investment management house". The last person's former employer had issues with being identified.
The author is himself highly respected. His house, Ambit, is known for its research-driven approach and Ambit's models for fundamental investing have been successful. It helps that the author has a personal relationship with all the interviewees. They all talked freely and in detail about their personal lives, and investment philosophies. No stranger, however well-primed, would have got them to open up so eloquently.
That expansiveness makes discussions of mindsets and personal investing styles much more illuminating than the usual platitudes. Another quality that comes through in the interviews is a shared sense of humility. Each of these men is well aware of his own worth. But they also have no issues discussing their historical errors.
Experienced investors will find the differences in approaches fascinating. These men use different filters. Beyond looking for basics like honesty and managerial competence, they have often chosen to invest in businesses that have little in common. Or they have bought the same businesses at different times, for different reasons.
Each essay consists of an introductory section, followed by the interview. The author suggests that a reader who is already familiar with fundamental tenets can skip straight to the latter. But this would mean missing out on a great deal. Mr Mukherjea has an easy facility for explaining complex accounting and managerial issues. "His" thoughts (as opposed to the interviewees') are well worth accessing and help to easily introduce the approach followed by that particular interviewee.
The book is also studded with interesting little nuggets. Did you know, for instance, that India was the least liquid among the world's 15 largest stock markets? The lack of liquidity creates specific problems. Also, like most stock markets, it is Pareto. A very small number of stocks beat the market return by large margins, while most stocks fall short. This is a serious problem for stock pickers.
It is relatively easy to identify "desert flowers" - businesses with unusual quality. But most analysts have a tough time ignoring the herd. Mr Mukherjea, and his five interviewees, all use accounting quality as some sort of proxy for promoter honesty. The book offers some useful accounting checks for honesty and also offers some interesting data on the subject.
Most Indian companies are not transparent in accounting practices. "Accounting Nazis" can eliminate entire sectors of the Indian market at one glance, just by insisting on clean accounts. Of course, this approach looks stupid during booms when money flows into hot sectors with shady practices, such as real estate and infrastructure.
But the book claims that the 50 stocks with the best accounting quality in the BSE 500 have generated 26 per cent more in the way of annual compounded returns over the past decade than the worst 50 stocks in that broad index. So an investor who ignores the noise and sticks to quality through booms and busts can make a great deal of money.
Gurus of Chaos is thought-provoking, as well as an easy read. Take notes and see if any of the outlined approaches work for you. Malcolm Gladwell claims 10,000 hours of relentless immersive research is necessary to develop expertise in any given subject. This book will only mean investing two or three of those hours, and it gives serious pointers about what to do with the rest of that allotted time.
Twitter: @devangshudatta
