The dharma and karma of investment, according to ASK’s Bharat Shah

Fund management was not yet a major career attraction back then. This was also the time when mutual fund industry was opening up. Private sector was allowed to set up fund houses and manage investor money.

“Probably, it was some charm, an attraction that drew me towards it, made me move from managing finance in the manufacturing industry to this new field of investing. Maybe the lure of money, maybe an opportunity to make wealth, maybe intellectual battle that you play and a sense of victory that it gives. Maybe all these were the drivers,” Shah reminisces.

In 2000, Shah joined ASK Group to head its portfolio management services (PMS), where he is the executive director today. ASK Investment Managers manage ₹35,895 crore worth of investor assets, across PMS and Alternative Investment Funds (AIFs).

With three decades of experience in markets, Shah has seen it all — the 2001 dotcom bubble, the Lehman Brothers crisis that trigged the global financial crisis in 2008, and more recently the Covid-19 pandemic.

So, what is the investment mantra of this market veteran?

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Avoid clutter, stay bottom-up

According to Shah, investing should be simply about finding high-quality businesses which have the potential to create value, and ensure that these are run by people who have integrity, capability, adaptability and resilience.

“Investing is not trying to predict markets, to try and judge markets. It is not trying to concoct some grand economic theory, it is not about a nice cocktail discussion on geopolitics, or some glamorous dialogue. It’s not about riding a theme or a trend,” he adds.

Shah looks for businesses that have large size of opportunity, so that they have real potential to grow, as well as growth that is driven by capital efficiency.

“In other words, using the same capital to get bigger outcome, or getting the same outcome with lower amount of capital, those are basically the fundamental principles of capital efficiency, and therefore that growth becomes self-sustaining, which is compounding, and because it has longevity, it creates value,” Shah says.

Prices follow value

Shah believes that over the long period, prices are always pulled by values. So, it is the job of an investor to use all principles, precepts, aphorisms, idea of investing, to convert all of that into a view on the value of the business, he says.

“Comparison between value tomorrow and price today is the definition of compounded returns in the intervening period. Difference between value and enterprise today is the definition of margin of safety,” he says.

Margin of safety

Investors can make three sets of returns, Shah says, “Future earnings growth is one annuity that you hope to make; quality of that growth, if it is superior, will aid the rate of growth, which is again an annuity; and margin of safety, if the prices are cheaper than the value, then that margin of safety is a one-time extra return.”

For example, something which is worth ₹100 is available for ₹90, then you are getting at a margin of safety of 10%.

“So, that is one-time extra return because prices will gravitate towards value. This means that the gap will be breached at some stage, you don’t know when, but the fact that it will be breached is a definite,” he says.

Shah adds that it is important to act with a margin of safety in your favor, rather than margin of hazard. “If you pay more than the value, then you are suffering with the margin of hazard. And therefore, instead of three returns, you get only the first two, future growth and quality of growth. But margin of hazard is a reduction. Margin of safety will be your third factor as an addition.”

Quality of growth

Shah says that without growth, businesses eventually stall, then “they start to decline, diminish and eventually die. And therefore, growth is very essential. That growth fountain comes from the size of opportunity, but quality of growth is even more important than just the rate of growth.”

“And that comes from capital efficiency,” he adds.

Be adaptive but remain steadfast

Shah says investors should keep refining their investment model with new insights and understanding. It should not be a “patthar ki lakeer” but an intelligent adaptive opinion of value.

But so long as the businesses continue to do what they do, you remain with them. “And with longevity rather than in a temperamentally quirky way, when something happens to the market, you engage or disengage, either get too excited or too defeated. Therefore, wisdom of remaining long term, this is what investing is all about,” Shah says.

Focus on absolute returns

According to Shah, investing over a period of time has to achieve absolute positive return. “And that positive return has to be reasonably healthy, compounding outcome over a period of time. But if you are in a competitive investing, clearly you have to create value in addition to what markets have done. If you fail to do that, then I think something is not right,” he says.

Shah says he treats it as his dharma, his duty, that the absolute has to be generated. “And equally I consider, it is my duty that relative has to also happen if we are in a business of investing and managing money for others, but the good news there is if you focus on absolute, relative will happen over a period of time; it is a byproduct,” he says.

Shah says obsession with relative returns to generate alpha or superiority over benchmark is not the right way to approach investing, as that would force one to watch over their back on a day-to-day basis, which he says is the worst way to do investing.

“Absolute and relative are like two rabbits. If you try to reach both simultaneously, you get none. But if you focus on one at a time, then you get both. And therefore, purity of investing demands methodology, philosophy, approach, strategy, stock selection, all harmoniously combined to create a confidence and a belief that you can generate absolute return without the help of the markets.” he says.

Market psychology

Shah says understanding the firmament in which the game of investing is being played is very vital. “That game on that firmament is marketplace and the market has its own mind. Therefore, they are a given and you have no choice. Whether they play nicely or brutally, whether they play fairly or unfairly, that is not the choice you have in your hands,” he says.

“The ability to control your psychology and not let market noise become your internal noise is a game that you must play effectively. It is an inner battle. If you need to subjugate the noise of the market, you need to sublimate the noise within. If you do not, then the two together become a cacophony. I would say I have improved in this game over a period of time compared to what it was 30 years ago. I still remain a student at it, but I am no more a novice,” Shah adds.

Shah says that eventually, invariably markets reflect the truth, even if in the short term they do all kinds of things. “In the markets’ ability to reflect the truth in the long term I have an abiding faith, and therefore that drives the mission,” he adds.

Exiting positions

Shah says over a period of time, he has improved his ease and ability to sell his investment positions. “It is still not perfect. There are still gaps that I am acutely conscious of. It is a work in progress, but it is in the stage of finishing. Selling discipline, understanding the method woven around it, all have become better. But I still can’t say that I am there, and to that extent, it is a constant area of refinement and improvement,” he says.

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