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UTI AMC's Vetri Subramaniam says valuations matter, no matter how great the story looks

UTI AMC's Vetri Subramaniam says valuations matter, no matter how great the story looks

UTI AMC's Vetri Subramaniam says valuations matter, no matter how great the story looks
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By CNBC-TV18 Sept 5, 2018 8:23:04 PM IST (Updated)

UTI Asset Management Company on Wednesday said that valuations matter, no matter how great the story looks.

UTI Asset Management Company on Wednesday said that valuations matter, no matter how great the story looks.

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In an interview to CNBC-TV18, Vetri Subramaniam, group president and head-equity, said, "Stock picking eventually matters and nobody who is in the market should ever forget that."
Subramaniam said, "The most important thing in investing is to have an open mind and be willing to revisit the investing case, when the facts themselves change and not to get wedded to a dogma."
Edited excerpts:
Q: Five years ago, in 2013 on Teacher’s Day, Vetri Subramaniam wrote a piece in Mint titled ‘To my Teacher: The Stock Market’. We thought the best way to celebrate Teacher’s Day here at CNBC-TV18 is to invite one of this very good, excellent students of the market to tell us how to learn from the stock markets. It is a lovely piece and I have read it several times. Let me begin with one of the quotes that most impressed me in that, George Santayana’s quote, "Those who do not remember the past are condemned to repeat it.” How would you apply this in the current market fall?
A: Without getting into the particulars about the fall – those who forget history are condemned to repeat it and maybe it's a different class, which comes up for the exam every time. The thing that is always striking to me is about how it is the same issue of a new paradigm, a new valuation regime. But the reality is that equity is swing between the extremes of being very rich in terms of valuation and then at some point, they plumbed the depths in terms of being traded cheaply and it's virtually impossible to know beforehand what causes the valuations to move between those two extremes because that is significantly driven by the emotions of people, by the sentiments of greed and sentiments of fear. But they do fluctuate between those two and it's good to know that and therefore, the old rule of buy low, sell high, I think still remains valid.
Q: Just to go back to some of those lessons, you talked about one, the other line I want to refer to is the challenge is not in identifying a good investment but in committing to it in size. This is the biggest problem, right? You buy a good stock, but then the market goes haywire and then you don’t know what to do, have you stuck to this learning or has it also been hard for you in the past?
A: This is always hard, because it's very easy to go back and say, if you had bought hundred shares of XYZ - fill in the blanks with whichever stock has gone up 100X over the last ten years - then you would be worth so much today. But the challenge is that, was it a significant enough investment as a percentage of your networth at that point of time to make a difference.
One of the strange things about investing is that to make a lot of money. Sometimes you need to have a lot of concentration, but to stay rich, you need to stay diversified and you will see this all over the market place that people become very rich with the concentrated investment style. But once wealth goes up, you prefer to stay diversified. So it's not just about picking the right stock, it's about position sizing and having enough money invested in that stock for it to be able to make a difference to you.
Q: You begin by saying in that piece that you started your career in 1994 and as of 2003, the stock markets were 23 percent lower. A lot of people would have gone through this experience if they had entered around 2008, that is how they would have felt in a couple of years, even those who would have entered much later in 2011 would have felt that way in 2013. What would you advise them, what did that teach you, how do you stay invested when you see the market down 23 percent?
A: It was pretty much trial by fire for me. We are obsessed so much about the macro and all the problems that India faced during that period. The Asian crisis, there were multiple challenges during that period, political instability and you name it, we had those problems. But what I learnt during that period is that eventually investing boils down to picking good companies and then staying invested with them, because during that same time that I talk about where the market went down 23 percent. There were multiple stocks, which gave you returns of 10x, 20x, 30x and 40x, because in a sense, they were perhaps not so affected by the macro. But the crucial thing here is to understand that eventually you make money by picking companies. Obsessing about the macro is good, you should worry about it as it's a risk factor. But money is made eventually by picking the right companies, and backing those entrepreneurs through difficult times, and to me that was the biggest lesson during that period, where markets went down over nine years. There were many opportunities for you to create wealth, if you pick the right stock. So stock picking eventually matters and nobody who is in the market should ever forget that.
Q: Do you have any examples, any interesting anecdotes to share with us? What has your biggest learning been from any company or any stock that you bought?
A: More than company or a stock, the two things and we were discussing this earlier. To me, particularly that whole run up into 2000, when the IT stocks went berserk and then meltdown after that, I think the two things, which stood out for me at the end of that experience. First point is valuations matter. It doesn’t matter how great the story looks, valuations eventually matter in terms of what your outcomes could be. When I look at some of those peak prices of 2000 today, and where those stocks are even now almost 18 years later, the returns on some of them have been very poor.
The second point is that, at an individual level, asset allocation matters. In the late 90s, leading up to 2000, I pretty much believed that being somebody in the market you could almost have 100 percent invested in equities. But it was a very humbling experience to see my portfolio drop almost 80 percent from the peak in the early 2000s. In a way, it taught me about my own risk appetite and I realise that if I need to sleep well at night, I cannot afford to be 100 percent invested in an asset class, which will surprise you every now and then. You could say, one should been aware that in 2000 valuations were excessive, but the point is, can you live with those kind of drawdowns?
The third thing that I would say, which was again a big lesson for me in 2000. I think the real destruction that 2000 did and I saw this at first hand level, was the extent to which people had leveraged themselves in the market. Therefore, when those stock prices came down, it wasn’t just stock prices coming down. These were real lives and these were real people landing in a lot of debt, because they had been wiped out by the leverage that they had and I think those to me were the three big lessons of what I learned during that whole period of 2000 and yes, the market can be irrational at times, get used to it.
Q: I was going to ask you what lessons you had drawn from the next boom, the mother of all booms, 2003 to 2008?
A: It's very interesting that you should ask that because it's very – in a sense the fundamental investing tool kit stays the same, but the context keeps changing and the strange thing about 2003 and 2008 was suddenly how investing became all about macro. It was all about India’s great macro. We stopped discussing companies so much and the focus shifted to all about the great macro that we had and we deserve the place at the world table. We were now a full grown adult. We were no longer a company dependent on foreign aid and in a sense, both that boom was globally led and even the fallout after that boom had significant global correlations.
So it's very interesting as the tests and the challenges that the market throws at you are different every time. So in a sense, the lessons of 2000, except for the bit about valuations, the bit about leverage were not necessarily fully relevant in 2003 and 2008, because it was more about macro. But again, I would say, end conclusions, the same three things asset allocation matters, valuations matter and please don’t leverage. Those were the consistent lessons, whichever boom or bust period you look at.
Q: The market, you said, has been your biggest teacher but what about a flesh and blood teacher? Any corporate, any business, market veteran that has taught you your biggest learnings?
A: Many of them, I would say it has been an amalgam, though I have in past highlighted my first boss in the stock market is somebody from whom I learnt a lot, but I would say many people and that is the great thing about the stock market. There is not just one teacher, there are so many people, there is a wealth of data, there are so many people who have written deeply personal accounts of their own style of investing, their philosophy of investing. So in that sense, this is like a buffet and you are spoilt for choice.
So go out there, learn from those experiences and you will find your own teacher, the one who works for you. It's not a question of who is the right teacher or wrong teacher. It's just a question of going out there and using all that knowledge and data that is available. The fact that all these people have shared their experiences, which you makes it so much more powerful.
Q: You joined in 1994, almost 25 years in the investing business. How should people – as they age – change their perception of investing? Even if you talk to us about which kind of funds they should choose, I am sure a lot of people are listening?
A: I think it's always evolving. I think about investing is again as I said, the tool kit is sort of the same, but the context keeps changing. Therefore, the most important thing in investing is to have an open mind and be willing to revisit the investing case, when the facts themselves change and not to get wedded to a dogma. Unfortunately, just as in other things in life, people unfortunately get too much into dogma about what works and what doesn’t work, whereas the reality is that things change and I gave you that example. To me, in 1994 to 2003 was about stock picking, but 2003 and 2008 was about how global macro could make such a big difference. We had never seen steel companies for example, make the kind of returns that they did during that period. So, it's always evolving, it's always changing, keep an open mind, but have a basic investing tool kit as that will prevent you from creating big blunders.
Q: We get so much from our teachers but seldom do we give back, how do we give back to the education system or to our teachers?
A: I think we should do more to help our own teachers to remember them, to honour them as it's genuinely a noble profession and I should say more on a personal note. Just recently, we had Guru Purnima in the month of July and at my old alma mater, Indian Institute of Management Bangalore, a lot of the students of my batch and other batches came together to make a significant contribution of almost Rs 2 crore to the institute to rename a classroom after one of the teachers that we greatly loved and respected, and she was there to grace that occasion and to the institute, it gives funds, which enables them to invest for students, who are going to go to that institution down the road.
I think those of us who have enjoyed a fair degree of success in life, we should look at ways to re-engage with those institutions and with those people, which made such a big difference in our lives early on as teachers and how can we give back to them, either in terms of money or in terms of kind by being able to spend some of our times with those institutions.
So I would certainly urge, using this forum that you have given me, that all of us who have benefited from this education system should look to re-engage with that system and do something about improving the quality of education in the country.
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