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Think You Can Predict The Markets?

Monday, January 30, 2012

He is a great believer in the virtues of disciplined investing backed by rigorous research. Methodical and philosophical are the words that comes to mind when you try to bracket P. Phani Sekhar, Fund Manager, Portfolio Management Services  at Angel Broking. Described by his colleagues as somebody always ready to take on new challenges, Sekhar has been a rank out performer in the growth category over the last 4 years registering a CAGR of 5% compared to the benchmark BSE Mid-cap index’s returns of -0.5% (CAGR) in the same period. The Sensex managed to deliver 3.1% CAGR over the same period. A member of core teams that established and scaled up operations at Angel Broking, Sekhar believes that the principle of investing is keeping it simple and uninfluenced by ego. Here this Investment Expert reveals to Mayura Shanbaug his ‘Strategy for Success’.

Your Background?
I have spent close to six years in the equity markets across the US and Indian equity markets in roles spanning Business Research, Equity Research and Portfolio Management. I joined Angel Broking in 2005 and have been associated with Portfolio Management Services (PMS) since its inception in 2006. I am currently managing two portfolio schemes – A Bluechip and a Growth portfolio that cater to large cap and mid cap investing respectively. I am a Mechanical Engineer with a Masters in Business Management (MBA).

At what point had you given a thought to making a career in the stock markets?

I am the first person in my family to make a career in the capital market. My entry in this profession was through a process of elimination rather than choice. After my engineering I gave a serious thought to what I wanted to do. I was certain that I don’t want to join the software or IT bandwagon. The core engineering jobs that were available were not satisfactory, monetarily. Pursuing further studies was not looking lucrative as well. I realised after introspection that there is an intrinsic quality in me and that is to make everybody’s business my business. I realized that I was too mercurial a character to fall into the systems if I had taken the third option of Indian civil services. This elimination left me with the option of pursuing an MBA that would have allowed me to do an array of things with lots of exciting options. I chose finance since I found it a subject which would appeal more to the left side of my brain. I passed my MBA in 2004 just after the equities boom of 2003 had started doling out lot of opportunities in the sector. I looked at the markets closely and realized that there is a lot that is offered by the markets which I found is the most intellectually stimulating entity and I felt, anything which is layered will keep you interested for life. The challenge of outsmarting the people who have spent a lifetime in the sector, with your knowledge and making money for investors who put their trust in you was too exciting for me to miss. 

Do you use technical analysis, or do you employ fundamental data?
My role in the company is of a fundamental portfolio manager, so naturally I have a bias towards fundamentals. But I have a healthy respect for all kinds of market analysis as long as there is an empirical evidence to back it. Every analysis is a tool about which you should know how to use it, when to use it and where to use it. I understand every tool of the trade but since my mandate is that of investing on fundamental basis, I stick to fundamentals.   

How would you describe your methodology?
I believe in very simple things which are the three pillars of corporate finance; Capital budgeting, Capital structuring and Working capital management. In simple terms it means what is the company doing in order to grow. How is it raising its finances and how are they spending it. How is it managing its short term finances for working capital? If I know that the company is not doing well with it’s finances or it’s debt laden, but because of some technical formations can give a short term return of 10% , so any technical investor  will be investing in the share with stop losses in place . But I am a fundamental analyst who is judged on the basis of long term compounded returns to the client. I can not be doing this business of calculating stop losses wiping out capital because that is not my mandate and secondly I am not even convinced of the business.  So I employ some very simple but rigorous methods. 

What appeals to you about Investing? The short or long side?
By nature of regulations and the current market structure in India, we all are ‘long’ only investors. May be short selling attracts you more, but with the limited opportunities that are present in India, the only viable option for wealth creation is through long term positions.

What differentiates you from other Investors?
I never really gave it a thought; I am busy working doing my own things. There is no one single rule. Every person has to find out what works for him. Investing is like life where every experience teaches you and you develop your own philosophy. For investors, wealth creation is the ultimate goal. In my book I emphasise on the process rather than the outcome. Outcomes are important but one should be very mindful about how the outcome has been achieved. Otherwise bad habits get perpetuated, and in really testing markets, you get exposed.

What gives you that edge?
I really don’t know whether I have an edge, I am busy just doing my job.

Is there any applicable lesson to trading/ investing?
The first thing people need to understand is that investing is not rocket science. Investing is closely related to behavioural science unlike other physical sciences and since it is related to behavioural science, it is bound to throw up different outcomes. There is no magic wand to make money. Nobody knows the exact formula for success. Investing is more than a full time job. Few things that investors should keep in mind are multi baggers happen, but they can not be devised.

Secondly, they should perfect their process. Investors should be appreciative of the fact that there is no one rule and you have to define your own circle of competence. One should be vary of what I call an investor’s ego.

How much of what you do is gut- felt?
Gut-feel is something that is within everyone. In order to become successful you need to develop an ability to reduce the impact of your gut feeling and rely on logical decision making. Gut feel is nothing but impulse and I try and reduce impulsive decision making by relying on logic.  

Do you try to anticipate or follow market trends?
It is impossible to anticipate or predict the trend. By looking at the data points across the economy you can anticipate corporate earnings trends. Once that is known you can easily conclude that the market trend is likely to follow given that there are no event risks affecting the trend like election results.    

When you put money on a trade and it goes against you, how do you decide when you're wrong? 
I am wrong, if my data is wrong and if my data is wrong I am out of the trade I cut my losses and I am out of the trade. 

Any positions you ever lost sleep over?
No, I don’t know whether it’s an advantage or disadvantage, but I have never lost my sleep over any position. I do not attach any personal feelings or stakes to the trade. 

What would make you wary about an Investment?
Portfolio management is more of an elimination process than a process of selection. Eliminating negative elements and considering desirable elements keeps you on track. Avoid businesses that you do not understand. Avoid complexities, keep it simple.

Of the tens of thousands of investments that you have done, which was your best trade/investment?
I would not like to name a few but I would like to mention the contra stand that we took on the banking sector in 2008 when the entire sector was falling apart really paid off well. We avoided some of the high flying names which are biting the dust now and that has indirectly also paid off.  

What makes an investor successful?
You have to understand yourself as a person. The more you detach yourself from the scenario the better it is for you in decision making. There are no definite formulae or parameters for an investor. One should not get carried away by the hearsay and should be wary of reacting to every stimulus. 

Do you have a scenario about how the current bull/ bear market will end?
I don’t know. It would be quite adventurous or perilous to forecast at the current situation. We are going through a challenging phase and many problems that have been built up by  inaction over the past. I hope they don’t take that many years to resolve but to the best of my knowledge it cannot be resolved in one or two quarters.    

Your take on the current market scenario?
There are two –three things going in its favour. There is a consensus view which is negative .What it does is it keeps a low bar of expectations. Results so far have been good. The Rupee is recovering....FIIs’ have brought in money back to the markets indicating positive sentiments. The combination of all these factors will bring broader market participation in the coming days.

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