There is uncertainty around the world. How are foreign investors looking at emerging markets, especially India?
We have a broad focus on emerging markets but I must admit that we spend more time on China rather than India because China is a bigger representation of the market. So getting China right or wrong is very important for us. Having said that, we have been underweight on emerging markets for some period of time because we think that the US market will do better in 2016 as compared to emerging markets.
What are the advantages of having two distinct investment horizons - strategic and tactical?
The strategic investment horizon allows you to focus on the variable you should have more confidence in. This sets the boundaries of what you should do and what you should not. The tactical investment horizon is the practical recognition that there’s a movement within those boundaries.
There are long term secular trends (demographics, death cycles) which are less likely to reverse. But in the short term, there are other factors that come into play which explain the financial market performance. So you have to have a balance. They are both important. If you focus only on the long term, the risk is that you can be very wrong for a year or two. If you focus only on the short term news cycle, then you make a valuation mistake.
How do you create alpha especially in developed markets where beating the market has become increasingly difficult?
There are many investment professionals who are doing the same job as you are. It is one professional trading with another. One of the advantages of emerging markets is that the influence of the retail or unprofessional investor is still important. To some degree, an informed investor can take advantage of amateurs in the market. As compared to emerging markets, the influence of amateur investors is very small in US markets. Thus, it is difficult to outperform.
So how do you outperform? You have to be conscious that the market is fairly efficient most of the time but not all the time. So you have to be patient to wait for those periods of time when somebody is making a mistake. Don’t think that there is an opportunity for you to add value every day. On most days, there are no opportunities. It is the impatience of investors who think they have an information advantage when they don’t that causes the underperformance. So you have to be patient and humble.
You need to understand as to where you will have an information advantage. To give you an example, if you spend one week analyzing the balance sheet of one company, you will learn more about that company than someone else. My guess is that if you spend a long weekend thinking about a currency or the price of oil and by the time you spend fourth or fifth day on it, you are not going to get any more insight. You will know as much about what drives the price of oil as somebody else. So think about where the time spent can really create an information advantage and where time is misspent. Most people think that just because oil is important you need to have a view on it and the reality is that you don’t. It is really difficult to get an accurate forecast on the price of oil versus will Google outperform Yahoo? I think trying to make that decision is a much more useful one.
Do you think investors learn from past market crisis?
I think the smart investors learn from the past crisis and mistakes. History moves along in a linear irreversible fashion but you should be mindful of similarities and cycles. You can look to history and form your forecast as to what is going to happen but you will be silly to think it will exactly be the same. The future is different from the past but you can learn from it.
What is the role of individual fund management skills versus organizational processes? What is more important according to you?
They are both important. Ideally, over time, very good investment processes have evolved from good skills. You learn from the effective decision making process of individuals. I think the best investors are very methodical, almost computer like in their approach to the market. The mathematical expression of good investment behavior is learnt over time and you need to appreciate that. In this day and age, people forget that linkage. If you are running a large investment organization then you have to be very conscious of process and the appropriate use of technology to ensure that this process is used consistently. But the process needs to complement with skills, especially for making investment decisions. We are not just investing portfolios, we are in the business of investing for clients. So understanding the linkage between capital markets, the investments you make for portfolio and how you run the business is an important skill.
Which are the most important skills to be a successful fund manager?
You have to have a continual thirst for learning. You have to realize that this is a competitive market and there’s a lot to learn. If you don’t like to read and study then you shouldn’t be in this business. It’s very intellectually satisfying but you have to know who you are and enjoy that.
There’s also a behavioral bias. You have to learn to make good decisions. In investing as much as in anything else you are making decisions. You are making decisions about resource allocation. You need to appreciate the importance of process and the way the brain works. You need to understand the psychology of human decision making and where you are prone to make mistakes. Noble prize winner Daniel Kahneman has written a great book called ‘Thinking Fast and Slow’. This book explains the biases that you have as a decision maker. You need to be aware of this as an investor. That book talks about two systems of brains. The system one is intuitive brain, which we use most of the time. It is the reactive brain which helped human beings evolve over time. The system two is the deliberate part of the brain which separates us from animals. Most of the time you are fine using just one part of the brain. But this thinking process does not work in the investing world. In the investing world, you need to use system two. But the tricky part is that once in a while you need to use system one part of the brain too. So the key is to know the difference – when to use the first part and the second part. So this self-awareness is really important to be a successful investor.
As a fund manager, how do deal with the information overload?
You should know what to ignore. It took me years to learn how to read newspapers. So much of what newspapers publish is complete waste. Most economic data which come out in newspapers are irrelevant. What is really important is the trend in the data. You should focus on what’s important for you. Identify where you are wasting time.
What would be your advice to a budding fund manager?
Identify successful fund managers whom you know personally or in the market place and learn from them. Read the annual reports of Warren Buffet’s firm Berkshire Hathaway and the interviews of Stanley Druckenmiller. They should also read why the authors of multi factor model Fama and French didn’t believe in active management. So take that mosaic approach to be a complete investor and understand that the world of investing is like a universal religion.
Fund managers have a passion for what they do. I often say that investing is like a religion for people who choose it as a career. But there are different religions. You need to learn to see the nuances between a growth versus value investor, fundamental and quantitative investor. Some succeed and some fail in both categories but the key is to be faithful to your own religion and recognize that other religions in the investing world that can be equally satisfying. You need self-awareness to be a good fund manager.
Whom do you look up to in the field of investments?
As a macro investor, I have great respect for Stanley Druckenmiller and George Soros. Also, you cannot ignore Warren Buffet who has accumulated his fortune simply from investing. Martin Whitman is another person I admire who has written a lot on his value investing approach.
Which is your favorite book. Why would you recommend it to others?
I just finished reading Daniel Kahneman’s Thinking Fast and Slow. I would also recommend a book called The Outsiders by William Thorndike.
