A Smart, Thoughtful Investor in the Making

In the third issue of Safal Niveshak TribeStar, I bring to you another brilliant, thoughtful investor in the making, Neeraj Marathe.

While I have met Neeraj just once, I have come to respect his investing acumen via whatever little discussions we’ve had. In this interview, Neeraj lays bare his investment philosophy for us to learn.

Over to you Neeraj!

Safal Niveshak: Before I pick your brains on investing, please share something about yourself – your education background and career.

Neeraj Marathe: Well, I am 34 years old, based out of Pune, Maharashtra. I have been involved with the equity markets as an analyst-investor for more than a decade now. Qualification-wise, I did my M.Com and CA (Intermediate), after which I did my M.Phil and I am now in the process of doing my PhD. I am full-time into investing. As a hobby, I have been teaching in a few B-Schools as a visiting faculty for the last 7 years. I teach subjects like Security Analysis and Portfolio Management.

SN: What got you into investing, and how did you begin to learn about the market and investing in general?

NM: I got interested in stocks in college. To be honest, what intrigued me was the fact that stock prices change so fast so soon, while businesses don’t. Why does that happen?

I started by hanging out at a broker’s place, meeting people, watching them trade, learning how the market works, etc. In the beginning, I dabbled in intra-day trading and F&O, purely with the intention of making some money. (My parents were always scared of the ‘stock market’, so I did not have any capital). But very soon, I realised that I am instinctively a risk-averse person; hence, rapid trading wasn’t for me.

I got my hands on a few good books and read up on Graham, Warren Buffett, Fisher, Lynch, etc. Those gave great insights and I built my investing process on it, which would suit my intellect and attitude. I also started reading up on the psychological aspects of investing and decision making. Then the entire 2005-2008 bull-run happened and I earned decent money, bit through skill, more through sheer luck!

SN: What would you say is one of the most important lessons you learned early on?

NM: I would say that the most important lesson I learnt is to know your temperament and skill-set. One can be good at only certain things. Identify what they are and try to do them. Aping successful investors never helps, since we are all different individuals.

SN: What according to you is the biggest problem why most investors don’t succeed in the stock market? Is it due to their inability to value assets properly, or is it due to the difficulty in understanding market’s behavioural cycles? Or is there some other factor at work?

NM: I would say that the biggest problem is controlling the human brain. More than analysis or valuation, the decision making process is what most investors go wrong on.

SN: Michael Mauboussin, in his book “The Success Equation” writes that much of what we experience in life (and investing) results from a combination of skill and luck. How has been your experience with skill and luck? Can you please explain with a real-life example in investing?

NM: This is an extremely important and interesting subject. Often it is hotly debated whether luck is prevalent or skill.

In my view, the answer lies somewhere in between and is a combination of luck and skill. It’s like marriage. One would be lucky to get a good wife, but one has to be skillful so that she remains good to you! 🙂

Success in investing is a matter of luck as well as skill. However, the percentage of both differs in different situations. My thoughts on this subject with a couple of examples can be read here.

SN: How can an investor improve the quality of his/her decision making? Some successful investors have talked about the importance of keeping a decision-making journal. What is your take on this?

NM: Yes, that helps. Once you pen down your decision making process in black and white, later on, if it goes wrong, you have no chance to justify or find excuses.

The human mind is extremely adept at finding justifications to prove that we were right all along. Putting things on paper will burn that bridge and force you to face and accept your mistakes, so that you can learn through them.

SN: How do you typically find ideas and what is your selection process before an idea gets added to your portfolio?

NM: Typically, an idea will be generated through multiple avenue, like reading annual reports, primary research like reading industry magazines or talking with industry people (who have nothing to do with investing), reading exchange announcements and by talking with (a few) like-minded investors.

There is no standardised selection process. I do not think this is something that can be standardised. Things are too relative and dynamic to standardise it. I do not use any screener or filter.

SN: How important are investment checklists? Can you mention a few key metrics your own checklist consists of?

NM: Again, I do not have a formal and standardised checklist, because I have often found that almost every time, some new factor pops up, which can be a game changer.

Since these factors will change from company to company, I don’t think there is any way that there can be one exhaustive checklist.

However, few things that I do are; understand the business properly and go into extreme depths of the same. Understand the management and their attitude, understand the financials and accounting, place the opportunity in the bigger scheme of things, try to be as conservative as possible while looking at the company’s future prospects.

SN: A lot of successful investors talk about the importance of having a “multidisciplinary approach to investing”. How do you approach this subject, and how can small investors create such an approach in their busy lives?

NM: I totally agree. Although I do not have much expertise in a huge number of disciplines like many successful investors, I have often found that in a lot of cases, good opportunities get unearthed since you know a bit about other disciplines, like engineering or psychology.

Lot of investors actually have an edge over the professionals, since they have expert knowledge of sectors/industries they work in. Lynch has excellent inputs on this aspects and one should surely read the same.

SN: If I understand correctly, you are focused on “special situation” investing. What makes you focus there and how can a small investor learn the rules and practice the same? Also, what are the biggest risks to watch out for in special situations?

NM: “Special situation investing” is an opportunistic exercise, where I deploy un-invested money in such situations to make better returns than liquid funds. Given a choice, if I become fully invested, I will not be participating in special situations at all.

Special situations require a holistic view. Knowledge of various laws, of the concerned company as well as very very good logical, emotionless thinking is required. Most importantly, almost nothing is ‘straight-forward’ in special situations. Looking into multiple possibilities, howsoever remote or ridiculous they might initially appear is essential. More often than not, the most improbable things will happen in special situations.

SN: How do you define “risk” in investing? How do you take care of that risk?

NM: Besides the risks like permanent loss of capital, etc. which are often talked about, I feel that the biggest risk in investing is that of “not knowing that you don’t know”.

Often, we investors have this illusion of control, where we think that we know all there is to know about investing or about an individual investment opportunity. This creates a false sense of security due to which we miss out on some key aspects, which could have totally changed our investment decision. To a certain extent, therefore, self-doubt is a good friend to have!

SN: Corporate mis-governance has emerged as one of the biggest risks in investing. How can an investor insure himself against this risk? What are the factors you look out for to get hints of mis-governance in a company?

NM: Yes, I agree this is a big risk indeed. I feel that to mitigate this to a certain extent, in-depth study of financials and looking at past management actions is a must. Reading at least last 10 years’ annual reports usually gives a good perspective on what all the management has done. Plus, keeping one’s eyes and ears open helps.

Personally, for any company I study, I start with the basic assumptions that this stock should not be bought and that there is some problem in its financials/accounts. Then I work towards disproving these assumptions, which, if disproved, might make it a good investment opportunity.

But starting with an assumption that a particular company is good etc, may result in overlooking of some key critical aspects.

SN: As investors, one of the most difficult decisions we must make is with respect to selling stocks. What factors help you make “sell” decisions?

NM: ‘When to sell’ is a huge decision. Personally, I think one should make the sell decision at the time of buying itself. At least, a perspective about when to sell a stock, at what market cap will it become ridiculously expensive is a must at the time of buying itself.

This will protect the investor from frenzy and irrationality when the price starts to jump substantially, since you already have a reference point in mind about when to sell. Of course, as time progresses, the original hypothesis should be revised as required.

SN: What are the 2-3 big mistakes that have characterized your investment life? Is there a way for investors to get over such mistakes?

NM: First mistake I would try to avoid is getting into something I know I don’t know!! Basically, companies which I do not understand, but which look ‘cheap’ on statistical parameters. So that’s one big no-no for me. Secondly, many times, I have sold out too early, which is one more thing I would want to improve.

Thirdly, I have massive number of opportunity losses, which happened only because of lack of follow-up and hard work. So basically, these are the major mistakes I would like to work on. I think investors should constantly introspect and identify mistakes.

The key is not to repeat mistakes. The market gives you chances to make new mistakes, so do make them, but don’t repeat any old mistakes. 🙂

SN: Who is one investment thinker that may be off the radar of investors that you think we should be following, reading and learning from?

NM: To be honest, the really amazing investors I know who are off radar, consciously want to remain off radar; hence I cannot talk about them. Besides those and my partner who I really admire, investors I personally look up to are Chetan Parikh (you will never find anyone who reads so much) and Prof. Sanjay Bakshi (his clarity of thought is amazing).

SN: What is the best and worst investment advice you have ever received?

NM: Best advice I have received: You are an idiot, always remember it.

Worst advice I have received: This time it’s different!

SN: What are your top five suggestions for investing and related books/resources?

NM: There is so much stuff out there to read, but any serious investor should read…

1. The Intelligent Investor ~ Benjamin Graham
2. The Most Important Thing ~ Howard Marks
3. Common Stocks Uncommon Profits ~ Philip Fisher
4. Fooled by Randomness ~ Nassim Nicholas Taleb
5. Predictably Irrational ~ Dan Ariely

SN: If you were to give “just one” piece of advice to a small investor on how he/she can become a smarter investor, what would it be?

NM: Strive to avoid the big mistakes. I feel that investors who are not full-time investors will do decently just by avoiding big mistakes. Mistakes become apparent in hindsight and we think ‘how could I be so stupid’.

For any investor, if the big mistakes are removed, the portfolio would look substantially different, wont it?

Therefore, avoiding simple mistakes like paying attention to ‘khabar’, tips, etc would be a good start. Always think ‘why I should not invest in this stock’. If you don’t get many answers to this question, maybe it could be invested in.

As Munger says, invert, always invert!

SN: Thanks a lot Neeraj! Your insights have been amazing, and especially for someone who is starting out on his/her investing career.

NM: Thanks Vishal! It’s been a pleasure sharing my learning as an investor. I hope your readers are able to benefit in some ways out of it.

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