Mr. Vikas Khemani | Who Stole My Returns? A Different Perspective on Investment Risk | Carnelian


Hi good afternoon all friends you must be hearing or as i look through the program there are lots of sessions which are there on you know what are the big opportunities over the next five years 10 years big themes and you will get lots of insights and i think you know i’m extremely bullish on india you know in my career of 25 years i have never seen what kind of

Time today and i’m sure you will get similar flavor from lots of other speakers the reason i chose the topic which i chose today which you know it has helped us to build perspective with lots of investors who struggle to make i mean you hear bullish view all the you know time from everyone right but how do you how do you sort of make investment decisions because

In investing you know more than returns we believe risk management is very very important anybody can make returns but very few can retain and that is very very critical and what it takes this effort is to build that perspective within the investor i mean lots of sort of investment gurus have said like i said that you know a sense of investment management is

Management of risk not management of returns retention of returns is very very important than anything else and as charlie munger said and this statement took me many years to understand but once i understood i think uh it really you know stuck that inward always inverts tell me where i will not die i will die i won’t go there and if you understand a sense of

This i think you know you can sort you can be sorted rest of your rest of your life so i would invite you to kind of delve on in this uh later as you sort of think very often investors are worried about we get these questions should i invest into market you know will it correct what level should i invest you know what sectors would i invest and you know all the

Time we see you know we get these questions from the from the people is it too too our value and partly i think we see you know you know fear in the investors throughout partly created by the short-term movement in the marketplaces media media created partly i would say short-termism in investing so we thought you know let us builds this perspective that how

To look at investing and the way we look at in investing there are three kind of risks and once you understand essence of these three risks you will be able to understand how to handle this type a risk which is the risk of permanent loss of capital meaning after you have invested you have lost between you know 50 to 100 of your capital that’s the type a risk

Very very important risk and we you know one has to manage this right because safety of capital is very very important now what is the source of this risk it comes from only broadly two or three sources when you invest into poor quality of the management or in businesses which are prone to disruption right now this risk is highly controllable manageable and i

Will talk more about it type b risk is the risk of volatility meaning after you have invested stock price goes down and which all the time happens right all of you must be relating every time i buy stock has gone down right it happens to me all the time right now that risk can come from any time from any source it comes from very very different sources you know

From from you know a political reason geopolitical reason natural calamity we saw pandemic happen right it can come from monetary policy related anything you know anything happens around the world it can happen because of the rumors this risk is extremely uncontrollable you cannot control this risk but most of the time investors are trying to manage this risk

Or worry about this risk right this risk remains same whether you are ten thousand of nifty fifteen thousand nifty twenty thousand fifty right so again this is the second risk and third risk is the risk of opportunity loss meaning you should have invested into asset class a sector a stock a but you invested into b stock b sector b asset class thereby generating

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Sub optimal return right the source of this risk is twofold one is lack of knowledge that we don’t know what’s happening where the things are going where the ball is moving right where should we invest and second is long-held biases we all have long-held biases around you know i have you have all of us have those biases and they prevent us from from getting a sub

Optimal investment many times and i’ll talk a little bit more about about them as i tell people right so just little bit talking you know in detail about you know type a risk so like i said that two sources when you put into inferior quality of management can you control this yes by doing a lot of work your study you this is very very manageable you know people

Who spend little bit time understanding business understanding balance sheet talk doing little bit work they can figure out that this management quality does not sound pretty you know good and you can avoid so once you avoid that you are actually taking uh you know care of lot of risk on that now we did some studies to showcase that what this risk and same thing

I was saying that businesses which are prone to disruption so we know that broadly which are the risks you know businesses are going possible the disruption the risk is very high if you constantly keep your eye on that you know you will be able to avoid this risk i mean we have seen many examples whether it is empty and many examples i mean you know in front of

Us where businesses over the years have got wiped out and today also there are many which are prone to disruption i mean we at carnegie and clearly believe that if you think there is little bit risk be very careful don’t look at them or at least even if you’re looking at the put them in the high risk bucket uh you know so you are consciously aware that this risk is

Prone to risk the disruption this can you have you are taking a particular risk just little bit you know study we did because of type a risk just to put number in context 32 lakh crores have been lost over the years right which is almost 2x the size of you know current equity mfam this is the extent of loss of capital which has happened because of many companies

Which at one point in time three lack of a market cap four electoral market cap today don’t even exist this is the kind of wealth loss which has happened because of this risk and you know it almost close to 12 percent of the equity current equity market cap and if you have any such stock in your portfolio one stock after 10 stock portfolio your 10 percent of

The capital is wiped out to recover that back you need a multi bagger you need so it is very boring to sometimes to say that oh you know invest into good quality management invest into good businesses but this is what it ends up doing so if you can avoid permanent loss of capital it’s it’s it’s it’s in my opinion again a very big addition to your alpha addition

To your uh you know money saved is money earned in this sense so we do a lot of work on in terms of avoiding this this this risk in our in our you know uh and this is by the way highly controllable highly manageable it is not that you know you can’t control through knowledge to hard work through study you can definitely control there is nothing and accidents can

Always happen but this is manageable type b risk again you know you cannot control it is impossible to control it is futile to control yes of course if you are a leveraged player you must worry about it if you’re a short-term trader you are worried you must worry about it and that’s not the category i am referring to that’s not at least what we do so hence hence

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We don’t worry about this but this is again you know risk which in my opinion 80 percent of the time most investors spend thinking worrying about this risk well actually 80 percent of your time you should spend thinking about type a and type c risk it’s just inverse in terms of how much time and energy we spend on the i spend on the on the on now just just give

You some data points you know can you guess a company which despite having corrected 17 times 10 in a day 8 times 25 in in three months time and forty percent draw down in six month period time has delivered forty five percent cr now forty five percent cagr now it’s very you know when when stock is good if you remain invested now as high quality company as

Kotak mahindra also has seen 40 drawdown so if you get worried about the intermittent risk volatility risk drawdowns in between you will always end up giving away a very high quality company from your portfolio so if you are a long term investor it does not matter that you know as long as you are convinced about the quality of the business quality the management

Long-term growth prospect of the company it does not matter whether you know it corrects 10 20 of course you have more money buy more otherwise just sit tight and that is and like this there are many examples not only tata consultancy has seen you know similar kind of you know percent draw down you know many one three twenty five percent down three times i mean

It has consistently seen like that many companies you know bajaj finance which is again has seen forty percent draw down twice which has delivered forty five percent clear three cementer since all of all the companies and this is usual in market it is usual in market we hike because when market goes down for many reasons whether you are a good company bad company

Everybody goes down good companies will probably go down a little lesser bad companies will go down more but everybody has to go down this is the nature of the market so according to us you know this is it is futile and to spend time on this this particular risk coming to type c risk risk of opportunity loss again this is the one risk i feel most people don’t even

Realize that they are taking this risk because of the you know again reasons i spoke about one is biases we we are holding all along if you have and i’m not going to kind of talk in detail about biases because biases is a very long subject one can kind of spend hours and hours about talking about but one when one is aware about some of these biases you know one

Can keep on fighting looking at what’s happening you must have heard many times i mean it happens to all the time to us that you know if you bought a particular sort of stock and you know what you own in your portfolio it is very hard when you even if you realize that this is a wrong stock to get out and switch into something else it’s very very you know very very

Hard and especially i have seen investor if you bought a stock at let’s say 100 rupees and if it has gone down to 80 rupees people keep on waiting indefinitely for it to get to 100 rupees to get in to switch out something else because i don’t want to book loss this is a very i mean i hear from accomplished investors average investor all the time but at 80 rupees if

You are finding something else which is better which can double faster than it getting back to 100 rupees it is better to switch out and move out right but these are the biases which help us to constantly move into which which you know which kind of prevents us from moving into even if we realize that we are in a wrong investment to switch into something which is

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Even better right and these biases i can tell you very hard to fight it is not easy i myself have gone through i still go through all of us go through this but when you are acutely aware about it constantly watching us out yourself you can really you know sort of fight and same thing i think you know there are many biases whether it’s anchoring bias recency bias

Recently biases you know typically we believe that what has happened recently will continue to happen if market has fallen we will get scared and we will kind of not allocate more capital or if markets are going up then we will allocate capital right i mean there’s no reason why sip flow should keep on increasing only after the markets have gone up 40 50 ideally

Should have been other way around right but it does not happen because human psychology is to believe that what has recently happened will continue to happen and these are the biases if we constantly fight i think you know one can come out well from you know these these biases and second reason for opportunity to see this is lack of knowledge you know if we many

People you know invest into markets without kind of and investing as we all know this is about futuristic what’s happening where the ball is going to be where the opposite is going to be where which are the futuristic things right because that’s where you have to be so it requires huge amount of knowledge understanding reading keeping track of trends you know

Interacting with people and if you are not up to it you know you will obviously will end up you know if you get it if you get into a good opportunity at best it will be by fluke not by your it will not be probably consistent you will not be able to find consistently few you know ideas opportunities where the the future opportunities are last year i remember when

You know post pandemic when we launched our saturday shift which is basically once in a you know in my opinion lifetime lifetime shift happening in india post pandemic on manufacturing and i.t services i can tell you we hit our head against wall people believe that manufacturing in india cannot pick up you know and today you know one year down the line we have

Seen how things have changed you know in in a significant way now conviction is still coming in but it’s still not fully there right so i think it requires a lot of connecting dots a lot of reading lot of you know preparation and once you are i think sort of up to it in my opinion you know you can manage this risk also and you know and we have seen you know i mean

Accomplished investors like you know uh we have heard warren buffett right who for 20 10 years kept on refusing that i don’t invest into technology so it’s not that only a common man uh you know suffers from this you know you keep on denying sort of certain uh you know sort of so idea is to avoid this risk if you spend your time in you know most of your time in

You know type a and type risk be risk i think you can come out very very well it’s futile to spend time uh on on on type b risk and if you spend on time time and type b risk then i think uh you should ask this question it’s not market which has stolen your return it is you who has stolen your return and i think i’m up with my time so i won’t break much thank you very much you

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Mr. Vikas Khemani | Who Stole My Returns? A Different Perspective on Investment Risk | Carnelian By PMS Bazaar