Investing and Life Lesson – I was Featured on Bipzz Podcast

Last week, I had a chance to interact with Jose from Bipzz for their new Podcast on finance and investing. You can listen to the Podcast or read the interaction we had as a transcript.

You can read more blogs on investing, personal finance, business, economics & startups on Bipzz. Download Now!!!👇

https://play.google.com/store/apps/details?id=com.mckayne.bipzz

Hi everyone, today we have a special guest. He has been a Software Engineer(Freelancer), content creator & active investor for the past several years. We welcome Mr Shabbir Bhimani to this Podcast.

Moderator: We would like to start this Podcast by understanding how you began as an investor. Also, I would like to know how long have you been in the market.

Shabbir: I have been in the markets since 2007, before the financial crisis. Like everybody else, I also invested in the market and suddenly made ₹1000 on the first day. I thought this could easily substitute my salary, but the reality check came in much sooner, and I lost 50 to 70% of the invested amount.

One thing I understood that day was the power of markets.

I saw more people getting into the market and was convinced that this could grow much more. Of course, it didn’t work for me in the early days, but I understood the reason for it being something I didn’t know that others knew.

Also, I saw MBA finance graduates getting placed with very high salaries, reinstating the belief that there is more to learn in the markets. This made me jump into the markets again, and I started trying out things for the first 3 to 4 years and found a way that worked for me, and this is how my investing journey started.

Moderator: Now, I can’t help but ask this question. You have been in the markets before the 2008 financial crisis, and now we are going through another crisis. People entered the market during covid with huge expectations and made a good profit last year only to realise losses this year. This is something that happened in 2008 as well. How do you draw parallels between both these events?

Shabbir: Always remember, there are two types of people in the market. One who is in it to make quick money. Quick money makers will leave the market very soon, and the others will learn the difficult way that fast money can’t be made and will go through a phase of struggle and survival and will learn to find their way in the market. I am not saying they will become big investors, but they will understand how to treat the markets and might start doing Mutual Funds or ETFs, whatever suits them.

First, you must be convinced that markets work, which can differ for each individual. For me, it’s investing in stocks, but for you, it could be ETFs, and for somebody else, it could be a mutual fund, depending on how much time and energy you want to give in.

Moderator: Since you have mentioned patience and conviction in the markets, I genuinely believe these are the essential qualities one needs to become a great investor in the long term. Speaking of a long time, currently, markets are experiencing pressure, which would impact in the long term. In addition, interest rates are set to rise in the short term, which would affect the market and other asset classes. What are your thoughts on the long term?

Shabbir: We have a very different or wrong approach to the definition of long-term & short-term. Short term means anything under one year, the traditional definition. But for people, short term means one day, two days, one week, one month or six months, and long term means one year, two years or three years.

My definition of short-term starts with one year. My definition of the long term means ten years. In the short term, there is a lot of noise in the market like interest rates, policies etc. but what is more important is whether the earnings of the company that you have invested in will grow or not?

So now, rates rise, rates fall, governments come, governments go, governors change, policies change, and these are just the noise.

For investing, you don’t need to know all this.

Let me give an example: Do you think ICICI Bank or Asian Paints will make more money or less money in the next ten years? More is good enough; even if the rates rise, some will be affected while others will not. So, you must check for companies with good competitive advantage before investing.

Now, coming to the interest rates, this will impact companies with massive debt. I don’t invest in companies with enormous debt. So, this would be an excellent opportunity for investors to pick good stocks.

Moderator: Basically, you are asking investors to focus on companies with huge earnings potential in the future. Right Sir?

Shabbir: Yes, In the long term, nothing else matters. The noises will be there and will peak and trough as we go forward, but if the earnings are solid, not even these noises can stop the company’s value from increasing. More importantly, if the earnings keep growing, the rest is taken care of in the long term.

Moderator: Fine, Sir. Even though earnings are significant, the new people who come to market seem not to understand all these relations and factors which have an impact. They are very fearful of what happens in the short term. For someone new to the markets, if we make an analogy with swimming, people first start by testing the water and try to remove the fear of water, and I believe it’s the same for markets as well. The market is just like an ocean current with n factors affecting it. New investors are easily confused with all this information overload. What do you think new investors do when they come to market?

Shabbir: See, there are three ways to approach this. First, my suggestion would be if you are approaching the market, then don’t do it by investing for the short term. So let’s say Rs 500 a day or Rs 1000 a day or something even higher a month. I suggest not to do this. You should approach the market in a way you are a business partner of the companies you want to invest in. That’s the most efficient way.

I am yet to see a single trader consistently make a billion dollars in the market. You might see some traders making money here and there but won’t be able to make money every year consistently. This happens once in a while. That’s fine, but it happens only sometimes and not every time.

However, my approach is to become a partner in the business. Let’s say today you and I are starting a business. Will you say RBI is increasing the rates, so let’s postpone the business?

Moderator: Never, never.

Shabbir: Or let’s say, we don’t approach like the US is getting into recession so let’s stop business. So, once we are starting a business, all this doesn’t matter.

I am saying that if you approach investing as a partner in the business, your view changes.

You could argue that you don’t have time to analyse the company.

Then you have to select – Nifty. They have the best in the business.

Investing in the market via an ETF or Index fund would help you grow your money over time.

Then you are investing in India, and you are partnering in the country’s growth.

Let’s think that you don’t understand ETFs and are very tech-savvy, but you might have seen the “Mutual Funds Sahi Hai” ads.

So then go for the mutual fund. Now, if you say I don’t know mutual funds, what if I invest in the worst possible fund? Then, you don’t need to know anything about mutual funds.

Just start, and you don’t need a PhD in mutual funds, and you can learn the process as you move forward.

Once you can put Rs 10,000/- per month by the year-end, you will have enough time to understand investing in mutual funds.

Moderator: Sir, coming to mutual funds & ETFs, can you please tell us how to analyse these instruments? While checking, we have seen that most of the theme-based mutual funds have somewhat the same kind of constituents, and the difference is minor. Would that affect our investment, or what parameters should we check before investing in mutual funds?

Shabbir: When investing in mutual funds, there is only one parameter that we should check: the expense ratio. So, let me give a brief idea about the expense ratio.

Suppose you put 1 lakh into a fund. One fund has a 2% expense ratio while the other has a 1% ratio. So what does it mean? Let’s say 1 lakh at the end of the year is 1.1 lakh. There was a 10% gain. Now, one company will charge 2% of this amount, roughly Rs 2,200. The other company charges 1%, and we will have to give Rs 1,100.

So, the expense ratio is the most important aspect to track when investing in mutual funds.

That’s why ETFs are always better than mutual funds; they have a 0.1% expense ratio and are better any day than mutual funds.

There will be people who argue that returns from mutual funds are better than ETFs, but there is a catch to it. Like, what used to happen is mutual funds had the power to invest outside the recommended zone.

So, what had happened is large-cap funds had to invest 70% in large-cap and 30% they can do in small and mid-cap. Then, since they had 30% exposure to a category which gave better returns, the overall returns used to be better.

Now what has happened is that SEBI has said that if you are a fund in a specific category, you have to invest only in that category. So, the returns from mutual funds currently are at par with ETFs.

Moderator: Moving on to our next question, we would like to know the ideal asset allocation for beginners? How do you look at asset allocation?

Shabbir: So, I am not a financial advisor. I am more into equity investing, and I don’t consider asset allocation. In my opinion, asset allocation is for losers. This is how it works for me. I have a gold investment for my wife. It’s something that we use.

As for debt, I Believe I am too young to consider debt. I am fine losing my capital rather than getting 8% on it. So, I purely invest in equities and don’t invest in real estate. The only real estate investment I have is my home.

I don’t invest in gold bonds, sovereign bonds or anything related to gold. So, I am more into equity, and it may be good or bad, but since I know what I am doing, I am okay with it.

Moderator: Understood, Sir. So, I think this is the best advice in this entire Podcast. We see that financial professionals learn that, in theory, asset allocation has immense importance but coming into the practical world, most of us have seen people with the highest exposure to fewer stocks are the ones who reap the largest benefit from the market. I think that stands true for you as well, and people with exposure to other asset classes for actual use cases are the ones who are weighing heavily on equities and winning in the long term. Am I right, Sir?

Shabbir: Yes, let me give an example of why asset allocation is for losers.

Let’s say you have an asset allocation of 50:50.

Just an example. This is into equity and gold. The book teaches us that once equity goes higher, you invest more into gold. So let’s say equity went up to 60%, and now you sell off equity to rebalance the portfolio. This is what a financial advisor will teach you, but this is like selling what is working and investing that amount into something that is not working. That’s never intelligent, and I can’t swallow it, so I don’t do it.

Moderator: Speaking of investments, what are your sector priorities?

Shabbir: I don’t have any sector priorities either. I want businesses which can generate lots and lots of cash.

I do avoid certain businesses, though.

So, let me help you understand. Some sectors require a lot of cash to do business, and others require cash initially but do not require much cash for an extended period.

Suppose you put up a steel plant. It will require a lot of cash. I like businesses where the capex is low so that faster capacity addition can be done and more cash can be generated.

That doesn’t mean I don’t like commodity businesses. Companies like Shree cement have proven that their cash flow is robust, and the behaviour is not similar to that of a typical commodity business. It is not only about what the companies do and which sectors they belong to but what matters is how efficiently they are doing business.

Moderator: Understood. Coming to equities, we saw your article about the P/E ratio and why it is not a good valuation indicator. Could you share why you think so and what, according to you, would be the right approach in valuing a company?

Shabbir: I have a book, The Right Stock at the Right Price and the Right Time. Right stock is the one which you understand well. The right price is an important part of the equation.

Let’s say you are focused on the P/E ratio. Let me ask who are you and me to decide that Asian paints should trade at 60x P/E and Daawat Foods should trade at less than 10X P/E?

So P/E ratio is nothing but a peer-to-peer comparison. Now, I can’t compare apples with oranges.

We can only compare two apples.

Similarly, the P/E ratio can only be used for comparing similar companies, but when the company is unique, there is no peer, and the ratio becomes useless.

Now, people will say that every company has competition, but uniqueness does not mean there is no competition the way you operate can also be unique.

For example, Zydus Wellness makes Sugar free, and they command 90% of the market share. This is not a recommendation and is only for education. I might have holdings in the company.

Moderator: Moving from valuation, we would like to understand your view on something that has been going on in the market for the last decade. We have seen a surge in new generation tech-led businesses. We call them startups, and they are getting listed now. We are seeing IPOs happening at huge prices, and many investors are getting trapped in these companies at high prices, and seasoned investors are fearful of these companies. What’s your view on this trend?

Shabbir: So I have 3 or 4 views here.

First, the IPO is never the right time to buy. Someone is selling you his business, and he is offering shares for a premium. The business is coming to market when it thinks it is the right time. IPOs are like a lottery. It has to be avoided.

Second, for new-age companies like Zomato, I am not sure how they will make money in the future. The model of Zomato is not sustainable. You might order from Zomato, but you lose out on going out, and this model will never work.

You look at Burger King, Domino’s, and Mcdonald’s. There is no USP with Zomato; if Swiggy starts burning money, the market share will move towards Swiggy.

Even Paytm has the same problem. They don’t have a moat, and nothing stops me from making payments from Amazon, Whatsapp or Google.

Moderator: The next question, I believe I already know your answer to this question. How do you see cryptocurrency as an alternative investment asset? Do you think it should be part of our portfolio?

Shabbir: I don’t have it. I don’t recommend having it in the portfolio. You can put maybe Rs 5,000 in it to understand the blockchain technology but not gain from the crypto. I believe that blockchain can transform the world but not cryptocurrencies. If RBI uses blockchain technology to launch a cryptocurrency and then paper currency goes away, that can be very good. I don’t invest in crypto and also not in currencies. But, you can use some money to invest and understand crypto and the system.

Moderator: We have reached the last question of this Podcast. This is related to markets and life. We would like to know one thing that you have learned from the market that you applied in life and one thing that you learned from life that you applied in your investment journey.

Shabbir: There are two things. In life, I have learned a lot of things that I apply in business.

I have become a better investor because I do business. When I do business, I always think about how I can create a moat around my business which I have learned from investing in the markets. When investing, I think about how I can do this business differently.

In my personal life, I learned patience. You need the patience to stay in the market, to hold cash, and you need the patience to find your love of life. You might fall in love or be attracted to some girl, but after marriage, you need the patience to move together for decades.

Very famous Warren Buffet quote says,” If you want baby, you have to wait for nine months, you can’t get a baby in a month by making nine women pregnant”. I have learned this from my life, and I use it in markets and vice-versa.

Moderator: With that, we come to the end of this Podcast. It was nice having you with us, Sir and thank you for letting us in on your thoughts. Thank you so much, Sir and all the best to you.

Disclaimer: Whatever is discussed in the Podcast is purely for educational purposes and is not recommended. We request you approach your financial advisor before making any financial decisions. Bipzz or our Guests(speakers) will not be responsible for any losses due to trades taken by listeners by taking information from our podcast series. Bipzz is not a SEBI registered investment advisor and has given the data from documents available in public sources. Bipzz has not independently verified the information presented in the document.