6 insights from Madhusudan Kela

Nov 16, 2021

I engaged with Madhusudan Kela, founder of Invexa Capital,  at the Morningstar Investment Conference, India.

I share some of his insights here, and finally end with his advice to investors right now.

There will be corrections, but I don’t see a crash coming.

The economy is in a great shape. A lot of companies are doing well. COVID has led to a lot of consolidation in the overall space. A lot of large companies have gained disproportionate grounds. Corporate balance sheets have been deleveraged. A lot of reforms have started to have an impact - Bankruptcy Code, GST. There's so much money lying outside India, so much liquidity. I feel that we are in a good cyclical long-term structural kind of up move. Having said that, one should not extrapolate the kind of move which we have had in the past 18 months on to the next 18 months, and expect to make the similar kind of money. Very unlikely.

It is never different in the market.

Every time people say that this time it is different, but it is never different in the market. Ultimately, markets will value cash flow, valuation, margin of safety, and reward a very, very good management. In 30 years of my career, temporarily it has been different many times, but eventually, it has never been different.

Right now, there are a lot of things which are in absolute fashion, and people have very, very different tools to value these companies. They're saying seven years down the line, there will be such distortion in other side of the economy and this company will gain significantly and hence we have to value it differently. I don't understand and I don't buy these valuations.

I believe in traditional investing. I believe in cash flows. In the new economy, some of them have offered a very, very good entry price and we have bought some of these companies. So, we cannot generalize. But, by and large, if you have to put incremental money, my bias will be more towards putting where value is.

The stock market is a place wherein people with experience need people with money.

Look at investing from a long-term perspective. Do not go on the basis of what is fashionable. Do not chase momentum. Do not buy companies you don't understand. Do not rely on tips and rumours. Equity is a long-term compounding machine. If you do really well in the next 25 years by protecting your capital, eventually you will be a rich man. But if you try to become a rich man in a few months, you may find yourself over leveraged, dabbling in futures and options because someone told you to do so and because someone else made money doing it.

But all times are not same. All conditions are not same. Someone who made money a year ago, did so in very different conditions when the market had a very different risk-reward. You can't copy what someone else did one year back and make the same outcome.

There are so many companies which have gone up 5-7x, they are trading in F&O, and they now have 100 and 150 P/E multiples. Just because someone made money in this company a month or two ago, don’t relentlessly chase this momentum thinking it will keep going up.

You need to look for value.

We have had a tremendous run in the market, the biggest wealth creation in the shortest possible time I have seen in my 30-year career. We had the Nifty go up from 7,500 to roughly 18,500, and the small-cap index go up by 225%, and the mid-cap index go up by more than 100%. Worldwide, roughly, I think $60 trillion of wealth has been created in the same timeframe, and in India itself more than $2 trillion of wealth has got created.

Who am I to say that we have seen the top? Between 1998 and 2001, IT companies went 100x, 150x, 200x earnings. No one can predict the top. But there are pockets of the market where I'm not very comfortable as an investor, valuations which I don't understand. These are very, very high P/E companies which do not have numbers right now. Investors are buying the future and paying a very, very hefty price for buying this future. I don't understand, so I don't invest.

There is another part of the market that is still very reasonably valued. There's a lot of value in stocks which are in this cyclical uptrend category, which are basically PSU companies, PSU banks, a lot of value in a lot of the economy related stocks. Even though metals have run very, very hard, but still, you can see that one year, two years forward, these companies are still trading at reasonable value.

I've been very positive on PSU banks. I've been generally positive on companies which are likely to get divested, because I firmly believe that though it may take a while, it will happen. Being bullish on the companies, which are traditional sectors, like metal, sectors like infrastructure, textiles, companies which are basically linked to a cyclical upturn in the economy. Banks, even some private sector banks, which are available very, very cheap.

I'm more inclined to invest in this side of market which is slightly out of fashion rather than buying fashionable. My portfolio will not have zero allocation in high P/E stocks or in growth businesses. It is there. But on an incremental capital basis, one is very cautious and careful where one is putting money.

Never ignore risk.

There is no other way you can avoid risk. There is always the possibility of some unknown happening. Who would have thought that a pandemic of such severity would hit? Or, what risk will manifest? Risk, by definition, is something which we don't know today, right? It is only after the event happens that we can retrospect.

Ensure that your portfolio is properly allocated. Buy companies where the risk-reward is still favorable. Have reasonable timeframes of making investments and reasonable return expectations. Apply common sense to the fullest extent possible. Understand the risk being put on the table; always ask: How much money am I likely to lose?

Don’t let a bull run fool you into thinking that stock markets are easy money.

I’m not a specialist – be it in pharma or metals or value investing or growth. I don't belong to basically a school of thought. My only goal is to make money ethically. I look at the overall opportunity, the overall company, governance, and the risk I am willing to take.

It's very easy to make some money trading, but very difficult to create wealth over a long period of time. One must put in a lot of effort and quality work. There will always be volatility, even in good companies, but it is the nature and the depth of the work which you do that eventually prevails over the volatility.

There have been times wherein I did not do as much homework as I should have and relied on the conclusions of others. Whenever that has happened and I failed to envisage all possible outcomes – either right or wrong - in a company, those are the times when I have really lost money. So, the bottom line is that it's a very hard-earned money. Stock markets look easy, but they are very, very difficult to make money in.

Here is his advice to investors right now.

If 90% of your wealth is equity, then you should be booking profits and rebalancing your portfolio. But if you have only 5% of your portfolio in equity, don't sell. Even if you have made money, it will not be wise to book profits. Only if your exposure is excessive in the overall allocation, it is time to book selective profits in companies where you feel valuations have run a bit too high.

If you've not participated in the market till now, and you have seen your neighbour make money, don’t get carried away and decide to put 90% of what your savings in the market. Or do F&O trading just because a lot of people have made money. Think calmly. Understand what you are buying and who you are giving your money to.

There is no issue in making a long-term investment even in this market, but you should not extrapolate the success of the last 18 months and use that as the basis of your expectations.

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