Nilesh Shah on Luck and Good Karma

Aug 09, 2023

It has been very long since I interacted with Nilesh Shah. And I was amazed at how very obliging he is.

He was travelling but still offered to do the interview. He logged on from a restaurant. When it was not working out, he darted into a bank. When that did not work out, he made a quick dash to an office where we could record the interview. He could have cancelled or postponed, but was so respectful of his commitment.

This is part of a series where I attempt to understand the behavioural traits and mindset of money managers and investors. At the end of this (slightly edited) transcript, I list the 20 individuals interviewed for this series.

NILESH SHAH is the Managing Director at Kotak Mahindra Mutual Fund.

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You have worked in various AMCs and donned many hats: fund manager, CIO, deputy MD, MD. How have your priorities and loyalties shifted?

I was lucky to get trained at Franklin Templeton where the client or the investor was always first. I started my career teaching the advantages of mutual funds, especially debt funds. So keeping client interest first has always been my motto.

A fund manager wants to outperform peers and the benchmark. A CIO wants to manage risk and generate returns. A CEO wants to ensure that all is observed from a compliance and regulatory point of view. But keeping the client first has always been my priority.

Priority has never changed, tactics have.

As a CEO how do you deal with conflict with your fund management team?

There is conflict of interest in everything.

My boss Uday Kotak told me that life can be divided into four quotients.

  1. Bhagwan Ram. The objective and the means to achieve it are righteous.
  2. Krishna. The objective is righteous but the means to achieving it could mean cutting corners.
  3. Duryodhana. The objective is not righteous but the means to achieve it are righteous.
  4. Ravana: Neither the objective nor the means to achieve it are righteous.

He told me that he would like me to be in the Ram quotient most of the time. Venturing into the Krishna quotient occasionally is acceptable. But never into the other two. This is how we navigate conflicts. Whenever we face a conflict, which we do on a daily basis, we figure out where we are with this as a framework.

As a CIO you would understand when the market punishes some of the investment bets. Let’s say some of your funds are not performing well. Do you stand by your fund managers or pull them up? How involved do you get?

Any parent will always have greater love for the weakest sibling. A parent wants to take care of the child who is weaker rather than the stronger one. All our funds are like our children. So extra effort goes into an underperforming fund.

There were times when I used to get swayed and copy an index or a successful peer. And compound my error. The market is not kind when you compound your error.

Over time, I learned that you have to stay with your conviction. Because you took a call doesn’t mean that the market will reward you immediately. The market rewards fundamentals over a period of time. So every time you take a bet, you do a careful analysis, weigh the risk and return, and yet can go wrong. When that happens, reassess your position without emotion. If you believe that you are right, double down your position. When you have to double down your loss-making position, it shows your conviction. If you are doing it grudgingly, you are not convinced.

Don’t compound your error. Stay with your conviction. Keep rationally evaluating your risk-return trade-off without emotions.

More often than not, I have seen that if you are fundamentally right, sooner or later the market will reward you. If you are playing momentum, sooner or later the market will punish you.

You have spoken of financial apartheid in the past. Can you explain it?

Financial illiteracy results in financial apartheid.

More than 18 crore individuals trade in cryptos, 99% would have lost money.

More than 7 crore demat accounts. When majority of them trade in F&O, 89% of them lost money last year, as per SEBI’s study.

There are millions of women who do monthly recurring investments with goldsmiths nearby. Many a time they get paid but the goldsmith has been known to run away with their money.

More than 2 crore Indians have lost more than Rs 1.80 lakh crore in ponzi schemes.

This is financial apartheid.

Against that, I have examples of people who were at the bottom of the pyramid and did SIPs of Rs 1,000 and Rs 5,000 and have built reasonable nest eggs.

How do we bring irrational, uneducated, greedy, illiterate people into regular, disciplined, long-term investing – so that their capital is protected and they get financial freedom?

This is where the mutual fund industry works hard. When I see 4 crore investors doing an SIP with us, I do feel happy. But when I look at the potential, there are probably 40 crore investors who need this.

There is no quick fire, instant gratification solution. Regular long-term investment provides financial security and removes financial apartheid.

You once said that you can’t expect rating agencies to treat everyone equally. Also, if a country in the West does money laundering, it is a tax haven. If an Emerging Economy does it, it is a terrorist nation. These are biases. How do you not bring your biases to the table? How do keep them at bay?

First, we must be aware that we do have biases. Self recognition is the most important step. If I say that I have reached nirvana and have no biases, it is a lie.

Once you acknowledge your bias, verify with data. For example, there was a software company which my fund managers thought was not appropriate from a governance point of view. In 2017, it kept going up. We could stick to our conviction and stay out of it completely. But it was important to listen to analysts who were bullish on the company and figure out the holes in their argument.

Be aware of your biases. Verify them with data. If you are right, well and good. If you are wrong, make a u-turn. There is no place for arrogance in the market.

Your first investment was one where you lost money but gained experience; you leveraged and bought into a frenzy. If your daughter was going to make the same mistake, what would be your advice?

My advice to her would be “beta learn from my mistakes. Why should you commit a mistake to learn?” If she still insists, I will ensure that the damage done is the bare minimum and not as high as when I committed that error.

It is important to learn from the mistakes of others, rather than make them yourself. It is inevitable that all of us will make mistakes. Just don’t repeat them. And make mistakes in smaller denominations or quantum so that it doesn't derail you.

What drives you? You have an impressive stature in financial services. Part-time member of the Economic Advisory Council to the Prime Minister. Are there moments when you allow yourself to enjoy your success? Or are you always thinking of the next mountain to climb?

The answer is yes and no.

My wife was a college professor when we were dating. She used to command a lot of respect.

We used to go for movies and when standing in line to book tickets, students would come and hand over tickets. We used to travel by train or bus. And a student or parent would give her their seat. That time, neither of us had a car. And neither was there any online booking.

I too wanted that respect. In those days fund managers were not respected. No one offered me a cinema ticket or a seat. Today, in the mutual fund industry, I earn reasonable money and I also earn reasonable blessings. This is what drives me. These blessings give me the energy to go to the next height.

In your journey, how has intuition or gut feel or karma or luck played a role?

Luck has played a huge role.

I was a gold medallist chartered accountant. I was about to join a manufacturing company. The general manager recruiting me advised me to try my hand at financial services. That was a lucky break.

I joined ICICI Securities. I later got an offer to join another company at double the salary. I told my boss. He told me to be long-term oriented, not short term, and that my career was better off at ICICI Securities. I was lucky to get that advice.

When I joined Franklin Templeton, I had no idea what a mutual fund was. They taught me. That was a lucky break.

Not many know that in the modern mutual fund industry, the first debt fund default was witnessed by me. It could have ended my career. But Franklin Templeton supported us when they realised that it was not our mistake. That was a lucky break.

So wherever I have reached, it is undoubtedly luck, luck and luck.

Is there good karma? Undoubtedly yes. I have made so many mistakes and some divinity has helped me out of it.

There was a newspaper company in which we had invested and owned a reasonably large stake. We were in love with the company. One day an analyst told us that this newspaper was selling advertising space as expensive as Times of India. Thanks to that information, we were able to get out of that position at a huge profit. Coming out of a mistake with profit is good karma. We respected that analyst, listened to him, and acknowledged that he was kind enough to come to us first rather than other stakeholders.

Do well. Good will happen to you. It is an eternal truth.

Finally, there is passion. We are in a hugely competitive industry. Everyone is hugely talented. Everyone works hard. How do you stay ahead? It has to be passion.

Passion. Purpose. Good karma. Luck. All come together to make a winner.

Individuals interviewed by Larissa Fernand for this series:
  1. Prashant Jain
  2. Sankaran Naren
  3. Nilesh Shah
  4. Vetri Subramaniam
  5. Anand Radhakrishnan
  6. Devina Mehra
  7. Saurabh Mukherjea
  8. Raunak Onkar
  9. Samir Arora
  10. Kenneth Andrade
  11. Rajeev Thakkar
  12. Aswath Damodaran
  13. Ian Cassel
  14. Vishal Khandelwal
  15. Sanjay Bakshi
  16. Ramesh Damani
  17. Jim Rogers
  18. Ben Carlson
  19. Mohnish Pabrai
  20. Christine Benz
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