Saurabh Mukherjea on dealing with flak and criticism, and avoiding echo chambers

Sep 08, 2023

Saurabh says that he is an introvert, but he is unbelievably easy to chat with. He has always been a controversial personality so I was looking forward to this conversation. Without much ado, let me present you with an excerpt.

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 (partial) transcript, I list the 20 individuals interviewed for this series. Watch the video for the entire conversation.

SAURABH MUKHERJEA is the Founder and Chief Investment Officer at Marcellus Investment Managers.

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In 2020, you were loved by everyone. A few years down the road, when performance has not been good, you have been criticised across the board.

How do you manage this mentally and emotionally? Constantly being watched – evaluated - mocked - praised.

We, at Marcellus, consciously ensure that neither the praise nor the mockery or criticism forms a big part of our lives. The core team has worked together for almost 20 years. We have been through difficult times and good times. We have been to hell and back several times.

My wife and I have known each other since primary school. We have a close-knit family, living in UK, New Delhi, Mumbai and Kolkata.

I pretty much have the same set of friends since high school; my high school friends are still some of my closest friends. Some live here, some abroad.

A close group of friends, a close-knit family, and the same set of colleagues for 20 years, is the world I live in. So people praising or mocking me in the broader world simply doesn't count for much.

One of my extended family members captained the Indian cricket team for a while. I've seen him go through the cycle. One of one of my ancestors was a pivotal figure in Indian political history and a formative figure in independent India's history. He’s been pilloried and praised at different times.

People’s praise or mockery is not a central part of our day-to-day lives. My parents, who are clients of Marcellus, are pretty oblivious to other people's praise or mockery. Similarly with my better half and my school friends.

You studied at the London School of Economics. Way back in 2007, you co-founded Clear Capital. You then moved to India. How have your evolved as an investor in this journey? Tell me something that you believed then, that you no longer strongly do so.

When I co-founded Clear Capital in my mid-twenties, I learned investing from reading Benjamin Graham, Warren Buffett and Peter Lynch. From that sort of academic standpoint, you end up believing that valuation is an incredibly important thing, and getting good companies at reasonable prices is the Holy Grail of investing. My UK years were very much like that. In any low-growth economy, such as the UK, valuation is bound to play a more important role. The Clear Capital stint was about identifying reasonably well-run companies at affordable valuation. And we made a name for ourselves in the UK small-cap market for doing that.

The first 4 years in India made me realise that even more important than valuation is integrity. Corrupt and powerful promoters can leave you with nothing in your pocket if you invest in their companies. This period was a training in terms of understanding accounting fraud, and how promoters can rob minority shareholders of what is rightfully theirs.

The first 200 pages of Diamonds In The Dust explained how many prominent companies stole lots of money, and the promoters ran away to London, or ended up in prison.

Around 2014-15-16, we went through a phase which shaped our thinking on moats and valuation. In India’s high-growth economy, a dozen or so companies can grow free cash flows at 20%+, over extended periods of time.

This is singular. Very rare. It hasn’t happened in too many countries and not in any other EM. China doesn't have anything remotely similar.

Because you’re getting these companies growing free cash flows at 20%+ over several decades at a time, the discounted cash flow valuations are actually enormous, and the stock market wasn't appreciating it. We realized that it's a once-in-a-lifetime chance to buy these companies, and keep buying them, and ride with them, as they keep growing their cash flow.

That's when I realized that looking at using PE multiples to value companies is useless. Often the best times to buy these companies, such as Titan and Bajaj Finance, is when their PE multiples are at their highest. A lot of people in our country baulk at this. They believe that PE has some inherently predictive power. Neither data, nor common sense and understanding of discounted cash flow show its true.

So understanding valuations not from the Ben Graham or the Peter Lynch perspective, but from the perspective of living in India and seeing these dozen or so companies grow free cash flow at 20%+ over extended periods of time.

A lot of people would disagree with you on the “buy at any price”.

I have never said “buy at any price” just that PE multiples are useless for investing.

May 2020. Bajaj Finance fell 60% in the preceding 4 months due to the Covid panic. Yet the Forward PE went through the roof, because in FY21 nobody in their right mind expected Bajaj Finance to make any money. Titan was in a very similar position. Nobody expected Titan to make any money in FY21. FY21 was fundamentally, from a profit perspective, dire for both.

But had you bought Bajaj Finance in May 2020, when the PE was at some 100+ level, the company tripled in the next 2 years.

Nobody in their right mind should believe that the PE will give you a realistic signal on what to buy or sell. With companies of this quality, if you take one year forward PE and try to use that as a measure of investing, you won’t make any money. I stress again that all the data in the world statistically shows that the forward PE has zero predictive capability.

Over the last 15 years, the PE of Bajaj Finance has always been higher than that of HDFC Bank. A PE devotee would submit to you that HDFC Bank will compound faster than Bajaj Finance because the PE is cheaper. But if you see the last 15 years, Bajaj Finance consistently compounds faster than HDFC Bank, both on PAT and share price, even though it's consistently more expensive than HDFC Bank on PE.

So that's where I think people get the wrong end of the stick. I don't think PE multiple gets you anywhere on valuation. You have to learn how to value companies from first principles. You have to figure out how long free cash flows will grow. That's not an easy thing to figure out.

I'm reminded what a lot of people have said about you. You're a very good marketer. You're very good at convincing people. Controlling the narrative. Selling an idea.

How do you make sure that you are not getting lost in the echo chamber of your mind?

Me as a good marketer, I find that intriguing. To be able to talk and write clearly is an essential prerequisite for success in professional life.

I've studied Prime Minister Modi's speeches carefully. I've studied Warren Buffett's books and annual reports carefully. I've seen successful friends of mine who work as management consultants. I've seen successful journalists. I haven't found a single successful professional in my working career who is not good at articulating concepts. Be it Warren Buffett or Peter Lynch, in the foreign context. Raamdeo Agrawal or Kotak’s Nilesh Shah in the Indian context. They are clear, clear, clear at articulating their point of view. You or I might not always agree with what they say, but we know where they stand, and I think that's a prerequisite for success in a life.

So how do I ensure that I don't get locked in an echo chamber?

It's not just me. There's 120 other people in the firm. Out of them, 35 own a stake in Marcellus. Many of my colleagues who worked with me for extended periods of time own huge chunks of the firm. I can't simply say it's all me, and I'll talk to myself effectively and run the firm my way. Other qualified and intelligent investment professionals have an equally large say. We have ferocious debates within the firm. We challenge each other.

We also have 10,000 clients who are basically the people who run India – promoters, CEOs, parts of the armed forces. Then there are institutional investors, large universities in the UK and US, pension funds from the US… They will not sit back and listen if I'm talking nonsense. I find it quite unbelievable that we will go unchallenged in our narrative. We have to answer to our clients on what we are doing and why. That is a huge check-and-balance to any megalomaniacal tendencies I might have.

What's your reaction if money is suddenly pulled out of your fund? Do you panic?

Honestly, money coming in is not a source of euphoria. It's not as if the first thing my wife asks me when I get home is, “honey, how much money came into Marcellus?” It's not a meaningful part of the discussion.

The way the firm has been set up and the cost structure created is whether money comes in or not, the way we run the business is largely unchanged.

I go back to the question you began with; if people say nice things about you, it feels nice. It feels nicer to be appreciated, than criticised. So that, more than the financial trigger, is what we live and work for. We're trying our best to do a good job for the 10,000 people who trusted us with their money.

From inception to now, we have beaten the index by 2%. From January 2022, when the Russia Ukraine war began, through to April 2023, we had a torrid time. We had a drawdown of 15% in our large-cap product, and 17-18% in our small- and mid-cap product. But 90% of our clients reposed their faith in us. This fiscal we are up 17% versus the market up 12-13%.

If you look at the last 5 years, barely 10% of the managers in India, be it PMS or mutual funds, beat the index. We hope that over the next 5 years as well , we will be there. It's not a cake walk. It's a lot of work. And we would rather be focused on that than agonise about fund inflows.

We're not trying to sell the company, so there's no great rush to gather a lot of assets. Client input, client criticism and client appreciation is the far more powerful factor.

In this whole scheme of investing, how does chance, gut feel, intuition, luck and karma play out?

Information is available to everybody – professional investors and the millions of serious semi-professional investors in India. All have access to information, quarterly conference calls, RoC, cash flows, information around visiting stores and visiting factories...

It is translating that information into insight.

Everybody could read the last 10 years of Bajaj Finance's annual reports. Listen to conference calls. Visit Croma or Vijay Sales and see the Bajaj Finance desk operating. But I suspect that 99% of the people will come back and say, “Bajaj Finance is an NBFC, it lends to people who want to buy consumer durables, given that it makes a RoE of 25% on a RoA of 4%, it should trade at a Price to Book of, say, 4 times.”

I think one out of 100 will say that Bajaj Finance is not a non-bank lender but a tech company. It's the largest user of Salesforce in the world. It employs more electrical engineers and computer scientists than any other firm in India. It potentially has a bigger data repository on affluent engineers than any other firm. And based on these intangible assets, Bajaj Finance is actually not an expensive company but a really cheap company at current valuations.

That's the role of creativity. The same information is available to everybody. But based on reading, training, upbringing and intuition, we are able to translate that information into insight.

Sometimes we get it right, sometimes we get it wrong. If we get it more right than wrong, we’ll be alright. But without that burst of creativity and spark of imagination, it's impossible to go from information to insight. If you don't have insight, you can’t succeed and make money in any aspect of life.

Okay, so that's creativity. And that's insight. And that's skill. How do you view luck?

Luck is the cards we are dealt with. In the ovarian lottery, I lucked out. It would have been even better if my parents were part of the Wall Street elite, but I got a decent draw. My mom went to Presidency College, Kolkata, and studied economics. She was a maths teacher. My dad went to IIT Kharagpur and did his Masters in engineering. He then worked for ISRO.

All of us are born with a certain draw of cards from the ovarian lottery. That's luck. How we deal with those cards and what we make of those cards is skill.

What makes you insecure?

When my wife says that because of the amount of time I spend reading and working, my children are growing up without a father. That's the one which really gets my goat. It's a big challenge.

We get so wrapped up in work that it becomes your world in totality, and we forget that there are real relationships and emotions beyond the realm of this office. And if you if you're not too careful you end up abandoning that.

Is there a reason you're not on social media?

I'm not so sure what I'll get out of it. I've sort of thought about it long and hard.

A lot of people tell me that if I am on WhatsApp, I can communicate better with 20 other people. But I'm not. I'm not that interested in communicating with lots of people. I'm a fairly introverted guy. I'm happy with my family, friends and colleagues. As I said, finding enough hours in the day as it is, is a problem. If I open myself to all other exogenous influences, that’s where the real echo chamber lies.

The real echo chamber is actually social media, where you simply end up reflecting whatever is the received wisdom at that point in time.

Disclaimer: All the stocks mentioned by Saurabh Mukherhjea during this interview are part of his portfolio, his parents’ PMS portfolio, and Marcellus’ clients’ portfolios.
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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