Nippon India Mutual Fund: Investing requires a stable temperament: Manish Gunwani of Nippon India Mutual Fund
When did you start your stock market journey? Do you remember your first years in the market?
I started my journey as a sell-side (i.e. broker-side) analyst after graduating in 1996. Fortunately, I became a software industry analyst and saw the sector to go through a major boom and bust cycle in 1996-2000. As they say, a calm sea does not make skilled sailors, so it was very useful to follow this cycle. I remember as the cycle progressed, how polarized the market became – in our sell-side company, analysts covering technology, consumer, etc. were very busy, while those covering metals, industry, etc. had little interest from customers – many of them played solitaire on the computer most of the time.
What was the first thing you learned during your first years in the market?
Being part of an industry that had a big boom, one thing you remember is how investors move down the quality curve as the boom progresses. Towards the end of the boom, there was massive investor interest in IT companies with questionable reputations, small SAP training institutes, manufacturing companies changing their names to add “Tech”, etc. the sector is out of favor and moving up the quality curve as the sector goes through a bull cycle. The other learning was that even the best companies in the industry go to a point of extreme overvaluation and then correct massively. The tricky part is that even in these strong companies most of the money is made when they go through the second half of this boom and bust cycle and how to time the exit is a mix of art and luck .
What was the first bad phase in the market that you remember clearly? How did you navigate it?
The first bad market phase when I was managing money was in 2011 which saw the European sovereign crisis and also the Indian economy start to face macro instability due to inflation and account deficit running. I managed the PMS division of an AMC. During my sell-side stint in 2008, the global financial crisis led to a massive market correction and one learned to respect global indicators such as credit spreads, the direction of the dollar against emerging market currencies, etc. . Fortunately, this learning came in handy when dealing with the 2011 Correction as we made our portfolios a bit defensive before the correction.
Can you tell us one mistake you remember clearly from your early years? What are your learnings from this mistake?
In the first part of my career, I was a real estate analyst in the period 2006-07 and one thing that we missed was to make a big sale on this sector near the top. I think one of the main reasons for this is that sometimes you get too close to the companies and miss the big picture. For cyclical sectors, when things are going well, there is a lot of positive bottom-up momentum – managements are loaded, fundraising is easy, stock prices jump with every company announcement. At times like these, it is periodically useful to look at the sector from the top down rather than just looking at the bottom and questioning valuations, market capitalization levels, macro issues that can break the cycle, etc
You’ve been in the market for so long now. Were there any bad phases that made you lose your temper? How did you navigate it?
One of the market phases that I found tricky was the cyclical rally in 2013-14 – many cyclical stocks in the Indian stock market soared, which I found surprising as many macro indicators were not supporting not such optimism. The global economy was going through a fairly flat phase with cyclical stocks not showing great momentum, the dollar was reasonably strong, etc. while domestically, inflation was a problem – after a long period of high inflation in 2010-13, lowering inflation expectations in a major economy quickly looked like a challenge. So, although the fund suffered during this period, fortunately some mid-cap autos and financials helped us to rebound, with the outperformance of cyclical stocks fading towards the end of 2014.
How do you see today’s market in the context of your own journey?
If I look at the period 1996-2010 for the Indian stock market, it was a period of maturity from a very nascent level. Over the past decade, pricing efficiency has increased dramatically as the market has become larger, more liquid and better regulated. The speed at which information is priced today is much faster than before. Moreover, the increasing number of companies, the expanding diversity of business models, the technological element in business models – all this makes information more complex to process. While human nature will always drive extreme phases of greed and fear into the market, which can create opportunity, generating outperformance at scale is definitely more difficult now.
If there is one thing you would want young investors to learn from your experience, what would it be?
Be like the duck – calm on the surface but paddling like hell below. Investing requires a lot of effort in research, analysis, etc., but also requires a stable temperament to accept things going wrong periodically and to take advantage of times when the market is in extreme fear or greed.