Investors Are Panicking—Here’s What You Need to Know | Harsh Madhusudan | Aashish Sommaiyaa

[00:00:00] Why are the markets falling? We thought that they only go one way to the moon. What we should keep in mind is that practically every year or every other year, from the highest point, the market declines 15-20%. The people found a 15-20% correction to be somewhat a huge thing. It has happened all the time. There will always be cycles. There will always be some people who get scared when the market falls and there will always be some people who lose their bearings when the market goes up.

[00:00:23] So what you want is not high American growth, but not a crisis in America. You want just muddling through US growth. So the US has been on a tear for now 13 to 14 years. India has been a ranked out performer. But if you step outside India and you compare Vietnam, Thailand, Philippines, Brazil, Mexico, you compare entire emerging markets. India has been a standout performer especially in the last four years. Our first guest, Harsh Gupta, is an investor, author and fund manager.

[00:00:49] He runs Ionic Asset Management, which focuses on long-term public market investments. He's also known for his bold economic insights and co-authored A New Idea of India. Our second guest, Ashish Samaya, is a veteran in asset management. Ashish was the CEO of Motilal Oswal AMC for nearly eight years. He now leads White Oak Capital, driving its investment strategy and growth.

[00:01:20] Hey Ashish, hey Harsh. Thank you so much for making the time on a Saturday morning. We're shooting, of course, in the lovely offices of Ionic by Angel One. Thank you so much, Harsh. And we have a lot of ground to cover today. And I can't think of more relevant, more experienced and more intelligent people to talk to about this topic. We're going to figure out what is happening with the markets today, where it's headed,

[00:01:45] and how one should think about investments in this sort of a climate. Right? Right? So roughly we'll split it up into two halves. Right? So one will talk about markets and macro. And the second, how should retail investors think about investing? Right? And broadly, how should they think about their money as such? So let me begin with some opening comments. Harsh, you first. Why are the markets falling? You know, we thought that they only go one way to the moon.

[00:02:13] Thank you so much, Roshan. It's a great honor to be on your podcast again, especially with Ashish, a dear friend. I would simply say, in September 26, 2024, which was the peak of the local peak of the market, there were multiple reasons. Of course, within the India market, valuations were on the higher side. But the real global reason why this happened was, in September, the probability of Donald Trump getting elected as the US president in their internal surveys, etc., was rising.

[00:02:42] So what is what came to be known as a Trump trade started playing out from end of September, basically October, November, December, January. He got inaugurated on 20th Jan. And we are seeing an early sign of the trade reversing, but I'll come to that in a bit. What is a trade? The trade was simply that he had been president once. He was going to be more prepared this time if he got elected, which he did. In the US, you are only president for two terms. So you don't have to worry about re-election for a third term.

[00:03:10] In the end, he also ended up getting the Congress and the Senate in the US, so he had more power. And he had more people who were loyal to him compared to the last time, right? So Trump's economic vision works on the basis that the world is ripping off America. Now, what was the US consensus on economics after 1945 Second World War? It was you can asymmetrically sell more to the US and the US provides you a security umbrella. Therefore, you were allies against the Soviet Union.

[00:03:40] And the US implicitly also then ends up benefiting from the world's reserve currency, right? This financial security plus trade were three pillars of this so-called liberal international order, which, you know, like the Holy Roman Empire was neither liberal nor international or order, but it was something. Now, Trump is basically coming here to in effect bury it. He's saying, I am not going to give my security umbrella to Europe or Japan or South Korea unless you give me something in return.

[00:04:08] No more asymmetrically selling to the US. All of this is passed. It's over. I'm going to put tariffs. You have to basically respect us. We've been ripped off for too long. Because when tariffs come in place, in the short term, the US dollar goes up because it's more difficult to export to the US. The US imports less, other things being equal. Inflation expectations theoretically should go up.

[00:04:29] And therefore, what happened was US yields, the 10-year yield in the US, went from in the threes, 3.7%, 3.8% to 4.8% in January end. Right. So, whenever the dollar gets expensive and whenever US risk-free rate becomes higher, money leaves the rest of the world, especially emerging markets. India was obviously a prime example of that. And that's exactly what happened.

[00:04:54] Now, in the last one or two months, what has additionally happened is, as the Donald Trump bite is not as worse as his buck, you know, so he's still more prepared than last time. Some tariffs have been put on China, the Canada-Mexico ones have been partially reversed a couple of times. Nonetheless, as his bite is not as bad as his buck, money has started flowing out of the US. So, the dollar index went from 100 to 110 when he became president roughly. It's now down to 103, 104.

[00:05:24] The US 10-Y went to 4.8 I mentioned, it's now down to 4.2, 4.3. But the initial money has gone back to Germany and China. China, because, you know, it was quite cheap, deep-sea capping, the China big tech is having a moment. Right. All the geopolitical issues remain and it may be more of a tactical trade, but that's a separate discussion. Germany, because what happened was Europe realized that it can no longer rely on the American security umbrella to go against Russia.

[00:05:49] So, Germany ripped off its zero debt kind of break, its self-imposed constitutional break, declared a 500 billion euro defense plus infrastructure budget. The new government, which has gotten elected there. That led to German yields going up, US yields were coming down because inflation there is actually coming down despite all of this because an American slowdown was long overdue. They were doing too much fiscal spending for too many years and Elon Musk and Doge is trying to constrain that.

[00:06:17] So, all of this mixed together led to the dollar coming down. The DAX, the German markets are doing very well. The Chinese, Hang Seng, etc. is doing very well. My humble submission before I pass it on back to you and Ashish and we'll of course discuss much more of this. Right. Is that as if we are basically sitting on a two-decade high in the dollar, when the dollar turns and now it's a question of if and not when. Sorry, when and not if. As the dollar turns, FIIs end up coming back to India.

[00:06:45] Remember FIIs, when they're investing, they don't get returns like you do. They don't get returns in rupee terms. They are denominated in dollar terms. So, for the last few years, if you were getting 15%, they were effectively getting 10 or 11%. When that cycle turns, your 15% becomes their 16, 17, 18%. And then it's a one-decade cycle different. And it's a cycle thing. I'm not thinking about online conspiracy theories of de-dollarization and all that. It's a cyclical thing.

[00:07:13] So, as that turns, eventually money will also come back to India. But the last five, six months was basically the Trump trade playing out. On top of that, China and Germany had specific reasons and India was expensive to begin with. That is the, I would say, the big macro-level market summary of why we had six months of a 20% valuation correction on the broad indices and 15% price correction on the large-cap indices. Right. Fantastic. Before I go to Ashish, I have a few questions as a follow-up.

[00:07:42] And of course, I'm going to refrain from asking any geopolitical stuff and focus on markets and economy more or less. This 10-year yield, these bonds and these foreign investors, moving money in and out. Now, this seems to have an outsized impact on how it affects you and I. Could you explain the significance of these in a way that a layperson can understand? Definitely. See, the US 10Y is the rate at which the US government borrows from the markets for 10 years.

[00:08:12] So, if today it's 4.2%, they are basically paying you a dollar interest rate of 4.2%. Now, the issue is the US 10Y is effectively the benchmark or standard given the dominance of America in global financial markets. It has half of the world's equity market cap and maybe 70% of the investable equity market cap, free, float-based, etc. So, whatever is a risk-free rate there decides, in effect, the asset prices across the world.

[00:08:41] When that was 1% or 2% or 3%, it's more likely that they will say, we don't want to put money in debt equivalent in America, safe, get 1% or 2%. It's too little. Let's try exploding emerging markets like India. When that becomes 5%, they are thinking, wait a second, why take that risk? We don't know about currency. Who knows about India? What's happening there? Remember, India is only 2% of the global investable market cap at this moment, despite this run-up.

[00:09:09] So, from a New York perspective, a higher US 10Y. That's a phenomenal fact, right? I mean, which you mentioned, which is the 2%. Of the investable market cap and around 3% to 4% of the overall market cap. So, we are still, we are rising in the scheme of things. But we're starting at a very low baseline. Yeah, but from a global point of view, we are a small cap. Yeah. Yeah. To put it in our language, yeah. Right. Fantastic. Okay, I'll come back to you on a few more points.

[00:09:38] But, Ashish, you just heard Harsh describe all of the macro factors, right? But we also got a sense, you know, in 21, 22 and so on, that the markets were super hot, right? I mean, there were individual stocks and, you know, businesses that even if you were kind of bullish about the business or the industry in general, you kind of was hesitant to invest at the valuations that we kind of saw in those years, right?

[00:10:07] Do you also feel that it's like a, you know, sort of toning down of the excesses that we saw at the time? Yeah, you know, see, what we should keep in mind is that practically every year or every other year, from the highest point, the market declines 15-20%. It's, you know, like in, you know, people who develop digital properties or tech, they say it's a feature, not a bug. And every time, so every year or two, it falls 15-20% from the top.

[00:10:36] Because, you know, markets will never be absolutely at the right valuation. There's nothing called a right valuation. There's nothing called a fair value in that sense, right? Because every time people are, it's all relative, correct? So it's the basic nature of markets to run ahead and then correct. To run ahead and then correct.

[00:10:57] If you take, since liberalization, last 32 years of history, last 32 years of history says that our nominal GDP growth has been in the range of 12-13% compounded. The earnings growth of big indices like Sensex, Nifty has been in the ballpark. So in the long period, large companies' earnings grows in line with the nominal GDP. And then, you know, there are some sectors and some companies which will go faster, which will grow slower.

[00:11:21] But, by and large, if the long period average for economic growth is 12-13%, it stands to reason that somewhere in the ballpark should be the long-term return for equities and the earnings growth itself, right? Now, look at it this way. Everybody has to be mindful of base rates or long period averages. So in the long period average, if the market itself has grown 12-13% and you find that in last three years, we have got 20-25% compounded. Then everybody starts thinking, I am a great investor.

[00:11:50] I am a mind-blowing stock picker, right? But then every time you should remember, you know, there is this cyclicality. Like you can visualize a pendulum. So if the long period average, the center is 12-13% and you are finding that the pendulum for last three years is swinging. Okay, you are getting 17%, 18%, 20%, 25% compounded. The beauty about pendulums is that how much you stretch it on the right side, you can be sure of two things. It will definitely go swing that much on the left-hand side.

[00:12:19] And then again, it will tend towards the center, but it will never stop at the center. It will again swing towards the left-hand side. That's what I meant. That markets, the basic nature of markets, to run ahead and then correct. Right. Run ahead and then correct. Now, in all of this, reasons can be, every time there is a different reason. In 2022, people actually thought we will have third world war. In 2023, there was an unknown bank called Silicon Valley Bank and Signature Bank. They went bust.

[00:12:48] And everybody thought, oh my god, this is the next Lehman crisis. In the end of 2023, people again thought, you know, Israel and Hamas and all. Again, one side US, one side Russia. There is going to be a flashpoint. In 2024, people thought that NDA will lose power. In 2025, people are thinking that FIS will never come back. Rupee will become 100 bucks a dollar. And you know, it's all gone. In 2020, people thought because of COVID that, okay, we are dinosaurs. This is where it ends.

[00:13:17] So, it's in the basic nature of markets. You know, we can keep discussing reasons. Correct? Of course, it's our job. Like, Harsh gave a brilliant explanation that in the last six months, because it's people's money. They want to know what is happening. So, it's good to understand why it is happening. But it is also good to understand that, brhai, after 18-24 months, it will happen again. Right? I read this, you know, this book, right? Psychology of Money. One of the books, like Morgan Houser's book.

[00:13:45] He said that if you get surprised by markets or the economy, if you get surprised, the learning is that markets and economy is surprising. Your learning should be, see, when we get surprised, we draw a conclusion that next time I'll be better prepared. I will not repeat this mistake. But the next time there will be a different method of surprising you. Right? So, I think everybody who invests should understand that this is how it works.

[00:14:17] Right? So, the market falls, like Harsh gave an explanation as to, you know, this FI thing is not permanent. The US market cools off. The dollar cools off. The yields cool off. They'll again find emerging markets attractive. So, the money will come back. Market will recover. And then two years later, there'll be some other reason why it will again correct. The only beauty is that market makes higher highs and higher lows. So, nothing to get worried about. This is how it will work. But do you think on aggregate, we get smarter every cycle?

[00:14:45] I mean, do you think that the excesses you saw? I mean, I'm trying to be optimistic about, you know, the nature which you mentioned, right? That, you know, roughly we repeat the same mistakes. And also, we enjoy the same highs and the same lows. So, I'll tell you two, three things. And Harsh can definitely jump in. Because this is like a very interesting, it's a very nuanced topic. There's no right answer to it. But I can tell you two, three things. See, first is, you must have noticed that in the last 20 years, twice it has happened that the Nobel Prize, as it applies for economics,

[00:15:15] has been given to people who study human behavior. Now, 40-50 years back, you wouldn't have imagined that a Nobel Prize in economics will be given to somebody who actually studies human behavior. That is because the economics we are taught suggests that human beings are rational and logical. But the finding is that human beings are emotional and psychological. Rational. Yeah. So, that tells you for part of your question that, no, I don't think we get much wiser.

[00:15:44] We repeat our behavior. Right. But on the other hand, I'll also tell you that, you know, the market is made up of multiple cohorts of people. Definitely, there are some, there is always some cohort of people who has seen many more cycles. And there are many more, some cohorts of people who can relate to it when I'm saying it's a feature, not a bug. And there are some cohorts of people who are greenhorns on, you know, who just started. Like, you know, people who came in 2018, for example. See, our first brush with digitization was after Demon.

[00:16:14] When everybody had to force to be digital. So, 2017-18, a lot of people, you know, their association with the market started because they started using, embracing the digital world as it applies to finance. So, a lot of people came into the market. But people who came in 2018 onwards, they must have thought, I mean, this place is crazy, man. After 2018, you had 2019-20, then it went up, then it went down, again up, again down. So, people in 2018, they must be thinking, this is crazy. And people who came in 2020, they must be thinking, this is easy.

[00:16:44] What's the song and dance about? I mean, I'm making money. Right. So, there are different cohorts of people. Some wisen up. But, every time the market goes down, people, you know, they remember all their good and bad deeds and they start introspecting. People become philosophical. Right. Yeah. You know, Harsh, couple of questions on the macro again. When do you think the FIS will sort of come back? See, first of all,

[00:17:13] fully agree with what Ashish said. You know, if markets would go up linearly, why would anybody put money in FD, right? So, it's totally a feature, not a bug. Every two, three years, you must expect some form of correction. It is actually a surprise. It's not so surprising, but it is surprising that people found a 15 to 20% correction to be somewhat a huge thing. It has happened all the time. It's just that the post-2020 cohort, to use that terminology, were probably not that prepared for it. Now, to your question,

[00:17:44] see, in the very short term, we can't time it. We don't know. That's the honest, intellectual answer. But we can probabilistically try to, you know, gauge the odds. If you try to gauge the odds, I think already the markets, not just Indian, but global markets, are responding with lower and lower impact, or lower and lower response, to Trump's tariff threats. So, you know, there is an old saying, that this boy is saying, there is a wolf has come, wolf has come, wolf has come. First two, three times, the villagers go out. Then when the boy says, the wolf has come,

[00:18:14] an actual wolf has come, and nobody goes out. So, there is a bit of that. There is a bit of fatigue, on Trump's pronouncements, and announcements. He just became president, again on 20th January. We are sitting in, around 10th March. So, you know, there is an element of fatigue, which is already set in. Now, as I was saying, the dollar has already corrected, from 110 to 104, The yields are off, significantly. And already, non-US flows have started, into Europe, and China, respectively. I think it's now,

[00:18:43] a matter of time, even domestically, we've had change of, leadership, on RBI, and SEBI. We've had a new budget, which continued, and promised, in fact, slightly over delivered, on the fiscal consolidation, from next year, that is FY27, this year was FY26, for next fiscal year, we are actually changing, to a debt to GDP situation, from a deficit to GDP, which basically means, to put it very simply, in simple language, we'll have more flexibility, in the fiscal side, from next year. On the monetary side,

[00:19:12] the RBI is infusing, in effect, tens of billions of dollars, and maybe in three months together, up to 100 billion dollars. How? It has done open market operations, basically buying bonds, it has done FX swap, so you buy the dollar right now, with the promise of selling it back, three years later, which infuses some more liquidity, you're doing repo auctions, already one rate cut has happened, and more rate cuts are on the way. So what is different in 2024 was, we were seeing a lot of fiscal, and monetary consolidation,

[00:19:42] at the same time, there was a lot of political uncertainty, as was mentioned, 2024 general elections were there, two, three key state elections were there, a lot of that seems to be behind us, Trump, we must also acknowledge, for good or bad, some of the global flashpoints, have reduced in its intensity, in whatever the fairness may be, the way they were reduced. So it seems, if the US slows down, but it does not slow down into a crisis, that's generally the optimal situation, when money leaves America, and goes to the rest of the world,

[00:20:12] including India. See, even if, there is global uncertainty, and even if it is caused by America, money actually goes back, to the safe heaven of the US. So what you want, is not high American growth, but not a crisis in America, you want just, muddling through US growth, and latest early signs of data, for example, not good. The US inflation, numbers, PC, CPI, without getting too technical, are becoming lower. So I would say, it's not too far. See,

[00:20:41] about a decade ago, or 12 years ago, FIA has owned about 25% of the Indian market, give or take, one four. Today, FIAs or FPI, is on about a sixth of the Indian market, 16%. The Indian market has seen, nine consecutive straight calendar years, of positive returns. 2015 was the last down year, that also very minorly, after the 2014 Modi rally. 2016, January, 2024, December, nine consecutive years, of positive returns, including the COVID year. December was higher than January,

[00:21:11] I'm speaking of calendar years. Now, that is quite phenomenal, when FIAs are on a relative selling spree. It is just that, DIIs, Mutual Funds are here, you know, industry folks like Ashish, who created this new investor base. That money has basically neutralized, de facto relative FII selling. But if you see it in another way, that FIAs were a headwind, for a decade, effectively, especially in the secondary market, I'm not talking about the primary market. They were a relative headwind, on the secondary market.

[00:21:41] DIIs were the tailwind, despite that, the markets have given, quite incredible returns, on an overall basis. Now, what happens in FIAs comeback? Then, instead of one headwind, and one tailwind, you have two tailwinds. I mean, DIIs are not going to short the market. Their flows may be less, or be slightly higher. You may have a bit more IPOs, QIPs, promoter P selling. So, I think FIAs are likely to come back. I'll just end by saying this. See, Trump's team also effectively, wants a lower dollar. Trump's team,

[00:22:10] Scott Basant is his, treasury secretary, Stephen Miran is the head of his, council of economic advisors. They've all publicly, they're documents. They used to work for hedge funds, respectively, Hudson Bay Capital, Scott Basant ironically, used to work for George Soros, at one point of time. They think that, actually, a weaker dollar, would lead to more manufacturing, coming back to the US. Right. They want a strong middle in the US. They think the American system, has gotten too financialized, with a big technocratic elite, and everybody just kind of, you know, getting by. So,

[00:22:40] the thing is, as a politician, they can't publicly say this. So, a lot of people are in the markets, global and Indian, are talking about, a Plaza Accord 2.0. So, in 1985, there's a Plaza Accord, whereby Americans, basically, forced the Germans, and the Japanese, to revalue the currency upwards, because they were selling, too many damn cars in America. This happened, officially, with writing, etc., because they were allies. With China, it won't happen, officially, because China is not going to be, seen as bending the knee, in front of Donald Trump, Xi Jinping.

[00:23:09] But effectively, the Chinese mercantilist model, has now run out of steam. See, you can have all these, export subsidies, etc., when you're a $5 trillion GDP. At an almost $20 trillion GDP, Americans, and Europeans, and South Koreans, and Japanese, and Indians, may not get along, on all issues. But on Chinese, over capacity, and dumping, they all get along. And the Chinese also rely, they have to jump, towards consumption. They did the first leg, in 2020, by putting off, new lending, to real estate. They tried to cool off, that lever.

[00:23:40] But because COVID was there, they said, one time manufacturing export, one time more. Now, the manufacturing export, with Trump 2.0, is also becoming, difficult to do. You can only reroute, so much through, Vietnam and Mexico. They are also, under Trump's crosshairs. So now, effectively, they will end up, choosing, after some volatility, and that volatility, could last for months, or quarters, just to be sure. I'm giving you, the big picture. But they will end up, choosing a stronger dollar, stronger yuan, RMB, stronger Chinese equity markets,

[00:24:09] stronger Chinese, domestic consumption. That's the only way, this system, partially, kind of balances out. And that's actually, very, very bullish, for Indian equities as well. See, in the last few months, we're thinking of China versus India. China versus India. But when money comes from FIS to EMs, it's actually China and India. Yeah. It's only in a risk off sentiment, that you have a zero sum mentality. You'll have to explain risk off. So risk off, globally, is when basically, money is going back to the US, as was mentioned, right? I mean, basically,

[00:24:38] people are not buying global risk assets. Equity is the classic example, of risk assets. But it could be foreign currencies, real estate. It could be corporate bonds. But basically, equities, people were not buying it. Money was going back to America, especially during the Trump trade, in September to January, the high intensity period. And then people are saying, if some money is coming, if it's going to India or China. But once the cycle turns, and remember, 2002 was the last peak of the dollar. 2011 was the last bottom, with the GFC in the middle. When was the last time

[00:25:07] the Indian market saw a crazy rally? 40% CAGR for around five years, on the large cap indices. 2003, till 2008, early. Our power IPO was the, was the crazy point. I'm not saying we will see a 40% CAGR in the Indian market. Don't, I want to be very clear, please don't misquote me, even by mistake. 40% CAGR on the Indian markets, for the next five years. Because this time, starting valuations are different. But the reality is, we are very close to another down dollar cycle.

[00:25:36] That generally is very, very bullish for broad markets. The only issue with Indian markets is India is a low beta EM. What I mean by that is, India imports commodities. In a down dollar market, commodities also go up. Right. So when commodities go up, India being an importer of commodities benefits, but does not benefit as much as a Brazil would benefit. But on the other side, when the dollar was strengthening, we did not get hurt as much as a Brazil got hurt. In fact, again, thanks to the broader

[00:26:06] mutual fund industry, as I said, we've had nine consecutive years of large cap positive returns in India. I mean, that's quite phenomenal in a global environment, which is a headwind. So I think the answer is, FI is a coming back. It's a question of when and not if. Nobody knows the exact time period, but probabilistically, we are getting very, very close to the turning point. Gun to head. I mean, if you were to, if not pick a date, I mean, or a week, I mean, if I were forced to choose with all the caveats, I would say it would happen this calendar year. Okay. Definitely,

[00:26:35] the probability of happening this calendar year is very high. But if you would force me further, I would say it would happen before the end of the calendar year. Fantastic. Hopefully before December 31st. That's the definition of calendar year. Yes. Okay. That's the best we can get out of you in terms of our timeline. See, the older you get, the more, where do you get about predictions? And I've been there, done that. But it's always all those probabilistic caveats. Yeah. And you've seen a few cycles, you know, things can always get worse before it being equilibrates.

[00:27:05] And as Ashish beautifully said, when it, you know, comes back to the equilibrium, it does not stop at the equilibrium. It does not stop. But the probability is very high this year. Ashish, Harsh has mentioned more than a couple of times, right? The fact that, you know, equity investing has gone from, let's say,

[00:27:33] 2% to about 5% or so, right? More people have come into the market, especially post, you know, COVID 2020, 2021. Again, championed by the mutual fund industry, right? I mean, has done a great job in improving the trust that people have in the markets as well, right? So, while the fallacy in finance is that this time is different, but this time seems different, right? I mean, it seems like we have a larger base and it seems like, you know,

[00:28:03] the retail investors, the domestic investors, seems like a bulwark against the foreign investors, right? So, do you think that, what do you think? I mean, do you think they'll hold, they will be able to hold and it's more resilient right now, the markets? Yes, you know, if you really ask me, credit should be given to the regulator and the finance ministry and not so much to the industry, you know, industry can't take so much credit because we are the only country in the world where the regulation

[00:28:32] requires us to set aside us, you know, 0.02% of our entire industry's corpus has to be regulatorily set aside and it has to be spent on investor awareness and education. that is where this mutual fund came because in the last few years, the finance ministry and our regulator has worked very hard to push financial inclusion and has worked, see, because India is a country where unfortunately people have lost money in plantation schemes and the Rose Valleys and the Sardas of the world, right?

[00:29:02] So, the regulator and the ministry has worked very hard to ensure that regulated products should reach far and wide. So, I think the credit is more to the, you know, regulatory framework and the government. The industry is obviously following the, I mean, the industry, the Association of Mutual has done a great job of execution. Right. I just wanted to clarify that we are the only country in the world which is, with so much foresight that you want financial inclusion and for that you mandate the industry to spend 0.02% of the entire corporate

[00:29:32] like 68 lakh crores and 0.02% of that is like over a thousand crores a year is earmarked for inclusion. That is what has led to this. Financial literacy. And it has coupled with, see, for ages now, people have been talking about India story, about the upcoming demographic dividend. Right. Now, what happens is that the thing about predictions is that people sometimes make long ranging predictions and this was not just a prediction, it's grounded in economics,

[00:30:01] grounded in mathematics because you can forecast the demographic trends that you know how the demographic pyramid will kind of shape up. So, it was forecasted, it was predicted, it was proper maths that there will be a point in time when most people in India will come of age. If you take 21 years, 22 years, 23 years, every year of age, we have about 2 crore people and we knew this was coming. But what happens is that when you actually get there, you don't believe it. This is what

[00:30:31] you've been forecasting for 20 years that there will be a demographic dividend and this is how the country will shape up. Yeah. Right. So, three things. One is the regulatory efforts. Second, massive deregulation of interest rates. You know, if you asked your mom or my mom that mama, what does the word interest rate suggest to you, they must have seen 12%. You ask a 21-year-old today, what is interest rate? They're most likely to say 6%. Correct? So, the demography, deregulation of interest rates,

[00:31:01] digitization, and regulatory efforts. That is why you're seeing, you know, all of this coming together. Right? Right? That's why you're seeing financialization, market participation, etc. So, I think it is here to stay. There will always be cycles. There will always be some people who get scared when the market falls and there will always be some people who lose their bearings when the market goes up. But, overall trend is here to stay and I wouldn't classify it as this time is different. It's just that

[00:31:30] the times have changed. The country has changed. The population has changed. The regulatory framework, the technology and, you know, plus, let's say, one more thing about regulation which is that it's far more robust now. See, what people are seeing on OTT now, I have seen it in the front page of the newspaper early 90s. But after that, you can see that the market is becoming safer and stronger. The regulators are becoming a lot more, you know, on the ball. We're probably, I mean, we're probably

[00:32:00] the best regulation in the world when it comes to stock markets and financial markets. So, I think that, you know, this is here to stay. I wouldn't want to get into this time is different, blah, blah, blah. I'll just say the time has changed actually. We're in a different era. Right. You start a small anecdote what Ashish said, you know, around even till 10, 12 years ago, but even recently somewhat, before a company results would come out, a few days before that, the company stock would start going up or going down. Off late, I'm seeing especially in Indian

[00:32:30] stocks, a very American style reaction, plus 5%, minus 7% after quarterly result comes out. What does that say? The common sense, it says there is more fear of SEBI enforcement. I'm not saying all corporate governance in India is good. I'm saying compared to earlier, just to add to what Ashish said, the regulatory framework. India has incredibly sophisticated equity listed markets for its per capita income. And a large part of the credit goes to

[00:32:59] the regulators who build the institutions like SEBI just three decades ago, NSE, BSE became modernized, the entire industry came together. It's not to say that we cannot agree or disagree on one or two specific decisions, but broadly it's a very idea that somebody could digitally put it in 250 rupees a month and build a corpus for his family over 20, 30, 40, 50 years is just incredible financial intermediation. So, I mean, along with the industry, a huge

[00:33:30] round of thanks for the state, but also the digital public infrastructure that has enabled this EKYC, this online stuff, the paperwork has gone. You can start a mutual point SIP on a relatively cheap smartphone with a very, very small ticket per month. That is the real thing that has boosted the Indian markets, given that bulwark, as you said, in that last 10 years of, which is frankly not a very supportive global environment. We kind of forget that because we did not see it,

[00:34:00] but it was not actually, if you look at other emerging markets, it has not been good. So, the US has been on a tear for now 13 to 14 years. And, like Harsh said, India has been a rank outperformer. So, we didn't realize, but if you step outside India and you compare Vietnam, Thailand, Philippines, Brazil, Mexico, you compare entire emerging markets, everybody has been under the heat of strong dollar, rising US markets, foreign outflows, markets with lackluster performance.

[00:34:30] India has been a rank outperformer, has been a standout performer, especially in the last four years. Only in the last six months, we got caught up with the other emerging markets, because it was a second round of thing happening with Trump trade. So, I think our markets have done relatively very well. And it's just the first brush that we are now getting. I don't think it's going to be long-lived. It's like Harsh said, it's a pretty short-lived thing now, and you will eventually see it reversing. Right.

[00:35:00] I want to talk about policy and regulation. So, if you listen to sane voices like perhaps Nilkand Mishra and so on, over the course of the last few months and so on, what they've been saying is that perhaps the government spending was not as much maybe because of the election cycle or what have you. And plus there was a fiscal tightening and so on. So, these as well might have affected demand, valuations, and things to that effect. So, do you see

[00:35:30] that turning on? I mean, we're talking in March when it's almost the end of the financial year. Definitely, Nilkand was absolutely right after the elections and you can actually see the three months in the fiscal year compared to the last three months of the fiscal year, right? Six months, nine months. So, it's a very objective, empirical thing that we don't have to like have narratives around. We were understanding. In that sense, it's very unique that in the US before the election year, they were actually putting the fiscal accelerator. Here, because of our model code of conduct, our democracy is structured

[00:36:00] differently. Ironically, this is a very important point. More responsible democracy, if you would say, not trying to bribe the voters, at least at the general election level. States have been somewhat different. We get the rough short for this all the time. We get lectures on democracy, but that's such an amazing point. This has changed. What just now, before an election, there was always this lurking fear that is cash being distributed? Are bottles of liquor being distributed? Are men being influenced

[00:36:30] to vote in a certain way? But see, there is so much change. You can keep debating about freebies, but the point is at least now what you're saying is as part of policy officially announcing that if I win, the weaker sections of society will get this much and women. See, giving to women is the important part. Doling out cash in an illegal, informal, informal manner is destructive. It's very bad. It engenders a parallel economy, which is what anecdotally

[00:36:59] we used to read about in the past, but see how much it has changed now. You come up on a stage formally and say this is my policy to empower women financially. And you do what you say. That's better than what was happening in the past. Completely echoing what Ashish said, it's better that we do it transparently to the extent we can. It's better that the most vulnerable sections of society are benefiting. See, I don't see capitalism and a welfare state as antagonistic to each other. In fact, I think they are supporting each other.

[00:37:29] The only point of improvement is how do you make the welfare state more and more efficient? There is less and less leakage or pilferage or euphemistically whatever you want to call it, missing recipients. That, again, digital public infrastructure helped. How can you make the capitalism more and more competitive? Regulated in a good sense, not in a license-rack sense. And I think we are moving towards that social economic compact. It may be two steps forward, one step back. But to the immediate question you mentioned on the fiscal part, yes. So I think the fiscal

[00:37:59] taps have been put up again. Of course, we are being very responsible. The fiscal deficit, in fact, for FY26 was 10 basis point lower than what was projected in the five-year fiscal consolidation roadmap. As I mentioned from next year, we are switching to debt to GDP. And the reason is, you know, ultimately, why do you have to have a fiscal deficit to GDP consolidation? Because when your nominal GDP is growing at 10-12%, and your cost of capital for the Indian government is around 6.7% today,

[00:38:29] provided you have a buffer and you're using it for CapEx. The right way to measure it is not deficit GDP, it's debt to GDP. So that switch will happen. So that's also positive for growth, I would say. But more broadly, the macro environment seems much better than it was last year. And I think sometimes regulators and politicians may also take a few months to realize and respond. But as I said earlier about RBI, the response is very, very strong. It's very, very clear. It's very, very methodical. So the system is working.

[00:38:59] It just may not work always exactly the way we want it. And you see on spending for the weaker sections of society or giving money to women, for example, let's understand one simple thing. We can keep debating capitalism and socialism. I think what Harsh said is the critical part that we're getting a balance. Let's understand practically. If there is a bunch of people, like if there is a few crore people or a section of the country who has to keep thinking where will my next meal come from, how do you expect them to focus on education or health or productivity?

[00:39:31] resistance is taken care of by the state. Only then they can think of doing something, right? I mean, if you're preoccupied with figuring out where your next meal will come from, basic survival, then how will you move on? So we have to support these people, only then we will move on. Some of these policy measures, right? I mean, people often talk about the exceptions, let's say someone who's really well off, who's also benefiting from a scheme and so on, but I mean, it's perhaps the most perfect start to an imperfect start, right? I mean, you

[00:40:01] cannot get it 100%, right? You have to have practical solutions. If you just start getting into philosophical, this thing that this is, you know, this is the framework, in this framework, this fits, this doesn't fit, then it's no use of that framework, right? I mean, you should be able to optimize for things. CapEx cycles, how does it impact everything that, you know, we're seeing around, right? And, you know, there are other things like interest rates, for example, you mentioned like

[00:40:30] repo rates and so on, right? So, yeah, can we talk about CapEx cycles? Why should the government spend more on, let's say, productive assets like infrastructure and so on? Absolutely. See, the point is, first, let's begin with a single individual or family. If you're taking a loan to go to a good MBA, which helps your salary double or triple, right? That's one rational way to go about your life. If you take a loan to buy a really expensive car, it's fine. I mean, I'm not judging anybody's utilitarian calculus,

[00:40:59] but that's definitely not increasing your future earnings, right? So, of course, other things being equal, to the extent the government creates productive assets in its spending, it's great, with the caveat that the balance has to be maintained with social spending, because if some people in India are not able to think about beyond survival, they are not building their children's human capital going forward. So, it's a balance. Now, the CapEx cycle is not just the government. The government post-COVID obviously took the lead in it,

[00:41:29] tried to quote unquote crowd in CapEx by saying, you know, right now the private sector is going through some troubles, demand may be not there because of partial lockdown. Let us use this instead of giving large enough checks, because as much as we want to do that, we are still a per capita poor income, relatively speaking. Let us do railways, roads, power, etc., which builds up the long-term productive capacity of the country. In the short term, it also creates blue-collar jobs, people literally working on those highways, expressways. That's great, but more generally, the

[00:41:58] CapEx cycle has churned. I think it's a bit of a narrative delay that people keep on saying private CapEx is not back. If you look at the NSE500, BSE500 data on CapEx, for example, it is already compounding at a very reasonable rate above 20% for the last two and a half years. A last part of the CapEx, what we economists call GFCF, Gross Fixed Capital Formation, is actually not even NSE500, BSE500 CapEx. It's like somebody making a house for themselves in a tier 2 town or a village through a

[00:42:28] government grant or directly on their own. The latest number that we saw was 34% on GFCF to GDP on the nominal basis. So that's a good number. And remember, again, this entire global cycle and the domestic CapEx cycle, real estate cycle, are all interlinked. They're not one-to-one coincident. But why could RBI not cut rates aggressively in 2024? Now when the dollar is strengthening so crazily, you cannot cut rates even with a slowing economy to that extent because

[00:42:57] on the margin you have the risk of capital outflow. Now that the dollar is somewhat comforting down and it may continue as we had a prognosis there in the earlier discussion, then it's easier for the RBI to cut rates and do easing etc. Which is what the new RBI governor is doing. So sometimes you get too lost with the personalities but you know, the framework or the time period of the last governor was different. This governor came just as the cycle was beginning to turn and he could do things

[00:43:27] perhaps the earlier dispensation could not do. So I think broadly speaking, if we wrap up the macro part, the macro is really really getting supportive. Although it is early days and in the very short term nobody can time that this was the peak of the U-turn cycle. Right. Right. Ashish, most people understand the demand side of things more intuitively than the supply side of things. I mean, which is to say, okay, you know, if my neighborhood shop is doing like brisk business, then, you know, perhaps the market is doing well,

[00:43:56] the economy is nice and so on. And to that point, right, I mean, I have spoken to a lot of these small businesses and so on and there is definitely some strain, you know. people say that demand is not as, you know, as it was earlier. In fact, I mean, it's gone to pre-COVID levels in some businesses and so on. So, like, how do you see that? I mean, what do you think, let's say the policymakers, the government can do to really stimulate, you know, demand in the economy as

[00:44:26] such? See, I think that, you know, there has been a lot of talk and conjecture about the fact that it's more urban, more, you know, affluent. That's where the demand has been strong and rural or, you know, lower income group, you know, or the unorganized part has been, you know, kind of facing some headwinds. Now, there are layers and layers in this. Let's see, for example, in the last few years, unorganized, you know, people who are operating in the parallel economy,

[00:44:55] people who are operating in the unorganized format, people who got the shortened of the stick after GST was implemented. So, a lot of these people who are outside the digitization loop, right? So, there could be structural reasons that a lot of these people are not yet aligned to how the rest of the world is, I mean, the rest of the economy. So, that could be one layer to it. Second layer could be that, you know, after COVID, say the rural economy, you know, the weaker sections of

[00:45:24] society, let us say they have not yet bounced back. Whereas, you know, stock markets booming, certain sectors of the economy doing really, really well, the organized sectors has, you know, got the affluent guys to bounce back much better. So, it could be multiple such things, right? But if you see the aggregate numbers, 6.5% GDP growth is not a bad number. I mean, if you end up with nominal growth of 10, 11, 12%, which is how it has been playing out.

[00:45:53] So, on the aggregates, it's not bad. If you look at sectorally, there are some sectors, like say, for example, now we're talking about tourism, hotels, airlines, right? So, all of those demand indicators, but unfortunately, everything which is linked with the affluent part of the world, or the organized part of the world, or the urban part of India, all of those indicators seem to be showing great traction. And that is the reason why, you know, when state elections come, or, you know, now say for example, now the government is, you know,

[00:46:23] all the governments are doling out some support. So, it's there. And I think it has been, it is being addressed. That's how I would put it. Right. So, you're saying it's more asymmetric, basically. It's asymmetric. And see, even if you see the government itself, right. Let's take an example. See, 10, 12, 15 years back, when all of us used to track governments and budgets, what was the most common criticism for the government? That the government spends on running a bureaucracy. The government is indulging only in non-plan or revenue expenditure. They're not doing

[00:46:53] enough CAPEX. Up until few months back, what was the criticism for this government? It was absolutely the opposite. So, I actually noticed that, wow, I mean, something which should be a compliment is now turning to be a criticism because this government has been blamed for only focusing on, you know, CAPEX. Yeah. Right. The higher functionaries of the government are being criticized only for focusing on launching trains and opening bridges and ports. Building roads. Building roads. Right. And they are saying

[00:47:22] that there are sections of society who are struggling to make ends meet. Right. So, it's, you know, these are all cyclical things. And I think the government is correcting the balance. Right. I mean, if you are in every state election, if you are giving dole outs, you are announcing an eighth pay commission, which is, of course, anyway due, but eighth pay commission will play a role. So, the point is that now, of course, the government is looking to correct it. So, that's why I mentioned that, you know, when states are giving out money, for example, eighth pay commission is coming up. Right. I mean, if you go by

[00:47:52] past history, pay commissions have a significant impact ultimately on pushing money into the hands of people. And for millions of people, their pay scales get completely reset. Right. And then, of course, now there are some tax benefits which are being given. So, I'm sure it will, you know, it's cyclical. It will get corrected. But I'm sure, you know, maybe Harsh has a few other points to add as well. Right. I want to talk about small caps. Right. That was a strange pivot.

[00:48:20] No, I think, so, we've covered enough of the macro and I think we have like enough rabbit holes that people can sort of like, you know, traverse by themselves. Right. So, let's talk about the meat of the matter which people hopefully have been waiting for, you know, for a while. Right. You know, there's been so much of discussion about small caps. Right. People discovered all kinds of stocks in the last like three or four years. I mean, wires, pipe settings and bottlers and,

[00:48:50] you know, I don't want to take specific names but I guess people have an understanding of what I'm talking about. Right. And it went up and up and up and up and up and then you know, it's the first to kind of like feel the brunt of the market at this point of time in the downturn. Right. So, your opinion on the state of the small caps at this point. See, Roshan, more broadly I feel this, see I run a flexi cap pipe PMS. So, pipe stands for

[00:49:20] private investment and public equity. We, I generally don't think in terms of size of the company. I think in terms of the size of the company in its particular sector or niche. If it's dominant there or not, if it's gaining market share. A particular niche may end up qualifying as a large cap. A particular niche may end up qualifying as mid cap, small cap, micro cap. So, first of all, it is the context that sets the, of course, the small caps may matter for liquidity and other reasons. I'm not saying it's an analysis that's not worth doing.

[00:49:49] How should one think about investing? Simple ways. We must always and always look for great business models. I can tell you that many companies are not great business models. In the sense that some are commodity businesses, they don't have any specific moat. I would say the average public sector bank is a long term not a great business model. It may be a great stock to buy. That's my personal view. There may be exceptions like of course SBI is the largest bank and that may be a bit of an exception because of its sheer size. First of all, you have to buy great business models with good corporate governance.

[00:50:19] Secondly, you have to buy businesses with what you think will compound your earnings over the next say three, four, five, six, seven years. Why over that time frame? Because if you force yourselves to think over five years, you will force yourself to think about the business. In the very short term, we are completely slaves to the market's emotions. Right? You may think you've got it on figure out, but if you are basically betting on the market in the short term, it can turn out to be completely different. And finally, which is why the reason you should enter

[00:50:49] at a reasonable valuation. So you have to have a great business model and corporate governance, fundamentally great growth ahead and a reasonable valuation. I'm not saying a cheap valuation, but a reasonable valuation is nonetheless important. I'll give you an example. Right? You mentioned some pipes and paints and this and companies. We all know some of the names which have corrected massively. The simple issue is what happened from 2021 to 2024, a lot of investors, including fundamental investors, ended up becoming momentum investors.

[00:51:19] They may not have done it deliberately or with any malice whatsoever. Yeah. Opportunistically. It may just have happened subconsciously. Just you have style drift. Right? You have style drift. It's not for any bad reason. You ended up becoming momentum investors where you thought this is the normal valuation for this sector of company. You could never visualize a situation where a new entrant competitor or a different market environment may suddenly cut the 100 PE multiple half into 50.

[00:51:48] Now, I would still respect the position where somebody says, I want to buy this company at 100 PE if he or she ends up buying more of the company at 50 PE. Right? But what ended up happening was people were not doing that, which effectively showed us that they were traders. They were momentum traders. So I'll just summarize by saying this. Warren Buffett has a beautiful quote. And the gist of that is please separate your investment account from your trading account. For your investment account, just have a simple litmus test.

[00:52:17] If the stock market is closed for say five years and it could be four years or six years, it's not about five years specifically. But for a long enough time that you have to focus on the business, are you comfortable owning the stock? If you're comfortable owning the stock at this entry valuation with the growth prospects that you analyze it to have over the next five years, with the possibility that you cannot sell it for five years, then that's a true investment. If you do that, whether it's a small cap, mid cap, large cap, if you focus on the cash flows and its

[00:52:47] compounding, it is very difficult to go wrong when the overall Indian economy is doing so well. See, remember, we are very lucky. We just coincidentally, we're all in prime working ages in the world's fastest growing economy. Yeah. Fastest growing major economy. 6.4% was obviously the number mentioned, correct? Let's remember the FI24 base was the GDP, real GDP by the way, inflation adjusted, was marked up to 9.2% in the latest number. So we are seeing very, very

[00:53:16] rapid growths by historical standards. It's just that China grew by 10% for 20 years. And in that comparison, we often doff. But the Chinese model is completely different. They did not, they had a very state-owned enterprise led model. Their wealth got created in real estate and not in their equity markets for a long time, right? Because of dilution, etc. So just to summarize, it's not about small cap, mid cap, long cap. Sorry for giving a slightly long and tangential answer. It is about buying a business. Right. If the business is solid and

[00:53:45] it is growing. If it is growing, then you can prevent a value trap. See, if a business is growing every year, its value is increasing, say, by 15, 20%, then you have a moving target, right? You're getting paid to wait even if the market does not agree with your hypothesis and does not correct to that valuation that you think it deserves. But if you're buying something which is just cheap, but it is static, you could continue waiting for 15 years, for 10 years. So buy great businesses which are growing at reasonable valuations.

[00:54:15] All of this sounds qualitative, I realize. There is no fixed formula. In the Indian context, it's very difficult to go wrong with that if you've done good research. Not about the size of the company. That's only one small factor. Right. You know, you mentioned investing and trading and also the price, right? Best of segregate. Yeah. I am kind of reminded of this quote by the late great Rakesh Junjanwala. He used to say that, you know, what you buy is important, but at what price you buy is even more important. What we saw over the last three or four years is

[00:54:44] like this whole like earnings versus, you know, what price and so on. There is massive deviation, right? I mean, yes, you think it's a good business, but should you buy it at the price it's kind of trading at, right? And for most people, it's a bit of FOMO also. You don't want to sit this out, right? And now you have a situation where, you know, prices have corrected, but you don't know if it's going to like fall even further and so on. So the point I'm trying to make is this whole earnings versus price, right?

[00:55:13] Do you think that, you know, sort of subside to a more reasonable sort of a logical kind of a median or do you think, I mean, this is something that we just have to be prepared for? I mean, it's just... See, I think in the last three to four years, what you're specifically mentioning, I assume after 2021, there is a big moment. Let's understand there is a couple of more points to this. It's not like every each and every part of the market has just gone crazy. So in the last three to four years, what are specifically what is more worrying? You know, you've spoken about

[00:55:42] quality of business and price. What is also a bit worrying or to be kept in mind is that a lot of cyclical businesses have gone up multifold. So see what happens. And I'm not an advocate for buying expensive, but I'm just trying to make a nuance or make a difference. In the last... Say stocks like Bajaj Finance, HDFC Bank, you know, because coming out of COVID, the mantra was that you buy rock solid, high quality businesses, right? And just hold on to them. Correct? Now, go back at that time and

[00:56:12] see that if you ended up owning these businesses, what is the worst thing that has happened to you? They didn't give any return for three years. But when they took that time for three years, they didn't give any return. But in that period, the earnings has gone up. So what happens is that also to keep in mind, it's not just, you know, when you... If you end up buying, a secular good quality business inadvertently at the wrong price, the worst thing that will happen to you is that it will make you wait. Exactly.

[00:56:42] It will give you a period of lull where you don't make return. But what has happened in last three, four years is even worse, which is that cyclical businesses, commodity businesses, businesses that are heavily influenced by the macros, businesses that are heavily influenced by government policy, those kind of businesses have gone multifold. Correct? Now, that is where the challenge is. So what I feel is that,

[00:57:11] you know, the... If you look at the market as a whole, there are still some parts of the market, especially after this correction, they have become very attractive. Take financial services or take the large private sector banks as an example. For the last few years, when FIS was selling, we had a huge discussion about this. What will FIS sell? They will sell what is there in their portfolio. They were not owning these small cap PSUs or something. So they sold what they had, they sold the big banks.

[00:57:40] So that's a headwind. But in this period, for the banking sector, the problems are in unsecured lending and microfinance. The big banks don't have a problem with the broader business. So they've conducted themselves, generally they've conducted themselves quite well. Okay. It all got muddled with a couple of big banks having change of management and all, but they are solid institutions. I don't think they've gone off the rails. Right? So there have been price movement, not much. Massive FIS selling. Fundamentals intact. Now see the delta change.

[00:58:09] RBIS policies on liquidity, on credit, on interest rates, the macro environment, everything has changed. And for three years, these guys haven't given any return. In the last five years, the private sector banking index return is less than their fixed deposit rate. Correct? So there is this huge, and this is like 30, 20, 30% of the market has not done much. Correct? Then you look at a few other parts of the market, like say, for example, you know, IT.

[00:58:39] They will, I mean, you know, every three years people write obituaries of the IT industry. It's going on for 30 years now. Yeah. Correct? I mean, when I was, when I started my career, people used to say, okay, it ends with Y2K. After that, they have no future. I'm hearing this for 25 years now. So what I'm saying is that all parts of the market are not crazy. Crazy bulldogs. There is space in the large cap where one can invest, especially after this correction. And even if you, you know, you asked us about, what's the small caps?

[00:59:07] So, you know, I'll just add on to what I said. The poor stock doesn't know you are calling him small cap, calling him over a small cap, you know. It's about how you assess. Classify or. You know, it's just a framework, but it doesn't mean anything actually. Right? Ultimately, the fundamentals is what will matter. It's just that these companies have a lower equity base and a lower number of shareholders and a, you know, relatively narrower shareholding, maybe less institutionalization. As a result of that,

[00:59:36] the amplitude of price swings is very, very high. So when volatility is very, very high, people end up entering at the wrong time and exiting at the wrong time. But in every five year period, small cap falls 30-40% once. Nothing new. It's just a high beta version of, it's just a high volatility. Yeah, it's just a high. And you know, it's been well documented. Volatility is not risk. Based on what Harsh said, you end up buying the wrong business. You bought a cyclical business at the peak of, peak volume, peak margin. You bought a cyclical business at the peak.

[01:00:05] Now you got to pay for it. Right? So when you, permanent loss of capital or loss of capital, buying the wrong business at the wrong price, that is risk. Just amplitude of price swings is not risk. That you can eventually tide over. So if your holding period is long, how does it matter that the daily volatility is 1.6% or 1.2%? That's the excellent point. So on, you know, on long holding periods and volatility, I'll quote, you know, a lot of times when I watch movies, I learn about stock markets from movies.

[01:00:35] You know, if you see this typical Bollywood setting, you know, when the protagonist is going through some real hard times and, you know, potentially life-threatening situations, you know, there is obviously somebody who's the old, you know, old and wise person who comes and says, I don't know if it applies to life really, but applies to stock markets perfectly. For sure, yeah. You know, as long as you've not bought junk, work thar zakam ko bhar deeta hai. Okay. I mean, there are excellent

[01:01:05] examples that for example, just for educational purposes, you're not recommending anything that Yeah, we'll put a disclaimer in the front. I just wanted to say it, but nonetheless, excellent points. You know, large caps, first of all, I'll give for the viewers, Nifty is today trailing at a 20 PE trailing ratio. Nifty bank is at 13 less than 13. The broader Nifty 500 market less than 24. These are all corrected by 20% or more in the last five, six months.

[01:01:36] Now, if you buy a great business, as Ashish rightly said, the worst that can happen with you is you'll have to wait. You know, he gave the example of Bajaj Finance. Bajaj Finance is a brilliant example of that. In September 2021, its price to book reached almost 13. I'm not talking price to earnings, I'm talking price to book. And a price to book for a lender of 13 is quite high, very high, even for a very fast-growing franchise. In November 2024, it came down to 4.2, 4.3. In the last four months in this

[01:02:06] falling market, in this brutally falling market, at least by recent standards, it has gone up by 25-30%, like from 6500 to 8500 or so. And the interesting part is this business never stopped compounding at around 30% in its book value per share. So the last 15 years, 30%, last 10 years, 30%, last 5 years, 30%. It's a classic case of if you buy a core franchise at reasonable valuation,

[01:02:36] you will end up doing well. So even though you bought at 13 price to book, the worst thing that happened was you had to wait for 3.5 years. Because the compounding effect of 30% was so strong, of course, I won't recommend you to buy at 13 price to book. That's part of the job is to make sure you buy. A lot of times is valuation you realize in hindsight only. So you should know that if it's a good business you bought at the wrong price, the worst thing I'll have to wait. But problem is people don't know. They are buying PSU, railway, infrastructure,

[01:03:06] defense, energy, utility. Now, like he said at the onset, some of them are commodity businesses. No, no nothing. Right. Right. But one of the critics, right, I mean, that you often hear is, look, a bunch of these folks will just ask you to hold indefinitely. Right. But life is more practical than that. I obviously will have need for the money. Right. And that money has to be productively deployed. Right. If not on a yearly basis, I'll want to pull out money

[01:03:35] on a two-year basis, three-year basis. Right. How do I know how long to wait, when to sell and all of those things? Now, I know some of these things are like way too perhaps probabilistic, philosophical for us to give definite answers. But could you sort of like, you know, talk about it? You see, I think once again, if just to get a sense of how rare a franchise compounds its book value per share at 30%, most, you can actually run screeners, most businesses don't do that. To do that for 15 years in five-year windows

[01:04:05] it's quite crazy, right? At that scale, to dance at that size. So the idea is, first of all, you have to be in a good franchise. The good franchise has to constantly keep on compounding. So what happens by compounding, to repeat what I said earlier, is you get paid for waiting, right? So you may have a time correction if you enter at high valuation and some of it is definitely retrospective bias, you know, 20-20 vision, etc. But first and foremost, the important thing is to choose great businesses. You can sell

[01:04:34] after some time, it depends. Ideally, if somebody wants to invest in equities, I would say one or two years is too short a window to invest in. Because in one or two years, you can see enough volatility that it may not suit what you invested it for. Then of course, you have FDs and you have more risk-free instruments like debt or you have hybrid instruments such as REITs, etc. But to get the real benefit of equity is the brilliant point that Ashish mentioned. The short-term volatility is not risk. Short-term volatility only matters if you end up selling in the short-term, right?

[01:05:05] Short-term volatility is saying that the market goes up by 1% or down by 1%, which is a literal definition of beta or standard deviation, etc. And your stock ends up going up by 1.2% up or down or 0.8% up or down. But if you are in a high-quality business, big, small, etc., which you at least plan to hold for three, four years, that's not unrealistic for most young people also. Even in an attention deficit society, it's not an unrealistic demand to hold for three, four years, a good quality, high quality business. How does it matter if it is in the short-term it's more

[01:05:35] volatile or not? So the most important thing is, is it a great business? Is it compounding at a high enough rate that today's fair value is not the fair value in today's fair value range? There is again not an exact fair value. Today's fair value range itself is a moving target, compounding moving target over the next three, four years, so that the probability, we keep on coming back to that word, of us cultivating or harvesting that asset in four years, three years, at a significantly higher price is much higher. But with the caveat

[01:06:04] once again that if it's a great quality business, the worst case that you may feel over five, six years is a time correction. Yeah. So imagine that odds that somebody is saying that your permanent loss of capital or a semi permanent loss of capital in a high quality business is very low, the chances of some significant appreciation is high. Those are reasonable odds a lot of middle class families may be willing to take. But what happens is if you do not actually enter a high growing good quality business, not just commodity kind of business which may grow high

[01:06:32] in cycles, then that is the real problem. What happens is this peak may never come back for a long, long time. Every market cycle, the crowd loses sense of what is quality. That is the problem. In the last three, four years, in the last three, four years, in fact, the market has been given returns, that's fine. But anybody who kept their head on the shoulders has underperformed. In the last three, four years, if you just show up and buy some stocks, you know,

[01:07:01] hot hands, that has done better. Anybody who makes, anybody who just buys a list of stocks has done better. But anybody who makes a portfolio, definition of portfolio being it has some investment universe, some do's and don'ts, some benchmark to follow, right? So anybody who is managing a portfolio has found it very difficult because they are sticking to some philosophy. They are sticking to something, you know, like whatever definitions of good governance, good quality, return on invested capital more than cost of capital, you know, free cash flows.

[01:07:31] In the last three to four years, what has worked in the market? Non-governance, meaning companies which are not known for governance, the worse has done even better, right? Right. Not free cash flow, order books, that has done well. Future promises, basically. Not secular, cyclical, that has done well. Not so much about private sector, not so much about secularity, not so much about defensives, everything about cyclicality,

[01:08:02] PSUs, macro, policy driven. So when that goes on for three, four years, people start thinking that even the public sector has transformed. You know, even these commodities are, you know, there is going to be scarcity, right? And, you know, like people start thinking like say, you know, in this cycle, take an American example. People got so carried away with buying chips and data centers and server farms. Amazon said that we'll have to have our own reactors and make nuclear power. We can't buy power off the grid.

[01:08:32] It's not enough. We'll have to make nuclear power. So three, four years, a narrative builds up. People start losing sense of in other general terms, what is good quality, good governance, free cash flow, secularity of businesses. People forget all of that and they start thinking, you know, when he says style drift, the definition because the price is going up and the market is treating certain businesses badly and the market is treating certain businesses, you know, with

[01:09:01] rose vision, people start drifting in terms of their very definitions of what is good and not good. Otherwise, you tell me, you know, it's the textbooks say the value of a business is present value of future cash flows. Where does it say future order books? Those order books need to materialize. They need to be executed profitably. The profit needs to result in free cash flow. That free cash flow should be more than the cost of capital and it has to find its way into the hands of the shareholders or the unit holders of the

[01:09:30] mutual funds that hold them. That is the complete cycle. Yeah. Right. What has happened in last three years? A company puts up a price exchange release. We won an order of 500 crores. The market goes, market cap goes up 5000 crores. So I think that sanity has to come back and that, you know, is just part of the normal market cycle. But ultimately in the long period, what market will reward is only those companies whose free cash flows in return terms are more than the cost of capital. Right.

[01:10:00] It's hard to sit out of some of this craziness as well, right? I mean, because you're, you know, I, for example, don't invest in any power, energy, utilities, all of those because I feel like I can't monitor all of these, you know, second degree, third degree things that could potentially impact the stock price. So we have to see, if you leave it to us, like Harsh said, or like even I'm saying, if you leave it to us, we will create portfolios the way you are saying, which is, you know, buy good quality, free cash flow, governance, you know, all of those

[01:10:29] parameters, which is actually investing, long-term investing. But then because we are managing a portfolio and a portfolio has a benchmark. So even I would feel that, okay, like you said, we should not buy energy, we should not buy commodity because they don't have a sustainable, they have highly cyclical, lot of policy interference. So even I might say I should stay away from it. So if you leave it to us, we'll make a portfolio as per fundamentals. But then there is a benchmark out there. We need to beat BSE 500 consistently.

[01:10:59] And the benchmark that's how the benchmark is. Benchmark is made up of all types of companies. So then you need to do some risk management. That, okay, you know, energy by and large, I don't want to buy, but if all of them are pygmies, let me get the tallest pygmy. Because ultimately, when I make a portfolio, it has to have some tethering to the, see, you can't be the benchmark. And in a mutual fund sense, you cannot be benchmark agnostic. So you make your

[01:11:29] portfolio, but you be benchmark aware so that you don't, you know, you're not playing in a completely different field altogether. So, you know, why I clarified is because a lot of discussion in our industry is only about stock picking. But portfolio construction, stock picking is not portfolio construction. Portfolio construction is also something very, very important. And most people out there who invest directly, you see the last few months, in the last few months, like say, Harsh is managing, say a good

[01:11:58] PMS or a good mutual fund, they have fallen in the teens, like 15%, 14%, 12%, 19%. On an average, people who are investing directly, what do you think they will be having in the portfolio? If you're a direct investor, unless you are a deep researcher, or you are contrarian at heart, you will end up owning what is hot in the market, which is being spoken in every YouTube channel, every news conversation, every WhatsApp group. That has fallen 50%.

[01:12:28] Because in the last three, four years, all this railway, PSU, infra, defense, energy, utility, that has gone up a lot. It's not like everybody entered at the bottom and made 5x. People enter somewhere along the way, when there is momentum. And then all of that is down 50-60%. Yeah. So that's why I said a list of stocks is not a portfolio. And that makes a hell lot of difference in your investing experience. Right. No, I think in times of chaos, we kind of learn the fundamentals of these things, right? Now, portfolio management, construction,

[01:12:57] risk management, which you mentioned. I mean, a lot of people, for example, have to resize their expectation and equities itself, right? I mean, if you think about it, like they had 80-90% of their total savings in equities, right? And they're kind of surprised that they can't pull out money often enough and at a premium, right? So it's difficult times for sure. Time for learning. You know, the herd behavior is so much. Yeah. You know, you mentioned about small cap. You know, the biggest run for small cap was

[01:13:26] the calendar year 2023 when small cap was 46% up. Yeah. Okay. So you take BAC 500, you take the market, small cap was up. So, you know, you take 46%, like I said, you strip it off into two parts. Take the PSU component of small cap and take the private sector component of small cap. So you'll realize not everything has gone crazy. The small cap index is of the small cap component is a 46%, but the private sector

[01:13:56] small cap was up 30%, which was more in line with Nifty. Anything which picks two boxes, small cap and PSU, 120% up in the calendar year. So, you know, the, it's the herd, it's the herd actually, the herd behavior. Like Mr. Buffett says, be greedy when others are fearful, be fearful when others are greedy. Right. The key word in that is not fear or greed. The key word is others. Who is the others? If you want to be successful, you have to make sure you're not part of the others.

[01:14:27] That's the issue. As Ashish was saying, there is also an overcorrection. It's not like, I'm not, I'm not, you know, evangelizing that form of quote unquote investing, but even bad businesses, quote unquote, have some fair value, right? They're not zero valuers. So what happened is they also got ran down before this post COVID rally to sometimes extremely low levels, right? Some of them were basically leveraged companies, enterprise value was multiple times the market cap. They effectively became

[01:14:57] de facto call options. Some of the famous utility names, I mean, we won't take names, but we know some of those names. So they became too cheap because it's, it's, it's, it's like a horse race, right? Everybody has odds that even the worst horse has, some odds. It's a non-zero, it's a non-trivial odd. So they got corrected too much and see really, really great investors like Akejun Nwala and Radhakrishan Damani have been simultaneously great investors and traders.

[01:15:28] They may conceptually mentally segregated, but they've genuinely managed to maybe conceptually buy something in their investment account while selling it in the trading account. For most of us mere mortals, which is why I always say literally have two different accounts because I also know a lot of investors will never be able to get off their itch in their palm. Right? Some itch hai. So if you recognize that itch, you internalize it, you know, you diet, you have a cheat day. If I go and tell you on your podcast, do not trade, what will happen? This guy is too academic,

[01:15:58] too theoretical. I'm saying you have a core portfolio. There you please try to think in five-year terms, even if you harvest it earlier. Genuinely good, growing businesses, quality names. You have a 20% portfolio which you say, I want to do it a bit based on gut. I want to do some research. I want to take a bit more punts. At least you're conscious that this will never transform into this. The problem is you do this too much, then the stock falls 50% and then it becomes your investment account because now you want to hold it for long term.

[01:16:27] Now you have the average cost bias. Now you're not looking forward. Now it is no longer a trading account. Now it becomes your investment account. Suddenly Warren Buffett quotes are coming on your social media account. It's cutting too close to the heart. See, by having two separate accounts, you can remove the cognitive dissonance to some large extent. Yeah. Yeah. Okay. Let's talk about sectors. You mentioned financial services. You also kind of alluded to IT and so on. But do you feel like there is

[01:16:58] real value that you can acquire at this point of time in the market and if so, what pockets of the market do you see this value in? Yeah. So, I mean, if you really ask me still, you know, discretionary consumption, I mean, you have to be choosy, you have to be stock specific, but if you see everything with travel, hotels, white goods, you know, a lot of that went up and then corrected a lot also. So beyond the two examples I gave you, the third example would be still, you know, persist with consumption, but more high-end and more selective

[01:17:29] discretionary consumption. And then, you know, also keep an eye out on when the 8th Pay Commission comes and, you know, what kind of impact that will have. Could you talk about that specific thing a little more? So yeah, I can give you a few examples. Like say, you know, I distinctly remember, 6th Pay Commission came in 2008 and then 7th Pay Commission was I think 2016. But I distinctly remember one news item from the 2008 Pay Commission. You know, we were in the throes of the Lehman Crisis. That was September 2008. Yeah.

[01:17:58] And October, November, December of 2008 when, you know, the world was falling apart. So obviously Maruti has been around since 1984. If you take last quarter of 2008 calendar year, for those 24 years, it was Maruti's best quarter ever in terms of sales numbers. Right? And, you know, if you generally just look up Google or nowadays say ChatGPT, you'll find enough data to show that some of these Pay Commission announcements are followed by

[01:18:28] significant uptick in, you know, people indulging in discretionary consumption, especially white goods and automobiles. Now, it's been announced this year. So if I'm not wrong and we will know announced this year. So it'll get implemented next year, but with areas. So I think so, you know, my sense is that some of the consumption will come back. Apart from financials and IT and digital, what I told you, this is the third thing to keep in mind. Right. If I understand correctly, and just so I don't get this wrong, Pay Commission

[01:18:57] impacts all the salaries of, you know, let's say the public sector government undertakings and considering that they're a large part of the formal employment in India, I mean, it has a trickle-down effect on the economy. The number of employees is in millions. At the PSU and It's in millions. Okay. I'll broadly echo what Ashish said that I think financials and consumer discretionary, in a broad sense, in a selective sense, consumer discretionary could also end up including something like auto ancillaries, etc. Now, the financials is very interesting. I think the large

[01:19:27] cap banks are obviously looking very reasonable and the market microstructure is such that because the FIs were selling, we started with macro, obviously they were going to sell, as Ashish said, what they already own. So they ended up first selling the HDFCs and ICICs of Indian markets. Capital markets is a theme which did very, very well from, let's say, March 2023 to September 2024. Massive corrections across the names. It's a sector that both of us are in. I am a long-term bull on this space. I'll just take a few seconds on how interesting the business is.

[01:19:58] In a mutual fund setup, even as your AUM keeps on going up, your yields fall actually. That's called telescopic pricing. Your TER, the total expense ratio falls. But despite that, let's say you go from 100 rupees AUM to 200 rupees AUM and your TER falls from 50 bips to 40 bips. So you've gone from 50 to 80 bips. So despite the falling yields, your overall amount of fees is higher. 60% higher in this case. And your costs don't

[01:20:28] rise by remotely as much. So despite the falling yields, operating leverage is built into the business. And not just for AMCs. Many capital market adjacent players like the exchanges, the CDSLs, NSDLs, CAMs, K-Fintechs. Again, I'm talking purely for educational purposes. The point is, if you're bullish on the long-term India story, and I fully agree with Ashish that while the cycles are inevitable, the long-term story remains intact, then one of the most capital-light, asset-light ways of

[01:20:57] playing it remains the capital market theme, of course, along with the lenders, high-quality banks and leading NBFCs. And there the key is getting the entry multiple rate. Because in the very short term, again, another point we discussed, they're completely high beta to the market. The market falls, they current a bit more. Market rises, they go up a bit more. But if you have a three-year view, and you can enter at this kind of valuation, who knows what happens in the very short term next? It's an excellent way of playing the India story. The India story does X,

[01:21:27] capital markets and financials do 2X, and if you have the right stock selection, it can do 3X. Just give you a broad sense of how many multiple tailwind levers can you pull. And same on discretionary. Discretionary has gotten suppressed. 2024 was a bad discretionary year after two bumper post-covid years of 2022 and 2023. from theme parks to hotels. See, in this relative downturn, not only a Bajaj finance has done very well, but an Indigo has done very well. Look at the price action of Indigo, right? Because of

[01:21:57] its relative monopoly in this space, despite Tata's entering, etc. And you can see that anecdotally, if you're flying from Bangalore to Mumbai or vice versa, you're going to Delhi, we see the prices, right? We see that some of the smaller routes have only one effective flight, at least in the first half of the day. So, there are multiple ways of playing the Indian story. And you need a good combination of a bottom-up thesis and a top-down thesis. That's where the sweet spot is. Right. Okay.

[01:22:27] So, let's say I know a few sectors that I'm bullish about, I'm optimistic about, I feel like generally this will do well, like a few of the ones that you mentioned. What are those two or three metrics that I have to watch out for? You've been speaking about cash flows, Harsh has mentioned price to book, and so on. And, you know, these things have changed over time, right? I mean, over the last three, four years, I mean, probably the metrics that we used to look at, whether it's PE or whatever else, we've had to sort of recalibrate on those fronts. So, I know the

[01:22:57] sector, how do I pick a specific business? I mean, if you can give me like an expert's perspective on that. See, I think two, three things. I think the point to start for me is the industry I work for. I mean, I'm not talking to me as in me, but anybody who's in, see, like a lot of time people ask me that, you know, which stock or which sector I should buy. So, I ask them, you know,

[01:23:27] what's your line of business? Which sector or what industry do you work for? So, let's say somebody says that I'm in travel or I'm in, you know, distribution of, you know, FMCG products or somebody says pharma or something. So, if you're a direct investor, you should start from the industry you work in because you are most likely to be able to do research of the basic, at least you will know your competitors, you will know your company, you will know suppliers, you will know customers. Yeah, I mean,

[01:23:57] even if you don't know, you will know whom to ask, right? Because you will know your suppliers and customers and your competitors and you know, you will know the people who provide all kinds of services to that industry. Circle of competence. Right. Yeah. So, I think that is the way to start if you're a direct investor. You know, it's not so much about the mathematics. First, you need to have an understanding about where is that sector and where is that company. Only then it will make sense to get into the mathematics. See, if you start with screeners or

[01:24:26] filters straight away, saying that, okay, let me look at this, this, this and let me look at PE and all, you're going down the rabbit hole in the wrong, you know, direction. So, yeah, that's my two bits. So, first qualitative and then quantitative. Yeah, because, you know, first get the lay of the land. Like, how does it work? Does the industry at an industry level, does it make profit or not? You know, how many players are making profits? Are they concentrated with the top one or two guys? So, all of that structure one needs to really understand first, at least that increases your

[01:24:56] probability of success. And the second thing is, every once in a while, the market will knock you. Then will you be able to hold on or not is when all this will matter. At that time, the match won't matter. Right. Right. Like, let's say, if you leave aside my formal role as a CEO of a fund house, but let's just see me as a person who has worked in this industry. If I have to do direct equity investing, I will only invest with asset managers, wealth managers, broking companies, etc. Because I think that I understand that.

[01:25:26] Right. And in that industry, in fact, I'll not have to do so much of mathematics. Because just kind of getting the contours is enough. Yeah. In that sense, this period has been a bit of a spring cleaning for all of us. We've had to empty the kachra from our portfolios in that sense. And it's also tested our hypothesis of investing in something whether we really believe in it. This was the last three years. The last three

[01:25:56] years was great opportunity to be a contrarian and be away from the herd and buy some of the businesses which Harsh mentioned which are not falling right now. And they are actually showing a very different price pattern or a very

[01:26:38] and you can make a conscious choice that everybody is saying this. what do I mean if I tell you let's say when the market is booming and everybody talks of Amrit Kaal example who will book profits or who will rebalance the asset allocation or who will sell when everybody is going gaga over Amrit Kaal only someone who has come but it's not tomorrow morning

[01:27:10] or who will invest in March 2020 it looks like we are in a bad scene looks like the world is falling apart but history suggests that human beings are something will come off this so you need those windows open actually that is very important I'll just briefly add to that I who are obviously

[01:27:39] doing a day job their business etc first of all they must invest through professionals or advisors they should have active or passive mutual funds index funds etc as a key part of the core allocation I'm again saying I know realistically they will do some stock buying there again have a separate investment in a trading portfolio but the reason on a serious notice is important is it gives you a but the main reason

[01:28:09] is there is so much churn and your core job is to earn money in your line of business and profession right and then invest here for your family's future so beyond the point this is great fun great learning great way to learn about the businesses and definitely start with your circle of competence you understand your industry better than in a professional fund manager could possibly but your core allocation on the equity side I think should be in the hands of a professional be in a simple mutual fund be an index fund be

[01:28:39] something higher for you H&Is H&Is but don't try to reinvent the wheel because this is a full time job you are doing a full time job at the same time there is some symbiosis cross learning possible Warren Buffett said a great investor will become a great entrepreneur and vice versa so 100% but please do not try to do it yourself completely while not letting go the opportunity of also doing some learning through do it yourself so just keep a balance right

[01:29:21] I so on and became options traders for example right or folks who would put a ton of their real money in startup IPOs and so on and watch it go 20-30% and thought that oh you know what I mean this is fairly easy right I can think of alternate employment as such obviously I mean there's a massive correction some of this induced by the regulation also on the derivative side right but

[01:29:51] these IPOs we have something like 250 companies I think that startups I think that are going to list right now and they are again biding their time for the next year 18 months for when the markets are more amicable for them right so how should people think about startup IPOs slightly differently from all other stuff that you guys have mentioned in terms of great business good metrics I just briefly add before

[01:30:21] handing over to Ashish I think Bangalore and Mumbai think differently private sector valuations and public market valuations sometimes a twain won't meet so I hear some of making investments and I can't make sense of it I am not trying to make light of it there is a nuance here for example Ramdi Agarwal has invested in some quick delivery commerce startups etc

[01:30:51] and it's not like you cannot envisage how they will end up making money so I don't want to make light of the fact that it's all nonsense and

[01:31:44] are quite different. So at some point when they list, they will be directly compared, right? Now you can say that we can't do a down round, it's illiquid, but some point the twain have to meet. So I'm happy if this arises a bit, but I'm just saying this may also have to adjust a bit. Anything you want to add on the IPO bit, Ashish? Yeah, so you know, like nothing to add further on the new age businesses or those IPOs, but if you talk about IPOs in general, I think two, three things to keep in mind. A lot of people seem to think of IPOs from the 1990s lenses.

[01:32:15] There's a lot that has changed. See today when a company, two, three things to keep in mind. In the 90s or 80s, there were only two ways or three ways companies could or an entrepreneur could raise money. Either friends and family or go to the bank or come straight for an IPO. There's no, I mean, but if you see now, there are family offices, there are private equity funds, there are venture funds, which are very early stage, right? So what is happening nowadays is that

[01:32:43] before a company comes for IPO, it's probably spent 5, 10, 15 years in the cradle of private equity, having a professional board, having third party investors, having the big audit firms, you know, having published financials, you know, being in the system where the brand is recognized, you know, the trade, correct? So the quality of IPOs in general has changed quite dramatically. You know, I'm not talking about SME, that is probably again a different ball to ball game, but at least companies which are coming for IPO,

[01:33:13] the quality has changed dramatically. The data availability, the transparency. So, you know, as professional investors, it behooves us to be open-minded. I'm not talking about, see, new age, there is a different challenge. On the valuation part, but the professionalism definitely. But the generally, if you talk about IPOs, there are some fabulous companies have got listed in the last 7, 8 years. Outstanding companies, you take manufacturing, you take consumer, you take the whole hospitals, diagnostics, right? You take asset management companies,

[01:33:43] take insurance companies. I mean, where will they enter? They'll come through an IPO, correct? Broking companies. So, this is how, you know, we talk about the per capita going up, we talk about demographic dividend, we talk about India's progress. So businesses, when they come off scale, sometimes I find it quite ridiculous. People almost talk as if promoters are doing something wrong by raising money in the market. But, if you list your company, what will you want to list it at?

[01:34:12] You want to give a discount. So it's for the investor to gauge the future potential and, you know, square up with the value. Correct? Don't want to participate, don't participate. Nobody's putting a gun on your head. Right. But, but, what if five years later somebody, like today, let us say, for example, today, if I ask someone, you know, you dissed all IPOs. So then what happened with all these hospitals, diagnostics, some of the manufacturing companies, the electronics manufacturing guys,

[01:34:43] the asset managers. Even this company listed in 2021. Yeah. Of course. The broking company. Yeah. So then what happened? If you, if you thought of, if you thought all IPOs are bad and one had to just stay out of all of them and everybody had to just gauge on listing gains, then, so I think you will lose, you know, the moment people generalize. Like, you know, there is a statement, right? Necessity is the mother of all invention. I have my own proverb. I say discrimination, generalization is the, generalization is the mother of all discriminations. It's true.

[01:35:13] Right? Right. So you should never generalize. I mean, we spoke about keeping a window open in our minds. So we have to be open-minded. Anyway, this is how financial intimidation happens, right? At the end of the day, all PE, VC, family or friends have to end up in the public markets, right? This, I used to call it democratization of finance. So that's what it is. In India, the problem is that 50% of the market is owned by promoters. Our problem is not that promoters are selling and raising money. Our problem is that promoters own too much.

[01:35:40] 50% of market cap is with promoters and government as a promoter. It's very high. Which is why the free float, investable market cap weight of India is 2%. But the actual market cap weight is 3% or 4%. If you go by some of the rhetoric, you're made to believe that promoters are… You'll have to explain that a little bit. As Ashish was saying, India is a unique market where promoters, including the government through PSUs, own about half of the overall market cap. Right. Basically, on average, they're owning half of the companies.

[01:36:10] That's actually not the case, for example, in the US. Yeah. It's very common to have a professional management, a board, etc. Right. And the leading guy, they don't even have the term promoter, may own 5-10% of the business, let's say. And what happens is, in many of the indices, you actually go by the free float of the market cap. Non-promoter holding. Non-promoter holding effectively. Correct. The one which can theoretically get traded every day. Right. Right. And in that sense, while the Indian market cap is, say, 4% or so of the global market cap, in a free float sense,

[01:36:40] in some other adjustments, investable sense, it is only 2% of the global market cap. We began by saying that, right? Right. At a global level, it's just a small cap, in that sense. Right. Part of the reason on the free float side, is that the promoters actually hold 50%. So, in fact, they have skin in the game, unlike the narrative. You know, in India, for example, I'll give you 2-3 examples. First is this 50%. So, any which way, our problem is that promoters, anyway, own a lot. Our problem is not that they are liquidating, or they are selling. Right. Second thing,

[01:37:09] the regulator had to make a rule, that when you list, 75, you have to get to 75%. Otherwise, Indian promoters, they didn't want to list, and you know, sometimes what happens, promoters list, just because there is some PE guy, who wants to go out. Just because they want professional employees, to be retained, and given ESOPs. Right. So, already they own a lot. They don't want to sell. The regulator has to put that, you know, for whatever reason, you got listed, now you better get to 75%. Right. I'll give you an example. For the longest point in time,

[01:37:38] Wipro was 87% owned by the promoter. Yeah. Right. Most illiquid. I don't know now, but back in the times. I'll give you another example. Long range history of India, the return on equity is 17%. So, Indian promoters have done a fabulous job. They are the most value conscious, most prudent. There is no reason to believe that these guys are suspect, of raising money, carelessly, left, right and center.

[01:38:08] So, what happens is, some bad apples, a few years back, are cited, to generalize. Otherwise, Indian promoters have stellar track record. Mr. Ambani still owns 40, what, 45% of reliance industries. And Kotak Bank, it has been a regulatory requirement for Mr. Odeh Kota over the years. He didn't want to sell. He didn't want to sell, right? Right. So, I mean, just to give another example to what Ashish mentioned, that actually, Indian promoters have what we now call skin in the game.

[01:38:38] Yeah. So, at the same time, if people occasionally have liquidity requirements, or they want to list, they want to list at a, attractive valuation to them. It's up to our due diligence. I mean, see, the RHPs, the DRHPs are all in the public domain. Again, a very, very well-regulated equity market. All of the information is out there. They're in many ways, legally culpable for whatever they put out there. What happens is, people don't do research, and they're just buying for that first rush. So, in that sense, you know,

[01:39:08] if you follow general chatter, I feel really sad. If you follow general chatter, people talk as if, you know, all the promoters are out there to take my money. Why are they getting listed? And, you know, the stock. Yeah. You know, it's, it's wrong impression completely. I think it's also like a study in contrast, right? I mean, like the kind of startups that you talked about. I mean, if you've been through three, four, five rounds of, you know, fundraising, you're down to single digit, you know, percentages of ownership, right? And those folks, you know,

[01:39:37] selling off like huge amounts, let's say pre IPO or even like a year after listing. I mean, that does send a bad signal, but the type of folks that you are describing who still hold 50% or more and have to be forced to sell. I mean, I think that's the good kind. Hopefully right now, I mean, those, those folks are still, you know, significant. The market aggregate is 50%. Yeah. It's more common. Now, yeah. So, so now you have to see that, okay, who's diluting and who's selling. So there is another story to it. I mean, look at it this way.

[01:40:07] Somebody right out of college or somebody left his or her job 20 years back. Building a company burns you out. It's not a joke. For sure. Right. So if a, if a guy has started a company 20 years back, you know, gone, you know, slept on airports and, you know, pretty much sacrificed a lot. Yeah. Built a business, got PE funding, run it for 20 years. And eventually if he installs professionals and reduces his stake,

[01:40:37] you can't have a quarrel with that. Yeah. You just try to understand, okay, what will be the management composition going forward? And I mean, in the US people are used to having board managed companies. Nobody questions them. Right. Yeah. So, uh, there are board managed companies. L&D is board managed. ITC is board managed. ICICI is board managed. So there are board managed companies, you know, you just have to,

[01:41:01] you don't quarrel with the guy who's made his money and is eventually wanting to hang up his boots or, you know, go easy because it burns you for 25, 30 years. Right. Okay. I'm going to ask a couple of, uh, markets guys. Uh, an unusual question, right? Which is to think of an alternate investment that is kind of sexy right now. Okay. Outside of, uh, let's say equities. If you were to invest in an asset class, what would that be? Harsh? Oh, wow. Um,

[01:41:32] um, I would say any long dated asset in India, because I, I'll give you the reason and then I'll give you the correct answer. I think Indian rates will go down. Indian growth will continue to do well. So rates means the cost of capital will probably come down. Uh, 12 to six already happened as Ashish was saying earlier. So that's leaves us with, for example, real estate. See, real estate is also a big cyclical asset. I think it's completely hated asset because last 10 years, real, and Mumbai is a bit of an exception. So I'm give, of course, I'm saying for a broader audience,

[01:42:01] I feel if somebody can today for their own living purpose, at least, if not for speculative purposes, are they, they're deciding between renting and buying today and they know where their family and their child will go to school, et cetera. Then I think it may not be a bad idea to consider buying today for two reasons. Number one, I think our floating mortgage rates are likely to go down. Number two, I think with economic growth, uh, basically your, the value of the property goes up if you were to rent it out, for example, uh,

[01:42:31] this is the only kind of cheap, uh, loan that a middle-class family can get in India to lever up. Right. Without any mark to market margin. Right. The important thing is to get the cycle right in real estate. And I believe that the next 10 years are going to be different from the last 10 years for real estate with the one caveat I would add is if possible, try to buy near airports. Uh, I would say, you know, it's a good idea. The good ground work that way. Navi Mumbai, North Bangalore, that Noida, that Jawar airport,

[01:43:01] if possible, more appreciation. But again, Mumbai is very, very different. Other cities may converge closer to Mumbai. Mumbai might continue to do well because a lot of wealth gets created here. But for example, in the U S New York and San Francisco does not have that Delta that a Mumbai and Bangalore has. So I think for middle class families, a real estate on an EMI simple standard product may not be a bad idea if they know they're going to be in that place for some time, not purely for speculative reasons. Ashish. Yeah. So real estate is covered.

[01:43:30] I will make one distinction. I would say private equity, uh, because, uh, I feel that, you know, India ultimately, you know, in financial market terms, we kind of, uh, track us. See, for example, in the U S private equity is 50 year old asset class in India. It's just up and coming. I mean, yeah, 20 years, but very nascent, you know, it's not very normal, very common only in the last three, four years become more common. So I think that, you know, there's a lot of discussion that say, for example, in U S that, you know, in public markets,

[01:44:00] you don't make alpha. So my learning and observation of data is that it's not that there is no alpha. It's just that the alpha has shifted from public markets to private markets, because as the private equity cult becomes bigger and bigger companies, companies enter private equity and they spend longer and longer time in the cradle of private equity. And by the time they come for listing, the value is fully discovered. So what happens is that when, when market gets institutionalized and institutions put a lot of money in private equity,

[01:44:28] then the alpha starts shifting from public market into private market. So my sense is that in the next few years, like a simple retail investor in, you know, get a slice of the tax. Yeah. So there is a challenge obviously out here, which is that for retail investors, it's still not accessible. Correct. Because, you know, these private equity funds have a minimum of one crore, but they don't take one crore at a shot. They take one crore over the next two, three years and then they invest. And then, you know, the money comes back after seven, eight, nine years. So, yes, I would say that,

[01:44:58] you know, alternate investment funds or private equity is something to look at, but I respect your point that it may not apply to public at large. So if I have to step back and make a correction because of that, then I would say that the other one is, yeah, clearly, according to me, real estate, no doubt. And I personally feel that, you know, a lot of times people don't want to buy real estate and they want to rent, thinking that the rent yield is 2%. So why should I buy? But you're missing one point.

[01:45:27] Is it that rentals are not going up? Rentals are going up. If rentals are consistently going up and still the yield is low, it means the denominator is going up much faster. Absolutely. Why will that happen? That happens because there is an end use market. There is consistently a buyer. Right? Right. I also say that gold is an asset that can do well for retail purposes. Gold generally does well when there's uncertainty.

[01:45:54] Uncertainty is there and also the dollar goes through a weak phase. See, actually gold, Indian equities and American big tech were the three assets that have done relatively well in the last few years. Right. And I feel like gold is something that given of the uncertainty, given the fact that crypto is not really scaled beyond a particular country or a particular context. And I myself have some separate, we can discuss it separately. The real only way to play that broader theme,

[01:46:24] if there is going to be more uncertainty, for example, Russia's forex reserves were captured or temporarily held by European Union and the United States. Right. The idea was if you're building a forex reserves, they are a no go area. They are sacrosanct. After that, central banks started buying more gold. It also became a popular mini investment option in China before the recent stock market uptick there. So gold may not be such an, and gold is the only asset which has beat most stock markets over the last 25 years.

[01:46:52] And it's just neck to neck with India, actually. In like to like dollar or rupee terms. So gold is something which we cannot fully write off, but I would not give it a large allocation. I would stick with equities, those who can do some maybe private equity and definitely real estate for end use purposes. Okay. You mentioned crypto. Now with a lot of legislation coming in, in the US and so on. I mean, do you think that we'll finally get to see crypto mainstream? And India has, of course, I mean, taken like a,

[01:47:20] like a totally different view of that. Right. I mean, in terms of the taxes and whatnot. It started off as a libertarian kind of fantasy. Right. It was said we're supposed to be anti-state. But it's pretty much traded like any other asset. That's what I'm saying. It started off anti-state, anti-big finance. Yeah. It's an ETF. You can just buy it as an ETF. And now the, It's optionality basically. Yeah. So now it has basically become, their view is it becomes a digital gold because they're no longer claiming it to be currency. Now my point is, if you're going to buy digital gold or just my gold,

[01:47:50] you don't, you don't have a 5,000 year history with gold, right? You don't have that kind of legacy with crypto. So at, for the moment I would, while keeping my mind open, I would respectfully not include crypto in that. Okay. So, this has been an amazing conversation, a lot of nuance, right? Because oftentimes, I mean, we tend to think of these things in binary terms and people may still be disappointed that we are not giving out like actual names of like, you know, 10 stocks to buy and whatnot, right? I mean,

[01:48:20] we, we can't use that in the thumbnail. Invest in our funds. Right. There's a framework like you, for example, I said that, you know, you start with the other sector where you work. No, absolutely. It's a lot more valuable, I feel, right? And it's a lot more long term as well. But I want to end on a optimistic note. And I want to get like one thing from each of you, right? In terms of what are you most optimistic for going forward? If you think about the next two years, five years, 10 years and so on.

[01:48:49] Most optimistic about is about, is about, you know, the Indian market in general. I mean, we are in the right place at the right time. Right. And people who are 25 year old, 30 year olds today, I've said it many times, they are going to be India's richest generation. Right. They're going to be the first generation, which is, you know, a lot more secure, a lot more confident. Right. When I passed out of college, I was, I was not very confident in mid nineties. India was not what it is today. Yeah. Our level of confidence, you know,

[01:49:18] you see the field of sports and you see the youngsters today. You know, that's a great manifestation. So I think this generation, people who are 25, 30 year old today, they are rightly placed. They are better educated than us. They have better socioeconomic status than us. They have better confidence, better knowledge, better education, better information, better technology, regulation, markets, frameworks, everything.

[01:49:43] And then their investment journey is going to coincide with India becoming at least a middle income country from being a poor country. So I'm, if you ask me very bullish on the market, but very bullish on people who are young today. Fantastic. Fantastic. Harsh, you're like the progenitor of the long India trope on Twitter. No, I mean, you see, I am extremely bullish on the long term of the economy. You know, we all know the reasons. We won't go into that completely echo what Ashish said. And of course, India is a unique situation.

[01:50:14] Rather, China is the exception. In India, as Ashish was saying, in the long term, the market broadly follows the nominal GDP. Right. China, despite massive growth, did not result in market return. So in India, over a long enough period, interchangeably speaking about the market and the economy is not completely wrong. So in that sense, being bullish on the people, the country and the market over a long enough period is correct.

[01:51:05] What's interesting today, is lower or not? I think we are getting close to the bottom, but that's, that could be famous last words. But, but, you know, this time is different, close to the bottom, but probabilistically, genuinely coming based on the news flow, based on our analysis experience, experience and we make mistakes and we live and we learn. But generally, we think we are coming to the bottom. So both from the, all three, long term, mid term and short term, very, very bullish on the Indian economy and the Indian market, which, unlike some other countries,

[01:51:35] can be somewhat used interchangeably, not fully. Fantastic. Okay. On that very optimistic note, we're going to end the podcast here and probably continue the conversations on another episode. I want to thank you folks for spending your Saturday morning with us. Thank you, Harsh, for letting us use your office as well. There was so much depth and nuance in this that, you know, I really hope that people are going to go down all of those rabbit holes that, you know, that came up in this conversation. And, you know, thank you for, you know,

[01:52:05] giving your insights. Super valuable. Thank you so much, Ashish and thank you Ashish. Thank you. Thank you, Ashish. Thank you, Ashish. Thank you.