Why this India-focused fund manager has adopted Warren Buffet’s partnership structure | Social Hindustan News

Why this India-focused fund manager has adopted Warren Buffet’s partnership structure | Social Hindustan News


Stellar Wealth Partners’ India fund, which has been designed by Baid, will be invested entirely in Indian equities for accredited investors in the US with a hurdle rate of 6% in dollar terms. The fund which garnered $3 million will start investing from October in about 26 Indian stocks across sectors including music streaming, cloud computing, digital transformation, specialty chemicals with critical applications, affordable housing and fintech.

Regarding the fund that Baid is set to launch, he said, “It is an investment partnership, which is modelled after the original Warren Buffett’s partnership fee structure. So, we charge zero management fee. I get compensated only for returns that exceed 6% per annum in dollar terms. The issue with most funds in the industry today is that the incentives are not completely aligned with the investors. So, most funds charge a very hefty management fee. As a result, there is no downside for the fund manager. But when incentives are aligned, then the outcomes take care of themselves.”

Warren Buffet wrote to Baid- “I think the arrangement you described is eminently fair,” referring to the partner-centric structure of the India Fund.

Baid, who authored the book The Joys of Compounding, also runs two smallcases in India—Stellar Wealth Flexicap and Stellar Wealth Megatrends —as a Sebi-registered research analyst with around 750 subscribers.

A chartered financial analyst, Baid had, prior to starting his own fund, worked as portfolio manager of global equity strategy at a US-based firm Summit Global Investments. Despite living in the US, a large chunk of his equity portfolio is in Indian equities as he is a “very big believer in the India story for the next few decades.” Mint interacted with Baid on how he manages his money, what he learned through his investing journey, and his views on various asset classes. Edited excerpts from an interview:

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A significant portion of your portfolio is in equities. Do you consider yourself a high-risk investor?

The reason for keeping such a high allocation to equities is that it’s a much superior asset class compared to others due of its internal compounding feature. I believe the higher the risk appetite, the higher should be the proportion to equities. For anyone, who has a duration of more than five years, equities are the best option because they are the proven asset class to beat inflation over the long run, provided one is invested in high-quality businesses.

Do you prefer direct investing in stocks or through a fund?

Around 80% of my equity portfolio is invested in Stellar Wealth Partners India Fund that I am managing. I’ve been investing in stocks for the past 15 years. For me, investing is a passion. I love the intellectual game and the mental process of investing.

 

As per your book The Joys of Compounding, to become a successful investor, one needs to understand human beings and human emotions. How did this philosophy help your personal investments?

In investing, you can control only two things—the research process and personal behaviour. The latter, in my view, is far more important in the long run. Maintaining an investment journal will help avoid repeating the same mistakes.

For example, the maximum amount of money that I’ve lost on a single stock ever is on Bandhan bank (not a stock recommendation). I fell prey to something that is called a ‘liking bias’. I read the story of its promoter, Chandra Shekhar Ghosh, in a book and I was so enamoured by his diligence, sacrifice and hard work that I failed to separate the deteriorating economics of the business from the personality of the promoter at the helm. I could not take remedial measures in time to sell the stock when things were not going well for the company. By referring to these details in my journal, I avoid doing such mistakes again.

What was your first investment?

I was attracted to the stock market in the late last stages of a euphoric bull market during 2003-2007.

I had invested in a mutual fund called Reliance Diversified Power Sector in late 2007, and Ispat Steel stock in January 2008, because steel and power were the hot and fancy sectors of that time. I made the investment decision just by looking at the price movement in these investments without paying any heed whatsoever to their valuations or underlying business models. Both these investments crashed about 70% to 80%, within the first 12 to 18 months of my purchase, and I successfully gained admission into the stock markets by paying my fees.

How has your investment philosophy changed over the years?

The investing philosophy and investing strategy is something that takes a long time to develop. I learned from my mistakes along the way. For example, I used to dabble in stock options. I sold a few good quality stocks in my portfolio to buy options in the hope that once I make a lot of money, I’ll be able to buy more stocks that I’ve sold. But, most of the time, the options expired worthless. Thankfully, I’m out of it now.

Today, I have a clearly defined investment philosophy in place. I follow a core-satellite portfolio approach where the core is of high-quality businesses, and the satellite is made up of stocks providing shorter-term tactical opportunities.

Also, I am now much more patient when it comes to investments.

You left a high-paying investment banking job in India in 2015 to move to the US for career opportunities in stock investing. Did you liquidate your investment corpus built in India to meet your expenses there?

It was an easy choice at that time to sell a few stocks from my India portfolio and take care of my expenses in the US. But I did not want to sell an appreciating asset to take care of living expenses. That’s the worst personal finance decision one can take. In the US, I took up a minimum wage job as a front desk clerk at a hotel in San Francisco, where I used to work during the graveyard shift to meet my expenses while looking for opportunities.

What lessons have you learned from the bull market?

I realized that during every bull market, we need to cut off the bottom tail of the portfolio, and the proceeds have to be channelled back into high-quality stocks, or it must be used to buy a hard asset.

Have you booked profits in the 2021 bull market?

One of the lessons which a lot of seniors have taught me is to make use of every raging bull market to build a hard asset. So, for instance, my parents had a long-standing aspiration of living in a big home in Kolkata, West Bengal in India. So, I made use of the 2021 bull market to take out some money and buy that house. Going ahead, I want to buy a house in the US. At the end of the day, investing should be a means of fulfilling our personal goals and aspirations.

Would you prefer taking a loan or liquidating existing investments to purchase a house in the US?

It’s a function of the interest rates in the US. Last year, the 30-year fixed mortgage rate had fallen to 2.5-2.6%. In those cases, buying a home with a down payment doesn’t make sense. But the same interest rate is now at almost 6.3% which is very high. I would not like to take a high amount of debt in a high-interest rate environment.

What is your view on real estate and gold as asset classes for investments?

Buying a physical real estate property is a bit cumbersome. Also, it’s a very illiquid asset. I would rather participate in the growth of real estate through the stocks of building material companies, which I own in my portfolio. I think that’s a much more efficient way to participate in the growth. Similarly, I want to participate in the growth of gold through gold financing companies, which generate money by charging very high-interest rates.

Do you have term and health insurance policies?

Yes, I have both. I do have a very adequate health insurance policy in America. As you know, healthcare in America is very expensive. So, it makes sense to have a good sizeable health insurance policy.

What about contingency funds?

I maintain liquid cash in the bank and this can comfortably meet my next five years of living expenses. It’s a bit on the higher side. But having more cash in the bank allows me to sleep peacefully at night and helps me stay the course during any period of market turbulence. Especially with my India fund in the US, which charges zero management fee. I don’t get paid unless I deliver more than 6% returns in dollar terms.

How is managing public money different from managing a personal portfolio?

In the case of managing public money, the focus is first and foremost on quality, above all else, and liquidity. You need to take the average trading volumes into account. We cannot just buy illiquid stocks because the impact cost will be too high.When you’re managing a personal portfolio, you can actually take a bit higher risk on the quality curve and the liquidity curve and still get away with it because the size is very small.

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