Investor Interview with Gautam Baid
Interview #9: Compounding through continuous learning
Welcome to investor interview #9. We are putting together this series to bring you diverse experiences and perspectives from other investors.
You can follow his thoughts or connect with him on Twitter.
Hi Gautam, thank you for taking the time to do this interview. Excited to have you here! Can you please tell our readers a little more about your background?
I am the youngest of four siblings in my family and my parents, my two elder sisters, and my elder brother reside in Kolkata, India. Prior to my relocation to the US in 2015, I served for seven years at the Mumbai, London, and Hong Kong offices of Citigroup and Deutsche Bank as Senior Analyst in their healthcare investment banking teams.
As is typically the starting story of many investors, I got lured into the stock market out of greed during the final euphoric phases of a bull market. In this case, it was the 2003-2007 one in India. I invested in Reliance Power Sector Mutual Fund in late 2007 and Ispat Steel in January 2008 as both were in “hot sectors” of the times and both had recently appreciated “sharply in a very short span of time” when I had first noticed them.
So, I just engaged in the blind extrapolation of their recent price trends without paying any attention to their valuations. Recency and vividness biases are very powerful but highly costly behavioral mistakes. Both investments crashed 70%-80% within 12-18 months of my purchase. I had successfully gained admission into the stock markets by paying my tuition fees.
Despite this bad initial experience, my curiosity and interest in the stock markets always remained very high throughout the years of my investment banking career. We have just this one life to live our dreams and I did not want to waste any further time doing something that I was not passionate about.
I was so keen for a career shift that I relocated to the US (one of my relatives who is an American citizen sponsored my green card) without any job in hand! I thought I would land a job in my desired profile within a short time since I was a CFA Charter holder and this particular degree is generally considered highly valued in the investment management industry.
Alas, life is not a bed of roses for those trying to carve their own destiny. I got rejected in my first three stock market job interviews, but I did not give up. I was adamant that I am not going to go back to my previous field of work where the presence of perverse incentives constantly led to incentive-caused bias and conflicts of interest and did not suit my personal nature, so I kept declining all investment banking job interviews calls that came my way (even though they would have had very high dollar salaries).
At the same time, I ran out of whatever little money I had brought with me from India and to take care of my living expenses in the US, I did not want to sell even a single share from my portfolio of Indian stocks as I did not want to interrupt the process of compounding. So, 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” (for the uninitiated, this is the shift that runs from 11 pm at night to 7 am in the morning).
Even though it was a big struggle for me physically, emotionally, culturally, and intellectually, today, in hindsight, I highly value those days of my life because, for the first time since the beginning of my professional career, I got some free time for myself to read and learn. This was the phase during which my learning curve really took off from a tiny base.
Little did I realize at the time that I was laying down the strong building blocks for compounding in my life. The pace of work from late night to early morning at the hotel was pretty slow and I made full use of the free time to read every single article published on blogs like Safal Niveshak, Fundoo Professor, JanavWordpress, Base Hit Investing, and Microcap Club among others. The passionate pursuit of lifelong learning had begun.
All of us who discover our calling in life get to do so through a defining moment, event, or experience. Let me share mine with you.
During a stormy night in San Francisco in mid-2016, I was at home (I used to rent and live in a single room as a paying guest. I was trying to save every single dime that I could during this phase) reading the 2012 edition of Tap Dancing to Work, a compilation of articles on Warren Buffett published by Fortune between 1966 and 2012. Immediately after finishing the book, I came to know that there was a more recent 2013 edition of it which contained one additional chapter.
I did not want to spend money on buying the newer version of the book, so I went to the local bus stand, got badly drenched (even while using an umbrella) while waiting for over an hour in the midst of the storm, and traveled all the way to a distant Barnes and Noble bookstore to read the final chapter of the book inside the store and save a few dollars (I had a monthly bus pass at the time, so the bus ride did not cost me anything).
That night I realized that I had finally discovered my calling in life. It is difficult to express in words the sheer intensity of the emotions, thrill, joy, and excitement that I experienced. I could not sleep that entire night. Only the fortunate few who discover their true passion in life will be able to relate to what I am trying to convey.
Luck, chance, serendipity, and randomness have always played a big role in various aspects of my life to date. One fine night in November 2016 while working at the hotel, I randomly clicked on the “quick-apply” button on a LinkedIn job application during my routine online job search.
I unexpectedly received an interview call for the job and that too for a senior role in an investment firm even though I had zero formal work experience in the stock market! And this was the phase in my life during which I was about to experience the power of compounding knowledge in action.
All those hundreds of hours I had spent during the previous year at the hotel reading the blog articles had built a strong intellectual foundation for me in investing (this is what I was lacking during my first three stock market job interviews in the US) and I excelled in all the three rounds of my job interview (body language derives from self-confidence and self-confidence, in turn, derives from knowledge).
I was offered the role of Portfolio Manager of Global Equity Strategy and it was a dream come true for me. During my stint of 4.5 years at Summit Global Investments when I was tracking global markets, India clearly stood out to me with regards to the many high-growth investment opportunities in its stock market. In July 2021, I left my job to set up my India Fund in the US – Stellar Wealth Partners India Fund – to bring the India opportunity to investors in the US. The Fund went live in October 2022. Earlier this year, I also launched Stellar Wealth PMS for NRIs and Indian citizens. Both the India Fund and the PMS are modeled after the Buffett Partnership fee structure and invest in listed equities in India with a long-term, fundamental, and value-oriented approach.
Incredible. Congratulations on your success. How has your investment philosophy evolved over the years?
My personal investment philosophy has evolved over the years with time and experience in the markets. Initially, it was restricted only to secular growth stocks at reasonable to slightly expensive valuations.
But now, it covers multiple areas of the investment universe like spinoffs, merger arbitrage, cyclicals, deep value, and management change special situations. In a nutshell, I now invest wherever I find “mispricing” of value and a highly favorable risk-return trade-off.
Another key area of my evolution as an investor has been in the understanding of human nature and the significant role of incentives in governing individual behavior. Always think about the possible incentives involved in any situation before making your final decision.
What’s your research process like? What are some of the common red flags and positive signs when researching a company?
Between low-quality businesses at a cheap valuation and high-quality businesses at a fair valuation, my preference is always for the latter since I can have meaningful allocations of my portfolio in them with peace of mind and higher stress-adjusted returns. High-quality businesses typically demonstrate sustainable competitive advantages, known in investing parlance as “moats”.
Strong brands with “share of mind” which confer pricing power, network effects, high switching costs, a collection of patents (as opposed to relying on only one or two), favorable access to a strategic raw material resource or proprietary technology, and government regulation which prevents easy entry – these can confer a strong competitive advantage which in turn enables excess returns on invested capital over the cost of capital for long periods of time (also known as the Competitive Advantage Period/CAP).
Growing firms with high Return on Invested Capital (ROIC), opportunities for reinvestment at those high ROICs, and longer CAPs are more valuable in terms of net present value.
One of the most highly underappreciated sources of sustainable and difficult-to-replicate competitive advantage is “culture”, best epitomized by companies like Berkshire Hathaway, Amazon, Costco, Piramal Enterprises, and HDFC Bank, to name a few.
To illustrate the critical importance of culture just consider this: From 1957 to 1969, Warren Buffett did not mention the word “culture” even once in his annual letters. Since 1970, he has mentioned the word more than thirty times.
Some of my favorite books on competitive advantage are The Little Book That Builds Wealth by Pat Dorsey, Understanding Michael Porter by Joan Magretta, and Different by Youngme Moon. For learning about how to evaluate the culture of an organization, I recommend reading A Bank for the Buck: The Story of HDFC Bank by Tamal Bandopadhaya, both the editions of Intelligent Fanatics by Sean Iddings and Ian Cassell, and Investing Between the Lines by L.J. Rittenhouse.
Moving on, what has been the most important investing lesson you have learned from your time in the market?
The answer lies in your question itself. It is “time in the market” and not timing the market that drives wealth creation. If I had gotten scared and exited the market during the periodic phases in 2013, 2015, 2016, and 2020 when my portfolio value fell 30%-35% (with many individual stocks down 40%-50%), then I would have completely missed out on the big bull market years of 2014, 2017, and 2020 which helped me achieve financial independence early in life. The words of Peter Lynch on this subject are noteworthy:
“Whatever methods you use to pick stocks, your success will depend on your ability to ignore the worries of the world long enough to allow your stocks to succeed. No matter how intelligent you are, it isn’t the head but the stomach that will determine your fate.”