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Harish Krishnan explains about Kotak Mahindra’s top stock picking strategies | Kotak Mutual Fund

Radhakrishnan Chonat: Hey, everyone. I have another special guest today, again from the fund management industry, none other than Mr. Harish Krishnan from Kotak Mahindra Mutual Fund. He has over 15 years of experience spread over equity research and fund management. He has a Bachelor’s of Technology degree from Government Engineering College Thrissur, and he is also a graduate in management from Indian Institute of Management Calicut. Of course, he is also a CFA charter holder. Mr. Harish, thanks for agreeing for the call, and it’s wonderful to meet you.

Harish Krishnan: Likewise. It’s always a pleasure to connect and looking forward to an interesting interaction.

Radhakrishnan Chonat: So Harish while giving out your brief bio, I see that you’re – you came from an engineering background, you did your IIM management degree and then you’ve got into fund industry. Please give us some insight into why you selected this industry and your journey over the last 1.5, two decades, and what kind of insights that you can give us in your journey?


Harish Krishnan: Sure. So I came into this industry by accident, if that is at all possible because getting into buy side clearly is extremely difficult as many of you may be aware of. I was – so I had always been interested in quant, I had always an interest in finance, but my primary interest was in strategy and management, and you can say marketing. And by some sheer luck and chance from my B school, got placed into four or five different companies and at the end of the day, all the other four companies, I had a IT background prior to joining my B school, two or three of them were from the IT background and a couple were from the marketing domain, etc. I thought that among all of them, this finance profile seem to be the most outlier. And I thought I should at least give it a shot to try and see whether, because all others, I thought I could always get back into those industries or the source. So you can say by sheer accident, I got in, and now that I’m in, I can only thank my stars out. Incredibly lucky I was, and also my decision making of pure serendipity if may use that word to get into it because once I have gotten into it, I completely love what I do and in some sense, it’s been my true calling. So I never planned it this way. But this is how it’s turned out.


Radhakrishnan Chonat: The stars were already in your fit? We’re glad that you could join the fund management. In your profile, I had read that you believe in first principle investing and also behavioral finance. We don’t hear much about cost principle investing in general. So for my audience, if you can explain that in general and the markets are down. We are recording on April 19th. So a little bit about behavioral finance for those who are worried about their portfolio and stuff.


Harish Krishnan: So first principle isn’t anything, but common sense. I think that is — that is this general sense and like you said I come from an engineering background, right and the technical sense that we have is, everything can be computed from — can be put into numbers, if you have run a DCF and get an accuracy of two or three decimal points, you have the feeling that you have arrived a life and you’ve conquered what needs to be conquered, right. So my journey started pretty much like that, right, wherein the idea was to — to get the inputs right to a reasonable amount of certainty among obviously while everybody knows that these are assumptions and therefore they are, there will be variances. But the idea was to get that right and over a period of time, what I had realized was right from my B school into the career of fund management that there are being these thumb rules, which started coming through, right, low-p, high-p, what is p [Phonetic] So everything became a derivative from the basic knowledge of reading a balance sheet, it became about understanding those ratios, understanding those things, which were rules of thumb. And anyone who has been through the markets over, say, two or three business cycles, realizes that that is essentially borrowed conviction or borrowed thinking, and over a period of time, you realize that that is not a way in which you can sustainably build an edge in fund management and which is where you need to further synthesize, you need to further get into the first principles to try and understand what is it that a company does. And once you start doing that, then it is all about common sense and starting out from the other dimension is that on behavioral finance is also common sense in the sense that I mean we all like to believe that we are all rational people, we are all logical people, but we all know that we end up doing illogical things, things that we can try and rationalize through some behavioral, mental model that you can have, and when you have the overall markets, having a particular psychology of the markets that as well the liking and the passion of behavioral finance comes through. So if I were to join both of them, I would say that, first principles is basically what you as an analyst [Phonetic] assess a company for what it stands out for and what it means for your portfolio, it’s your assessment, right. Behavioral finance in some sense is what the market gives us a reflection, what is the feedback loop that the market is giving, it could be on that particular stock, it could be on the particular sector, it could be on a particular asset class. But there are important signals that the market is trying to reflect back on. And if you can combine both of them, obviously, it’s easier said than done and I myself, I’m in a journey where I’m hoping that I am getting better at it at each passing day. But when you do that, I think that you are adding valuable signal, signal of your analysis and you’re renewing out all the noise of thumb rules and all of that and getting your signals from the market and hopefully when you combine those two, you can make slightly better decision making. So that’s really where I stand between the intersection of both of these areas.


Radhakrishnan Chonat: Interesting. Getting the right signal from the noise all around us. So let’s — let’s jump a little bit to the funds you manage. You manage five funds, if I’m right. And most of them are flagship funds from within the Kotak portfolio. I saw that the infrastructure fund that you’ve been managing very successfully. India is on the cusp of — we’re seeing a lot of investments in infra in particular. Give us a little bit of insight into where you see the infra push happening in India and your views in general.


Harish Krishnan: Sure. So infra is obviously from a demand side, there are four engines of demand and while most of us think of infra is primarily government and government obviously capitalizes a lot of that demand. But there are four varied demand sources. The first engine is government spending, the second engine is private sector capex, the third engine is housing and the fourth engine is what in the earlier cycle, what will be known as public private capex, which is unleashing the complete animal spirits to try [Indecipherable]. So the broad thinking that I have is that when all these four engines fire that is the time to get worried about because then you’re pretty much running on full throttle so to speak, right. At this point of time, we’ve been through a very painful decade of deleveraging, getting overall corporate India’s balance sheet back into shape after a significant amount of excesses and misallocation of capital that we saw in the pre-GFC era. And it’s taken us slightly longer than what we would have liked, but at this point of time, thankfully, our balance sheets of corporate India in aggregate are in the best of health that we’ve seen in the last 20 odd years. Add to that you bought, say four or five key changes that have happened, you can — without going into greater depth over that, I mean, I’m sure we all know about BLI initiatives, we hear about the government push towards creating reasonably strong infrastructure, you also have got say for example, the tax cuts that got announced, specifically for manufacturing, new manufacturing firms at 15%. It’s the lowest in anywhere in the world, which can attract. We’ve seen, for example, our biggest competition as far as infra and manufacturing is concerned is China, right and if you — then obviously if you all look at say the forex trade in the form of USD-INR cross, but if you look at say the CNY-INR, which is the Chinese yuan to the Indian rupee, it used to oscillate around 9.5, 10 pre-COVID, and today it’s close to about 12. So essentially our currency has become slightly more competitive by about 15%, 20% in a pre-COVID and a post-COVID world. Yes, so when you add all of these, and then you start thinking through that government spending is good, but now you’ve got private sector balance sheet’s in good health, they are talking about capex, you’re talking about housing, which I gave and for a long period, where not pretty much nothing happens, housing prices have been stagnant. And now, inventory is getting cleared out that is starting to move up. I think PPP is still a long time away. So when you look at it in that construct, I think there’s still a reasonably large cycle to play out over the coming course of the decade, and that is what underpins our relative positive bias towards the space, in aggregate.


Radhakrishnan Chonat: Interesting engines. So keeping to the same theme, how do you see the higher commodity cycle playing out and the worries about inflation in general, not just in India, but in the western world also?


Harish Krishnan: So I think commodities has got two elements, right, you’ve got the supply element and the demand element. Now in my view is that the demand has been soft even pre-COVID and it continues to remain soft. So structurally the world has aged, the world has gotten more and more prospects, which means more and more money is going to services compared to goods. What changed really for igniting that entire, the super cycle of commodities was essentially free money being given by the Western world in the form of checks to citizens, right, wherein trillions of dollars, especially in the U.S. were given to citizens every month. And in an environment where services were pretty much shut, so free money services shut and services account for say 60% to 70% of overall spending. And so when you have that, you basically have pushed all the spending going to goods, which meant that there was — and goods are more energy and more commodity-heavy, which has pulled up the entire chain for them because the world was optimized on a particular demand program, suddenly you’ve seen a lift of goods explosion. Now the question is, I think generally with higher prices, supply needs to come through because that’s the response of higher prices. But I suspect that the suppliers also know that this demand is a temporary demand and demand will face off and therefore they’re not bringing in capacity, which means that prices are staying longer than what any of us — I mean I’m happy for the producers, but as a consumer or as the world as a whole, I think it’s taking a very high price. So we did this analysis wherein we said that between CY ‘19 and CY ’22, the world is likely to add close to about $7.3 trillion of economic output from GDP. The incremental delta in GDP at current rates of just the basic food, energy and metal prices. And these are basic commodities, right. Of that incremental $7.5 trillion, close to about 55% to 60% goes only into these basic commodities, which generally otherwise as you know in single-digit terms. So that’s the extent of extra money that the world is going to allocate into these commodities, which means that there is going to be pressure in somewhere else, right. I mean the wallet is only so large. So therefore I would suspect that there is going to be demand destruction. It’s not a pleasant site that ideally we would want the equilibrium to happen without — without a significant jolt, but it appears that the solution because suppliers are not bringing in capacity because of higher prices because of the reason that I said. Therefore, the only way should be to reduce demand and in certain cases, I think it’s already starting to play out with higher interest rates and the higher commodity prices, I think we’re poised for a chaotic kind of a macro environment globally and hopefully we arrive at an equilibrium sooner than later is what I would — I would hope for.


Radhakrishnan Chonat: Interesting. So with this market uncertainty and of course, the geopolitical tensions between big nations, how have you positioned your portfolio and what should an investor, a retail investor who is investing in your funds should be aware of?


Harish Krishnan: So I think, firstly, we don’t really focus on the near term. Typically, if you look at our turnover ratios of the funds, that we manage this in the region of about 25% to 30% effectively. Therefore, our stock has got anywhere between three to four years of minimum lives that we give for these companies to execute their desire or their stated goals. Given that obviously at any three, four year period, I don’t think you’ll never get a suite pads wherein there will not be any uncertainty, so there will not be any untoward incidents, right. And therefore, I mean obviously one can be paranoid about it, but beyond a point there is nothing we can do about believing that the world order has changed, etc. at least that is not the base belief. Yes, it is unfortunate what’s happened, but I think the world will arrive at an equilibrium in the way that it sees fit. And therefore, our focus is therefore, which are the companies, which are best of breed. That is our underlying investment focus in our funds are and what we mean by best of breed, we’re essentially saying that every step of certain sectors will have transient headwinds, certain sectors have structural headwinds. Now how do we differentiate between both of them? We look at the supply side, wherever there is consolidated supply and that is pricing power, we tend to prefer such sectors over other sectors, which have too much fragmented suppliers and lack of pricing power or regulations determining pricing. Having said that, once we arrive at those sectors and these companies, we believe that in every sector there are maybe three or four companies, which are very differentiated and which show through in terms of either better margins, better return on capital employed compared to the rest of the pack and also tend to take higher market shares, which means that they are becoming more and more relevant to the customers. And to us, those franchises will tend to grow in value over the course of the next two, three, four, five years. And therefore if we buy into them and back them, especially during times when there are transient headwinds, we tend to kind of make up for that uncertainty or that greater period of volatility you may say so with slightly better returns compared to the relative market and that is what we think over a three, four year period, any investor should expect that. So we don’t really focus on sales over the next six months, 12 months, how the portfolio needs to be positioned, how they need to be changed. Of course we’ll maybe, 2%, or 3% of the portfolio maybe shifting, but that’s about it. The rest of the 97%, 98% of the portfolio is still geared towards those three, four, five year kind of a horizon that we think an investor should at least be looking.


Radhakrishnan Chonat: Very interesting. If I were to ask you to sort of do some sort of a crystal-ball glazing, if I may, you mentioned about three to four years once it [Indecipherable] whatever time it takes for the geopolitical tensions to calm down markets to bounce back, any sectors, if you can that you’ll see us as future beneficiaries and any sectors that probably can be a laggard with the changing times?


Harish Krishnan: So I guess, obviously in three, four, five years, a lot can change, right, and therefore you need to constantly be checking, whether it’d be structural underpinnings have moved or is it only a noise that has come through, which is causing something right. So with that caveat in the sense that this is obviously prone to change almost on any given day. I would say that there are two sectors that are looking much better or two themes, I would say, which are looking far more promising in the next five, seven years compared to what they were doing in the last five, seven years. The first space is I would say export from India, both on the services side, I think we’ve done a phenomenal job and over this kind of further reinforced the fact that Indian companies could deliver because the whole world was in the same block, right. So at the same point, everybody was scrambling how to set up redundancies and all that. And here you had a way, in which you could actually do it and deliver it at scale. And I think that definitely augurs very well for the overall Indian services space, but also in terms of goods, I think we are starting to get our act right because of all of those reasons that I spoke about when we spoke about infra, when we spoke about tax cuts, currencies and a whole host of others, including the geopolitical developments that have happened. I think that is a growing importance of India as a strategic partner compared to many others. So I think export and that entire value chain that will be one area that I would look out for. The second area, I would say would be the investment cycle starting to come through, because this is again like I said, it’s almost been a 10-year kind of phase wherein there was a double — deleveraging both the banking system, while the financial services system was deleveraging and you also have the corporate sector deleveraging at roughly about the same time and we are, I would say, closer to the end of the tunnel than where we were two, three years back. And that gives us confidence that we can get the investment cycle kick started. The one area where definitely there is a spot of bother at this point of time, I would say is bottom of pyramid consumption because essentially COVID as I think impacted both savings and income profiles for the bottom of the pyramid. Of course the rest of the world give those free checks to everyone, India given limited resources hasn’t been able to match that up rightfully or wrongfully. Of course, they did give a lot of support in the form of free ration and all of that, but at the end of the day, it is going to take some time before livelihoods are regained and savings and income profiles start coming back. And that is a space that I would say where that would be a spot of bother unless there are some serious government intervention in terms of getting the demand uplift back. So that will be one area where I would be a bit watchful.


Radhakrishnan Chonat: Interesting. If I’m not putting you in a spot, but if you were to present in front of the Finance Minister, what would be one or two things that you would want personally to be implemented for the economy and to be back in its aggressive form and as you rightly mentioned the bottom of the pyramid are affected a lot. It’s not a politically loaded question, just from a fund manager perspective, what would be some of your wish list items if you were to meet the Finance Minister?


Harish Krishnan: I think we’ve done a reasonably good job. Again not — I’m not taking any political undertones at all. So please don’t get me wrong on that. Because this is the feedback that we get when you speak to companies as well. What is it that you want further the government to do and a lot of companies are saying I think they’ve done a lot. It is now up to us to invest back into capacities and create the demand etc. So at one end of course, the enabling framework etc. especially given the significant pulls and pressures that are there it’s not an easy job to execute, right? And so I think there is still a long way of reforms that we can keep incrementally hoping for and I’m sure the government at the right time would end up doing that. And also that it’s my belief that we should never look at utopia as the solution in the sense that we’re never going to get there I think in our lifetime. So I mean I would say that as long as the rate of improvement is on the positive side and the slope is improving, we should, I think there is enough opportunity for businessmen to make more profit. So with that caveat, I would think that clearly there needs to be slightly more administrative reforms, if not anything else. So judicial reforms that’s the other area, which these are long pending and I’m sure there are many people far more with greater expertise who have kind of written thesis and recommendations for this, but those would be the two areas I’m personally someone who believes that a lot of money is spent on administration. Again we’ve got some brilliant administrators, but I think it’s disproportionate money being spent on administration, which could be better served as well as my personal view, but I’m sure they’ll take a considerable view given the significant books and pressures that [Indecipherable].


Radhakrishnan Chonat: Very, very interesting and very different viewpoints. Thanks for that. Shifting gears a little bit, Harish. You manage about close to 25,000 assets under management and you are basically a career veteran at Kotak Mutual Fund. Tell us a little bit about Kotak Mutual Fund, your team, what is your research process, how you keep the sectors or the new stocks coming in and what kind of due diligence do, any insights into how Kotak Mutual Fund works would be excellent.


Harish Krishnan: Thanks for being fortunate to be part of the overall group. This is my 18th year at Kotak. And we’ve had our own evolution. I think the fund management industry in India itself is quite nascent, right and so there were phases where we were cowboys, you go meet a company and I’m talking about nearly close to two decades back right and that was the cycle there. We got rewarded disproportionately. You go meet a company, you like it, you buy it the next day and then you make the money and then everybody is happy. And then obviously the regime shift happened and that is when risk management started coming through and therefore we started putting the guard rails and so what is it driving? Then there was a phase personally if you ask me wherein we were buying the right names, but still not making money for our investors. In terms of obviously for us if the relative edge or the relative alpha is what we are looking at, so even with buying the right names, there is a particular need for a portfolio construct, a particular way of asset allocation that needs to be practiced, so that even with the right names, you start making money for investors. I think that was the next part of the evolution that we were. And again I’m talking about a 20-year kind of a track. So I’m not saying that you know this is not something that we focus on. Obviously all of these got focused on, but priorities keep shifting and so please take off this as more of a movie kind of or a journey rather than something that we are lacking now or something I’m sure we need to improve now also but, so that is what we did then, right. Then over a period of time, we moved into an environment wherein we’d be kind of focused on your forensic analysis because, especially in India while there are a significant amount of companies that are there, we know that certain managements are to be trusted and certain aren’t, and therefore we invested significantly in that area with our focus on cash flows and focus on accounting. So that we are able to have lesser of those mistakes. Obviously we’ve all made mistakes, but we are constantly in the journey to reduce those mistakes as we go ahead. [Technical Issues] bring in quant and this is something that I personally kind of do in Kotak, which is to build up the entire quant ecosystem grounds up using first principles. And over there, it gives us both fundamental based quant and quant-based fundamental both are two completely different schemes that we have, one helps us in escrow location etc. and other helps us in stock selection. So that is something that we look doing at a significant amount. Overall we’ve got about 14 analysts, each of them sector veterans who track maybe one or two key sectors. We were fortunate that we’ve got a long tenure team. So just like me who’s been 18 years in this group, I would think bulk of my colleagues have at least got a 10-year plus kind of a history. So there is a certain wavelength, a certain frequency that we all kind of resonate with and therefore especially in COVID, wherein two years, we were pretty much working from home. That kind of helped that we were constantly in sync because we know how each of us think right in some sense and therefore we know how to complement it to our own skills. So yes, so it’s a reasonably full-fledged team focused on fundamental analysis. We’ve got a quant team up, which is focused on alternate data and then you’ve got the entire ideation process that comes through. And like I said just getting the names is half the work done, the second part is in terms of seeing how they fit into the portfolio from a three, four year period and then after that bring in that entire resume of risk management, so that you don’t go excessively into a particular name believing that only your thesis is right, right? And then you see hopefully the magic unfold over a period of time wherein we’ve got reasonably consistent performance over I would say the last 10 odd years.


Radhakrishnan Chonat: Very interesting insights into how you pick a stock. You did mention about the management quality that’s something that we always hear. Yes I look at all the other metrics, but at the end of the day if I were to decide that’s on the management quality. Are there any broad guidelines that you look at when you evaluate the management or is it more like from your experience and any insights into how you judge the management?


Harish Krishnan: So I think we’ve got a process called BMV in terms of our investment process. So B stands for business, wherein we look at probably two attributes which is the scalability of the business and the sustainability of the business. Scalability is basically how big can the opportunity be and how can it scale up. Sustainability is primarily looking at all the down cycles in the past and how the company is navigated right. The second attribute that we look significantly is on M which stands for management. And here we look at about probably two or three key attributes. One is in terms of alignment of interest. I think that is something that is imperative and while a lot of people say that promoters own a lot of stock in India and therefore they are completely aligned. I don’t really agree because there are related party transactions, brand custodians are different compared to what the company is, and so there are enough telltale signs how the main promoter or the main management thinks about minority shareholders and as a custodian of wealth rather than believing that it is their company and they want to do whatever they want. So that’s something that we look at. The second attribute that we look at is capital allocation. I think this is something that we’ve realized that in bad times capital allocation is actually quite good because everything is on fire, the management knows when to prioritize and let — does less mistakes because they know that they have a problem, it’s very well identified and they want to clear it out and so that they can move on with live source. It’s in good times that mistakes happen conversely right because that is when the opportunity is seemingly endless and then you’ve got resources and that is where you start making mistakes. So if you start evaluating both of these very differently, you start realizing that which are the ones which are slightly ahead of the rest of the cycle or of the industry pack and which are the followers and because there needs to be a certain amount of counter cyclicality when it comes to capital allocation, right. in some sense, we are also doing that, but you would also expect the CEOs and the industry captains also to do that because that is when they can also make more than industry in terms of profit pools, and they can keep increasing their relevance, or salience of profit pools, right. That’s the other attribute that we look at and the third thing that we look at is, cash flows and that’s a very strong focus at Kotak. So there’s just saying that top line is vanity. The actual reality is cash flows I think very early in our careers we realized that the profit and loss statement. So there are three statements, right. You’ve got the P&L, profit and loss, you’ve got the balance sheet and you’ve got the cash flows. Invariably look at any DCF or any projection, you will focus 90% of the time on the P&L right of all future things and balance sheet is just one residual portion and cash flow is something that you just change to three cells, just so that it kind of values. What we’ve realized is actually cash flow is the most important statement, then comes the balance sheet and then comes the P&L. And once we get that clarified in our thinking I think broadly we are at least able to I would say have lesser mistakes, mistakes still come through and that is why we bring in diversification, right. So that even if there is a mistake we have lesser of an impact to our unit holders than what we would have liked. So that’s probably what we look at and the third thing just to complete that series of BMV, while the third is valuations, which is based on interest valuations. We arrive at where there is a reasonable margin on safety. So that’s broadly our approach in terms of management equality.


Radhakrishnan Chonat: BMV, let me pick your brain on the valuation aspect because I know you are — you recently did an interview with Aswath Damodaran and also let’s talk about the recently IPOed so-called tech companies with high valuations. Investors have got burned and you know a lot of youngsters who went into markets probably believe the hype and all that stuff. Now the usual balika bakra kind of stuff. So when it comes to valuation, how do you see the current valuation trends in India, especially when it comes to the Initial Public Offerings, any views or any thinking on that?


Harish Krishnan: Sure. So I think that is enough literature to say that IPOs are broadly not stacked in your favor in terms of the odds because obviously somebody is wanted to sell stock, right and obviously for one, two years it may play out and then eventually the odds of making money are much more in the secondary markets than in the primary markets. I think that’s based on we are well established in India as well as the rest of the world. Having said that, the temptation is always there that and that is how it’s like the casino right. It loves you, it gives you some gains you think that that’s this is the newfound mantra, you found a winning edge and then you put in more and then the house takes it all. And I think we’ve seen it across sectors, across cycles, across time. This time is no different. The difference I have is and I’ve got a slightly different view as far as new age companies are concerned. The one school of thought that hey these are loss-making companies, and therefore we should never look at them and I’m definitely not in the camp. I’m definitely in the camp that you know there are — there are significant value that a lot of these new age companies bring through and primarily do also appreciate that you know the last 10 years when capital or India Inc. was going through a whole zone of deleveraging and getting its act right, in those five, seven years all the capex was done by these unlisted companies and that is where big money has gone in and certain habits have definitely shifted right. Now the key question or the key attribute that one needs to ask is, how far is that journey to — path to profitability and once they reach profitability is it — is the industry structured in such a way that it is amenable to distributive of profits, right. So in fact this is something that I’ve written a reasonably long blog post on sub stack which is on how to value new age businesses and a long story short because that’s a — that’s a recently 2,000 word article, but so I would encourage you to look that up, but broadly the way I look at it is that new age businesses are like options. They are long-dated options now in any option for those of your audience who trade options, you’ve got a strike price right. So in a business what is the strike price. The strike price in a conventional business is your debt cost of debt or the debt because that is — that goes straight to the debt holder and only the residual portion if the value exceeds that, that comes to the shareholder right. That’s a typical structure. But in the new age businesses. most of them are dead because they are so new and nascent that no bank would want to give them and they can’t afford those things. So the way you estimate that fixed cost is essentially look at all the fixed costs that are there, which includes the cost of technology, the cost of manpower and the what I call as the consumer surplus, which are the discounts that the company gives over the course of the next three, five, seven years to arrive at what the hurdle rate for the businesses to at least cover and then to start giving value to the equity holders. So there are some businesses where you know for example cumulatively they have spent only $200 million so far over the course of the last say 10 years and they are already making revenues of close to $1 billion etc. in which case you know that the ask rate is lower and therefore you have a greater odd of being on the right side of that fixed cost and therefore over a cycle, you will be able to make better odds of making money, but on the other hand, there are other companies but you know where it’s like a black hole effectively wherein they have sucked in close to about a $1 billion and $1.5 billion revenues, we have about $100 million and therefore you know that there is a inherent mismatch whether you want to be on such — a such a cap table, which is so far right if you — if you get the structure that I’m talking about. But I would strongly urge to loop that article up and because that will — that will give a lot more clarity rather than you know these two minute kind of spiel, but I — long story short, I think new age businesses do add value, but you need to treat them like option values, which means more importantly that you need to have between 2% to 4% of the option value in your portfolio. So if you think that you can have 50%, 60%, 70% in your demat accounts with just IPO stocks, I think it’s a very bad strategy in my opinion, but as long as it’s a small portion as an option value, some of them are fully aware that a lot of them will go down. I mean that’s the nature of an option right, but a few of them will make super normal value creation and if you write them, I think you will be able to cover those clauses and make more than the rest of the pack. So that’s the way I look at new age businesses.


Radhakrishnan Chonat: Very interesting. Avoid the black holes. And for our listeners, we’ll ensure that the link of the said article is given in the description and thank you Harish for that recommended read. Before I ask you to recommend the favorite read books that I normally ask, let’s — hope to know you a little bit better. When you’re not evaluating companies when you’re not looking at cash flow statements, what is Harish off work and what kind of hobbies you have and how do you spend quality?


Harish Krishnan: So a lot of my obviously last two years, COVID is different, but generally I like to travel quite extensively and that’s the way I try to unwind and — and so that’s — that’s primarily how I get unwinding. I also like teaching, but again yes teaching would again be in the same field, but in some sense I think both writing, I write quite extensively on social media, on Twitter, Substack etc. I think all of them help clarify thinking more than anything else. So it is more to give myself a better understanding of what my principles are, offers principles and the good thing is, I think we are so much of valuable feedback comes back to constantly keep you thinking that whether you know in terms of your framework is that something that needs to be refined. And so I would spend a lot of my time on those two teaching and writing, and traveling. So that’s the way I am currently at ease in mind in the space of life.


Radhakrishnan Chonat: Excellent. So you’re 24 hours building your mental models as to speak.


Harish Krishnan: I think it never stops. So that’s the positive thing, right. It’s all about curiosity in our approach. I am completely blessed that I get to do this for a living. So yes make the most of it as I can.


Radhakrishnan Chonat: Great. Great. So Harish before we wrap up the usual question, please recommend us your favorite three books that you’ve held?


Harish Krishnan: So I think one book that I think a lot of people have found a lot of value and I rate it as an absolute top read is Capital Returns. This is a book off the buy side of a firm called Marathon Asset Management in U.K. and in some sense it shaped my thinking in terms of how I looked at companies and for any serious professional investor, I think that’s a must to get us in because it’s very contemporary. I mean it’s basically like case studies of the last 15, 20 years, so there’s a lot of relatability that one can have over there. The second book that I recommend is a book called Creativity, Inc. Now this is a very diff — offbeat or a very differentiated book in the sense it basically chronicles the success of Pixar, the animation studio from its CEO’s lens and saw its founders lens right. Now why is this interesting is because investment in my opinion is both about numbers and narrator. It is art and science. And so while there is a certain rigor and all of that that you bring through on the analytical side, you need a creativity spark or a creative spark to try and see that same data in a completely different lens. And that is where I think it makes a lot more sense primarily because you know especially if you look at Pixar and I think now they’ve churned out even more hits, but that is one animation studio that had if I’m not — my memory serves me right, about 25 hits one after another and it’s an incredibly difficult business right, creativity as we all know to keep sustaining those levels, you need a process and they define that process so beautifully that I think on an investment side, we can use a lot of those principles to create a framework and to create a team and discipline and more importantly a culture that encourages innovation brings in creativity and in which case all of us are reasonably of that analytical rigor or possibly what we are lacking is those two elements and therefore that brings in that spark right. The third book that I think is very useful and this is for more need, I would say you know a newly initiated investor or someone who has just started right, I think it’s a beautiful book called Rebel Allocator. Okay it’s a very small book, it’s possibly like a fairy tale you can finish it off in one session, but it basically says the importance of capital allocation or story and the story of old person and another person who’s starting who interviews him as to how a businessman, forget stock markets and all that, how a businessman actually sees and grows his business and why is capital allocation so important. So I think we have three different books, one is on contemporary issues of the buy side called Capital Return, second is like I said Creativity, Inc. and third is Rebel Allocated.


Radhakrishnan Chonat: Excellent. This is one of the most diverse set of book recommendations I’ve heard and you know first time I’ve not heard of any of the books that have been recommended. So definitely the next thing that I’m going to do is, go buy them on Kindle. Thanks a lot Harish for spending such quality time with us and giving us such great insights. I look forward to catching up with you again in future. Thanks, again.

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