Vishal: I remember reading somewhere in your blog that most people get into troubles in their financial lives because of their inability to say “No”. That’s truly a widely prevalent problem, right?

Subra: Yeah. My most popular article is one that says – One word that will make you rich.

This article was inspired by another article on Wall Street Journal, in which a doctor with 25 years of experience says, “If a doctor asks you to go for this or that test, don’t do it. You don’t need to do it, because the risks of the test are greater than the rewards of the test.”

So I asked – “Isn’t the same thing applicable to financial services?”

All you need is one term insurance, one savings bank account, one index fund, and that’s it. Then, anybody comes and tells you buy this and buy that, you just need to say no.

And I see portfolios of people who’ve put money in 100+ mutual fund schemes without understanding what they are doing. You don’t need to do all this! This is bound to give you sub-optimal returns.

Either you be in an index fund or you pick stocks. If you can’t pick stocks, be in an index fund. That’s fine. Concentrate on your career.

What is your biggest asset? Today when you are 25, your biggest asset is the present value of your future earnings. So that could be say Rs 15 crore for a 25 year old guy. So that’s your human capital. That is your biggest asset. The most important thing is to protect it.

How will you protect it? You take term insurance, and you take care of your health. Because if you fall ill, you will eat into that if you are unable to earn for 1-2 years. That is your most important asset – your human capital.

Now, if that asset is in a government job, you’re sure it is like a bond fund. Nothing will happen to it. You’ll get an indexed pension. So, then your portfolio can be in equities.

But if your human capital is in running a website or courses, things like you and me do, then that is behaving like equities as your earnings might fluctuate. Then your portfolio has to include some bonds.

So if your main income is like equity, you have to have bonds in your portfolio. And if your main income is like a bond, then your portfolio has to be equity.

• Click here to read Part 1 of this interview

Vishal: What would you say is one of the most important lessons on money and investing you learned early on?

Subra: It’s very important to learn the theories, and it’s very important to see how they are working practically.

The worst thing you can do is meet company managements, because their enthusiasm will rub off on you, and you will make mistakes.

Second thing is to see whether the company can really scale it up, or whether it is just being run for passion by one person.

Third, when you are seeing company managements, you must see whether the top executives are friends, or is there a clear distinction between the owner and others, because friends can’t run companies. To run a company or a government, you have to be a loner, and you have to be able to catch your marketing head by the neck.

If they’re friends and go back-slapping and dining and wining together, they won’t answer the tough questions. Performance won’t happen. I would rather prefer a dictator who runs a company to an over-democratic manager. Let’s face it. I like the Narendra Modi and not the Manmohan Singh style. You cannot take democracy too far.

Vishal: What according to you is the biggest problem why most investors don’t succeed in the stock market?

Subra: I think patience. Go back to what Pascal said, people can’t sit tight. But look at it this way, you don’t need to do anything else than put money in an index fund. Today you have an index fund at 0.15%. Believe me, it matches with the best cost in the world. You can always argue that Vanguard is at 0.02%, but then those volumes have not built up.

So all you do as a kid when you are 23-25 years old, and you can start with say Rs 2,000 per month, just do an SIP in an index fund. You will make money in the long run, as the economy grows and the market rises. Even when the market goes down you will make money as you will get more units. And look at it over a 10-15 years period.

Unfortunately, people cannot do this. I think they watch too much of TV.

Just don’t do anything and keep investing in an index fund, and pick up one stock every year after doing some research and studying say 20-30 companies. It’s not very difficult to do that.

Vishal: It’s good you mentioned about picking stocks, otherwise what I do at Safal Niveshak – teaching people how to pick good stocks – would’ve been at risk!

Subra: Let me go back to what Field Marshal Sam Manekshaw told Indira Gandhi. This was sometime in June or July of 1970, when Indira Gandhi asked him to attack Bangladesh in September. But Sam Manekshaw said, “Not September, I’ll attack only in December.”

As usual, Indira Gandhi tried to bulldoze her way, but Sam persisted. And the actual attack happened in 1971. The Indo-Pak war lasted just four days, but I am sure it was not a four-day war. It was more than four months of preparation.

What you are teaching at Safal Niveshak is preparation, not buying. Buying is easy. Just press a button and that stock is bought. But which stock to buy is a four-months job.

When you have a small amount of money, you need to spend a lot of time in learning than in buying. People spend much more time in front of the screen.

You don’t need the screen. You can go away to a far-off village, do your research, call a broker, and buy shares. What does it take?

It does not require too much brain to buy. Brain is required in knowing what to buy, which is what you teach.

Vishal: Thanks Subra! Michael Mauboussin, in his book “The Success Equation” writes that much of what we experience in life (and investing) results from a combination of skill and luck. How has been your experience with skill and luck?

Subra: Tremendous amount of luck, I must say. And I completely agree with what Mauboussin says, though I have not read this specific book. Taleb says that we underplay the role of luck.

During 2003-07, you cannot discount the ability to sit. Because in 2003, if you were in the Sensex at 3,000, it would have been very tempting to sell off at 6,000 in a few months thinking that you had already doubled your money.

The ability to sit from 3,000 to 21,000 is not easy.

The question you have to ask everybody that you meet is – Did you sit on your equity portfolio during 2003 to 2007? That’s the skill. Can you also call it luck, yes it was luck.

If I were sitting in Dubai or some other place during that time, I wouldn’t have even known about this market. Or if I were completely in bank FDs, I would have thought of it as complete madness. So it was luck that I was sitting in the right place. It is skill that I did not jump off the rocket when it went up to 6,000.

Skill is a combination of identifying the right kind of businesses and sitting tight on them. And then it’s also about luck. At that point in time, if you needed money, and your money had doubled, you would’ve happily sold. And what if you needed emergency money, maybe to buy a house, or hospitalization expense? Luckily I did not require the money.

So, not requiring money was luck. Not knowing where else to invest was lack of skill, or lack of understanding the bond market, because that was the time interest rates were going down and bond markets were also doing well. But I did not shift, so that was skill or luck or a combination of both, I do not know.

The story I would like to talk about skill and luck is that of Sachin Tendulkar. There is absolutely no doubt that his success comes from his tremendous attitude towards the game. It is not just skill or luck.

Very clearly, he was lucky that his parents, like typical Maharashtrians did not ask him to stop playing cricket in eighth standard and instead concentrate on Maths and Physics. That is sheer luck that they allowed him to play cricket.

Then, the fact that he was playing in Shivaji Park (a large and centrally-located park in Mumbai) and everybody could see him was luck. If he were playing somewhere in the outskirts of Mumbai or in some small town, nobody would have spotted him at 16. People would have spotted him at 21, like it happened to Mahendra Singh Dhoni. But it wouldn’t have happened at 16. So he got spotted then, and that is luck.

He had skill, there is no doubt about it. After that, it was all about his attitude. When he was playing, if he had to reach the practice session at 9 AM, he would reach there at 8.30, finish his warm up and be ready to take strike at 9, and not reach at 9. That was attitude, because after you have Rs 1,000 crore net worth, you need not do it. But he was still doing it.

So I believe it’s a combination of skill, luck, and attitude. You need skill, but you also need luck.

Vishal: Yes, and then your attitude creates a lot of good luck for you, right?

Subra: Yeah. And then you also need to have the passion, like in enjoying investing, or cricket, or anything you are doing. And it requires discipline and sitting over boring things.

Like, for lucky people like me, we have benefitted from sitting, and so we know the benefits of sitting.

Now, nobody would come to teach me that this company will take five or more years to perform. Sitting on good stocks is a habit for me. Whether that is good or bad is a different thing. Sometime you have to take a quick decision and get out.

Like, look at this company called Deccan Gold. For the last 10 years I have been hearing that it’s a long term story. It is a long term story because we don’t know when the gold license will come. If it comes, the stock could be a multi-bagger. But I’ve been in that stock for 7-8 years and nothing has happened. There is no question of dividends.

Luckily, I have built a margin of safety because I bought it at Rs 6-7. It’s around Rs 25 now. So some cushion is there. Till it goes back to Rs 6-7, I don’t see a loss of capital. But for the last 4-5 years, it has not done anything.

But I know the day it does something, it could do tremendously, so till there you’re waiting. Till then, you can’t see incremental returns coming on a quarterly basis. It’s not a TCS or Bharti where you can see something happening every quarter. This is a company that is like a seed. We are just waiting for it to grow into a tree.

Vishal: How can an investor improve the quality of his/her decision making?

Subra: It requires a tremendous amount of reading. Unfortunately, most of the literature in investing is related to America, written during the most prosperous period of America, when Americans had the whole world market, they could get all the raw materials literally at whatever prices they wanted, and the whole world was willing to buy whatever they made. They could even export cement.

I am not sure how many of those theories are applicable now. So you have to read what those people say, and know how to adapt them to today.

For example, the most often quoted thing is what Peter Lynch said that if it’s a good product and if many people are using it, you should buy that stock. Now, that’s wrong!

Peter Lynch said if it’s a good product and if many people are buying it, go and pick up the Balance Sheet. He did not suggest to straightaway buy the share. You still need to do research.

For example, Jet Airways gives me fantastic service, but it’s bad for shareholders. ITC creates cancer, but it’s good for shareholders. So don’t go into what is good for the customer will be good for the shareholder, and vice versa.

I am not at all happy with prices of HUL’s products. But I’m happy as a shareholder. So don’t get confused.

So yes, a lot of reading, lot of understanding, lot of adapting, understanding things like corporate governance, and seeing what really works, helps.

There are extremely well-run owner-managed companies. There are reasonably well-run MNCs. There are reasonably well-run Indian companies that are professionally run. There are well-run PSUs. You have all these combinations. So, there are no easy rules to follow. You have to see what works for you at that point in time.

What worked for me in the last 20 years will not work for me in the next 20 years. And my portfolio is going to look very different in 2034, than it is in 2014.

Vishal: Yeah, for an individual investor, the process and philosophy has to be very personal. It should be connected to what kind of a person you are, rather than simply copy-pasting it from someone else.

Subra: You really can’t copy-paste. Let me go back to 2003 to 2007 and then 2008-2009. In 2007-08, I was still earning well so it did not matter that my portfolio fell.

Now suppose I am retired and I am say 65 years of age, and the market falls 40% in one year, I have no clue how I will react.

I would have had 20 years more experience, but at 70 I may just panic and worry what if I lose everything. Because I am one of those guys who are generally 85-90% in equities, so when I see a 40% fall in my whole portfolio, there is panic thinking what if I live till 90 and will my money last.

So even a person like me who, by then, knows everything and has seen everything, I have no clue how I will react. So, your own reaction is very important apart from what you learn from the market.

You thus have to have an individual process and philosophy, and know your own biases.

For example, I am extremely biased against companies from many cities. For me, a company has to be from Mumbai, Chennai, Pune, and that’s about all.

I generally don’t like companies from Delhi. I hate companies from Hyderabad. I just don’t touch them. Philosophically, it doesn’t matter. I lost money in Jupiter Biosciences by breaking my rule of Hyderabad companies. That was the last time I lost money there.

After that I will never touch, say a GMR, because it’s from Hyderabad. You may call it my bias.

If I am a fund manager and I make such a statement, I’ll be killed. I cannot afford to have such a bias. But personally, I have this bias.

I look at the business and the promoter. I am so much people-driven. I look at the numbers only after I am convinced about the people. And that’s a hard learning, because there were times when I was looking at the numbers and not looking at the people.

Vishal: Looking at people is what most people don’t want to do because it cannot be easily quantified and thus not readily ‘available’. They would make their decisions going entirely by what numbers say, while completely ignoring the quality of people behind those numbers.

Subra: True. It should be a combination of both. You cannot get carried away by just one of them – numbers or management.

Remember one thing – when you are meeting a management, the management is completely ready to meet you. So they intimidate you right from the breakfast to the quality of hotel they take you to, and the way they talk. They want to give you a feeling that everything is fine, and they want to draw personal connections between them and you. And they try to hide the most important things, which is fair enough.

This is what I would also do looking at a venture capitalist or an auditor. I am not going to tell him the bad things about me. But I realise as an investor, that is visible in the numbers. That is visible in the notes to accounts.

And then, talking about the company with the people who are not in the management is far more useful than just number crunching.

To be continued…