Interviews with the Investing Elite
Our “Interviews with the Investing Elite” Series is an initiative which will attempt to provide varied perspectives in Value Investing, to trainees, students and investors alike, which form the loyal audience of Beyond Quant InvestTraining.
The interviewees would be drawn from among Thought Leaders in Value Investing – authors of investment books, professional investment managers and buy-side / sell-side equity research analysts. We will also present a few Emerging Stars (exceptional fund managers with small hedge funds, who we think could strike it big some day). We intend to provide our audience with unique, invaluable insights directly from these experts themselves. We might add that many of the views and insights presented in these interviews would be unpublished previously. The idea is to avoid dishing out something which is already in the public domain. In line with our philosophy, we would desist from sharing stock-specific recommendations, calls or investment advice.
The interviews are mostly by invitation only. We reach out to potentially interviewees ourselves. We will usually not consider interview requests coming to us, but there may be exceptions. The final call on who we interview, will be ours.
We are sure that as we interview more and more experts, our interviews would nicely complement whatever value investing reading you may have done already.
An Appeal: If you like our interviews and believe they added value to you, please support us financially, by purchasing the books discussed here, via the specific Amazon.com links provided in the interviews. Separate links for Amazon India (amazon.in) customers are also provided.
We are pleased to publish our First Interview in the “Interviews with the Investing Elite” Series.
Our first interviewee is Sundeep Bajikar, a former Wall Street, sell-side equity research analyst focused on the technology sector. Sundeep is the author of the book “Equity Research for the Technology Investor: Value Investing in Technology Stocks”, possibly the only book on Tech sector-specific equity research.
The book can also be purchased on Amazon India, at this link:
Sundeep is also the founder of acteve LLC, an Investment Advisor based in San Francisco, U.S.
1.Please discuss your evolution into an equity analyst. What led you to pursue a career in investing?
Sundeep Bajikar: After working for nine years in Technology Industry Operations, I changed to Sell-side Equity Research towards the end of my MBA program at The Wharton School. I majored in Finance for my MBA because I felt I needed a strong base of academic training in the field. I was contemplating a change into the financial services industry, but wasn’t convinced until I met a Wharton alum working at Morgan Stanley. I was offered a position in Semiconductor Equity Research working for a famous analyst. I decided to make the change with excitement, knowing very little about what I was getting myself into!
2. Which books did you read in the course of preparing for your research/investing journey? Which are your favourite authors and books?
SB: Much of my investment related reading began after joining Morgan Stanley, in part because what I observed happening routinely around me (just before the 2008 financial crisis), wasn’t making a lot of sense at the time. I found a lot of comfort and insight in value investing books, my favorite being The Intelligent Investor by Benjamin Graham. I read Security Analysis (also by Graham), and a number of books on Warren Buffet-style investing. At the end of it, I recall I had built a Factset-powered stock screener in Excel, a tool that came in very handy to pick stocks during the financial crisis. My screener implemented various Buffet-style stock-picking rules across the U.S. stock market. Needless to say, those stock picks did very well, coming out of the financial crisis.
3. Your book could possibly be the only book on Tech sector-specific equity research. How did you hit upon the idea of writing a book on technology sector research? Does tech sector research require in-depth domain knowledge of technology, or even the non-techies can successfully track the tech sector? What broad tips can you share with individual investors, in order to better track and invest the tech sector?
SB: The idea for writing a sector-specialized investing book for the Tech sector originated from the disillusionment and chaos that I experienced during my early days in Equity Research. Suffice it to say that individuals I routinely interacted with were not value investors. They neither understood the Tech companies they were investing (trading) in, nor were they patient enough for their investments to qualify as adhering to any particular strategy. They were essentially gambling, likely without realizing it. It occurred to me that there were two problems here. First, these investors didn’t have expertise in the Tech Sector, by virtue of academic training or industry work experience, and second, they also seemed to lack a disciplined process for investing.
My investing process places a huge amount of emphasis on domain knowledge as a driver of margin of safety, as well as superior returns. Without such domain knowledge, it is difficult to make a convincing case for having any sort of advantage or edge over other market participants. Having a differentiated view of a company and/or industry is a pre-requisite for (risk-managed) investment success, in my view. There are some exceptionally good generalist investors (i.e. “non-techies”) that manage to come up with strong investment cases for Tech stocks, but this is more of an exception rather than the norm.
My recommendation for individuals or even professionals would be to find a Tech Specialist with strong domain expertise for advice related to investing in the Tech Sector. Trying to do this on your own is treacherous and unadvisable.
4. In the current scenario of abundant access to information and analyses, do you think it’s become harder to find mispriced stocks, and therefore generate alpha consistently? What is the way out?
SB: Yes, I agree it has become harder to find mispriced stocks these days, but I would attribute it to global “easy money” policies and historically low interest rates. Access to information only helps if you know how to use the information, for which, in the case of Tech, you need to have domain expertise. So, I would not blame democratization of information/analyses for the current froth in the market.
The way out is 1) sector specialization, and 2) disciplined process. Neither of those are easy, and as a result are unlikely to be followed.
5. With the advent of algo trading / HFT, do you think the role of human traders/investors will reduce going ahead, at least in the institutional/hedge fund investment space?
SB: Yes, I think this might happen for the majority of market participants who aren’t necessarily adding much value for their clients, but still charging high fees. In that scenario, it makes sense for the assets to shift to Robo advisors and low-cost ETFs. But I think one thing people easily miss in this dynamic is that everyone will not be able to move to Robos or ETFs without dramatically raising the cost of investing for everyone, through reduced liquidity, among other things. In other words, there will be room for active managers who are truly executing their strategy and generating alpha. And that kind of active management, I think, will benefit from sector focus.
6. Within the listed space, which basket would you be more positive on, the large cap stocks, or the mid/small caps? Do you think large cap or index stocks could beat mid/small caps, or the reverse is more likely?
What are your views on the US tech sector? Apart from tech (if at all), which other US sectors are you bullish on, at this point in time?
SB: Since I am a bottom-up, fundamentals driven value investor, I don’t have strong views on large cap vs. small cap. It does seem off late that SMID cap stocks are taking more of a beating, just given the uncertain macro environment. That doesn’t necessarily mean that SMID cap stocks are cheap, just that they may get to a level of cheapness faster, as investors try to hold onto larger cap stocks under a potentially false sense of safety.
I am generally bullish on the tech sector, particularly Cloud services, memory semiconductor, sensors and portions of semicap equipment. I believe tech will continue to disrupt adjacent markets like automotive, financials, insurance, retail and even healthcare on a secular basis. So, it is arguably a good time to maintain a sector focus on tech. Beyond tech, I like miners, particularly Gold, Silver and Lithium.
7. Within the small cap space, how does an individual investor tackle the issue of evaluating management? Can an investor take a call on small cap stocks, based purely on published information, and scuttlebutt investing, without engaging with the investee companies’ management?
SB: My philosophy is to work in collaboration with company management to evaluate potential investments, rather than against them. I think this probably applies even more to SMID cap companies where some of the underlying technologies or end markets are relatively more nascent. Management at these companies tend to be experts in their areas, so I enjoy learning from such experts and then forming my own view of industry dynamics and valuation.
In general, in my flavor of value investing, forming a strong view of fundamentals is critical, and I don’t think this can be accomplished without partnering with company management.
8. Value investing v. Growth investing: “The market can remain irrational longer than an investor can remain solvent”. How does an individual investor overcome this dilemma? Value investing has seldom worked during long periods of bull markets, when asset prices remain unjustifiably high, prompting some investors to remain on the sidelines. How does an investor choose between the two?
SB: That’s an important and difficult question. My approach is to adapt to market conditions, which primarily means updating valuation frameworks.
Fundamentally, in my view what people refer to as growth investing is in fact a subset of value investing, with perhaps a slightly different valuation framework. Ultimately, valuation is relative, and trying to anchor to absolute frameworks for valuation is problematic.
The longer a bull market persists the more difficult it can become to find value. Trying to fight this dynamic might be a recipe for disaster. One of two things could happen – either you end up buying value traps or over pay for assets. Neither is good for your investment returns.
Assuming you are investing for the longer term, my approach in a prolonged bull market like the one we have been in, would be to increase cash allocation, increase the hurdle for new investments, and look for portfolio insurance to protect against inflation. It is possible or even likely that you will underperform for a period of time, and that is okay in my framework, because the first priority is always capital protection. The alternative is that you don’t have sufficient protection against a catastrophic market event, which is an unacceptable outcome.
9. Please share your views on the future of the sell-side research model. With declining commissions, and regulations like MiFID 1 and 2 (in Europe), is sell-side research likely to prove unviable, going ahead? How is the scenario likely to pan out in the US?
SB: The first thing I will say is that sell-side research is unlikely to go away for a long time, because it is integral to the IPO process. That doesn’t mean it will not shrink through industry consolidation, as I think is happening already.
The second thing I will say, which almost everyone in the industry already knows is that the sell-side research business model is broken, and it gets more broken with each passing year. So, what has happened and will continue to happen is that good analysts will leave the industry and will be replaced by those with lower skills for a lower salary.
Meanwhile, for those that are left on the sell-side, regulatory compliance pressure will only increase; with the result that, while the analyst population shrinks, the IT/Compliance army will only grow in size, and contribute to the demise of the business model through higher costs.
10. What is your take on Emerging Markets (EMs) v. US/European markets? Are EMs actually safer than European markets in the wake of Brexit, and now, Deutsche Bank? What are your views on India? How much should a US investor allocate to EMs v. US markets in percentage terms?
SB: These are good questions from a macro perspective, but I am not qualified to provide an intelligent and generalized opinion because I barely understand technology company fundamentals myself, much less the complexities of global macro. My approach is to go wherever I can find value, after thorough equity research, and then layer in a portfolio level risk control to make sure risks are not inadvertently concentrating in certain areas. Beyond that I don’t think of allocation the way “top-down” asset managers (the vast majority of managers for individual investors) do.
Exclusive Offer on Sundeep’s Book to U.S. based Readers of Beyond Quant InvestTraining Blog
Sundeep is offering discounted copies of the paperback edition of his book, exclusively to U.S. based readers of Beyond Quant InvestTraining blog.
While the book retails for $38 on Amazon, Sundeep is offering a signed copy of the book for $23 + shipping (within the U.S.). Priority Mail (2 to 3 day shipping) is typically $6.50 within the continental U.S. Media Mail costs around $3.50, but is much slower (about 2 weeks).
To avail the discount offer, readers should email him a PayPal payment at firstname.lastname@example.org, provide their shipping address, and mention they read Beyond Quant InvestTraining blog.
Certification and Disclaimer:
We certify that the interviewee did not, and will not pay us any remuneration directly, or indirectly, for publishing this interview on our website. In other words, this is not a “promoted” interview. Again, we have no financial interest in the discount offer on the interviewee’s book, though the offer is being made exclusively to the readers of our blog.
The interview contains the interviewee’s personal opinions. Beyond Quant InvestTraining may or may not necessarily subscribe to them in whole or part, or vouch for their accuracy or completeness, or otherwise. The contents of the interview should not be construed as investment advice, and we no accept no liability or responsibility for the use of the same by anyone.
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