“Before swimming, learn to swim”: Ace investor Nilesh Shah’s exclusive trading insights

Nilesh Shah, Managing Director of Kotak Mahindra Asset Management Company,  a prominent figure in the Indian investment world, highlights the importance of understanding and following the rules of the game when participating in the stock market. He says if you want to swim then you need to learn swimming. Maybe one in 1,000 people pushed into swimming pool will swim on its own but 999 are likely to drown until they know how to swim. Same way it is trading. If you want to trade then please learn the tricks of trading. 

Watch the full interview here: 

In an exclusive interview with Republic Business, Shah,  warns against excessive exposure, especially in the face of potential market volatility. He highlights the critical role of stop-loss orders in protecting investors from significant losses. Edited excerpts:

Republic Business: Do you think that India could experience a correction in the coming days?

Nilesh Shah: The rule of the market is – never say never. Always unexpected things can happen, they can surprise you, or they can shock you. So, I wouldn't be surprised if there is a correction in the market. But I will be shocked if the correction is very deep and persisting. That looks unlikely to happen. 

Republic Business: Given the current situation, how do you suggest investors position their portfolios to brave any ups and downs that may be coming their way in the coming months or so. 

Nilesh Shah: First of all, my submission to investors will be to be a long-term investor in the India growth story. There is a watch called ‘Patek Philippe’ and they advertise their watch saying that you never actually own Patek Philippe. You merely look after it for the next generation. I think Indian equity needs that category. You don't own equity or equity mutual funds in India. You merely look after it for the next generation. Number two, if we see the last 20 years' return on the broad market. 

Roughly it is around 13% big figure, last 4.5 years return is 21% big figure and before that 15 and a half odd years were about 11% big figure. Going forward you will have to moderate return expectations. Inflation is down so nominal returns will decline and two the base is reasonably valued. So be a long-term invested and with moderate return expectation. Follow the dharma of asset allocation. This is a fairly-valued market with some froth in micro caps and small caps. Maintain neutral allocation and keep some dry powder in your portfolio to buy during corrections.

Republic Business: Talking about retail investors, what are a few glaring errors to your mind they are committing? 

Nilesh Shah: So many retail investors, Sharmila, follow momentum investing. Whatever has run yesterday will continue to run today. Please don't make that mistake. If the valuation goes up, it can also come down. This is the time to buy quality, not momentum. Second, many investors go leverage into market into derivatives like futures and options. For an ordinary investor, trading is injurious to their financial health. One out of ten may make money trading. Nine out of ten are likely to be losers. 

Please remember, for an ordinary investor, there is no future in the futures and options market. Number three, many a time, people have unreasonable expectations. They expect their stocks will rise after they buy and fall after they sell. Please remember, market is far bigger than everyone else. There's no way one can predict what's going to happen tomorrow. So be a long-term investor. Follow the dharma of asset allocation and be a regular investor. The proverb of ‘little drops of water make an ocean’ applies in regular investing, ‘don't put all eggs in one basket’ applies through asset allocation and ‘jaldi ka kaam shaitaan ka’ applies for long-term investing. 

Republic Business: Talking about future again we know how artificial intelligence is getting involved in the way markets are predicted. Do you think AI will have a role in fund management like how AI is already being used in health for instance. Do you see a future of AI getting more and more involved in non-biased fund management? 

Nilesh Shah: Yes, It will be fair to say Sharmila that a fund manager using AI and machine learning is more likely to outperform a fund manager who is not using it. But will AI drive the portfolio?  Answer is No. There will be plenty of human as well as AI together in managing money.  If I try to balance it on my own and punch the data, I will make errors and I will take longer time. Through machine learning, I can do that task in two minutes. Undoubtedly, machine learning will help in crunching data. AI will help in analysing that data but finally it's the human being who will have to take the column. So I will say AI will play a significant role. But it is human with AI which are likely to do better than AI alone or human alone. 

Republic Business: You know, there is a very upbeat sentiment about India becoming one of the largest global market investment destinations is already among the top five. But do you think that it can become the biggest by beating rivals like China?

Nilesh Shah: From an economic point of view, China will be significantly better than us, significantly bigger than us. They are already six times bigger, and that lead will narrow down but not going to get bridged. Now today the gap between our market cap and the Chinese market gap is not as wide as it is between our economy, which means we are getting valued three times more than China. If Chinese companies make Rs 100 profit, it gets valued at about Rs 900. If an Indian company makes a Rs 100 profit, it gets valued at roughly Rs 2,200- Rs 2,300. 

We are getting a higher valuation because market beliefs will deliver better growth than China which I think will happen. Our governance standards will be superior to China and most importantly the sentiment stats in India are likely to remain more positive and will get reflected in liquidity. It's the combination of growth, governance and liquidity which will keep Indian valuation ahead of China. Now will it remain three times more, two and a half times more, two times more I don't know. But certainly, India will continue to enjoy a premium valuation over China. 

Republic Business: Despite misgivings, people, especially newcomers are getting extremely enticed by F&O. So, what is your word of caution? 

Nilesh Shah: So one if you want to swim then you need to learn swimming. Maybe one in 1,000 people pushed into swimming pool will swim on its own but 999 are likely to drown unless until they know how to swim. Same way it is trading. If you want to trade, then please learn the tricks of trading. Reading WhatsApp messages, and following Telegram channel that's not training. A trader has to be wedded to stop loss. Investor is wedded to averaging as trader learn about stock loss trade. Learn about managing your exposure. Don't bite more than what you can chew trading is continuously on the screen. 

You can be roaming around while your positions are open. So trading is a very, very hard way to make money. If you want to play that game then first learn the rules of the game, don't have exposure more than what you can afford because things will go wrong at the most unexpected time. Follow the rule of stop loss. That's very, very critical for your survival. If I see some of the best trading people in the world, trading firms in the world they follow stop loss to the hilt. They have a lot of computing power. Their algorithms are fantastic, and they have a lot of data analytics capability. If you are going to fight against these people with better connectivity, better data analytics, and better algorithms, you need to be good at your game. Otherwise, investment is much easier. Way to make money. 

Republic Business: Do you think crypto is again going to raise his head? And what are the risks of or what is your perspective on crypto investments in India? Should it be a part of people's portfolio? 

Nilesh Shah: Crypto isn't a set class, it's not currency. Currency is what is backed by the sovereign guarantee of the government. Crypto is not backed by anyone. Number two, there is no way to identify fair value of crypto. It believes in the greater full theory. If I have bought crypto at x price today. I believe there will be another person who will be buying at a higher level from me the day I believe that no I will be able to sell it only at lower price. The crypto magic will disappear. Now there are stout supporters of crypto but think of it. There will be many users of crypto, who want to stay out of the radar of central banks and investigative agencies. It allows you to move money across the borders without getting caught by the regulators. Will regulators allow this to flourish over a long period? 

Number two storage of crypto is a risk. As per one report, 30% of bitcoins that were mined have now disappeared because of hard drives, crashes because of password misplacement and so on. So, the price you see is only on 70% of the bitcoin which now covers 100% of the market cap. If you invest in Bitcoin, please ensure that it is stored properly. Otherwise, bitcoin prices may go up, but you will not make any money like those 30% unfortunate holders of Bitcoin. 

Third, this is an unregulated market. There is no guaranteed settlement, there is no regulator to whom you can go if you are cheated. The transaction costs are enormous so please be aware that this is not a regulated market where you can go to the regulator to safeguard your interest. If after all these caveats you are interested in investing trading in crypto, please ensure that your exposure is such that even if it goes away if it disappears, you will be able to take that loss. 

Republic Business: What are a few undervalued sectors that may reap benefits over the next five years? 

Nilesh Shah: This is fairly valued market, and you are unlikely to get a very cheap sector. Yes, you are likely to get what we call growth and reasonable price valuations. We believe technology is one sector where valuations are trading below or around historical averages and companies which are recruiting people who can use AI tools can deliver cheaper, faster, better solutions to their customers and many Indian IT companies are leveraging AI to deliver such solutions to their customer. We believe at current valuations and keeping in mind company's ability to leverage AI tools. Tech sector is something where one can pick up bottom-up stocks. The second sector is consumer FMCG, for last about 18 months. Consumer stocks have not performed well because consumption per se has remained subdued in rural India. 

In mass market products we believe with election good monsoon incoming festival season, consumption has a good chance to bounce back and that should be reflected into select consumer stock. Obviously companies which are innovating on product on cost and distribution are likely to be beneficiaries. The third sector where I believe there is next 10-15 year run is precision engineering. If you read transcripts of companies like Google, Apple, Tesla, and Microsoft, they are talking about robotics as the future growth area. 

Now we don't have companies that can produce robots, but we have many companies that can provide components for robotics. Indians are known for precision engineering skills, and I believe over a while there will be many Indian companies that will become preferred suppliers for robotics components all over the world. Such companies will provide you’re not only year, two-year, five-year investment view but maybe 10-15-year kind of growth opportunity. So I will say keep a watch on precision engineering especially one which is trying to cater to futuristic industry like electric vehicles, robotics and so on and so forth. 

Republic Business: Talking about mutual funds, do you think that there is a regulatory framework in place but it needs some tweaks or some changes? What is your take on that? 

Nilesh Shah: So if you are playing a game of bowling you need a guide-rail to ensure that your ball goes in the right direction. The regulators like SEBI provide guide-rail to the to the industry and it is thanks to regulation we are able to earn investors trust. There are so many Ponzi schemes which are not regulated. What's the experience of investors over there and how much scale size they can make cryptos again is unregulated market. What kind of investor protection and governance will be there is anybody's guess. On the other hand, mutual fund industry has grown to 60 lakh crore, plus we manage trust and confidence of more than 5 crore customers. That's all possible, thanks to SEBI's regulation, any industry which is to grow will require regulator. Thanks to RBI, banks are growing. Thanks to IRDA, insurance companies are growing thanks to SEBI, mutual funds are growing. We need regulators or referees in the game that we are playing.

Republic Business: For young people interested in trading, what is your advice? 

Nilesh Shah: So one there is no free lunch in the world other than your parents. No one is going to give you free lunch. There is risk and hence there is a return. To all the young Millennials, my advice will be for one. Please follow income minus saving equal to expenses rather than income minus expenses equal to savings. Many people want to borrow on credit card to spend or invest. That's not the right way.  Second little drops of water. Make a notion. Be a regular investor in market. 

Don't waste your time trying to predict where markets will go. Number three, be a long-term investor because if you want good juicy mango, you need to wait for a dozen year after planting mango tree and number four, don't put all eggs in one basket. While you do have risk-taking capability, you still need some amount of anchoring in your portfolio to withstand volatility. Divide between debt equity, real estate, and commodities like gold based on your risk appetite and investment objective.

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