Shyam Sekhar on Learning To Align Risk With Personality

Q1 The Investment World’s Natural Fascination for Warren Buffett

[Vignesh]

Shyam I am just going through your twitter profile and I think it is a cornucopia of a lot of exciting and interesting things and I think I just want to talk about I just want to have a conversation about two of those tweets amongst a lot of other brilliant ones so the first is I think you put something out on the 1st of May about Warren Buffett and you were basically saying to experience his style and learn from an investor few ground rules apply – don’t clone blindly, don’t quote him obsessively, avoid comparison, never virtue sell yourself using him, understand him but don’t oversimplify him, genuine learning and respect are behavioural, so I think it is a lot of interesting things going on in that tweet but can you talk about the origins of where that idea even came from and why you actually put that out.

[Shyam]

See for anybody who is coming into the investment world it is a natural fascination to see people who have done seven decades and are still able to maintain relevance too many people have done it certainly not in India strangely the longevity of our investors is not as good as the longevity of the great American investors.

Maybe hopefully some people are going to live long and do that seven decade thing when you have such a long track record and history and a body of work, adulation is bound to follow everybody would want to be like you but like in entrepreneurship in the investment world also no one person can be like the other. For example Warren Buffett is not like his mentor Benjamin Graham and despite him having numerous disciples and numerous people who claim to be Ekalaivas there is a problem in how we are going to learn from him and how we are going to learn with him.

Ekalaiva never used Dronacharya to improve his image in society or to get some other objective. For him learning was the primary pursuit. In investing also I think that we must learn a little bit from Ekalaiva that is the simple thing that I would like to say because yeah we would have learnt a few things for sure but how much are we going to be able to do it in our work and what we do should be more from the learning than just doing what he has done that is not learning

[Vignesh]

so you are saying have heroes but don’t mimic them blindly

[Shyam]

yes because individuality is what is going to keep you going because your heroes will be gone one day after that what are you going to do it’s like you know there are Indian Gurus who live. As long as they live the place they live is buzzing people go and visit them every year or whatever function there are grand occasions there are lakhs of people who visit. After that how many people are able to carry forward what they have learned from the Guru in the absence of the Guru. So if at all you are deeply reverential of Guru I think that your engagement with that person itself should transcend tokenism it should have more meaningful impact in what you are taking away what you are carrying into yourself and whatever little you are practicing.

I don’t see people who are continuously posturing practicing enough so I think that that difference is very very critical for everybody it’s very critical that’s that says more about how you are treating a Guru first… somebody whom you claim as your teacher.

[Vignesh]

yeah that’s totally true and very it resonates with me because you see a lot of these people who wake up in the morning and put out like a Warren Buffett quote in the morning and I’m like why are you all doing this on Twitter so yeah.

[Shyam]

so I think recognition comes to people who position their own self in society when you have less to position about yourself it’s a very easy option to position yourself as somebody’s associate it’s very easy.

[Vignesh]

yeah yeah no I think that is very true which is a great

[Shyam]

not even associate

[Vignesh]

yeah yeah yeah it’s true and this is a great segue to the second tweet which I wanted to talk to you about which is “the more you sensationalize your investing the more ordinary your investing would look… something simply won’t happen by trying too hard” it’s crystal clear very very concise and very precise and accurate but some context will provide greater clarity to our listeners so can you just talk a little bit about.

[Shyam]

So what do investors like us bring to the table – first we bring capital we bring conviction but we don’t bring delivery. Delivery is outside our domain of competence. Investors deliver nothing the delivery is in the hands of people who are entrepreneurial. They don’t hype how much they can deliver the best guys never over promise they always believe in promising modestly and delivering more than what they promised.

Now as an investor if I am going to give just my capital to a company and then go to town trying to virtue sell the company then I have no control over what the company is going to deliver. So what am I trying to sensationalize? I am trying to sensationalize my involvement in the company and I am trying to make more people become affected by that sensationalism and participate in it… effectively without contributing to the success of the business I am over promising on behalf of the company this is what I mean in that quote.

I have zero competence to do it actually and it’s clearly sitting in the middle of being irresponsible… no it’s it’s totally irresponsible. So what happens is if something goes right because the entrepreneur is a super guy who has delivered even beyond what I thought he will deliver then I take credit but if he doesn’t deliver… right… then the blame becomes mine. Now in this kind of a situation why would a sensible sane guy wager such sensationalism on behalf of something which he has limited control over and in which he is not a contributing person at all.

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Q2 Impact of Popular Trends

[Swami]

so so so which you know which brings me to one of the famous quotes that you know I read about what you said why popular trends scare you right so so why do so this popular trends why does it scare you and what does it do to investing what does it do to entrepreneurs what does it do to business ideas so what impact does it have on success and what impact does it have on failure.

[Shyam]

See when you viralize something what are we trying to do… virality is basically making everybody act in a particular way acknowledge a particular thing and amplify that thing to bring in more people in the investment world. This virality means you are bringing in more money into a place where that money should not be. What would eventually happen is when people realize that too much has happened, smart money will move out first and all the late money which for lack of better phrase I would call dumb money will get sucked and lost.

It’s like a shredder… you are putting notes into a machine thinking that it’s an ATM and it will give you back money anytime you put all the notes inside and you look up and then you realize that it’s a paper shredder… this is what popular trends mostly turn out to be. So virality which has now got nicely conceptualized… see actually you have to conceptualize something very clearly but virality is basically where you create a mania whether it was tulip mania or whether it is Bitcoin today or it is some other thing related to recency – then it tends to be more powerful today than it was 20 years ago and it will become even more powerful going forward.

Which means that if you catch a popular trend and if you are seeing it mature you must be very scared. It’s like seeing a cyclone in the eye – even if you see it on your monitor you should still be scared. So there could be a small section of people who catch the popular trend very early, they will be successful because they will leave before the party ends… remember that most people come late and stay on when things become too hard to handle. That is why popular trends tend to scare me because I have seen the popular trend kill lakhs of investors financially and today it’s probably going to kill millions of investors and tomorrow it may kill crores of investors, because as more and more Indians become financially active and participative, then the popular trends are going to become even bigger and they will probably cause more damage than in the past and that is why they scare me.

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Q3 Understanding Your Circle of Competence

[Vignesh]

…and just to follow up on that can you tie this with say something like understanding your own circle of competence and also understanding what are some biases you have in your circle of and then start investing and thinking about their money differently but there are some time-tested ideas some time-tested mental models that they will have to learn the hard way they either know it before and they believe in it so deeply that they avoid making mistakes or they make those mistakes and learn the hard way that I should only understand what is within my circle of competence or I should not have any hindsight bias I should not have any availability bias or anything like that right so so can you talk a little bit about what are some mental models that they need to consider when they are going and making these sort of investment decisions early on in their careers.

[Shyam]

See the first thing that an investor must be clear about is what is his own circle of competence what is he really good at. What is his pain bearing capacity that’s the second point. The third point is how much time does he have? A person who is let’s say in his early forties who has to send his kids to study in two years cannot take all his money and put it in the equity market today. He needs to keep that money away so you have to see your circumstances. What you are saving and investing for what kind of risk appetite you have what’s the nature of your regular income is it something you’re going to have for the next 20 years or you are a cricketer who’s playing IPL and making crores of rupees or somebody in a similar vocation which has a shorter cycle but a very impactful cycle. So understand yourself and based on your understanding of who you are what are you good at? What is giving you your capital? How long will you be able to get that capital? What are you using that capital? For what is that capital being purposed for? How much time do you have with the capital? Do you need that money for your purposes then you decide what is your investment path.

You cannot see what somebody who doesn’t need money at all is doing and try to emulate most of India’s super rich investors are in it like it’s a sport. Now somebody who is running towards life goals and who has so much to do, should not be blindly copying somebody who has no purpose… so your model is something which is unique to you, your mental model should form based on all these aspects it’s completely personality centric. And even the risk you take must align with who you are now if I go and try to jump off a plane even with another fellow that doesn’t sit with my personality I should never try it. There are lot of people who go in flights and then you know they have these they jump and another guy will open a parachute and he will bring you down and land you… even to do that you need personality. Now I know I don’t have it so just accept it and do something else.

So in the investment world also understand your personality and do things. There are people who have this personality to do that jumping but their life situation doesn’t allow that… they have responsibilities which are very very specific. I will give you two examples which completely shocked me. One was somebody I knew who was highly accomplished who went into a trek in Switzerland and then all of sudden saw a nice water body and he felt like taking a nice dive so he removed all his clothes and kept it on the side and took the dive because of some temperature shock he never came out… and I seen the same episode happen in India also but it’s not a temperature shock it could be something else we don’t know what it was.

When you make an investment also there are lot of people who make these blind dives emotional decisions where they throw their money into a situation in which they should not be a participant.

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Q4 Friends, Family and Crowdsourcing Models in Funding

[Swami]

So this brings me to a very interesting you know concept that is happening now in India which is when you really do these startups, young companies there is friends and families wrong there is a crowd funding wrong okay and is that not something that you know what you are telling you know is so relevant because you tend to get these kind of things saying that okay you know why don’t you participate in a friends and families round, why don’t you participate in a crowd funding model okay and when you actually don’t have the right you know purpose and objective you then tend to actually you know what is your pain bearing you say right… so then suddenly you are shocked and this just kind of affects you and pretty much also affects you when even when you are a promoter and entrepreneur not knowing what risks you are taking right… so there’s a you must have seen these situations both as a angel investor, both as a you know portfolio manager and is that not true and is that not something which people should avoid.

[Shyam]

See I think you have to understand the nature of the business very very clearly before you get into something. Capital can be very easily lost in businesses. Businesses can run out of capital very fast… especially in the high burn entrepreneurial era that we live in cash can burn so fast and the rate of replenishment is never going to match the rate of work. so I think that middle-class savers people who are saving and investing for clear purposes should avoid it. there is no doubt in that. and there should be investment vehicles that should be created for people to participate in them today you have the AIF as a model but it clearly knows that somebody who has one crore is the base level participant.

So I believe that your risk taking should not be out of your zone of comfort, that’s very clear. because the entrepreneur is your friend it doesn’t mean that you have to give him money. I don’t think this dinner party conversation should lead to private equity investments or venture capital or family and friends. you should be behind your friend but you should ask yourself whether you have this appetite you should have the spine to take a loss, should have the stomach for a loss right. if you don’t have it then I think it’s best that you remain a friend and don’t become a co-investor. your familiarity with a very high risk taking person should not make you follow the same thing I have always said this even to my friends that you know sometimes I may be out of depth with an investment… don’t follow me because I may make a mistake and I may walk out of it and every 5-10 years there will be something which will happen like that. however hard you try some things will go out of hand.

But when you copy you will not be able to control this decision. but yet I think that this temptation to be a part of what others are doing… to clone is extremely high and fear of missing out which we call as FOMO is very high when 5 people put, the 6th fellow has to put his hand in whereas his situation would not allow that… he would have kept money for his daughter’s college and he will take that and put it in private equity from which you can never get it’s like samudra manthan you don’t know when it will come out… so but people put money there thinking that no no no whenever I can’t I can dip and take the money it doesn’t work that way so I think that that is something that people should be very very clear about and you should say no to what doesn’t suit you.