A leading equity strategist, respected by market participants for his maverick approach and sharp views, Saurabh Mukherjea, as the founder and chief investment officer of Marcellus Investment Managers, has grown from strength to strength. In this interview with bl.portfolio, Saurabh shares his investment philosophies, approach and experience for the benefit of readers. Edited excerpts:
Who were your earliest investing influences, and why did they influence you?
The first influence was my first employer when I graduated from university, Sir John Kay. John encouraged me to think for myself rather than being swayed by whatever the latest fad or fashion of the day is. The second influence was reading Roger Lowenstein’s excellent biography of Warren Buffett titled ‘Buffett: The Making of an American Capitalist”. That book allowed me to see that microeconomics and investing are allied subjects and for the first time I started understanding how I could put my training in Economics to practical use.
What drew you to economics, and why didn’t you pursue a Ph.D or post-doc in economics? How did you venture into equity research and investments?
I started studying Economics in school in 1991 when the Indian economy liberalised in the wake of a Balance of Payments crisis. Around that time my parents migrated to the UK. I was immediately struck by the contrast between the two countries. In specific, people in India worked much harder than people in the UK but earned much less than people in the UK. I wanted to understand why that was.
That question took me to the LSE. Whilst at LSE, a professor pointed me towards Sir John Kay’s firm, London Economics. Working in that firm and reading Sir John’s books taught me how companies and financial markets functioned. When I was 24, a colleague of mine told me to read Buffett’s biography (the one I have referred to earlier). Reading that convinced me that I could put my knowledge of economics to work in the stock market. In contrast, doing a Ph.D would have meant veering away from the practical world (where I could apply economics) and instead go deeper into theoretical thinking. I could not build up the appetite for that after having studied at the LSE for 4 years.
What was your initial experience with stock investing?
Before I began working as an equity analyst in the stock market in London, I passed my CFA exams. Studying for those exams made me realise that you needed to research stocks in-depth if you were going to make money from investing on an ongoing basis. So, before I made my first stock-specific investment, I invested in a tracker fund that tracked the British stock market. That investment doubled on me over the next four years.
In terms of investing mindset, how would you describe yourself on the following parameters?
Risk tolerance: High. Marcellus manages concentrated portfolios which go through deep drawdowns.
Emotions: Resilient. My colleagues and I have worked together for nearly 20 years and we have been through many ups and downs together.
Long-term vs. short-term focus: Very long term. We aim to compound our clients’ monies and our own monies over horizons of three years or more.
Information processing: Focus on the signal and cut out the noise. We pay minimal attention to high frequency macro data like GDP growth, interest rates and inflation.
Patience and discipline: Research stocks as deeply as you can and trade as little as you can. We typically hold stocks for 8 years. In a given year and in a given portfolio, we buy/sell only 1 or 2 stocks
Learning and adaptability: Try to be a learning machine. Aim to read one book per week. Seek out other wise people and spend time with them in deep, focused discussions. Cut out social media completely from your life.
In the world of investments, who do you admire and why?
Pulak Prasad for being a great investor and for writing an outstanding book, ‘What I learned about investing from Darwin’. Samit Vartak for having the courage to return to India and then build a successful investing firm, not in Mumbai, but in the booming city of Pune. Terry Smith at FundSmith and the folks at Lindsell Train for running highly concentrated portfolios over several decades. It takes a lot of courage and character to do what they do.
Could you summarise your investment strategy in 75 words?
Buy clean, well-managed companies which have built dominant franchises. When their share prices crack, double or treble down on the position. Don’t sell unless the management does something corrupt or stupid. Never sell because of valuation.
Can you name your favorite “forever stock” and why?
As I have explained in my book ‘The Unusual Billionaires’, Asian Paints is Indian capitalism at its best. It’s a tech company with ferocious competitive advantages (around tech) masquerading as a paints company.
Share your most significant successes and failures from the past decade.
We identified GMM Pfaudler as a multi-bagger nearly five years ago when it was a fraction of its current size and when it was still an Indian subsidiary of a German company (GMM). We understood that the company’s proprietary technology and its sticky relationships with pharma companies meant that the firm had formidable moats which would allow it to compound profits at a rapid rate.
In terms of failures, although we understood that as Relaxo scaled its business rapidly through the Covid years, the firm was outgrowing the promoter family’s management bandwidth, we did not do anything useful with this point of view. Specifically, we did not try to persuade the promoters to professionalise the management of this rapidly growing company. That lack of initiative on our part cost us as Relaxo made some missteps in the summer of 2022.
You and your team have built Marcellus over the years. If someone had ample capital, what obstacles might they face in competing directly with you?
Building a profitable asset management business is not about capital; it is about talent. Unlike in the IPL, the best talent is not for sale in the asset management industry because the best talent wants to be its own boss. So, the tricky thing about building successful asset management businesses is to give the talented staff a significant stake in the firm and yet run the firm like a well-oiled professional services firm like, say, McKinsey. Just like no amount of money will allow you to recreate a McKinsey, capital per se will not allow a potential rival to compete with us.
As a professional fund manager, do you believe that AI can fully replace human managers and consistently deliver market-beating returns in the long term?
Systematic investing has been around for nearly two decades. It has made massive inroads in the developed world markets. As the Indian market develops and becomes more liquid, systematic investing will grow in India as well. Marcellus’ MeritorQ portfolio is using systematic investing techniques coded into Python to successfully beat the broader indices by a country mile.
Disclaimer: Please note that through Marcellus’ PMS portfolios, Saurabh is invested in all the stocks mentioned in this interview and so are his parents and Marcellus’ clients