Crowd is right on trends, but wrong on ends: Nimesh Chandan of Bajaj Finserv AMC

Chandan says he doesn't review his stock portfolio annually and rarely sells anything unless there are any major turning points in the stock or the markets. His portfolio is largely devoted to equities (80%), while the remaining is invested in fixed income and liquid assets (15%) and gold (5%). Around 50% of his equity portfolio comprises direct stocks bought in 2005-2006, while the remaining is in mutual funds (MFs).  In an interview for the Mint series ‘Guru Portfolio’, Chandan opens up about his investing style and how he waits for the 'right' overreaction from the crowd. Edited excerpts from the interview:

Can you tell us about your career journey?

I started my career as a research analyst for a company called Strategic Capital (StratCap Securities). I was the first equity analyst for that company. The business was about institutional broking and investment banking. And till 2003, I was looking at IT sector and pharmaceuticals post that. In 2003-end, I came across the term behavioural finance and started reading up on it. I went through some research papers. And I got very intrigued by it and then saw it as a common thread that connects all the good investors that I admire. And so I decided that I needed to know more about it.

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But I thought that, being on the sell-side—where you just write recommendations and send these to your clients, will not really suffice in making me understand the psychology of investing. So, I decided to come to the buy-side from the sell-side and began to hunt for a job in the MF industry. Now, I have spent about 17 years in the MF industry, including 14 years with Canara Robeco AMC (asset management company). For the last two-and-a-half years, I have been at Bajaj Finserv, where we have established this AMC, focusing on the behavioural edge.

How have you applied behavioural finance in your investing?

I entered the market in 2000 as an IT analyst. On 10 April 2003, Infosys plunged 40% because of bad guidance compared to what the Street was expecting. Some of my colleagues came and asked me what I would do next now that nobody will require an IT analyst. But there was so much fear in the markets that valuations had become attractive for the stock. Later, I realized that it was the best buying opportunity for that company because the market had severely overreacted on the downside. Post-that fall, Infosys actually became a multi-bagger. So, some of these lessons from instances of the market being too greedy or too fearful had an impact on my thinking. And maybe, there is a slight contrarian streak in me. I developed a new investment style—waiting for the right opportunities when the crowd overreacts. And it always happens every few years. Every asset class, in cricketing terms, gives you a loose delivery to hit a six or boundary. The crowd is right on trends but wrong on ends. You have to wait for the right overreaction from the crowd.

Can you explain this with a broader example?

In 2004, the markets hit two lower circuits when the election results was not what the market was expecting. In hindsight, that was a brilliant buying opportunity. People had overreacted quite negatively. In 2006, when the US Federal Reserve was increasing interest rates, I remember Sensex had come down from some 12,800-levels to 8,800-levels, within a matter of two-three months. Ironically, that was the first quarter when India actually recorded more than 9% GDP growth. But people ignored that. During the 2008 financial crisis, obviously there was a reason for the market to fall. But at some point of time, it was over-exaggerated because India's fundamentals or economy was not that affected. You can see the same during the Euro credit crisis in 2011, the taper tantrum in 2013, demonetization in 2016, and covid pandemic in 2020. These were equity market opportunities that come knocking almost every two-three years.

Whenever the crowd is focused on one asset, there is momentum and it becomes a glamour asset. People overvalue it, expectations are very high. At the same time, there will be some asset or a theme or a sector that is getting underpriced because it's just being ignored by people. It is not exciting for them in the short-term. And that's where you should go fishing.

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How do you see this playing out in current markets?

I feel that greed is going up and patience is coming down. People have seen very good returns in the last three years. And now there is greed to take more and more returns from every move. So, people are moving into F&O (futures and options) or leveraging their bets on short-term stock movements. Their patience is thin and they ignore companies with good fundamentals if they are going through a lean patch that is temporary.

I think that's where the opportunity is. We identified quality as a style, where the premium of quality stocks compared to the market has become quite low, so that spread has become quite thin. And purely because a lot of these quality stocks of, say, private banks or consumer goods firms have not done well in the last year. The numbers were below expectations. But within this pool, there are many structural stories. You can take advantage of that.

What’s your view on small- and mid-caps?

People are excited about buying a small-cap company. They should rather be excited about a good business, whether it is in large-cap, mid-cap or a small-cap. But investors also soon start generalizing that all small-caps are good when there is a bull run or that they are all bad when the bears take over. When markets generalize,  many investors end up paying the wrong price. One can take advantage of the situation though. When market has generalized that this whole category is good, companies that may not deserve a good valuation may also be at a very high valuation. You're lucky if you hold those firms and make money.

Have you trimmed mid- and small-cap positions in the last year or so?

I am lazy in terms of selling. I kind of endure the corrections when the stocks go through it. I do a lot of thinking before putting in my money. I do a lot of research beforehand so that I get a good entry price.

What about your exposure to fixed income (debt) and gold?

Seven-eight years back, there were these tax-free bonds which were yielding 7.5-8%. And the tenure of these bonds were 15-20 years. I thought that was a fantastic time to lock-in a yield for a longer-term. So, a large part of my fixed income portfolio is these tax-free bonds, with an average yield of about 7.8%. In gold, I think I ended up timing it well. In March 2023, when the indexation benefits were expiring, I put a good chunk in gold at that time. And that has benefited me. Suddenly, gold has done well. I was not expecting it to do so well so quickly. And this was not the right environment. I was expecting that gold would start doing well as interest rates start going down. But it was an additional bonus that it started doing very well soon.

How you have navigated through different market cycles?

You never learn in the first cycle. You only learn in the second cycle. I started my journey in the markets in 2000. It took one cycle to see how deep the market can go in fear and how high the market can go in terms of craziness. I started during the dot-com bust. Then came the 2002-2007 bull run. Some infra companies started at three or four-times price-to-earnings multiple in 2002-2003 and ended at 40-times forward kind of a multiple. So, it was that kind of a move. So, you learn through one cycle how crazy it can get. In the second cycle, you actually start creating wealth for yourself.

Also, when you start in a bad market, your incomes and savings are not very good. By the second season, where the second cycle comes in, you have some savings. And then you can be a little more intelligent or mature investor. And that's when in the second and the third cycle, you make very good returns. The third cycle was approximately in 2013. I think August 2013 was a very bad time for Indian markets because of the taper tantrums that came in. So, that was a good opportunity.

But when one starts in a bad cycle, it can also colour one’s psyche.

From 2003,  I was still an amateur student of behavioral finance, but it at least made me very conscious about my biases. And the more I read about it, the more I understood why I am making these mistakes. Why I am anchoring on a bear market only or why I am anchoring on a bull market valuation. Things like confirmation bias and all. I am not saying that I don't make any emotional mistakes or so. I still do. But at least it got me conscious about what biases can come in.

Very early in my career, I learnt that if you put a process around your investing, whether you're doing it professionally or personally, it helps you safeguard against greed and fear and overconfidence that you may run into during investing. So, process becomes extremely important.

But does process sometimes override intuition?

What I also see value in is expert intuition rather than just intuition. Expert intuition is slightly different because it is honed over a period of time by your experiences and what you have consciously learnt from those experiences. So, investing is a business, which constantly gives you feedback about your decisions. If you take those feedbacks positively, you accept where you're wrong and identify where you went right. And then you start learning from it slowly. That's expert intuition. So, expert intuition has a role. I like what Daniel Kahneman spoke about intuition. He said delay your intuition. First gather the right data, which is your process. Do your analysis based on this process. Then close your eyes for five minutes and see what your intuition is telling you. If you immediately let your intuition intervene and then look at the data, then you get biased. First, collect the data that you want.

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How are you structuring your team at Bajaj Finserv AMC?

In terms of analysts, we consciously took a call to have a slightly different structure than the industry. We did not go for a specialist. Instead, we have a generalist for each of the different sectors except pharmaceuticals, where we hired a specialist who also works as a generalist. So, we went for the generalist because rather than having an analyst who can analyze only one particular sector, we wanted somebody who can come up with ideas about any business. Somebody who can actually look at different businesses and then find out the key points to focus on in each business and then go on from there. See, we already have broking research reports on companies coming from specialists. We need somebody who can think like a fund manager in this team. It also helps me groom fund managers of the future. Somebody who can look across businesses, compare them and see where the opportunity lies rather than giving me the best idea for a sector which is going through a downturn.

Going forward, we also want to have strategy-based teams. For example, with the first fund we launched, the flexicap fund, we have a strategy of mega trends investing. So, we will build teams which focus on identifying mega trends through different lenses like technology, regulatory, consumer trends and put all that research out for our fund managers to use that for investing. So, we want to build strategy-based teams rather than splitting them on sectors.