← Excess Returns 
Loading summary
Transcript64 lines
- [00:00]
A
Compounding is convex on the upside and concave on the downside. The true power of compounding lies in this positive asymmetry. The true power of compounding lies in its power which enables you to be wrong half the time as an investor and still end up making spectacular returns over the long run. A long term investment horizon must be married with an investment process that is willing to continually question the core investment thesis. Once AI gets integrated into the application layer, you will suddenly start seeing a sharp margin improvement in the actual users of the AI. That's the S&P493. That is when a lot of new winners will start emerging. Do not just buy and forget. You have to buy and monitor.
- [00:48]
B
You're watching excess returns. I'm Matt Zigler. Bogamil Baranowski is with me today. We're talking to the managing partner at Stellar Wealth Partners India Fund, a fund modeled after the original Buffett partnership fee structure but focused on listed Indian equities with a long term fundamental and value oriented approach. And he's got books the Joys of Compounding to the Making of a Value Investor we're going to dive into all this and more because candidly, Bogumil and I were already talking to each other about these behind the scenes, so we wanted to have the man himself on Gotham Bade welcome to Excess Returns.
- [01:22]
A
Thanks by Martin Bogumill. Looking forward to our interaction.
- [01:26]
B
Wonderful. Let's dive right in. Let's talk about the book and let's talk about just the impetus for writing. I'm going to ask about both books, but you can dive into either that you want. How did you decide on the time period to cover? How did you decide on this topic? What brought you to these pages?
- [01:42]
A
I'll talk about the second book, the Making of a Value Investor and the genesis of the second book actually lies in the response to a tweet of mine in August 2022. I often used to post on Twitter and LinkedIn about the benefits and importance of maintaining an investment journal and one of my followers on Twitter actually recommended to me that why don't you publish all your learnings and insights from your journal into a book? So I found this suggestion to be very helpful and interesting and shortly thereafter I began work on writing the book and it took me around one year to complete and the book was released in October 2023. And as regards for the Joys of Compounding, that book has been in publication for more than six years now. And initially I'd self published this first edition of the Joys of compounding, and even that has got a similar backstory there. Also, what had happened was that two of my followers from Twitter, they'd actually traveled all the way from India to Salt Lake City, Utah when I was based earlier to meet me and thank me for what I was posting on Twitter. And they recommended to me, why don't you publish your learnings into a book? So again, pretty similar parallels in both the situations, but I guess listening to the recommendations of my readers did pay off in both the cases.
- [02:56]
C
You've been on talking billions a bunch of times, I asked you a thousand questions and I have more. But one of the things that really stayed with me was your love for keeping a journal journaling. And that's an inspiration for this book. But for the benefit of this audience, tell us why it's such a powerful tool for you as an investor to keep a journal.
- [03:14]
A
So I spent $10 on buying a journal in late 2014 and I consider that to be one of the best value investments I've ever made. Ever since that time I've been keeping track of my investing decisions and the subsequent developments in an investment journal. And my writing frequency in the journal actually witnessed a sharp rise from 2018 onwards. There is a reason for that. The biggest learnings of investing always come from a bare market. As an investor, you evolve and develop the most if you're a really passionate, eager learner and you are able to document your learnings and mistakes in a bare market. And you know, from January 2018 to March 2020, for 27 long months, we had a severe and very big bear market in mid cap small cap stocks in India. That is the area of the market in which I specialize. And during that particular period I really evolved as an investor. So the making of a value investor covers the evolution of my journey as an investor during that time period and my learnings and reflections along the way. Now regarding the benefits of journaling. So I receive a lot of valuable feedback from revisiting the journal from time to time, and I use that insight to correct my biases. As Charlie Mangares taught all of us, it's a moral duty for all of us to be as rational as possible. None of us can be 100% rational, but we can always try to minimize our previous, minimize our mistakes, and avoid repeating old mistakes. This is where the journal really comes in handy. It has greatly helped me learn a lot about myself, both as an individual and as an investor, and the growth and development as a result has been very, very beneficial. So I've also maintained an archive of the investor behavior and media commentary during various episodes of market panic over the last 11 years. And I find it highly beneficial to refer to this information whenever the market undergoes its periodic sharp corrections, because human behavior and human nature in the markets has not really changed much over time.
- [05:20]
C
I'll add real quick that our memory is finicky and we kind of rewrite things in our head. I definitely do. So if I don't write it down as it's happening, when it's happening two years down the road, some things seem obvious that I didn't know at the time. So keeping a journal, it's very humbling to go back and say I really had no idea what's next, how this is going to play out, and you can learn a lot from it.
- [05:44]
B
I especially, and you really caught me with this Gautam was the, the idea of the reflective nature. And I think that really comes out beautifully in the book. When you talk about documenting what's happening in the markets at these individual points in time and what investor sentiment didn't just look like, that's just what was in the headlines, but what it feels like. That reflective aspect of looking at the world around you. Can you just explain that, how investors can go about this process without judging it?
- [06:16]
A
I think first of all, you used a very keyword there without judging it, because as an investor, you know, it's our duty to be non judgmental. There are multiple roads to heaven in the stock market, but often I keep hearing different investors, you know, just talking over each other because people have got different investing styles. Some focus on momentum, some focus on deep value. Some focus on growth at a reasonable price. Some focus only on special situations. There is no one right way to investing. The right way for investing is one which you can stick with for a long period of time. That is the one you have to basically stick with. You mentioned something about investor sentiment and that is something very, very important to judge as an investor. Because fundamentals do not decide or determine the stock price at a given point of time. Demand and supply does. And that in turn is driven by the prevailing investor sentiment. And there are two very effective ways to measure investor sentiment in the markets. First one is initial public offerings IPO market. And second is quality of investor portfolios. I'll talk about the first aspect, initial public offerings or IPOs. They are a very effective indicator of prevailing investor sentiment. So during stage one, good companies come out with IPOs at cheap valuations. In stage two, good companies come out with IPOS at expensive valuations. And in stage three of the IPO market, that is when you have bad companies coming out with IPOs at ludicrous valuations which are heavily oversubscribed by retail investors whose surging presence in the markets is a late cycle indicator. And very high levels of margin funding in the primary and secondary markets is a predominant characteristic of the final blowout phase of a bull market. So in the US markets also right now, if you observe carefully, you'll see huge levels of unprecedented levels of margin funding taking place in the stock market, which means that there is speculation flowing all around. So this is a time to be actually very, very careful. The second way to judge or understand the prevailing investor sentiment is by the quality of existing investor portfolios. So as a bull market matures and has, and once the bull market has run a couple of years, like in the US market, the AI bull market has been invoked for more than three years now, what happens then? Multi year bull markets is that investors should start shifting their portfolios from high quality stocks having high returns on equity to lower quality stocks having higher growth but inferior return ratios and inferior management quality. Then they move their portfolios further to commodities. Then they move their portfolios further to deep cyclicals. Then they start moving their portfolios further to turnarounds that are loss making. Then they further move their portfolios to illiquid micro caps with limited track record of operations. And finally they move their portfolios to companies with promises of rapid revenue growth, but which are resorting to large amounts of debt. At this point of time, the bull market usually tops out. And at the end of the euphoric phase, most investor portfolios have only junk stocks left in them. And in the subsequent bear market that follows, both quality and junk stocks fall. Quality eventually bounces back in the final recovery, whereas junk stocks lie low for many, many years until the next bull run takes over. And it is only after going through the pain of a couple of such market cycles that an investor can finally develop the discipline to avoid going down the quality ladder to chase quicker returns in bull market. So you have to actually go through this experience of losing money in a bear market through your junk stocks to understand the importance of investing in quality.
- [09:54]
C
Related to that. I'm very curious about this idea and you and I talked about it long term investing, five to seven years. There are two sides to it. One, very few people have that time horizon. But you point out something really interesting that I think belongs in this conversation. That the world is so dynamic that holding stocks over a long period of time is challenging because the management's changed, the environment changes. You almost say that you don't get married to your stocks. Can you talk about that not being too complacent?
- [10:24]
A
So Bergamil, it pays to have a long term view, but a long term investment horizon must be married with an investment process that is willing to continually question the core investment thesis. Investors should exercise active patience, that is diligently verifying their original investment thesis and doing nothing until something materially adverse or negative emerges. You know, many a times what happens is investors become complacent in bull markets and stop analyzing their holdings when the stock prices is going up. They resume analyzing in detail only when the stock prices start falling. But you should not do that. Don't analyze your stock holdings only when the prices fall. Just because the price of your existing holdings is going up, it doesn't mean that there's nothing wrong taking place with the existing business. And this is particularly prevalent in bull markets. The whole idea behind writing the second book and the mistakes learned during a bear market was to avoid those mistakes which actually occur at the fag end of a bull market. So basically, because investor behavior does not change much over time, you end up making the same mistakes again and again in bull markets. So the idea is to avoid doing all that at the same time. Be do not just buy and forget. You have to buy and monitor because things are changing very, very rapidly. And if the terminal value of your business gets disrupted, then the PED rating can be very sharp and stiff. So you have to always be on the lookout for that particular change.
- [11:54]
C
Can I follow up real quick? I'm writing a piece that will come out in the next few weeks and I call it A Value Investor's Dilemma. So I have stocks in my portfolio that I bought when people didn't like them. In my mind, they were half off, no matter what. Whichever way how you look at it, at some point people are loving these stocks. They're higher, the valuations expanded and I have a dilemma, which is I still want to hold them. I like the businesses, but the valuations make me uncomfortable. Do you have some thoughts about it? Because it kind of rhymes with what you shared. There are moments where you can be too complacent, but you don't want to get out of a good position that you will not go back to.
- [12:29]
A
And this is where maintaining a diversified portfolio comes into play. So I've talked about this in the second book as well, that by having a diversified portfolio, basically you are able to participate in a Variety of tailwinds while resisting FOMO fear of missing out. Many times what happens in bull market especially is because your high quality stocks, they tend to underperform and the more speculative names start outperforming. We are very tempted to sell our family silver and go down the quality curve to chase quicker returns. But by having a diversified portfolio, what happens is while you are quality stocks are taking rest, some of the other factors which are exposed to in your portfolio, they start outperforming. So this helps you maintain patience and remain disciplined in bull markets. So you know it's one of the biggest mistakes which investors can do is to sell out of a quality stock too early. So you know these stocks tend to, you know, find favor first just as we are emerging from a bear market. And you know they are bid up to full valuation levels based on current year earnings. So they will look optically expensive. The stock prices will take rest for a year or two. But you have to maintain patience because what happens in these quality stocks, if you notice the price pattern of stock price pattern of these high quality stocks from the past, they go up sharply in a span of one or two years. Then the stock price goes sideways for a few years while the fundamentals backfill into the valuation. And that is the time when the other stocks in your portfolio start generating returns for you. So I think you should be very ultra, ultra patient with these high quality stocks in your portfolio. Don't sell out of them too early. And as long as the terminal value is not being disrupted and as long as the competitive advantage of the business is still in place, I think you should be very patient with such investments.
- [14:15]
B
I'm going to read one of your quotes because I feel like it's also tied to this concept. You said compounding is convex on the upside and concave on the downside. Positive asymmetry. Few understand this, but the day you do it will change your investing perspective forever. In the context of Bogomil's question especially, can you elaborate on that a little bit?
- [14:38]
A
So this is one of the biggest eureka moments in my investing journey of the last 20 years. And I'm very happy to share this with your audience. In fact, the biggest learning from this statement is actually found in the kind of stocks which Bogomil specializes in, that is quality stocks. So I'll explain this with the help of an example. So compounding is convex on the upside and concave on the downside means that compounding increases at an increasing rate on the upside and decreases at a decreasing rate on the Downside, positive symmetry. And I'll explain this with the help of a numerical example. Let's say that you have got two stocks in equal rate in your portfolio. Stock A, stock B, stock A goes up by 26% in year one, whereas stock B goes down by 26% in year one. So net net your overall portfolio return is zero. If a stock goes from 100 to 126 while the other stock goes from 100 to 74 net and you have made zero returns for the first year. Now, let's assume that the same phenomenon takes place for 10 years in a row. What do you guys think will be your overall portfolio of CAGR at the end of 10 years? At the end of year when it was zero.
- [15:46]
C
Right.
- [15:47]
A
So at the end of 10 years, what would happen to your overall portfolio return? How much CAGR do you expect to make?
- [15:53]
C
It will start to turn positive at some point and very soon. But the number you have to tell us.
- [16:00]
B
I could take out the calculator, but I know you already know this.
- [16:04]
A
The overall portfolio level CAGR will be 17.6%, even though stock B went to nearly zero. And this is the true power of compounding, in my view. Most of the investing authors and various investing community people, we often talk about compounding power in terms of saying if a stock compounds at 20% for 25 years, it becomes a 100 bagger. Or if a stock compounds at 26% for 20 years, it becomes 100 bagger. But in my view, the true power of compounding lies in this positive asymmetry. The true power of compounding lies in its power to which enables you to be wrong half the time as an investor and still end up making spectacular returns over the long run. And this is tied to the key investing principle, which Stanley Dragon Miller has also taught us. You have to let your winners run. And Peter lynch has said it even more beautifully. Water your flowers and cut your weeds. So basically, let the since the big winners are so far and few in the stock market, the stock market is characterized by power law. The US market, for instance, from 1926 to 2016, only 4% of the listed stocks accounted for 100% of the wealth creation. In India, the difference is even more stark. Between 1990 and 2020, in 30 years, only 1% of listed equities accounted for 100% of the wealth creation. So once you have found the goose that lays the golden eggs, do not kill the goose. You have to hang on for dear life to your big winners, because they are the ones which will drive the bulk of the returns in your portfolio. So once you understand this power of positive asymmetry and the fact that investing is a probabilistic activity, it basically empowers you to not be too hard on yourself, not be too harsh on yourself. And occasionally some of your stock picks go wrong. It is perfectly par for the course. But you have to be very patient with your big winners. Let them run. As long as the earnings growth is in place, the competitive advantage is in place, capital allocation is sound, management is treating minority shareholders friendly in a friendly manner. So then you just be patient with such investments.
- [18:08]
B
Okay, wait, you said you invoke Stan Druckenmiller and you invoke the go. The, the golden goose. I will point out because I'm really curious about this here. Here in here in the US we have golden geese and they've been the mag seven for a while and liquidity inflows and all these things, certainly you can argue they can help. Mike Green's been a proponent of explaining this quite quite handily, quite interestingly I'm curious though, because you have an expert expertise in Indian markets and I don't think the markets behave, I don't think human behavior is different. Can you explain the Druckenmiller approach and sort of the liquidity idea and just through the lens of like Indian markets, What's the nuance here?
- [18:49]
A
So, you know, I'll just speak quickly about Drucken Miller for those who are not aware of his investing track record. He actually compounded capital at 30% CAGR for 30 years. So one of the greatest, you know, traders come investors, you know, for the last many decades. And for Stanley Draken Miller, the single most important metric that he tracks in the market is liquidity. For him it's all about liquidity, liquidity, liquidity. So you know, he basically positions himself on the right side of the market cycle. In the second book in the. Which talks about bare market in bare market in India, I've actually talked about this in great detail that however good an investor you may be, but if the, but if you're a mid cap, small cap focused investor and if the market cycle, I.e. liquidity is not in your side, even after your best efforts, you will struggle to make returns. You have to be just patient and wait out that difficult period and wait for the market cycle, that is liquidity cycle, to turn back in your favor. Now I invested in the Indian market, so I'll attract liquidity only in that particular market. And in the Indian market, liquidity is driven by two kinds of flows. One is the global investor flows or what we call FII foreign institutional investor flows. Second is DII Domestic Institutional investor flows. Domestic institutional investors refers to pension funds, insurance companies, domestic equity mutual funds. There was a time before 2020 when foreign investors used to dominate the liquidity flows in the Indian market. But ever since April 2020 it has been the individual investor who has been powering the bull market in India. Just to give you some numbers here, the monthly investments in domestic equity mutual funds has grown from half a billion dollars in April 2020 to $2.5 billion as of November 2025. So a 5x jump in monthly investments in domestic mutual funds by the investors in five and a half years and there is a massive trend towards financialization of savings in India. With improving literacy, with improving digitization and prevalence of smartphones and better awareness about equity investing, the individual investors in India are really participating in the growth story of the country in a very big way.
- [21:00]
C
I have an anecdote about Druckenmiller. I used to have lunches in Manhattan and Druckenmiller must be a man of habit because he would have lunch in the same place on many occasions and I would sit there with a friend many tables away. I never got to talk to Druckenmiller and he would always have lunch, at least the ones that I got to witness with somebody famous, recognizable and people would walk up and shake hands and say hello to the celebrity with him but nobody knew who Druckenmiller is and I would poke my friend and would say that's Stan Druckenmiller. You work with Soros. He helped Soros break the pound back in the day and he has an incredible track record. More of a trader than a long term investor but either way incredible mind but almost unrecognizable on the street in New York in the middle of Manhattan. People didn't know who he was.
- [21:51]
B
But that's success when you get the.
- [21:53]
C
Table and nobody knows you respect. Right. That's the kind of billionaire I want to be. But anyway.
- [22:01]
A
Right region. Anonymous the best.
- [22:04]
C
Yes, yes, right. I don't know. I think he must have been laughing to himself that before have no idea who he is and I think he's loving it. Anyways, Gotam, I want to ask you about the experience of the bare market which the book is in to a large extent about and looking for the bottom and it's. It's always a scary time. I've lived through a few in the us You've witnessed the US ones but also the ones in India. I'm going to mention a quick anecdote. I remember at one of the firms where I worked we had this senior analyst, a lovely guy and the day he would go in and turn his 401k all cash, we knew this is the bottom. So I'm curious, what's your telltale in the markets? When you know where the bottom is, who do you look at or where do you look?
- [22:48]
A
That's a very good question Bogumil. So bull markets, a new fresh bull market usually kicks off with a few consecutive weeks and months of hugely positive breadth trusts, which means that the advance to decline ratio in the market has to be significantly a positive for a few successive weeks and months in a row. However, you will get to know the exact bottom only in hindsight. I remember in by middle of March 2020 when the federal Reserve had already announced big liquidity injections, still the markets were collapsing non stop till 23rd March 2020. That was the exact bottom in hindsight. But you know, fear is and pessimism is at, is at is at its absolute peak near the depths of a bear market. So you know, you not know the exact bottom, but you'll get a fair idea of whether a new bull market is about to start or not. And how do you understand that a new bull market is on the verge of starting? Now there are three ingredients for a new bull market to start. There has to be low valuations on depressed corporate earnings with strong capacity to recover and grow, and loosening liquidity from tight levels. Conversely, there are three ingredients for a bear market to begin very high valuations on peak corporate earnings and inflated margins which are starting to weaken and tightening liquidity from very loose levels. Today in the US market you have the first condition which is peak valuations, peak margins, peak earnings. But on the other side, the other piece is missing. The Federal Reserve has just announced a fresh amount of QE quantitative easing and they've also started cutting interest rates. So until the Fed tightens monetary conditions, you cannot really have a severe bear market in the us so be on the lookout for inflation to resurface in the future. If that does happen, that is when the Federal Reserve may start tightening again and that is when the combination of high valuations hits the wall of tightening liquidity. And you'll have a bear market which.
- [24:50]
C
Will begin real quick. And I don't know if it translates across borders, but I remember one of the introductions to Phil Fisher's book Common Stocks and Common profits. And it's something that I missed reading it the first time. But in that book, he wrote that the crises that we're going to have in the future are different than the Great Depression. In the Great Depression, the stocks went down 92% in the US between 1929, 1932, and actually the second half of it was the hardest for people that were jumping in ahead of a falling knife here. But Phil Fisher said that because of the policy that we have and the decoupling from gold, from the standard allows us to ease into this kind of pain. Is that something that happens in India as well when they ease into this kind of a market, not allowing it to brutally correct or it's something that's more of a US Phenomenon that we.
- [25:44]
A
Have to fundamentally different is Bogoville. So America is a capitalist country. India is a socialist country, even today, because more than half of the population in India still lives below the poverty line. So the Indian government honestly has a pretty, you know, I would say indifferent approach toward the stock market. They are not really pro stock market like the US Administration is. So, you know, in, in India, you don't have policymakers acting until there is a crisis of big proportions. So the second book, you know, it was not just the stock market crisis. There was a financial market crisis. We had a layman moment in India which took place in late 2018 when ILFS, a big financial institution, went bankrupt. And then there was systemic risk in the financial markets and in particular the banking system. That is when the government actually intervened. So the government of India does not proactively act to stop steep stock market declines. They only act when there is a crisis in the real economy, which actually took place in 2018, 19 and early 2020. That is when they took some really big, bold measures. But unlike the US Market, where the administration and the Federal Reserve, various governors start, step in to calm the market's nerves whenever there's a steep correction. In India that does not happen. And in the US I understand why this takes place. See, a large part of the U.S. government tax receipts are now driven by capital gains. And given the fiscal deficit situation in the US The US Government cannot allow the stock market to fall. They're compelled to keep the stock market high so that the capital gain taxes can keep flowing in to fund the deficits. So it's a very precarious situation, I would say, as far as the US markets are concerned.
- [27:26]
B
You certainly help describe the US markets as the public utility that it sometimes feel like they've become in that Framing. So it's extra interesting. I, I another quote from you or at least another idea. This is when it's appropriate or not appropriate to average down on stocks in a bear market. And I'm thinking specifically to the Indian example and Maybe in that 2018-2020 window, if you've got any examples. I'm going back to what you said before about watering the flowers versus watering the weeds with this. When you researched buying stocks in a falling market like that, what did you find?
- [28:03]
A
So from a risk management perspective, Matt, it is very important to distinguish between when it is prudent to average down versus when it is not to. So there are four conditions or four situations where you should not average down on declining prices. Number one, you should not average down on levered business models like banks. Number two, you should not leverage. You should not average down on operationally levered business models like commodities. Number three, you should not average down on businesses facing technological or technical obsolescence. And number four, you absolutely must not average down in levered businesses involving fraud. So what are the kind of businesses that you can average down in or buy on dips? You can buy structural growth businesses or high quality businesses on dips. And this again brings to the forefront of investing in quality. The biggest advantage of investing only in quality is that it empowers you or enables you to view market corrections as buying opportunities. Because if you, the moment you're out of quality in every market decline, you'll start, you know, wondering, you know, if, if my stocks will ever recover back. Then you're dependent on the markets. You're not depending on the core variable that is earnest growth to bail you out in the long run. You're basically depending on the kindness of strangers to bail you out. So this is the key difference between quality and non quality.
- [29:23]
C
What you're saying is that there's an underlying value and no matter how though the price goes, eventually you reach a point where it's worth going in. The kinds of situations that you describe are the kinds of situations that I personally tried to avoid. High leverage. I'm very uncomfortable of high operating leverage as much as it makes you look like a genius sometimes. And I'm definitely staying away from fraud. I actually broaden it. I call it questionable practices because fraud is such a big word and so many people will get away with so much before it's actually called even a crime. But anyways, if something feels questionable, I don't want to be a part of it. Gautam, I want to ask you about how you Think your investment philosophy changed in light of a bear market. And I'll ask that and I'll give you some context. I've worked with quite a few people a lot older than me. At some point I was 25 and I was working with 80 year olds that are no longer with us. And I feel like almost it feels like there's a limit to bear markets that any of us can live through. And if you have lived through too many, you get so cautious that you basically remove yourself from the market. And obviously that's an extreme. But I'm curious, the market you describe in the book, how has it shaped you?
- [30:36]
A
Bogomila Personal experiences in the market over time eventually lead us to our individual investing styles. We are all a product of our history and our personal experience and the joys of compounding. Actually wrote about this that I was very fortunate and lucky to deploy a decent sum of Capital in December 2013 for the first time, just as a new bull market was about to begin. So from December 2013 to December 2017, there was a big bull market in mid cap small cap stocks in India. And during that phase I used to take very, very high risks. I used to invest in illiquid microcaps, deep cyclicals and commodity stocks. And I was very fortunate that I made a good sum of money using that highly risky investing style before the bear market began. But the bear market from January 2018 to March 2020, that particular bear market ingrained in my mind the significance of resilience and longevity, which is the key to compounding. And by the time the bear market ended, I had evolved from being a highly concentrated investor who is to focus on statistically cheap securities to one focused on quality and prudent diversification. And the bear market brought about a profound shift in my thought process as an investor. Henceforth, I would focus on return of capital before return on capital quality. And a focus on capital preservation would take precedence for me henceforth. I also learned a very big lesson for the rest of my investing career, which is that no matter how well you have prepared and calculated your odds, risk surfaces from places which you cannot imagine. Even if you are very careful in crossing the road by looking left or right, a drone might still kill you from above. Things can go wrong in ways you cannot even think of. And your only defense against an unknown future is prudent diversification. A portfolio of 20 to 25 stocks diversified across industries and risk factors. This practice ensures against a catastrophic outcome for the portfolio as a whole. And it also opens the door to optionality for you as an investor. So a focus on quality and a focus on prudent diversification. These are the two investing mantras by which I invest in it today, ever since I launched my fund in 2022, and I plan to practice this for the remaining part of my investing lifetime as well.
- [32:59]
B
You wrote in the book, and I wish you wrote something about drones coming to attack us from overhead, because now you've added that to my list of.
- [33:05]
C
Things I'm terrified of.
- [33:08]
B
You wrote that different stocks require varying degrees of patience. And I think this is an exceptional point because understanding its patience no matter what, but with varying degrees is a really powerful statement. Say what you mean by that.
- [33:25]
A
Absolutely true, Matt, that different stocks require varying degrees of patience. So be very patient with able management teams operating in structural growth industries because such management usually find ways to pivot into adjacencies. And if you are able to find such stocks in the mid cap or small cap space with a large size of opportunity and with sectoral leadership, then be the most patient with such investments because there are certain embedded optionalities in a business which the markets cannot price upfront for management that can scale. Businesses led by dynamic managements tend to keep springing positive surprises as they keep pivoting into adjacencies and they keep expanding the terminal value, something which is quite difficult to model in an expense spreadsheet over time you realize the importance of management is paramount as an investing the management creates so much unexpected value over time for you when you invest in a high quality business which is operating in an industry with tailwinds and led by very capable smart management. Just look at what Jeff Bezos has done. He was no analyst in 2000 could ever imagine or model the emergence or discovery of aws. This is a great example. Basically you had Jeff Bezos at the helm and he was able to innovate a new segment altogether. Similarly, Steve Jobs in Apple innovation of the iPhone followed by the iPad. Before that we had the ipod. So you know, multiple. They keep springing these positive surprises like a magician draws a rabbit out of hack. So once you've identified a very smart, capable entrepreneur, you should be very patient with him.
- [35:13]
C
You brought up Amazon and a thought popped in my head on the show on talking Billions. I was talking to somebody who decided to talk to everyone that was bullish on Amazon before the Internet bubble burst or right after. Around that time and there were interviews, very few people were still excited about it when the Stock went from 106 to $6 or something like that. So he looked them up and he thought, wow, they must be really rich by now because we bought the stock at 6 and just held it until today. I mean, do the math. Unbelievable. And he called them up and you know what he learned? That after doubling money from the $6 to 12 or whatever it was, they all sold. Which goes back to what you talked about earlier. Holding onto those ideas for a long period of time makes a difference. What gets in the way. It's what you write about, which is Mr. Market. Ben Graham's Mr. Market. I want to ask you from a different angle about Mr. Market. You talk about how different stocks react at different points in time and you tell us how the market prices can actually give us valuable information and signals about the company.
- [36:18]
A
Correct. So over time, as a highly engaged and active investor in the market full time, you start developing what is known as a feel for the market. So if a group of stocks from a single industry are all rapidly going up together for a few successive days in a row, then that is a strong signal that the industry's fortunes may be turning around and should be studied further. So this scenario is even more significant if it takes place amid overly negative sentiment for the sector in question. And this is one of the best ways to identify inflection points in a sectoral trend. Just as an industry's fortunes are beginning to turn around. Many times you'll observe that the stocks which are going up together so rapidly do not even have any current earnings to support them. But we realize only in hindsight that the market was an extremely smart discounting machine. For instance, from early 2022 to late 2022, we had a severe bare market in the Nasdaq. The Nasdaq fell 40%. You had Apple, Google, Meta, Amazon. All the stock prices crashed significantly. And in November 2022 when Chat GPT was introduced for the first time, you would have noticed a pattern that suddenly these large cap tech names, their stocks stopped falling, started forming a bottom and they started and their stock prices started going up again. So even though the earnings outlook at that particular point of time in November 2022 was very murky and very poor for these large cap tech companies, in only the hindsight we got to realize that the market was an extremely smart discounting machine and the market and its collective wisdom understood the power of AI as a revolutionary technology which can, you know, help these companies earnings recover and grow. So, you know, that's why over time you start respecting the quality wisdom of the market. The key here, here is not to do big mistakes at the extremes and the extreme bouts of pessimism, at the extreme bouts of euphoria. That is when you have to maintain your humanity and calm and not fall prey to the common biases of bleed and fear. And I think if you can do that, it sounds very simple, but it's not easy. Trust me. If you can do that and maintain your investing discipline through all the ups and downs and not get really too much affected by the market cycles, you'll do pretty well as an investor in the long run.
- [38:43]
B
US Investor advice Time you wrote and you weighed in a bit in 2018 with markets are falling and inflation and then if the Fed is going to intervene, stop a meltdown, that type of stuff in the U.S. now, we've got a lot of pressure on the Fed today and on the Fed chairs and what they do coming direct from, very politically motivated, direct from the White House on this stuff. With concerns about the Fed and Fed independence, with concerns about inflation, with concerns about valuations. How do you think about a body like the Fed in the US and its impact on markets?
- [39:23]
A
Well, the Fed has been since 2008 one of the biggest drivers of liquidity and the financial markets around the world. And this time it's going to be no different. However, the most of the policies being pursued by the Trump administration are very inflationary in nature, medium to long term, be it deregulation, be it re industrialization, be it tax cuts, be tariffs. All of these are inflationary in the medium to long term. But because of the weakening labor market, the Federal Reserve is being forced because of its dual mandate, it's focusing right now more on the unemployment mandate. They are being forced to cut interest rates at a time when asset prices have already risen. So so much. So this is a Goldilocks scenario for the financial markets. You have high growth economic policies being pursued by the government and you have a loosening policy from the central bank. So this is why you're seeing a melt up in risk assets, including precious metals like palladium, platinum, gold, silver and in the commodity space. Also if you look at copper and if you look at various commodities, excluding oil, you can see there's a big rush of money going into various asset classes, be it precious metals, commodities, equity markets. So you know, you may witness a very big melt up in risk assets for the next possibly heading into 2026 as well, before inflation resurfaces in a big way. Until CPI inflation goes up in a very big way, I don't think you'll see the Federal Reserve really acting in A hurry to tighten monetary conditions. In fact, like you rightly mentioned, if Fed independence goes away next year with the appointment of the new Fed chair by the administration, and that Fed chair starts cutting interest rates even more aggressively heading into high inflation, then you know that may lead to very sharp volatility in financial markets in 2027 or whenever inflation resurfaces in a big way.
- [41:19]
B
What do you think about high valuations, inflation and high valuations mixing? What does that make you think of?
- [41:26]
A
So I basically see corporate earnings growth in any stock market of the world, Matt, is a function of nominal GT a function of nominal GDP growth. Nominal GDP growth is real GDP growth plus inflation. So as long as you have got a very high nominal GDP growth rate in any part of the world, I think stock market should continue to do well. And also in the second book I've talked about this, that even if interest rates go up in a slow and steady fashion, in an orderly fashion, you will not get a sharp bear market. You get a sharp bear market only when interest rates are are basically taken up in a very, very fast and curious pace. For example, from late 2021 to late 2022, the Federal Reserve basically went from 0% interest rate to 5.25% interest rate in just one year. So because of the sharp pace of interest rate increase, that's why you saw the Dow and S and P fall 35% and the Nasdaq fall 40%. If the federal Reserve had taken incremental approach to raising interest rates, then you would have not had such a big bear market taking place. So it's all about the pace of change. The stock markets are always concerned with the pace of change, be it earnings growth or be it interest rates.
- [42:36]
C
There's a movie, a certain classic that I like, which maybe will reveal something about my sense of humor, but there's a movie, Trains, Planes, Automobiles with John Candy and Steve Martin. I don't know if you guys know the movie or remember it.
- [42:47]
B
I'm going to count it as a.
- [42:48]
C
Holiday classic, even holiday classic. There you go. They're trying to get from New York to Chicago and things get in the way, as you can imagine. Takes trains, planes, buses and to get there. But anyways, there's a scene they're driving in a rental car at night and they fall asleep and once they wake up they make a massive correction and get off the highway. All ends well. But anyways, the Fed sometimes reminds me of that scene because it feels like they show up every day or however often they meet officially, unofficially and then there are moments where kind of they wake up and they go from zero to five or whatever it is at a given point in time. Where were you guys yesterday and a week ago and a month ago? That's what I always ask. But it's not my job. So I just observe it and react to it in my own way. But it's always fascinating how it looks like they oversleep again and again and again for whatever role that they think they have these days. Anyways, I'll leave it at that. I'm curious about India, Gautam, for those listening that are less familiar with the market and you and I talked about it a lot. I know you have a lot to share. You know the market very well. But for us looking from outside, what should we know? How different is that market? What kind of companies, the dynamics, the disclosure, the accounting? I know it's a whole different universe, but you have so much to share on that front and I think this audience would benefit a lot.
- [44:07]
A
So a government free float or publicly available float in the Indian market is possibly the lowest among global stock markets. There is no other stock market in the world which has got such high levels of insider ownership. And as a result there is a low supply of quality equities available for purchase in the Indian market. And consequently quality with growth is available only at an expensive valuation. In the Indian market there are different demand supply dynamics at play. And that is why comparing the valuations of the Indian markets with that of the US and the Western world is not exactly appropriate. Also in India there are almost 5,000 listed stocks. But more than, I think three and a half thousand out of the 5,000 are basically illiquid micro caps. So they are anyways not considered for purchase. Of the remaining 1500 stocks, I would say 150 to 200 stocks, you can consider them as quality stocks with good corporate governance. The remaining stocks are basically either cyclicals or commodity stocks or have questionable corporate governance. So that's an additional filter. So because the domestic mutual funds with the constant monthly inflows coming from retail investors, they are forced to buy into the same set of 150, 200 largest stocks in the market. And which are the best quality stocks? That's where the valuations of these high quality stocks in India just do not go down, you will never get them cheap. The best you can expect or hope for is to buy them less expensive in a bear market or a sharp market sell off. But generally in India, quality along with good corporate governance always has a very big scarcity premium. So once you find the stocks at a more reasonable level in a bear market or in a market sell off, then you have to just patiently hold on to them and your returns over the medium to long run will be in line with the earnings growth of those companies.
- [46:04]
B
For U.S. investors, for U.S. allocators, emerging markets International, they're a perpetual thorn in our sides because for the last 10 years US markets have been really pretty strong, especially on dollar terms. I'm going to think because of my entire career, because of almost, you know, almost 20 years now adjacent in and adjacent to this business, that there's growth opportunities outside of the US we are far from the only market. And India has been perpetually, if not perennially, one of the more interesting ones. Both because of the size of the population and also because of this move towards some of these more capitalistic tendencies in some of these companies. How should a US investor think about allocating to India? How it relates to the us how it's different, why it belongs in a portfolio.
- [46:52]
A
So before answering your question, Matt, I would like to talk about a very important bias which affects most investors around the world, which is known as home country bias. Home country bias refers to the tendency to favor investments from one's own country, ignoring global diversification. And as a result you end up with an allocation solely in domestic stocks and bonds. And what is the impact on your investing? As a result, you basically miss out on higher growth foreign markets and participating in global equity profit pools. You also end up with significant concentration risk because the U.S. for instance is 4% of the world's population today, 26% of the global GDP. But today it is 71% of the global market cap, which means that 7 out of every $10 allocated globally come into the U.S. stock market. And this in my view is not simply not sustainable. The market cap to GDP ratio is simply out of whack. The valuations are at an all time high. You also expose yourself to significant single factor risk, including exposing yourself to domestic market downturns. For example, in 2022 when the Dow in the S&P fell 35% and the Nasdaq fell 40%, the Indian market, the nifty in the Sensex, the headline indices, the primary indices, they went up that year, 2%. So you know, you, because you were exposed only to the domestic market of the US you could not benefit from global diversification. You also expose yourself to domestic sectoral bear markets in the US for instance, the NASDAQ. I talk about the NASDAQ in particular from March 2000 to end of 2002, the NASDAQ fell 80%. In December 2018, in just one single month, the NASDAQ fell 20%. In 2022, the NASDAQ fell 40%. So during all these periods the Indian market significantly outperformed the Nasdaq. So again you could have benefited from global diversification in those when you were facing domestic sectoral bear markets. And on top of all this today in the US I'll just share a statistic with you. It's an eye opening statistic. As of end of November 2025 on a trailing three year basis, 73% of the market cap addition in the US has been only from AI stocks. So betting on America today and on the American stock market today is essentially a single bet on AI. You're basically betting on one single on top of the single factor risk, single geography risk. Now you're going even further down the rabbit hole and you're actually taking a full on bet only on one single factor, a sub factor AI. And history tells me that whenever China enters any industry in the world, the margins of that industry start collapsing very sharply. And now China is entering into a big way, albeit decentralized. In the US it's more of centralized AI and more of a focus on compute power, raw computing power. In China it's more on getting lot of efficiencies and decentralizing AI and integrating it into the life of daily Chinese citizens and living that country. So but if China and now they've entered full throttle into this AI space, I think over time if they start disrupting the economics and the margins of these AI players in the US and because 3/4 of the market cap creation in the last three years has come only from AI stocks, I think you're really putting yourself and exposing yourself to significant single factors. So you should definitely consider global diversification.
- [50:31]
C
Out of the us I'm so tempted. You brought up AI and I listened to Howard Marks with William Green, Wonderful show. Richard Wiser, happier interview, highly recommend. And Howard Marks, famous billionaire, maybe people recognize him more on the street than they recognize Druckenmiller, although I'm not so sure. He talked about productivity and profitability when it comes to AI and he made a point that stayed with me. And I can't get it out of my head that sometimes higher productivity doesn't mean higher profitability. And I think that's something that we have to ponder because we're so fascinated with what AI can do to us, for us, and maybe to us too on the productivity side. But does it mean that the new business models will have the margins we've seen before? I don't have the answer. I think Howard Marks doesn't have it, but at least he's asking the question. But I'll. I'll leave it at that unless you have thoughts. Because it's a whole Pandora box that you want to. You want to open it.
- [51:31]
A
I think my personal view that, you know, right now it's most of the value is being captured by the upstream guys more on the hardware side. And BD is basically getting most capturing most of the economics in the AI valuation today. But I think in the long run this is the short run. But in the long run the real margin improvements will take place in the S and P non max 7493 stocks outside the max 7. Because once AI gets integrated into the application layer, you will suddenly start seeing a sharp margin improvement in the actual users of the AI. That's the S&P493. That is when a lot of new winners will start emerging. And you may have a phase when the max events underperform and value finally comes back in favor. And value investors have enough opportunities to hunt in the s and P 493. So I think that is the time when value as a factor will start outperforming mega cap tech growth.
- [52:29]
B
So value just needs AI too. That's the answer, right?
- [52:35]
C
A whole other box. But I think AI is changing the way we do research and maybe I'd like to think that it improves our process, but I'll leave it at that. I want to ask you about something that's been on my mind and you write about it and it rhymes with the way I think that at the end of the day it's not about the money. And it's something I shared in an anniversary episode for Talking Billions. You write about it in the Journal that beyond a certain point it's about passion and love for stock and investing. It's kind of you get it or you don't. I realize. And you say that. What's more, you say you can't really make it big if you are doing this only to get rich. Can you unpack that for us, investing.
- [53:13]
A
Success is very challenging over a long time period, even though a bull market or two in between may fool us into thinking otherwise. And it is essential to have great enthusiasm for the intellectual process of investing in order to sustain in this field for a long time. Because without the inner strength of our passion for investing to carry us during the periodic phases of pain and suffering in bear markets. It is unlikely that we will be able to survive in this field for long. And personally speaking, stock market investing remains the most fascinating analytical sport I've ever come across. Because of investing, I feel more connected to the world around me. And to be a truly passionate investor means that you're always thinking about the future and direction of the world. It means that you're always enthusiastically observing everything around you. And investing is not just a process of wealth creation, it's a source of great happiness and sheer intellectual delight. The truly passionate investor and I would not want to live my life any other way. I truly love what I do, and I'm very fortunate and blessed to have discovered my passion in life. And I hope to continue this for the remainder of my lifetime as well.
- [54:25]
B
Closing question for you. If there's one thing you could teach the average investor, not Howard Marks, not Warren Buffett, the average investor, one thing you could teach them, what would it be?
- [54:37]
A
Well, it's very difficult to teach it because you're either born with this gene or not. But if you can just develop patience, because that is the biggest equalizer of cycles and financial markets. If you can just be patient, buy good stocks, be patient, and do nothing that you know over time, you cannot help but become rich and very well wealthy because the incentives in the capitalist society and capitalism system is so, so powerful. It's designed to make you rich over time, but only if you're patient. So patience, I would say, which basically ties in with behavioral temperament. I think the behavioral aspects of investing are far more important than the analytical aspects of investing, in my view. And that's why you should continuously educate yourself on the various behavioral biases and the importance of patience by reading people like Charlie Munger and all the other great thinkers of history. And they'll actually talk a lot about the importance of developing patients.
- [55:35]
B
This has been fantastic. Katham, I want to ask you one more question. How can people find more? Where can they get the books, other resources on your writing? Where do you want to send them.
- [55:45]
A
So readers can get a copy of the Joys of Compounding and the Making of a Value Investor on Amazon? And if anyone wants to learn more about Stellar Wealth Partners India Fund, they can visit stellarwealthindia.com this is wonderful.
- [55:57]
B
I'm so glad we got to unpack these books. Bogomil Sending People to Talking Billions Bogamil Baranowski on Substack Anywhere else we should send them for you.
- [56:06]
C
These are two good places to find everything that I share out there in the world. Thank you.
- [56:10]
B
Well, I'm glad you suggested we get Gotham onto the show with us. This has been an absolute ball. Thank you for watching. This is Excess Returns. Like subscribe, comment, all the things below and we are out.
- [56:21]
A
Thank you for tuning in to this episode. If you found this discussion interesting and valuable, please subscribe on your favorite audio platform or on YouTube. You can also follow all the podcasts in the Excess returns network@excessreturnspod.com if you have any feedback or questions, you can contact us@excessreturnspodmail.com no information on this podcast should be construed as investment advice. Securities discussed in the podcast may be holdings of the firms of the hosts or their clients.