ponzi schemes | Saurabh Mukherjea: Most new-age stocks are ponzi schemes, warns Saurabh Mukherjea

Edited excerpts:

New-age stocks listed in the last few months are now going through a bad patch. Do you like any one of them after the correction?
We have nothing against new-age or old age. We just look for companies with clean accounts, good capital allocation and strong franchises. Right now, one simple proof of a strong franchise is profitability. I am not even saying show me the cash flow. I am saying boss
profit bana ke dekaho (Please, show me some profit). I am not even saying make profit at a consolidated level. I am saying
product level pe profit bana ke dekhao (be profitable at the product level) and these guys do not have it. Most of them do not have credible business models and basically most of them are ponzi schemes where a group of investors pass the parcel among themselves and keep marking to market these positions. The businesses do not have credible business models and my reckoning is that in the next five years, 70% of them will disappear.

So you are never going to invest in any loss-making company?
We are never going to invest in a company which is not a dominant franchise. Profit or loss is, in a way, a manifestation of dominance. Our job is to look for dominant franchises.

The actions of central banks are now leading to fears that we might be headed towards a global recession. is already talking about a slowdown in Europe. So how should one go about picking stocks that are recession proof?
Inflation and recession are passing squalls. If we look back at the data for the last 40 years, a majority of the time the global economy and the Indian economy has been in an expansion mode. If you take a typical decade, recessions are two to three years in that decade. The economic expansions take up 70% of the time period that you and I have been alive. And similarly high inflation periods, especially supply side driven high inflation periods are sporadic.

We have had them for a couple of years at the beginning of the 70s, a couple of years at the end of the 70s and today because of the whole Russia-Ukraine thing we have a supply side driven inflationary episode. These are passing spells. One should not get too fussed about these. The most dangerous form of investing people do is they try to use macroeconomics, inflation, recession, central bank actions for stock selection and investment strategy. Even professionals do that. It is lethal. It is futile and it is basically a dangerous way to invest.

The simplest way and the most powerful way to invest is to look for quality and clean franchises and stay invested. Do not get lost in this macro noise. Our belief is that macroeconomics should not be used as a way to construct investment strategy.

How are your investors reacting to the downturn in the market? Is it true that you are still investing a few crores every day?
Yes, we are still getting a few crores every day. We have had very little by way of redemptions. Obviously, the inflows are lower than they were before the war started in Russia. Before the war started in Russia, we were getting around Rs 80 to 100 crore a week. Now we get roughly half of that number. But the money continues to come in.

Household financial savings in India are 15 per cent of GDP. Our GDP is roughly $3 trillion, which means Indian households have annual financial savings of $450 billion. It is a staggering sum of money. We are one of the largest savers in the world now. I am not even talking about total savings. If you include physical assets, which is gold and real estate, then the number comes closer to $600-700 billion. We save colossal amounts of money in India every year.

In that context, the $30-40 billion which is coming into the stock market from domestic investors is the tip of the iceberg. Abhi to kahani shuru hui hai, poori picture baaki hai. And the picture will wind away over the next decade which is why when people fret about FII inflows I get quite amused. I also want to see FII inflows but FII inflows are no longer the prime driver of the Indian market. The prime driver of the Indian market, not surprisingly, are your readers. They are driving flows and the amount of money they are saving is colossal. We in Marcellus get a small fraction of that. Our competitors are also getting daily inflows and we are all continuing to invest in the market which is why in spite of all the drama around Ukraine and Fed, the market has not fallen in the last 12 months.

How do you go about rejigging your portfolio when your outlook towards a company or sector changes?
We do not take any sector views. We invest in clean companies with good capital allocation and having a dominant franchise. All of these aspects are scored. Our investment committee signs off on these scores. For example, if the company’s capital allocation starts becoming suboptimal, then these scores are altered. If the score comes down, we exit and a new company comes in.

For example, our exit from

two years ago was because of capital allocation. ITC franchise in cigarettes remains as dominant as it was a decade or two ago. They are one of the greatest free cash flow generators ever in Indian history but the capital allocation of that free cash flow was to our mind not the greatest. We lowered the capital allocation scores and thus ITC exited our portfolio and entered shortly thereafter.

So we do not take sector calls. We do not do macro calls. Our focus is bottom-up. That stock specific focus is articulated by taking qualitative characteristics of a company such as capital allocation, such as the franchise and turning it into quantitative scores. That is what the 20 analysts in Marcellus do.

ITC is one of the top performers in Nifty in 2022. Looking back, do you regret selling ITC?
No. Share price action has no bearing on what we do. The share price of a company, whether it is ITC, Titan or

, tells you nothing about the company. If the share price has gone up, you should not be happy. If the share price has gone down, you should not be depressed. The share price of a company contains zero informational value, as explained in the beautiful book
‘A Random Walk Down Wall Street’ by Burton Malkiel.

One of the most basic and the most counterintuitive things to learn about investing is that the share price of a company follows a random walk. It means that the share price of a company is basically like a drunk man swaying his way through the street at night. If he turns left, it does not mean his house on the left. If he turns right, it does not mean he is looking for a taxi on the right. He is just a drunk man swaying his way through the night and that is the share price chart of a company. A lot of people attribute some astrological significance to it. We obviously believe that is not quite the right thing to do. Our focus is therefore not on the share price but on accounts, capital allocation and the franchise.

ITC is a good company. I hope they continue to do well. Our reckoning is they will continue to compound by around 15% which is a solid compounding figure in the Indian context. Our goal is to compound for our clients at around 20% and so far, which is over the last four years, we have been successful in that regard.