Why Durgesh Shah believes knowledge is over-rated in mkts
Moneycontrol | November 04, 2015
The two most important traits required to become a successful investor are temperament, followed by experience, says Durgesh Shah, director of Corporate Database, and governing body member of FLAME University.
The two most important traits required to become a successful investor are temperament, followed by experience, says Durgesh Shah, director of Corporate Database, and governing body member of Flame University.
In an interview with CNBC-TV18's Ramesh Damani for his series Wizards of Dalal Street, Shah was discussing the virtues required to become a successful investor.
"Markets are a subset of nature. In markets, as in nature, you have to be humble or you will be humiliated," he says. "Those who do well in the markets say that they realize how little they know. Also, when they do well, they know how much of the result was because of luck and how much was skill."
Shah managed the institutional desk at investment bank ENAM before setting up Corporate Database, and rubs shoulders with market veterans Nemish Shah, Vallabh Bhanshali and Manish Chokhani (all of whom are associated with Flame).
In the interview, Shah espoused the idea that knowledge is over-rated in financial markets, echoing legendary investor Charlie Munger's advice [as well as that of his famous partner Warren Buffett], who rates temperament above virtues such as intelligence or knowledge.
He elucidated this with the example of a "large investor" -- pointing to big bull Rakesh Jhunjhunwala -- who a few years ago took a large position in oil refinery HPCL.
"His knowledge about the company was not a fraction of most analysts who track the company. But he had the courage and temperament [to understand the opportunity arising out of the oil slump and deregulation]," he said. "The brokerages will carry out the stock's brokerage but he will make the money."
Below is the transcript of Durgesh Shah's interview.
Q: I was talking to Sunil Singhania a few weeks ago, and he said he felt like a zebra in lion country, saying in effect nature dictates what happens in markets. You also believed that markets are a subset of nature don't you?
A: I clearly think so and I feel that anyone who is able to recognize and understand that can do much better with getting to be a part of seeing how the behaviour of the markets and nature is. Very clearly, whether it is the market or it is the nature, you better be humble or you will be humiliated soon. You see that as a tree has more fruit, it will bow down more, similarly you see markets that those who do well they will tell you that now they realize how little they know and how much they do not and when they do well, how much of it is luck and how much of it is skill.
Q: Know thy stuff you said. Are you saying between temperament, knowledge and experience, which is the one that you value the most?
A: I have no questions in my mind that temperament is the most important, experience surely thereafter, and knowledge although is essential, it is a little overrated in terms of how important it is to markets.
Q: All smart people are knowledgeable.
A: There is a given situation where people feel they should do a engineering degree, go to a MBA school and then they are equipped to do well in the markets.
A: The best example would be let us take a recent situation where we all know there is a large investor who a few years ago went and took a large position in a refinery company HPCL. Both of us know about it that his knowledge about the company is not a fraction of most analysts on the street who track the company and yet he does not care, he had the courage and the temperament to understand that here is a company at the price today is going to deliver unprecedented returns and it is proving right. His knowledge was nowhere close to those other guys, but his temperament was far ahead of most fund managers even across the oceans.
Q: And the irony is as you say that he will end up making more money than all the analysts put together in that single stock.
A: All the brokerages will do brokerages of that stock.
Q: And he will get the multiple returns of the stock because of temperament.
A: Clearly because of temperament.