Saurabh Mukherjea is a sleuth in the guise of an investment manager. He has a prominent nose that he deploys for sniffing out suspicious elements in the accounts of listed firms. Companies with poor accounting standards are injurious to the wealth of investors, is a credo he passionately believes in.
His eye for detail and forensic approach to examining accounts have even earned him multiple threatening phone call. But this student of economics from London School of Economics, who started his career with Anderson Consulting (now Accenture) is an uncompromising soul. He headed Institutional equities of Ambit Capital for almost eight years before founding his own portfolio management services company Marcellus Investment Managers.
By adopting a quantitative framework, forensic accounting and optimal asset allocation, his PMS has compounded wealth at 25% per annum. In an exclusive interaction with Money9, Mukherjea spoke about the tricks of the trade and what investors should watch out for.
Q: Can you put some light on your investment philosophy when it comes to picking up a stock?
Mukherjea: At Marcellus, we choose stocks basis three specific criteria: 1) the company’s accounts have to be clean i.e. the promoter should not be fiddling the figures; 2) the company has to sell products or services which are essential for India’s 1.4 billion strong population; 3) the company should for all practical purposes be operating unchallenged in its market. Two examples of company’s whose shares we own are Nestle and Pidilite.
Q: When it comes to an investment opportunity, how do you approach it?
Mukherjea: All our investments are based on intensive analysis. Our investments are based on reading the last 10-15 years of annual reports on the said company. This is followed by 30-40 discussions with customers, suppliers, ex-employees and competitors of that company. Finally, right at the end, we spend a few hours talking to the management of the company about where they would like to take the company.
Q: What gives you the confidence to hold on to stocks that have turned into multibaggers?
Mukherjea: We rarely look at the share prices of the company’s we invest in. Our focus is on keeping an eye on three things: (1) The promoter’s behaviour – is he doing naughty things? Is he making sensible decisions or rash decisions? Is he a power-hungry & insecure person or is he delegating authority & empowering his team? Is he lazy or is he hardworking? (2) The demand for the product – is it holding up or is it softening? Are substitutes or disruptive products coming through? (3) Succession planning – is the company training & grooming the next generation of leaders? Or is it a ‘family run’ business where it is a given that the next generation will run the show regardless of how capable or incapable they are?
Q: What is the typical holding period for stock at Marcellus?
Mukherjea: We rarely buy or sell stocks in Marcellus. In a typical Marcellus portfolio, in a given year we will sell one stock and buy one stock. This implies that our typical holding period is a decade.
Q: How does your typical workday look like and what are your hobbies?
Mukherjea: I wake up at 5 am, have breakfast and then read for 2 hours. I then exercise for an hour and begin my workday at 8.30 am. Morning through to lunchtime is spent talking to Marcellus’ research team and our fund managers. Post-lunch, I do client meetings. I try to finish my day at 6pm (and then go for a 30 minute walk) but sometimes due to calls with our US clients, my the workday stretches on until 8.30-9 pm.
Q: Which stocks turned out to be duds and what were the lessons you learnt?
Mukherjea: We haven’t yet had stocks that have eroded our clients’ wealth. We have had a couple of stocks where over an extended period of time the company’s performance has not been satisfactory. In such instances, we have engaged in a dialogue with the management team to see if the situation could be remedied. Once we have realised that the situation cannot be remedied, we have exited.
Q: Which book are you reading currently?
Mukherjea: I read a book a week. I am currently reading “The Nature of Technology” by Brian Arthur.
Q: What would be your advice to an individual investor?
Mukherjea: Learn how to read and understand annual reports and how to assess barriers to entry. Invest in clean companies with high barriers to entry and then let compounding do the rest.
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