Devina Mehra, chairperson, managing director and founder, First Global, shared her expert insights on picking winning stocks during the final day of Outlook Money’s 40After40 Retirement Expo. She emphasised the importance of diversification, focusing on strong fundamentals, managing risk, investing in global securities, and maintaining a long-term perspective to achieve success in stock picking.
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00:00It's actually an honor to talk to someone as big and knowledgeable as Devina Mehra and
00:15I'm lucky and very glad to be hosting you today ma'am.
00:19We'll talk about a lot of stock picking strategies we learned from ma'am today and we all know
00:28that you know a lot of us are trying to dip our feet into equities.
00:33There is a lot more DMAT accounts and mutual fund of folio registrations etc.
00:40So somewhere at least some people have seen the merit in investing in equities.
00:45Of course there are a lot of short term investors which we do not always advise.
00:53So but the thing that most of us would want to know now that we are into equities is how
01:00to pick that stock that is really, you know, that is really going to give you that kind
01:06of success that a lot of these big people have or how to pick the right stock.
01:14And I'll tell you that's the most challenging.
01:17So Devina Mehra who's an expert stock picker herself will today shed light on the strategies
01:23that may guide you on the road to stock investments and make it easier for you to kind of go through
01:31the market and make the right choices.
01:35So welcome so much Devina.
01:38And I would start with the what I was talking about.
01:43Everybody wants to be kind of successful in stock investing, right?
01:46And they have this expectation that there'll be a lot of money and stuff like that.
01:51So could you tell us a story, something that is an inspiring story about picking the right
01:58stock and then seeing it becoming successful in your long career?
02:03Thanks Nidhi for a very kind introduction.
02:08And while I will be answering your question on stock picking, I will also like to explain
02:14why, you know, the stock picking the way people understand it is not what you should be totally
02:21focusing on.
02:22I mean, I'll come to that later, but first the stories.
02:25So I'll talk about the two most well-known stories in First Global's history of 30 years
02:33in terms of the stock picks.
02:36And one was HDFC Bank, which the report is now what, 29 years old.
02:42So it's 1996 report, which people still remember.
02:46And what did it have on the cover?
02:48It had a baby, because this was one year after HDFC Bank went public.
02:52So at the price of 38 rupees, which split adjusted at 3.8 rupees.
02:57So it had a baby on the cover saying this is what it is now.
03:01And it had Arnold Schwarzenegger, who was the then reigning Mr. Universe, that this
03:06is what it will be, that it will be this big bodybuilder from a baby.
03:13And the reasons, of course, were simple.
03:15One was, of course, at that time, nearly all the market share in the markets were with
03:20the PSU banks.
03:22So here you had a good private bank coming up.
03:28So obviously, it would take away some market share.
03:30Plus, it had the advantage of the brand of HDFC, which was already an established brand.
03:37So all of those things were there.
03:39But as I say, there was also an X factor, because many banks, people remember the successful
03:46stock stories, which is HDFC Bank and Kotak Mahindra.
03:49They forget that there were many other banks which came and went, from Times Bank, Global
03:55Trust Bank, Centurion Bank, and so many others.
03:59Yes, bank went through such a turmoil.
04:02So I also say that it was an X factor, because a lot of the HDFC Bank people were my ex-colleagues
04:09from Citibank.
04:10So I knew them personally.
04:12So I also took a bet on the management, because in banks, that's very important.
04:19The other very famous call, which everyone remembers, is Amazon, which was just after
04:24the tech crash.
04:26So in the first quarter of 2001, we had a strong buy on Amazon at $15, which is equivalent
04:34of $0.75 now.
04:36And at that time, no other firm on Wall Street.
04:41We've been global for 25 years.
04:44But no other firm had even a buy on it.
04:47Everybody had a sell.
04:48And that was purely a numbers call, because in the last quarter of 2000, Amazon, for the
04:56first time, made substantial cash flows.
04:59So cash flows is something to focus on.
05:01So that's why this.
05:03And that's why we made that call.
05:05Even Jeff Bezos sent us an email saying thanks for the support, because ours was the only
05:09buy on the street.
05:11So those are the good stories.
05:13But I will come to why one should not just stick to these kind of stories.
05:17So you talked about these interesting stories and certain strategies that you may have followed
05:22at that time.
05:24Have those strategies undergone a change over the three decades, more than three decades
05:30that you've been doing this?
05:33Yes, your methodology always evolves.
05:36Because remember, three decades ago, when I started First Global back in end of 93,
05:42securities research did not exist in India.
05:45So much so that in my MBA at IIM Ahmedabad, we didn't even have a course on securities
05:50research because that career did not exist.
05:53So obviously, it's been an evolution over time.
05:56But what I have done is I have always stuck to first principles to really understanding
06:02from first principles.
06:03So one of the things, for example, at that time, people used to focus mostly on and even
06:08now on the income statement that this happened to the sales growth, this happened to margin,
06:12this happened to profit growth.
06:14But hardly anyone focused on, for example, return on capital employed return on equity
06:21or cash flows.
06:23And those were things where you have to really focus because many times, for example, if
06:28there is a problem with a company, they will first they also know everyone looks at the
06:32income statement.
06:33So they will try to manage the sales and profits, maybe sell some goods on credit.
06:38So you might see the pressure on receivables first, you will see a pressure on cash flows.
06:43So those things evolved over a period of time, then you also realize that sometimes you get
06:49the call right, that you want to buy something, but it falls more before it bottoms out or
06:54something looks very expensive, but it might still continue to run for a while.
06:59So some amount of other systems to add on to the fundamentals also evolved over time.
07:06So yes, it evolves over a period of time.
07:10So a lot of things that you do mention, of course, they're very, very important, but
07:14a very few retail investors might actually understand them.
07:19So do you have kind of a not exactly a thumb rule, like two, three points that are easier
07:25for them to check, review and understand when they are choosing a stock?
07:30Okay, I would say that everybody tells you how to buy a stock.
07:35But whether it is some course you are doing, whether it's a fund manager, how many people
07:39focus on when to sell a stock or on risk management.
07:43So those are the things where real value can be added.
07:48And I would say that if this is not your full time job, then the broad things you have to
07:54get right, number one is asset allocation.
07:58Asset allocation, and also there I say that just as in Google Maps, you don't just put
08:03the destination, you have to put the starting point.
08:06So look at where your assets are currently and what asset allocation sounds like a fancy
08:13word if you're not from the world of finance, but it is fairly simple.
08:16The categories of assets.
08:18So it's equity, for example, equity means both what you hold directly as well as through
08:22mutual funds.
08:24Then there is fixed income, where you have the fixed deposits, you have all these tax
08:28saving schemes, you might have put money in, you might have fixed income mutual funds,
08:34then there is gold, there's real estate, land, building, flat, house, whatever.
08:42Maybe you have something else also, maybe crypto or art.
08:45So look at first everything altogether, and then see that are you where you want to be
08:51or do you need to make some changes.
08:54So get the asset allocation right, and one leg of asset allocation which Indians often
08:59miss out on, that India is not the world.
09:02I mean, if you look at equities, India is less than 5% of the market cap of the world.
09:08There's no reason why 100% or 90% of your assets should be in India.
09:13So please look at global diversification and remember that the US is not the globe either.
09:20So if you look at India and just think buying a Nasdaq ETF will get you global diversification,
09:26that is not it either.
09:27I mean, the world is a big place and this is a cause for me personally.
09:32And because of that, like Infos Global, we have a global product that starts at $10,000,
09:37which the rates have dropped so much that it is now 8.7 lakh rupees, but still a very
09:43low start compared to where you will not get a product like that for less than a million
09:50dollars.
09:51And why global diversification?
09:53Let me just give you one statistic.
09:55When I started working, the dollar was 12 rupees.
09:59There's been an 87% depreciation in the course of less than a career.
10:03So you cannot make a 10, 20, 30 year plan or look at your financial goals and forget
10:09about global diversification.
10:11That's very important.
10:12So broadly, if you get these things right, it doesn't matter so much that you have to
10:17get the exact best performing stocks right.
10:20Right.
10:21Another thing while we are talking about investing is passive funds have, you know, are becoming
10:29very popular, like index related funds.
10:33So how does that work in the stock markets?
10:36And what I mean to ask is that, is something like that, could people replicate it in their
10:44own portfolios by buying only stocks that are in the index?
10:48And what could be the pros and cons?
10:51I don't think you should go and buy stocks which are in the index.
10:54That doesn't make much sense.
10:56And you know, also any stories, and we started with a story of these successful stock picks.
11:02I mean, look at how the indexes have changed over the years.
11:07So let us say, if you look at the original Sensex, for example, what did you have there?
11:11You had, in terms of industries, textile, paper, shipping, in terms of groups, or for
11:19that matter, premier automobiles, Hindustan Motors.
11:22And in terms of groups, you had Mafatlal and JK and Thapar.
11:26All of them have become irrelevant in history.
11:29And those were the blue chips of the day.
11:31Don't forget.
11:32I mean, in hindsight, you can say that, you know, everybody knew they weren't going to
11:35do well.
11:36No, I mean, these were all companies with decades long history in the original Sensex.
11:41There's only one company with a shorter history, which was Indian Hotels.
11:45All the others were very old companies, very established companies, and the blue chips
11:49of the day.
11:50So that is, and if you look at, again, over the time, how Sensex and Nifty have evolved,
11:55at one point, there were so many PSUs in the index.
11:59There was BHEL, MTNL, VSNL, IOC, BPCL, HPCL, I can go on.
12:07And then there came a time when everybody forgot that PSUs existed.
12:12You look at 25 years ago, there was not one single financial stock in the Sensex or Nifty
12:19for that matter.
12:20And now that's the largest weight.
12:22That's how much things change.
12:25So looking in hindsight, you look at the success stories in everything.
12:29This is called a survivorship bias.
12:30You're looking at only the successes, you're looking at only the survivors.
12:36If you look at real time, and I've done this for people, sometimes people come that my
12:40father or mother has not looked at their portfolio for 20 years or 30 years.
12:45And when you open it, this is what you find.
12:47Or even worse, I mean, somebody, this is an actual story, this is a distributor who came
12:51with his mother's portfolio, and you looked at it, and there were, what, DSQ Software,
12:56Pentamedia, NEPC, Micon, all the hot stocks of the tech boom of 99, 2000.
13:04So things change.
13:05Indexes, and even if you're investing in a passive index now, even if it's a fund now,
13:13in terms of passive sounds as if it is lower risk.
13:18But actually, what does passive mean?
13:20It means that if the market falls 30%, that index will also fall 30%, and probably a little
13:25more because the funds do not track the index exactly.
13:29There is what is called a tracking error.
13:31So there is some amount of underperformance relative to the index most of the time.
13:37And then there is this thing that what is the active fund manager really doing?
13:41And to my mind, the biggest plus of an active fund manager or advisor is to limit your downside
13:50risk.
13:51Risk management is the main value add in active investing, and if you look at the best performing
13:58mutual funds, for instance, the best performing ones are the ones that outperform during downturns.
14:04I was looking at, there was a study done by Economic Times, which they were surprised
14:09that I was not surprised at the results, that this was the case.
14:12And there was a scheme which outperformed in 93% of the upturns, but it was among the
14:18bottom five schemes.
14:20Because investing is a loser's game.
14:22You win if you don't lose.
14:24So your first priority should be not to take a big hit on your capital.
14:31And for that, you have to take the small hits on your capital.
14:34So always have a stop loss.
14:37I say the best thing you can do for your portfolio is when you invest, tell yourself, I may be
14:42making a mistake because a reasonable percentage of your picks are not going to do what you
14:48thought they would do, however well you choose them.
14:52That's why I'm saying stock picking, when I talk about, it's a limited thing because
14:57there is nobody who knows in advance which is going to be a multi-bagger.
15:02I cannot say in 1996, I knew this would be HDFC Bank's trajectory or Amazon's trajectory.
15:09At best, when you are picking a stock, at best, you can say it will double or triple.
15:14Beyond that, no one has the vision.
15:18So always buy a portfolio of stocks.
15:22Always buy at least 25-30 stocks as per your system, as per some system.
15:29And out of that 25-30 stocks, still 5-7 stocks are going to be duds, where you will need
15:35to get out.
15:36Some will give you reasonable returns.
15:38And then if you have picked them well, and then your luck also favors you, maybe you
15:43will get two or three multi-baggers out of that.
15:46But no investor, no fund manager in history has this crystal ball that which is going
15:52to be this multi-bagger over multi-years.
15:55Anyone who's telling you that is misleading you because not Warren Buffett, not Rakesh
16:01Shunjunwala, nobody knows.
16:03In 70 years of investing, Warren Buffett says, there are only about a dozen decisions that
16:09have accounted for my performance.
16:11He sells 85% of what he buys within two years, the majority within six months.
16:18Rakesh, if you met him over the years, talked about so many stocks.
16:22He did not know in advance that all his money would be made in Titan, Crystal and Lupin.
16:27Nobody knows that.
16:28So don't kid yourself that you have this magic formula that you will pick up only the multi-baggers.
16:35So always diversify.
16:38So just going back to that Amazon and HDFC story, so just as an aside, do you still own
16:46the stocks?
16:47Not really.
16:48Amazon we held for a longer period.
16:53HDFC Bank, yeah, got out a reasonable time ago.
16:58Okay.
16:59You also mentioned one of the biases while you were talking about the passive strategy
17:03and how it might not always work.
17:07Is there any other kind of bias that you think can really hold you back when it comes
17:14to stock picking?
17:15Oh, there are many, many.
17:17So I've talked about quite a few in this book.
17:20That's like one of my favorite topics.
17:22I always say that I can teach a whole business school course on biases because basically,
17:27I mean, the basic principle why biases are there and why they are so hard to get rid
17:34of is that they are hard-coded within you through human evolution.
17:41So as I always say, your brain is not concerned about the health of your portfolio.
17:45The brain is only one, two things, survival and procreation.
17:50And many times those are at odds with what you should be doing for your portfolio.
17:55So for example, you know, there is always a FOMO feeling, my friend made money in PSU,
18:01made money in defense, so I have to get in.
18:03And that's the psychology behind a lot of thematic funds that are launched.
18:07All the NFOs are based on this psychology.
18:10But why do we have this?
18:12And why do we, for example, want to buy a Gucci bag or a Tumi computer bag or something?
18:19The core of that is that you want to belong to a tribe.
18:23Because when we were living in caves, if you got out of the tribe, you definitely could
18:29not procreate and you might not survive.
18:31So we are the, our ancestors were people who have chosen to stay on in the tribe.
18:36So you know, that's the reason why we want to be where everybody else is.
18:39We don't want to think for ourselves.
18:41So this is one.
18:42Then there is loss aversion that we know the stock has gone down, but we hate actually
18:48booking the loss.
18:50This is something.
18:51So that is why I'm saying always have a system.
18:53Don't think, when the market falls, we will think what to do.
18:56When you enter a stock, as I said, tell yourself, I may be making a mistake, put a stop loss.
19:02So this is another one, storification, you know, human beings, one thing which is common
19:07across all human beings, all civilizations, from the most sophisticated to the most primitive
19:13across geography is stories.
19:16We remember stories, we teach through stories, we are storytellers and listeners.
19:23So that is why I say look at data and for a lot of fund managers have very creative
19:31stories about why they, you know, how they buy a stock, why they are holding a particular
19:35stock.
19:36And the problem with stories is that over a period of time, you tell it enough times,
19:41you also start to believe it.
19:43So if you look at Warren Buffett, for instance, you know, his most famous call is Coke.
19:48I mean, I'm just using him as an example because he's well known, not that he's the worst example
19:52or anything like that, that Coke, that is this great brand, great cash flows.
19:58But because he kept telling that story, he didn't sell that stock for 30 years.
20:02That stock is a huge underperformer relative to the index and relative to Pepsi.
20:08So last I looked in 30 years, it had gone up 12 times, the S&P had gone up 18 times
20:15and Pepsi I think had gone up 24 or 25 times.
20:18So that's the stories keep you captive.
20:21The market is not a person.
20:24So it has no interest in how carefully you have crafted your stories.
20:29So only one thing matters, which is numbers and data.
20:32So even stories about the management is good or brand is good, where does it come through
20:37in the numbers is one of the things which I always talk about.
20:41So I mean, biases are more, I mean, there's a very long list.
20:44But the point is that Daniel Kahneman, who won a Nobel Prize for his work on biases,
20:51who worked on biases for nearly 70 years, he died at the age of 90 last year.
20:56He said, in spite of all that I have done, I find that I have my decision making has
21:03not really changed because these things are so hardwired.
21:07That is why now we use a system, we use an AI ML system, because that's the only way
21:12to really get rid of biases.
21:14And biases is one thing which is systematic, but they're also something called noise.
21:19So if I have like, 15 people with 20 years experience in the market, and I give them
21:24the exact same data on the same company, they will have different views on it.
21:28So that is random noise.
21:30You know, that the day you have a fight with your spouse in the morning, or in the traffic,
21:36you are in a different mood, you will look at the same things differently when you reach
21:41work.
21:42So human beings are like that.
21:43I mean, Daniel Kahneman, for example, I mean, he talks about the book he had written.
21:47And he said that I and my co-author thought that we will finish the book in six months.
21:54Whereas we should have asked the publisher that a nonfiction book of this length with
22:00two authors, how long does it typically take?
22:03And they would have told us two years.
22:05It actually took us three years because, you know, that thing that as human beings, we
22:10do not think in probabilities, we do not think in statistics.
22:14He said, even I, myself, who's been doing this work, and I'm writing the book on biases,
22:19this was this bias still remained in my whole thought process.
22:23So your own book, Money, Myths and Mantras, which is the new book on the block.
22:29And in fact, I should tell the audience that there will be a book signing session also
22:34with David outside the way, outside this auditorium.
22:39What are the main takeaways from here?
22:42Am I correct in assuming that the myths is the part where you're talking about biases?
22:47Yeah, so I mean, it is also that there are a lot of things which are taken for granted
22:53in the markets, which you will be, which you'll see a lot of people talking about as mantras,
22:58but they're really myths.
22:59For example, invest in your circle of competence.
23:02Now what does it mean?
23:04Invest in your circle of competence.
23:06If I say it in plain words, it means invest in your comfort zone.
23:13So if your fund manager only understands, let us say, FMCG, fast-moving consumer goods
23:20and banks and invest only there, what are they going to do when the theme in the market
23:25changes, let us say, to commodities or something else?
23:29So why should you be captive to someone's so-called circle of competence?
23:35So those are the things I have held up to light that what actually holds, I mean, should
23:40you follow well-known investors who supposedly have found success?
23:45Is that even the right question to ask?
23:49And also, of course, I have also started, because as I say that to know, to break the
23:53rules, you have to know the rules.
23:55So what are cash flows?
23:58What determines the PE of a stock?
24:00Why is it that within the same industry, something trades at 10 times PE, something trades at
24:0530 times PE, something trades at 40?
24:08So why the difference?
24:10What are the real drivers?
24:11So it is actually, you know, a distillation of 30 years of what I have learned.
24:17And I have tested everything.
24:19I mean, I have not taken anything from granted, whether it appeared in a textbook or said
24:26by a professor or anything.
24:28So I have tested it.
24:29And I mean, for me, the thrill in this whole journey has been the learning.
24:33And this is an attempt to share that learning.
24:36And I think it comes out of my genes, because my parents have been both academics.
24:42So that, you know, that urge to teach is strong.
24:46So this is really that.
24:48So but I mean, I was I met a content writer recently, and she was telling me that most
24:54books these days are by well-known people are ghostwritten.
24:57And I said, wow, you know, I didn't know that.
25:00So like, this is really what and I've tried not to pad it up at all, because I'm a big
25:06reader.
25:07And as a reader, I hate nonfiction, where a few ideas are just stretched out to a book
25:12length.
25:13So this is not that either.
25:14So that's why it's been difficult for me to answer questions that one take away or one
25:19this thing, because this is not like that.
25:20Yeah.
25:21So the by the way, this book is by a book buff, Devina reads like how many 40 you read
25:29last year?
25:30Fifty three last year.
25:31Fifty three.
25:32So that is that kind of count kind of goes year, year on year.
25:36And then this year, she also wrote for us about the excerpts of the main books that
25:40she liked.
25:41So the last question to you, Devina, is, which everyone would be really interested in, which
25:47are the sectors to really look out for in 2025?
25:50Okay, so I mean, the themes change, which is one thing which I was talking about that
25:55in markets, no theme last forever, no geography, no asset class or the same sector within within
26:04the country.
26:05So we look at everything in our PMS, or for that matter, our global funds from base zero
26:10every quarter.
26:11So I can tell you where we are overweight today.
26:14It may or may not hold for the whole year.
26:17So as of now, we are overweight, which where we've been actually overweight for a while
26:21has been pharma, IT, auto components.
26:25So these are where we would be still overweight.
26:27FMCG, maybe now we are a little overweight.
26:30Capital goods and industrial machinery.
26:33Interestingly, most people started talking about it only in 2023.
26:38We actually went overweight because of our systems, because because they signaled it
26:43back in October 21.
26:46So we were overweight for three years.
26:48We went a little underweight in October again, because the prices have fallen.
26:52We bought some of them again.
26:54So that would be broadly where we are today.