smalltalk with Raghav Behani of Alphamultiple

Raghav Behani shot to fame as a 21-year old when he won the Hunt for India’s Smart Investor, a national competition for investment professionals hosted by Zee Business. Now at 25, Raghav has already become a qualified Chartered Account, a SEBI licensed Research Analyst, and launched his own advisory practice Alphamultiple, that has more than 250 clients.

In an open conversation with the smallcase team, Raghav talks about his love for equities, his time on a reality TV show, his investing philosophy & style, and all things markets.

How did you get into the stock markets space?

I got introduced to the markets as a kid when I was in Class 5 or 6. I used to spend my summer holidays at my maternal grandparents’ place in Kolkata – and at the time my maternal grandfather used to watch business channels & track the price of stocks like Reliance Industries and Rolta. I used to ask why the price is changing every minute & he used to attempt explaining it to me but I obviously never really understood back then.

But I really started tracking the markets more seriously as a teenager later on when the global financial crisis happened in 2008 – almost all newspapers were filled with news about the crash & there was a lot of excitement/talk about this for a long time. You could sense this in the markets at that time. Finally, I opened a Demat account in my mother’s name in October 2011 – and soon, I bought my first stock! It was Sonata Software, and the decision was based on my own research I’d done over the previous year by reading a lot of material.

At that age, how did you go about identifying Sonata Software as the investment for you?

I remember reading an article that had a thesis of identifying good companies that are at all-time or multi-year lows. I don’t exactly remember who had written the article, but thought it made sense & searched for such stocks. Sonata Software met that criteria and I started tracking it as I had a bit of familiarity with that company since their office is quite close to where I stay in Hyderabad.

I was a 17-18 year old then & had already started to prep for the Chartered Accountancy course. As such, I already had a fair understanding of accounts and financial statements & I tried to go through all the numbers. My analysis told me the business was doing okay – not great but not bad either – and that it had low debt. So my thesis was that when the markets rebounded, there was no reason for this to remain at all-time lows. The stock was around 20 when I invested in it – and it doubled within 2 years. In hindsight, of course, I should’ve held on to that, but that was an important lesson learnt later in life!

What made you participate in the Hunt for India’s Smart Investor?

I came across an advertisement to apply for the trading round of the competition on Zee Business, which was hosting the show. Although I was preparing for my CA finals at that time, I just enrolled for the show & took part in the trading round and unexpectedly got selected for further rounds!  

How were you tested & challenged on this show?

For the trading round, we had to create a portfolio for the next 15 days & although that didn’t really sink in with my long-term philosophy, I created a well-diversified portfolio that had a lot of defensives like Pharma & FMCG. I was expecting the markets to tank, and the Sensex fell down by around 3-4 % in that period – but my portfolio didn’t fall as much as the Sensex, and as a result I qualified!

After that, we were tested on topics like mutual funds, insurance, fundamental analysis, and a wide range of general industry-related questions. My articleship experience from Deloitte where I had to audit many listed companies helped me prepare for the industry knowledge and fundamental analysis rounds. I had also read about personal finance, mutual funds, insurance & was already blogging on these topics on my own blog (then known as Dalal Street Bulls). Because of these reasons, I didn’t really have to put in a lot – I was studying for my CA finals and maybe giving in half an hour a day for the case studies and preparing for different rounds. Managing all of this was a great learning curve & I eventually went on to win the show.

How was the experience of participating in such a national scale competition?

The experience was wonderful! The best part was the chance to visit the Bombay Stock Exchange at Dalal Street – since all the rounds took place in the old trading ring, it was very exciting for me to just be there!

I was also one of the youngest participants on the show. It was open to everyone with the exception of those who had an AMFI license (i.e. mutual fund distributors). I think the average age was probably more than 40 years old, with most of the participants being retail investors who had the multi-decade experience of investing in stocks. Learning from them, and eventually winning the show was certainly a great experience.

How did things change after winning that show?

I was on Cloud 9 after winning that show and I had just finished my CA finals as well. I had Rs 5 lakhs from the show winnings & my exams had just got over – so the next two months were like a ball & I forgot everything about the markets! The pressure of CA exams was so much that once you’re done, you’re too numb to think of reading or doing anything. But soon the results came & I didn’t clear my CA finals, so I had to go back and start studying again. The next attempt was only a few months away, and I cleared it then. So overall, 2015 ended on a good note – I had become a Chartered Accountant, and I had won the national competition Hunt for India’s Smart Investor!

A 21-year old Raghav Behani (far left) winning the Hunt for India’s Smart Investor

When/how did you decide to take the plunge & start the research advisory business?

Around that time when I finished my CA, new SEBI regulations had come in for the advisors & researchers – I had applied for the SEBI Research Analyst, but was told it could take almost a year for it to be approved and arrive. So while I was ready to start my own venture, I knew there was a possibly long waiting period so also applied for other roles.

I had received good corporate experience during my articleship at Deloitte as an auditor – and by the time I became a CA, I was clear that I didn’t want to do that. So instead, I chose to work at one of the best (and highest-paying) CA placements then at Bharti Airtel.

The role was away from my core domain of Finance, focusing on Marketing & Sales so it offered a new learning curve. It was also exciting as I had to travel through the land rural areas & towns – also Reliance Jio had just started, so there was a lot of anticipation in the telecom industry & things were changing very fast.

I got the SEBI license within 6 months of joining though, and immediately quit my job (paying back a hefty joining bonus) and started my own research/advisory business called Alphamultiple.

How did you settle on this broad approach you have where you shortlist Low debt companies that generate FCF & give high RoCE?

The credit for that goes to the auditing stint at Deloitte during my CA articleship. I got the chance to look into the workings of a lot of listed companies & learnt a few core things about businesses. One of them was that if a business is unable to make a return on capital employed more than its cost of capital on a consistent basis, then shareholders have a very low chance of making any decent returns from investing in that business. Also I back-tested a lot of data which shows that low RoCE companies generally destroy shareholders’ wealth

Economies, in general, go through cycles of contraction & expansion – if a company has no debt, then it has a greater chance of surviving through any slowdowns in business in general. The FCF logic is straightforward – if a company is making profits but is unable to convert these to cash, then it makes no sense. 

In fact, this is actually a red flag because the company might be overstating its revenues and profits, and it’s likely they might not be able to recover receivables and all that.If low-debt businesses are generating good cash flows, then there is a very strong case for it to de-leverage its balance sheet, bring down debt-equity ratio and, strengthen its fundamentals. Which is why I like businesses that can grow & expand steadily by deploying the cash they earn from ongoing operations.

Are there any investors that you draw inspiration from?

I guess so, but not one person. I like to read about different investors from different time periods and what their philosophy was. What I’ve understood is that you need to develop your own thought process & need to have conviction in your own research. So old-school investors like Chandranth Sampath, Parag Parikh, or Ben Graham – they had their own styles of investing (value) and they did very well for themselves. Then Rakesh Jhunjhunwala or Radha Kishan Damani had their own style of investing & a different outlook towards companies, and obviously, they did well. New age investors like Ramdeo Agrawal, Saurabh Mukherjea, and Prashanth Jain who have again developed their very own distinct style that suits the Indian markets.

One investor I really like is fund manager Kenneth Andrade, who follows his own contrarian style – I feel it’s one of the toughest and yet can deliver highest returns. But not everyone has the skills and experience to be a contrarian. Ultimately, I’ve realized that every successful investor has some traits which you should grasp and try to inculcate in yourself but eventually you have to come up with your own philosophy.

What’s your outlook for stock markets in 2019, pre/post elections?

My personal opinion is that irrespective of the outcome, the market will correct by a few percentage points after the results. The earnings growth is missing & valuations in the large-cap space are above the historical average now.

That said, since my approach is bottom-up, I’m focusing more on individual companies than the sectors or market as a whole. I don’t really try to predict the indices or and all of that for my long-term investments. At Alphamultiple, we have almost 40% of our current portfolio in cash now, which we are waiting to deploy to certain stocks on our watchlist once the valuations cool off.

In 2009, Congress got 209 seats or something on its own and the markets were locked in the upper circuit. in 2014 again the markets cheered, you know when the opinion polls started coming in that the single largest party will have to 220, 230 or more seats. So I feel it’s not about which party, but how many seats the largest party will get – and currently the opinion polls are pointing that the single largest party will have 220/230+ seats and there will be a decisive government at the centre.

What is the one thing that you’d like to see improve in the industry?

I believe the industry needs new tools that make investors more disciplined. I’ve seen investors trying to recover their losses from the same stock they’ve been stuck in for years. Loss aversion is very strong amongst investors in India & people fail to take a portfolio approach, focusing on single stocks instead. Investors should realize that not all companies in their portfolio will do well – if you’ve lost 50% of your capital in Tata Motors, then why try to recoup the losses from the same stock?

While there’s a lot of material available about investment discipline & biases, when it comes to investing your real & hard-earned money in equities – all the discipline & philosophy is one side and raw emotions on the other. All it takes is some potentially scary event (like negative news from North Korea or a terrorist attack) that suddenly crashes the market – and all the discipline is gone for many investors. So personally, I’m really looking forward to some tool which helps investors either remove or at least mitigate this bias & habit.

What’s unique about these 2 new strategies that you’ve launched with smallcase? Are they different from your existing strategies?

These new strategies are rule-based strategies which we’ve backtested across different market cycles with multi-decade data to ensure robustness. These two new strategies eliminate human bias & offer a completely different basket of stocks that can match the needs of investors with differing risk profiles.

The Alphamultiple Long Term smallcase is a high risk, high return strategy that is suited for return-seeking investors with a recommended holding period of at least 3 years. On the other hand, the Alphamultiple ETF smallcase is a low-risk portfolio of ETFs that follows an all weather concept, where the investment is spread across multiple asset classes to reduce volatility in order to deliver high risk-adjusted returns.

What are your views on smallcases?

The best part about smallcase is that it helps investors focus on the overall returns on their investment, rather than getting distracted by individual stock returns. 

Also, as an advisor, it is a wonderful platform which allows my clients to invest in my researched portfolio in just one click while also allowing me to monitor their investments. This way, I can give personalized and actionable advice to my clients.

As an avid blogger yourself, who/what are some of the people/publications that you follow yourself?

On the investments’ side, I always read the annual letters to shareholders that Warren Buffett writes. Then there are Ramdeo Agarwal’s wealth creation studies from the Motilal Oswal team, and also Saurabh Mukherjea’s blogs & letters to investors. Apart from this, I read the Business Standard and Economic Times on a daily basis and obviously a lot of broker reports.

On the personal side, I really enjoy reading through people’s experiences on Reddit and Quora. Folks from different backgrounds & different geographies share a lot of life experiences & inputs/advice, which is amazing