Episodes

Dan Ferris: Hello, and welcome to the Stansberry Investor Hour. I'm your host, Dan Ferris. I'm also the editor of Extreme Value, published by Stansberry Research.

Today we'll talk with investor and author Gautam Baid. He's a very thoughtful, super smart, super well-informed, fundamental bottom-up investor.

In the mailbag today, a former guest and avid podcast listener points out how wrong I was about Murray Rothbard. And remember, you can call our listener feedback line at 800-381-2357. Tell us what's on your mind and hear your voice on the show. For my opening rant this week, stop talking about market bottoms. The top isn't even in yet. That and more, right now, on the Stansberry Investor Hour.

So we keep seeing these silly articles about the market bottoming. And there was another one just recently in, I guess it was Barron's, no, Bloomberg. Yeah, Bloomberg. The article had a headline that said, "Top Investment Ideas for a Market That Might Have Hit Bottom." And if you type something like that, you'll get a bunch of other articles in the past few weeks. And I think it's silly because, as I've said before, when the bottom finally does hit, nobody will be talking about bottoms anymore. And the fact is, I don't even think the top is fully in. I think we are still in the most massive mega-bubble in history.

And if you want at least a little bit of evidence, just look at the meme stocks, the original meme stocks. Look at AMC Entertainment, the movie theater company that is owned by a bunch of shareholders who call themselves "apes." And the same apes also own GME, the ticker symbol GME, for GameStop. AMC and GME, the two most famous, iconic meme stocks.

And I have a one-month chart of both of them in front of me on Bloomberg. And in one month, AMC is up 73%, and GME is up 36%. These are highly indebted companies whose businesses are dying. And the market says that they're worth billions and billions of dollars. I'll be shocked if there's more than two or three bucks' worth of intrinsic value in either one of them.

And they've been diluted and diluted and diluted... well, especially AMC has been heavily – the shareholders have been heavily diluted. The CEO says he loves his ape shareholders, but he took advantage of them and sold huge amounts of equity. He raised $3 billion. I don't even think they have $700 million of it left. It's such a scam, and it's going to crash. One day it's going to be a penny stock, and then it's going to be out of business. You'll never hear about it again. Same thing with GameStop.

So there's that. There's also still new meme stocks being minted. You probably heard about this company, AMTD Digital, ticker symbol HKD. It just went public, so it went from, just call it, eight bucks – well, on July 14 closing price according to Bloomberg. And it peaked – the high closing price was less than a month later on August 2, last week, and $1,679 a share. So, yeah. The company was very briefly, it spiked up intraday to $2,500 a share. It was worth like $400-and-some billion, just for a few brief moments in the trading day. It was worth over $400 billion. They made $25 million of revenue last year. It's ridiculous.

It's just another meme stock. It's ridiculous. And if you look into the company, it's like Hong Kong-headquartered, Cayman Islands-registered. It's heavily controlled by this other company called AMTD, ticker symbol AMTD. And as soon as you say Hong Kong-headquartered and Cayman Islands-registered, it's like, "Oh, red flags. Look out." And there's a lot of other shady stuff about it that Corey McLaughlin noted in a recent issue of the Stansberry Digest.

And I had to mention his piece about that again recently, because I was saying, "Look, this is not what bottoms look like." Sure, it might be like a bear market bottom... This might be just a brief bear market rally here, so there's a little near-term bottom. But I'm talking about the big bottom. I'm talking about if you believe we're in the midst of the most massive bubble ever. The top started coming in.

The top is a process. We've said that over and over again, but we haven't talked about it in a while because, well, it sure looks like the top was in January for the S&P 500, November for the Nasdaq, and early 2021 for all the sort of garbage stocks, all the Cathie Wood stocks and the ARK Innovation ETF, and a bunch of other stuff – SPACs and cannabis companies, some of them are good companies, but that was massive bubble, too. So all that stuff caved in, and then the broader indexes peaked out.

But I'm telling you, as long as we still have a stock that can go from $8 to $1,600, briefly to $2,500, worth $400 million, and it only makes $25 million in revenue, and it's Cayman Islands-registered... as long as this stuff is happening, this ain't no bottom. This is what tops look like. This ain't what bottoms look like. So just hang on to your hats. I've consistently counseled holding plenty of cash, hold some gold and silver, maybe a little bitcoin if you still like it – I'm less in love with it than I was, and I've sold my bitcoin for reasons I've discussed. It just trades too much like one of these meme stocks, frankly. It just doesn't seem to be behaving like a store of value or a currency or anything like that.

So, I would counsel you against thinking, "Hey. We're all good. We're all clear. This was another buyable dip and away we go." I don't think that's true at all. I think one of the things that people will get consistently wrong – I'm going to constantly talk about this until it's not true anymore, or till it doesn't need to be discussed anymore. Inflation is real. It might be peaking slightly, just in a near-term kind of short-cycle way, but it's here to stay for a while. It's stickier, it's a more persistent phenomenon than people realize.

And we saw huge inflation in the '70s, and we didn't get that big, very famous now-market bottom until 1982. That was the big buy moment that people were talking about a lot into the '90s. They were saying, "That was the big moment." And you can get that moment after, you know, people will stop talking about inflation, they'll stop talking about owning gold and doing all this stuff you should do during inflation, and yet maybe the market will bottom after that time.

So inflation is a sticky phenomenon that will be around, and you'll feel its effects even after it truly peaks. And pretending we know when that's going to be is not a good idea. "Prepare, don't predict." You've got to be prepared for inflation. And I know, I know, I know, I know. Holding lots of cash does not prepare you for inflation, except when it does by beating the daylights out of equity multiples, like it did in the '70s. If you look at a chart of the P/E ratio of the S&P 500, it's mostly above 15 except when? During the '70s, it just got bludgeoned. And that was a great time if you were a true long-term investor.

Like Warren Buffett said he felt like, I forget the way he – but he said he felt like a man, a harem, or something like that... an unmarried man in a harem. I forget how he put it, but the point was well-taken. He was a long-term, fundamental investor who wanted to buy great businesses at cheap prices and just hold them forever. And the '70s were actually a great time for a guy like that to do that.

And I think we're going to get another great time like that. But the trip between here and there is painful, and you got to be prepared for it. So that's why I say hold plenty of cash because that cash will temper your losses. I don't think you can afford not to be invested, but I also don't think you can afford not to be holding plenty of cash. It seems like contradictory advice but it's not really... because I'm not telling you to get rid of either one. I'm not telling you to be fully invested in stocks. I'm not telling you to go all to cash. It's more important than ever, I believe, to hold a diversified portfolio, including cash and gold and maybe some precious metals, gold, and silver because as long as we get days like today, where AMC is up 15% and still valued at $13 billion, yeah, it's not the bottom. It's the top. It's still topping out.

And if you look at bonds, that was arguably a much bigger bubble, because it's a much bigger market, and prices were not at multidecade lows, they were at all-time, 5,000-year lows. We talked about this before, too. If you read the yield books, Sidney Homer's "Yield Book," A History of Interest Rates, is the real title, but it's colloquially known as the Yield Book, he goes back 5,000 years. And in 5,000 years, interest rates were never as low as they were in the past couple of years, meaning prices of bonds were never as high – so arguably, the biggest mega-bubble ever in the history of humanity. And this stuff doesn't go away with six months and a little drawdown, and we have this whatever, 20-ish-percent drawdown in the S&P, 33% drawdown in the Nasdaq. No, you don't get out of a mega-bubble this easy. It's going to be rough. Be prepared.

1. And with that, let's talk to a fellow with a very long-term view, who I believe is quite sympathetic to my own viewpoint, Mr. Gautam Baid. Let's talk to him right now.

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All right, it's time for our interview. Today's guest is Gautam Baid. Gautam Baid is a CFA. He's also the managing partner and fund manager at Stellar Wealth Partners India Fund, an investment partnership modeled after the original Buffett partnership fee structure. The fund is based in the U.S., and invests in listed Indian equities with a long-term, fundamental, and value-oriented approach. Gautam is author of the international bestseller on value investing, The Joys of Compounding. Previously he served as portfolio manager at Summit Global Investments, an SEC-registered investment adviser based in Salt Lake City, USA. Gautam's views and opinions have been published on various forums in print, digital, and social media. In 2018 and 2019, he was profiled in Morningstar's Learn From the Masters series. And with that, Gautam Baid, welcome to the show. Glad to have you here.

Gautam Baid: Thank you for having me, Dan.

Dan Ferris: I think what I really want to talk with you about today is – well, we have to talk about your book, really. That's the only way that I know you. But maybe, real quick before we do that, maybe you could just give us the 20 or 30 second background on your career as an investor.

Gautam Baid: Sure. So I stared my career as an investment banker with Citigroup, where I worked for three years at their India office. And then I worked with Deutsche Bank for four years at their India, London, and Hong Kong offices. But all through the first seven years of my investment banking career, it was always investing. That was my true passion. And one fine day, I realized that we just have this one short life to live our dreams, so I didn't want to waste any further time doing something that I was not truly passionate about. So I quit my job in investment banking, and I moved to the U.S. in May 2015 without any job in hand.

I was under the impression that since I'm a CFA charterholder, I'd be able to land a job on the buy side in the stock market pretty easily. But, as you know, life is not a bed of roses for those trying to carve their own destiny. I got rejected in my first three stock market job interviews in the first six months of coming to the U.S., but I did not give up. I was very adamant that I'm not going to go back to my previous field of work, where the presence of reverse incentives constantly led to incentive-cost bias, and led to conflict of interest. And that particular job did not suit my personal nature.

So I decided to continue my pursuit of getting a stock market job. And at the same time, I ran out of whatever little money I'd brought with me from India. And to take care of my living expenses in the U.S., I did not want to sell even a single share from my portfolio of stocks in India because I did not want to interrupt the process of compounding. So I took up a minimum-wage job as a front-desk clerk at a hotel in San Francisco, where I used to work during the graveyard shift for 15 months.

Now, for all your listeners, who do not know what a graveyard shift refers to the shift from 11 p.m. at night to 7 a.m. in the morning. And even though it was a big challenge for me intellectually, physically, culturally, and emotionally, today, in hindsight, I highly value those days of my life because for the first time since the beginning of my busy investment banking career, I finally got some time for myself to read and learn.

The pace of work during the late hours to early morning at the hotel was pretty slow, and I made full use of the free time to read every single blog article on investing, published on blogs like SafalNiveshak.com, FundooProfessor.com, MicroCapClub, Janav.Wordpress, basic investing, and others. And thus, the passionate pursuit of lifelong learning had finally begun.

Now, luck, chance, serendipity, and randomness has always played a big role in various aspects of my life to date. One fine night, while during the course of my daily routine job search at the hotel, during November 2016, I randomly clicked on the "quick apply" button on a job application on LinkedIn. And wonder of wonders, I got shortlisted for the interview and that too, for a senior role at an investment firm as a portfolio manager even thought I had zero formal stock market work experience. And this was the phase in my life during which I was about to realize the power of compounding knowledge in action.

You see, all those previous 15 months, reading all those blog articles and spending those thousands and hundreds of thousands of hours had now built a very strong intellectual foundation for me in investing. This is what I was lacking during my first three stock market job interviews. And this time I was able to clear all the three rounds of my job interview, and I was offered the role of portfolio manager of global equities. And it was like a dream come true for me.

And that is how my journey started on the buy side. Having tracked global markets as a portfolio manager for five years, and yes, the stock market very clearly stood out to me in terms of the high-growth opportunities available. And so last year in July, after serving at Summit Global Investments for five years, I left my job and started work on setting up my India fund in the U.S.

Dan Ferris: Excellent. So, I guess I should ask you, Gautam, a friend of mine is Rahul Saraogi, another fairly well known Indian investor, who's done pretty well. Is it stupid of me to ask you if you know him, because I realize India has a billion people?

Gautam Baid: No, I've heard about him. I do know him in the professional circles. I don't know him personally, but I do know that he's doing a good job managing his fund. I believe his fund's name is Atyant Capital if I'm not wrong?

Dan Ferris: Correct, yes it is. Well, I guess it's a fair question because even though India has a billion people in it, the value-investing community has shrunk a bit the last 10, 15 years, and it's fairly small these days. And just to be clear, you would characterize yourself as a value investor, correct?

Gautam Baid: Well, let me clarify that value investing does not mean buying bad, damaged businesses cheap. It simply means getting more value for the price you're paying, with the lowest possible level of risk. That is the true definition of value investing. You have to have a "DCF" mindset. You don't have to carry out a precise discounted cash-flow operation on a spreadsheet. That is actually a red flag. If you have to do a full-fledged DCF an Excel spreadsheet.

The decision to invest in any company should be very obvious. Those tend to be the best investment opportunities for investors. So, basically, as long as the intrinsic value is growing over time, that is a much more peaceful way to invest, letting the exceptional management teams do all the heavy lifting for you, while value compounds over time. That is the ideal way to invest, in my view.

It's fine... mean reversion trades and hoping for stocks to get back to fair value and then flipping them over to get to the next deep-value opportunity is fine. But there are multiple ways to good long-term investing. I'm more of a growth investor, and in my experience of the last 15 years, I've realized there is only one single strategy which works across market cycles and across different macro environments. It is growth at a reasonable price.

This is the only one single strategy which has worked across market cycles and across macro environments. Other styles like deep-value or high-growth investing in unprofitable companies... those styles come and go. They come in and out of favor from time to time. But growth at a reasonable price, better focus on the balance-sheet strength, the debt ratios, and cash flows... this style, in my view, will never go out of favor. I think that is what fundamental investing is all about.

Dan Ferris: Yes. And fundamental investors like you, the discussion often comes down to a point where someone usually says that they just find value and growth impossible ideas to completely separate. You can't really have one without the other. Certainly there are deep-value strategies in companies that might not be growing, but a long-term, fundamental investor – somebody who doesn't want to turn their portfolio over frequently, and in fact, somebody who wants to turn it over as seldom as possible, the model being Warren Buffett for that – you can't separate value and growth, really, can you?

Gautam Baid: Right. Here I would like to add a very important point that managing a fund is very, very different from managing your personal portfolio. You can practice these mean reversion trades and have high turnover in your personal demat account or your personal brokerage account. But when you're managing a public fund, I'm telling you from experience, plans do not like managers who turn over their portfolio all too frequently. And that practice actually forces you to focus on long-term durability and long-term economics of a business.

In fact, it actually makes you a much better long-term investor when you're actually managing a fund because the kind of attributes you focus on when you're managing a fund as a fund manager, and when your entire mindset completely changes, and you tend to focus on what really matters in a business. Those two or three key variables which actually matter the most to a business, you tend to focus more on those, rather than just focusing on the valuation methods alone when you're managing your personal portfolio.

So I think you managing a fund is a very challenging endeavor, and one has to have very differentiated qualitative insights if you really want to be a good long-term investor.

Dan Ferris: Right. So this is interesting to me because we talk to a lot of fund managers... dozens and dozens over the past few years on the show. And most of them will say, at some point things get difficult and your clients put pressure on you to do things, to change what you're doing. But you represent it as your clients not wanting you to turn over too often and not wanting you to maybe change what you're doing. Am I interpreting this right? Do you just have a really good group of clients?

Gautam Baid: So there are two things here. First of all, a good thing about this book is that many people, so far, have just reached out to me on their own after reading the book. And what is happening as a result is, the clients are self-selecting themselves. Only the people who understand long-term compounding and having an importance of a longer time horizon, they are the ones who are approaching me. And in any case, before onboarding any client into my fund, I try to gauge two things: their attitude toward short-term volatility, and their time horizon.

One very important question which I ask my clients is, what is this money for? You'll be surprised to know the kind of deep inside you can get into a client's psyche just by asking this question. What is this investment for? What is this money for? What is your objective? And that, in turn, helps me vet the right kind of prospective clients for my fund. And like I've written in my book as well, it is as important for the fund manager to vet prospective clients for the fund, as it is to say no to the wrong type of investment idea... because at the end of the day, we all talk about Warren Buffett's success, but he was able to succeed because he had patient capital.

Same thing should be our focus as fund managers. We should try to grow slow and steady, not chase AUM, not chase assets under management, and dilute the quality of our investor base. For me, the quality of my investor base is very, very important. I'm looking for patient capital, and similar like-minded, long-term, patient partners. So I would rather go slow and steady, rather than trying to just chase AUM for the sake of it. And that's one of the best advantages of having a zero-management-fee structure like mine, because since I am under no compulsion to raise AUM, because I don't get paid on AUM, therefore it allows me the luxury of the privilege of being patient and selective in which clients I want to let into the fund.

Dan Ferris: And the structure is one – you sent me a very nice link... Warren Buffett himself used this, and in fact, praised you, praised you in public for doing it, didn't he?

Gautam Baid: So my goal from the very beginning was to make this fund the most partner-centric fund in the U.S. And I was constantly asking myself one simple question that, if I was a client, and if I was an investor in this particular fund, what would I love to see in the fund structure? So in my view, the original Warren Buffett partnership structure is the most equitable fee structure ever practiced. And Warren Buffett used to charge zero management fee and a 6% hard hurdle cumulative rate. So basically he would not get paid unless the investors made at least 6% returns per annum, cumulatively. And finally, Warren referred to 25% of profit share on returns over 6% per annum.

But I was also inspired by Charlie Munger saying that if you rise high in life, then you have a duty to be an exemplar, to take less than you deserve. And so in order to maximize the net realized returns of my investors, and to just promote their best long-term interest, I decided to lower the performance fee from 25% to 19%. So I basically tried to go one step further and improve upon the original Buffett partnership structure.

Dan Ferris: Sounds good to me. Zero-percent management fee sounds good to me. And a hurdle rate of 6%, too, sounds good.

But let's talk more directly about your book right now. It's titled The Joys of Compounding, which makes me think it's going to be an investment book only. But then it is subtitled, The Passionate Pursuit of Lifelong Learning. Tell me about that. Why is it... what's the intersection? Why write about investing but really writing a book about lifelong learning?

Gautam Baid: So my life epitomizes Isaac Newton's saying, "If I have seen further, it is by standing upon the shoulders of giants." The Joys of Compounding is my heartfelt tribute to all my teachers who helped me achieve financial independence, become a better adviser person, and embark on the path to a fulfilling and meaningful life.

And writing about that, and sharing my life's biggest learnings, was my way of giving back to the investing community from whom learned so much over the years. Our goodwill compounds when we share with others. And we should always act as a funnel of knowledge, not a sponge.

As Charlie Munger so beautifully put it, "The best thing a human being can do is to help another human being know more." In life, winners also lose occasionally, Dan, but those who help others win can never lose. So always help others rise. This is how goodwill compounds over time.

In the first chapter of my book I state, "Today, after having successfully achieved financial freedom through my passionate pursuit of lifelong learning, I can happily say that I'm a better investor because I am a lifelong learner, and I'm a better lifelong learner because I'm an investor." The principles emphasized throughout the book follow the lifelong compounding journey of a value investor.

At the same time, the learnings are not restricted to only about investing. This is because compounding does not apply only to money. Social and intellectual capital also compound. Investing in yourself and your relationships, and in your understanding of the world, pays massive dividends over time. And this, in a sense, is the ultimate message of the book, that the best investment you can make is an investment in yourself.

All the great things in life come from compounding. And that is why I've written about compounding positive thoughts, compounding good habits, compounding good health, compounding wealth, compounding knowledge, and compounding goodwill. And the reason for the subtitle is that Charlie Munger said, "The game of life is the game of everlasting learning." And he had also said that those who keep learning will keep rising in life. And these, to me, were profound words, and I embraced them as a way of life. So that's what the book is all about.

Dan Ferris: I can't help adding another quote that you put in the book here, right at the beginning here. It's from an investor who folks like you and I know well, Francisco Paramés. And he says, "The true value investor who deserves my utmost respect is somebody who devotes their life to their passion for reading. Nobody can spend their life studying for 50 years, which is what we do, if they don't enjoy it." I like that because I like to read, and it is enjoyable. I'm always telling our listeners.

Gautam Baid: So here I would like to add a very important aspect about the importance of reading for investors. I think this is something which all investors should inculcate. And in my book, I talk about compounding in both an investing sense and in a learning sense. And the reason for that is the body is limited in ways that the mind is not. In fact, by the time most people are 40 years old, their bodies begin to deteriorate.

But there is no limit to the amount of growth and development that the mind can sustain. And reading keeps our mind alive and growing, and that is why we should inculcate a healthy reading habit. Books are truly life-changing, once you develop the habit of reading every day while watching your every thought. And the neural connections that compound through the effort will make you an entirely new person after a few years. In fact, Buffett and Munger estimate that they spend 80% of their day reading or thinking about what they have read. And therein lies the secret to becoming smarter.

The way to achieve success in life is to learn constantly. Once, when asked about the key to his success, Buffett held up stacks of paper and said, "Read 500 pages like this every day." That's how knowledge works. It builds up like a bond interest. And compound interest, Albert Einstein had said, is the most powerful force in the universe. So what happens? Many are blessed with an incredible power through knowledge building. You become a learning machine.

Even after achieving such enormous success, Buffett still reads for many hours every day, and he often credits this good habit for much of his success in life. Reading allows him to learn the lessons of others. And the more you read, the more will build your mental repertoire, and incrementally, the knowledge you add to your stockpile will grow over time, as it combines it with everything new you put in there. And this is compounding knowledge in action.

Eventually, when fire is faced with new challenging or ambiguous situations, you will be able to draw on this dynamic inner repository, or what Charlie Munger refers to as a "latticework of mental models." Now, what are mental models? Mental models are an explanation of how things work, what variables matter in a given situation, and how they interact with one another. In short, mental models are how we make sense of the world.

Dan Ferris: Right. So give me an example of a good mental model. Just one.

Gautam Baid: A very simple mental model from the world of philosophy... one part of that is stoicism. So, if you're familiar with the core principles of stoicism, stoicism basically teaches us to focus on what we can control, which is our reaction to things as they unfold. We cannot control the events, but we can control our reaction to them. And this is a great mental model to follow for the investor from the field of philosophy... that as investors, the only two things in our control are our research process and our risk management practice, and our personal behavior. So, that is the only thing that we control... the process, and our behavior.

So, what happens later is all up to luck, chance, or independent randomness. But what is in our control? That is what we should focus on, because once we start focusing on things that we cannot control, then we end up becoming dejected on bad outcomes. And investing, at the end of the day, Dan, is a probabilistic activity, which means that occasionally, even after following a good process, the outcome will not be favorable. Similarly, sometimes, after following a bad process, due to dumb luck, the outcome will be favorable.

This is the single biggest realization which investors need to imbibe in themselves. And this can only come when you actually understand the fundamental principles from stoicism.

Dan Ferris: Yes. Lots of value investors... I know you're a reasonable price investor. And to be fair, lots of investors, period, seem to have embraced the tenets of stoicism. So I'm glad that you mentioned that.

But I'd like to try to get at something. I'm not even sure about the question, so just hear me out here. I'm just fascinated by the fact that – and I realize it's largely due to the influence of Warren Buffett and Charlie Munger. They've really fostered this. And what they've fostered is this intersection of principles. You mentioned Munger's latticework of mental models, and we talked about stoicism a little bit. And just the intersection of building character and lifelong learning, and what most people think of as just making money, and trying to get ahead.

And it fascinates me that those two things intersect so well, because culturally people will often criticize someone as only thinking about money. But it seems many people that I've met in my life – I think I've self-selected my group... many people, they seem to have married the idea of gaining, making money, building wealth, and having really good character. I think that surprises some people. It doesn't surprise me. But I'm nonetheless fascinated at the intersection of those two things.

Maybe I don't have a question. Maybe I just need to tell you I'm fascinated with it, and you can pick up from there.

Gautam Baid: So I'll just add to you just said. I've talked about this in my book as well, that the goals of investment should be happiness, joy, growth, intellectual satisfaction, and eventually peace and serenity. Wealth and financial prosperity are natural byproducts of lifelong learning. And I've also said that many people achieve success in life. But to sustain the same, and to potentially build on it over an entire lifetime, it requires a sense of gratitude, and of humility, and a constant learning mindset.

So this is the key. You'll notice that many of us start off in the pursuit of making money, in as fast a time period as possible. But once we achieve financial independence, we'll actually come to the deep realization of what actually matters in life... which is that the entire purpose of making money was to gain control over our lives and gain control over our time, to not have to wake up to an alarm clock anymore in life. And trust me, that is one of the biggest luxuries which financial independence gives you. You don't have to wake up to an alarm clock anymore, you can design your day as you deem fit. You can associate with people you want to associate with.

This is what financial independence means to me. It doesn't mean materialistic consumption or just buying a luxury car or a big house. It's about gaining control over my life, and gaining control over my time, and doing things that promote happiness to me. And that is what actually gives your life fulfillment. This is the big wisdom which value investors get to know after they achieve financial independence. But till the time you don't become financially independent, short-term volatility will bother you. It will make you nervous. You will be scared. But all these insecurities vanish the day you achieve financial independence. Actually, that is when you achieve true wisdom in life.

Dan Ferris: Well said. So we had a very philosophical discussion here, but I wonder – we do a lot of, you might say, "teaching our listener how to fish." A lot of our guests, I ask them to do that, and you've done it very, very well. I wonder, do we have any fish to offer them? If you don't want to give a specific recommendation of stocks that you're looking at, but maybe you could talk about India, why India's so attractive to you.

Gautam Baid: Well, in my view, I'll just give you the big picture to start with first. So, it took India 60 years to reach its first billion dollars of GDP. But it took India just seven years to reach its second billion dollars of GDP, and the subsequent billions are expected to be reached in much faster succession. Now if we simply assume the market cap of GDP to approximate one over time, one can just envisage the kind of wealth creation that lies in store for investors in the India stock market. Trillions of dollars, and the nation's best managed business with proven execution of track records and ability to scale up their operations will capture the bulk of this upcoming wealth-creation boom in the Indian stock market.

One more very important point here, if you look at the history of all the major stock markets in the world, you look at U.S., Japan, and China, whenever those economies' GDP – they're built from 2.5 billion to 5 trillion, their stock markets did not just double. Their stock markets tripled and quadrupled. And why did that happen? It's because when any nation transitions from a low income-per-capita country to a middle income-per-capita country, the basic spending on items like food does not go up, but the spending on discretionary-branded consumption, and financialization of savings – those categories go up 10X and 4X, respectively.

And this is what India offers to investors today. Today, India is at $2.8 billion of GDP. And as India moves to $5 billion of GDP, history teaches us that the fastest pace of wealth creation takes place when a nation goes from $2.5 billion to $5 billion. So, India offers you linear growth in GDP, but exponential opportunities within two key categories, which is discretionary-branded consumption, and financialization of savings. That's a big-picture view first.

One more really important point: what is the driver of GDP for any country? It is estimated change in the working-age population coupled with productivity growth. And apart from Nigeria, which is a very small country, over the next 30 years, as per a study published by Collaborative Fund research, over the next 30 years, apart from the U.S. which will keep benefiting from favorable immigration trends, India is the only major economy in the world that is expected to experience a positive change in its working age population.

You look at countries like South Korea, Spain, Germany, China, Russia, and Italy... all of them are expected to experience a severe fall in their working-age population. So that's why those economies may face the same problems which Japan as an economy has been facing over the last 20, 30 years... that of supporting an aging population. And this again lends credence to the long-term India story. It's a decadal story ahead for the next two, three decades.

So, for compounding to work, you need decades. You need to put money to work for decades. And this is why India offers you a large economy, a large size of opportunity because it has 1.4 billion people, and you have got longevity of growth for the next 20, 30 years. So, all the macro factors are in place for India at the moment, finally. As investors, we always aim to get in on the ground floor and ride all the way up to the top floor.

So fiscal year 2009 and fiscal year 2020, for 10 years, there was an economic slowdown because the government there had instituted a savings of reforms to clean up the banking system's balance sheet, and corporate India was also deleveraging their balance sheets. And, as you know, deleveraging is a very painful exercise. So now what has happened is, the banking system balance sheets have been cleaned up, corporate India has deleveraged its balance sheet, and now the bank/corporate sector is primed for a fresh capex cycle.

And if we know from history, what is the key driver of economic growth in any country? It is banking-system credit. And what is the key driver of any bull market in any country? It is the capex cycle. So you have these twin engines of banking-system credit growth, and corporate India capex cycle revival. These two engines firing... that will lead to return on equity of the entire stock market expanding over time. And therefore, you'll get earnings growth, coupled with written ratio expansion, and you'll get valuation relating, and that is how you get the multibagger stock returns from individual companies in any stock market.

So, the setup for India is very, very promising as of today, and I think this is one of the best times to get investors to invest in India. It's my personal conviction and belief that all investors in the world should have some allocation to Indian equities in their portfolios and should not miss out on such a big wealth-creation opportunity.

Dan Ferris: I see. So, regarding the macro picture that you like so much, you must be very confident that the current prime minister, who's in his early 70s now, that whoever comes after him will – the momentum is so great then, I guess you're saying, that whoever comes after him will not be able to reverse the situation so much. They might not be so great, but they can't be too bad. In other words, India's headed so strongly in one direction that that is a direction that will create a lot of wealth, that you're confident it will not reverse this direction.

Gautam Baid: Right. And I've shown this in my book as well, in the chapter on financial market history, in which I've actually shown all the various prime ministers of India for the last 40 years, and I've shown the Indian stock market performance in each of those different government regimes. And I keep telling people that you'll make money in India in spite of the government, not because of the government, because in any democratic nation, you know that things tend to move very slowly.

But in spite of that, the truly exceptional management teams who can execute, those are the managements you want to back with your capital, and those managements create wealth across market sectors. It is predictable, whichever political party is in power.

This is the key, learning again. This comes from experience and from study, financial market history over decades, not just the last few years. I've come to the conclusion that great businesses create wealth across different environments, be it a global pandemic, lockdowns, Russia-Ukraine War, or China-U.S. tensions, geopolitical risks, disease outbreaks, etc. But bad businesses eventually destroy them – irrespective of whether the macro headlines are negative or positive. So just focus on bottom-of-topic of stock picking and leave the macro noise to the economist to handle, having that much better approach to succeed in the long term.

Dan Ferris: Right. So, where I'm heading with this is, it sounds to me like – and the reason I even brought it up – I think when people think of India, they think, "Well, that's an emerging-market country. So you have to be careful about political risk, among other things." But your attitude toward it, and others' – Rahul Saraogi was on the program expressing basically the same long-term outlook – it's more like the way we would think of a developed country, is it not? It's that kind of long-term confidence that, in spite of the government, it's going to do really well.

Gautam Baid: Individual businesses, which are very good, they do very well, and there are many businesses that struggle. So, just to give you an idea, there are more than 5,000 listed companies in the Indian stock market. But in my view, barely 1% of them, 50 or so, are suitable for long-term investing. The rest of the 99% are basically either bad businesses or deeply cyclical businesses in which you cannot do long-term investing as such.

At the same time, one particular problem with many Indian companies is that they have either bad economic quality, or poor levels of corporate government. So one common question I get asked often is how am I able to evaluate the management quality of companies in India, while living and working in the U.S.? And for that, I tell them that I follow a comprehensive corporate government checklist. And I'll share it, the items from the checklist with you right now.

So I look for any frequent change in auditors and the qualifications of these auditors. Is there any abnormal auditor fees? Is the auditor fees growing faster than the revenue growth? Does the company have a long list of unaudited foreign subsidiaries? Does the promoter or the owner of the business have any political affiliations or criminal proceedings against him? Has the company been subjected to any regulatory or income-tax department raids in the past, or any cases of capital market regulatory department?

What is the history of churn or attrition in the C-suite? Is the e-management personnel drawing excessive remuneration or blowing large sums of monetary shareholder money on building a lavish corporate office? Is the company diluting its equity a lot? Is the promoter holding coming down? Is the promoter pledging his shares? Has the company shared with minority shareholders in the past through dividends or share buybacks? Is the company taking loans from the promoter above market interest rate?

Are the related party transactions significant in size. What is the view of the current index employees of the company? You can get this information on websites like Glassdoor.com. What do the industry experts and reputed investors think about the company? Is the promoter running a similar business as the listed entity in this privately held company? Because that will lead to a conflict of interest.

Also, evaluate the accounting quality of each business. So what do I mean by evaluation of accounting quality? Check for volatility depreciation rates or the changes in depreciation policy because the depreciation policy can be managed by the management, or modified by the management to manipulate earnings.

Also check whether the company's writing off its operating expenses against the reserves and surpluses on the balance sheet, thus inflating profit. Check whether the company's having any aggressive revenue recognition policy. Is the business really working capital intensive? Is the accounts receivable days or the inventory days going up a lot?

What is the trend in the historical cash flow from operations to net income ratio? This ratio tells you how much of the reported income is being converted into cash flow from operations to finance your investing and financing activities. Also check for any abnormally high margins versus your peers in a commodity industry because it's very unusual for a commodity company to be earning 30% margins while its other peers are only 10% margins. So do a deeper dive in such cases.

Check for any excessive write-offs of assets in the past. Check for any capitalization of operating expenses. Check for trends in the debt-to-equity ratio. Check for [inaudible] because the balance sheet should be good. Check for any instances of defaults on statutory payments, any high contention liabilities, and for any off-balance-sheet obligations. For example, has the promoter given a guarantee on the debt of his group companies through the listed entity?

Now, some people may ask, what is the need to do so much hard work? Who looks at balance sheet and cash flow in a bull market, let alone the full cost of the accounts? My response to them on this is that when you're in a position of fiduciary responsibility and managing other people's hard-earned savings, then you owe it to them to reciprocate their trust in you. And following this comprehensive corporate government checklist has helped me avoid so many bad companies in India.

And, at the end of the day, investing is a negative art. Knowing what to avoid is much, much more important than knowing what to look for. As long as you can avoid the land mines and avoid the big mistakes, you shall do very, very well as an investor. So just focus on avoiding errors of commission. That is the key to success, and India, again, I emphasize, is not a market to take a risk in... because then you'll have your head handed over to you.

India is a market in which you want to crush risk. As a fund manager, you want to crush risk from multiple angles – the regulatory risk, the government risk, the business risk, the industry risk, the management risk – there are multiple risks to be crushed. You just want to crush risk from every angle that you can think of. And a fund manager is first and foremost a risk manager. That is how a good fund manager thinks. He's first and foremost a risk manager because at the end of the day, you want to protect your clients' hard-earned capital. That attitude will only come when you have a deep sense of fiduciary responsibility, fiduciary duty. That is very, very important. It's a mindset, which you need to have.

I did mention that in that corporate government checklist, but let me talk more about a checklist in general. So a prudent investor never purchases ownership in a company without conducting the necessary due diligence. So learn about the company and its competitors, both listed and unlisted, from company websites, filings, and information on the Internet. Read the last 10 years' annual reports, proxies, notes and schedules to the financial statements, and management discussion and analysis section in which you should check for changes in the management tone and industry outlook.

Also observe the recent trends in insider shareholding. And after you've concluded initial groundwork, study the following parameters in a checklist fashion. Income statement analysis, cash-flow analysis, return-ratios analysis, operating-efficiency analysis, balance-sheet analysis, management quality analysis, as well as a psychological checklist of the standard causes of human misjudgment.

And here I would like to emphasize that it is very important to know that the ideal checklist is subjective and it varies from situation to situation. And investors should have a clear understanding of what he or she's trying to achieve in each individual investment situation. For example, the primary checklist items, when investing in spin offs or commodities, is very different from the primary checklist items to look for when you're evaluating high-quality growth businesses. So it all depends on the individual situation.

Dan Ferris: I see. OK. But suffice it to say, it sounds like you gave us your governance checklist, but you have many others, it sounds like. Is that correct?

Gautam Baid: Yes. Income statement, cash flow, return ratios, operating efficiency, balance sheet, and a psychological checklist of the various behavioral biases... and within each of the six categories I've detailed in my book, all the large number of items to look for with each of these six categories.

Dan Ferris: I see. So it's all in the book. Good.

Gautam Baid: It's all in the book.

Dan Ferris: Excellent. I wanted to get that across to the listener because I have a feel for the kind of incredibly detailed work that you do. But it's time for our final question, and it's the same question for every guest on the show, no matter what the topic. Sometimes we have guests who are not even investors, or financial guests, and it's the same question for everybody at the end. And that is, if you could leave our listeners with a single thought today, what would it be?

Gautam Baid: Invest in the stock market for the long term with good-quality businesses, what are reasonable valuations to create long-term generational wealth for yourself and your family. And the key to compounding is to start early. The best time to start was yesterday. The second-best time is today. So, start right away.

Dan Ferris: Excellent. Straight to the point. I appreciate that. Well, Gautam, it's been wonderful talking with you, and I just want to say thank you for coming on the show and talking with us today.

Gautam Baid: Thank you, Dan. This was fun.

Dan Ferris: All right. And we would certainly like to check back in with you in another six or 12 months and maybe talk again.

Gautam Baid: Sure, Dan.

Dan Ferris: All right, thank you. And I guess that's bye-bye for now.

Once again, I hope you enjoyed that as much as I did. That's our tagline, isn't it? Some of these interviews lately have just been so enjoyable for me. Maybe in my old age, I'm just really enjoying interacting with people more and more and more. But I have to tell you, I find Gautam to be quite brilliant, and I really am glad that he spelled out a good portion of his checklist process that he uses when he vets the companies that he invests in. That's a real long-term, fundamental, bottom-up investor process right there. And as he said, you can find it in his book, The Joys of Compounding. And his last name is B-A-I-D, Gautam Baid. So look that up on Amazon. I highly recommend it. I have it, and it's great. It's half investing and half philosophy of life. And it's a good, pretty easy read. It's not written in some sort of academic language or something. It's easy to read. So, definitely recommend that, and man, I really enjoyed talking with that guy. I hope you did, too.

All right. Let's check out the mailbag. Let's do it right now.

Look. I think you know by now I'm always trying to tell you the really hard truths, even when, especially when what I have to say is unpopular. Today, the hard truth is that your wealth is in danger. Everything you may have made in the bull market of the last decade could disappear very quickly. Some of it's probably gone already. This process has already started. And even if the financial markets somehow avoid a devastating crash from here, inflation is still eating 8% of your money every year. I've spent 20 years helping people prepare for extreme market shifts, just like the one we're going through right now, in my role at Stansberry Research. I've recommended 24 triple-digit winners, and I called the collapse of Lehman Brothers with near-perfect timing.

Well, today I'm issuing my biggest warning ever. If you want to preserve your retirement and your lifestyle in the coming years, you need to act. I recently went on camera to lay out a simple, one-step plan for what to do. You can set yourself up in minutes and likely forget about inflation, rising prices, or the worst effects of a market crash for years to come. This plan does not involve options, shorting, crypto, or anything complicated, and it doesn't require perfect timing.

The perfect time to act is right now, and you could see triple-digit upside in the coming years. To watch my full interview with the brilliant financial journalist and hard-asset expert, Daniela Cambone, simply go to CrashProtection 2022.com. Again, that's CrashProtection 2022.com, to watch our full interview for free.

In the mailbag, each week, you and I have an honest conversation about investing or whatever is on your mind. Send questions, comments, and politely worded criticisms to [email protected]. I read as many e-mails as time allows, and I respond to as many as possible. Or call our listener feedback line, 800-381-2357. Tell us what's on your mind, and hear your voice on the show.

A really light mailbag this week. Super light. I've got one item I want to talk about, but it deserves quite a bit of attention. So we've had Kevin Duffy on this show twice. And you know him to be a very thoughtful, well informed guy... fundamental, bottom-up investor. Just a really, really smart, thoughtful guy. And we've never met in person, but I sort of met Kevin. He listened to the podcast once, oh maybe a couple years ago or so, and he wrote in and he said, "You know, I disagree with you about this and that." And he was just so thoughtful and smart about it, I don't know how else to put it, that I was immediately just attracted to his mind and his way of thinking.

And he wrote me an e-mail last week, and he said, among other things, "I have to admit your comment about Rothbard," that is Murray Rothbard, "not being a money expert caught me by surprise. No doubt Rothbard has his share of critics. I have to think that comment came from someone else, not Dan Ferris. Gilder, perhaps? While I hate argument from authority and believe experts often get it wrong, Rothbard wrote extensively on monetary theory, monetary history, and money and banking. In his magnum opus, Man, Economy, and State, written at the age of 36, money is foundational. In fact, 100 of the 900 pages are dedicated solely to the money supply. Agree or disagree, it's hard to disparage his credentials on the subject of money."

Well Kevin, message received. OK? I believe you are correct, and I believe that I am wrong about Rothbard. I've read the money and banking, mostly the banking stuff, and yes, money always figures into the argument. But who knows. I think it was just my ignorance about – like I have read Man, Economy, and State, for example. Just my ignorance about the sum of his works. Also, I found myself sitting back and wondering, "Gosh. Do I think anybody is truly and authority about money?" Certainly about the history of money, and why various types of currency may have succeeded or failed in the past... but I don't know.

I want to be sort of just a gold bug fanatic, but I'm just open to other possibilities. I never would have – maybe I don't have enough of sense of time and history, but when I look at the U.S. dollar, I'm like, "How did it last this long?" I know it's only been since 1971 that it was a free-floating abstraction, but still, how did it last this long? I don't know. I think it's owing to the economic power of the United States. Some people say the United States is a fiat currency backed by aircraft carriers. So, maybe that's it. Maybe I don't appreciate that enough.

But message received. So thank you, Kevin, and thank you everyone who's ever done the same. And that's another mailbag, and that's another episode of the Stansberry Investor Hour. I hope you enjoyed it as much as I did. We provide a transcript for every episode. Just go to InvestorHour.com, click on the episode you want, scroll all the way down, click on the word "transcript," and enjoy. If you liked this episode, and know anybody else who might like it, tell them to check it out on their podcast app, or at InvestorHour.com. And do me a favor, subscribe to the show on iTunes, Google Play, or wherever you listen to podcasts. And while you're there, help us grow with a rate and a review. You could follow us on Facebook and Instagram. Our handle is @investorhour. On Twitter, our handle is @investor_hour. If you have a guest you want me to interview, just drop me a note, [email protected], or call the listener feedback line at 800-381-2357. Tell us what's on your mind and hear your voice on the show.

Till next week, I'm Dan Ferris. Thanks for listening.

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