Gaurav Sharma – Fail Fast, Fail Early, Move On

Jun 17, 2019

Ask episode

Chapters

Transcript

Episode notes

Gaurav Sharma holds a post-graduate degree in management from Birla Institute of Management Technology (Bimtech), in Uttar Pradesh, India, and a bachelor of science degree from the University of Rajasthan. He has had a rewarding five years of experience at various multinational companies in the domains of wealth management, investment analysis and portfolio reporting. He is presently working towards democratization and simplification of the wealth management services by leveraging machine learning, AI and data science. Gaurav aims to solve problems across customer segments comprising the masses, the affluent middle class and high-net-worth individuals (HNIs). During his tenure at Moody’s Analytics, he gained practical exposure to global standards of investment research and reporting through various tool such as Bloomberg, Morningstar, FactSet and other proprietary tools. At Mercer, he gained exposure to asset allocation, financial and retirement planning, and investment consulting. Prior to these, Gaurav worked in the global wealth and investment management business-line of Bank of America-Merrill Lynch and supported ultra-HNIs in managing their wealth.

“If the company’s growth plans are there, it will work.But if the management is not able to understand and … make investors’lives easy by telling them everything, if they try to hide and try to play with the accounting standards, and of course, if they try to siphon off money,at the end of the day, investors will get to know.”

Gaurav Sharma

Worst investment ever

Young blood catches bug for stock investing

Gaurav was very young when he became interested in the stock market and was one of those guys who “jumped right into it”. He borrowed some money from a friend’s father, who was kind enough to believe in his investment philosophy. Due to his youthful enthusiasm, he was trying to make it big very soon in the market.

First foray rides educational technology wave in India

So, he decided to invest in education technology company, Educomp Solutions (Educomp, EDSO.NS). He did some balance sheet analysis and most of the basic research, and invested in the stock around its peak in 2008-2009. The company appeared to be at the forefront of the education-plus-technology mix, and for India, with hundreds of thousands of public, private, international and specialty schools all looking to drag their classrooms away from chalk boards, it seemed a no-lose situation. He bet really big on it, the numbers looked good, and every one or two years, there was very good news about Educomp winning contracts with 15 to 20 schools. Add to that the promotion of the K-12 education system, and government policy wanting to put a tablet into every student’s hands, everything was going great.

Hidden mismanagement leads to company’s downfall

Gaurav says that if the company’s growth plans are there, it will work. But in Educomp’s case, the founder and CEO of the company had other plans with regards to managing. He was not doing the right thing with regards to the proper management of the company’s money, and was siphoning some off to other transactions, investing in other asset classes by taking money out of the company books, and was basically fudging of the books. The Gaurav had done extensive research on the company’s numbers, its balance sheets, growth plans, and growth in the sector; it all looked good. But as for the management quality, he was unable to assess that very well.

Investor loses 90% of borrowed funds as stock plunges

That’s what made his life difficult, because when the shares started falling, due to the management quality, he sought to assess the business, but he could not trust the management. The stock took a beating and it ended up a 90% loss of the whole money he put in. He then exited, and the only profit was considerable lessons learned.

Some lessons

Read between the lines when it comes to management. A company can have excellent prospects, great products or provide great services, have good numbers, great balance sheets, fine growth outlook, but all of that can come to zero if the management is poor. If the C-suite is lacks ability and is not smart enough to understand different root causes that can emerge to disrupt its business, it will fail and hurt investors very badly.

Sometimes it’s very difficult to prepare for corrupt management. If the founder/CEO had not misspent company funds, siphoned money off for bad transactions and family members, the company would have been in a much better state.

Numbers tell a story but they do not tell the whole story. Investors need to check the background of management, and this kind of analysis must be done on the quality of the management team, their consistency as well, because balance sheets can be fudged. Such misreporting can go on for a long time before investors get any hint of it happening. There must be checks and balances also on management, through vehicles such as active board members and shareholder activists demanding details.

Spend 70% to 80% of your time with numbers when looking at a company. The rest of your time should go into understanding the quality of the management team and the consistency of their reporting. You can even look into what the performance of members of that team at their previous companies to get a better idea of how they are or will perform in your target firm.

Andrew’s takeaways

Bad times are the best time to talk

The most important time to communicate is when we have bad news, when we’re having bad time. At such times, most people avoid communication, and most companies avoid communications at such a time. Investors and fund managers do not expect a company to be perfect. Therefore, getting out there and saying, “This is bad”, “This is wrong”, “This is not working for us” or the like is not as bad as it feels. People are going to accept that.

Overconfidence happens to us all. It’s human. We all suffer it at times when we focus only on what we are looking at. When we do that, we build confidence through that work. And sometimes that amounts to a very false confidence.

Experience comes with age. It would be nice if people could start investing at a young age and not make any mistakes. But the truth is that sometimes we just have to make these mistakes.

Actionable advice

Read between the lines in the annual report. There are a lot of things that are actually said that are not actually written and you need to understand and act upon them, and act wisely.

No. 1 goal for next the 12 months

I want to learn more … I believe the next year will be giving me a lot of more maturity about choosing my investments in a smarter way, I’ll be able to understand more about management. As I meet more people every day, I’m trying to judge and understand what exactly goes on in their minds as they run their companies.

Parting words

Fail fast, fail early, learn fast and recover fast.

You can also check out Andrew’s books

Connect with Gaurav Sharma

Connect with Andrew Stotz