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With me I have equity research analyst and investment manager Niraj Monga, and I'll give you a quick backstory on how I actually came across Neiraj. So I was watching this Netflix series. Uh it's called Bad Boy Billionaires India. And the first episode, it covers the rise and fall of Vijay Malia.
VJ is a high-profile, larger-than-life entrepreneur in India who, after much success with other businesses, decided he was going to start Kingfisher Airlines, which went on to become a publicly traded company. Long story short, my guest Niraj had suspicions about Kingfisher being a viable company. He did some digging, he then became convinced, and he published a report titled Pie in the Sky.
This research report brought to light what was taking place behind the scenes of Kingfisher. Needless to say, it wasn't good, and it was all downhill from that point forward. So having watched this and seen Niraj is the man largely responsible for having uncovered the dodgy operations of Kingfisher. Which as you'll hear started from the top and trickled all the way down to the Indian banking system. I thought Naraj would be a great person to chat with.
To summarize Niraj's professional experience, he spent thirteen years as head of research at Veritas, a Canadian independent equity research firm, and then in twenty fifteen he founded Antia Investments. Now over the next sixty minutes or so we go into many research slash analyst related topics and talk specifically about several cases such as Naraja's work on Kingfisher.
Reliance Communications, BlackBerry, Yellow Pages, and everyone's favorite, Tesla. I'll leave it there, folks. Please enjoy this one. Here is episode two hundred and nine with Niraj Monga. Today you are the founder and principal of Antia, a money management firm. Previously though, I think you did around about fifteen years at Veritas, which was an independent equity research firm. Is this where you got your start or how did you wind up becoming involved in research and analyst type of work?
So Aaron, my first job was working for a newspaper called The Economic Times, which is the world's largest business daily, published out of India. And at the time when I had graduated from my MBA program, masters program from University of Indore They used to publish a product called the Investor's Guide. Which was published weekly on Mondays, where they would discuss and highlight new IPOs coming to the market, as well as macroeconomic and investing related topics.
So that's where I got my start in writing about investing options and equities. So that was 1995. Okay. And then when did you start at Veritas? How did that come about? So then I moved to Canada to do my MBA at the Richard Ivey School of Business at the University of Western Ontario in nineteen ninety-eight. And then when I graduated from business school, I started at Tebane and Company in Strategy Consulting, where I worked for a year.
And at that time there was this whole 2000-2001 tech telecom bubble in North America, which bust. I was part of the TMT strategy consulting practice at Bain, but that didn't really matter because the entire office was. uh rationalized and we went down from approximately 110 people to maybe 20 people in the office. And when I was let go, I decided that I wanted to go back to doing what I really loved before I started in strategy consulting, which was equity investing and equity research.
Uh Veritas Investment Research was a startup. It was founded by Michael Palmer, who had been an analyst on Bay Street for approximately 25 years before he founded Veritas. He was one of the leading consumer products analysts. And I was the first employee there. And that's how my journey into independent investment research in North America began. Yeah, right. I had no idea you were the first employee there. That's uh that's kinda cool.
Yeah, so I ran the research department there for approximately seven years. I became head of research at Veritas in around two thousand late two thousand six, early two thousand seven. after having spent approximately five, five and a half years working with Michael. And then I, along with Anthony Shalipolli, who is the president of Veritas right now, we built the entire team. I hired, trained approximately
80% of the people that were there. Until in 2014, I decided that I wanted to move away from just writing more research and actually build a money management business. So this line of work and here I'm talking about the research and analyst type work, it requires a very deep level understanding of company financials. How are you equipped for this?
So my background is quantitative in the sense that I have an undergraduate degree in economics, I have a master's degree in finance, and obviously I did an MBA at the Richard Ivy School of Business. And I've always been interested in the world of investing and in the world of business.
I remember since grade nine in my school days, I used to read a magazine called The Business World, which was published in India, and then Business Today came sometimes later and then Business India, which was there as well.
So while I love playing cricket, as many people in your country love to do too, but my spent outside of cricket and outside of schoolwork was spent reading business magazines and economists So that all gave me the background which was needed from a macro standpoint to understand the world of business. And with my ability to retain obscure pieces of information, some of those nuggets of information came in pretty handy later on in my life, in my professional career as a research analyst.
And then understanding the accounting part. So one of the benefits of working at Veritas's inception, Veritas's inception and my career inception in research in North America, was that Anthony was an accountant. uh with a background in forensics and we hired a couple of other people and over time working with them I got to have a very good understanding of accounting.
But more importantly, I learned that accounting matters, but it matters more to people who are non-accountants than to the accountants. Because what happens in financial statements is accountants go through a certain type of training. And then they are taught to actually implement that training in the process of either preparing those financial statements, auditing those financial statements, or understanding those financial statements.
So sometimes or many times they lack a perspective which is critical that that this does not make sense. Even if the accounting says it's okay, from a business standpoint, this does not add up. And therefore, that's where a lot of differential value add comes in when other people read the financial statements and they think, Oh, this makes sense. And somebody else who does not agree with the accounting standard itself may say, well, this does not make any sense.
Who were you doing this research for? Because as I understand it, you weren't doing this for your own investments. Uh you actually had a client base who was, you know, would purchase this research or would be a subscriber of Veritas or I'm not sure the exact detail. That's right. So Veritas product Veritas
till I worked there, twenty fifteen, even later and up till twenty eighteen perhaps, Veritas was never into money management. We were a pure independent research house and our research was sold on a subscription basis only. So there were no conflicts of interest ever. And the clients would buy the research because it presented a differentiated view of the world. uh on specifically on the stocks that were comprising the large cap North American, primarily Canadian market.
which would be approximately TSX stocks. I would say approximately one hundred stocks that were large cap, say from between two thousand one to twenty fourteen while I was there. That was the primary Yeah. portfolio of securities that we covered and clients paid for that on a subscription basis. So we were not front running in the sense that we didn't have any vested interest in saying a company is doing going to do well or it is not going to do well.
because we had money on the line, what mattered was purely a differential opinion. And and it is very important that over a period of time in the stock market, if you have a sixty percent hit rate, you are a superstar because nobody can get everything all right all the time.
And differentiated opinions similarly that when clients read it, they need to get a view which is Even if it is not different from where the rest of the market is coming from, it is still more value added than somebody somewhere else that they might find. And w what's the profile of the typical client who would pay for this type of research? Was it more institutions or was there also some some retail interest or was retail priced out? Like, um, yeah, what what did the typical client look like?
These are all institutional clients. They're some of the world's largest institutional money managers, pension funds, uh mutual fund managers, uh, there are no hedge funds. And so these are all very, very credible people who are usually buy o long only. buy own buy aside, long only. And obviously people who are aware of the global investing landscape, they know Canada has some of the world's best managed and largest pension firms, Canada Pension Flam.
Ontario Teachers Pension Plan, Ontario Municipal Employment Retirement System, Alberta Teachers, Canada has some of the largest and the best pension plans, and similarly other money managers. These are all long-only institutional money managers.
That's interesting because A lot of the high profile cases which you're known for seem to be I I don't want to say short pieces, but more uh pieces which lean towards the negative side, saying that, you know, things aren't adding up at this company, you know, there seems to be some risks here. How come long-only clients were interested in that sort of research?
So I think the short side gets a lot of um media and makes a lot of noise. But at the end of the day, if you're the world's greatest short investor, you only make a hundred percent. You can buy something for$100 and say it's worth zero and you made 100% on your money. That's it. But as long investors, they can make 10,000, 20,000, 30,000% over a period of 10 years if they've got the stock right. And that's how wealth is created.
So one of the golden rules of money management is that you don't want to be in a loser that's going to blow up. And if you're a long-only money manager, it's very important for you as a money manager to not be invested in a stock where there is a likelihood it's going to blow up because of governance reasons or it's going to blow up because of uh improperly positioned business or you're going to miss out on the inflection point of the business. So yes, you rode it while you wrote it up.
But suddenly the business has reached an inflection point and now it's time to get out and you didn't get out in time because the market doesn't give you time to get out once the market knows what's happening. So long only managers have a real interest in finding out about governance issues, accounting issues, business inflection points, because they make money by staying invested.
Yeah, okay. That that does make sense. So it's more of like almost like a risk mitigation, they know which stocks to avoid. That's right. So I like to call it avoiding the torpedoes. That is when stocks which will torpedo your portfolio performance. Alright. I like to call them. So if we talk about one of these specific cases, and I think this is
Uh up there with at least one of the top cases you're known for, and this is how I first heard about you on uh the Bad Boy Billionaires Netflix which you were paired in. Uh and here I'm talking about the Kingfisher case. For anyone outside of India, it it's highly likely that they are uh unfamiliar with who VJ is. Now VJ is the man behind Kingfisher.
Can you just set the scene here and just tell us a little bit about who this character was and why he had built a reputation for himself as the king of good times? It's a very interesting question. And it is also interesting that you say that's my best known piece of work, and I'm best known for that. Uh all I would say is that that is one of just one of the many pieces of work I have done and it is one of the least important, but that's one that got the most notoriety.
Because Netflix ended up making a documentary on it. And that documentary was inspired by my research report. And that's what the producer of the film and Oz Film told us, or told me. Right. Now, as far as Mr. Malia is concerned, he used to be a very successful businessman in India. who had inherited a business of uh liquor from his dad and ultimately he had a grand lifestyle so he thought it'd be best for him, given his persona
And given India's growing economy in mid-2000s, between two thousand five, six, seven onwards, that he wanted to launch an airline. Now, clearly having been uh Having lived a life with a silver spoon, Mr. Malia didn't realize that he was getting into a very capital intensive zero free cash flow business and that it was gonna be cyclical and while it sounds fun and dandy, it can blow up pretty quickly. Which she did not realize and it didn't blow.
Now my s entanglement or my story with m Kingfisher was that I was on a trip to India and I bought a flight ticket to fly from New Delhi, uh sorry, Bombay to New Delhi. in one of their pre aircraft, I don't even remember the class, and I thought the ticket wasn't that expensive, but the level of service was exceptional. And I thought, wow, they're trying to run an airline and this must cost them a lot of money. And the plane wasn't even full.
So I thought I will take a look at the financial statements and so when I came back to Canada from India after my trip, I looked at those financial statements and I said this company is basically a flying coffin. So I published a report titled A Pie in the Sky because that that's basically what it was and I I said the company was going to go under and there is no way this can survive.
And it is surviving at the largest of Indian financial institutions which seem to be turning a blind eye both to governance and to disclosures. And perhaps the bankers do not understand what they are reading or they are choosing completely to ignore what they're reading. And by the I published my report in September of two thousand eleven.
uh within few weeks all hell broke loose in India once the report got widely distributed. And then within six months the airline went belly up and Mr. Malia who used to be a member of the upper house of India Uh uh Indian uh parliament, he which is called the Rajya Sabha, he left India and the Indian government tried to extradite him, now he's in London, and there are all kinds of allegations flowing left, right and centre.
But the fact of the matter is, without getting into the seriousness of allegations, all I will say is that in terms of the airline, he made a bad business decision, he did not know where to cut his losses. Beyond that, I don't know what's behind the scenes. Mm. What did you uncover like?
You gave the example there that you took a flight, uh the service was exceptional, you thought this must be really expensive to run, you took a list a look at the financials. What were some of the things which really stood out to you when you took a closer look at this business? Well that's a good question. It's almost coming on to ten years since I published the report. But what I can say Is that there was too much debt, there was no free cash flow.
The company was deducting, uh, for instance, taxes at source from employees, which is called TDS, tax deducted at source from employees, was not remitting it to the exchequer. The company was behind on its payment for landing fees to the airport operators. uh perhaps to the extent it was collecting funds in the form of excise duty or service tax from uh ticket sales uh that was behind remittance to exchequer. It the way I looked at the financial statements
They had a significant deferred tax asset on their books, which gave them the semblance of having actual book equity. Now, this is a little technical. But to the extent those net operating losses which gave rise to that deferred tax asset were never going to actually fructify. The entire company was effectively insolvent anyway. They had a qualified audit opinion from their auditors, and there were other issues. in terms of how they were accounting for
Aircraft leases, how they were accounting for maintenance of those aircraft leases, where I thought they should be expensing all the maintenance expense on the aircraft lease. They were capitalizing it to say towards the over the life of the lease. So there were a lot of technical interesting lacuna again, like I said, you know, accountants they look at something and say, well, from an accounting standpoint, it's okay.
somebody else who understands accounting and understands business and looks at it and says, Well, this doesn't make any sense. So all of those things came together for me to write a report which was very critical of uh Uh, Kingfisher, it was also very critical of the in Indian banking system because essentially what the lenders were doing, they were changing, they were. re-characterizing unpaid debts as perpetual preferred shares. They were re-characterizing defaulted preferred shares into
other cumulative convertible pref wood shares. So it was just pushing paper around and changing nomenclature without actually anything of substance changing at an operational level to make the airline viable. Can you just dumb down that last bit a little bit? You said you were critical of the banking system and some of the things which they were doing. Can you just explain that in I guess slightly simpler terms?
I can. So just to give you an idea, so when I um Published my report in September of twenty eleven. And I highlighted some of the problems that with the banking system. Three weeks later, Moody's downgraded the standalone credit rating of s uh India on the State Bank of India, which is India's largest financial institution. And so for instance, the bank has given a loan to the airline, the loan has gone into default.
So instead of taking the loan as a default on its book and disclosing it's a non-performing asset, the bank converted.
the loan into a preferred share and converted it from a loan into an investment. And then that preferred share is a cumulative convertible preferred share. So to the extent the company does not have the cash to actually pay any preferred dividends, which it cannot because it is a loss making organization and doesn't have the cash flow, then the preferred share will accumulate the dividend for the number of years it is not paid. So this is all just putting lipstick on a pig, you know?
Yeah. Is that I mean, it does sound kind of dodgy uh to me just listening to you talk about that. Uh but I don't I don't know, is that like common practice or was this a big red flag? W in Indian banking anything can be common practice. And that's why right now, if you look at the entire Indian banking system, it has been under intense pressure, it is under intense scrutiny.
And the banks, especially the public sector banks, which are these banks owned primarily by the government of India majority, they have done very poorly. in the last five years and they've taken a lot of flack and the Indian economy has suffered because credit growth is down. So to the extent Kingfisher is just an indication of all the other shenanigans that banks have been undertaking in India, it's evident for everyone to see.
Even the last um governor of the Reserve Bank of India, Dr. Ragura Murajan, who is at the Chicago Booth School of Business. He was critical of the Indian state banks and he has been critical of Indian banking. And recently him and uh Viral Acharya, who is the other
a well-known banker from India, from central banking. And they have both been critical recently of the government actually now saying that perhaps they haven't made a final decision that they would allow Indian corporate sector to own banks. So now that is I think a significant problem because these corporate sector corporations in India.
Have really poor governance structures. They are the ones who have actually caused significant bankruptcy like conditions in the Indian public sector banking space. And only if these same management teams are allowed to own their own bank. So I'm not sure what's in store.
Okay. Before you gave a whole stack of issues of things which you uncovered, once you took a closer look at uh Kingfisher How long did it take you between, you know, when you begun researching this company until you actually released the your your findings? You know, was that in the space of a few months or did it go on a little bit longer? Like how hard was it to to track down these issues or did they come to the surface pretty quickly?
You know, I worked hard for twenty years and I became successful overnight. Yeah. So I I think it's not a fair question in the sense that To the extent you're trying to assess how long these things take, it depends how much work experience you have, how many similar other projects you have done in the past, and how long you have been in business. Specifically, if you ask me, the moment I read that annual report, after two hours I knew this was barely up.
Knowing something and proving something with consistent and comparable data over time. getting the deductions right and the inferences correct, the source is properly aligned, putting it all in a piece of paper, publishing it as a report, all of that process can take between six to eight weeks. Okay, okay. Well that's that's less than I had kind of imagined. But yeah, good point you made earlier.
Um I wanted to ask you what was it like actually releasing this research? Because Vijay was a very high profile personality. I get the impression that he was quite liked uh in India. He was very much a public figure. You were coming out with this very bearish uh research and it was very contrarian to public opinion. What was the initial response like?
So I think uh management, like most managements, when they get access Or when they see a critical piece of research on their company, become defensive and they try to play down the veracity of a document that has been produced or published in the marketplace. And I believe that's exactly what Kingfisher tried to do. Uh the CFO and Mr. Male himself, they tried to disparage our work by saying that they didn't know who we were.
And why would we try something like that? And they said that there were factual inaccuracies. But to to their defense, amongst so many other people we have dealt with over a number of years in my career. Uh Kingfisher Airlines actually published a three-page or four-page, I don't recall now, a white paper saying some of the things they disagreed with us on our research.
So they didn't just say something, they try to say something in writing so that people can get their point of view because other people they just sent threatening letters or civil lawsuits and all that kind of stuff. So yes, Mr Mali and his team were critical or disparaging of our work, but they tried to at least provide their perspective to the world. Okay, so there was never any lawsuits against you? Yeah. Okay. How did you feel?
that no one else had picked up on what you had uncovered here. Like you you mentioned a little bit earlier that it it almost seemed like a lot of people were probably aware of this, but were turning a blind eye to it. Aaron, it's very difficult for me to answer that question. Uh I uncover and in my long career of twenty years in the equity markets. uh I have seen so many things and written on so many aspects of a company's governance, disclosure, accounting, etc., that
it always seems that someone else should have seen that too, but perhaps not. And in a retail now from an investing standpoint, in a Now in your market is a bit more institutional, but generally in a retail driven market, retail investor driven market. Rhetoric is a lot more valuable than facts because it takes time to dig up facts and it takes lots of work to prove the facts that you dug up.
What's the outcome of the Kingfisher VJ case? I know he he fled to uh UK and India was trying to have him extradited back. What's the how did this whole case come to an end? Well I I don't know, Indian government and the UK government are talking to each other and uh this has been going on for a number of years now. And then we have the COVID crisis. Um I think Mr. Malia has lost his extradition appeal.
Uh I'm not even sure what Indian government is trying to prove against Mr. Mawaya because it's his company that went belly up. If newspaper reports are correct, to the extent he has given some personal guarantees, he's willing to pay them up. What else is going on behind the scenes? I have no idea. Okay, so it's still essentially ongoing. Okay.
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So if we just move on here, we won't go into quite as much depth on uh some but some of the other cases that you have been involved with. I think uh RCOM or Reliance Communications uh was probably a big one for you. I just You know, I had a quick look at that stock. Um It's bankrupt. It okay. Does it s it's still trading though, right? Well reliance communications is bankrupt. Well but in India anything can trade, so I have no idea. Oh okay. So so a bankrupt company uh still trading.
Because I looked at the just uh had a quick look at it and it seems like it once traded at around ninety rupee, uh, and it now trades around one. Uh I mean, what was the story there? Can you just uh give us a quick uh rundown on that case? Well, when we published on Reliance Communications, um it was basically what we said was we don't believe anything the company says.
Not a single word of any of their annual reports, any of their key performance indicators in their balance sheet, what they're doing, what they're not doing, what they're saying, everything is just made up. Pensa que lhe dá sua pulsão. And what gave you that impression? Again y a lot of it is b technical to understand, but
So what they were doing is they would sell comp their they would sell one subsidiary to another subsidiary and fair value the subsidiary and book the gains in their equity and say, okay, our companies are worth so much. That's like I sell my house to myself every month and say the price is going up. Okay.
So that is one of the things they were trying to create book equity. And their accounting was also very aggressive. They were choosing not to include some costs, they were choosing to include other costs. they were while they would be choosing to exclude costs, they might be choosing to i include gains that are not from coming from businesses.
Then there are some interesting lacuna again from an accounting standpoint. So if your assets, because you're in a telecom business, so you're buying these say base stations from And the international market paid for in US dollars and you have put them on your towers over a period of three years. Let's assume the base stations will all depreciate and in four years or five years you'll have to replace them with new base stations.
But because you are buying in dollars and the Indian currency is depreciating, your assets instead of declining could be flatlining or going up without new additions taking place. You see what I'm saying, Aaron? Mm. So and there were other lots of interesting issues and these are very detailed seventy, eighty page reports that we published. And they moved the stocks a lot. Again, the management tried to say that we didn't know what we were talking about.
But ultimately it seems to me that we knew what we were talking about and they went bully up. How does a company and in this case Reliance Communications how do they ex how do they just choose to exclude costs from their financial statements and Uh for someone like you who's on the outside looking in, I mean, how do you how do you pick up on that? Like how do you actually if if these things aren't listed on their financial statements, how do you know that that they've excluded something.
So, Aaron, it's very interesting. You know, in India, the Corporate Law and Companies Act. Has very strict rules and regulations and statutes related to disclosing information. But the fact is they do not have a standard procedure for disclosing information. So everything that we found, if somebody else had looked long enough and hard enough, in those same publicly issued and pr presented financial statements and annual reports, they would have found it as well, most likely.
Of course you need experience and of course you need diligence and of course you just need hours and hours of work. Because some of these Indian annual reports are like four hundred, five hundred pages with a six-point font. And I think they do that purposely, so you just give up. Yeah. It does sound very tedious.
Right. And then you have to go through five years of those things because it's not that you read the twenty seventeen annual report and oh, you have the view because you don't know what they did in twenty sixteen and what they did in twenty eighteen. So when you read 2016, 17 and 18, then you know over a period of three years what happened basically in 2017, in a way. So you in order for anyone to form a real opinion on any business.
Consistency and comparability of disclosure over time is the first criteria. So five years of annual reports. That's the first thing you need on your desk if you're going to look at a stock, whether you want to buy it or sell it. And then you read through the MDNA, so Indian management disclosures and analysis is not very good. It is it has been getting better recently in some companies, but it's generally very poor.
Uh so all the information you have to collect is basically from the financials and audited footnotes, etc., yourself and then do the analysis yourself to find out what's happening, what trends are emerging. Okay. So these couple examples have been on Indian companies, but you actually do a lot more work on uh US companies, I understand.
That's right, because those Indian companies, I've only done work on three or four Indian companies. My my primary area of work is in North America. And that's where I do most of my work and some of the world's best work or my own best work has been done in North America. It's just the the Indian cases have had the the most spotlight, I guess. Yeah, just because of Netflix.
Damn Netflix. Um I was gonna ask you about Blackberry because that's a an American company which uh you wrote about or you did research on, and I believe You're one of the few, if not the only, analysts to mark this stock as a sell, while all other analysts had buy ratings on this stock. How come? What were you saying differently?
So BlackBerry is is a Canadian company. Uh it was founded by Mike Laservidis a long time ago. And of course everybody remembers BlackBerry. They are the world's best keyboard on a smartphone. Um before we all got hooked onto Apple and Android.
So when I started covering the stock, I think there were fifty three analysts on the street who covered the stock. And now what would what year that would be? I won't even remember now. But maybe two thousand eight, two thousand nine. Uh and I was the only one with a cell recommendation. And when I started writing and and doing work on Blackberry initially, one of the biggest uh Things that people missed was the rise of iOS and Apple, the rise of Android and iOS and Android Android.
The management of BlackBerry at the time, because they had been so successful, they missed the boat in terms of not understanding that Apple was really serious. And because Apple only had a arrangement for the first five years with AT and T in the US and Verizon was not uh and the Apple phone was not on Verizon, it gave BlackBerry room to keep on growing in the US selling its devices as smartphones because most a lot of customers didn't leave Verizon to go to ATT.
But while I was writing, I was saying this is not this is not a forever issue and this is not going to last. And if you look at the technology and the scale that Apple has and the fact that there is fungibility in terms of the operating system between the Apple Mac and the Apple uh the laptop, the iMac, the laptop and the phone, and with iTunes, strategically everything is going to change.
And so while BlackBerry was very successful and they were basking in that glory and they were basically, I would say, on a pedestal in Canada. Nobody realized that their rug was being pulled off from under their feet. And I remember uh having this discussion in a conference where there were so many other analysts and I was there and everybody everybody basically said that I did not know what I was talking about. And which is okay, uh, but over time
Uh we know what happened. We know Apple took over the world. We know BlackBerry, which are one of the world's best technology in terms of security. They lost. But it was never an accounting or governance issue. It was more not being able to pick out the inflection point on the business. I think the management missed out on the inflection point. And I was in one of the other things that was very...
Disturbing to me, and everybody else thought it was okay, was BlackBerry was generating so much free cash flow instead of reinvesting it in RD or keeping it on their balance sheet. for a rainy day, they decided to buy back their stock. And I had a big problem with that. And I said to them, So we are in a neighborhood where Apple has a hundred billion dollars in of cash on his books. Maybe at that time it had fifty billion.
And Google has so much of cash on its books. And here you are, you're using all your surplus clash to buy back stock. How can you be in the same neighborhood? And this was in Orlando we had a meeting where I was talking to Jim Bolsley who was the co CEO and he basically he said to me, Because I can, said, but the other guys are not doing it. They can too. And so ultimately BlackBerry ran out of the funds to keep on competing.
Yeah, that's really interesting that it you know, you had raised this concern and a lot of analysts couldn't see your point of view. Well, i i that was not the only time it has happened. It has happened at many, many other times on many, many other stocks. But I think what happens is people just get taken in by the flow. or their own uh biases because perhaps they've they have been right on the stock in the past, so they think they will continue to be right on the stock in the future as well.
Mm. Yeah, I mean it just it it seems I'm looking at this from twenty twenty, so I've probably got some sort sort of This is probably a little bit hindsight, but it seems like you you should you couldn't have uh it shouldn't have been so easy to disregard that Apple could have could have risen and and taken over the way it did. One of the other cases which I think you wrote about, and I think you might have had been somewhat of a contrarian on this as well amongst your peers, was Tesla and L
This was obviously you were leaning towards a buy here, uh, and this was many years back. I'm not sure exactly when. Uh, but Can you just share a little bit of uh your thoughts on Tesla and, you know, why you were convinced this was a buy at the time? So Tesla is an interesting story. Uh I started looking at Tesla in two thousand late sixteen, maybe seventeen.
And the whole world was so negative on Tesla. And Tesla had one of the biggest short positions in S P five hundred in Nasdaq. Um David Einhorn, who's well known for His value investing waves, Jim Chanos, they were all saying short Tesla and they had big short positions. And I looked at Tesla and I saw a company that was on the cusp of changing the world.
Because when I look at looked at their cars, I said these cars are clean, people are paying money to buy these cars, and I have not seen a single unhappy Tesla customer. And then when I look at it and I when I dug more, I looked at the kind of software they had, their ability to go into full self-driving mode.
the ability of their supercharger network globally. I believe in Australia you can go coast to coast on a Tesla because you have the supercharger network surrounds the entire country along the coast. I looked at the technology edge that they had, the fact that they have no incompency, the fact that their workforce is makeup is different compared to the workforce of the other automakers.
The fact that it was going to be the only company in the world to have 100% uh ownership of manufacturing capacity in China, which is the world's largest auto market and is going to be the world's largest electric vehicle market. The fact that uh Uh there Elon Musk had 22 million followers on Twitter. And if you follow his feed and you look at all these people are saying, they're all believers in his vision of driving the fact that
They're trying to build solar roofs and it's um it's going to be a massive market. The fact that If while everybody else is saying Tesla is going to go bankrupt, you look at the market cap of the company is fifty billion dollars and people are making noise about the fact that two billion dollars of debt is coming due and they keep on saying it's gonna go bankrupt, and I'm thinking
At that time, well, with fifty billion dollar market cap, all the company needs to do is maybe sell five million shares and it can pay off the entire debt. So why would it go bankrupt? So so we I build these arguments over and over again over a period of two and a half, three years. And I bought the stock from my clients and myself. And over a period of um I would say from 2017 to 2020, June or July. We made six to seven times our money on the stock and uh we sold out uh
after it was up six six and a half times before it was added to the S P. Since it has been added to the S P it's up another twenty percent. So we missed out that twenty percent, but that's besides the point. Uh but I think the real thin is being able to see the asymmetrical investment opportunity in Tesla, which was going to be a unique global growth large cap stock that most of the people
And on most of the sell side was negative one. It's not to say that everybody was negative one, but the entire sell side on Wall Street was basically negative one. Morgan Stanley now upgraded the stock to a buy once it has been added to the SP 500 and it's a$500 billion market cap.
And the whole world says the Morgan Stanley analyst is the top ranked analyst in Tesla or or automotive space. And the guy was negative all the way from when the stock was fifty dollars. So on fifty dollars the stock's two thousand six hundred dollars now, because it's been split as well. So from fifty to two thousand six hundred dollars he had a sell and now he has a buy. So
That's funny too. Uh but he they still call him the top and downlist Tesla because he works for Morgan's down there. But you see, Tesla is now a six hundred billion dollar market cap company. Can it double from here? Maybe. But so many other stocks can double from here too. So now is it the kind of investment opportunity where I would stake my neck out? Not really. If in five years Tesla can double from 600 billion to 1.2 trillion.
There are so many other stocks in the world who can do that too. Because now it's a 10, 12, 14% a year return, right? It is no longer the 25,000% return you're going to make. So as you exited your position on Tesla, what was the rationale behind that? Was it purely because you thought it had reached a was it a market cap thing or? Yes, no, it's a good question, Aaron. So while I was looking at Tesla, there's a a Chinese electric vehicle manufacturer called Neo.
And they listed in the US in the last couple of years. And when they listed those people, basically what that organization had was a plan document that we are going to do A, B, C, D, E, F in the next five years. And the market was valuing that company at$10 or$20 billion. Right. Uber said, no, Softbank and GM, they decided to enter into an automotive driving.
Automotive self-driving partnership, because you don't know the Driver, they call it the Cruise. And SoftBank and GM valued that piece of spreadsheet or that piece of presentation at$7 billion. And so on and so forth. There's so many things going on in the market. So then I looked at it and I said, okay.
Tesla is going to be the first full self-driving car in the world with its own data, over-the-air software update capability, and nobody's going to catch up to Tesla, and that's going to be worth a hundred billion dollars. over and left are in the business of taking customers from point A to point B through an app. Tesla is going to be in that business and that business is going to be worth a hundred dollars.
And then I said, okay, Tesla is in the car business, and ultimately the car business is gonna be worth a hundred billion dollars. China ultimately will be worth a hundred billion dollars. And and then the solar roof and all this and that is gonna be worth a hundred billion dollars. So I think in my view at the time, two years ago, I thought Tesla was gonna be a five hundred billion dollar company sooner or later. Yeah.
It's already a$500 million market cap right now. So I said, I am out. Let the other people have fun. Yeah. Fair coal, fair coal. I just had a couple questions around research, just generally speaking. How come you focus mostly on large caps? A lot of these companies you talk about are very big companies. And when we see, you know, particularly some of the short research that we see, a lot of that
is probably more medium to to smaller cap companies seem to get targeted the most. And I I know you don't just purely focus on the short side, your long and short research. But how come your space is is predominantly around large caps? So small caps, they don't have enough information and disclosure around them to really assess what's going on. And small caps are already very volatile.
And especially if you are in the independent investment research business and your clients are going to be large institutions, they are not going to pay you for small cap research. Because they cannot take positions. They might say, Oh, it's good, uh, it's it it's I can buy the stock, go long. Okay. The stock's worth five hundred million dollars. Sorry, I run a ten billion dollar fund.
In order to have a two percent position in my fund, you know, I need to have twenty-five to thirty million dollars of stock at least, just to make it worth my while. And if the stock's only five hundred million dollar market cap, I can't even get in. And then personally, small caps, mid caps, they don't excite me. Because if you're gonna go hunting, you go lion hunting, or if you go fishing, you go catch whales in a trawler. That's what I'm saying.
When I had spoken to you prior to this, when we were arranging this podcast. You'd mentioned that you see some short research being published which isn't of a high standard. Now you didn't label any names or you were just saying in general terms. How do you determine what's a quality piece and what's of lesser quality? And I think this is interesting because a lot of my audience are traders who might.
try to trade or and participate on the back of the the release of some of these short reports, I guess the question becomes, do you do you just trade this or do you actually try and hold on for a bigger move? So I I was just interested in your take about how you determine whether a a piece of research is of a high standard or not. It's a good question, Aaron. So in terms of if you have a sell on a stock and your cell is a fundamental So It's not going to move the stock in a day or two.
And you might have to continue to follow up with your conviction. over a period of six months, nine months, twelve months, eighteen months, while the stocks may be going up or maybe going down, and you still keep on following till you think the fundamental number is attained. A lot of short research that I've seen and which you perhaps are referring to, I think it's personality driven where people try to smear the management team.
or are trying to highlight something which is so atrocious that everybody s suddenly sits up and takes notice. And the stock moves 10% or 15% in one day and they are gone. People forg and to the extent they have already taken a short position, perhaps they cover the short position and leave for the next one. But if you are a research guy and you are an investor, some of your
Sell ideas are maybe they are short ideas because over a period of time you could see the stock going from a ten billion market cap to a billion market cap or even to zero. I've seen that myself. I used to cover a a company, again, a Yellow Media Income Fund, it used to be called in Canada. It was a$14 billion market cap. The entire street loved it. This is now two thousand seven. That was the early days of Google search beginning to displace the directories business.
And the stock was loved as a there was something called an income trust uh In Canada, which was a kind of corporate structure where you pay out a large majority of your cash flow to your investors in the form of a distribution or a dividend. And so it becomes a yield pay. And since Directories was a mature business, it was considered a yield pay. And what I said was while the entire street was gungo and positive on stock, I said the stock was a sell.
And that the business will shrink and go down to nothing over a period of time. I don't know exactly when, but the stock will go down to nothing much before the business goes down to zero. And that created a furor in the marketplace. I published a report called The Count of Yellow Pages. And the way we went about doing that research was we looked at the directories that were published in the top 13 cities of Canada, which basically covered the
I think one third of Canadian population and around sixty percent of Canada's economic activity. And what we found was an unmitigated decline in the number of pages, number of advertisements. uh size shrinking from large to small, people moving from color to black and white, and each and every one of things suggested the revenues per directory in every city was declining.
And why it was not showing up in the top line was because they were raising prices every year, 3% to 5%, and they were buying other smaller directed businesses and integrating them. And so when we published that report called The Count of Yellow Pages, it shook the entire street.
And I think there are 14 analysts, because this is a Canadian story, there were 14 analysts on the street who published a report the day after my report was published, with one of them actually publishing a report with the top two paragraphs read backwards. basically implying that I did not know what I was talking about and I had no understanding of the directories business.
But the stock kept on falling from fourteen to thirteen to twelve and then I pub was everybody had published their rebuttal of my first coverage piece, I published a report titled The Face Off. You might find the titles of my reports are pretty colourful too. So I published a report titled The Face Off, actually highlighting for them why the statistical data set that we had accumulated was significant.
And and ultimately within two years that business went dully up and um and you and I both know directly that the business does not exist anywhere in the world. Everybody has a smartphone and a Google browser. And so I didn't have to say anything about the management team or anyone in there because it was very clear where to me, very clear where the business was headed. Okay. I see what you're saying, yeah.
When you're doing publishing your research, a lot of it's very driven by fundamentals. I think that's probably fair to say. As we know, price of a stock can can very much become disconnected from the fundamentals and reality, I I guess. Um but given that price is ultimately what pays How do you factor this into your research?
Well that's another very good question, Aaron, because right now if you look at I can talk about only the North American markets, I'm not sure what's happening in Australia or rest of the world. There's so many stocks that are so disconnected from the underlying value of the business. And but they keep on running up. They keep on running up. And there's no let up. And I think what's happening is that um there's lots of retail investors, lots of bloggers, lots of people
Who seem to be plugging some stock that they love, and I guess people are following them. But these corrections do take place. And and But mostly what happens again, then going into these large cap stocks that you referenced earlier, it's not that easy to move a large cap stock through a retail audience.
So oh j price can correct quickly in a large cap stock, two fundamentals, because if an institutional investor suddenly sees that, well, there's no value in what I'm holding, they'll get out in two days and then Whoever is coming behind them is left holding the back. Um but Ultimately, the fundamental value shows through. But people who are in the market know
Especially short investors, that markets can be irrational for much longer than you can be solvent. And it's a well-known saying for everybody who's in the business. So you have to be very careful. Overconfidence is going to kill you for sure. Niraj, I think we might leave it at that. Uh if someone wants to find out more about yourself and follow along online, uh I I think you're on Twitter. Uh would you like to share your Twitter handle and maybe give out uh your website as well?
Well my website is antyinvestments.com an t yainvestments.com and my Twitter handle is Neerj at Anthya. It's not that I use use that much. I am on LinkedIn too, so Okay. Well I'll dig up those few links. I'll pop them in the show notes as per usual.
Uh, but yeah, this has been a really interesting conversation and I I appreciate you taking the time to come on and uh chat with me. So um yeah, I'll also just mention once again Anyone who's listened to this and and finds this uh this subject particularly interesting, uh bad boy billionaires. That's the that's the one, isn't it? Yeah, Bad Boy Billionaires on Netflix. Uh check out I can get. Episode one. Thank you Aaron. Yeah, okay. We'll chat soon. Thanks a lot. Okay.
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