Zerodha founder Nithin Kamath’s tips on picking stocks for the long run

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The country’s top online brokerage firm Zerodha has become a go-to investment platform for retail investors with over 8 million users. In an exclusive conversation with mint, its founder and CEO Nithin Kamath shared his views on investor’s approach when it comes to stocks selection, how to diversify portfolio while avoiding the common mistakes and biases, his company’s plans for the future and more.

Value vs growth investing

Investing in capital markets has evolved due to the ease in access of information. Any potential future outcome is already priced into the stock. Though, finding a really value stock is a tough ask. 

The essence of investing isn’t really value or growth, its about portfolio diversification and ensuring there’s not too much exposure to a stock or a sector or to a country as well. The idea is to diversify it enough and, especially for retail investors is to not to try to time the investment by doing everything at one time, but to invest overtime so you get a decent dollar cost averaging.

Stock selection

Today the value really lies in growth companies and everyone’s investing based on how a company can grow. And the strategy of choosing growth companies is a higher risk strategy and investors should be conscious and aware of the risk one is taking and diversify efficiently. Investors should look at stocks of the companies that are doing well which are priced better in today’s world.

If I were to pick two big mistakes that investors make – is one is getting concentrated into 1 or 2 stocks and two is to make it worse is to averaging it down, and this is majorly the reason of downfall for most retail investors who come to the market. They end up falling in love with a few stocks and as and when the stock goes down their conviction of the stock bouncing back goes up and they end up buying more of it and eventually they get to a point where those 2 or 3 stocks become such a large concentration on their portfolio.

Its hard for retail investors specially to sit on their investments so portfolio approach of investing is the right way to go about it, which is easier said than done as it also depends on the amount of investment. The problem with this approach is that the foundation and the principles on which one has started to invest is bad. In the long run, the highest odds of making money in the market is by taking in a portfolio approach. 

Though it’s a tough problem to solve as the human biases get you to do certain things in certain ways but the easiest time to learn all of this is when you are just getting started as it gets hard in the future to change those certain investment habits that you develop. 

A cheaper stock doesn’t mean its attractive to buy, which has become a common retail investor strategy, as they expect it to bounce back, which is a worse strategy. In stock markets, if a value of a stock is going down and drops significantly that means there’s some bad news around the hall.

At Zerodha, we are trying to nudge people away from making such mistakes as the lesser mistakes investors make, the more they will survive in the market. People get attracted to low value or penny stocks, especially first timers, and the nudge feature cautions people which has helped us as our penny stock trading volume is down by almost 75% and has created a large impact. 

Asset classes that will lead the way in the next few years

It is for every asset class, wherever returns are more, will generate more interest. Only reason crypto even with all its regulatory grain has done so well is because it has made money for people, so that’s why people are interested in it. The reason stock participation has gone up because markets in the past 2 years have done really well. They are outperforming real estate, fixed deposits and others. 

As long as stock markets can go this, people will be more interested in this versus fixed deposits or others. Personally, I think there is no money to be made in real estate. It is in the bottom of the list. Gold there is uncertainty in world. Crypto talk in terms of (AUM) is nothing. While you may have 1 crore investing or 1 in 5, as they claim, don’t think the amount of investment is more than 2-3 billion dollars, which is nothing considering the size of Indian capital market, size of gold market in India. 

Crypto is a wildcard here, can be anywhere based on how the returns are. I believe the activity in crypto will go lower and not higher cos govts will have to jump in and regulate it in some form. Gold above FDs. If India is to do well in next 20 years, equity will be the best performing asset in class. Historically corporate governance was problem in India, which has improved in the past years. If corporate governance goes up, the opportunity of equities performing well also goes high.

IPO market in 2022

Don’t think IPO market will be that hot this year, which according to me is good for public. If the market is very hot, everyone’s trying. If the IPO market is not too hot, people will try to price the IPO in the best possible way, and leave more value in the table which is good for retail investors. 

Zerodha’s new year plans

We are self-funded so do not have any fundraising plans for now. For this year, helping our customers reduce money mistakes is on top of our priority list so we are working on nudges and other features. 

App’s downtime during trading hours was a large issue in 2017-2018 as we were depended on third parties. Over the last 2 years, which has seen the most volatility, if you look at our downtime, it is by far the least not just in India, across globally. During the pandemic, when we saw high volatility, we probably had 5-10 minutes of issues as compared to others being down for hours or days. 

We are working on it to make it better. Today, we have customers set up in 4 different setups so even if there’s a downtime for some issue it will affect one setup at a time. Even if there’s downtime, it will affect setup, rest 3 working. Zerodha’s customer complaint in % terms as compared to active customers is by far the lowest as compared to the industry.

 

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