Lessons from Stellar Wealth’s Gautam Baid on riding bull market

Stellar Wealth Partners’ India fund, designed by Baid, is fully invested in Indian equities for accredited investors in the US with a 6% hurdle rate in dollar terms. The fund, which raised US$3 million, will invest in about 26 Indian stocks across sectors including music streaming, cloud computing, digital transformation, specialty chemicals with critical applications, affordable housing and fintech from October.

Referring to the fund that Baid will launch, he said, “It is an investment partnership modeled after the original fee structure of Warren Buffett’s partnership. So we don’t charge an administration fee. I am only compensated for returns that exceed 6% per annum in dollars. The problem with most funds in the industry today is that incentives aren’t fully tailored to investors. Therefore, most funds charge a very high management fee. This does not result in any disadvantage for the fund manager. But when the incentives are aligned, the results take care of themselves.”

Warren Buffett wrote to Baid, “I think the arrangement you describe is extremely fair,” referring to the India Fund’s partner-centric structure.

Baid, the author of the book The Joys of Compounding, also runs two small cases in India – Stellar Wealth Flexicap and Stellar Wealth Megatrends – as a Sebi registered research analyst with around 750 subscribers.

A licensed financial analyst, Baid worked as a portfolio manager for global equity strategies at US-based firm Summit Global Investments before founding his own fund. Although he lives in the US, a large part of his equity portfolio consists of Indian stocks as he “believes very strongly in the history of India for the next few decades”. Mint spoke to Baid about how he manages his money and what he’s learned through his investing journey and his views on different asset classes. Edited excerpts from an interview:

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A significant portion of your portfolio consists of stocks. Do you consider yourself a risky investor?

The reason for maintaining such a high allocation to equities is that it’s a much better asset class compared to others due to its internal compounding function. I believe that the higher the risk tolerance, the higher the proportion of equities should be. For anyone with a maturity of more than five years, equities are the best option as they are the proven asset class to beat inflation over the long term provided you invest in quality companies.

Do you prefer to invest directly in stocks or through a fund?

Around 80% of my equity portfolio is invested in the Stellar Wealth Partners India Fund which I manage. I’ve been investing in stocks for 15 years. Investing is a passion for me. I love the intellectual game and mental process of investing.

According to your book The Joys of Compounding, in order to become a successful investor, you need to understand people and human emotions. How has this philosophy helped your personal investments?

There are only two things you can control when investing – the research process and personal behavior. In my opinion, the latter is much more important in the long term. Keeping an investment journal helps not to repeat the same mistakes.

For example, the maximum amount of money I’ve ever lost on a single stock is with Bandhan Bank (no stock recommendation). I’ve been the victim of something called liking bias. I read the story of its founder, Chandra Shekhar Ghosh, in a book and was so amazed by his diligence, sacrifice and hard work that I failed to separate the company’s deteriorating economic situation from the personality of the founder to separate at the top. I couldn’t find remedial action in time to sell the stock when the company was not doing well. By referring to these details in my journal, I avoid making such mistakes again.

What was your first investment?

I was drawn to the stock market during the latter stages of a euphoric bull market between 2003 and 2007.

I had invested in a mutual fund called Reliance Diversified Power Sector in late 2007 and in Ispat Steel stocks in January 2008 because steel and energy were the hottest sectors at the time. I made the investment decision solely by looking at the price movements of these assets without considering their valuations or underlying business models. Both of these investments fell about 70% to 80% within the first 12 to 18 months of my purchase, and I successfully gained access to the stock markets by paying my fees.

How has your investment philosophy changed over the years?

The investment philosophy and investment strategy takes a lot of time to develop. I’ve learned from my mistakes along the way. For example, I used to deal with stock options. I sold a few high quality stocks in my portfolio to buy options in the hope that once I make a lot of money I can buy more stocks I’ve sold. But mostly the options expired worthless. Luckily I’m out now.

Today I have a clearly defined investment philosophy. I take a core-satellite portfolio approach, where the core consists of quality companies and the satellite consists of stocks that offer short-term tactical opportunities.

Also, I’m much more patient now when it comes to investing.

They left a high-paying investment banking job in India in 2015 to move to the US to seek career opportunities in equity investing. Have you liquidated your investment corpus built up in India to cover your expenses there?

Back then, it was an easy decision to sell a few stocks from my Indian portfolio and fund my expenses in the US. But I didn’t want to sell an appreciation asset to make a living. This is the worst personal financial decision you can make. In the US, I took a minimum-wage job as a receptionist at a San Francisco hotel, where I worked the graveyard shift to help pay for my expenses while I looked for opportunities.

What lessons have you learned from the bull market?

I realized that in any bull market we need to cut the bottom end of the portfolio and use the proceeds back into quality stocks or use it to buy a hard asset.

Did you book profits in the 2021 bull market?

One of the lessons many seniors have taught me is to use every raging bull market to build a hard asset. For example, my parents had a long-cherished wish to live in a large house in Calcutta, West Bengal, India. So I took advantage of the 2021 bull market to pull out some money and buy this house. I want to buy a house in the USA. Ultimately, investing should be a means of fulfilling our personal goals and desires.

Would you rather take out a loan or liquidate existing investments to buy a home in the US?

It is a function of US interest rates. In the past year, the interest rate on 30-year fixed-rate mortgages had fallen to between 2.5% and 2.6%. In these cases, buying a house with a down payment makes no sense. But that same interest rate is now almost 6.3%, which is very high. I don’t want to take on large amounts of debt in a high-yield environment.

What is your take on real estate and gold as asset classes for investing?

Buying a physical property is a bit of a hassle. Also, it is a very illiquid asset. I prefer to participate in the growth of real estate through the shares in building materials companies that I own in my portfolio. I think it’s a much more efficient way to participate in growth. I also want to participate in the growth of gold through gold finance companies that make money by charging very high interest rates.

Do you have term and health insurance?

yes i have both I have very reasonable health insurance in America. As you know, healthcare in America is very expensive. Therefore, it makes sense to take out good health insurance.

What about emergency funds?

I keep liquid cash in the bank and can easily cover my next five years of living expenses with it. It’s a bit on the higher side. But having more money in the bank lets me sleep better at night and helps me stay on track through any phase of market turbulence. Especially with my India fund in the US, which doesn’t charge a management fee. I don’t get paid unless I deliver more than 6% return in dollars.

How is managing public money different from managing a personal portfolio?

When it comes to managing public funds, the focus is primarily on quality and liquidity. You need to consider the average trading volume. We can’t just buy illiquid stocks because the impact cost is too high. If you’re managing a personal portfolio, you can actually take a little more risk on the quality curve and the liquidity curve and still get away with it because it’s so big, it’s very small.

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