Ep647: Raghav Kapoor – Be on High Alert When You’re Doing Well

Andrew Stotz 00:02
Hello fellow risk takers and welcome to my worst investment ever stories of loss to keep you winning. In our community. We know that to win in investing, you must take risks but to win big, you've got to reduce it. Ladies and gentlemen, I'm on a mission to help 1 million people reduce risk in their lives to join me go to my worst investment ever.com now and sign up for my free weekly become a better investor newsletter where I share how to reduce risk and create grow and protect your wealth. Fellow risk takers this is your worst podcast host Andrew Stotz from a Stotz Academy, and I'm here with feature guests raga Kapoor, Rod, are you ready to join the mission?

Raghav Kapoor 00:44
Yeah, thank you.

Andrew Stotz 00:46
I'm excited. It's funny that we've taken so long to get you on the show.

Raghav Kapoor 00:51
Yeah, well, Doug has done that the lab.

Andrew Stotz 00:55
So I'll introduce you to the audience. Now, for the audience. I'm going to call him Raj, because that's the way we've always talked, and I known him for many years, but Raj is the CEO and co founder of smartkarma, and Asia focus Investment Research Network that serves global institutional investors, corporates and private wealth, rods, take a minute, and tell us about the unique value that you're bringing to this wonderful world.

Raghav Kapoor 01:23
Thank you, Andrew, appreciate the introduction, and also for inviting me to the podcast, a very briefly, but I felt that, as you mentioned, there's there's millions of new investors that are entering the market every single year, a lot of them don't know how to get started, several of them have bridged that journey, they now know what to do, but then they do not have access to great information insights. And they do not feel that they're part of a community of equals. And that's what smartkarma tries to do. We've created a network that connects anyone from a private individual who's learning all the way to the most sophisticated quantitative or systematic asset manager, to a community of top research analysts on a single network and a single platform. And through this, we're trying to shine a light on some of the best companies, some of the best investment opportunities, and also ensuring that people understand there is no shortcut to success. To make money, you have to do the work, you have to put in your karma, you have to put in that effort. And then you reap the rewards.

Andrew Stotz 02:30
And for the typical person going to smart karma, how would you describe the core benefit that they're gonna get?

Raghav Kapoor 02:38
Yeah, I think for the typical user today, and we've just crossed 38,000 users, but for the typical user, they will get two or three things. First and foremost, they will get access to independently researched investment ideas from some of the top most influential analysts in Asian markets. And this is direct access. This is not coming through a broker or an intermediary, you're directly in a one on one almost conversation with these analysts receiving their highest conviction ideas. Secondly, you will be able to participate in discussions with them. And this is really important, because especially when you're learning, there are a lot of questions that you might otherwise be hesitant to ask. But smartkarma is a community that encourages open dialogue, whether it's simple or sophisticated. And obviously, we curate these ideas. And I think that's really important, because today, there is an abundance of content, and people are overwhelmed by too much information. So we use technology. And we use data that we collect on the platform in order to curate what would be the highest conviction ideas as surfaced across that network. So for investors think of this as a fantastic digital magazine of sorts, where you get to consume great investment content, but also be able to interact with the sources, the fountain heads of that, of that content.

Andrew Stotz 04:09
Yeah, and I would say one of the things that's changed in the area of let's say, magazines is you don't get controversial views anymore. Yeah, people aren't making big expos A's and things like that. They've become, you know, a lot of corporate communications from the advertisers. Whereas on smartkarma, including myself, who I've been on smartkarma for a long time, we're giving our opinions in that space. And that's something that you don't get that much in other places these days.

Raghav Kapoor 04:40
Agree. I mean, 98% of publicly listed companies in the world do not have any research at all zero. And that I mean, that has enormous whitespace that is not covered by banks, brokers or any traditional providers of research. smartkarma tries to focus on that 98% You We try and avoid, you know, the top 30 or 50 stocks, because they've sort of very, very well followed. But for that balance 98%, we want analysts to really hold companies accountable, to really bring to light some of the best stories that people have not heard of. And that's the reason why we also serve a lot of corporates, because we bring the largest microphone they've never had to the CXOs at these corporates and give them a chance to amplify their message to the rest of the network.

Andrew Stotz 05:30
So maybe just before we get into the big question of the day, if if somebody's listening, and they're working in Investor Relations Department of a small and medium sized company, and they want more exposure and all that, what, what's it? What do they? What does that look like for them with smartkarma?

Raghav Kapoor 05:47
Yep. So first and foremost, we offer a free digital investor relations platform. Nobody else does that. I think our closest competitors in that space are NASDAQ, maybe Bloomberg, and it's very expensive. I think a small Asian company, especially in one of the emerging Asian markets can't afford to pay close to $100,000 for something like that. So we've made it completely free. This allows you to read research on your own company, your sector, your competitors, your country, etc. Second, it allows you to connect to a community of over 300,000 institutional fund managers, where you can directly set up your roadshows your meetings, your investor education. Third, you can do a lot of data analysis on your company, especially how it compares to the your own the peers that you nominate. And this is extremely important for IR firms to map out their journey, where do they want to get to, then fourthly, you can do a shareholder registry analysis. So you can figure out who owns shares in my competitor, but not in me. And then you can go and set up meetings with them. And lastly, you know, we have, we have built seamless connectivity between the corporate and the rest of the network. And the manifestation of that is that you can participate in chats, you can participate in discussions. So on our platform, you know, any user can just simply click one button and send a chat message to the IR guy. And that's quite powerful. This is not just a not some anonymous, you know, Mr. Tom approaching through your website, but this is someone who's pre qualified, has a name has a company name, you get a lot of information. And so the IR person knows how to answer it. And of course, all of this is souped up with a lot of technology in order to make the user experience, you know, very to point oh,

Andrew Stotz 07:44
well, you've come a long way. I mean, I remember when you started, and it's impressive. So for those people listening that are interested, I think, at the end of today's podcast, I think Raj will share some stuff about how you can get some access and learn more about it. But now it's time to share your worst investment ever. And since no one goes into their worst investment thinking will be tell us a bit about the circumstances leading up to it, then tell us your story.

Raghav Kapoor 08:10
Sure, and I actually think it's really valuable to do a retrospective and look at your biggest mistakes. And hopefully, then remember them going forward. I'll bring you back about two years or 2021. And, you know, just a preface. I've made lots and lots of mistakes. And I think there's nothing wrong with that. But this is one where I probably lost the most percentage value from an investment standpoint. So in 2021, my own personal portfolio which I manage very actively and with a lot of discipline, and I've done so since 2009, at least, I was doing quite well, I think I was up more than 50% on a very conservative portfolio of stocks that I've known and followed for a long time. And partly because I was doing so well, I decided to veer into a direction where I had not stepped in before. So I am most of my portfolio tends to be around Asian companies where I have a good degree of familiarity. I've met the management teams, I've looked at the numbers very closely and I've seen their products and services firsthand. But in 2021, with a you know, with a great sort of performance behind me, I guess I got overzealous and I invested in a US biotech company. Now, this come there were lots of things that look really amazing here. So this was a company that had been going on for about 15 years. They were developing a new platform for cancer research on cancer drugs, and the specific type of cancers that they were trying to cure are called orphan cancers. orphan cancers are cancers that affect a very, very small percentage of the global population. But they're almost always fatal. And because they affect such a small percentage of the population, the big pharma companies do not have a big incentive to try and come up with medication. This company also had a very strong belief that you could cure some of this, these diseases using hormone, you know, some sort of hormone treatment, which boosts your own immune system, as opposed to chemotherapy, which obliterates good and bad cells in the body. They had been doing this research for many years, they had had quite a bit of success, but around 2021, and about four years prior, this company had actually joined a bigger group, a very, very large investor. Think of it as a mini buffet, very well known in the US, I will name this individual with an impeccable track record, you know, Midas Touch, had actually taken a controlling stake in this business. And there was a lot of hidden value in this company. In addition to the research that they were doing, they were also sitting on a very, very attractive piece of real estate in downtown New York. They own their office building, and it's only Avenue of the Americas, for those of you who are familiar, so it's super prime, that alone was worth almost 40 50% of the market cap was the business. But this company because it was labeled as a pharmaceutical company, but because most of its value, and revenue at that time was coming from real estate from that commercial real estate they own, who was misclassified in all the industries as a real estate company. Even though it was the whole story, it was a biotech story. And so it was used to trade at a discount to book value. Whereas biotech stocks back in 2021, when growth was all the rage, were trading at very, very rich valuations. So you had a valuation cushion, you had a hidden asset, you had a very, very strong shareholder, and their first drug entered phase three trials.

Andrew Stotz 12:23
So let's stop there just for a second, because, you know, as you said, you're an active investor, you've been investing for a long time. And what you've just described is a very, very attractive thing you've talked about, you know, cancer, you know, first of all, you know, solving that's a big problem. And if it can be solved, it's valuable. But you know, you've got a top investor that's really validated this idea, doesn't mean you're not going to do your own research. But man, that's a vote of confidence. You've got this. Yeah. And you got this hidden asset. And then it's also misrepresented by, you know, in the market. So when it gets seen as biotech is going to fly, so continue on.

Raghav Kapoor 13:03
Yeah. And then it got better. So they hired a guy who was heading the oncology practice at Novartis, which is one of the largest Big Pharma firms, the head of oncology, left Novartis, and joined as the CEO of this tiny company. And just to contextualize at that time, the market cap was around two $300 million, right. So that was a big vote of confidence. And after he joined he built a very strong bench around him at this company, for example, the either the head of legal or compliance, I can't remember often Maderna which you remember, this was COVID Time subheader, Madonna's legal and compliance. Also joining the board of this company, like it was a really, really, you know, illustrious group of managers and board members here, right. And a great investor. And their first drug went into phase three trials, right, which is pretty much the last thing you have to pass before you can commercialize. Now, the math, basically, even the smallest of these drugs, would generate about a $5 billion per year of revenue stream. And when you look at how these things are valued, you typically tend to get a, you know, at least a two times revenue multiple on that, because these are very high margin businesses, when you do a DCF etcetera, it roughly comes to at least two to three times. And these companies are not allowed to exist till they grow into that size because one of the larger pharma companies just snaps them up because they've had a major success. So it looked quite likely that maybe even before the trial results come out, or maybe soon enough To words, this will get bought out. So there was a great event angle to. And the Novartis Oncology CEO during his era at Novartis had done tons of m&a. So he clearly knew how to pull these deals off, right? So the payoff, when I looked at this looked, it was a 5,000% return on the upside. And if I got it wrong, I thought this will drop 60%, because there was that real estate asset, which was 40% of its

Andrew Stotz 15:36
market cap, Honey, we're going to be rich, right?

Raghav Kapoor 15:39
So, you know, that's your payoff down 60, up 5000.

Andrew Stotz 15:45
So an asymmetric, you know, trade, which is what we're looking for.

Raghav Kapoor 15:51
And so what I did, after I looked at this is, and this is the only thing I did, right. And the whole situation is, I decided to put 1% of my portfolio into the situation. Why, you know, if this led to that 5,000% return, you know, I would get many times my entire portfolio back. Which was sort of amazing. But I knew it will never get there, it would just get bought out before that. And if it dropped 60%, that would just shave off about 60 basis points from my book, in a year when I was about 40 to 50%. Overall, anyway. So I wouldn't miss that 60 verbs, but you know, hey, so I was buying a lottery ticket. You know, that, to summarize, I went and bought a lottery ticket. And

Andrew Stotz 16:45
well, you could say it's a much better. It's a much better thought through and research law than just a lottery ticket. So continue on. Yeah, I read the back

Raghav Kapoor 16:55
of the lottery ticket. And, you know, I started following what analysts, what not, it wasn't covered by analysts, no surprise there. But there were a few buyside guys writing about it on Twitter, I started following what they were saying. And it was really like, the market was really divided in terms of opinion. There were a bunch of people who were convinced that this therapy, their whole sort of platform would just never work, it just can't work. And then there was a group of investors who had put in significant percentages of their entire portfolio into this situation, because they were convinced that this would be a blockbuster. It was very hard for me sitting in Singapore, listening to people sitting in Boston and jersey, you know, close to where the action was. So divided. And then the next thing happened, which is this company did a small placement. And I thought that was tactically very smart. Because a these clinical trials are expensive. So having some money on the balance sheet is great. Second is there were no biotech investors on the cap table on the shareholding of this company, through this placement that brought in four or five pure healthcare investors, which again added to the credibility.

Andrew Stotz 18:20
So it was a private placement.

Raghav Kapoor 18:24
It was, I guess, the anchor book was pre organized, but there was a bit that went to the market. Okay. So they did the placement abroad,

Andrew Stotz 18:34
roughly how much was the placement?

Raghav Kapoor 18:36
I think it was around 4030 to $40 million. Okay. So about 10% of their market cap, then, the main thing that they accomplished was they managed to reclassify this company from real estate to healthcare, which is also right, you know, I felt that this will now unlock more value. Now, this is where I made the second mistake. I felt and you know, the stock fell below that placement price, the placement came at a discount, it fell below the placement price. And that's where I doubled down on my position. So it went from being 1% or 2% position. The rest of the story is quite boring, because we waited, waited, waited. And then one day, we woke up and saw the phase three had failed. It had failed by a very wide margin. And I lost 98% In this it dropped from about $50 to about $1 basis pretty much in the next two days. I still on this stock because it's still a lottery ticket. They might still accomplish something I do not know they still have that real estate acid, it's now a cheap company. But it needs a balance sheet again, so keep diluting my stake. But, you know, this was, as I was mentioning, I probably didn't lose the most amount of dollars. But in percentage terms losing 98% on an idea was is the worst mistake I've ever made.

Andrew Stotz 20:24
And well explained. So let's summarize. What did you learn from this learn from this experience? Yeah.

Raghav Kapoor 20:31
So I think the first, and probably the most important lesson is there's a lesson around areas of competence, you know, I had stepped very far out of what was my area of expertise or competence, I have never invested in biotech healthcare. You know, this was a Boston based company, I'm here in Singapore. And it was a reminder to me that, you know, it's very hard to get good risk adjusted return, when you take bets that are outside your area of competence. And I have tried very, very hard to just pass on stuff that I don't know, don't understand, don't have an expertise on since then. That's why I think the second thing is, I think I created a band, I should not have doubled down on it poster placement. You know, if there was no extra information that I had, that would justify that decision. If I had come to that story, right after that placement and done, I would have probably only put in 1% of my position. So I think thinking about how to size and when to size, I think the how to size, I got it right the first time around the second time around, I think there was a bit of a mistake. So I think, trade, you know, sizing and trading decisions have a very big impact on eventual return or losses. So that was my second learning. The third learning for me is that, you know, just because great people are involved in a business doesn't necessarily make the business successful. You know, this company had the best shareholders, the best management teams, all of that. And yet, you know, the share price idea. And I realized that even some of these people are maybe going into buying lottery tickets, and we're all buying a lottery ticket together, and no one really knew. But I thought my lottery ticket was safer than it was just because I saw those people. So, you know, increasingly, I think very hard about the product and service. So looking at what customers think, etc, is important. And my fourth and final one and this is actually the biggest driver of what I invest in is how much does the company share with me as a small shareholder. Now, not in the future, but so I tend to wait my portfolio towards companies that are sharing the spoils with me now. Now this company had no income from its biotech business, no revenue from its biotech business, they never paid a dividend, they needed more and more capital in order to succeed. So they were taking money from us rather than giving money back to us. And I think, again, you know, there are investors out there that love such situations, because there is that possibility of exponential growth, but there is also the possibility of permanent destruction of gambling. You know, I wasn't born with millions in my bank account or so for me, every penny has been known for a lot of hard work. So capital preservation and compounding is important. Hence, I tend to now wait my investments and a lot more towards companies that have achieved a stage in their development and lifecycle and also have the, you know, also help this concept of respecting smaller shareholders such that they share on an annual basis. So those were my lessons.

Andrew Stotz 24:21
Okay, let me share a few things that I take away. I mean, first of all, they say that life is inches in seconds. And I would say you are inches in seconds from an absolute disaster, but you averted it, in my opinion. I think that this is a story of successful diversification where you carefully went into something new, and you didn't I mean, I was a little bit worried when you were telling me that you were just going to put in a little bit you're gonna put more money in I was thinking, Oh, God, don't take half of your portfolio. And it reminds me in my book, How to start building your wealth investing in the stock market I talked about, you know, imagine if you're a young person and you're investing in you make two mistakes. In two years out of 30, or 40 years of compounding, and you lose 30% of your money in those two different and I say after five years, and after 10 years, it's massively damaging to the final value that you're going to have. So you really need to be kind of flawless unless you're an absolute genius, like Buffett as an example. But the point is, is that if you make a mistake, in your later years, you do not have the compounding time, you do not have the time to compound. So this is an important thing to be more cautious as we get older, and we build our wealth, which is the time that we actually start to get a little bit more aggressive, like I got some money. Now I'm doing well. And now I'm willing to take some bets. But just be careful. Second thing I thought about was all or nothing ideas, you know, they're binary, and they're interesting, and they're fun. And there's a lot of cool stuff. But I think this is a good example of if you've gotten and the next thing I wrote down was seduction, seduced. If you get seduced into something like this, you know, rightly so. Just keep that waiting very low in your overall portfolio. The other thing that I wrote down was, this is the hardest one, the hardest one, how to take on opposing views. I mean, you saw the research. Yeah, there was a debate. I mean, you have a platform to bring opposing views that you get people on. And I've seen many cases where I've had a particular view, and someone has an opposing one. And all I do is attack attack attack. And I'm not taking on and it's very hard to take that on. And that I think, would there's that's kind of my hardest lesson from this. And I'm just curious what your thoughts are about that. And anything you would add to what I've just shared?

Raghav Kapoor 26:57
No, I think I want to circle back on the point about, you know, we probably end up making our biggest mistakes when we're doing well, you know, the hubris pride comes before four is very true. I think, in 2022, thereafter, when my portfolio was not doing as well, markets were bad, I probably would have never, never invested in something speculative like this. But in 2021, you know, with great portfolio performance beyond my bag, it just gave me, you know, bigger balls to go into debt. So I actually think that we need to build in that internal risk management to be on high alert, when we are doing well. Right. It's, you know, the, I think, to your point about taking an opposing views, I think being able to sort of wait all sorts of views is really important. I think it's hard to be your own devil's advocate when your long term thing. And I think you should actually listen more to the people who have an opposing view. But then I think if you don't know, who is that person who has that opposing view, you should try and do research to establish that credibility. It just mean, go ahead. Yeah, I think I think, of course, you know, we live in the land of fake news. So we have to be very, very sure that we can identify the source of these views. And sadly, platforms like Twitter do a very, very poor job. They're synonymous platforms that propagate all sorts of information, right? So they promote confusion rather than objectivity. So that it was very difficult for me, but I guess what, you know, what I can do and I try to do is keep my investing so simple, that it's very, very difficult for people to have starkly opposing views. You know, or even have any views at all, you know, sometimes. So, the what, you know, again, you might not make phenomenal returns over short periods of time, that way, you might not lose phenomenal amounts over short periods of time anyway. But you know, the compounding is extremely graceful. So, I try and get an early on a story where I know the story is so simple, I can explain it in one sentence, and almost everyone would agree to it. Of course, there will always be things around the edges that are not perfect, but that's fine. And that's not the whole story.

Andrew Stotz 29:48
One of the lessons that I would take away about opposing views that you mentioned that I think's kind of interesting. When I was a young guy in the stock market, I did screening and I said, Okay, kick out every stock that has a PE above 50. And then out of what remains kickout, any stock that has any company that has an ARO E, below 15%. You know, and you go through this screening process. And what I learned is that screening is not really a great way to do it, it's better to do scoring. And that way you keep your universe and you punish it based upon different things. And what you just made me think is, don't, don't screen out ideas, wait them, and score them. And so I think that's a huge takeaway. So based upon what you learned from this story, and what you continue to learn, let's go back in time. And let's imagine a young person right now, facing this same exact type of situation, what's one action that you'd recommend our listeners take to avoid suffering the same fate?

Raghav Kapoor 30:48
I think, I think ask yourself, do you know enough about this industry or space to actually have some kind of edge? And by edge? I don't mean, you know, information that nobody else has. But do you have a really good feel for this? So that when new information comes, you will know how to process it quite intuitively. So simple example, I live in Singapore, right? I know, how much your taxi costs, how much a bus cost, how much you're creating costs, let's say I own shares in the taxi company in Singapore. Tomorrow, the government changes some rules around the transport industry, I would intuitively know what the implications are. I won't have to open up investopedia.com Or you know, I wouldn't know where to begin, right? So that's the area of competence. And I think the more competence you have, the more chances of you or making good money over time.

Andrew Stotz 31:48
So what's the resource you'd recommend for our listeners?

Raghav Kapoor 31:53
I'm extremely biased. But if you are focusing on Asian companies, I definitely feel smartkarma is now the go to resource. We, you know, we've worked very, very hard over the last eight years, we have over 400, analysts now 38,000 users. And we're, you know, we're growing very, very well. And it's testament to just one thing, which is that we focus on good independent research. And I'll underscore that word independent, because none of the analysts on our platform are pushing up research, because they're trying to do, you know, beings on the back of it, or there are conflicts of interest in the back of it. So that really helps. The second is, it's very affordable. Now. You know, a private individual can start with just, you know, a few dollars a year. And all the way if you're very, very sophisticated, sophisticated, you can pay, you know, seven figures on it, as well, I

Andrew Stotz 32:53
think we've got it, we've got a link that you've shared that I can share in the show notes. And that way, if anybody's interested, you can check it out.

Raghav Kapoor 33:00
Yeah, absolutely. You know, we'll make it totally inexpensive for you to kick start your journey on smartkarma Make up your own mind. And I think the last thing I'll mention about smartkarma. And to me, this is an area of immense opportunity. Where you're sitting Andy, where I'm sitting in a two to three hour flying radius from us is now 1/3 of the global population. And it's an area that is grossly under invested by domestic investors as well as foreign investors. But the place is getting richer, you know, there will be more bigger and bigger pools of capital that will be forced to invest in this region. And you get insanely amazing companies at dirt cheap valuations, that nobody knows about. And this is my joy on smartkarma. Because we don't care how big or how liquid the stock is, we care about, you know, the growth potential of that company. So and smoking was the only place where you will find that kind of research.

Andrew Stotz 34:08
Fantastic. So I believe it's one dollars and 99 cents for the first month if you use the link that's on the landing page. And so check it out. Now less last question for you is what is your number one goal for the next 12 months?

Raghav Kapoor 34:24
Investment wise or in life

Andrew Stotz 34:26
in business investment up to you something interesting?

Raghav Kapoor 34:30
Yeah, I think, you know, every year it's useful to have priorities. And you know, I think the top three priorities don't change, but the ordering of those priorities might change. So for me, you know, last year was a year when I have to dig quite deep into various parts of our business and a lot of process revamps. In order for us to scale further. I think this is the year when I do a lot more empowerment. So It's a year when I will be spending a lot more time grooming leaders within the company. And also spending a lot more time meeting our external stakeholders. So my number one priority is to spend more time in my outbox than my inbox, that sort of thing. That's sort of more of a work thing. But there is another thing, you know, I have this I want to be able to prioritize my health a lot more this year as well, relative to last year. So kind of having that balance in work is important. And again, it's, I'm not going to try and optimize the performance of our company to, you know, blow it out on all fronts, but then completely neglecting my health. So I think I think having that ICA guy or that balance is going to be important as

Andrew Stotz 35:54
well listeners there you have another story of loss to keep you winning. Remember, I'm on a mission to help 1 million people reduce risk in their lives. And if you've not yet joined that mission, just go to my worst investment ever.com and join my free weekly become a better investor newsletter to reduce risk in your life. As we conclude, Raj, I want to thank you for joining our mission and on behalf of a Stotz Academy I hereby award you alumni status for turning your worst investment ever into your best teaching moment. Do you have any parting words for the audience?

Raghav Kapoor 36:28
I think I think my parting words I've never stopped investing because I think it's the biggest superpower that nobody teaches us in school. And it is the only shore way towards independence in many aspects of our life. And it's also something you can do until the moment you die. So it keeps you young and keeps you active. So never stop investing.

Andrew Stotz 36:55
What great parting words and that's a wrap on another great story to help us create, grow and protect our well fellow risk takers. Let's celebrate that today. We added one more person to our mission to help 1 million people reduce risk in their lives. This is your worst podcast host Andrew Stotz saying. I'll see you on the upside.