That money is always invested entirely in the stock market. I don't remember any time investing in fixed income opportunities. The joy that I get from investing is greater than the joy I would get from splurging. There are fund managers who are sitting on 50 to 80% cash levels right now. We are generally fully invested, meaning 1% or less of cash. A lot of research has shown the biggest damage retail investors cause to their returns over a long period of time is in this attempt to try and time the market, getting in, getting out.
Hello everyone. So 2024 has been quite eventful for investors with the Indian elections and regulatory shifts, and not to forget the US elections. So looking at 2025, as the current year draws to a close, we have a market expert with us, and he's going to share his insights for the coming year with us. We have with us Mr. Prashant Khemka. He's the founder of White Oak Capital Management. Welcome, Mr. Khemka.
Thank you, Dipti. Pleasure to be here.
Same here, sir. How are you doing?
Doing very good. Looking forward to the new year.
So to begin with, where would you invest that money?
Certainly, assuming all the living expenses are taken care of. What has been the case with me since almost, so to say, is money is always invested entirely in the stock market. In fact, nowadays my wife takes care of these investments. So the standing instruction is to invest in the other funds and vehicles that we have. I often jokingly say that the few times that me and my wife have an argument is when she may slip up and overlook, and for a few days the money is left in the bank without getting deployed in the market. So always fully invested in equity markets. I don't have any... I don't remember anytime investing in fixed income opportunities. So that continues to be the case.
So considering what you said, how would you look at diversification? Considering a lot of people these days, especially market experts, are pointing out that diversification is key. So how would you look at that?
See, our funds may have, you know, 100 companies, so very well diversified across companies within the fund. Now you were talking about diversification across asset classes. That comes at a cost. You know, equity, in my belief, is over time, it has been the case over the last 40 years. I started or stumbled into equity markets in 1985. Personal observation has been, and even if you read history, equity markets over a long period of time have delivered the highest returns as a passive investor. So obviously, someone who has a business of their own, that may provide higher returns, but as an investor, equity markets, and that's my firm belief going forward as well. That's for the market, and obviously, I believe our team can generate over and above the market returns, so can generate excess alpha that, when combined with the market return, produce a total return which is very difficult to beat in other asset returns that we might get in other asset classes. So the diversification benefit from a personal standpoint gets more than offset by the extra return that I expect from equity investments.
So would you invest the entire amount in equities, or would you also splurge a little?
The joy that I get from investing, that is greater than the joy I would get from splurging. That's been the case, fortunately, for me all throughout.
So I know that you believe that equity is, like, you expect long-term superior returns from equity, and you're quite gung-ho on that asset class. But given the current returns, do you expect investors should temper their return expectations?
See, it depends on what the return expectations are. But yes, I would say at any point in time, you ask me what are the return expectations for the next 12 months or whatever time period, I would say low double digits annualized. So if you ask me today, that expectation is no different than it was at any point in time. That's the base case expectation. It's like if you ask me, you're going to flip a coin 10 times, what are my expectations for heads and how many heads and tails? I would always say five each. In reality, it might be 6-4, 8-2, sometimes 10-0. But on the next set of 10 coin flips, it's again going to be 5-5. Similarly, expectations going forward have always been low double digits, which is not too different from what the Indian market has delivered over a very prolonged period of time. Just like with coin flips, if you have enough coin flips, they'll tend towards 50/50. So that's going forward also the expectation, Dipti, that it should deliver about low double digits.
So that means around 12 to 15%?
No, low double digits would be more like 10 to 11% pre-tax.
Okay. So many are concerned about a slowing earnings growth followed by potential earnings downgrades. So do you also share a similar concern? What's your take there?
See, there are always concerns. There's not a single time, forget about year-end, but not a single time in the market where there aren't concerns. By nature, people look for concerns, and you'll always find some. And then these concerns are nothing new. Yes, it is possible in the near term, with the economic growth having been a little bit slower last quarter, we might see this quarter as well, that that spills into corporate earnings. But that's all part and parcel of the game. If you look at, as I said, over the last many years, you know, there have been a number of periods where economic growth and earnings growth has been slower for a little while and faster at other times. So if we have that over the coming months, that's also very possible. Does not necessarily mean that markets would do poorly.
So do you believe that this is factored in also? Like there was a point where geopolitical concerns were a big worry for the market. So have we surpassed that concern? Like even elections were somewhat of an important factor to watch out for. So basically, what are the other concerns, and has the earnings downgrade or slowing earnings been factored in?
Yes, in my view, at all times the concerns are factored in the market in a probabilistic manner, meaning probability-weighted outcomes are factored into the market. Now, if the reality turns out to be far worse than that, the market may adjust to some degree. What we may think is factored in the market may be very different from what the market has actually factored in. What I mean by that, let's say going back five years, if we were at the end of 2019 and we were told all this is going to happen in the real world over the next year or two, with all that happened in COVID, right, we would expect, you know, markets to do very poorly and be sitting in cash or in other asset classes. Maybe if I had known all what was going to happen, I might have also considered. As an exception, March 23rd is where the market bottomed in 2020, and on that day, if I'm not mistaken, the total number of cases in India were still around 1,000 or something. That day, the number of cases reported were 75, just 75. And obviously, then it went on to become in millions and all. And the market rose in the face of those soaring COVID numbers and the lockdowns and everything. But on March 23rd, if you were told that forget about 75 cases today or a thousand cumulatively, there are going to be so many millions of deaths in India and globally and so on, it would seem a very dire outcome. But the market started rallying from March 24th onwards because they factored all this in and more, and figured out, you know, the impact in terms of corporate cash flows and the present value of those cash flows is not that material.
So you also mentioned something about sitting on cash. There are fund managers who are sitting on 50 to 80% cash levels right now. What's your reading there? Do you still find opportunities in this market?
See, our team always finds opportunities. Forget about 50 to 80%, our team generally does not even have 50 to 80 basis points of cash in the portfolio, meaning not even have 0.5% to 0.8% in cash on many of the days because they're fully invested. So we never take market timing calls. We are generally fully invested, meaning 1% or less of cash. And our view always is the market is fairly valued. But in a fairly valued market also, half the names would be overvalued, half the names would be undervalued, meaning market-cap weighted. You have to get more technical. And so to find the undervalued names, you have to beat the market, you have to beat the peer group, and that's what we are focused on.
Has there ever been a time where you have probably regretted not being so invested, like, I mean, always having entire cash levels, like not sitting on cash?
