Play safe, plan for a bear mkt, Kamath of Zerodha | Economic Times

It is scary that people are buying stocks not because they believe in the business, but because their friends bought something and profited from it, Nikhil Kamath, Co-founder, True Beacon and Zerodha tells ET Wealth.The pandemic has brought thousands to the stock market, and they have made a killing from the one-way ride over the past 18 months. Do you feel newcomers could confuse this for skill?We all have hindsight bias. Historically if I have done 10 things of which five have worked out and five that haven’t, I will tend to give myself credit for the five that worked out and put the other five down to bad luck. We do have an inflated sense of ourselves, not just in stock picking. If you were to put 100 people in a room and ask each of them how many of them are better than the rest, 80% would say they are better—which can’t be right mathematically. People are starting to believe that making money in the stock market is easy. If you buy anything, it has gone up. People are attributing that to better research that they have done versus momentum in the market.So yes, it's a big fallacy. The euphoria is scary. People are not buying companies because they believe in the business or valuation. People are buying because their friend bought something and it went up 30-50% or higher. That is a recipe for disaster. Eventually it will come back to bite us. History has shown that we can have prolonged periods where everything can go down for many years. When things will correct and go back to the mean nobody can predict. The current investing crowd has not experienced that. It is prudent for them to not get carried away. They need to play it safe and plan how they will act in a bear market and not just a bull market.Your biggest rivals are also setting up discount brokerage platforms. With pricing getting commoditised, what is the compelling differentiator in broking?The future of broking is that things will get cheaper and more efficient. Technology will be the key differentiator. Traditionally this industry worked on relationship management. It is now moving on to what tools are being provided for the benefit of the investor. That is the big switch. Credibility is also big part of any fintech business. People have to trust where they are parking their money. The only way to gain credibility is to offer transparency. We have been doing this for 11-12 years now and it has helped. Unlike many others using gamification to boost volumes, Zerodha has introduced a ‘kill-switch’ that discourages over-trading. What is the thinking behind it?The idea is not to have traders come and get their fingers burnt and then stop trading. Gamification is a bad idea. It only works in a short time frame. We need to have a trader or investor who can survive and make returns over the long term. We are focusing on giving the right nudge. It is helping people be more resilient and disciplined.How is True Beacon attempting to reshape the wealth management space?In the asset management space around ultra HNIs, there have traditionally been too many inefficiencies. Let’s say you want to invest some money. Typically you would have gone to a private bank or wealth manager, who will put you in touch with a fund manager. For this service they charge you 1-2% as a set-up cost or distributor fee. Then the fund manager will charge you 2% a year, whether you make money or not. This 2% may not seem a lot but if you compound it over a 20-year period, it becomes as much as 50% of the capital you invested. Then there are arbitrary rules like lock-in period, exit loads if you take out money early, and so on.We have tried to eliminate all these inefficiencies. We don’t have any middlemen, so no set-up fee. We do not charge any annual management fee. We have replaced that with a flat performance-based fee of 10% a year. If for any reason the client does not make money for three years, we earn zero revenue. We only charge on the profits made and at the end of the financial year. That really puts our necks on the line. We have also made the funds open-ended. You can exit when you like without any exit loads. All of these make the platform a lot more transparent and efficient, irrespective of how well the fund performs.Is True Beacon’s new launch of hybrid fund influenced by the unfolding market situation?We believe markets are expensive today. Having a product that offers a combination of equities and risk-free debt is the need of the hour. It brings down the market risk by 40-50%. The timing feels right for a fund like this. Many people will try to go for funds that are trying to get 20% alpha over the Nifty, but I don’t think the time is right for that today.Do you see the current rush for global equity investing as more of a fad or a genuine shift in mindset?Diversification is always a good thing. Not just between asset classes but across geographies. When things go bad, they don’t necessarily go bad everywhere at the same time. Global equity exposure should be encouraged. Through GIFT City, NSE plans to make it a bit easier for domestic investors to buy foreign stocks, which is a good step.Also read: Investing in US, foreign stocks? Know how buying, selling these scrips are taxed in IndiaAlso read: Investing in US, foreign stocks is necessary for portfolio diversification: 7 things to keep in mindWhere do you stand on the cryptocurrency mania?I am fairly pessimistic on everything crypto. In the war between governments and central banks versus cryptocurrencies, my money is on governments to win. Each of them takes away power from each other. So I am not a big fan and have maintained that outlook from the very beginning. I have never invested in any type of cryptocurrency.