Ep. 23 - Puru Saxena, Portfolio Manager: Growth + Price = Success

Puru Saxena was the founder and portfolio manager of a Hong Kong based money management firm. He set up my first firm with 2 partners in 2001 and then branched off on his own in 2005 and ran money until 2016; which is when he retired from the business.Thank you so much for listening, we really appreciate you.If you have found this valuable, please consider leaving us a review as it will help more people find it! Thanks you're awesome!You can find more information and contentby going to these places:Website: https://www.investingcity.orgYouTube: Investing CityTwitter: investing_cityInstagram: investing_cityOr feel free to email us at service@investingcity.orgAgain, we really appreciate that you would take the time to listen. Hope it was valuable. Let us know if you have any questions!Transcript:Puru 0:01So the key question you have to ask yourself is, if I am looking at this business, what are the substitutes available and as a customer of that business, what is the likelihood of me actually going to the other business as opposed to this business, and that gives you a fairly good indication of a mode.Ryan 0:21Hello, everyone and welcome to the investing city podcast where the goal is to get better at investing business and life. Thank you so much for taking the time to join us, it really means a lot. Without further ado, enjoy this episode is presented for informational purposes only, and is not investment advice. This information must not be relied upon in making any investment decision. Investing city cannot be held responsible for any type of loss incurred by applying any of the information presented. Furthermore, securities discussed in this podcast may be held by the investing city and members thereof. Thank you. On today's episode, we have the pleasure of talking with Puru Saxena. He's the founder and portfolio manager of a Hong Kong based money management firm that he set up with his first partners in 2001. And then he branched off on his own in 2005. He ran money until 2016, and then retired, and now he just manages his own portfolio. We talk a lot about his research process, what the two drivers of investment returns are his trend following strategy in order to limit severe drawdowns and much much more, including a lot of discussion on Uber and Lyft, and the ride sharing industry. I hope you enjoy this one because Puru is really sharp, and he has a lot of great insight. Enjoy. Okay, on this episode of the investing city podcasts, we're happy to have Puru Saxena on. So thanks so much for being here.Puru 2:00My pleasure.Ryan 2:01Great. So I thought we'd start with kind of a deep dive on your research process. And I feel like our research processes are fairly similar being kind of growth investors, but I just want to dive in a little bit about how you think about starting to research a company and then kind of the process in which you analyze one.Puru 2:23Okay, I mean, basically, I realized a long time ago, that proves why a shareholder makes money from investing in the business. The first reason is obviously, the growth of the business. And the second aspect is the valuation of the business both at the time of investment and the time of divestment. So there are two factors at play here. You know, there are a lot of investors who get caught up in the value traps because they think something is cheap, but they don't realize, you know, something is cheap for a good reason it the top lines are shrinking the business growth isn't there? Well, there is some competitive threat lurking on the horizon prestigious can't see or discounted and modeling. So for me, I try and look for those businesses, Ryan, which are dominant in the respective fields, generally businesses, which are disrupting the existing industry, because obviously, it's a lot easier to steal existing demand from within an industry than it is to actually create new demand for a service or a product. So I look for the leading dominant businesses in the relatively new industries. And then I try and put the business through four filters in the business has to be one, which I understand. And there are a lot of companies and a lot of industries and a lot of businesses, which I don't understand, and I don't try and you know, dabble in those, I just stay in those areas where I have some level of degree of comfort or aptitude to understand the nuances of the business. So that's the first field. And then the business has to have a a competitive advantage or a moat, as Warren Buffett and Charlie Munger, like to call it so on the business has to have some level of durable competitive advantage, which can keep competitors at bay for an extended period of a period of time. Because if you have a business, which is a commodity type business, for example, where all you're doing is you're taking a price, you're a price taker, as opposed to a price setter, and there is no differentiation between your service with anybody else's service. And it's a very easy business to enter, then those businesses from my experience, don't end up generating a lot of shareholder wealth or returns on invested capital, which ultimately drives shareholder returns. So I try and stay in those businesses where I at least find a degree of an economic mode, then, the third filter is that the business has to be run by able and honest people, you know, I've seen a lot of people, over my 20 year career turned sour, because either the management was incompetent, or the management was basically lying outright to shareholders. So try, I try and stay away from companies where it was either a one man band, or there is some sketchy or shady history pertaining to one of the senior management in place there. And finally, the fourth filter is valuation. You know, from my experience nine, no business no matter how wonderful is worth an infinite price, because the As mentioned earlier, the return that you get as a shareholder, it depends upon the growth of the business and also the price that you pay to enter into that business to buy into that business that is very, very important. So if you invest in amazing companies, at a cheap valuation, that is the best scenario, because you get not only, you know, the upside from the growth of the business, but also you get the rerating, when the market realized is the the prior appraisal of that business was incorrect. And you know, this business, in fact, does have some intrinsically amazing characteristics. And when there is the when the V rating takes place, then you have, you know, maximum bang for your buck. Now, the second best scenario is when an incredible business is trading at a fair valuation, in my opinion, in my observation, you know, those sort of investments can still provide pretty decent returns, they still tend to outperform the broad indices. And finally, you know, if you invest in an incredible business, when all the future growth is already in the prize, it has already been discounted by the market. And the business is trading at outlandish valuations, ie, very high price to earnings multiples, or very high price to sales or enterprise value to sales multiples, then even though those businesses continue to perform history has shown that, you know, under the best case scenario over the long run over a five or seven year period, either investors break even from those businesses or they generate subpar returns. And if a bear market, a recession comes along, and they lose a lot of money. So from my point of view, or the way I look at the world, I mean, there are two reasons which determine investment success. One is what you invest in. And secondly, when you invest in it, there are two factors is not just a one off thing where you just pick up any randomly or random fast growing business at any valuation and hope for the best. That doesn't work, in my opinion.Ryan 7:30Great. So I think that provides a really solid kind of structure for how we started this conversation, because so those four filters need to understand it, the company needs to have a moat, honest management and then valuation. So I kind of just want to dig into some of those, particularly on the moat side. Because I think that a lot of people always say that they want to invest in companies with moats. But then a lot of people kind of end up investing in these maybe subpar companies. So what are some ways that you kind of ferret out if a company has a moat? Are there any metrics you look for? Or how you kind of discern a moat?Puru 8:08I mean, there are a few reasons. One, you can go about doing this to a few ways ? Well, what I do is I try and look at the industry mine, and I see, you know, what is the standing of one particular business, then within that industry, you know, like some fairly obvious businesses, which have a very wide moat come to my mind right now, you know, you look at the credit card business, it is it wobbly, or you know, you have visa, you have monster, and then you have to close circuit, the closed loop. And now, if I give you $10 million, and I said, Go, Ryan, here you go, here's $10 million, check, go and fight off, these are monster, I don't think you'd be able to do it. Because these guys have already signed up 10s of millions of merchants all over the world, they have got two and a half, three, three and a half billion cards in circulation for the on monster. And people have. And they have gained their customers trust over several decades. So it's not going to be very easy for a startup with a $10 billion check in its pocket to disrupt Visa, MasterCard, or Amex. Similarly, if you look at, you know, the retailing side, in the US, we look at Costco, you look at Amazon, you look at Walmart, I mean, these companies own a piece of their customers mind, and they are the de facto businesses when whenever people are looking for that particular product or service. And similarly, you know, if you look at search, Google, or alphabet now has a huge mode. Now they control the search market, they have Android on the phones all over the world, they have got YouTube, they've got maps, and several other irons in the fire. So you know, these are some of the businesses are on the transportation side. If you look at the railroads, you know, no matter how much cash you have in your pocket, you will have to be a valuable sport to try and compete with, you know, either Union Pacific or Canadian National Railway will see it's actually one of those companies and trying to lay a track right next to them, you will have to be incredibly stupid, and very, very silly to do so. So you know, these are the some some of the characteristics, which I tend to look at another more sources can either be a brand name, like McDonald's, for example, or Coca Cola or Pepsi, it can be a network effect, it can be a cost advantage. It can even be user data in today's day and age. So the key question you have to ask yourself is, if I'm looking at this business, what are the substitutes available? And as a customer of that business, what is the likelihood of me actually going to the other business as opposed to this business, and runners, and that gives you a fairly good indication of a mode and scale is also a moat in today's day and age where thanks to the internet, businesses are able to dominate in regions and in some cases, the entire world. So you have to look at scale, because with scale, you have you know, revenue, and your costs are relatively fixed. So in that scenario, you know, scale also is a big morsels, in my opinion.Ryan 11:13Great. And I just want to ask a follow up on that question. You said, the most important question you need to ask is, if there's a competitor, why would I use this competitors product versus the other company? And I want to talk about that in the context of two particular companies that have IPOs somewhat recently. And this is none other than Uber and Lyft. And so just in terms of that question, I think it'd be really interesting to kind of break down your thoughts if you have any on Uber and Lyft, and kind of the substitutes and competitive dynamics there.Puru 11:48Sure. I mean, it's no secret that I invested in Lyft. Soon after the IPO, and I've been adding to my position so far has been a disaster. So it just shows that I don't get everything right all the time. Far from it, I make plenty of mistakes. But Lyft and Uber; and Uber I've actually invested in last night, and the stock has popped up six or 7%, since I invested but all this is short term noise. In my opinion, the big picture, the way I look at Ryan, hailing a ride sharing is the transportation as a service opportunity task. It is no secret, you know that cars or private cars just sit idle for 90 or 95% of the time, because the fortune, the depreciate the burn a lot of money, people have to spend cash, on petrol on insurance on car park, and servicing and maintenance and so forth. And it's just not a very efficient use of capital. Now, for decades, the taxi industry or the cab industry in the states didn't actually do anything at all, they actually sat on their laurels, they collected, they basically bought into their medallions. And then they just took it very easy. And it was not very easy for most people in the the country, especially in the suburban and rural areas to actually call a taxi was inconvenient. Well, all that was changed a few years ago. And Uber started off and initially started off. And now the average person can call a taxi, within a matter of minutes by simply pressing on an app. And you can actually see the taxi in real time, the payments are very easy, you don't have to worry about cash, the payments are actually made via digital means before one gets into the right. So you know, it does become very, very easy and convenient. And already, there is some evidence that especially in the United States, a lot of families actually giving up on the second cars, and they're relying on one primary vehicle and then the spouse, or the kids are using either Lyft or Uber. And this is not a phenomenal job observe just in the US. But also all over the world. You know, if you go to China, China, you can go used to fight it out in China, but now over 20% of GDP. And also, you know, in Southeast Asia where has got about a 27 and a half percent stake in the ground. And recently it has invested in Kareem and taken out the entire company. So if you go to about 60 odd countries today, most people view Uber, as a utility, it has become a verb, you know, like people say, you know, let's go just Google it. Similarly, people say, well, let's just call an Uber. And I think that is a major mode source. And the business is growing rapidly. You know, at the moment, in q1 Lyft announced that its top line increased by about 95%. year over year, over the whole year. Lyft is looking to grow its top line by 50 to 60%. And the projections which I have seen from various Wall Street analysts suggests that Lyft will be able to increase its revenue, eight to 10 fold over the next 10 years. And although Lyft is currently unprofitable, if the revenue continues to scale, and the cost, the cost on sales and marketing on insurance, and the incentives mission has been providing to both the drivers and the riders, when that goes down, I think the business will scale and there's going to be operating leverage. So in my assumptions, and I may be totally wrong and off the market, and nobody should follow me blindly. But I believe that, you know, within eight to 10 years, religious revenue would be around 20 billion, and the business would be probably generating close to 15% operating margin. So you're looking at about 3 billion in operating profits in 10 years from now. Now, if you slap on a 20 multiple on that number, you're looking at a market capitalization or the value of the business and about 60 billion and where is it creating today about 1516 billion. So if my assessments are vaguely correct, then I think you know, investors could be looking at a four x return from Lyft, or the next 10 years now obviously a lot can go wrong with be now in them. But this is what I'm looking at for Lyft. In terms of Uber, Uber, I believe will be able to increase its revenues five or six x over the next 10 years, simply because you know, they're only in about 63 countries right now 701 cities, and I think they will expand into other areas. And ride sharing now only represents about 1% of the total miles traveled. And I think over time that will increase the number of users are going to increase. Also, the rights for number of users are also going to increase over time. And I believe that at some point, maybe not within the next six months, but down the road, I think Uber and Lyft will come to their senses and they will stop fighting over market share. And there will be some sort of price stability that you normally see in la police and the police. Because if you look at the landscape today, yeah, sure you have some startups, which are operating currently in a few cities, but is incredibly difficult for a new startup, in my view, to set up a new competing platform and compete with Lyft. And knowing fully well that they're going to be facing renderers losses for the first several years. So I think that business globally, and a lot of high quality investors, and professional investors and institutions have taken positions in these companies. SoftBank is a big player, the Saudi Investment Fund, the sovereign wealth fund has invested in Uber alphabet has a stake in Lyft. And Uber, then you've got you know, the private equity guys, Andreessen Horowitz, benchmark, capital, and fidelity. So you have a lot of players including GM. So you have a lot of well funded players with deep pockets, which are basically supporting these businesses. And I do think that down the road, maybe not tomorrow, or in two or three years from now, but 567 years from now, I believe that both Lyft and Uber will become hybrid taxi networks or platforms whereby you're going to have a combination of human taxis or taxis driven by humans, and also some autonomous vehicles. And I know a lot of people are saying now that you know, the other four years will be able to build their own fully autonomous networks, and Tesla is going to do the same. But I think that's not going to happen, because the regulators are going to be very, very cautious. And they're not going to allow a full scale autonomous platform running all over the country from scratch is going to be scaled and slowly. And we'll start off in my view in you know, the easier areas like the big motorways and highways and so forth. And gradually, it will spread everywhere. And the mapping gets better. And there is some sort of a safety record. And I think both Lyft. And Uber daily situate is to take advantage of such a hybrid network, because they not only do they have, you know, partnerships with existing AV makers, but also they have millions of drivers already on the platform, and not to mention the 10s of millions of riders or users.Ryan 19:16So I think that's a really interesting last point, kind of this autonomous, autonomous platform. And just the way I'm thinking about it, maybe I'm thinking about it wrong, because you can have this hybrid model, but I'm just interested to hear your thoughts about if kind of Lyft or Uber partners with an autonomous vehicle maker, then it kind of cannibalize is some of the people who are already driving for Lyft and Uber. So how does they kind of fit in to the autonomous space?Puru 19:48Well, I think a lot of the driversUnknown 19:48driversPuru 19:49are going to leave because either they're not going to be satisfied with the wages that they own, or the thing they realize, you know that there are better ways to earn a living by I think, for the next 10 to 15 years, I don't personally see a fully autonomous fleet anywhere. And I know Mr. Musk has recently said that he's going to launch his own fully autonomous level fine ride hailing fleets next year. I think that's wishful thinking, I believe that, you know, there will be a combination of goals, drivers and the cabs. And, you know, as the recent churn rate suggests that a few on a lot of the drivers will continue to leave both platforms. But you know, at the end of the day, Uber and Lyft are a means for most people, not all of them, but for most people to earn some extra cash on the side, you know, and especially those people who are looking for some extra income, it's a great way for them to actually, you know, drive for maybe an hour or two or three hours a day, and I announced some extra money. But ultimately, I do think that, you know, down the road, you will get autonomous vehicles. And you know, that's something most companies will have to factor in, you know, obviously, they're spending very heavily right now on trying to acquire and retain drivers by, you know, offering them a lot of incentives. So it's going to be interesting is not a slam dunk, you know, by any stretch of imagination is not one of those industries where you know that Okay, great, you know, these companies are going to make an absolute killing down the road, there are uncertainties and risks and more than that's why you have these valuations. I mean, both companies and are trading around five and a half, six times trailing 12 months revenues.Ryan 21:32Right. And so I think that was a super good way to kind of go over how you think about moats. But let's move on to the next one kind of assessing, honest, management's, are there anything that you look for, in particular? Is it just listening to how the management speaks or their past performance? Or just how do you? How do you assess that?Puru 21:53I mean, I look at the past performance, see, you know, where this chain of management has worked in the past, what is their pedigree, what sort of qualifications they have, what is their track record in the business world, whether they've been involved in some sort of shady or dodgy transaction, how honest they are, how transparent they are, and they can not communicate with the shareholders during the earnings calls and how they perform during the TV interviews, which they do from time to time. And obviously, the deeper the bench it is, the better it is, for me, I'm not really looking at a one man band, I prefer to have our management team in place, which basically will continue to function, even if one or two coppers in our model disappear tomorrow.Ryan 22:35Gotcha. And so just moving on to the last of those four filters, really interested in your thoughts on valuation? How do you think about valuing these companies, because we're, especially with high growth companies performing a very detailed discounted cash flow might not be the best thing, because they're just so many assumptions, like you said, so just interested to hear your thoughts about valuing the high growth companies.Puru 22:59Sure. I mean, if, if a business is profitable line, and then what I do is I look at the peg ratio. So I look at the consistency of the earnings growth, the revenue rules how the business has performed over the last few years, what is the current expectation, what are analysts projecting for the next three to five years, and then I look at the forward or year and E ratio. And then I look at the projected earnings growth rate over the next three to five years from various analysts. And then I do a simple calculation of peg. So if a business is trading around one peg, or one forward peg, not, to me is an incredible business opportunity, or an investment opportunity, if the business is trading around one and a half to 1.6 1.65, up to 1.7. Peg, That, to me is a fair valuation, anything over to stay well away from, you know, because I think then, a lot of the future growth is already in the current price, therefore, the future returns are tend to be subpar. And if the reason I say unprofitable, then obviously I try and do some sort of analysis on what this business will generate in terms of revenue, what its operating margins will be majority, a 10 years from now, what sort of multiple business will fetch and that time based on, you know, interest rates and you know, similar businesses, and then I come up with a market cap, and I compare that with the current market cap, and then I see, you know, if we go from x to y, what will be my annualized compounded return as an investor? And if it is around 15%, Kaiga or anything above that, that gets my attention? And if it's 10 12%, then I avoid the opportunity altogether. Gotcha.Ryan 24:46And at the top of this conversation, you mentioned that two things drive investment returns, and that's basically the business growth, and then the price that you pay for it. So is there ever a time where you weren't more of a growth oriented investor? Or did you ever make a switch at a point?Puru 25:05Well, I've made plenty ofUnknown 25:06ofPuru 25:06mistakes in my career, you know, I started off 20 years ago. And I started off as a trader in commodities, futures enhancing index futures in Hong Kong. Then I basically went heavy into emerging markets and gold and commodities and stuff in 2001 2002. And I avoided the bear market from 2000 to 2002 2003. I was in hedge funds, and I was in gold and stuff. So my investors were pretty happy with me. And I made money from 2001 to 2006, seven in commodities, emerging markets, and so forth. And I could see the housing bubble brewing in the US. And I call it you know, I even wrote about it extensively. And I mentioned that this was a disaster waiting to happen. And to my bad fortune, and my bad luck, I wasn't totally smart. And instead of avoiding all risk assets all together, I actually invested in commodities and emerging markets thinking that these areas will fundamentally sound middle did I know that the entire, you know, banking system in the US was on the verge of a collapse. So when everything stormed off, everything was hammered, including commodities and emerging markets, and I had one of the worst drawdowns anybody can imagine, I think from top to bottom tick, I was down about 55 to 60%. So that wasn't a very pleasant time for me, because I saw these problems coming, my investors knew, you know, what I was saying made sense, they trusted me with their cash. And because of a wrong thesis, where I thought that some sectors would be immune from the sell off, I got burned badly. And, you know, from day one, I basically put in place risk management system, because I realized, you know, no matter what one believes, as an investor, anything can happen in investment world or in the real world, there are no guarantees. did some real homework, and spent many, many months trying to see what works and what doesn't work. And that's when I basically realized, you know, if you invest in World Class companies, which are growing and the other leaders in the industries, and if you simply have bought into those companies, all those stocks and IP on anytime, and if you are simply ignore the market gyrations, the ups and downs, in the short term, Wiggles, and even recessions, you will still have made a lot of money in these companies. You know, if you look at the long term charts of any of these big dominant businesses like Nike, Starbucks, Costco, Walmart, Amazon, Netflix, Visa, MasterCard, American Express, you know, you name it, added ours, and you will see that, you know, these companies have actually delivered amazing returns for their shareholders, in some cases, you know, 20% 30% compounded annual growth rate over several years, in some cases, 10 15, 20 years. And that, you know, makes a huge difference for the average person's wealth. And all you need to do is get a few of those right, and you set for life. So I basically sat down, and I learned vicariously from the mistakes of other people, including my own. And I realized, you know, what are the sort of things I need to avoid going forward, basically, to make sure that I don't suffer this kind of horrendous drawdown again, and to avoid the risk of ruin. So I realized, you know, investing in dominant businesses for the long haul, worked, I also realized big outsized bets on any business or anyone industry did not work, you know, over the, over the years, many hedge fund managers, many fund managers and so forth, took outside backs on one or two businesses, and then those basic bond out and they need that nearly wiped out their businesses. So for me, position sizing, is also critical. No matter how much I feel strongly about one business, or no matter what my conviction level is, one, I don't invest more than 5% of my original capital on a cost basis, in any one company. Because I've been doing this for nearly 20 years now. And I've seen, you know, many things can go wrong with the business, you know, you can have a competitive shift, and you're going to have a management or all wonky on shareholders, anything canUnknown 29:29wrong, andPuru 29:30I just don't put myself in a position these days, where, you know, one or two mistakes can wipe me out. So position sizing is also critical. I also looked at, you know, some of the common mistakes, which other people made or have made and continue to make, and I try and avoid those, like the plague, you know, a lot of people believe that their own view and their own opinion, and assessment is correct, and everybody else is stupid, daft, and hasn't got a clue. And for me, that is a big recipe for disaster. So from my point of view, now, if I make an investment, or if I invest in a business, I give it time I give it a few months, I'll give it a year, year and a half, two years. And if the stock is not moving in my direction, and if the business is underperforming, I cut my losses immediately, I don't sit around and basically, you know, control myself and tell myself how smart I am and how stupid everybody else is, I see the writing on the wall, and I get out. So you know, cutting losses, and not letting your ego get into the way plays a big role in, you know, becoming a successful investor. And I think the key thing is, you know, just to stay rational and objective, because in investing, you make your money by evaluating the facts correctly, you don't make your money by either following the crowd or going against the crowd, you know, contrarians love to go against the crowd, because it Stokes their ego, it doesn't any difference. You know, this is not an opinion poll, voting contest, this is a contest, way us all the available information. And then you try and come up with some sort of meaningful a thesis, and the market and the price action eventually tells you whether your thesis is right or wrong. So even though if I invest in 10 businesses, I get maybe six or seven, right? And I cut losses on the others. And I move on to the next one. And I think as long as an investor sizes, their bets appropriately, does their homework and cups losses quickly and writes the winners. It is just, it's just a massive game, and that person will do one over time.Ryan 31:38Yeah, so a lot of good information in there. And I'm really just interested in that. You mentioned a risk management system a few times in there. And so on Twitter, I was reading up for this interview, and I saw your hedging strategy, this trend strategy. So I'd be just curious if you could explain that and how you develop that process.Puru 32:01Sure. I mean, basically, as I mentioned to you, I took a big draw down in the Great Recession. which was very painful for me, not the least because I saw this problem coming. And instead of hiding and treasuries of just going into cash, I was stupid enough to actually invest in or stay invested in commodities, gold, silver, and emerging markets, and everything went down. Because the problem was just so big. And then, you know, I had the same experience with gold and silver. But before then, I actually came across a trader who, who was actually active on Twitter, alaoui, temporarily, and his Twitter handle is l&t. And he basically saw me on Bloomberg during a TV interview, which I was doing. And he asked me a couple of tough questions, which I believe I answered, appropriately. And he gained, and I gained his confidence. And he got in touch with me. And we became friends over the years. And he introduced me to trend following to his credit, he basically told me that there was a way of managing risk in a very objective manner by simply looking at prices and the trends. And he put me in touch with trend following. And he basically was kind enough to speak to me on the phone for about an hour, many, many years ago, I think it was 2010, or 11. And speaking to me was eye opening for me, because I was always good at fundamental analysis, and sporting businesses and so forth, and the macro trends. But I had no idea that there was a trend following approach which was available for anybody or to anybody to actually mitigate risk, or to have a risk management system in place. So I did a lot of reading and research and trend following. I looked at moving averages. And later on, Larry put me in touch with Tom basil, and other renowned CTA, the fund manager who's now retired and he manages his own portfolio. And he taught me how he basically used to still hedges his growth stock portfolio, and he reduces the market risk by shorting the s&p and that idea really appealed to me because at heart, I'm actually a long term investor. And I believe that owning one class businesses for the long haul makes a lot of sense. And I've got evidence to show that this is the case. So for me, my logical brain, I thought that this was a great idea to be able to ride through the recessions, the volatility, the panics, and so forth, which don't come from time to time. And to do so with a much less severe drawdown by simply you know, incorporating a systematic, no emotion, hedging strategy, by shorting the NASDAQ futures, the mini futures. So that's exactly what I do. Now, you know, I use a set of indicators, which are actually freely available on my Twitter feed. And when my indicators tell me that the trend is actually turned down. And the short term trend is also down, which is the five and 20 day ma cross, which is what I define as the short term trend, then I short NASDAQ futures, basically, put a bigger hedge or better hedge my entire portfolio. So for example, you know, in q4, last year, when we have this insane volatility, and big drops in November and December, my hedges kicked in, in early November, and I was hedged all the way through until I think, the seventh or eighth ninth of January, I believe. So you know, the market went down, and I was flooded every day, my portfolio moved, maybe 30 or 40 basis points in his directions, and wasn't a perfect hedge, but it did his job. And this is what I do. Now, you know, whenever the storm clouds gather over the horizon, and it starts raining, I just opened up my umbrella and write it out.Ryan 35:52So it's a really interesting strategy. And I'm just curious about kind of false positives. So if you kind of if the hedge is triggered, then you are you just basically closing out those hedges as soon Is the trend reverses and is an uptrend? Correct?Puru 36:11I mean, there are a few ways you can do it. I deliberately chose longer term moving averages because I saw from a back testing and I spent three or four months last summer around back testing all these hedging strategies on my software. So I had the results in front of my eyes. And I realize there are two ways. Basically hedging this protection, you're buying an insurance policy can protect your house against fire, that's what hedging is. Okay. So obviously, the more insurance you buy, and the more frequently you buy, the more is going to cost you. So obviously, if you try and hide yourself and protect every single drawdown, and every single downtick, obviously going to be hedged all the time, and the losses from the hedges are going to basically make your investment pointless. So what I did was I looked at indicators which actually said well with my risk tolerance, so with my hedging strategy is, whereas the 40 day, me, and the hundred and 20, me, crossover is the primary trend filter for me. So when the 40 day em and goes under the hundred and 20, to me, by that time, nearly the NASDAQ, which is what I use this filter on, has already come off about maybe 12, to 15%, from the highs 12 to 13 14%, from the highs. So my hedges only kicking, when one when the market has already lost maybe 1312 to 14 15% from the top. And I'm happy with that, because I don't want to head all the time, I don't want to be hedged, you seem to have within three or 4% from the highs, because history has shown me you know, 3540 years of back testing has shown me that if you hedge so quickly, and so early, and so frequently, there are lots and lots of lip sores, and hedging actually ends up costing a lot of money. So whatever I ran my current system, which is the 40 day, and 120 day, me and the five and 20 cross within the primary downtrend. And I ran the back test on the quantum software or 35 years since the NASDAQ came into being in the mid 80s, I realized that the hedging was pretty much cost neutral. So the hedging losses, actually basically were paid for by the hedging profits, I think there was like a three or 4% cost of the entire hedging exercise over 35 year period. And that was fine for me. So it's all a question of you know how quickly you want your production to kick in and how much you're willing to pay for it, you know, there is no free lunch. Obviously, if you're going to hate all the time, you're going to end up paying for it. And it's going to go, you know, result in lost upside and you're going to cap your upside. But the strategy which are coming to us now sits well with me, I don't mind living through a 15 to 20% drawdown because, you know, that is the standards, volatility on standard deviation of the s&p over many, many decades or as an equity investor in growth businesses, I'm mentally always prepared to, you know, withstand a 15 20% drawdown, I don't mind that. But what I do want to avoid at all costs, mine is the big nasty bear market where you know, you end up losing 50 60% off your capital. And the markets can stay down for a long time. Because if you lose 50% of your capital, you need to double your money just to break even so what I'm trying to avoid is not the normal, you know, volatility of the stock market. But the big horrendous bear markets, which could essentially, you know, cause my capital to have or worse.Ryan 39:49Gotcha. And if you don't mind, I want to dig in a little bit to the specifics of this. And you can find more information if you just follow Puru on twitter at Saxena underscore PR, and I'll put that in the show notes and everything. But I think we'll get a lot of listener questions in terms of kind of the specific So you talked about this 40 and 120 day moving averages, and then this five and 20 as well. So kind of just explain the mechanics of that.Puru 40:18Sure. I mean, I know a lot of traders actually use the simple moving average and the SMEs. But again, my back testing all those 17 months last summer showed that the exponential moving averages actually performed better, they produce better returns simply because they are more responsive and they move faster. So I use the 40 day exponential moving average against the hundred and 20 day exponential moving average line on the NASDAQ 100 index or the N dx. As long as the 40 day exponential moving average is above the hundred and 20 day moving average. For me that is an uptrend. So under that scenario, I avoid looking at the five and 20 cross it has no meaning for me. When the 40 day exponential moving average cross is below my hundred and 20 day moving average. But to me is a downtrend. And within that downtrend, if the 40 is below the 120, then I look at the short term trend, which is the five and 20. So when the 40 goes under the hundred and 20. And at that time, if the five day ama is below the 20 DMA, then I bought folio, a beta hedge my entire portfolio rather. So I actually check the portfolio based off my entire portfolio on a daily basis. And that is available to me freely on my through my broker online broker. So I calculate the portfolio beta, I check the portfolio beta of the NASDAQ, I mean, the NASDAQ portfolio beta is about 1.2. And my portfolio is normally about 1.4. So what I do is I basically hedge by shorting the E mini futures the NASDAQ futures. So if my portfolios value or my long exposure is 100 dollars, and if my portfolio beta is marginally higher than the portfolio bit of the NASDAQ one, then I would actually short hundred and 20 or $125 worth of NASDAQ to basically offset people from your beta to make sure my entire portfolio is covered, because obviously, my portfolio has more volatility, and more, you know, based on the NASDAQ because I'm invested in the multi stocks. So that's how I hedge. And when the five day exponential moving average crosses above the 20 day moving average, I immediately remove the hedge. And if it goes back down again, and if the 14 is still under the 120, then are we hatch? Can I keep doing that until the 40 day exponential moving average scores above the hundred and 20 day moving average, and triggers the uptrend and then I just stopped looking at the five and 20 colossal comes again.Ryan 43:01Gotcha. Thank you for that because that was really clear and I'm sure a lot of listeners be happy. Be because you put in a lot of work to do the back testing. And it's it's a sound strategy makes a lot of sense. But just to be respectful of your time, we just have a couple more questions. So a couple of people from Twitter are interested in your biggest investing mistakes.Puru 43:24My biggest investing mistakes have got to be, you know, being extremely arrogant. In my younger days. I'm not anymore. You know, I used to be because when I first started off, I did very, very well, for a number of years. You know, I avoided the bear market in the US and globally in stocks from 2000 to 2003. I was long gold, I was smart enough to invest in commodities, precious metals in 2001. I was smart enough to go into emerging markets. And you know, by the time the global financial crisis came in 2006 and seven, I had my blinkers on, and I was convinced that I could do no wrong and I could not foresee how the systemic banking crisis in the West As long as I'm in this game, you know, I as long as I'm playing this game, so I think humility, open mindedness, and risk management have contributed significantly to my performance over the last few years.Ryan 45:21So I think that's a great way to end this actually. So just really appreciate your time, Puru. I'm sure listeners and myself included in that just got a lot out of this.Puru 45:32Well, thank you very much, man. Always a pleasure. If you want to do this again, just give me a shout.Ryan 45:36Great. Thanks again for listening. You can find more information at www dot investing city.org where you can sign up and subscribe for our email newsletter that goes out every Friday. And you can also follow us on basically every social media platform on the face of the earth. And if you feel an extra generous, please leave us an iTunes review as it really helps us out and with that, have a fantastic day.