Unlocking the Empathetic Edge: Navigating Behavioral Biases in Investment with Ravee Mehta

Welcome to Indalupe by Talupa. We hope you enjoyed this episode. Hey everyone, welcome back to our podcast. So today we have Revee Metho with us. Our Revee is the founder and chief investment officer of Mishkama. I had fun here in the US. Revee, thank you for spending the time with us today. Yeah, happy to be here. Yeah, thank you. So maybe just to start off, perhaps you could introduce yourself in Mishkama to some of our audiences, both of our audience are in enterprise finance and investment roles. So you can feel free to use some of the standard jargon that we use here. Sure, yeah, so we're a long-sured equity fund primarily focused on tech media telecom, but we do invest in some of the other areas. The other areas are mostly consumer and industrials. Been around for about 11.5 years and we have about $9,000 on the management. Haja, are you guys market neutral or are you guys some biased? We're not market neutral. We have some discretion on the net exposure. But the historical exposures have been on the lower side. I think our average historical net exposure is mid-20s. Haja, I just heard you're pretty close to neutral. So Revee, I think one of the things that all of the sense will have to understand is just from your see how do you think about the space of opportunities out there, how do you think about what makes an opportunity an opportunity. And perhaps later on in full, I'll question those how do you think about risk with some of these opportunities and some of these names. We don't have to get into exactly what you own or whatever, just from a framework perspective. Yeah, sure. So maybe just a quick background on me. I was at Soros for about 3.5 years and then I left Soros enjoying the car's capital, Michael Carst, the Soros PM that I knew. I was there for 8 years. And up until that point I was really a fundamental analyst and then I took a little time off before launching this comic. Took a couple years off actually and I tried to reflect back on my experiences and try to think of the comic characters as the winners and loses I had. And when I did that, I realized my biggest winners were not just when I had a really good analysis of what we call the analytic edge, but also when I had what I call the empathetic edge. Where I really understood who the Cheryl base was, what their behavioral biases were that we were potentially taking advantage of and where I could really identify in Cologne buyers, right, and or sellers on the short side. I took a little time to try to think about how to develop a process for getting that empathetic edge. And so all of our positions are ones where we have analytic edge where we do all the fundamental work that you expect from a good fundamental analyst, right. But then we also have to always for all the positions I need to be able to tell you what I think the biases are that we're taking advantage of with the incurable virus. And if I can't do that, we should just pass. So it's only about 10% of our time that's on the empathetic edge, but it's a key core requirement for all of our names. When you think about behavioral biases, there's kind of a few big groups of market participants out there, right. And they all have their own different behavioral biases that we try to get advantage of. So for example, market neutral platforms are pretty prevalent these days, right, in the marketplace. They tend to have to be able to advise where they tend to overvalue your trim certainty, right. And so there's a lot of situations where the trim certainty can change, right. And so we sometimes get in front of that change. And then there's the kind of the growth investors out there, fundamental growth managers out there, where they tend to undervalue kind of temporary or sickle drivers of growth, right. And so for example, don't COVID, you know, customer nutrition went down for Netflix or Spotify. They might have extrapolated that forward, and then they get surprised after COVID when, you know, the nutrition goes the other way, right. And then there's the value managers out there that they tend to buy when stocks are cheap on versus intrinsic value, right. But usually that only happens when there is bad news coming out. And more often than not, the bad news keeps coming out. And so stocks just get cheaper. And so they tend to add and then add on the way down. And then because they take so much pain, they tend to have a big impact. So they sell too early, right. When things actually do change possibly. And so sometimes, you know, we can't imagine that. So the growth investors tend to take advantage of the value investors behavior bias. The more neutral platforms tend to take advantage of the growth investors behavior bias. And so sometimes we look like a market neutral platform when we're buying a stock. And sometimes we look like a growth manager when we buy a stock. So we have a pretty diversified mix of kind of long-term investments where we can hold for, you know, sometimes a decade or something. And also short-term investments. We have a mix of value investments for and growth investors. This emotional bias is interesting to dig into. You know, investing is easy to know when you're right. But sometimes it's difficult to know when you're wrong. So let's say you're presented with a situation where there is a lot of rotation in the market. We've seen a couple of those events happen recently. What is the thought process around like this is just a rotation in two-shot paths versus like this is an opportunity for us to step in versus like, you know, there is a fundamental shift in capital based from, you know, one of these sets of investors involved into a nursing. How do you think about that? We've been relatively immune to these kind of rotations because, like I mentioned before, we have a pretty balanced approach where we have, you know, for example, value and growth on both sides of the portfolio, right? And we have a mix of long-term trades and short-term trades in the portfolio as well. And we always try to kind of maintain that balance. So if you have, you know, we look at our two-doolists and we have, if the bottom of the build of the portfolio doesn't have some type of balance, all other things, we will prioritize names to make that more balanced, right? But we're working on them. In terms of like, when we're wrong, right? I guess, and I mentioned these, this analytic and after that edge. So, so what does that mean? It's all of our positions need to have that all times, right? And so if we think a company's going to beat learning expectations and that view changes or if they don't, we also are wrong. I mean, I would have a gadget and we'll get out of the position or cut the position, right? And then we evaluate. There's other times when companies, you know, beat expectations like we think or maybe a cell side note comes out and exactly puts the yellow, you know, analysis exactly in mind what we think. And then the stock isn't performed like we think it should, right? And so that's, I see, telling you you're wrong on the empathic edge because if, you know, if the need is coming out like you think and then you're not getting any carol buyers and by definition you're wrong on that, right? And so we usually trim the positions then as well, right? And so that, that, that, that, this flinter need have the analytic and after that gadget all times. It's really, you know, helped us get out of losers relatively quickly. It also helps us time getting out of the winnersome, you know, as well. When you're just a fundamentalist, like I was, right? You just think a, the stock is going to say go to $45 because you think it comes going to earn $3 and you put $15 multiple on that or something. And you don't really think about who's going to bring it to $45. But on the other side, there's good traders that kind of be lately think that, think about that, but they don't usually can't explain process of decision making. And then they're not usually as good on the fundamental side, right? And so that limits the conviction they can have and limits the sizing they can have on positions. So we try to kind of have the best of both worlds where we can have a concentrated portfolio where we really understand, you know, we have conviction in the ideas. But then we also are, you know, trying to say this one with an analytic engine, maybe sometimes we'll sell before, you know, well before the target, for example, because it seems like you're, you're also in a number of technical buyers. Prior to the work back on from a marketing trope background, and one of the things that was hammered into me is actually stock school up because there's more buyers than sellers and stocks go down because there's more sellers than buyers. It seems really simple. There's so much truth to it at the end of the day, because sure the fundamentals matter, but at the end of the day, you could be around the fundamentals, but it's not really matter if everybody's selling around the bulk of the shareholder basis, it's sure it just wouldn't really matter. On that topic, the world of investing is not like a plot, right? You know, just get presented with a situation where the fundamentals are perfect, and you know, it's the right shareholder based, and you're going to get all the other shareholders that you want. A lot of times these changes happen over a long period of time. A lot of times you start seeing rotation and people saying like, this is not all available by the developers, but you know, they don't just wake up at Thursday morning and all of the side, I'm seeing things. Yeah, right. So how do you track the dose events that are happening? How do you position into that? And ultimately, how do you know if you're right or wrong? There's a lot of things we do on the empathetic edge side, right? Some of it is systematic where you can kind of, you know, for example, you can analyze short interest. If a couple of weeks, you can analyze it, you know, the by cell side ratings, you can ask cell side analysts, you know, how many calls are getting on the stock compared to other stocks that they cover, right? So there's some things that are kind of very quantifiable. You can aggregate holders' vise style and see, you know, for example, you know, where stock lands in a group of growth investors or where stock lands in a group of value investors, right? A mutual fund or a wait under wait, you know, you can see that as well. But then there's also things that are kind of, we kind of do that's more on the less quantitative side or artistic side, you know, investing where you know, we'll analyze types of questions the management team gets. So is it getting questions that are kind of seem like they're coming from a value investor, like, you know, what they tend to ask questions like about capital allocation or cost structure or, you know, sustain of the existing business or are they getting questions about, you know, from a growth investor, like, you know, new products, new geographies, company manager to, you know, transform their acquisitions, things like that. You've put a spin a lot of buy-set networking events and we can see how, you know, how often certain stocks are being pitched and can kind of, triangulate on that empathetic edge and see if you're kind of how much room you have for the path, how much capacity for the caromires you have. You know, again, it's hard hard for our science, but as that empathetic edge and declines or as the analyst, as declines, we generally will kind of gradually reduce the position as not as attractive and as it increases, we increase the position. I understand. The thing we did talk about is, you know, there's always the, this is a position that I like for whatever reason, both along the short side, I believe, for Jeffrey Telfa, and then there's also obviously the edge part of the business to risk analytics, partly this is. Could you walk me through maybe a high level, like how do you think about risk, how you think about how you, I guess, sort of, like, define risk and how that influences the decisions you put out? Yeah, so the goal first is to not lose money in any given year, right? And we're a little different than you can, for the more neutral platform background, right? They're always kind of concerned about Peter Troll from drawdown, right? And so their risk management is kind of static, right? Where, like, you can be up 20% and you still care about the Peter Troll, you know, as being the same level as when you're not up 20%. Our risk management is more dynamic, right? Where we, the more we're up, the more we're, risk we're willing to take, right? So we kind of call it a risk budget where, you know, the more we're up in the year, the more risk we're willing to take, we don't care about the Peter Troll as much, right? We just care about not being down for the year, and then we want the upside optionality as well, right? And so, you know, I think that's just, that's generally how we take about risk. And we think about, you know, all the different forms of risk when we're deciding to take more risk, right? So it's not just, you know, factor risk or, you know, overall net growth exposure, it's also event risk and so, and that you're taking on for certain names and concentration risks, etc. When, when you think, think of some of these factors and understanding I come from a very different background from risk, as you pointed out, right? Yeah. Where I think about risk is like this, it's like the core framework that you just described. One thing I'm always curious about is when do you decide, uh, when does one decide to take risk, um, versus to hedge it out? Well, rather to not take the risk versus to hedge it out to like for any of these factors, because in my old training, it's, it's a hedge, it's mostly a hedge in game, right? You know, really choose to not take risk. You just try to make it as through the course possible, right? But it does seem like in your fund, um, sometimes you are choosing not to take a risk. So how do you decide to do that? In the beginning of the year, when we don't have any gains or if we're, you know, flatter, you know, in the year, we'll kind of probably more look more like what you guys, like you just described. The more gains we have, the more, uh, we let the bottom up stock picking decide the, the risk in the portfolio. And we know, and if the bottom up stock picking is leading to, you know, certain, uh, higher exposures to certain factors, we'll, we'll say that that's what the bottom up stock making is leading to. And so we should, we should have that exposure, um, right? And so that's basically the way we think about it. Right? And the more we're up, the more we're willing to let that directional exposure, um, exist. Right. So Ravi, one, one interesting thing about the listener base of our podcast is, um, we have a lot of analysts, uh, like biceye analysts from all different types of strategies that you described and a lot of them ultimately want to be the position that you are either BAPM or Sergey on fund. Um, and so what, if you look back to the days where you're an analyst, I'm sure you have analysts today and you can give them advice on like, if you're goal is in 10 years or eight years to get to a PN level, um, what are some things that you think that they should be working on that they might not be, they might not be thinking about today? Yeah. So I think with this factor being a stock picker, right? It's more than just, uh, being a good analyst, right? It's, uh, you know, it's thinking about, you know, what makes a good stock, who the providers are. And then, and then it's also, you know, uh, thinking about, you know, how to construct a portfolio and, um, you know, like how to manage risk like, you know, some of the stuff added, but it also depends on your own personality. You have to think about, you know, who you are and, what kind of, what kind of fund you want to have, right? Oh, what kind of PM like you want to be, right? And so that will, uh, right, there's certain people who they're much more willing to take have pain and much, you know, more conscious answers is, and really what they love about investing is, is the analysis side, right? And so those kind of people probably should be put themselves into position and market themselves in a way that will allow them to have, um, bigger drawdowns, right? Um, there's other people who don't have as much fatality and pain and maybe more emotionally sensitive and they might be kind of more, uh, you know, suitable for a market neutral type of, of platform. Right? There's a lot of kind of introspection involved, I think, that a lot of people don't necessarily do, um, you know, right before they get to the PM level. Right? And then maybe then they can potentially go to the wrong place, right? Like if you're, yeah, uh, or do it in the wrong, you know, get them, get the clients in the wrong way, right? Yeah, like make the wrong, like one common decision I hear a lot of people make is, you know, obviously when you start a fund, you have to build the business from scratch, right? You got to risk capital, you got to actually build everything. Versa in a big platform, a lot of that's taken care of for you. Yeah, you don't have to call up a book and sign up for a license, like none of that. It's to be done. Oh, yeah. So there's a lot of work all that stuff and especially in the beginning is a lot. Because you are building a business from, from nothing. And I would just say it's also a lot of heart, you know, starting a business is, any business is always harder than you think it would be. I mean, our own firm, for example, you know, because I took that time off before launchers come, I didn't, I didn't market right away and we launched with, you know, less than $15 million, it was mostly my money and, uh, you know, the business was, we always made money for our clients, but, but, uh, the business was losing money for the first four or a half years, right? And so I was, I was eating the losses and it took a couple years to get that back, right? So, so it was a long, uh, journey to get to where we are now, right? Yeah, you've prepared for that. Yeah. Yeah. I think, I think it's easy to forget that it has fun. There's also a business, right? Just like how, like everything else, they give us this company and if you're building a hatch fund, you're just too size to it, you're building a bulk, but you're also building a company. And then that piece is like easy to forget, especially with your analyst and so much of the stuff is, you sort of like have for granted, right access to discrete access to models, like all of that is taken for granted. Review, a coming up in time there, is there anything else you would like to share, um, with listeners? I think you covered, uh, uh, you have questions for you. Good. All right, so, well, thank you for taking time. I look forward to catching up with you. Okay, great. Thank you. Deluba provides perfect historicals, including every KPI, operating data, financial metric, adjustment and guidance for thousands of public companies globally. Moreover, Deluba update our customers models in near real time during earnings season in your format and style. 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