Episode Thirty-Nine: Learning From History To Plan For The Future

The Need For Agility In The Changing World Around Us

Willingness to come to the conclusion that what you thought earlier might be wrong and willingness to change very quickly, and the agility it brings will help companies survive and thrive.

In this podcast episode, Nikhil Kamath, Co-Founder and CIO of Zerodha and True Beacon covers the need for pragmatic education and identifying areas for growth. He also discusses capital market shifts and the opportunity for India to become a global manufacturing hub.

(Please note that this podcast was recorded remotely.)

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The Power of Data Podcast

Episode 39: Learning From History To Plan For The Future

Guest: Nikhil Kamath, Co-Founder and CIO at True Beacon and Zerodha
Interviewer: Sam Tidswell-Norrish, International CMO at Dun & Bradstreet

Sam 00:00
Hi, welcome back. You're joined by me Sam and today we have Nikhil Kamath, who is co-founder and CIO of True Beacon and Zerodha. Welcome, Nikhil.

Nikhil 00:09
Hi, Sam. How you doing?

Sam 00:11
Very good, thank you very good. We last saw each other in the mountain resort about six months ago, how the world has changed. But before we tuck into the world we live in today. Let's talk about your journey. And it's one that I've been fascinated with ever since we first met. You've had an amazing career so far, albeit still very young, starting trading at the age of 17, to co-founding Zerodha, and then your latest venture True Beacon. Can you tell us a little bit about your career?

Nikhil 00:39
Yeah, sure. I'll start off at the very beginning. I was born into a family where my dad was a bank manager. So it meant a lot of travel. We spent three years at a time in different towns across India. I think we moved into Bangalore at the point when I was about 10 years old. I had gotten into playing chess professionally, focused on that quite a bit when I was younger. Gave up going to school when I was about 14 to pursue other things, some of it being chess and working on different projects. And trading kind of started when I was about 17 years old. Started trading the stock markets here in India, learnt on the job kind of thing made many mistakes, burnt out many times. Trading led to managing money for others managing money led to being a broker, first a sub-broker and then a broker in India. But the Zerodha platform we started about 10 years ago when I was 23. And everything which we have done is kind of ancillary to the broking platform. So we're in the lending space a little bit. We're in the FinTech space, all kinds of technology around stock broking and FinTech, we kind of build in-house. And asset management is something which has been my personal focus, something that I enjoy more than other aspects of the business. So I've spent a great deal of this time focusing on asset managing, management and investing into different asset classes across the world. That's like a very brief summary of everything.

Sam 02:13
I will start at the beginning because you know, Mark Zuckerberg dropped out of Harvard and people thought that was cool. You dropped out of school at 14 and have achieved so much. It's quite incredible. And tell me chess, it's an interesting hobby to have in sport to get into how to chess play into the way you view the world and think strategically about investing?

Nikhil 02:33
So I think a lot of people misconstrue being good at chess to kind of like equating to intelligence. I think chess is more about memory. It's more about memorizing every game which has ever been played, remembering openings, metal games, a lot of theory goes into it. So chess is more a factor of how well you're able to memorize what has happened in the past and kind of be able to learn from that. I think if you were to equate that to life at large, and not just the stock market, so investing, I think we live in a very cyclical world. What has happened in the past tends to repeat itself. I'm a huge history buff and I think there are many trends and many patterns which have occurred in our past which invariably occur in the future. So if you were to like, look at it from that point of view, I think chess is a good place to learn and equate certain aspects of your life to, but reading about history, not just financial history, but geopolitics at large or beat the pandemic, which we have right now and how we have dealt with it in the past. I think there are important learnings in history and we spent so much time trying to look upon what is happening right now and what is going to happen in the future. I think at many times it's wise to sit back, look at what has happened in the past and try to figure out larger cycles at play.

Sam 03:56
I love that, and a follow on question. But before I go there, I want to set some context for our listeners. Could you give a little bit of an overview on True Beacon and also Zerodha and the position and the Indian marketplace? I think that'll be a useful context for our listeners.

Nikhil 04:11
Yeah, sure. So Zerodha is a stockbroker, for the retail and institutional stockbroker. It's the largest one in India. We do about 15% of all the transactions, which happen in India. And India is a fairly deep stock market. I think it's the third largest in terms of volume in the world. So it's a big market. And I think at Zerodha we've been lucky to garner significant market share, because we came about at a time when the industry was very opaque and we had a very transparent fee-light model wherein we were more community based stockbroker versus the old school corporation and people really latched on to that. It’s a company which has never done any marketing, we don't put out any ads or anything. Don't have any cost of acquisition in terms of the startups that we see today. So all of our client base is organic. We have a couple of million active users on our platform and all of these guys have seeked us out based on word of mouth and people kind of like going out and you know, vouching for the product. And Zerodha along the way has kind of branched into other things in the FinTech ecosystem, we do most things FinTech outside of banking. True Beacon, on the other hand, is an asset management company. It caters to the ultra-HI audience across the world. This company we started just about a year ago. The reason to start this was when I was trying to personally allocate money to some private banks, I think that kind of inefficiencies in the private banking or the high end asset management space right now in terms of the kind of fees they charge, in terms of how much alpha they actually generate, I thought there were many inefficiencies at play which can be easily plugged. So True Beacon, as asset management company without any standing keys, there is no distributor there are no middlemen that does not have annual maintenance charge or there's no annual fees as such. It's a very client aligned model wherein the fund manager and the fund house only benefits based on how much money the client makes. So we have a 10% flat carry model without any other kind of per-fee that we put in 100 bucks into to beacon and it becomes 110 vs the fund house charge you one. But if you don't make a profit, we don't charge anything. So this is our little attempt at, you know, trying to disrupt the status quo in the asset management space at large, which in many ways has not changed in the last decade or two.

Sam 06:45
Are there any other examples of firms that had similar fee structures to the one that you guys have pioneered?

Nikhil 06:51
I don't think anyone does it exactly the same way that we do it because we are an open-ended fund wherein, we allows for people to come in when they want and go out any time they want. And we do this without an exit fee or a setup cost. Plus even things like you know, the salaries of the staff of the fund or the rentals or the infrastructure costs are not built on the clients. The main the net expense ratio of the fund. I think this is one of the unique funds were in the net stat is charged to the client outside of the 10% carries absolutely zero. So in that way, I think it's unique for most places in the world. I don't know if there is a fund out there which charges lesser than us. But as far as I can see it it's kind of like unique.

Sam 07:33
So a unique concert in a unique market really. You and I were first introduced through a mutual friend Richard Patil. And generally I love Richards energy because he's got so much of it and solve some mistakes. But one of the things I love hearing him talk about is the India opportunity, and he is deeply passionate as are you, and a huge advocate for the opportunity in India. You know, if you look at some of the data, and D&B India has a lot of this data, the GDP India puts it at about the fifth, I think ranking in the world. But then if you look at the GDP by purchasing power parity, it tells a totally different story. India is then third and has GDP nearly five times what it is otherwise. It paints a picture of huge opportunity I think for people that really understand what's happening in the market. What are some of the key trends that make us so excited about India?

Nikhil 08:24
India is a really large market. I mean, we're a huge population and under penetrated in many senses, even if you were to talk about the financial ecosystem, direct or indirect exposure to equity markets, the number in India would be 6% or 7% of the population, which has some kind of access to the stock markets, whereas that same number and say America would be 90% or 95%. So even though we are a large market relative to the rest of the world by being the third largest and stuff, I think the scope for India to grow is tremendous. Since we are in the position that we are now because of the pandemic, and COVID-19, what we see in the interim and the very short term is a lot of people who are now averse to doing any kind of business with China are moving business into India. It could be anything from manufacturing or outsourcing or even something like say, auto manufacturing plant or textiles. And I think the short-term spike in manufacturing and GDP of India which will come about maybe not in the next six months, but the next 12 to 24 months, will give us a tremendous leg up in the peer group that we have in this region. And I think we would end up becoming, if not more as competitive as China very quickly.

Sam 09:46
At D&B we spend a lot of time thinking about global supply chains and looking into multi-tiered levels of supply chains and where they're most impacted, where the shifts happening most. We're seeing a lot of focus on India as a supply country of the future. What do you think India's opportunity is in terms of global trade?

Nikhil 10:05
We have ample scope to become a big manufacturing hub. I think we are well on the path of becoming one, there are certain changes that the government needs to make in terms of boosting infrastructure, rationalizing taxation for foreign companies doing business in India, a whole bunch of reforms which are required. But I think the government right now is very adept to the need of the art. And we see the Modi the incumbent Modi, BJP government in India, we see them being very opportunistic at this point where the Western countries definitely are looking to diversify out of their traditional supply chains and their traditional manufacturing hubs. They're doing a lot to take advantage of the opportunities that are out there right now. I think this is a long story, something which plays out not in months, but over, you know, five to 10 years, but the potential is there and you given a few tweaks and a few reforms, I think we would definitely have the potential to become one of the largest manufacturing hubs and a big part of supply chains everywhere.

Sam 11:10
I completely agree. I assume it's Zerodha, given you have 2 million clients and nearly 15% of all Indian retail trading volumes, it's going to give you a pretty incredible view of the marketplace. What are some of the shifts you're seeing in capital markets, specifically in India? And what do you think the motivations behind those are?

Nikhil 11:29
Right, so I think some of the shifts we're seeing in the retail ecosystem is up until now we had an older genre of people which kind of dwelled in the stock markets, think of people in the age group of 40 to 60. This is traditionally where wealth is concentrated across the world be that the West be that Southeast Asia Africa anywhere. But we see a lot of engagement coming in from the millennials of today or even say the Generation X wherein we have people in the age bracket of say 19 to 25-26 coming in to the stock markets, making their first investment, allocating capital into different assets very quickly. I think traditionally what happened in this part of the world is a lot of the wealth of families were stored in real estate. But real estate as an asset class is a) very illiquid, and b) have not returned any real returns over the last five to six years. So we see this changing quickly. We see a lot of youngsters coming in and not really looking at buying a home, especially in a country like India, where residential real estate typically yields about one and a half 2% in rental yields. So people are going the route of saying, you know, I don't really need to own a home if I can rent a home for one and a half percent of the value of the home and then allocating capital elsewhere. I think that's a big shift. Housing according to me is a bubble and many pockets of the world, be it in London or be in America, but more so in India because for us, it's a cultural thing for a guy to not own a home is really looked upon badly in India. But I think that cultural shift is happening. So we would see a lot more reallocation of assets, moving away from asset classes like real estate, and moving into more liquid asset classes, like fixed income or government debt, or the equity markets.

Sam 13:28
I subscribe to that, I think in many regions of the world, the general shift away from fixed assets, it's somewhat surprising. We've seen it in many developed markets with, you know, the ability to rent your car, you know, the likes of Uber rather than car ownership and similar. But say, I'm 19 years old and I live in India and I've never traded before. How are you making it easy? How are you educating people on how to do this responsibly because I used to trade at Barclays. It can be addictive. And you got to make sure educate appropriately that people understand the information that's in front of them. They understand the data. And I guess most importantly of all, you're helping them not lose money at the same time.

Nikhil 14:12
Well, we've set up a free financial education university of sorts called Varsity, which is online and completely free. This kind of trains people in the long-term benefits of allocating capital correctly and stuff like that. So I think the only way to overcome this is education. Unfortunately, education systems across the world are more theoretical, less pragmatic. I don't think they really teach you how to allocate capital or what to do with the money, but they focus on the theory of things which might not be relevant today. I think the onus and this has to go back to education boards across the world and governments to you know, kind of change the syllabus, because how you manage your money is such a big part of it. What you need as a college graduate or whatever kind of graduate that you might be in any pocket of the world, the only way to overcome this, I think is education, financial literacy. I see a lot of countries adding this as ancillary education. But I think this has to be part of the primary curriculum per se. And everybody should be aware and should learn this, like learning maths is a necessity. I think learning basic financial education should also be a necessity.

Sam 15:26
I’m with you there. I spent five years in the trading world, and I still don't understand it, as well as I would like to. Do offer any products of like indices and tracker products, that mean that people don't have to take individual stocks to be successful?

Nikhil 15:40
So we have some companies in our portfolio, which do that. We have a company called Smallcase, which kinda like allows you to bet on a team without betting on an actual company. So you could go on to small case and say, buy in the solar energy sector, and their proprietary algorithm will kinda list all the companies in that sector. It will grade them based on their fundamentals, create a basket of companies, which the algorithm thinks are the best place to allocate capital. And then it will buy the basket of 10-20 companies for you without you having to buy them individually. We'll create the basket and executed for you with a click. We also have something called Streak, which is a product which kinda like allows you to test technical strategies back, test them, execute them with risk metrics in place and without the need for you to know how to code. So you could go in there and write the logic in plain English and the software will kind of create and execute the strategy for you.

Sam 16:40
Wow, incredible product and that as a company rather than just a product.

Nikhil 16:44
It's actually a company, it's called Streak.

Sam 16:46
It's just awesome. Can you tell us a little bit more about your non-banking financial company with an aim to make loans more accessible for your retail customers and not just our networks, how that fits into your sort of broader roadmap?

Nikhi 17:00
Non-banking financial companies in India are a way to lend to people which the traditional banks can't effectively lend to. Our NBFC plans have kind of been focused on lending against shares. So typically what we do is we take shares that the client might hold in the large cap space or the mid cap space, traditionally high quality companies, they pledged this and in turn get funding on it at a very low cost. That is the NBFC plans. The NBFC I must say has not done as well as many other laterals, more so because we have not focused on it yet. Shortly, we really pay more time and attention to the NBFC product to fine tune it and make it a little bit better. We want to create a way where there is no manual intervention and this whole process of lending and pledging can be done seamlessly online. So we will be working on that. Once it's out there we definitely do have the captive audience which could be really spiral us to becoming a radiate large NBFC see very quickly.

Sam 18:03
Your portfolio of companies is growing all the time, Dun and Bradstreet and we have 355 million company records all around the world and we help companies use that information ultimately to make better decisions. And that might be a better decision to mitigate risk, it might be a minute decision to create cost efficiencies, it might be a better decision to accelerate growth. How at Zerodha and across your portfolio companies are using data to ensure your company is operating at its optimum?

Nikhil 18:33
Each of these companies has a leadership in place which is agnostic towards what Zerodha is doing and each of these companies also have an equity partner who has a larger shareholding then us who's typically the founder of the company in the founding team, which are running it. I think, for anybody to run a company effectively they have to have larger stake, larger skin in the game, then somebody who is investing into the company or funding the company for it to go from A to C. So we luckily have that in place. And we have great management teams in place in each one of these companies to kind of innovate in a very agnostic to what we might be doing as a broker or being a venture investor or somebody who's bringing in capital to the company. And they run their companies in the way that they want and I think that's the best way to do it.

Sam 19:21
You talk about managing teams, ultimately, businesses are all about people. I would argue businesses are about the application of data, and high-quality people, people who develop in their roles. You are a well-known guy in the business world. And we've got a number of listeners that I know would love to glean some lessons on entrepreneurial as from you. What advice would you give people out there who are in a corporate role at the moment, who want to be more entrepreneurial? What are some of the lessons you can teach them?

Nikhil 19:49
I think Timing is everything. I mean, I could say that, you know, I knew the path or we knew the path and we knew exactly what to do, but so much of creating the company depends on being in the right place at the right time. I think to pick an industry in which you want to create your product, which is on the verge of growing significantly or which has plenty of room to grow, to a point where the industry is large enough that even if you're a small player, you can remain largely profitable is very important, you could very easily become a big company or a big fish in a very small pond. But to identify ponds, which allow for you as a company to scale I think is very important. And I think something which we don't give enough credit to is the element of luck. Luck is such a big part in why some companies do well and some companies don't do well. But one thing you should definitely pay attention to is what cycle that industry in which you want to start the company is in at this point. And always try to set up a company in an industry which is either growing very quickly or is set to grow very quickly according to your thesis or your research into the industry?

Sam 21:03
A lot, a lot. So always think about your target addressable market. Think about some of the macro and domestic trends. I mean, India is such a vast market. How much time have you spent thinking about markets outside of India for your businesses?

Nikhil 21:18
We kind of spending some time on the US markets right now. We're kind of in the midst of buying a broking firm in America, and we're trying to integrate our technology with the technology available there to offer products in the US. I think a lot of innovation happens in America, but when it comes to banking, I think what has happened in America is they are still riding on the back of six systems which were created in the 60s and 70s. Emerging countries like India had the privilege of creating the systems afresh in the 90s in the 2000s. So we're a little bit more evolved in those criteria’s than the West and I think there is scope for us to expand into America and pick up product offerings there. And definitely something we would be focusing on more in the future.

Sam 22:08
We’re coming to the end, I would ask you a very selfish question. And that because I'm hosting tonight, a webinar, that's titled, Leadership in a Crisis, and the audience is a few hundred next generation leaders. We have the vice chairwoman of MasterCard, Ann Cairns we have the Lord Mayor, William Russell, and we have one President Barack Obama's former Special Advisers, Adrian Harris. What advice would you give to a next generation leader about how they approach leadership? You've been a leader since a very young age people have been looking up to you for as long as you can probably remember, but in a world changing as fast as this one is, you know, particularly in a technological sense, but also in a cultural and socio economic sense. What advice would you give to people who want to be leaders? What qualities do you think are important?

Nikhil 22:56
I think one big quality is don't have approach any problem with the preconceived notion in a world which is changing as quickly as it is right now, I think what keeps companies relevant is the ability to, you know, change and innovate very quickly. Oftentimes, when you approach a problem with a preconceived notion, which might have worked for you many times in the past, is more counterproductive than anything. I think your willingness to be able to come to the conclusion that what you thought earlier might be wrong and your willingness to change very quickly. And the agility that it brings with it is something which helps companies survive and thrive. I think that would be the one biggest advice I could give here, is your agility in changing when the world is changing around you.

Sam 23:46
I completely agree with you. I think adaptability is essential. I think speed of decision is also essential. And another really interesting topic is cognitive diversity. Naturally in groups of human beings, you create hierarchies and as hierarchies don't allow for diversity of thought. And people actually end up deferring to that leader, and you don't get the most out of everyone. Interesting concept. Huge, huge thanks for joining us today. It's been wonderful to talk to you again. I'm looking forward to seeing you in person. And I promise you, I promise you this last time, when the world is a slightly different place, I will be coming out to see my marketing team in India, led by a wonderful woman called Nayna, and I will be making sure that I stop by and come catch up with you and see how things are going with you and Richard. Thank you so much for being on this.

Nikhil 24:38
Thank you so much, Sam. Thank you. Bye-bye.