- Neeraj Monga
Will Bachman 00:01
Hello, and welcome to Unleashed the show that explores how to thrive as an independent professional. I’m your host Will Bachman. And I’m excited to be here today with Neeraj monga, who is a noted research analyst on equities. And now money manager Neeraj, welcome to the show. Thank you. So I love the story, you’re telling me earlier Neeraj, about how you were writing for The Economic Times and writing some pieces that were slightly critical of some of the IPOs and so forth. And you ended up getting getting shut down, tell them to tell me that story.
Neeraj Monga 00:44
So So what happened was that this is the boom, boom 90s in India. So I will say, year 9596, that IPOs were hard. But what was happening was there were a lot of unscrupulous small to medium businesses that are coming to the market to sell equity to investors. And there used to be in those days, 1520 publications that will be published on Friday, touting various IPOs. So I was specifically involved in actually going and doing the due diligence on on one IPO. But it was a family that ran a textile business in Ludhiana, which is in Punjab, which is the result of textile businesses are based in India. And they wanted to expand into generating power, independent power producers were coming out at the time in India. And then I went there and I looked at everything I came back and I published a piece which was highly critical of the entire process. And I basically, I advise readers of the newspaper not to subscribe to that IPO. and subsequent to that I wrote an editorial in the economic times. And I was critical of the entire process of managing these IPOs and how they were coming to the market, and how they seem to be in favor of the unscrupulous individual selling equities and not really in favor of protecting investors. And that didn’t go down well with the powers that be at the time in the Ministry of Finance in India. And it was indicated to me that such similar opinion will not be published for a certain period of time, in the opinion pages of the economic times, which was India’s largest financial daily at the time. And so that’s the story. That was my first run in with people who did not like my opinion, and how it was shut down.
Will Bachman 02:43
And then I mean, so you got that word that I get it was this or them someone at the Ministry wouldn’t talk to the the editor, the paper, and they gave that word to you. And you just said, Alright, fine, I quit.
Neeraj Monga 02:59
Yes, I didn’t leave the newspaper afterwards. Well, I was informed that there will be some restrictions on what I could publish. And it will also not in the hands of, I guess, the paper or the editors at the time, because in the early 90s, India was still opening up. And they didn’t want people writing too many critical stories, which ran counter to the narrative of an India opening up.
Will Bachman 03:25
Yeah, I mean, that’s a fascinating story of kind of behind the scenes of how things can really work sometimes in the real world. But after that, you became you. You joined Bain for a couple years and then you were you worked as a equities research analyst and really made your name uncovering some, some big accounting irregularities. Tell us some of the stories of some of the companies that you that you discovered some some interesting findings.
Neeraj Monga 03:56
So I joined a company called very fast investment research in Toronto, which was a startup founded by Michael farmer who was a veteran based data analyst at the time. And the Spitzer reforms had just been implemented in the US and Canada was following in the footsteps. And previously, in that year, Nortel had actually went bust or was going bust around the time they were getting the business off the ground. And so now tell the full story. And Anthony slippery who is the current president of Veritas, he was the analyst of the Nortel at the time and I held him for the stock for a period of time. And ultimately was was interestingly found and not always I recall correctly now because it’s been almost 20 years is that Nortel has also had a financing arm and Nortel would finance its own sales. So when the buyers failed to pay up, all the sales evaporated and so it all the receivables So, and so many other things went wrong at Nortel. And ultimately when my separate oskie was likely last CEO when he was in charge, I wrote a final report and Nortel think this company was going to go bankrupt and not survive, given the issues that have arisen over a period of 10 years. And that didn’t happen to come the liberal backdrop. My personal beginning as an indie in analyst independent standalone was a company called MDS Inc. and the sink was Canada’s leading healthcare company at the time. And I found the entire story to be fascinating. It was a priority billion dollar market cap. But I started coverage in September 2001. And everyone on Bay Street and Wall Street loved the company. But I just found that they had a lab business and they had a nuclear medicine business. And there was nothing really that stood out to me. And what I found even more fascinating was they launched something called a business called proteomics, which was at that time, supposedly going to be a high growth business. And then I went and invited all the analysts to come to their facility here in Toronto, and take a tour and understand what’s going on. And they had this IBM supercomputer, which they had bought from IBM. And water and IBM have taken a stake in the proteomics business value and very highly, what I found very interesting was that IBM took a stake in the business, give them some cash. And that business to be IBM took IBM scash and bought a supercomputer from IBM. And I said, That’s very interesting. So here’s IBM saying that we are going to really back you and you are guys. And there’s this company taking their cash and actually giving it back to IBM and buying a supercomputer from them. But next steps, I go to the facility, and they have all they have all these individuals and white coats, looking through microscopes into some plates, etc. And I looked at one of those things, and it just reminded me of my grade 10 biology class. That’s like in remember in grade 10, in India, and they said, Oh p the alien and put it under the microscope and you look at it, this is what it does. And I said, Wow. So somehow, after the tour, I didn’t like that thing at all. So I came back and I said, I started reading their first annual financial in detail. And I found that they were building a nuclear reactor. I said that’s interesting. So they were building a nuclear reactor called the maple reactor here in chocolate chalk river laboratories in Ottawa. And like I was saying to earlier, I had been reading so much for 3040 years, I realized that no nuclear reactor has ever come on stream, on budget and on time, anywhere in the world. So how is this company going to build a nuclear reactor basically entirely new technology and bring it on stream on time and transition, its production of isotopes, nuclear reactor medical, or to shut down, which will run in at the end of its life. So I looked at it, and then Canada has an organization called the Canadian Nuclear Safety Commission. So I went there to see what they were saying about Maple reactors. And that brought out even more fascinating stuff. What there’s more than five or 10,000 pages of public hearing in terms of safety of nuclear reactor. And I read all those titles on our 10,000 pages that were there. And what was evident and clear to me that this Maple reactor is never going to come on stream. Because the problem with that neighborly reactor was the same problem that Chernobyl had, which was that when the core heated up, the shut up rod did not fall into the core of the reactor and could not shut the reactor down. The reactor overheated the coal melted, and we know what happened to Chernobyl. So the maple nuclear reactors also had a faulty design, it was evident in those pages, and they could not rectify the whole sort of road system. So as a vault Canadian regulators will never allow this to come on stream. And they cannot just catify it. So I wrote a research report highly critical of the whole thing. And I said that they have spent half a billion dollars more and they’re going to go, this is only the originals. And this thing is never going to come on stream. So when the report was published, you know it was it created a lot of store in the market, it was a bug. And then whenever I would go, you know, people say oh, that’s the reactor guy. He’s the reactor guy. But funnily enough over time, they could not take the reactor on Steam. They had to write it off. They shut down. They had to sell out divisions to pay it off. And the whole company was sold in pieces. That’s all my whole courier and digging deeper and be more critical and finding the truth. Solid.
Will Bachman 10:07
amazing story. amazing story, reading 5000 pages of safety reports. Not something every analyst would do.
Tell me, I found it fascinating. Well, I mean, that probably relates to you, you were telling me before we recorded about how,
Will Bachman 10:26
when you were a kid in ninth or 10th grade used to read the business press and remember statistics about companies the way some kids might remember statistic about cricket, cricket or baseball?
Neeraj Monga 10:40
So I knew statistics about cricket as well. Does anyone else?
Will Bachman 10:46
Well, one question I have about the world of research analysts is I mean, in your story illustrates it, maybe you could share some other examples is like, beyond the information that’s in the public 10k and the, you know, just the reports that are publicly available? How do you go about getting insights on the company and discovering things that, you know, someone else hasn’t discovered? and talk to me a little bit about how that is done. I mean, there’s, there’s some philosophy out there the efficient market hypothesis that, that all public information should be reflected in the stock price. And that, you know, if if one person can read the report and look for accounting irregularities, you know, 100 people have probably also already done that. But it sounds like you know, from your life and your work, that is not necessarily the case.
Neeraj Monga 11:50
That’s an interesting question. And I’m not one of those guys, who doubts the efficient market hypothesis. But, like you said, the efficient market hypothesis presumes that information is all out there in the market. And we will see stocks move, you know, you will listen even the so called short sellers, they issue research reports of a certain viewpoint, stocks move a lot. And all the people whose stocks will negatively always try to paint that in a sidelight saying that these people have a vested interest. But the fact of the matter is stocks move because there is new information. But once that new information has come out today or tomorrow, the stocks will attain a new level of equilibrium, people would have digested that piece of information, investors and others, and they would have made a viewpoint. But there are many, many instances where information is not fully reflected. That’s the whole game of alpha, otherwise, you can just get the beta in the market. One of the issues I have observed is that investors tend to take publicly disclosed information at face value, and audited financial statements as gospel. So, specifically, in terms of audited financial statements, I think the disconnect is that many investors are not accountants, and most accountants are not investors. And accountants have a certain view of presenting information based on financial accounting standard board. But when you look at information from a critical standpoint, although an accountant may have presented information that is in line with the standard, it may not add up to what the business is. So when you’re trying to make an investment as an investor, you have to challenge the assumption of the accountant all the time. And it’s as simple it could be as simple as aggressive revenue recognition, or the company might say, yeah, we had a billion dollars in revenue. And last year, we had $900 billion in revenue. So our revenue grew by $100 million in the simplest terms, but the fact of the matter might be that $50 million of that revenue could have been booked by sending product to a friendly distributor. And the company could have a accounting policy that we recognize revenue upon shipment. So I ship to a friendly distributor and I book revenue. When I look at the working capital, suddenly I’ve always receivable because the distributor needs to be able to sell it before they can actually pay me. So now certainly between last year and this year, while my revenue went up 100 million but 50 million might have gone up in receivables too. So I have moved all this non cash, earning an income etc. This is the simplest way where you can start your critical analysis. Aggressive revenue recognition is One of the easiest ways people can manipulate the financial statements. And then over time, accountants and everyone else has become far more creative. And now I can look at financial statements and they all are so creative, that you can keep on working through layers and layers. And every layer will give you an answer that says this is this is correct, or the accounting standard says this is correct. Or the management says this is non gap disclosure, but this is how we like to look at it. I’m not saying non GAAP disclosures are trustworthy. Obviously, the attention to that, what I’m saying is that, unless you have financial statements that are consistent, and comparable, over time, which is I would say five years, those financial statements don’t have much relevance for making lasting decisions. You know, as an example, Uber gives incentives to customers, their incentives ongoing, there’s also incentives on Uber rides. Overall, Uber gives incentives to drivers to provide services, Uber gives incentives to customers, to use it services, over gives incentives to old customers to provide referrals to new customers, or customers get a referral incentive, the new customer gets an incentive to use the product, and a new driver gets an incentive to provide the right. From a cash standpoint, each and every one of these things can be treated in a different way. And whichever way these things are treated, whether it is based on auditing standard accounting standard, you can have either this as a reduction of revenue, you could have it as a sales and marketing expense. And you could expense it all. In current year, you could say, Oh, my customer has a life of one year, I expense it all in one year, but $1,000 that it cost me to get a customer, you could say Actually, my customer has a life of tears. So this $1,000 I’m gonna spend capitalize expense 300 this year 300 next year 300 thereafter. So every action that you take, is going to have a different impact on your financial statement. And in any way that you change that action, in terms of the accounting policy you’re following, the financial statements will get restated. So what is this? Well, it has $2 billion of incentives that it is recognizing in revenue and expenses in sales and marketing. If it chose to recognize revenue based on the net revenue, it gets after the incentive, because it’s a non cash numbers equals revenues could be down to a billion dollars. But that’s not an accounting policy. They are following. I’m not saying equals accounting policies or oxide. They have disclosures and they have accounting notes. And they have footnotes and they have fast interpretations. And they have accounting standard guidelines, which are all there somewhere in one, two or three annual reports. They could read them. But that’s what Google’s financial statement is. But I don’t know how many people who buy Google stock know that there’s $2 billion of annual expense, which is recognized as revenue. That’s what I would say. So long winded answer, I think to your question. Yeah.
Will Bachman 18:32
Sure. Another story. I know there’s been a number of these firms where you’ve discovered things like he did with MDS. Give us another case study.
Neeraj Monga 18:44
Well, another case study in terms of finding information that is not in a financial statement would be many years ago by associate Kissel rusty and I, we worked on in rectories business in Canada, which was called the telephone records business. It was called the yellow media Income Fund, which is Canada’s largest directory business. And the company kept on buying directories or smaller companies and was reporting revenue growth and free cash flow growth. But what the financial statements and the entire market missed was that Google was gaining traction, people are beginning to search online. And the size of those directories was filling out. So the company was raising prices One, two, it was by other dying directory publishers, and then showing revenue growth and free cash flow growth. And so by the two of us, we spread across the country and in 13 cities of Canada we collected right directories for a period of five years. And we counted every ad in every directory and every placement and whether it was black and white or color I think it took us 45 days to that. And what we found found was that in every city of Canada, in every directory, that will look that number of pages as the declining, the size of the ads was going down, there was more black and white and color, which proves that fundamentally, the business was already facing decline, because of the rise of the web, and the users was going. And then the other thing we found out was that we will go to these condo buildings where directories are delivered in a truck. And they will tell us that a week after the directories were delivered 90% of them were actually thrown into the recycle bin. And so at the time, when I published that report, in 2007, it was called the count of yellow pages. It was a $10 billion stock. And I was only analyst on the street to the negative. And then I published my report 13 other analysts on Bay Street after a couple of days published a report their own reports, making fun of my reporting, I had no idea what I was doing. And one of them actually published a report with the first cover page, the two paragraphs eating backwards, implying I had no idea what I was reading either. And then I published a report after that in September titled The face off, which actually explained why everyone else on decedent in Canada and all the bankers and everybody you want to stop was wrong. And then what we had done covered 90% of Canada’s GDP and approximately 80% of Canada’s population. And that’s what happened within two years, the company went bankrupt.
That is amazing. You collected 45 days, you you counted ads, and and looked at five years worth of yellow pages for all these different towns. Wow, that is really, that’s really doing the digging and doing the work.
Neeraj Monga 22:07
Why, and what we found interesting was that the company did not refute anything we said. Because we told them, I think we had counted 95,000 advertisements in one directory or something. So I don’t remember the data now is 2007, the report was published, but we highlighted every table everything counted by city by directory by say by province, you know, by type, because they had in their annual information form, they would disclose the top 10 categories of advertisers that were in those directories, and be counted all those top 10 category advertisers as well. And we showed all these categories were declining too. So there was another company that went bust. And one of Canada’s hedge fund billionaires, Eric Sprott used to own stock in that company called ceylinco. And terminfo, was an interesting company because, and that was this solar is hot, and even 2007. Solar was really hard. So they were in the manufacturing polysilicon business. And Schimel bush ExxonMobil used to be one of the big shareholders and export was Canada’s hedge fund, and lead at the time, he was invested in that company. And both of them made to the cover of the Canadian business magazine, highlighting their investment prowess and their strategic insight in terms of building the polysilicon business. And I didn’t believe it for a moment that what they were saying was worth anything. And I just thought that they were shoveling sand to people. And so we did the dig in there. And their whole claim to fame was that they had a patent with a world. They had a patent on their production method of polysilicon in World Trade patent organization, some organization in Europe, it was not in the US. So I downloaded that pattern. And I read that pattern. And it seemed a lot of hodgepodge mismatch to me, but I was not a physicist or a photovoltaic engineer. So what I did was I bought a, I bought the Handbook of photovoltaic and then it was like a 600 page handbook that they use in a master’s program and University of Toronto includes University for photovoltaic engineering. And I read every page and when I say I read everything, it doesn’t mean I read it cover to cover, I read and flip the headlines every page page. I came to a page where there was a paragraph, and I said this paragraph I have read somewhere else. And I said, Good how I read this. I was thinking for a while and I went back to reading the patent of this organization called Tim Uncle, and that paragraph had been distilled from this book. And I said, Wow, this is interesting. So Chris LSU was working with me on that, too. So the two of us will read that again and again. And then we figured out and the visa figured out, this was all fraud. So we basically took that paragraph from the book and source it from the book. And we took this paragraph from their story and sources from their patent. And then we wrote a 26 page report, which basically said that this was going to blow up and it was all fraud. And ISO $34 stock, I think, 345 billion dollar company, I don’t remember now, maybe three months or six months, it went to zero. And the booklet. Wow, that’s amazing. Yeah, I was thought about finding that paragraph.
Will Bachman 26:00
So you have this habit of, and this kind of knows for just digging and not necessarily believing, you know, everything you say, but what is it about? I mean, you obviously can’t research everything. So what is it that kind of gets you curious or lights up your sensors that something doesn’t feel right here? Have you come up with a? Is it just purely gut? Or do you have no a set of no thumb rules for for things that just seem off to you?
Neeraj Monga 26:39
Now, I have so much experience that every time I read something, I know that I’ve read something related to this somewhere else. Number one, and number two, if a business is not generating free cash flow, and it is investing, and reason and its value highly, then you have to figure out why is it value? So on it? Is it because of this technology is because of the potential? Or is it because it’s going to be real growth in time? For instance, when Canada was in a building phase four, as well as business 10 years ago, 15 years ago, so you had the company, Rogers communication, and capex was high, but what was it doing? They were building out the internet, that was they were building out the mobile networks, you could see the customers coming onto the network, yes, there was competition in the market, average revenue per unit could be going down. So you could say, well, it could be a valuation issue. Maybe they are capitalized income costs, they shouldn’t. But he also knew it was a real business, which was building out, you could see it. So in that kind of a business, then it’s more of a valuation story. But in other businesses, like the ones I mentioned to you, it’s not a valuation story. And if it’s a gut check story, technically, but if something is too good to be true, actually, is too good to be true.
Will Bachman 28:07
How does that feel? When you have published these reports that are critical of a company, and like the Yellow Pages, one, you know, the consensus of the other analysts or other investors is kind of like, everyone is saying that you’re foolish? What’s that feel like? And, you know, do you experience any self doubt or wonder, you know, go through that where, geez, you know, am I the only one right out of 100 people, or talk me through that experience emotionally?
Neeraj Monga 28:44
Well, it has happened to many happened to me many times, people have said to me on my face and otherwise and consistently over a period of time, that I do not know what I’m talking about. But that hasn’t faced me. It hasn’t created any doubt in my mind. I was at a conference in Orlando, with Jim Baldry and Michael every days of Blackberry. And when I started coverage on Blackberry, it was the world’s darling, awesome companies, great technology. But looking at it from a rearview mirror, they completely missed the emergence of apple. And they completely dismissed the emergence of Android. So I had been critical of them that they were tasting and spending resources in other places and they should not be and Jim balsley should stop looking for NHL hockey team and focus on his business, or he’s going to have needed and so in Orlando at that conference, there was a group of analysts and Jim and Mike and we were standing outside I guess they were serving some food or drinks and we were standing in the park because it was there at the Marriott I believe, and I asked him the gym And they have just announced a stock buyback because the stock had fallen. And I said to Jim, why are you buying back your stock? And his answer was that because I can. And I said to him, but Jim, you know, Google has $100 billion of cash, Microsoft has $50 billion in cash, Apple is a billion dollars in cash, they are not buying back their stock. They are in building investing. And you are buying back your stock. This is our board agrees with that. I don’t that’s not a good answer. And so then, he says, All this is all I can say to you, I feel okay. But that’s where you get into a question of strategic vision, from management standpoint, and push back. And I had in that interesting place in that position, many times, sometimes I’ve confronted people directly and confronted in a sense of discontent, and they have confronted me, for instance, you know, and I’ve also gone head to head with them list. There was a conference here where when I was outlining my views on Blackberry, and why that there is technology, their superior is good court is behind the curve in terms of the touch interface and how consumers are responding to Apple and Android. And there were other analysts who were saying, My view was all going to hold because that was inferior technology, etc. And that blackberry was doing what it was doing, rightly. And it was in front of 1000 people on a podium where we went and went head to head, but ultimately, unfortunately, library, which was a Canadian tech champion, went bust. And Apple and Google ruled the world. Okay. Have you?
Will Bachman 31:52
Can you think of any examples where you made a call, and the company has surprised you, and you did the research, and you made a call, that the company wasn’t going to perform? Well, and you ended up being surprised by by the results, maybe they they actually did grow and did succeed and surprise your expectations?
Neeraj Monga 32:21
Well, you don’t do that two types of stock coverage, this there is two types of stock coverage. One is your covering stock, say for instance, you’re going Google you’re covering apple or something like that, or the regular grocery store, when you cover that kind of industry, some days, or some months, you’re going to God because you said the socks in go up and it went up some months, you’re not going to feel good, because you’re going to say, Oh, the stocks will go up, but the stock doesn’t go up. And then some months, you’re gonna say the stock is going to go down and the stock will go down and other months, it will not, because the businesses are mature, and there’s nothing churning unless something specific happens, like a tipping point. Whereas in the instances that I have discussed with you, it was evident that industries are changing, and the businesses are changing, but the management is behind the tipping point. So blackberry was at the cusp of a tipping point in consumer behavior change, and technology change. And it missed that yellow media was at the tipping point of the consumer behavior change and technology adoption curve, it means that America was just a fraud, so I won’t even discuss them. And other companies, you know, have taken place. So that’s where the asymmetrical investment opportunity in the marketplace, comm it can you identify the tipping point for an industry or a specific company? Right. That’s what I would say. What Yeah, you know, I’ve covered tech and telecom for so long. There are times you can say all the stocks and sell it because you think it’s 10% overvalued and the market doesn’t care. But that’s more of a that’s not a special situation. Because again, that’s just coverage game.
Will Bachman 34:03
Yeah. So you aren’t have moved on from the research analyst. An equities talk to me about now. So now you’re actually managing money. Tell me Tell us a little bit about your business.
Neeraj Monga 34:18
Alright, so I manage money and the way what I learned over 15 years managing, managing, writing research and advising a traditional investors is what is important, there’s only two things that are important in managing money, don’t own a stock that is going to go up. If you don’t own it, you’re already ahead of the market. And pay attention to corporate governance because it catches up with you sooner or later. You never know when because but once it catches up with you, it does not give you any time to exit. So whereby portfolios are structured and how they manage money, I have something called the core satellite approach, which is pretty simple. The core of the portfolio which is the proximately 50% is an asset allocation to various asset classes in the market. So to s&p 500, to NASDAQ to Toronto Stock Exchange, to some, some bonds, it will be based on the type of the portfolio. And the other 50% of the portfolio is active stock picks, where I tried to put my asymmetrical opportunities to test. And then we’ve been managing money since 2000, March one 2014. And in terms of the Canadian TSX, I think we are ahead of the TSX by approximately 6% annualized, and they’re also ahead of the s&p 500, I believe I have one or 2% or more. And again, it’s a low turnover. low turnover marking data type of a portfolio because clearly 50% of the portfolio is exposed to the market. So we’re trying to capture the market return at the least possible cost with volatility in that component, which is kind of matching the market. And then fundamental research investment takes which provide the alpha. and again the asymmetrical investment opportunities every year she can find one or two stocks to find one or two men over a period of three to five years they work out what to do. So for instance, I won’t Google in my portfolio since I started the portfolio, I never sold a single share in terms of percentage of the portfolio it has stayed constant, but the stock keeps on going up. And similarly most oxy on some of them, we won’t see the portfolio started. They are still doing well in the IT THE I believe they will continue to do they may not dive into the other stocks. Every year we add one or two when we either have one or two. It’s a long one the portfolio there’s no shock.
Will Bachman 36:47
And how can people if they wanted to find out about more about your firm and and what you’re doing now? Do you want to point them to any website or location online.
Neeraj Monga 36:59
Now my website is www dot until a dot ca and they can send me an email from there, come and take a look there. A website has lots of research I’ve written over time and Chinese stocks and Indian stocks and other stocks in general. Even now I advise funds on managing money in asymmetrical situations. And I advise clients on go to market strategy. Currently I’m working on helping a startup in the wellness and holistic wellness space with a go to market strategy for their product Mr. plan to launch next year. And if boards are looking for independent advice on acquisition opportunities, because managers tend to bring their banker etc. to the board. But many times as we have seen in the case of an sp board autonomy, autonomy was a whole accounting thing. Governor’s thing which nobody understood, and that went bust, Caterpillar Water Company in China, it was a whole accounting and go nation. It completely went bust. Many of them did large cap m&a acquisitions, and up in problems, because the board do not have an independent third party to actually look at the recommendation that is provided to them by management and the bankers who have their own incentives. So that’s where also my expertise and knowledge comes into place.
Will Bachman 38:35
Fantastic. So we will include that link in the show notes. Neeraj, it’s been fascinating hearing these stories of how you’ve really, you know, discovered this material about public companies and great having you on the show today. Thanks so much for joining.
Neeraj Monga 38:53
Thank you both. Thank you for having me. Talk to you soon.