Nikhil Kamath: Chess Champion Turned Billionaire Entrepreneur

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I'm Guy Kawasaki and this is Remarkable People. Today's remarkable guest is Nikhil Kamath. Nikhil is the co founder of India's largest stock brokerage firm, Zerodha. If this sort of thing impresses you, he is in his 30s and therefore one of India's youngest billionaires. His made for movies story is that he dropped out of high school to play chess, worked at a call center answering support questions, started a stock brokerage and became a billionaire. Kind of a Queen's Gambit meets Slumdog Millionaire meets Charles Schwab. But the actual storyline is not as Bollywood as you might think. The real value of this episode is his insights the value of removing barriers for people, methods of monetization in an industry where almost every service is free, the advantages of not raising venture capital, using sentiment and psychology to make investment decisions, the pitfalls of cryptocurrency, and the advantages and disadvantages of a calm demeanor. This episode of Remarkable People is brought to you by Remarkable, the paper tablet company. Yes, you got that right. Remarkable is sponsored by Remarkable. I have Version two in my hot little hands and it's so good. A very impressive upgrade. Here's how I use 1. Taking notes while I'm interviewing a podcast guest. 2. Taking notes while being brief about speaking gigs. 3. Drafting the structure of keynote speeches. 4. Storing manuals for the gizmos that I buy. 5. Roughing out drawings for things like surfboards, surfboard sheds, and office layouts. 6. Wrapping my head around complex ideas with diagrams and flowcharts. This is a remarkably well thought out product. It doesn't try to be all things to all people, but it takes notes better than anything I've used. Check out the recent reviews of the latest version. I'm Guy Kawasaki and this is Remarkable People. And now here's the remarkable Nikhil Kamas. Do you think that dropping out of school and playing chess really had any causative relationship with your success?

It's an easy narrative to sell and people Pick up on that and sell. Might have had a small effect, but I don't think a really large effect. No.

So you wouldn't advise kids to drop out and play chess in order to become a billionaire?

That's absolutely not. Especially in the startup universe. So few companies get lucky and they're in the right place at the right time. So would definitely not be the generic advice.

Now, I am actually more interested in if your experience working in the call center for a dollar a day had any causative relationship.

Not as bad as a dollar a day. More like maybe five to ten dollars a day back in the day. The fact that you can't control the outcome in a call center when you're a cog in a really large wheel, I think leaves you feeling a little bit helpless and dependent on so many external factors. And that definitely instigates you to, you know, want to take more control over what you're doing. So that definitely played a part. Yeah.

For most Americans, if we have any appreciation of what happens in a call center, it's because of the movie Slumdog Millionaire. Most of us, when we call, I don't know, quick and tech support, we're talking to somebody in Bangalore or Mumbai and we have no idea. So is it just rows and rows of people with headsets and they just pick up the phone and they start, this is how you print a check on QuickBooks?

Yeah, it's like the place where I worked at was called 247 customer. I think I saw them grow from about a hundred, a couple hundred people, to many thousand people. So there would be three floors in a really large building with maybe 3,000 people on the phone all the time. Wow.

So that is a factory.

Yeah, yeah.

So you started right after the financial crisis. So with hindsight, do you think that bad times create good companies?

I think bad times create less competition. The fact that we started right after the financial crisis, I think there was very little capital going around, very little innovation in the industry by virtue of what had just happened. And we kind of got lucky to be doing something new. We were in the right time at the right place, and I think that helped significantly. If we were to try and replicate what we did back then, today it would be a lot harder because fintech is the flavor of the season right now across the world, and there is a lot of money and innovation chasing it.

The name means zero barrier, I think. Let me verify that, because you never know. So what barriers were you seeking to remove specifically?

Well, we were trading before becoming a Broker. Back in the day, the incumbent brokers of then charged as much as half a percent of the total turnover of a transaction in broking fees. It made it very hard for a retail investor trader to remain profitable because of all these leakages in the form of fee. So I think that's the barrier we faced as traders and that we tried to address as brokers. So that's what we were talking about at the very beginning. The cost and transparency element of it all was the barrier of the day.

And does the creation of Zerodha reflect that it's fundamentally better to be the casino than to be the best gambler?

I guess there is something to be said for both. Some of the best gamblers in the world have done very well and some casinos have also done well. I think two ways to look at the problem, but being a gambler is accelerating. Being a casino is a bit more stable. So I think depending on what you're looking for, a different mode might suit you more.

One story I read was that your brother was burned out as a trader, so then he wanted to go to the other side and be the casino. Is that a true story?

Yeah, I think that is partly true.

You make it coming and going, right? It doesn't really matter, does it?

Yeah, but I think you make much lesser relative to while you bet on something, if it works out, it really pays off. But while you're on the other side, you make small amounts of money many times. But there is a liability at hand at some point, if somebody with a lot of leverage burns out, goes into a debit or there is a technical glitch. Both have their pluses and minus. I really don't think you can compare one with the other, but you certainly.

Would not be worth a billion dollars as a trader. I mean, I guess Warren Buffett is, but that's less likely, right? Yeah, true, your trades are essentially free, but people pay for options, futures and intraday trades. And is that because those things are harder to execute? And is it because there's price elasticity, because people are willing to pay for that? Or is it because that's the only three things that's left to charge people for? Since trading is free, the way the.

Markets are structured in India, a lot of the volume, the speculation actually comes from the derivative, the future option and intraday traders. So they form a large percentage of our overall clientele. And they do pay a fee. They pay about 20 rupees per transaction. So about, you know, one third of a dollar vaguely is how much they would pay to buy or sell any equity. But we don't limit them with quantity. You could buy a million dollars worth of share X and you would only pay that one third of a dollar as fee. So that is our revenue model essentially.

So the free moniker is really to. Because you have to do that, right? Because there's so many places you can quote trade for free. But really the intraday. So you want intraday trading, you want 33 cents per transaction.

That's right. So the intraday traders are essentially 70% of our volume and they do pay that fee. That fee to relative to the incumbents when we started is extremely cheap. It's 90% cheaper than anyone else charged when we began. The reason we have left equity investing as free is because India is a very large country, right? We have about 100, about 130 crore people. And a very small proportion of India actually has financial exposure. Something in the range of 2%. Favorable taxation really helps long term investors in India they pay a much lower level of tax and capital gain if they have held the equity for over 12 months. So in order to encourage that we have kept the equity investing part free and we hope more people will be long term traders and allocate a certain portion of their asset base in the equity markets.

Do you view that as a social responsibility because it doesn't help you to have long term infrequent trades?

I feel that if the ecosystem in the country grows, if a lot more people start allocating money to equity markets, A, I think it helps them diversify their portfolios which right now in India we are too real estate bullion heavy in many ways. A lot of us leave money in a bank account which is barely beating inflation. So A, it affords people another asset class to diversify into. But B if the ecosystem grows larger, I'm sure you know, they will start trading, they will start doing other things where we do charge a fee.

Sorry, is that your ringtone?

Yeah, the default one.

A growing interest in the asset class will create people who will then dip into options, futures and intraday trades. That's the thinking, yeah.

I mean the more people invest, I think the speculators also increase. I think that's a very natural correlation. People use it for hedging. A lot of people have equity portfolios. They want to buy insurance on it. They would come by a put option. A lot more savvy investors will come into the market and use the derivatives where we actually charge.

How would you define your competitive advantage vis a vis the other brokers in.

India, I would say the ecosystem of products that we offer, I think that is the USP Today. We have a lot of great technology around. How you would analyze your portfolio, how you might back test execution, the user interface, those are the reasons that people come to us today.

Is that sustainable?

To sustainably have the best? Maybe not, but we endeavor to kind of change as quickly as we can and put new stuff out there faster than the next guy.

Do you have fractional shares?

No, we don't. We don't.

Obviously that's the big deal with Robinhood. So why don't you have fractional shares?

It's a regulatory thing. The Indian government, the regulator in India does not allow it.

Are you lobbying for that change or not? Really, no.

Also, I think you have many high value shares in America like you have before the split or Alphabet. Many companies which are trading at thousands of dollars. That is not the case in India. Here, typically stocks tend to, you know, split. The companies do it on themselves much earlier to keep stock prices in that range where people can still buy a share.

My kids have Robinhood accounts and my interpretation of why they have that is because they may not be able to afford one share of Tesla, but now they think they're a Tesla shareholder because they own a fractional.

Right.

Part of Tesla might be deceiving themselves, but that's the attraction. A lot of people, when I told them I'm talking to you, they say, oh yeah, that's the Robin Hood of India. But that's not at all true, is it?

No, it is.

In the fractional sense.

It isn't. It's actually not true in any sense because how a broker monetizes in America is very different from how one does it in India. Like Robinhood makes a huge portion of their revenue from things like selling order flow and all of that is not allowed in India. So a broker is essentially a hop between a client and the exchange. All the order matching in India happens at the exchange level. So completely different revenue model, completely different set of rules in compliance. So we're very unlike them. Also, I think we started maybe a good five, six years before them. So very little similarity between us and.

Them in these 10 years of having this company. And you already said you have to keep coming out with innovative products. What have you learned about keeping a startup innovative?

All credit to the team. We have a great team which is constantly thinking of new stuff to put out there. The fact that we were traders to begin with helps because we kind of understand what the market might need. Also the Fact that we don't have external investors and we don't really have too many levels of hierarchy keeps us a bit more nimble and agile than somebody who has to answer to an entire boardroom and external investors before they can make a decision.

Well, isn't it ironic that the company that fosters investing doesn't take any outside investment?

I don't know how to look at that. I think the reason we exist and I think the reason we have done well over the last decade is the fact that we have not looked upon ourselves as a corporation, but we have looked upon ourselves as traders, creating a platform for fellow traders. It's a community of sorts of. And with external investment, I think we would have become a corporation. We have never really done any marketing or advertising. We've never put out an ad, and we rely on word of mouth and people to like the product and talk about it. So I think we approach it less from the corporate lens and more from the community lens. And having an external investor might take away from that.

Would you ever take an external investor?

Not that we have thought of it. Not in the near future and probably unlikely.

Well, if you don't need capital, why, why have the headache?

Right? Yeah.

Do you think that investing is understanding what a company is doing, what the market is doing, or what people's sentiment about the company is?

It is important to understand what the company is doing, what the fundamentals of the company are. But what moves price at the end of the day, is sentiment. Very hard to read because there are so many participants and any random set, if you were to gauge sentiment in it, might not replicate to the entirety of the company. Sentiment is one of the hardest things to read because there are so many factors at play. Geopolitical flag factors, which central bank is printing, how much money, what are commodities doing? So no one person can actually place a bet with any great degree of certainty about sentiment. But it is sentiment that moves prize at the end of the day.

And what are the chief forms of evidence that you measure to determine sentiment?

We look at things like money flow. I think more than anything, the amount of foreign capital coming into the country and who that capital belongs to makes a huge difference. Because often you can gauge the appetite of an investor. Even though he makes a small investment, he's likely to scale it up if it is a certain kind of investor. So, guy, a large part of our rally recently over the last three or four months has been driven by foreign inflows. You guys in America are printing a lot of money. And I Think that is finding, seeping its way into emerging economies across the world when that tap goes off is a very hard thing to call. But if it does go off, I think the repercussions will be felt here and we would correct very quickly. So it would be prudent to say watching what America does with their money, the central banks in particular, is a good way to gauge sentiment going forward in India as well.

Well, I can understand that to gauge geopolitical sentiment. But how do you pick which equity based on sentiment? That doesn't help you pick which stock in India to invest in, right?

Yeah, I think it makes. So if you stick to the large cap companies in any geography, not just in India, but across the world, a better investor or a better trader, it becomes more about picking when to buy stock than what stock to buy. Because these large cap companies are pretty much always moving, you know, in the group. So if the benchmark is going up, every company in the in the index is going up. Some might be going up a little bit more, some might be going up a little bit less. But typically to pick market direction is probably more important to pick which particular company will do better.

Do you think a good trader is a good student of psychology and behavioral economics or a quant?

Psychology is probably the biggest, biggest metric in figuring out who is a better trader and who isn't. I'm a big fan of psychology and I think being able. Nobody can really read people or read market sentiment accurately. But I think psychology helps you understand why people thought in the manner that they thought historically. And in a lot of cases these patterns tend to be cyclical. But I think psychology is the one biggest differentiator in what makes a good trader versus a bad trader.

So what would be sitting in India? What is your psychological assessment of the American market right now?

Wow, I think that's a tough one to call. I would say. See, I think the question, it goes even beyond America. I think you guys are printing so much money right now, but nobody is questioning that because we all have been taught and we have been bred and grown up on thinking that the dollar is essentially the currency the world will always denominate assets in. The real question will arise when somebody really challenges that. I don't think it'll be in India. Maybe it's a combination of Russia, China, Iran and a bunch of countries who suddenly start to trade in something which is not dollar denominated. But it's a very tough time thing to call. But as long as the world is buying American debt and we're kind of banking on the dollar to store assets across the world. I think it will continue to retain the predominant position it has in the last few decades.

When you look at America, do you say, well, the sentiment there is that we have vaccines, the pandemic is coming under control, people haven't traveled, they haven't spent, they haven't visited. So there's going to be an explosive economy. And so the sentiment is very positive. Time to invest in America. Or am I like smoking drugs? I'm imagining this. I'm wishful thinking.

We understand things are expensive, right? Companies are expensive compared to historical averages. The multiples they are trading in in many cases are ridiculous to say the least. But nobody knows when that will stop. Just because something is ridiculous today does not mean it will continue to remain ridiculous for the next 10 years. And nobody wants to really miss the boat entirely. Nobody can afford to sit out on a longer term 10 year trend trending market. So I think people are buying it, thinking, okay, I know things are expensive today, I'll get on this bus and be on it for a couple of years and exit before the crash actually happens or a correction really happens. But I think we all across the world understand that asset classes are inflated right now. Everything from cryptocurrencies to stock prices to real estate to most asset classes are fairly inflated relative to historical prices today.

But no one has the courage to short, right? Or very few people have the courage to short.

I think a lot of people have been shorting, but they've been getting burnt out for a long, long time now. Someone smart, I can't remember who his name is now, but an American said prices can remain irrational longer than you can remain solvent. A lot of people have become insolvent by shorting and kind of schlepping through the entirety of the rally that we have just witnessed over the last 12 months. Typically, in my experience, markets correct when the skepticism goes away. Right now we have too many skeptics around who are saying that markets are too expensive. We need to get to the point where nine out of 10 people are like, the markets went up 10% this month, they will go up 10% the next month and the month after that. When there is a certain degree of hubris in the market and people get a little bit cocky in a way. That's when markets typically correct and surprise people.

So basically you're saying when people start believing their own bullshit, that's when it's going to correct?

Yeah.

You think we're close to that?

I think we are. I don't know how close we are, but I think we're close to that.

If you were to make an analysis about a specific company that their product sucks, the sector sucks, but the sentiment is still positive, would you still invest? Or do you say the fundamentals are bad? I should stay out of this?

I wouldn't, but a lot of people would. I'm a little bit conservative as a fund manager or as an investor. I try to look at the glass half empty most of the time. So I probably wouldn't. While things are expensive, I would buy what is least expensive. But a lot of investors chase momentum and they don't but have a choice but to get on companies like that.

So do you think good investment is about buying right or selling right?

It's about both. You need to buy right and sell right. Because at the end of the day, it's also cyclical that there are up cycles and down cycles. It matters when you buy and when you sell. I don't think you have to get it perfect. But if you stay away from buying when things are too expensive, I think your net needs net fine.

Do you like volatility?

Yeah, I love volatility.

Why do you like volatility?

I run a long short fund which kind of feeds of volatility. But outside of that, I think even as a trader, volatility allows so many more opportunities to make money in short time frames because people become irrational when there is volatility and people will drive up the price of something either too low or too high and you get more opportunities in the market.

So do you care if you make money because the market is going down?

Well, do you?

It's just a transaction. Money is money.

Yeah, yeah. It doesn't matter. It feels the same. If I were to short something and make money, if I were to buy something, it's the same thing.

Same thing, yeah. So then what's your feeling about cryptocurrencies? Because that's talk about volatility.

I think they're too volatile to be, you know, even have that word currency attached to them. I think they should be called something else. But somebody has to remove currency from the name. I'm not a big fan, personally. I know the dollar isn't backed by anything and you guys weaned off the gold Standard in the 70s and all of that. What we forget is there is a government backing the dollar. There is a government backing different currencies across the world. Cryptos don't seem to have absolutely anything behind them. And that makes Me a bit wary. I also feel that they take power away from government and government's ability to regulate across the world. At the end of the day, you know, we're a world ruled by politicians and governments, and I don't think they will allow for this power to be taken away from them for too long without reacting.

But don't you think that some of the cryptocurrency evangelists, if you will, they're saying that that's the advantage of a cryptocurrency, that there's no government involved and somehow all governments are evil and they're out to screw you. So having a currency supported by people mining things is somehow better.

Okay, let me look at it from another lens. Each time somebody is mining a cryptocurrency, say a bitcoin, for example, they are expending tremendous amounts of energy and carbon emissions onto the world to net, net, create something which is a token, which is actually nothing. It's terrible for the environment. I don't think it is as traceable as hard physical currency because at the end of the day, it moves from one bank account to another and who the person is because the bank has done some kind of diligence about the guy opening an account and stuff like that. I feel with cryptocurrency, one really bad, terrible event, like a catastrophe of sorts, which could be funded by cryptocurrency, will have a very big detrimental reaction in the price of cryptocurrency. That is true for most of the world. But countries, some countries in Africa where inflation is like 500%, they can't keep their money in currency. For them, maybe cryptocurrency makes sense. Personally, what I tell my clients and what I would rather consider doing is getting a vault, maybe in a neutral, safe geography somewhere, and storing physical gold. I think that's a better hedge against government than cryptocurrencies in my point of view.

I have to say I'm a little surprised because I thought Nikhil is like this leading edge, fintech kind of guy. He's going to be this great cryptocurrency expert and he's going to tell me about the great benefits. And here you are telling me it's not. That's my interpretation of what you just told me. I've seen interviews with you where you talk about going back to the very original question that chess has rules, but within the rules there's creativity. And investing has rules, but within the rules there's creativity. So have you figured out what the rules of entrepreneurship are?

This will sound very counterintuitive, but often what entrepreneurs do is they fixate on one company, their holding company or their operating company, and they spend all their time and effort in making that a success without diversifying, taking money out and, you know, kind of securing their lives. Immaterial of how great a company is and how big the idea is. It's very important for an entrepreneur to have that secondary round, take out some capital, allocate it to some other thing and diversify even a little bit. Because that brings a level of mental stability where you're not dependent on this one thing. Well, that in turn makes you a better entrepreneur. Often people would think to focus on that one company and put all your eggs in that basket is a great idea, but maybe time has showed me otherwise. Having some level of diversification is good in everything, not just in entrepreneurship, in relationships, in everything. A little bit of that is good.

But you could make the argument that if your company offered equity and you took money off the table, you could diversify, but you're not doing that.

Since we are privately held, I can still take some of the profits and diversify. I don't need to necessarily sell equity. I think that works for us.

So that's the rules for the entrepreneur. But what about managing the company? Have you learned some rules about managing, managing this company and fostering innovation and keeping the wheel going?

Well, one, I feel like the old school method of having targets and reprimanding people when they don't achieve it, I don't think that works anymore. I don't think the manager or the mentor mentee relation really works. I think people like employees in today's day need to feel like stakeholders. The more people the promoter of a company can give equity to and breed a sense of loyalty not to the promoter, but to the company. And the idea of the company takes companies a long way.

So do employees of your company have options?

Yeah.

And in the United States, the way it works is there's a one year cliff, there's four year vesting. Is that similar to India?

It is similar in India, yeah.

And what is your capital gains rate in India?

Long term capital gain is about 10% with surcharge and everything else it comes up to about 12. Long term's definition in the Indian government's book is over 12 months. Short term is about 15%.

So for that 2.5% benefit, if you exercise the option, you have to come up with the money. Right. So then you're at risk. Why would anybody exercise the option just to get long term.

So the employee stock option route kind of changes depending on what structure you are. It's different for a private limited company. It's different for a public limited company. For partnerships, even though the long term capital gain rate might be 10%, it's an extremely complex system. For example, if a company has to pay people out, the dividend distribution tax is really high. It's like three or four times what the LTCG rate is. So it's a very hard thing to kind of explain in a short para, but the headline rate which external investors coming into India should look at is 10%. That sounds useful.

That sounds good to me because it's much higher in the United States. The next question is brought to you by our sponsor, the Remarkable Tablet Company. Unlike an iPad or many other tablets, the Remarkable Tablet enables you to focus because it has a single purpose. Taking notes, no email, no social media, none of the distractions of a typical tablet completely aside. Just I'm interested in you as a person. How and when and what circumstances do you do your best and deepest thinking?

I don't have very many abilities, but the one thing I do reasonably well is remain sane in panic scenarios. I think when things get chaotic, I do fairly okay. So I think that I consider to be a strength of mine and I think that is very important to traders across the world because there is chaos all the time. Every now and then something ridiculous will happen in the market. Market with no justification whatsoever. Personally, if you were to ask me about what time of the day or what I am doing while I do the best thinking, maybe while I'm going for a run in the gym, while I'm working out, or just before I go to bed. I think I do less thinking when I'm sitting in front of my computers than I do while I'm sitting away from them.

Truly my last question. I have interviewed about 70 people for this podcast and Steve Wozniak, Jane Goodall, Margaret Atwood, and I will tell you right now, you are the calmest person I have ever interviewed. If I were to write a dictionary and the entry is stoic, I would say C Nikhil Soap. Was that in your DNA? Are you like, are you doing yoga 24 hours a day? I mean, what makes you so calm?

Yeah, a lot of people say that guy. And it's obvious. I think I am fairly stoic. I'll tell you the good and the bad of it. So the calmness and stoicism, in a way is very good for a professional environment where there is a lot of volatility, but you take that over to your personal life and people hate that, then you know, you're not. You're never very happy or never very sad. People think you're emotionally dead in a relationship and it does not work. I think I have to figure out. I have figured out a way to kind of turn it off and be calm all the time. I need to now learn a way to turn it on as well.

There is no better way to end this podcast. The definition of a stoic is someone who can endure hardship and pain without displaying their emotions or complaining. My impression of Nikhil is he is truly a stoic. I hope you learned about the value of removing barriers, the advantages of not raising venture capital, using an analysis of sentiment and psychology to make investment decisions the pitfalls of cryptocurrency the good and the bad of a calm demeanor. My name is Guy Kawasaki. This is the Remarkable People Podcast. My thanks to Jeff C. And Peg Fitzpatrick, who historically endure working on this podcast with me until the next episode. Mahalo and aloha. This is remarkable people.