One of India's Top Super Investors Speaks His Mind - The 5 Minute WrapUp by Equitymaster
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One of India's Top Super Investors Speaks His Mind

Apr 6, 2018

Kunal Thanvi, Research analyst

Have you met a super investor?

Maybe I should ask - Have you ever thought of meeting them.

Asking them questions about their holdings/investment philosophy?

I know many of you have always wanted to meet them. I know this because I met many of you at Equitymaster conference.

Many of you wanted me to meet more super investors and ask them tough questions.

Well, I am taking forward your request. I've re-started my journey.

What if I tell you that I have recently met one of the smartest value investors in the country.

Yes. I'm here again meeting India's super investors and asking them tough questions.

Last week, my colleague Sarvajeet Bodas and I met a super investor at his office at Nariman Point.

It was a long conversation.

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Introducing, Rajeev Thakkar...

Rajeev Thakkar is the chief investment officer (CIO) and director at Parag Parikh Financial Advisory Services Ltd (PPFAS).

He has more than 15 years of experience in various segments of the Capital Markets such as investment banking, corporate finance, securities broking and managing clients' investments in equities.

His tenure at PPFAS began in 2001. Initially, he was heading the Research division at PPFAS. His responsibilities soon expanded as he was appointed the Fund Manager for the flagship scheme of the Portfolio Management Service, titled "Cognito" in 2003.

Rajeev is a strong believer in the school of "value investing" and is heavily influenced by Warren Buffett and Charlie Munger's approach. He is a Chartered Accountant, Cost Accountant, CFA Charterholder and a CFP Certificant.

We had a great time talking to Rajeev at his office. There are many pearls of wisdom that you will find in this interview.

Rajeev Thakkar - CIO, PPFAS Mutual Fund


Without further ado, here is our conversation with the cool, calm, and collected - Rajeev Thakkar.

Kunal: Our readers would like to know your initial journey and how did you get introduced to the world of stock markets? How did you start? What is your story?

Rajeev: The first introduction to equities as something where investment is made was from my father and started in early 80s buying equity shares.

As an eight-year-old, I would see annual reports coming in and luckily at that time, physical reports used to get delivered. Today everything is on email and internet. So, in today's time I would have not seen the reports come in, but at that time you would see the things coming in and the curiosity, questions would be there as to what is it that comes by post every now and then. That was my first introduction to equities.

My graduation year from college (I'm a Commerce grad) was in 1992. And that was the bull market year and Harshad Mehta period. So, every young person wanted to be in stock markets.

The message from my family, my parents was first to do something more in terms of education, be grounded as well and then pursue whatever is your calling. So, after 1992, I enrolled for my Chartered Accountancy, but the 'equity bug' was there already.

So, in Chartered Accountancy, typically there is an option of either doing a training three year with a Chartered Accountancy firm or you can do two years with a Chartered Accountancy and then last year you can work with a company.

So, in the last year, I worked with an investment bank. And that was in 1994, so that's the time since when I have been in the capital market. Initial years were not directly into equity research or in managing portfolios, it was more on the investment banking side mainly doing IPOs and all. So, I was in IPOs for a couple of years. One year I was in corporate finance, couple of years in bonds brokerage. I moved formally to equity research investment management in 2003.

Sarvajeet: Warren Buffett started his career as a strict follower of Graham and then got influenced by people like Charlie Munger and Philip Fisher. We know people like Parag Parekh and Chandrakant Sampat had a great influence on you. Can you help us and our readers understand what were the key things that you learned from both these legends?

Rajeev: As I mentioned, I did a couple of years in bonds. So, there was a little bit of a bond person in me even after coming to equities. And one of the ways I would look at equity in the initial days was in terms of earnings yield and dividend yield.

So, earnings yield would be you are paying this much of market cap, against how much profit is the company earning for you and of which how much are they paying out and how much are they retaining.

That was a very crude elementary framework that was there. That was in terms of earning capacity or in terms of assets what are you getting in return for your purchase price.

The aspect of looking at the quality of management, quality of business franchise, capital efficiency came through Mr. Chandrakant Sampat.

The aspect of looking at your own behavior, guarding against behavioral biases came from Parag Parekh. Quality of business and management from Mr. Chandrakant Sampat.

Kunal: What is your investment philosophy in brief? I say brief because when I asked this question to Professor Bakshi last year he just said in two words 'own quality' period. - how would you sum it up?

Rajeev: So, equity means owning a piece of the business. Essentially it boils down to that. And finally, when you're owning equity, I am of the school that believes that growth is a component of value. So, you can't distinguish between growth investing and value investing in that sense.

A growing company is more valuable. However, you should buy it a discount to intrinsic value.

And a no-growth company or even a company with declining cash flows will have some intrinsic value and if you are getting at discount even that is fine.

Essentially, the intrinsic value is, in theory, the present value of all future cash flows and you have to buy it at a discount to that value.

Sarvajeet: How do you find stocks? What are your filters for selecting a particular stock? What are the sources you use? Where do you get ideas?

Rajeev: So, we have a research team which at the beginning of the year defines an investment universe. Those are the companies which we in any case have to track and that takes bulk of the time of the analyst to cover. And let's say 80% of the time.

Remaining 20% of the time they can be towards general reading or towards looking at companies which are not in the defined coverage universe.

So, this coverage universe comes from companies which have a proven track record in terms of good return on capital, good return on equity, where management does not have a track record of cheating minority shareholders, and businesses we can understand.

So, from all of these parameters we come to a list which roughly is in the region of 500 companies in all. So, typically if a company does not fall into the list we would most likely miss something which is not there. So, we define our area and then try to find potential opportunities in that space rather than continuously be stimulus led.

Kunal: What would be our biggest failure in terms of picking stocks? Any one or two stocks that you think your hypothesis went wrong? What were the key lessons from that?

Rajeev: So, from 2003 onwards (so this would cover both the portfolio management services as well as the mutual fund), in terms of what went wrong, I think one space I can think of in the early days was oil marketing companies HPCL, BPCL and more recently Noida Toll Bridge. The first ones were under public ownership - public sector companies.

And when it came a choice between business economics versus populism, populism won over.

In Noida Toll Bridge, we thought that given it's a private sector company that may not be so much of a problem but the problem came about by judicial intervention. So, I think the key learning especially in the Indian context is to stay away from sectors where public perception, public opinion as consumers and as voters have a role to play in the business economics.

Kunal: And what are the omissions that you believe you've missed in your investing career?

Rajeev: One of the things that we look for investments is a good track record in terms of the business performance as well as management quality. And this typically is a bit more difficult to come by in the small and mid cap space and in newer companies.

So, in 2016-17, where a large part of the returns came about small and mid cap space that we were not participating to that large an extent in that space. Again, our mandate is multi cap, but people who have been tracking this space very closely for longer have done better than the average mutual fund manager in the past couple of years.

The other space I think again given our background and given what would one would call circle of competence, the B2B businesses, we have not been that well clued on to. So, some of the industrials and manufacturing businesses.

So, the third space where we have had a bit of ambivalent stance is in the cyclicals and commodity kind of space. These are not buy and hold investments for exceedingly long periods of time, because they go through their up and down cycles.

However, at very beaten down valuations, some of them may merit investments. We haven't got too many of these right in our journey since 2003 about 15 years.

Sarvajeet: Of these three omissions, do you think going ahead PPFAS will concentrate on any of these?

Rajeev: I think in the small cap space again given the open-ended nature, given the mutual fund structure, it may not be very feasible to go very aggressive in the small cap space. Commodity space, yes, we would build our competence going forward and yes, I think we will even in the B2B space try and do more work.

Finally, one has to define one's areas of strength and play to the strengths rather than trying to operate in all spheres. So, we would not compromise on our conviction and just buy something for the sake of participating. First step would be to build competence. Unless that competence gets built and unless the conviction comes, it would be pointless to try and invest in that space.

Kunal: Makes sense. You are a very firm believer in biases. How do you help yourself in keeping these biases aside while evaluating stocks? What according to you is the most dangerous bias?

Rajeev: So, Professor Sanjay Bakshi who you have interviewed in the past had a wonderful talk called vantage point.

Kunal: Yes, he does.

Rajeev: He starts with a movie where different people in the audience have a different perspective on the event that has happened. Basically, how you can take each of their views and arrive at the truth of the matter. And he recommended that we should do a similar thing when we look at companies.

So, we look at a company from the point of view of a bond holder or from the point of view of an acquirer or from a minority shareholder, or many perspectives could be there.

So, I think having these multiple perspectives helps avoid some of the biases or points out some clear mistakes. So, as has been said that the best software to write fiction is Excel and not Microsoft Word, because - and again DCF is like a Hubble Telescope. Move it one inch and you are in a different galaxy.

So, the problem with computers is garbage in- garbage out. If you put wrong assumptions into a spreadsheet it will give you wrong answers for the intrinsic value. So, how do you guard against these biases?

It's when you are valuing a business with very little entry barrier. The current return on capital is very high. Growth has been very high in the past. On Excel, you project forward saying this will be the future and this is the present value and it's still looking cheap.

Then the other perspective will be if it is so attractive why are other people not entering or who are other people who have announced plans to enter a similar space. What is the replacement cost if you were to recreate the entire company with sufficient capital, would it be possible to do so? And if the answer is yes, then the projections that you have entered probably will not fructify. So, these things help in guarding against biases, having different perspectives.

One very important tool to guard against biases is to seek out people who have a view different from that of yours. If you like a company, if you are biased towards that company, then seek out people who have a sell rating on that or who are negative on the stock. And just listen. Do not try to argue with them or justify your point of view. Just listen to their arguments dispassionately and note them down. Finally, you may stick to your conviction, but at least be aware of the arguments of the other side.

Another thing which helps, or which may not help immediately while taking the decision, but later it would help in a very significant way is writing down your investment rationale or maintaining an investment diary.

So, let's say in the case of Eicher as is well known, a lot of people bought into the stock for a different reason and finally that didn't work out - something else worked out, which is fine. As long as your investment decision does well for you, it's good for people who bought it. But when you write down the rationale it enables you to look at whether your original thesis is right or not and if those have been invalidated by later facts then maybe you should take corrective action. I think the hallmark of a good investor is not someone who does not make any mistake.

The hallmark of a good investor is someone who takes corrective action at the earliest opportunity when they figure out that a mistake has been made and does not rationalize it to themselves and just create new reasons to hold on to the stock.

Sarvajeet: What would be the most dangerous bias according to you?

Rajeev: Commitment bias. I would say if you have bought into something or if you have recommended something to someone and then to walk back on that is difficult.

Kunal: According to you, which is the difficult part? Buying or selling? So, how do you tackle this buy v/s sell problem?

Rajeev: I think selling would be more difficult in some cases but not in all. So, if you recognise that it's an investment mistake, then it's easy to come to that decision. Sell it out and go out of it. Here, you have to overcome the commitment bias. That's the difficult part. Once you do that then it's a simple thing. Sell at whatever price is available. Don't wait too long.

In the second case, if selling is to be done on account on valuation factors then you have to counter opposing forces.

It continues to be a great management, continues to be a great business and overall you love the company, but valuations are making you increasingly uncomfortable.

Here it's difficult to arrive at point estimates for intrinsic value. It's always a range. You have a low point, you have a high point. And even the high point is prone to error.

You may think that the higher range for this is 100 rupees whereas maybe the answer is 150. So, while selling on account of valuation what we try and do is gradually run down the position.

So, rather than having a bullet exit, one should keep trimming the position so that even if you are wrong in terms of your upper bound you keep participating in the stock and overall as your weightage comes down, your risk comes down. You can sleep peacefully because it's not an excessive part of your portfolio. At some point, it may make sense to completely exit, but then you would have sold in maybe 3-4-5 branches on the way up.

Kunal: But selling is always more difficult than buying, right?

Rajeev: That is usually the case at least in our kind of scenario, because again selling on account of valuation. So, what happens is that typically in the bull market your older investments have done well and are quoting at elevated valuations.

Again, the environment is such that people want to give you more money or invest more so cash also is coming in. Your existing cash has piled up because new opportunities are difficult to come by and your older securities have appreciated in price. So, to that extent it's a bit more difficult. So, you do it in parts rather than taking a one-shot decision. In terms of buying; as long as money is there and the stock is quoting at below intrinsic you, buy the stock.

Sarvajeet: This question is about your routine. So, apart from investment what are the other activities you do and how do you start your day?

Rajeev: It's not very different from what most people so. Get up finish morning activities, have breakfast, come to office. Typically reach office by 9:30 or so. 9:15-9:30 is when I reach office. I am in the office till about 5-5:30.

Most of the time is spent either in reading or interacting with the team of analysts. Periodically, the analysts have internal presentations or internal discussions. A bit of time is spent interacting with clients or the media. So, that takes some amount of time. There would be a little bit of time devoted towards corporate activities.

So, there may be, a board of directors meeting and some agenda for discussion and things like that. That's the workday. Post work, I try and walk for an hour at the Marine Drive sea face. So, start at this end and go up to Chowpatty and come back halfway.

Then get picked up for the commute home. While on the sea face, I listen to music and after reaching home spend some time with family, with my wife, daughter, parents. That's typical weekday.

On weekends, there are plenty of other distractions apart from investing. So I read all kinds of fiction or general books. Watch a lot of video content streaming services that are there. Occasionally strum the guitar or do some karaoke. Chess is another distraction. I waste a lot of time playing chess online. This is completely unlike Professor Bakshi who does not have a television set at his home. I watch plenty of content both cable TV as well as streaming.

Kunal: That's great. So, we have scope then.

Rajeev: I am that person. So, there is one person who is inspired to live a long life and he goes seeking answers. So, he comes across a sage who is maybe 110 years of age so he bows down at the feet of the master and says, 'Master, how did you reach such an advanced age? Let me know your secret.' The sage says, "Okay, get up early, avoid all these foods, stop drinking, stop smoking, do not live in cities where air is polluted, remove all this stress... and goes on and on.

Finally, this fellow says, 'sage I would rather live a shorter life.' In my case, I would rather knock off maybe a percent or two from the investment returns and not give up on my television.

Kunal: We know you love reading. However, you know there is a lot of information explosion there is so much to read these days. So, how do you pick what to read? How much do you read?

Rajeev: I came across this interesting podcast by Naval Ravikant. He has addressed this question and I think that's a good answer there. So, this is a very important question, because if you are on social media and if you are on the internet in a day, people will blast you with 10 book recommendations. Now even if you read books all days and do nothing else you'll never cope up.

So, one is the investment classics which are there and very small list. So, if you have read let's say the Intelligent Investor, Philip Fisher's Common Stocks and Uncommon Profits or Buffett's letters or one of the books of Peter Lynch. That covers most of the areas. And it's about nuances or additional factors. You can go slow once your basic reading is done, because finally then you have to read individual annual reports, concall transcripts and things like that to finally get investment ideas. Just reading books will not give you investment ideas.

And plenty of books have good ideas, but essentially, they lay out the idea and then go on giving example after example why that idea is relevant or they give nuances. So, some of the books you can skim pretty fast once you get the central idea of the book. So, Naval has put it beautifully.

A lot of books that are published should have been blog posts. So, what has been said over 250 or 300 pages the idea is worth only a paragraph or two. That would work. Again, don't fall into commitment bias. If you have picked up a book and after reading a while if you feel that it's not worthwhile or does not resonate with you or does not interest you put it down. It's not that every book that you start has to be read till the end.

Kunal: That makes sense.

Rajeev: Sometimes, it may make sense re-reading what you have already read rather than pick up a new book. So, don't be in a race to claim that you have read the maximum number of books or anything like that.

Sarvajeet: Are there any book suggestions that you have for our subscribers?

Rajeev: So, given that it's a retail audience I would say stick with maybe five investment books first and then build up on your company knowledge or your industry knowledge. Stick with maybe Peter Lynch's book and let's say Making of the American Capitalist and Intelligent Investor, and Philip Fisher's book. So, stick with a few investment books, get a basic framework and then actually do the work of understanding businesses.

Kunal: Is there any fund manager you admire in the mutual fund industry?

Rajeev: I guess there is something to learn from various people. One of the people we admired, who retired at an early stage, was KN Siva Subramanian of Franklin Templeton Mutual Fund. But his team even after him continue to do well.

Kenneth Andrade is again someone who plays to a different strength. So, he is someone who does cyclicals and all well. So, he is someone I observe for the area where we don't play too much. So, there are various people. Sanjay Bakshi of course doesn't manage mutual fund, but he is renowned investment manager.

Kunal and Sarvajeet's Rapid Fire

Questions Rajeev's Fire Answers
Graham, Buffett, Munger or Chandrakant Sampat Munger and Sampat are essentially the same so not much of difference. Its Munger and Sampat rather than choosing one.
Alphabet, Amazon, or Apple Alphabet.
Management Meeting or Annual report  Annual report.
Growth (Size of the Opportunity) or Valuation Growth is a component of value.
Management or strong business Both.
Your Preferred Valuation Metric Earnings yield.
100% in a year or 15% cagr over 5 years 15% CAGR.
With respect to Stocks - Historical Performance or Future Expectations Both.
Cash Flow Statement or P&L Cash flow.
Your Top Three Favourite Books Bhagwad Gita, Intelligent Investor and Numbered Account
Your Favourite Annual Report Berkshire Hathaway.
Your Favourite Movie & TV Series Sholay and Billions

It was a great meeting Rajeev. We believe, this will help you the way it has helped me become a better investor.

Our curiosity and a long list of questions ensured we overran the one-hour time limit. But Rajeev was very gracious to allow us more time.

In Monday's issue of The 5 Minute WrapUp, I'll bring you the concluding part of our interview.

Here's an excerpt:

  • 'In Vipassana meditation training they say there are three kinds of wisdom:

    One is what is called Received wisdom - where you say this book says this and that's why it's true.

    Second kind of wisdom is Intellectual wisdom - where you can reason things out.

    Last but not the least is: 'Experiential wisdom' - which comes only from actually doing it.'

Chart of the Day

One of the unique things about Parag Parikh Financial Advisory Services (PPFAS), mutual fund is that it invests in the international markets.

PPFAS Mutual Fund's Exposure to International Markets

The global portfolio forms around 26% of the total portfolio and interestingly, Alphabet (Google) is the largest holding of PPFAS mutual fund.

Regards,

Kunal Thanvi
Kunal Thanvi (Research Analyst)
Editor, Smart Money Secrets

PS: The best investors in India do all the hard work required to pick the right stocks - all you need to do is watch what they are doing. Follow India's top 40 super investors here.

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1 Responses to "One of India's Top Super Investors Speaks His Mind"

sudip parikh

Apr 6, 2018

Dear Kunal,

It was a pleasure reading your interview with Rajeev.
Frankly such articles are more interesting than conventional newsletters.
I hope we will have more such interviews.

Thanks & Regards,
S.Parikh

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