Our Private Class with India's Value Investing Guru
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- » Why the Mind Underestimates Compounding
- » ...and more!
I am fascinated by the idea of learning from the successes and failures of other people.
My colleague Rohan Pinto is also a firm believer in this practice.
I joined Equitymaster last year. My first day at work, I was assigned a desk next to Rohan.
A great coincidence!
We spoke a bit. Conversation drifted to books. I remember how animatedly Rohan talked about the book he was reading, Grinding It Out by Ray Kroc.
I too had read the book and loved it.
Rohan and I had another passion in common: tracking India's super investors.
It came naturally to us. We both knew we could reduce our learning curve in the markets if we stood (metaphorically, of course) on the shoulders of the giants.
And thus, we began our journey to meet those giants...
Our goal was to understand their approach to stock picking. Our first conversation was with India's Peter Lynch, Kenneth Andrade. The second in the series featured the famous valuation professor, Aswath Damodaran.
And this week, Rohan and I are excited to bring you our conversation with a highly-respected professor and practitioner of value-style investing in India.
Introducing Professor Sanjay Bakshi...
We have been following Professor Bakshi for many years. In fact, I was fortunate enough to attend his three-day workshop on behavioral finance at FLAME University Pune.
The professor teaches MBA students (at Management Development Institute Gurgaon) a popular course on 'Behavioral Finance & Business Valuation'. He also helps countless students understand the nuances of value investing through his blog and Twitter.
Without any further ado, here is our conversation with the legendary Professor Bakshi.
Rohan Pinto - Professor how did you get introduced to the world of stock markets? Could you walk us through that initial period of your life?
Sanjay Bakshi - My father used to invest in stocks including initial public offerings (IPOs) and was a big fan of Dhirubhai Ambani and his company.
While pursuing chartered accountancy (CA), my first investments were in IPOs of Orissa Synthetics and India Polyfibers. Both companies went bust, so that was a pretty good start for a career in investing.
Chartered accountancy taught me the language of financial analysis, i.e. accounting, but didn't teach me anything about business economics and human psychology.
While studying for my masters course in the London School of Economics, I read about Warren Buffett in a newspaper. I read that he had a wonderful track record, works from a place far away from Wall Street, believes that the markets are often inefficient, and also that he writes wonderful letters that anyone can ask for. So I wrote to him for the letters and I got a reply from his secretary, Debbie, asking me to send her the money for the postage! That was probably the best investment I ever made.
The letters arrived within a few days of my sending Debbie the money. And reading them changed my life forever. Basically, reading those letters made me find my calling.
Kunal Thanvi - Warren Buffett started his career as a strict follower of Graham and then got influenced by people like Charlie and Phil Fisher. Was there any event-person-company-management that in anyway changed or improved your investment philosophy?
What is your story professor?
Sanjay Bakshi - I too have evolved as an investor over the last 23 years. Buffett's letters marked the beginning of my investing journey. Those letters also led me to his mentor Benjamin Graham. Graham was a big influence towards shaping my investment philosophy in the initial days. Between 1994-2011, I was a statistical bargain investor, a risk arbitrageur, and also an activist investor. My focus was more towards risk arbitrages, special situations, and cigar butt investing.
By 2011, I transitioned from a quantitative-focused investor who would look for margin of safety only in a low price in relation to estimated intrinsic value, into a qualitative investor who sought margin of safety from the quality of the business, the quality of the people running it, and of course also from a low price in relation to probable future value in the future.
This transition was, in a way, prompted by an introspection about a few mistakes I had made over the years. While the consequences of these mistakes did not show up in the returns, they still mattered because they showed up in the 'opportunity P&L account', which measures the cost of what you could have done but did not do.
One mistake was that, by focusing on cigar butts selling for low single-digit multiple of earnings or a low price in relation to liquidation value, I missed out buying into higher-quality businesses like Asian Paints and Pidilite, which compounded capital at high rates of return for a long time.
And the second mistake was that, while I would sometimes buy into a great business because it became cheap by the standards laid down by Ben Graham in his books, I also sold out of them when they were no longer cheap by Graham's standards. And that cost me helluva lot of money. For example, I bought Eicher Motors at Rs 200 and sold it at Rs 600 and now it sells for Rs 26,000. This type of mistake helped me realise that one can get disproportionate payoffs by staying invested in high quality businesses for a long time.
Realising the importance of keeping an 'opportunity P&L' account marked a turning point in my investing career.
I also realised the importance of slowing down. More action means more decisions, which increases the likelihood of error and often results in selling your winners too early.
Rohan Pinto - You are a firm believer the role biases play in investing. What do you see as the most dangerous bias?
Sanjay Bakshi - Well, it is not correct to point out any particular bias as the most dangerous. All the biases like availability, anchoring, commitment bias, social proof, among others are important. One needs to overcome all of them through deliberate practice over the long term. And of course, that's not easy because one is really fighting biology...
Charlie Munger has talked about twenty or so behavioral biases in investing. I believe one cannot afford to ignore any of them.
Kunal Thanvi - According to you, what is most difficult part in investing? How do you tackle both Buy and Sell decisions?
Sanjay Bakshi - Both decisions require different approaches.
Decision to sell is the more difficult of the two because one tends to not sell something that should be sold thanks to commitment bias including endowment effect, social proof, and psychological denial.
What's interesting to note is that endowment effect is not always bad. If you look at successful investors that didn't sell stocks of great companies, they bought and their money compounded over the years and made them very wealthy. If you take a sample of 100 very successful investors who made money in the stock market, I would argue that an overwhelming majority of them will be long-term buy and hold investors. They would have bought into great businesses and just held on to them through thick and thin. If this is not endowment effect, then what is?
Incidentally, Ben Graham's best idea - the one that made him the most money - was GEICO, which he bought and held for long time.
So the decision to sell is very complicated. One needs the right dosage of detachment, but then one also needs to be very much attached to the right kinds of businesses and people who run them.
The buying decision comes with its own set of complications. Different investment strategies have different rules for buying. But the kind of investing I now like requires me to look at three key things before I decide to buy a stock. Those are business quality, management quality, and valuation. All three are critical and a low price cannot, under the investment process I now follow, compensate for poor quality of business or management. Now, of course this does not mean that everyone should follow this approach and the other approaches don't work. They do. In fact, they may even work better than mine. But I like mine because it suits my personality. And my partner likes it too, because it suits his personality. And we are very much at peace with that kind of investing, even if other approaches may do better.
Rohan Pinto - How do you start your day? What you love to do when not thinking about investing and teaching?
Sanjay Bakshi - I do not have any structured day schedule. I like to keep things very simple and do things that stimulate creativity. Usually that means lots of reading. So out of 24 hours, I try to read around seven to eight hours a day.
It's hard for a teacher who loves teaching to not think about teaching when he is not teaching. So I am always looking for new ways to teach and become a better teacher over time. I think this is important for all professions and sports. You don't have to compare yourself with others (although they may inspire you). But one should compare oneself with an earlier version of oneself and seek ways to get better over time.
Kunal Thanvi - When you went through testing times, especially in your earlier days in London, how did you learn to endure the pain? What were you thinking then?
Sanjay Bakshi - Well, it was not just in the early days, even when I came back to India it was a struggle. I had to make compromises in my life to make ends meet, for instance, by teaching things like CAPM and EMT and MPT to CFA Students (their curriculum did not allow me to say that markets can be inefficient). But I did it because I needed the money. Those were very tough times.
Adversities and tough times give you determination and make you stronger. It forces you to visualise a better future and makes you move in the right direction. And a lot of persistence with a bit of luck can do wonders in the long run.
As for pain endurance, well, the stock markets teach you that very well indeed.
Rohan Pinto - Value investing is simple but not easy. How do you bridge the gap between what is written in supertexts versus reality? Transitioning the gap between professor and practitioner.
Sanjay Bakshi - Practise. Practise. Practise. You need to train yourself to think different.
For instance, if you are playing tennis for the first time, you will mistime your shots. When Roger Federer plays in court, he consistently hits winners. However, imagine Federer when he was starting out. He too would have made mistakes like you. He went through a steep learning curve and improved himself.
Here's the key. Deliberate practice is required to be successful in any craft. This applies to investing as well. Focus on learning. Keep at it. And you will get better over time through deliberate practice.
Now, there is a big difference when we compare sports and investing. And that difference is to do with feedback.
In sports, you get instant feedback. The learning improves faster - i.e. if you mistime a shot, you know it instantly and can work on your mistake.
In a long-term investing process, the feedback is delayed. So if you invest in a company with a time horizon of say five years. That's a long time to figure out whether you made mistake in buying the company or not.
This is exactly where reading has helped me. I have learned and observed from extreme investing successes and failures in the past. So you need to know a lot of things beforehand. It is thus imperative to learn from others, to study the past and apply those learnings in the current context. Life is not long enough to learn long-term investing because there aren't sufficient data points of feedback to learn from, so you have to learn by observing others.
Rohan and Kunal's Rapid Fire Questions
|Questions||Professor's Rapid Fire Answers|
|Graham, Buffett or Munger||Munger.|
|P.V Chandran, Prem Watsa, Ajay Piramal or Achal Bakeri||All of them.|
|Management Meeting or Annual report||Annual report.|
|Growth (Size of the Opportunity) or Valuation||Growth.|
|Management or strong business||Management.|
|Your Preferred Valuation Metric||Expected return over 10 years.|
|100% in a year or 15% cagr over 5 years||15% CAGR over 20 years.|
|With respect to Stocks - Historical Performance or Future Expectations||Always future expectations.|
|Cash Flow Statement or P&L||The Trinity. Balance sheet, P&L, and cash flow.|
|Your Top Three Favourite Books||Poor Charlie's Almanack by Charlie Munger. All I Want to Know is Where I am Going To Die So I Never Go There by Peter Bevelin. My Name is Red by Orhan Pamuk|
|Your Favourite Annual Report||Berkshire Hathaway.|
|Your Favourite Movie & TV Series||Sherlock Holmes.|
Rohan and I admire Professor Sanjay Bakshi a lot. We and countless others have been beneficiaries of his teachings, his blog and course lectures, and his book recommendations.
We made full use of our meeting the professor. Our curiosity and a long list of questions ensured we overran the one-hour time limit. But the professor was very gracious to allow us to call him later to continue the interview.
'I don't want any good question to be left unanswered,' he said with a smile.
In our tomorrow's 5 Minute WrapUp, Rohan will bring you the second part of our interview. Teaser: It's even more exciting and thought provoking. Here's a sneak peek:
- I am a pattern seeker. I seek success patterns and avoid failure patterns.
Please join us in the classroom again tomorrow.
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04:45 Chart of the Day
In our interview questions, we gave professor Bakshi a choice of making 100% return over a year versus a steady 15% cagr over five years. Since this was a rapid fire question. He instantly replied, 15% cagr over 20 long years!
This question though may seem simple had a deeper meaning attached to it. The two main variables involved in compounding is the rate of return and number of years.
In his teachings, professor Bakshi always recommends that you don't just blindly look at the higher enticing 'Rate of return' in the short run. Think about longevity i.e. it is preferable to have a lower yet steadier rate of return for a long period of time. This is key.
The Power of Compounding
However, very few people benefit from the power of compounding. The primary reason is the inability to delay gratification and the urge for action.
For more than 37 years, the benchmark index, BSE Sensex has grown at an average annual rate of around 16%.
As is always the case in creating wealth in equities. Time in the market is always matters more than timing the market. You also benefit from compounding too.
04:55 Today's Investing Mantra
"The difference between successful people and really successful people is that really successful people say no to almost everything." - Warren BuffettThis edition of The 5 Minute WrapUp is authored by Kunal Thanvi (Research Analyst) and Rohan Pinto (Research Analyst).
Today's Premium Edition.
- Sensex PE May Look Cheap... But It's Not April 27, 2017
- Market Indices are touching a record high. Time to tread cautiously.
- Revealing the Trade Secrets of India's Superinvestors April 26, 2017
- How leaning from the best brains in the markets can help create huge long-term wealth.
- How I Discovered Smart Money Secrets April 25, 2017
- Rohan and I continue on our quest to uncover these Smart Money Secrets.
- A Little Known Way to Clone India's Super Investors April 24, 2017
- Here is a solid way one can clone India's Super Investors.
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