Guru Mantra 13: Value Investing (Investing Values to Life)
Back to 2012, unusual cold engulfed Mumbai that year; the mercury dipped to 8 plus degrees. It was around 6 O clock in evening, I rushed out of airport quickly and jumped into an auto. Without even looking at driver’s face I said loudly, Bhai Saab “Parle Chalo”. That’s Mumbai, the blood line of Indian financial system, the gatekeeper of Indian treasury and also a place in India where you can comfortably jump in to a cab or auto without looking at face of driver. If I started ranting about Mumbai, the betenoire of the city may shake their head and write me off as habitual imprudent flag bearer of Mumbai. Needless to say I am one of those who worships Mumbai spirits and will continue to do so.
By the way I didn’t went to Mumbai for paying another tribute to impeccable queen of India but to keep my head straight and listen to one of Guruji’s friend along with few others. When I saw the gentleman he must be late in fifties, with one of those white old pyjamas, black type of specs may be outdated. A room full of books and apparently we knew his portfolio was close to 70-80 Crs. So I asked Guruji what are we up to today? He said nothing I just wanted to introduce you guys to an old friend of mine. I was more than displeased, murmured myself Guruji I flew from Bangalore to Mumbai …may be not a best idea on a chilled evening.
It was a gathering of 8 people, as usual value investing comes up on the table. We were all in a mood not to spare Ben Graham that day citing value investing in real form don’t work today. Now this person (the friend of Guruji) finished one large peg at one go. Then it was fiery speech which I never expected from a person whom I perceived initially as a nerd person.
I am using his verbatim, lot of words today were spoken by that great man whom I again apologising for initial bigotry thought.
He roared, tell me guys; why somebody who was throwing news paper apparently create self made wealth of 60billion dollars lives life like any other middle class and donate every pie he got through entire journey. Is it weirdness? Fallacy? Unstable mindset? You can name anything……value investing is a way of life……it’s a religion of charity and mankind for followers.
Value investing ignites a passion within anyone who is involved into investing in equities anywhere in world. It has become a way of life, an identity for practitioners. Very few will agree it’s absolutely not the same concept what Ben Graham taught all of us. Then bigger question is what is value investing, let us understand one of our own countryman first.
Prem Watsa: Cry for few dollars more
His acquaintances say Prem Watsa spent good amount of days in absolute struggle in the chilling winter of Toronto. Now he buys public companies, often called as Warren Buffett of Canada. He promptly agrees his calculation of initial fund was terribly wrong which drove him to a park. He is an icon for me, after graduating from IIT Madras he moved to Canada to work with insurance companies. Value investing has been passion since then, like any other value investing bugs him so hard he decided to become an investor. Currently his net worth is stamped at 1 billion USD. 2012, he bought the famous Black Berry.
Prem Watsa is one of many successful value investors who has been in news for almost a century. Let’s have a look at list of well-known value investors:
Warren Buffett (United States)-67 B , William Ruane (United States)- 4B , Irving Kahn (United States)-19B , Charles Brandes (United States)-2B , Charlie Munger (United States)- 2B , Seth Klarman (United States)- 1.47 B, Walter Schloss (United States)- 1B, Christopher Browne (United States)- 650Million, Alex Roepers (United States)- 14 B
This a small list of value investors who cut into billion dollar club, the full list needs a book. Though any value investors list includes folks predominantly from US actually they are spread across. The basic tenet of value investing is such the value investors are not media savvy, lead a principled life. Before we plunge into the nerve chilling idea of value investing and it’s influenced investors let’s pay attention to some kind of pattern for value investing.
Most of value investors started from scratch, Buffett was throwing news paper, some one was selling flowers, George Soros was a refugee without food, Ben Graham couldn’t pay education fees….the list is long. Conclusion: humble beginning.
Value investors continue to be principled and humble in their entire life. Buffett stays in a 5 bedroom house and travel by economy, Chadrakant Sampat travelled by Bus, Seth Klarman lives in small apartment. Conclusion: humble lifestyle and end.
Value investors donated through roof and land, Buffett donated 99%, Sampat 90%, Irving Kahn almost 50%. They donated money more as they create more wealth. Conclusion: give more expect less.
Hard to get value investors into media glare, most stay as oblivion.
Research has been back bone of value investing, every value investors roughly spend 1000-1500 hours every year.
Writing is connector for every value investors to their imaginations and thoughts.
Extreme caution is warranted for buddying value investors, value investing influence your philosophy, change your life style and more importantly can fundamentally tell you what currently you are doing is worthless ! A radical change may not be needed for all, hence people shouldn’t blindly follow value investing. Most of the times it test extreme patience, can be unsuccessful and asks for tremendous hard work and contrarian mindset.
Genesis of Value Investing
Ben Graham advocated first don’t look at the price ticker published in news paper then. Rather understand the business, buy a piece of it at a valuation so that it delivers more earnings that stock market thinks. The concept remain same, methods are completely over turned; it started with his biggest disciple Buffett himself.
Graham used to buy companies below what he defined as intrinsic value and sell it once it crosses a certain limit over intrinsic value. Buffett put a larger lens by exploring a profitable and log term survival of the business or he called out as durable competitive advantage.
Pre-Requisites for Value Investing
A. Reading is a good habit
Value investing does not ask you to be an accountant or finance person. It does expect you to be an avid reader, philosopher and researcher. One need to create their own spectrum of “Reading Chart”. Currently this my reading chart:
Newspapers: I don’t them read anymore, I rely on alerts from Google, Economic Times, Wall Street Journal and Bloomberg.
Magazines and Publications: 1. Mckinsey Quarterly 2. Monthly HBR 3. The Economist 4. Money Life 5. Dalal Street Journal 6. The Capital Market
Blogs:
Random search, I don’t want to put them to favourites.
New and Old Books: at least 1 every month. Last new book I red was “Super Forecasting by Phil Tetlock”.
Investor Profiles: At least one in a month, last I red was about a guy called Lukas Neely. He wrote a book too:
Popular TV Shows: None, media news are distortion.
B. Change of lifestyle and philosophy
Get ready for a bus ride, walking through dusty road or even a place where you never like to go.
Liking for “uniqueness” whether its music or movie value investing prefers strong focus. This comes with own risk, it may ask you to quit something which you even like.
Arrogance and ego is recipe for disaster in market place. I know it’s not easy to overcome, but those with lesser egos and arrogance will do well.
Predefined mindset thinking this is the best way is going to be an obstacle. Changing views and wandering mind is key force behind value investing. Expect to change your views and mind very often, you may not implement all of them.
Optimism and live with less, information is abundant and plenty yet right information scarce. One has to take decision with available information. Avoid grand ideas and statements.
Ok great, I won’t extend further pre-requisites. What about the “MUST AVOIDS”…yes a small list again.
First and foremost, plenty of investor in market thinks they are investors or value investors in reality they are not. No homework, no discipline ever lead to success in value investing. If you don’t want to spend time you are not an investor……you may keep buying shares, investment is buying business.
I get money from employment I buy what I like and what I think is correct. Perfect way to lose money, in other words you are novice. Hence again get ready to be disciplined again.
Behavioural finance: if you don’t know then read, no one is asking to invent anything. Follow the successful concepts, that’s sufficient for value investing.
I red a small cosy little book by Debasish Basu (plain truth about stock investing), not sure about entire book now. But I like the 16 golden rules what he emphasised :
- An attempt of making quick money leads to losses far higher than the initial investment.
- If stocks don’t seem cheap by historical standards, stand aside or invest in small amounts. There is always chance to buy everything, nothing is end of world. BSE was standing there for 100 years, it will stand another 100 years.
- Buy and hold does not work always, never average down a losing investment unless it’s a part of well thought out method.
- There is no such thing as hot tip.
- Don’t fall in love with your stocks, it will never fall in love with you but fall with market.
- Valuations don’t matter in short run and short run can lasts for months even beyond a year.
- Calculate first how much you can lose not how much you can gain.
- Experts care about risk, novices dream about returns.
- Forecast usually done by experts are trash.
- Develop a method and stick to it and have patience.
- Lots of humility helps, a rising tide raises all ships and so you may be lucky to part of tide.
- Stocks fall more than you think and rise higher than possibly you can imagine.
- Investing in what popular stocks, fad industries or new ventures are riskier than they looks.
- Bear market start in good times, bull market starts in bad times.
- Neglected sectors often turned out be good values.
- Don’t assume either media or fund managers know more than you. Record shows they don’t.
What next? Before we plunge to value investing methods and philosophies an obvious question….why so much efforts? Isn’t going to distract from employment/other activities? Am I not going lose money? Fine, let’s talk about rewards……
“World is shrinking, blank pages of map getting filled up….we must find our own place or perish”- From the movie “Pirates of the Caribbean- Dead Man Chest”
Reason 1: Equity as instrument beats inflation considerably even in a high inflationary country like India. Indexed equity (only large companies) have delivered 17.8% CAGR in last three decades against inflation of 6-7% average (peak was 16%, low is 3.8% now). Inflation eats into your money, meaning value of 1 Dollar/Rupee is 0.95 next year and so on.
Reason 2: Debt which is also loan either loan from bank (liability) or deposit in fixed deposits in bank (assets). Remember Net Interest Income for bank is earned in by lending to us minus paid to us for deposits. Hence rate of interest in loan will always be higher than deposits. For a person with EMI and deposits both is actually negative cash flow which otherwise is positive for bank.
Reason 3: They say knowledge is inner freedom, freedom rules conscience and conscience defines the path to success. If you think knowledge is key to your DNA then equity is best platform, it asks for people with IQ less than 40 and move then to 150 Plus. Value investment requires knowing economics, psychology, finance, anthropology, Meta physics to name a few. PHD gets you a degree, value investing tells you how to turn knowledge to value.
Reason 4: Prospect of a monumental wealth creation and open dreams. Value investing targets somewhere between 100 times to infinity (few stocks delivered more than million time returns) as return. Dreaming in an open space can be nostalgic than within bedroom.
Reason 5: Value investing though synonymous with wealth creation it actually asks you to create values in life. It’s combination of wealth, philanthropy, integrity and honesty. What else one need in life?
I am sure in our childhood we liked something or other, I was a crazy fan of Rock and Metal (till now too!). I kept buying those rectangle shaped “audio cassettes” from every part of world I can access to whether it was courier, or even going to Nepal. I gather around 1400-1500 cassettes, put them to specially made wooden box with electric bulbs inside (someone said they help removing moistures!). Little did I realised audio cassettes will become an item for museum, as different mediums replaced these cassettes I just look at the three giant boxes now (bulbs are now off) which reminds me constantly about stupidity. Luckily, I learned a valuable lesson from the whole experience. Although I don’t exactly remember what that was, I’m pretty sure it had something to do with the importance of saving money for things that you might want or need in the future rather than wasting money.
Unlearning the biases and prejudices
When we speak of Warren Buffett we can’t ignore his basic rule, books (thoughts, articles, research) drives your philosophies, philosophies derives methods, methods and principles executed together with discipline and hard work is stairway to success. This is not applicable only to equity investment but all facets of life.
They say pen is mightier than swords, properly written words can cut across the thoughts and perceptions of masses resulting principles and ethos sometime also called “way of life”. Indeed writers continue to influence generations for long as good role models are imperative. They give us something to aspire, and someone to look for. Of course they do motivate us.
So does investors do write books as well, so what’s difference then; these guys are not someone who go to Alps and sit with windows open against view drop of snowy mountain to strike an idea what can be next human relationship; On the other hand investors got back to table when they started near vision eye glass, with the pedigree of their acquaintance and experience. They don’t write to earn from book, but to guide the “misguided ones”, to ensure the wisdom juggernaut rolls on, an eternal pursuit towards an un-ending tunnel of full lights.
An investor is told to read some books and create a customise discipline and method for practicing the investment. Question is do they matter? Can anyone rake moolah in market by reading books? Well we do not have straight head answer but most of these books help in saving yourself from losing money!
“When you identify action with passion wealth is outcome”.
A investor develop an endless desire to learn for art of stock picking. A perspective investor be absolutely passionate about investing and anything remotely connected with it. Passion of investment is different from passion of stock prices!
The first job of an investor is to look for a group of likeminded people who are focused with serious investing. Having find a group which is devoted and selfless investor should develop a habit of reading, an act where there is no substitute. Create a list of books and understand their investment philosophies. It’s like exam preparation, underline, bold and get prepared for actual market.
Must Avoid
Looking listlessly at stocks which have grown over a period. The price is future business not past track record.
Peer comparison is a disaster for recipe, unless cooked properly it can damage more than a wrong investment. Most of peer comparison is made on financials not business!
I found 99% of people do not invest based on documented decisions but more gut feeling and very little broad data. As a matter fact, 5 out of 10000 investors have tracked, analysed investments systematically on a paper over the years. And those 5 only succeed!
I feel this is right, I need not believe others. This is one major problem I had always during employee days. I always thought I am right all others may be ok but they must pay attention to me. Similarly if I think Mr. X is does not agree with my views I will keep disturbing conversation and somehow I will not believe whatever s/he says. This attitude did not cost a lot during employment, however during initial investing days I lost not only my hair but shirt! Marketplace brings down the most of high fliers almost crashing to ground. I was lucky I escaped with few thousands….you may not be that lucky!
Learning the rope: keeping eyes on ground will help rather on sky. Be truthful to yourself……again going back to employee days. 3+ plus year syndrome at office: by this time I was acquainted to office space, I knew where cafeteria is, I knew how to manage managers……employment is my stronghold! Of course I started cribbing….you know what by accident I am a finance person……I always wanted to open a garment retail outlet. Infact we had the blue print but family commitment kept me away. When I got few critical observations during performance appraisal, first thing I did was to find out another employer! Stop lying to yourself for God’s sake!
Optimism (Extracts from Basant Maheshwari Book- The Thoughtful Investor) with minor amendments- QUOTE
The attributes that can make the mental framework of a person desirous investor can neither be learnt nor taught. It is a general offshoot of how the person has been brought up and how he views the world. Among the trick of games one of the major attribute is optimism. He has to go to bed thinking that tomorrow will be better day. Equity is on basis of what business will do in future, if you feel future is dark……equity will never perform also.
Despite of this investors talk about negativity more, if stocks goes up more they talk about valuations. If prices are low environment is to be blamed. For a defeated person (or investor even) defeat is a complaint book, for a person who makes living out of something have to accept his responsibility.
You must love the market not hate, a person who loves will be more in game ….winner have one thing in common….running for them.
Pain of Loss
The investor does not understand the stock may fall after he buys or rise after he sells. This heartburn can change once you become matured and serious. An investor decide a price to buy and sell, market just provide the platform.
Stocks do not go straight up, if they go come down equally fast. When I was using local transport for saving money 20% fall in portfolio was easier to manage as my expenses was limited. Today even 1% loss hurts me more emotionally as I can’t travel without business class. Now with every loss I compare did I lose the trip to Paris? The imaginary discomfort from not buying things rise with every fall. My suggestion live a modest life, it helps. Falling stock prices are like child falling while learning to walk.
Investing is about making more and more investment and retaining less. Market does not bother about whether you get your capital is recovered or not. All that it does price based on information, opinions.
One of avoiding of pain of loss is you buy more. But as most investors are invested for initial amount conviction level goes down. It is easier to bear the pain collectively when all his friends are also loosing money. There is a strange sense of comfort in seeing everyone loosing money.
Conviction
An investor who does self research is in a better position when downward trend starts. Stealing an idea is easy but borrowing conviction is matter of grit and skills.
(Extracts from Basant Maheshwari Book- The Thoughtful Investor) with Minor Amendments- UNQUOTE
Though equity investment is part of process of globalisation…….its evolving day by day against new challenges, opportunities and threats. Combined with research and patience I am sure we can conquer the fear!
Let’s talk about what is a nest and how to infuse security, safety and random thoughts before we move to investment specific subjects.