Archives for 2016

Latticework of Mental Models: The Halo Effect

Complexity is the indispensable thread in the fabric of world of business today. As a result, in spite of all the secrets formulas and all the self-proclaimed thought leadership, success in business is as elusive as ever. Unlike hard sciences there are no immutable laws in management because managing business isn’t a science.

Rajiv Bajaj, Managing Director of Bajaj auto, said this in one of his talks –

I joined the company [Bajaj Auto] twenty years back. In my college I was trained to think ‘Just in Time’ because it was supposed to be one solution for all the problems. And then somebody said, Just in Time is not enough. They said there must be Kaizen, World class manufacturing, Toyota production system, Kawasaki system, automation and robotics. Then they said you must also know CAD, CAM, simultaneous engineering, re-engineering, six-sigma, TQM, and you must wear six hats, follow seven habits, look for blue oceans, be a bit of a maverick and indulge in management by walking around. Every time I learnt something new, I found myself back at the starting point. There was always the new book on the shelf, and there was always the new consultant on the seminar circuit. And these guys would do anything to keep themselves in demand and keep all of us confused. So I decided to ignore all of these.

Rajiv Bajaj turned around Bajaj Auto from a loss making company in the year 2000 to the most profitable auto company in world and it’s pretty clear from his talk that he didn’t do it just by blindly listening to those management experts and celebrity CEOs who claim to have the next new thing.

Annual Report Review: Bajaj Auto

Here is my review of the FY16 annual report of India’s leading two-wheeler company, Bajaj Auto.

Click here to download the PDF review (4 MB file), or read it in the panel below.

Let me know your thoughts and questions on this review in the Comments section of this post, plus any additional thoughts from your own review of Bajaj Auto’s FY16 annual report. Also share any suggestion(s) you may have to make future reviews better and easier for your understanding.

Click here to read past annual report reviews

Statutory Warning: This is NOT an investment advice to buy or sell shares. Please make your own decision, as blindly acting on anyone else’s research and opinions can be injurious to your wealth. I own the stock, and thus my analysis is biased, and may be wrong. I have been wrong many times in the past. I am a registered Research Analyst as per SEBI (Research Analyst) Regulations, 2014 (Registration No. INH000000578).

Latticework of Mental Models: The Zero Price Effect

Would you buy something if it were discounted from Rs. 500 to Rs. 200? May be.

What if it was discounted from Rs. 500 to Rs. 10? Possibly.

How about if it were discounted to zero? Absolutely!

Getting something for free feels good. Isn’t it?

But don’t get too excited. Although the ‘cost of free’ is zero, it’s also a source of irrational behaviour. Remember those pile of free key chains, free pencils and notepads lying at some corner of your house? Well that pile may be harmless but there are other situations where this irrational affinity for FREE stuff can cause us to make bad decisions. The Zero Price Effect says that we often pay too much when we pay nothing.

I regularly give in to this zero price effect in my day to day decisions. Amazon offers zero shipping charges if I make a minimum purchase of Rs. 499. Every time I order a book which costs less than 499, I end up buying another book (which I don’t plan to read) just to avail the free shipping offer. I just can’t let go off the free offer.

So what explains our unusual love for FREE! stuff?

Latticework of Mental Models: Deliberate Practice

There are moments in life when you are in awe of someone so much that you wish to be in that person’s shoes, doing what he or she is doing.

For that matter, everybody aspires to be really good at something. It could be a sport, an art, playing a musical instrument or any other activity like reading, painting or drawing. When we see someone who displays an extraordinary talent in any of these fields, it leaves us awestruck and inspired.

So how do you become good at something? How do you improve your performance in a chosen activity?

The most popular strategy among people is to practice by mindlessly repeating an activity over and over. Many performance coaches and motivational gurus tout this idea of working incessantly for long and hard hours. Practice makes perfect – is the mantra they preach. Ten thousand hours of practice, they say, is the key to world class performance.

Latticework of Mental Models: Naive Realism

Let me start by inviting you to have an intellectual and emotional experience. Take a few seconds and stare at the picture below.

**Image-1 (Source: The Seven Habits of Highly Effective People by Stephen Covey)**

Observe closely. What do you see?

You’d probably see a woman who is looking away from you. You may notice that she is wearing a necklace. She seems to have high cheekbones, long eyelashes, and a pointy nose.

Now I ask you to take your eyes off her and focus on the second picture below –

**Image-2 (Source: The Seven Habits of Highly Effective People by Stephen Covey)**

What do you see now? Another woman? What does she look like? How old do you think she is? What is she wearing? In what kind of roles do you see her?

You probably would describe this second woman as beautiful as the first one. You might guess that she is about 25 years old and fashionable. In fact, the second image looks like a lower resolution version of the first image.

Latticework of Mental Models: Antifragility

As a kid, one of the most fascinating thing I ever witnessed while conducting my own zoology experiments, was to watch a lizard leave it’s tail behind.

I am sure many of you must have found it intriguing that a lizard, if threatened, can voluntarily let go of its tail. It’s common in many lizard species to shed a part of their tails. It’s a survival mechanism. The trick allows these reptiles to escape when captured by the tail by a predator. The detached tail writhes and wiggles, creating a deceptive sense of continued struggle, distracting the predator’s attention from the fleeing prey animal.

It’s a marvellous self-preservation mechanism that evolution has given to lizards. And what’s more fascinating is that the lizard can grow that tail back in a matter of few weeks. What a robust way to deal with loss!

If that sounds cool then you must also know about Hydra. It is a serpent-like creature from Greek mythology. Hydra grows two new heads every time you cut one off. In Indian mythology, there is a similar character called Raktavija. A demon (asura) who who has the magic boon that every drop of blood shed from his body gives rise to another Raktavija (literally the blood borne).

These apocryphal characters are very important metaphors to improve our understanding about fragility and robustness.

What is fragile? Something which breaks or disintegrates easily when subjected to a stress or disorder. Isn’t it?

True Wealth Workshop 2016: Want to Meet Us In Your City?

After covering nine tier-2 Indian cities in 2014, we plan to conduct the second round of Safal Niveshak’s True Wealth Workshop starting this September. This is going to be a three-hour Workshop in a non-metro city, through which we plan to help people learn the most important rules of value investing, personal finance, and long-term wealth creation.

So if you wish to meet us in your city, please click here to fill this registration form.

As for the fee of the Workshop, we would let the participants fix the same. So, if you attend the Workshop, as a beneficiary, whatever you decide was the worth of the Workshop – anything ranging between Rs 0 and Rs 3,000 – you can pay us.

We are also looking for volunteers to help us arrange the Workshop in their respective cities. If you represent an organization and would like us to conduct the Workshop at your office premises, please email with your request at vishal[at]safalniveshak[dot]com.

Safal Niveshak’s journey that started five years back now craves for a wider path as more tribe members join in. And we will be happy to join you on this path of becoming simple and sensible with your hard-earned money.

Latticework of Mental Models: Straw Man Fallacy

A policeman, while on his usual late night patrol, finds a well dressed gentleman squatting under a streetlight.

“Is there a problem sir? Are you looking for something?” Policeman asked the man.

“I lost my car keys officer.” Replied the gentleman.

“Do you need some help?”

“Thanks. I sure could use some help. It’s been an hour since I lost my keys and can’t find them.”

So they both started looking under the streetlight together. After about half an hour, the policeman asks, “Where exactly did you lose your keys?”

“Oh, I actually lost them in the park, half a kilometre down this road.”

“Then why in the world are you searching here under the streetlight?”

“Because this is where the light is.” The gentleman replies with shrug and a look of obviousness on his face.

This might look like a party joke but it has important clues about human behaviour. Please allow me to explain.

Value Investor Interview: Rajeev Thakkar – Part 2

Note: This interview was published in the January 2016 issue of our premium newsletter, Value Investing Almanack. To gain instant access to more such interviews and other interesting stuff on value investing and business analysis, click here to subscribe now.

Read Part 1

SN: Is there a mechanism in Mutual Funds where you repay cash to shareholders if you’re not finding opportunities for a long period of time?

RT: Some people do it by the way of dividend payouts. Other mechanism is that you can shut the doors for the inflows. What you can say is that I’m not getting opportunities now so I wouldn’t be buying anymore. Lot of people have done that also. So you shut the door and say I’ll not take any more inflows from this date onwards. And you can open it as and when the opportunity arises. You can keep it shut for may be 3-6 months or 1 year or whatever period you deem fit.

SN: Being a fund manager, what are your thoughts on indexing?

RT: Indexing has a very important role to play but you can’t overemphasize it. People typically fall into two categories. One category of people are completely pro indexers. And the other is people who are completely against indexing. I am someone who is in between. So at one side indexing acts as a huge control on excessive fund management fees. Since indexing is a low cost mechanism for people to participate in equity markets. It’s a fact that if all the money were to be managed by professional managers the aggregate return that they give to investors will be market return minus fees. They can’t outperform themselves as a group. So mathematics is fine and I appreciate indexing from that point of view.

Value Investor Interview: Rajeev Thakkar – Part 1

Rajeev Thakkar possesses over 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. He is currently the Director and Fund Manager at PPFAS Mutual Fund.

Rajeev’s tenure at PPFAS began in 2001. His passion for researching and analysing the fundamentals of companies was evident from the very beginning and very soon 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. In his interview with Safal Niveshak, Rajeev shares his wide investment experience and how investors can practice sensible investment decision making.