Blog on Value Investing | Safal Niveshak

Announcing – Classroom Course in Value Investing

Happy to announce admission to the January 2024 batch of my most comprehensive classroom course in Value Investing titled – Value Investing Blueprint.

This residential course is scheduled to be held from 11th to 14th January 2024, at the campus of Pune-based FLAME University. The last date to apply is 10th December, 2023.

Click here to read more and apply if you are interested in joining this course.

Since it’s a classroom course, seats are limited.

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Path Dependence: A Lesson for New Investors

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I was going through a few of my journal notes and came across this thought from Nassim Taleb who explained the concept of “path dependence,” which is the dependence of outcomes on the path of previous outcomes, rather than simply on current conditions –

Ironing your shirts then putting them in the washing machine produces a different outcome from washing your shirts first, then ironing them. The reader can either trust me on this, or try the experiment with both sequences on the next Sunday afternoon. Now, assume that your capital is around one million dollars and you are involved in speculation. Apply path dependence to the reasoning.Making a million dollars first, then losing it, is markedly different from losing a million dollars first then making it.
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In Praise of Slowness, in Life and Investing

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As part of my exercise regimen, I have been climbing stairs to my 5^th floor apartment 2-3 times every day for the past few months. And most of these are not slow climbs, but sort of high intensity, that leave me with a heart rate of almost 140-150 beats per minute.

Of late, I started keeping track of the time it took me to climb this much at one go. On an average, it took me 30 seconds to run up five floors, two steps at a time. Sometimes a second more, sometimes a second less. But on an average, almost 30 seconds later, I was huffing and puffing for the next 30 seconds as I reached my apartment.

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The Most Important Thing That Counts in Investing

The Sketchbook of Wisdom: A Hand-Crafted Manual on the Pursuit of Wealth and Good Life

One story from World War II that I found as tragic as it was magnificent was that of Anne Frank.

Frank was born in Frankfurt, Germany but moved to the Netherlands for safety in 1934, five years after she was born. The Frank family hid in their basement with four other Jews when Germany took control of the Netherlands.

Anne then began to write, at age thirteen, in a diary of her life, feelings and the outside world. She wrote in the diary every day for two years until their hiding place was found and she was forced into a concentration camp where she died with her sister due to a sickness. She was just fifteen when she died.

Although Anne wasn’t only a tragic girl in this war, her diary that is available to read as The Diary of a Young Girl displays the strength of her character. The diary portrays her as a brave and hopeful girl, character traits that are hard to manage in the kind of hardship that she was a part of.

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My Notes on Howard Marks’s Latest Memo: Few Losers, or More Winners?

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Howard Marks yesterday released his latest memo to clients of Oaktree Capital.

It is titled “Few Losers, or More Winners?”

It’s an insightful take on how a proper choice between the two approaches of investing – one with the aim to minimise losses, and the other to maximise gains – is the path to achieve good investment results over the long run.

I have prepared some notes on the memo. Click here to read my notes.

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With respect,
– Vishal

What to Do When There’s No Stock to Buy?

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Investing is difficult.

But not investing – sitting with cash and not finding stocks worth buying – is more painful.

After all, to most of us, activity equals achievement.

The need to remain active at all times is what leads CEOs to make bad capital allocation decisions, especially during heady times. And that is what leads most investors – big or small – to buy overpriced stocks.

We all want to be in the thick of action – largely because we hate the feeling of missing out on the party.

But then, as Charlie Munger says…

It takes character to sit there with all that cash and do nothing. I didn’t get to where I am by going after mediocre opportunities.

What to Do When There’s Nothing to Buy?
This is one of the most common questions I am being asked these days.

“I am not finding value in the stock market anymore,” asked a friend. “What should I do now?”

“Accumulate cash,” I replied.

“But that’s tough.” he said.

“Why?” I asked.

“Because cash in bank is a wasted opportunity,” he replied. “And why should I hold cash when it is paying nothing while stocks can grow my money much faster?”

Over the years and after learning my lessons (from not holding cash) the hard way, I’ve found several reasons to ‘hold cash’ when I have nothing to buy. Here are the biggest two –

When cash is paying nothing and stocks have a greater probability of losing, nothing beats losing.
If I don’t have cash, it is almost impossible for me to take advantage of opportunities that may present themselves in the future.

Accepting these reasons has made me fearless of holding/accumulating cash when I do not find (much) value in the stock market.

Of course, this is not with the intent to time the market – which is impossible. The intent is to avoid acting when I find no reasons to act.

As Seth Klarman wrote in his wonderful paper titled The Painful Decision to Hold Cash, the idea is to –

…remain liquid, defy the steady drumbeat of performance pressures, and wait for the prices of at least some securities to drop. (One doesn’t need the entire market to become inexpensive to put significant money to work, just a limited number of securities.)

But then, as Klarman also wrote –

Human beings are only endowed with so much patience, after all. Few are able to look past near-term returns, and today anything appears to offer better returns than cash.

Also, given their relative-performance-oriented, competitive nature, investors loathe the possibility of underperformance that comes from sitting on the sidelines; they find it better to be in the game (unless, of course, the market drops). Most significantly, they remain highly skewed toward the greed end (how much can you make?) and away from the fear end (how much can you lose?) of the spectrum of investor emotions. In short, investors remain the consummate yield gluttons, seeking high return without regard for the likelihood of actually achieving it or for the risk incurred in the process.

You see, investing doesn’t always mean “buying something”.

In fact, as Warren Buffett said –

Much success can be attributed to inactivity. Most investors cannot resist the temptation to constantly buy and sell.

Here is an insight from Prof. Sanjay Bakshi whom I asked this question few years back –

There is no “nothing to buy” situation. If you ignore transaction costs and taxes, you are in-effect, selling every stock you want to hold, and buying it back at market price everyday. Remaining invested in a position is the functional equivalent of selling it for cash and deploying that cash in the position at its prevailing market price.

I think you mean “nothing new to buy.” But if you think about that carefully, there is a disconnect. If you are, in effect, “buying” your existing positions every day, then when you say there is nothing “new “to buy, aren’t you also, in effect saying that you prefer to own what you do but don’t want to deploy new cash in those very positions? Now there may be good reasons for not deploying new cash in old positions but the reason cannot be that your old positions are overvalued, for if they are overvalued, then why are you, in effect, buying them today?

Two good reasons to not deploy new cash in old positions could be: (1) need to diversify; (2) setting aside capital in expectation of a new, lucrative opportunity arriving in due course in which you prefer to hold cash (Mr. Buffett uses this “carrying-a-loaded-gun-waiting-for-the-right-elephant-to-appear” approach).

If there is nothing new to buy, by doing nothing, you’re still buying cash. Cash has huge option value, but delivers negative real rates of return. Sometimes, in life, when all choices are bad, you simply choose the least worse choice.

What else could you do? Holding cash which earns a small negative return may not be a great choice, but it’s better than holding other assets which can greatly depreciate in value.

Another advice when investors face such difficult choices is this: Lower Your Expectations.

Finally, here is what Vinod Sethi, the ex-MD and CIO of Morgan Stanley India advised in the second episode of The One Percent Show –

People have this natural urge that if I have spent 100 hours doing something, then I must act. Whereas my view is that act when prices are going to go up or down, not when you have completed your homework. The market is not waiting for you to complete your homework for the prices to go up or down. I would always urge a lot of my analysts, including myself, to delink analysis from decision-making. Because you have spent a hundred hours on something, you don’t need to act.

The key to being a good money manager is to not act, or not link your hard work to your action. Delink the two. Keep working, because the point of conviction and intuition comes when it comes. But at that time, your homework should be complete. That time you shouldn’t be running around doing homework, because that intuition point will happen when it happens. It is all sitting in your brain. But you act when your intuition wakes up. In a way, the market whispers in your ear.

At the end of the day, I’d say that’s what it is. Because there are 10,000 listed stocks and why would you zone in on something? You need to do a lot of work, but don’t believe or don’t live under the delusion that your work has got you this brilliant idea.

The work has given you the foundation for good seeds to grow. It’s like a garden, which has been well fertilized and watered for some roses to bloom. That’s your research on a daily basis. But the act of the rose coming is when there is a confluence of events, like when a stock is dirt cheap or forgotten or expensive. There’s the real world out there and you’re ready with your homework.

Let’s put it this way. It is like there’s a woolly mammoth coming at you and I give you a gun with a few bullets. There are two ways you can respond. I’ve given you a gun with bullets, so you can start firing. The other way to look at it is to just sit and fire when the woolly mammoth shows up. So, research is like loading the gun, having the bullets. The opportunity is the mammoth showing up. They’re not linked. Having a gun gives you the arrogance that I will fire and can hit the mammoth. That is a classic mistake of most analysts.

In short, keep doing your work of identifying great investment opportunities, but if the prices are not right, and there is no margin of safety, don’t act. Least of it, don’t act just because you have done the hard work. Stocks do not bother about your hard work.

But when the time is right, and you are ready, as Vinod said, the market will whisper in your ear.

Act then.

That’s about it from me for today.

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Thank you for your time.

Regards,
Vishal

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Why Most of Us Are Bad at Investing

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…because most of us in the stock market, most of the time, do not do investing, which is…

Thinking how markets work,
Understanding how other investors behave and why not to behave like most of them,
Studying businesses,
Sticking only with what is simple and what we understand,
Buying stocks at appropriate valuations,
Owning those businesses knowing they are ‘businesses’ and not just symbols on your screen, and
Being patient with those businesses and holding on till they remain good businesses.

Instead, we are busy…

Envying (others making money fast or losing money slow),
Cloning (others’ stock ideas mindlessly),
Predicting (future of markets, stock prices, and economy),
Fearing (missing out on future gains),
Regretting (past mistakes),
Avoiding (accepting current mistakes),
Denying (reality, especially when it’s harsh), and
Indulging (in useless information and noise)

And if that’s not all, these often lead us to –

Trading (frequently, which adds to our costs),
Averaging down (on bad businesses),
Boasting (about our lucky short-term gains), and sometimes
Trolling (other investors on social media, who have not performed as well as us in the recent past).

With such a busy schedule, where is the time to practice investing?

Countless wise people have advised us for centuries that to become good at anything, we do not need to always add more things but give up on some of them.

However, when it comes to investing, giving up on everything mentioned above is not as easy as it sounds. All these (mis)attributes and (mis)behaviours make us human (except trolling others), and thus there is no point trying hard to eliminate all of them from our lives at one go.

But if we work towards minimizing these – some starting today, and others over a period of time – we may end up with an outcome better than we had ever imagined.

I would leave you with a couple of quotes, which signify how what we think and do now, help us create our destinies –

Watch your thoughts; they become words.
Watch your words; they become actions.
Watch your actions; they become habits.
Watch your habits; they become character.
Watch your character; for it becomes your destiny.

– Lao Tzu

You are what your deep, driving desire is.
As your desire is, so is your will.
As your will is, so is your deed.
As your deed, is so is your destiny.

– Brihadaranyaka Upanishad

For good or bad, investing does not follow any other path.

A Teacher’s Three Secrets to Living A Good Life

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We know Ben Graham as the father of value investing and the first real teacher of the subject. His book, The Intelligent Investor, has changed the lives of many, particularly Warren Buffett’s, who was one of Graham’s students at Columbia Business School.

Graham played a significant role in shaping Buffett’s career and investment philosophy. But as Buffett has mentioned at several occasions, Graham’s influence on him extended well beyond lessons on analyzing financial statements.

In a short article in the Financial Analysts Journal, remembering Graham after his death in 1976, Buffett emphasized what he learned from the three things Graham said he hoped — even at the age of 80 — to do every day. He wrote –

Several years ago Ben Graham, then almost 80, expressed to a friend the thought that he hoped to do every day “something foolish, something creative and something generous.”

Let’s talk about each of these.

The word “foolish” often carries a negative connotation, but the implied meaning here has more to do with humility and a willingness to forgo self-importance than anything else. Like this is what Buffett wrote to shareholders in his 1989 letter –

Charlie and I have both total job security and financial interests that are identical with those of our shareholders. We are willing to ‘look’ foolish as long as we don’t feel we have ‘acted’ foolishly.

And this is what he wrote in his 2017 letter –

Though markets are generally rational, they occasionally do crazy things. Seizing the opportunities then offered does not require great intelligence, a degree in economics or a familiarity with Wall Street jargon such as alpha and beta. What investors then need instead is an ability to both disregard mob fears or enthusiasms and to focus on a few simple fundamentals.

A willingness to look unimaginative for a sustained period – or even to look foolish – is also essential.

On the aspect of “creativity,” Buffett wrote this about Graham –

A remarkable aspect of Ben’s dominance of his professional field was that he achieved it without that narrowness of mental activity that concentrates all effort on a single end. It was, rather, the incidental by-product of an intellect whose breadth almost exceeded definition.

That’s the thing about creativity – the willingness and the ability to get over the narrowness of your mind and perceive the world in new ways, to find hidden patterns, to make connections between seemingly unrelated phenomena, and to generate solutions.

Maria Popova of Brainpickings defines creativity this way –

Creativity is a combinatorial force: it’s our ability to tap into our ‘inner’ pool of resources – knowledge, insight, information, inspiration and all the fragments populating our minds – that we’ve accumulated over the years just by being present and alive and awake to the world and to combine them in extraordinary new ways.

Coming to the third aspect of “generosity” that Graham aimed to practice in his daily life, Buffett has often told us –

I benefited enormously from the intellectual generosity of Ben Graham, the greatest teacher in the history of finance.

And here is what he wrote in his 1976 remembrance –

…his third imperative – generosity – was where he succeeded beyond all others. I knew Ben as my teacher, my employer and my friend. In each relationship – just as with all his students, employees and friends – there was an absolutely open-ended, no-scores-kept generosity of ideas, time and spirit. If clarity of thinking was required, there was no better place to go.

And if encouragement or counsel was needed, Ben was there. Walter Lippmann spoke of men who plant trees that other men will sit under. Ben Graham was such a man.

Even leaving aside his generous contributions to the world of investing, Graham was an extraordinary man who left the world with invaluable lessons.

This one especially – of daily being foolish, creative, and generous – can certainly help us lead wonderful lives.

Wishing you all a very happy Teachers’ Day. In whatever way you may be playing the role of a teacher – parent, child, friend, colleague, teacher, or even as a student – I thank you for bringing light into dark corners.

More power to you.

Regards, Vishal

The Most Powerful Mental Model for Identifying Stocks

“It’s a funny thing about life; if you refuse to accept anything but the best, you very often get it.” ~ W. Somerset Maugham – English dramatist & novelist (1874-1965)

As I’ve seen in the past 20+ years of investing in the stock market, Maugham’s thought holds a great relevance when it comes to picking up businesses for investment.

Pick up a business with good economics and with good margin of safety, and the probability of making money in the long run is high. Pick up a business with poor economics with any margin of safety, and the probability of losing your shirt, and entire wardrobe, in the long run is very high.

Understanding a business also adds significantly to your margin of safety, which is a great tool to protect yourself against losing a lot of money.

Move Forward, But with Caution: Lessons on How to Deal with Bull Markets

Recent advances in neuroscience and physiology have shown that when we take risk, including financial risk, we do a lot more than just think about it.

We prepare for it physically. Our bodies, expecting action, switch on an emergency network of physiological circuitry, and the resulting surge in electrical and chemical activity feeds back on the brain, affecting the way it thinks. In this way, the body and the brain string together as a single entity, united in the face of challenge.

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