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You are here: Home / Archives for Interviews

Interviews

Simple Ideas on Wealth Creation, the Subramoney Way – Part 3

Vishal: What are the 2-3 big mistakes that have characterized your investment life? What lessons did you learn from the same?

Subra: Funnily, all my mistakes are one – trusting people who are not trustworthy. I will not call them fraudsters. I will call them incompetent. And I thought they were competent because they were known people, and friends.

For example, I got close to bankruptcy when I was 32 years of age, because my broker defaulted. And I remember one employee of the brokerage firm saying, “Subra, you never take risks. But you took this biggest risk of all!” Like I will never do an F&O, or a badla, or things like these. And I was taking a risk on my broker, and my broker defaulted.

I used all kind of support, from police to political, but that guy didn’t just pay. But I paid up for my clients. So that was horrible mistake which was all about trusting the wrong person.

Anyways, these mistakes of trusting wrong people helped me in a good way – I did not get carried away by any of these booms, like the tech boom, and the real estate boom.

[Read more…] about Simple Ideas on Wealth Creation, the Subramoney Way – Part 3

Simple Ideas on Wealth Creation, the Subramoney Way – Part 2

Vishal: I remember reading somewhere in your blog that most people get into troubles in their financial lives because of their inability to say “No”. That’s truly a widely prevalent problem, right?

Subra: Yeah. My most popular article is one that says – One word that will make you rich.

This article was inspired by another article on Wall Street Journal, in which a doctor with 25 years of experience says, “If a doctor asks you to go for this or that test, don’t do it. You don’t need to do it, because the risks of the test are greater than the rewards of the test.”

So I asked – “Isn’t the same thing applicable to financial services?”

All you need is one term insurance, one savings bank account, one index fund, and that’s it. Then, anybody comes and tells you buy this and buy that, you just need to say no.

And I see portfolios of people who’ve put money in 100+ mutual fund schemes without understanding what they are doing. You don’t need to do all this! This is bound to give you sub-optimal returns.

[Read more…] about Simple Ideas on Wealth Creation, the Subramoney Way – Part 2

Simple Ideas on Wealth Creation, the Subramoney Way – Part 1

If there is one person I’ve known in my life who can most easily and sensibly guide people on wealth as on health, it is PV Subramanyam (or Subra as he is popularly known). When he is not advising people on how to manage their financial lives sensibly, you can find him running or cycling long distances.

Subra is a Chartered Accountant by qualification and a financial trainer by profession. He writes frequently on his blog, Subramoney, and has also authored a book on wealth creation called ‘Retire Rich Invest Rs 40 a Day’.

Subra believes to make money, you do not need too many ideas. You need simple ideas and discipline. Simple ideas, and many of them, are what he shared recently with me in his interview for Safal Niveshak.

Before I get into our discussion, let me share that this was the most unusual interview I have been a part of in my life. The reason being the venue me and Subra decided upon, which was on a hill here in Navi Mumbai that lies midway between our homes.

We met at the base of the hill at 7 AM day before Diwali, walked all the way up, prayed at the temple on the top, and then sat at the backside of the temple, roadside, for this interview.


Let me now go straight to what Subra shared with me. Like all interviews I have shared with you in the past, I have broken this one also into a few parts so that you get a chance to absorb the ideas better, and also practice patience while waiting for the next part. 🙂

Let’s me start with the interview now.

[Read more…] about Simple Ideas on Wealth Creation, the Subramoney Way – Part 1

Safal Niveshak TribeStar: A Curious, Passionate Investor

After a long-long gap, and after profiling the ever-so-amazing R.K. Chandrasekhar and Dev Ashish in the first two issues of Safal Niveshak TribeStar, I bring to you another young investing star in the making, Nishanth Muralidhar.

Nishanth is a 32-year old IT software engineer, hailing from Kerala and currently residing in the US. He has been investing in the Indian stock market for eight years now and is a keen follower of value investing.

Over to you Nishanth!

Safal Niveshak: Please share with us your investment journey so far.

Nishanth Muralidhar: My investing journey, started at the age of 23, when I started my IT career in 2004. Right from the very first salary I received, I explored various investing options and stumbled upon equity mutual funds.

Through a series of articles in Value Research and other websites, I understood the basics of mutual funds and decided to invest in them. I picked 3 of the best funds out then – Reliance Vision, Franklin Indian Prima, and HDFC Equity. I didn’t have the faintest idea regarding asset allocation or diversification at that time; however I had read about the power of compounding.

I opened a demat account and decided to foray into direct equity investing. I started investing in stocks based on the recommendations from various stock brokers and websites. I had only a rudimentary idea of the PE ratio and knew nothing else about these stocks. I didn’t read the annual reports, balance sheets, income statements or cash flow statements.

[Read more…] about Safal Niveshak TribeStar: A Curious, Passionate Investor

Value Investing, the Sanjay Bakshi Way 2.0 – Part 2

Image Source: Outlook India

After talking about the important concept of economic moats in the first part of his interview, in this second and concluding part, Prof. Bakshi talks about his thoughts on valuations, mental models, diversification, checklists, and why you must buy great businesses for the long term.

Safal Niveshak: One of the problems that new or small investors have is that they can’t really get their heads around valuation. It seems so complex. A lot of the terminology is complex, the concepts are, and there is a lot of contrary thinking needed to effectively value businesses.


How can valuations be made easier? How have you made it easier? Or can it not be made easier?

Prof. Bakshi: Vishal, that particular problem is equally applicable to large investors!

Anyway, over the years I have dealt with the problem in many ways. As a disciple of Ben Graham, when working on any business and not necessarily moats, I developed my own ways of thinking about valuation.

[Read more…] about Value Investing, the Sanjay Bakshi Way 2.0 – Part 2

Value Investing, the Sanjay Bakshi Way 2.0 – Part 1

Image Source: Outlook India

After much delay owing to issues in getting mutually convenient dates, I have finally finished my interview of Prof. Sanjay Bakshi. 🙂

Here is the first part of the interview. As you will find below, it’s amazing the way Prof. Bakshi has explained critical concepts in investing in a highly comprehensive yet simplified manner.

Enjoy the wisdom!

Safal Niveshak: Let me start with a question I have been waiting to ask you for some time now. Through a comment on a link I shared on FB and through a few of your posts over the past few months, you have suggested that your investment philosophy has moved further towards high quality businesses, and great managements. Can you please elaborate on the same? What has been this transition all about? And why?

Prof. Bakshi: I started my career as a value investor in 1994. Over the last twenty years, I have practiced most styles of value investing including as Graham-and-Dodd style of investing in statistical bargains, risk arbitrage, activist investing, bankruptcy workouts, and Warren Buffett style of investing in moats. There have been times when I have owned 40 stocks and times when I have owned just 10.

I teach all these value investing styles in my course at MDI. I tell my students that they need to pick a style which suits their personality.

[Read more…] about Value Investing, the Sanjay Bakshi Way 2.0 – Part 1

Safal Niveshak TribeStar: A Young, Stable Investor

After profiling the ever-so-amazing Mr. R.K. Chandrasekhar in the first issue of Safal Niveshak TribeStar, I bring to you a young star in the making, Dev Ashish.

Dev has been a long time tribesman of Safal Niveshak and a friend. I have come to respect him a lot via our discussions and also via his work at Stable Investor, a website dedicated to long-term investing.

True to the spirit of Safal Niveshak TribeStar, Dev lays bare his entire investment philosophy for us to learn.

[Read more…] about Safal Niveshak TribeStar: A Young, Stable Investor

Value Investing, the Chetan Parikh Way – Part 3

I recently had the privilege of meeting one of the highly regarded value investors in India, Mr. Chetan Parikh in his office in Mumbai.


After publishing Part 1 and Part 2 of his interview recently, here is Part 3.

Safal Niveshak: Do you think it’s important to do historical research looking back at companies in different circumstances and understanding or trying to draw conclusions about why they succeeded or failed in a particular decade or period of an economic cycle or change in leadership? Is historical research an important part of your investment methodology or not so much?

Mr. Parikh: In trying to answer the question, I’m reminded of George Bernard Shaw’s remark that when an historian had to rely on one document he was safe, but if there were two to be considered he was in difficulty, and if three were available his position was hopeless.

[Read more…] about Value Investing, the Chetan Parikh Way – Part 3

Value Investing, the Chetan Parikh Way – Part 2

I recently had the privilege of meeting one of the highly regarded value investors in India, Mr. Chetan Parikh in his office in Mumbai.


Mr. Parikh is a director of Jeetay Investments Pvt. Ltd., a portfolio management firm. He is also associated with Capitalideasonline.com, a website dedicated to investor education.

Here is the first part of his interview.

In this second part, Mr. Parikh enlightens us on the mental models and checklist he uses to short-list companies for investment.

Over to Mr. Parikh.

—————-Art of Investing Workshop 2013————-
The 2013 journey of Safal Niveshak’s Art of Investing Workshop has begun. You can register to attend the Workshop in Kolkata, Bangalore, Chennai, or Hyderabad. Seats are limited, so please hurry!
————————————————————————————————

Safal Niveshak: Please explain the mental models you use to short-list companies for further research and to make your investment decisions. Please talk about some multidisciplinary models that have worked well for you in investing and life in general.

Mr. Parikh: It is paradoxical that to make sense of messy reality one has to deal with the highly abstract.

Any comprehension of any facet of the world, be it physical, natural or sociological needs insights (I hesitate to use the word theories) or more generically, mental models.

These mental models reduce the overwhelming complexity of reality to its crucial aspects which helps to make sense, like the equivalent of having specifications in engineering.

Use mental models to deal with complexity
Mental models are a powerful way of dealing with complexity.

It was Albert Einstein who stated…

The … goal of all theory is to make the …. basic elements as simple and as few as possible without having to surrender the adequate representation of ……..experience.

Furthermore, reality is multi-faceted (remember the blind men and the elephant) which also means understanding the interactions between these mental models as applied to the situation or problem being studied. This diagnosis should lead to more effective action.

There must be many ways on how one can use mental models, but I prefer to make my approximations of reality using simple diagrams drawn from systems theory as they better map the interactions and connections between the disparate mental models that find their place in those diagrams.

Whilst calculus teaches how to differentiate and integrate mathematically, I think that the mental models approximations help to differentiate and integrate conceptually.

Interactions can change depending on situation being studied. Take salt, for instance. Sodium and chlorine have a single type of interaction in all environments, but not hydrocarbons comprising of hydrogen and carbon.

For as the Sufi story goes: “You think that because you understand “one” that you can therefore understand “two” because one and one make two. But you forget that you must also understand “and”.”

It is when penciling in feedback loops that a lot of “why” and “what if” questions arise and the answers can come only through understanding, as distinct from information which is copiously available today and usually answers the “what” question and knowledge which answers the “how” question.

Of course, one needs the “whats”, “hows”, “whys”, and “what ifs” to answer the overarchingly practical “What the hell is going on here?” question.

An investor should be looking at possibilities in the future and the behavioral possibilities of any system or situation being studied depend on how structures and conditions change.

In many cases this makes prediction impossible and leaves a reasonably small subset of companies where the range of possibilities is not wide.

Alternatively, the price should have discounted the worst possibility. Given that understanding is not easy, given that information that does not fit our mental models is often discarded, we are often blundering “satisficers” according to Nobel Laureate Herb Simon.

“Bounded rationality” and behavioral biases often makes investors and managers view things in a manner that may not lead to desirable outcomes.

I have through my experience also learnt that there is a difference between my approximations of reality and reality itself. It has usually been based on…

  1. Ignorance masked as “knowledge”;
  2. Focusing too much on the short-term at the cost of trying to understand the long-term behavior and structure;
  3. Extrapolating in a “non-linear” world;
  4. Taking simplifications too far; and
  5. Applying the wrong mental models.

In short, faulty understanding of reality itself. For as G. K. Chesterton, the famous author, wrote…

The real trouble with this world of ours is not that it is an unreasonable world, nor even that it is a reasonable one. The commonest kind of trouble is that it is nearly reasonable, but not quite. Life is not an illogicality; yet it is a trap for logicians. It looks just a little more mathematical and regular than it is.

The only antidote I believe, to this is to remain a learner and to become what psychologist Don Michael calls “error-embracing”.

An experiment in investing
Here is a thought experiment on investing (adapted from a wonderful book, “Good Strategy Bad Strategy” by Richard Rumelt).

Imagine that you have found Aesop’s goose and it is not going to die, not going to mate, not going to eat or fall sick and will keep laying golden eggs every year worth Rs 1 crore.

There are no taxes and interest rates are to remain constant at 10 percent. You decide to encash your good fortune and sell the goose for Rs 10 crore to a gold miner.

Whilst the goose does have a competitive advantage (zero cost of production and a unique asset) in the gold mining business, the new owner will not become richer with the purchase. Unless a way is found to get the goose to lay more than Rs 1 crore worth of golden eggs every year.

Competitive advantage (or an economic moat) by itself does not lead to wealth creation. Only a growing competitive advantage (deepening and widening the economic moat) does.

Of course, if you were fearful and the buyer was greedy, you could have sold the goose for less than its economic worth and value would have been created on purchase, but let’s not assume irrationality.

Good investing comes from good business analysis more than good financial analysis.

Mental models that help to understand business strategies that lead to growing competitive advantage should be useful to investors.

Here are some from biology although there are many from other disciplines which I’m not listing.

a) Evolution as an algorithm: Innovation, formula that through trial and error creates new designs; Competition + variation + replication = natural selection + evolution; “Differentiate, select and amplify” resulting in novelty, knowledge and growth; Economic evolution dependent on physical and social (method of organization) technologies; In evolutionary systems, statsis will result in extinction; Economic equivalent of mutation and sexual recombination are business plans based on risk, relatedness and time horizon; Swarm intelligence.

b) Punctuated equilibrium: Removal of “keystone” species from ecosystems; Disruptive technologies, technology S-curves; Extrapolationism is not a good theory.

c) Co-evolution: Arms Race (Red Queen races) and thus the difficulty of maintaining sustainable competitive advantage; Organizational resources and business plans; Symbiosis and “switching costs”; Eras and stages of co-evolution; “All forms of life make one grand system” -Charles Darwin

d) Fitness: Designs are fit if they survive and replicate under the constraints of environment; Fisher’s fundamental theorem – average fitness of a population grows from generation to generation; The experience curve.

e) Adaptation: Evolution produces designs that reflect new selection pressures; Speciation; Usually resisted due to delusional optimism, psychological denial and loss aversion; Organizational structure – hierarchies, Skunk Works; Cultural norms and inertia.

f) Industry clockspeed: Fast clockspeed species have extremely short life-cycles; Sustainable advantage is a slow-clockspeed concept; Fast – clockspeed industries tend to generate hedging strategies.

g) Genes: Business genes or practices that perform the same role as genes in biology; Information stored in “organizational memory” and passed on between individuals and firms; Relationship between genes and organisms typically complex and indirect; Genetic engineering has begun the process of short cutting the process of species evolution, proactive chain (organizations, technologies, capabilities) will shortcut industry evolution; Business double helix and cycles between vertically integrated industries and horizontally disintegrated industries.

Let me elaborate. Differentiation is vital to evolution. As Robert Goizueta, the late CEO of Coca-Cola said: “In real estate it’s location, location, location. In business it’s differentiate, differentiate, differentiate.”

There is an absolutely amazing presentation by Mr. Rajiv Bajaj of Bajaj Auto which is one of the clearest expositions of good business strategy that I’ve come across.

I’m grateful to Mr. Darshan Engineer and Mr. Dhaval Shah of Siddhesh Capital Market Services Pvt. Ltd. for drawing my attention to this presentation and link.

There are some mental models from biology that one can apply to this presentation although there are many from other disciplines too.

Here are some of them from the presentation. I’ll like to thank my colleague, Mr. Anish Jobalia, for making the notes.

Scooter strategy (Speciation)
‘Speciation’ is the evolutionary process by which new biological species arise. ~ Wikipedia

  • When we make a scooter, it has to come out of the same center from which comes the motorcycle. If we create a completely different platform, it won’t work
  • One of the key difference between scooter and motorcycle is: In a motorcycle, one has to change gears, in a scooter one doesn’t have to
  • Bajaj has to be paranoid about leadership in motorcycles. What if tomorrow someone made a motorcycle where you didn’t have to change gears
  • If scooter technology is put in motorcycles, it can be done but price to pay is fuel economy
  • Technology of ability to deliver high mileage as well as no gear technology would be meaningful to motorcycles
  • Once we have that technology, it’s a piece of cake to make a scooter. This way we can make a scooter with a high mileage
  • If we make a scooter, it will come from womb of a motorcycle. Then it will be de-risked completely

Three wheeler and RE 60 strategy (Speciation)

  • Bajaj is the largest 3 wheeler maker globally
  • As a leader, one has to attack oneself, strengthen oneself and guard oneself – Defense strategy
  • People who use 3 wheeler deserve much more like a 4 wheeler : water cooling, fuel injection, steering wheel, seat belts etc
  • Better 3-wheeler is a 4-wheeler
  • Provide it at the same cost structure of a 3-wheeler
  • It takes nothing to make a 3-wheeler (no high capital, no technology)
  • Idea is to create a entry barrier to the high EBITDA business so that nobody would be able to copy the technology, certainly not China

ASEAN market strategy (Co-evolution)

  • Entered Philippines and Indonesia 6 years back
  • Approach was different in both markets: In Philippines went as Bajaj but along with Kawasaki because it already had the network while in Indonesia went by themselves
  • Result was that in Philippines they are market leader (45% market share) while in Indonesia merely 2% market share
  • Tie up with Kawasaki was to overcome the first mover disadvantage
  • In Indonesia, people do not come into the showroom. Only way to reach them is through mass media
  • To overcome this disadvantage, had to find a clever entry strategy i.e. Kawasaki

KTM Strategy (Co–evolution)

  • We never pursued KTM for technology
  • Started working with KTM in 2008 and by 2011, Bajaj had finished designing, manufacturing and shipping them back to Europe
  • Chose to invest in KTM (47%) for guerilla marketing
  • Bajaj is trapped in a value for money proposition. People would not buy the best of the motorcycles from Bajaj priced at a premium
  • So invested in KTM

Hero as a competitor (Punctuated Equilibrium?)

  • Biggest mistake Hero is making is that they are not defending their leadership
  • Splendor has remained static for too long
  • Hero thinks their brand is ‘Hero’
  • Have to do something about the design, performance and price
  • This is what happened to Chetak 15 years before. One day world moved past Chetak

Royal Enfield – Siddharth Lal (Fitness)

  • Was clear from start that he would never participate in mainstream
  • Strategy was to be a niche player and employ a guerilla strategy
  • Never acts like a leader

Mr. Charlie Munger, the father of the “mental models” approach to thinking, once said: “Those who will not face improvements because they are changes, will face changes that are not improvements.” This is what evolution is about.

Safal Niveshak: How do you typically find ideas and what is your selection process before an idea gets added to your portfolio? What types of questions are on your investing check list?

Mr. Parikh: The first part of the question has been answered in my previous interview) and on Jeetay’s website.

We have different checklists depending on whether we are evaluating a potential purchase or whether we are reviewing an existing holding.

We would tend to emphasise business strategy more for a company with “moats” and catalysts and valuations more for the Grahamian sort of bets.

Broadly the sort of questions would test our understanding about…

  • Business;
  • Its strategy in relation to its competitive advantage and industry structure;
  • Its operating efficiencies and operating leverage;
  • Its capital structure;
  • Financial analysis with a lot of emphasis on cash flows and balance sheet; the management – competence, integrity and compensation;
  • Corporate governance and history of capital allocation.

Whilst evaluating the opportunities, we are looking for downsides.

Finally, if we think we have understood the business, we try to figure out the price we are willing to pay.

Value Investing, the Chetan Parikh Way – Part 1

I recently had the privilege of meeting one of the highly regarded value investors in India, Mr. Chetan Parikh in his office in Mumbai.


Mr. Parikh is a director of Jeetay Investments Pvt. Ltd., a portfolio management firm. He is also associated with Capitalideasonline.com, a website dedicated to investor education.

He had obtained his MBA from the Wharton School. He had written for ‘Investment Week’ which was a popular weekly financial publication in India and developed a statistical model for them. His writings have been published in Business Standard, Business World, Economic Times and Business India. He has been rated as amongst one of India’s best investors by Business India. He is a visiting faculty member of Jamnalal Bajaj Institute of Management Studies, Mumbai.

Like my meeting with Prof. Sanjay Bakshi, this meeting was also like a dream come true for me, having met a guru who has been a great teacher in my investing pursuits over the past few years.

What follows below is Mr. Parikh’s answer to just a couple of my questions. I will publish the entire interview in parts.

[Read more…] about Value Investing, the Chetan Parikh Way – Part 1

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