This is maybe the first time I am introducing someone here not on my own, but through a testimonial, and that too from a legend himself.
Here’s how Prof. Sanjay Bakshi describes the investor I am profiling today, Arpit Ranka –
Arpit is one of the finest human beings I have ever met. He is trustworthy, ethical, humble, spiritual, and diligent. Many years ago when he approached me through his wonderful brother Arpan (who was my student at MDI), I allowed him to sit in my class. He was the best student in my class. Later he worked with me for many years.
Arpit is a very successful value investor who loves his craft. Anyone who associates with him should consider himself or herself lucky. I am lucky to have him in my life.
Now for a more formal introduction. Arpit is a value investor based out of Mumbai. He is an avid reader and considers himself fortunate to have found his passion in value investing. He has worked with two of the leading value investors in India, Prof. Sanjay Bakshi and Late Mr. Parag Parikh before starting out on his own. Apart from investing, his interests include movies, music, Buddhism, and travelling.
For whatever little I’ve known Arpit for the past few years, I count him amongst the finest thinkers among the younger lot of value investors in India. That he breathes value investing would be an understatement.
For this interview, Arpit has been generous in letting his thoughts flow freely. And as you would realize by the end of the interview, there are great lessons that we can draw from his invaluable experience.
Let’s now dive straight into the interview.
Safal Niveshak (SN): Could you tell us a little about your background and how you got interested in investing?
Arpit Ranka (AR): It’s been a roller-coaster ride — growing up in a small town in Tamil Nadu called Tirukoilur, to dropping out of engineering within the first couple of weeks, to spending an year learning the pharmaceutical wholesale business at my maternal uncle’s shop in Jodhpur, to working for a month or two as an operator at a BOLT in Jodhpur, to get to work with two of the leading value investors in the country, to eventually becoming a full time investor and starting out on my own, twice over.
I will not bore you with the details except for highlighting two important developments along the way, which led me to value investing.
Firstly, in hindsight, dropping out of the engineering college is one of the best decisions I have taken as yet. While I had no clue what I would be doing with my life when I made that decision (I had not even heard of value investing then) but I became a voracious reader the very day I dropped out. I was scared to death that I might end up a failure and introducing myself to books seemed like my best bet to avoid that fate. After dropping out, I read like a maniac for a few years.
It was burning my bridges in this manner which, indirectly, led me to value investing and introduced me to some wonderful role-models and people along the way including my mentor, Prof. Sanjay Bakshi, who have enriched my life in so many ways.
As for the second incidence, in early February 2005, my brother forwarded me a mail that Prof. Bakshi had written to one of his students – My Own Story. That was the first time I had heard of Prof. Bakshi. At that point in time, I was confused about working towards becoming an investor because we were struggling to make ends meet as a family and here I was dabbling with the idea of making a career as a long-term investor with no capital. But I still remember reading it in a cyber-cafe in Jodhpur in one sitting and just knowing deep down that it has to be worth the struggle. By the time I was 30-35 years old, I had to be an investor!
Following which, I reached out to Prof. Bakshi for some guidance with the help of my brother, Arpan, who was a first year student at MDI then and his very first response in February 2005 propelled me towards a career in value investing. I still remember that mail because the message made it crystal clear about what was required to succeed as an investor. I wish to reproduce that mail as some of the readers might also find it inspiring.
Mail from Prof. Bakshi –
… Your conclusion that one can make a decent living out of the stock market is right. However, do keep in mind that only very small percentage of people do well in the stock markets in the long run. So, you have to do two things, if you want to make a successful career out of stock markets:
1. Find exceptional performers in the stock market and understand their thought processes and try to replicate them, modifying them as you go along; and
2. Find the big losers in the stock market, and try to avoid doing what they do.
Both the above things are important in my view. So far as the first point is concerned, I suggest that you spend some time (at least a month) reading all the letters that Warren Buffett has written to the shareholders of the company he manages – Berkshire Hathaway. In my view, there is no better education in Finance than the one contained in these letters.
Once you have finished reading them (take printouts and read them slowly, carefully, underlining things that you found important, putting your own comments in the columns etc.), you can write to me and I will tell you what next to read.
You are what you read. If you don’t enjoy reading at least 5-6 hours a day and probably much more, this profession is not for you. So, give those letters a shot and see if you enjoyed reading them (I am presuming that you have not already read them).
I hope this gives you an idea about the background and what led me to investing.
To sum up, it’s amazing if we think about the contrast – on the one hand, I dropped out because I had to take up a loan for my engineering, which would have required me to compulsorily work for 3-4 years after my graduation tying me up from the age of 17-25. On the other hand, I entered a virtual classroom and, eventually, a real one at BFBV (Prof. Bakshi’s course at MDI), where these generous souls shared timeless wisdom and helped you expand your horizons and work towards your financial independence!
SN: Wow! And how have you evolved over time as an investor?
AR: As far as the evolution as an investor is concerned, I am not sure if I have evolved enough to be able to successfully address this question. None the less, let me give it a shot.
I consider my training in the school of classical Benjamin Graham – quantitative bargains combined with loads of diversification – an indispensable part of my journey. In general, I strongly believe that trial and error combined with feedback loops in place is the most potent form of learning across disciplines. And I think Grahamian approach allows for trial and error, which when combined with feedback in the form of ‘50% up or 2 years holding’ sell rule makes it a very powerful learning system.
Eventually, I have migrated to a school of thought, which approaches investing more along the lines of a pari-mutuel system. You are looking for an edge and favourable risk/reward ratio.
I do not compartmentalise myself as Fisher or Grahamian investor. I tend to look out for mis-priced bets and tend to look for them in all areas. More closely aligned to Seth Klarman in that sense, if I may say so. But looking for opportunities where vast majority of the people are not looking remains an integral part of the process. Inevitably, you allow for mistakes to crop up and ways to minimise the impact of those mistakes and maximise the gains, when you tend to get it right.
This brings me to a topic that has engrossed me completely over the last couple of years – money management. I think finding a favourable bet offering an edge is only 50% of the job, while the remaining 50% is money management. It’s not easy to articulate and it’s subjective in nature but I think if you look at any great investor or trader across generations, sound money management principles are an integral part of their approach.
Towards that end, I think George Soros is a genius and I can’t think of anybody else, who can teach one as much as him. At least, I learnt the most from him on this front along with few other seminal traders, ironical as it is. When I started out, I could not have imagined learning from traders but here I am owing a lot of important lessons to them.
I think the following quote by Soros best sums up money management and I think is worth its weight in gold —
“It’s not whether you are right or wrong that’s important, but how much you make when you’re right and how much you lose when you’re wrong.”
Let me quickly add that he knows what he is talking about as I think his success rate was only around 30% (i.e., 7 out of every 10 calls he made turned out to be a mistake eventually, but he still compounded money at around 30% CAGR over 30+ year period and made US$ 20+ billion for himself and multiple times over for his limited partners!). So, for Soros, money management played a very significant role in his success.
And even in the case of Buffett, I think Munger has gone on record saying that if 20 most profitable investments are taken away, their record is mediocre. And this is over 50 years time frame and over hundreds of decisions made by someone as brilliant as Buffett. I think in the case of Rakesh Jhunjhunwala, he himself has gone on record saying that if you take away his 3-4 of his best investments, his investment track-record is not that great.
Recognising winners, loading up on them, and holding onto them remains a critical part of any successful investment or trading approach in my view. Exceptions like Walter Schloss, Peter Lynch are far and few in between.
So, it won’t be a mistake to say that my evolution has involved learning from classical investors like Graham to fantastic capital allocators like Buffett to traders like Soros, Seykota, Druckenmiller, Steinhardt, Baruch etc.
SN: How did you train yourself to be a value investor? Did any particular books or investors inspire you?
AR: For the first few years, I spent all my waking hours learning all I could about value investing.
I decided not to invest for at least 2 years till I have read up enough (2005 and 2006). Why? One, I did not have any capital and it turned out to be blessing in disguise because it made it easier to focus on process.
But also my idea of education had evolved from one of earning a degree to doing an apprenticeship (inspired by Benjamin Franklin), even if it meant not earning much for 10 years till the age of 28-30.
I was sure I was not going to die of starvation so I did not bother too much about earning during that time even as I was driven by this burning desire to seek financial independence eventually. I have never made a CV in my life and both the jobs I was offered, I said yes without caring about what I was going to be paid (in fact, it was the last thing on my mind) as I believed that I was getting paid to learn and I was indeed paid to learn. And jobs that I did not want (sell-side research, for example), I was sure no amount of money was going to lure me away. That clarity helped me focus.
Another thing, which has had a big impact has to do with the greatness of people like Prof. Bakshi, Late Mr. Parag Parikh, and Rajeev Thakkar (of PPFAS), who do not impose their world view on you. In fact, Prof. Bakshi at Tactica encouraged us all to speak out and attack each others’ ideas and he subjected his own ideas to scrutiny most actively.
Looking back, I can say that it’s the best training one can get in the field of investing. Independent thinking is an indispensable tool and I consider myself extremely lucky that I was surrounded by mentors, who not only excelled at it but encouraged others around them to think independently as well!
As far as books are concerned, all I would say is that going to the source i.e., the classics of value investing is the only way one can truly come away internalising the key principles. In fact, integral part of Prof. Bakshi’s BFBV course is that he makes it mandatory for students to spend time reading Warren Buffett’s letters, great books on crowd psychology etc.
Thankfully, the noise hitting you was not as severe 10 years ago as it is now. And not owning a personal computer or a mobile phone till I was like 23 years old was a great advantage. You were on a perpetual internet sabbath! 🙂
SN: In your experience, what characteristics or attributes are advantageous for a value investor to have?
AR: In my view, the following traits are indispensable:
1. Independent Thinking (not a big fan of cloning, at least at the start of one’s career);
2. Humility (Mistakes are inevitable part of the process, Soros’ Fallibility Principle, which prides in recognising mistakes);
3. Passion and Curiosity combined with healthy mix of detachment;
4. Judgment Under Uncertainty (Investing is an exercise in approximation);
5. Persistence; and
6. Satisficing (Munger: ‘Someone will always be getting richer faster than you are. It’s not a tragedy’).
The famous trader and a very wise person — Ed Seykota — has observed that ‘everybody gets what they want from the markets.’ I think he is onto something amazing when he says this.
Being self-aware and cognizant of what is driving us deep-down plays a very important role in determining our success in my view.
Let me try and emphasise his central message using an example. If you approach stock market as a mechanism to gain financial independence, your response to a mistake will be different as compared to somebody who simply looks at stock market as a way to engage in a healthy banter and share exciting stories at cocktail party. On the face of it, both of them will tend to believe that their primary motive is to make money. But the subtlest of difference in the motive underlying those actions alters the actions themselves.
In short, I think it’s very important to align our internal compass in a way that we are driven by intangibles when approaching the markets rather than tangibles. If not mistaken, a lot of successful investors are attracted to stock markets because of the riches it promises but then evolve beyond them is how I have come to understand this process.
SN: What’s been the most difficult part of being a value investor?
AR: It’s a journey, which I won’t exchange for anything else out there. But it’s also a very challenging one.
I realise that a lot of people get attracted to investing by the glamour of all the money that this profession promises, which is great. In my own case, I happened to be largely driven because it promised riches, which as my family was going through a financial crisis seemed like the most important thing out there to me, when I started. But as Seykota said, we have got to be very clear about what we want from the markets. And it’s no co-incidence that all the great investors wanted something more than just the riches it promised as they progressed in their career. It’s paradoxical but something very important as far as I can make out.
Also, I think there is no well laid path to succeed in this profession. Each one has to create opportunities for himself to pursue this profession. And, along the way, it scares you to death. There have been countless periods, when I have questioned myself and wondered if I would be able to make it through.
I still have periods when I question myself and knowing myself, it’s quite likely that I will continue to go through those periods. They help you grow as a person and the short-term pain is a small price to pay for retaining sanity in the long-run.
The source of this insecurity is that it’s impossible to segregate skill and luck in this profession. Is stock market a game of chance or skill? In the long run, it’s mostly skill but in the short term, it’s very hard to differentiate. And we live our lives in the short-term even as the long-term picture takes shape. So, I think preparing ourselves for a challenging journey is very important.
On the investing side, mistakes of omission hurts a lot more than mistakes of commission and its natural that we will have more mistake of omission than commission. There is no easy way to handle this part of the process except that we learn enough from each opportunity we miss while accepting that there are bound to be mistakes of omission. It’s more like a case-study approach to learning rather than being driven by regret and greed driven.
SN: What are some of the characteristics you look for in a high-quality business?
AR: In my view, spotting a high quality business is not a challenge in itself but spotting a great business, which also qualifies as a good investment is the challenge. Any MBA student can do the Porter’s analysis or financial ratio analysis to figure if it is a great business or not. For example, despite the soup Nestle India finds itself in, it’s quite likely that it will remain a very high quality business coming out of this crisis. But is it an attractive investment at this point in time? That is the question to answer and there are no easy answers. And let me confess, I personally do not have the answer.
As I think about it, I realise that I am not qualified enough to answer this question on characteristics of a great business. May be as an intellectual pursuit, I can engage in this exercise but as an investor, I am not sure.
So, in my world-view, I am looking for a reasonably good business to start with, which is managed by a decent promoter, who is not going to cheat you and, most importantly, it offers an healthy risk/reward rather than looking for the best business out there.
But yeah, if I have to relate to one characteristic that fits into my scheme of things – its time arbitrage. Where all you need to do is align your expectation from the situation with that of the underlying trajectory of the business and let it play out while patiently waiting. In such situations, your edge comes from your temperament rather than any special insight.
Easier said than done but then investing is a competitive sport at the end of the day and sometimes you wish that it remains challenging while preparing yourself to rise up to the occasion. It’s not for nothing that Buffett has spoken about donating chairs to classes teaching EMT.
SN: How much weight do you put on the quality of the management versus other quantitative or qualitative factors? Also, how do you assess a management’s quality?
AR: One line that explains my approach towards management is – you cannot do a good deal with a bad guy.
I follow a two-tier process while evaluating managements (i.e.,) is the promoter able? And is he ethical?
Out of 5,000 companies listed, I would estimate that around 40-50% of the promoters are able but only about 10% would be able plus ethical. I wish to restrict myself to this universe of 10% while scouting for opportunities.
Having said that, I am not looking for saints either but rather pragmatic entrepreneurs.
And depending on the attractiveness of other variables, the weight that I assign to management quality varies. I don’t want to associate with crooks but then sometimes you have got to be lenient towards an entrepreneurs’ committing a genuine mistake and trust him with your money. They are human beings and treating them like automatons would be a mistake on our part I think.
Plus, I think it’s important to learn to evaluate people and exposing oneself to people risk at early stage of one’s career is not a bad idea. So, I am not bogged down by the idea of betting on a promoter and making a fool of myself in the process because eventually learning to bet on people is also an integral part of the process.
SN: How do you think about valuation? Do you have a preferred valuation framework to assess the attractiveness of an investment?
AR: I have alluded to the framework I follow while assessing opportunities: pari-mutuel system aka looking for mis-priced bets.
Moreover, I try and follow a journalistic approach to evaluating ideas – one should very quickly be able to create a thesis (story, if I may) around the situation then go about disproving the thesis. Many a times, you realise your thesis is weak and you just let it go. Sometimes, your thesis stands the scrutiny and that is when you deep dive and go back as long as possible to understand the company, sector, and the mgmt. Also, once you build a thesis, laying out trip wires to test your thesis and understanding of the situation is a useful way to stay on top of the situation. But it all starts with your assessment about a company being mis-perceived standing a test of critical analysis. Easier said than done but that is what it makes it an art I believe.
And as Geico’s Lou Simpson advised, ‘evaluating the bear case’ is also a critical part of the process. Mr. Munger also alludes this to in general, when he quotes Jacobi, ‘invert, always invert.’
While it pays to be a contrarian in investing, I think it’s also very important to realise that the bet pays off only when the crowd comes around to seeing merit in your thesis. It’s a contradiction of sorts but then stock market investing is full of paradoxes, if I am not mistaken. That is where Klarman’s idea of successful investing premised on healthy mix of arrogance and humility is so relevant.
SN: What are your thoughts on position sizing? When you find a good bet with great risk-reward, at what level do you stop and how do you think about it, whether it should be 10, 20, or 30% of your portfolio?
AR: I think if somebody believes that markets are fairly efficient, which I think they are, and as a consequence great opportunities are rare to find then the logical thing to do is the learn to wait for them and back up the truck when one runs into them.
So, in a sense, what I have realised is that a concentrated approach not only acknowledges the challenge in discovering great opportunities but also has a subtle yet very important effect on almost all the other critical aspects of any investment process. Let me highlight some of them here:
1. One learns to say NO to mediocre opportunities, which is an essential part of the process;
2. Forces us to think hard about our own ignorance and the risk factors at play;
3. Renders us more sensitive to the situation (with 15% in a position, you respond to a new adverse development differently than with a 3% position. Ideally, if we were rationale automatons this should not happen but we are human beings).
All said and done, I think the best test of a suitable portfolio construction for each one of us is whether we can sleep peacefully at night or not. The key is to strike a balance that works well for you and then let an evolutionary process based on trial and error take-over.
Personally, I am comfortable with a 10-12 stock portfolio with more or less equal weightage across situations (at cost). But I will lose my sleep if I were to have a 3-4 stock portfolio especially with little diversification across sectors (ex: Bruce Berkowitz).
So, each one to his own, but I think portfolio construction is the glue which holds a lot of variables together in a sense helping us streamline our investment process.
Also, a critical part of my process is to let the validation of a thesis to determine the weight that the situation needs to carry. And sometimes it requires one to average up, which I was very averse to doing till a few years ago but I have learnt to do it now. In fact, some of the best opportunities are those where you will be tempted to add more even after the stock has gone up by 200-300%. And sometimes, it’s the right thing to do as well. At least, this framework ensures that we will not sell out of our winners easily even if we don’t add more.
SN: What are your thoughts on the concept of a “value trap”? How long will you hold onto a non-performing position?
AR: The answer is easy but practising the same is very difficult – When you recognise your mistake, SELL. Cut your losses!
This is where the idea of laying down trip wires is very relevant (Ravee Mehta talks about this in his book, The Emotionally Intelligent Investor). Also, the idea that what you are carrying is a representation of reality but not the reality itself helps.
So, once you realise that you are fallible, then as Soros says, “Once we realize that imperfect understanding is the human condition, there is no shame in being wrong, only in failing to correct our mistakes.”
Easier said than done especially when you commit yourself to the same publicly!
I typically will revisit the non-performing opportunity once or twice a year and sell after 2-3 years. I think despite somewhat opposing styles towards investing, both, Fisher and Graham, had a similar rule when it comes to weeding out the non-performing bets i.e., sell after 2-3 years. Fisher followed it throughout his career and observed that it hurt him only once or twice!
SN: Do you believe in investment checklists? If yes, what are the most important points in your checklist?
AR: Ironically, I do not follow checklists. The reason for the same is not necessarily my disregard for this wonderful tool. In fact, I loved the book. Just that my temperament is not aligned to such a mechanical approach at this stage.
I will possibly find it suitable to my approach in the years ahead. But I do not wish to force myself at this stage. Having said that, I agree that recognising patterns is very essential. Sometimes checklists helps you filter and spot patterns, sometimes you have other tools to accomplish the same. In my case, I hope I have other tools to compensate for the lack of checklist as part of my tool kit to recognise the all important patterns that are common across winners and losers in the stock markets.
SN: What are some of the tricks that you use to save yourself from behavioural biases? In other words, how do you minimize the mistakes of behaviour in your investment decision making?
AR: Richard Feynman observed, “The first principle is that you must not fool yourself and you are the easiest person to fool.”
I think mitigating the side-effects of behavioural biases is all about not fooling ourselves and not fooling ourselves is all about being brutally honest. In fact, this reminds of this wonderful quote by my favourite writer of all-time, Dostoevsky –
Every man has some reminiscences which he would not tell to everyone, but only to his friends. He has others which he would not reveal even to his friends, but only to himself, and that in secret. But finally there are still others which a man is even afraid to tell himself, and every decent man has a considerable number of such things stored away.
With this background, let me share some tools, which I employ to try and not make a fool of myself:
1. Journal Entries – I try and religiously maintain an investment journal to record the thought process behind my actions; sometimes when it’s the emotions which are driving the action – I record my emotions as well. And I believe that keeping a private journal helps because it allows you to be brutally honest.
2. Visualisation – Bordering on mysticism, but I think it’s a very powerful tool, generally speaking. If you can transport yourself across situations (one of massive loss or outsized gain or 40-50% correction in markets) and see how it feels, you will be relatively better positioned to retain your sanity in the face of any such eventuality.
3. Devil’s Advocate – Handful of friends, who understand me as a person are best suited to attack my ideas. And I try and be brutally honest about my thesis with them even if it sounds foolish on the face of it, which it does more often than not.
Caveat – I am not trying to immunise myself against these biases as I believe it will be disastrous. Some of these biases are treasure trove; it’s in learning to handle them and understanding them that their true value lies in my view. So the idea is to be able to act in spite of these biases. A complete lack of behavioural bias will be disastrous in my view.
SN: Can you talk about your biggest real-life investment mistake, what caused it, and the lessons you learned from it?
AR: There have been too many mistakes, Vishal. But, fortunately, I followed a diversified approach and small sums were involved, so there was no major loss as such. But I believe that I have learnt a lot from my mistakes than any successful investment, generally speaking.
As far as generating ideas at PPFAS and Tactica was concerned, it helped that while you had complete freedom to go about scouting for ideas and you did come up with a lot of ideas, the buck stopped with the more experienced people around and they had better sense to avoid the less attractive ones and pick up the seemingly attractive ones.
So, it’s to their credit, if they managed to spot and capitalise on any good investment in the process, which might have originated from your end. Because you did not even know that this was the best of the lot in terms of ideas. And I have come to believe that evaluating the relative attractiveness is an indispensable part of the process.
So, this is what I was referring to – trial and error (uninhibited approach to learning) combined with feedback (better if done with the aid of an experienced mentor) is very important. I got lucky on this front to have some amazing set of investors providing real time feedback!
I would also like to highlight a realisation that has dawned on me — being an analyst and an investor are two different things. I think even Klarman talked about at length in one of his interviews a few years ago on this topic. And he has excelled in hiring good investors masquerading as good analyst at Baupost, which is not very easy I think.
SN: How do you determine when to exit from a position? Are there some specific rules for selling you have?
AR: Wish I had figured this out. But the answer is no. Just like everybody else, I continue to struggle on this front. However, I must mention that learning to hold onto winners i.e., not selling unless you have very good reason to sell is an important development in my evolution as an investor till now.
At the end of the day, trend is your friend, especially, if they happen to be mega-trends, and one has got to learn to ride them. You can use crowd psychology, fundamentals, time related rules etc. but the ability to ride the winners or the mega-trend is central to success of any investment approach in my view.
I hope in the years ahead I will have the wisdom to hold onto some winners when my intellect might have exhausted its reserve of patience urging me to sell. The freedom to sleep through market hours helps me tackle some of the risks on this front.
For tackling your losers, I think wishful thinking can be disastrous and having mechanical rule like – selling non performing ideas after 2-3 years – acts a powerful anti-dote in my view. Also, not to forget, comparing incoming ideas with existing ones is a useful way to spot potential losers in the making and cutting the losses and opportunity cost.
SN: Howard Marks said in one of his interviews to be cognizant of the temperature of the market and if one ignores the market and buys companies at any level of general market, that may not be a wise strategy. What are your views on this?
AR: I am reminded of this wonderful study conducted by Tweedy Browne on the distribution of investor returns, which concluded that majority of the returns came during 7% of the time frame. If somebody was out of the market during that 7% of the time frame, his return would have been mediocre at best. To sum up, I think it pays to favour ‘time in the markets’ strategy over ‘timing the market’ one.
Coming to Mr. Marks’ warning, I get a sense that what he is trying to do here is help us appreciate that there are times when ‘an investor is his own worst enemy’ and one such instance, when we are very vulnerable to act against our own self interest is when markets are riding high on a wave of optimism and greed. And just like in the case of behavioural biases, the antidote lies in being self-aware. So effectively, being cognizant of the temperature of the market should at least ensure that we will not succumb to the mood of the market.
This subtle adjustment in the way we perceive markets shall ensure that we do not let go off our guard just when it matter the most and stick to our time-tested principles. And I presume, if this were to happen then a natural consequence will be that we shall run out of investment ideas and, consequently, be left with cash as the temperature (or greed) runs too high for any of us to handle. So, if not mistaken then Mr. Marks’ warning is more about us insuring ourselves from our own fickle-mindedness more than anything else, especially, when everybody around is making tons of money in a market frenzy. Of course, easier said than done! Let’s hope we will retain our sanity, when it matters the most.
SN: While you have already talked somewhat about it, what are your thoughts on the luck vs skill equation in investing? How has been your experience?
AR: I think it’s the combination of skill and luck that works wonders. In a world, which is so complex and where randomness reigns supreme, the best skill set (or) world-view is one, which factors in that complexity and accounts for the inherent unpredictability and uses it to its advantage. That is why I love Taleb’s book Antifragile. It’s just mind-boggling stuff!
So, in a sense, the quote that one needs to work hard enough to get lucky applies squarely in investing. I won’t be surprised if some of the most skilled investors around the world attributed a large part of their success to luck.
We might mistake this confession for their humility but in a deeper sense, this humility is a glimpse into their wisdom, which acknowledges the complexity of the system and fallibility of participating agents like us. In short, their brilliance lies in them learning to position themselves for luck.
Moreover, if I may elaborate a bit, skill is the foundation on which great things can be built upon but its good luck that determines the scope of the structure that eventually gets built upon it. And there is a massive symbiotic relationship between the two.
Personally, I continue to be intimidated by the uncertainty, which renders me paralysed and timid more often than not. But sometimes this very uncertainty liberates me and helps me find an expression. It’s learning to handle the confusion that has helped me get lucky rather than being free of any confusion. In short, it’s not easy to be skilled at an activity having to deal with complexity.
I am reminded of this wonderful quote by George Soros, which I think is somewhat relevant to the discussion here:
I consider myself an insecurity analyst… I realize that I may be wrong. This makes me insecure. My sense of insecurity keeps me alert, always ready to correct my errors.
SN: Hypothetical Question: Let’s say that you knew you were going to lose all your memory the next morning. Briefly, what would you write in a letter to yourself, so that you could begin relearning everything starting the next day?
AR: I would want to remind myself – To Google up value investing, Charlie Munger, BFBV, George Soros, Extraordinary Popular Delusions…and then internalise the lessons therein, slowly but surely. And I would also want to remind myself to ignore a lot of other stuff while I am at it. In short, be focused!
SN: How does one know if he is on the right path in investing, or how does one measure that he is getting better and investing is working for him (or not working)? How has been your experience on this front?
AR: Oh, wish I had an answer but it’s not for nothing that there are so few investment courses in the world. It’s inherently a complex process and its complexity renders it very difficult to break it into pieces. But I think there is a common thread, which possibly acts as a wonderful feedback mechanism about our journey as investors and helps us assess, if we are working along the right lines. Do we enjoy the challenge that the profession keeps throwing at us?
In short, if one doesn’t enjoy the challenge involved then the passion-cum-motivation, which are the key drivers, will eventually run their due course leading to burn-out. And one enjoys the process far more, if he is not singularly driven by proceeds. It’s not a coincidence that a lot many super-investors happen to be driven more by the process than the proceeds and in the process, do phenomenally well. As for my own experience, it’s been hazy all through and continues to be hazy.
For example, I remember struggling for a couple of months with ‘How do you estimate intrinsic value?’ Not the standard definition, which Mr. Buffett re-iterates in almost all his shareholder letter but how do you calculate it. I do not recollect Mr. Buffett or Mr. Munger ever talking about how they calculate intrinsic value. Moreover, I don’t think they ever do DCF themselves when estimating intrinsic value even as they rely on that principle to think about it.
Eventually I found the principle underlying ‘perpetuity formula’ help me relate to intrinsic value and released the tension. The underlying principle driving that formula is based upon protection rather than prediction and it leaves you with a conservative number as ballpark intrinsic value. That understanding opened up tons of other questions and seeking answers to them helped deepen the understanding further.
So, that is where I believe that learning happens at the periphery, at the boundaries. So I have learnt to cherish this state of confusion and wish to be eternally confused.
SN: Warren Buffett’s approach of reading a lot seems impractical unless one has the thinking abilities and capital allocation wiring like he has. How does one improve his/her process to overcome this challenge? How have you done it?
AR: I think Mr. Buffett is a great role-model but trying to emulate him without being self-aware about our strengths and weaknesses can backfire. In fact, I often times wonder that if Mr. Buffett were to start his career today, will he go about it the same way he went about it over the last 60-70 years. The answer in my mind is that even he would not emulate himself blindly if he were to start today. How can an investor like him not adapt to the changing times?
Coming to reading habits, rather than asking how much does Mr. Buffett read, I would rather ask, what is the minimum time one needs to spend reading to succeed as an investor and try to match it up for sure. Anything on top of that shall be a bonus. And I think the answer is not more than 20-30 hours a week. I think Keynes did most of his investing during the first hour or so at the start of the day lying in his bed and he did a phenomenal job. I am not saying we emulate Keynes either. Just that it’s interesting to see how different people have gone about it and still got the job done.
In fact, I think, spending too much time on investing can work against us. Let me clarify that I am not saying that reading less is the answer. Just that I think we should not push ourselves so much that we stop enjoying the process and follow a mechanical approach. Investing is as much an expression of our state of mind as it is mechanical and a good state of mind is one, which is balanced.
And, personally, I have tried to follow my heart when it comes to time spent on reading. There have been months when I have not read anything remotely related to investing and weeks on end, when I have not picked up a newspaper. I do read BSE announcements religiously to ensure that I am not missing out on essential developments and I do have a company or two on my radar to keep myself engaged at any point in time. But, I presume that learning to ‘doing nothing’ is as essential, when it comes to investing, and I am trying to get better at ‘doing nothing’ as we speak.
SN: If you were to go back to the start of your investment career, is there one thing you would want to change/improve upon?
AR: Ironically, the answer is no. Let me very quickly add that I can think of so many areas, almost all of the areas, where I could have progressed fairly quickly with the benefit of hindsight and the struggle seems futile now. But I say I don’t want to change anything because of my core belief that to deny the time spent at the periphery in a state of confusion is to deny learning. But if somebody were to hold a gun to my head for an answer, I would say – money management.
SN: Except Buffett, Munger, and Prof. Sanjay Bakshi, which other investor/investment thinker(s) do you hold in high esteem?
AR: Oh, there are so many people I admire and look up to. But if I were to name a few:
1. Benjamin Graham
2. Benjamin Franklin
3. George Soros
4. Nassim Taleb
5. Bernard Baruch
6. Seth Klarman
SN: What’s your two-minute advice to new investors or students interested in a career in investing?
AR: I will say a couple of things:
1. Focus on the classics out there. Go to the source. They are priceless!
2. Not having answers to all the questions that crop up as we read these classics can be intimidating (it was for me at least) but I have come to understand that the struggle through these questions is an integral part of the learning process.
And tighten your seat-belts for a bumpy ride but it’s one hell of a ride!
SN: Which books/resources do you recommend to a budding investor for learning multidisciplinary thinking?
AR: I think there are few amazing lists on the Internet including your website, where you get a list of classics, which a budding investor can read over a year or two to introduce himself and make progress as an investor. I think rest all is commentary and commentaries can be read after this initial period of internalisation for reinforcements, which is also an important part of the learning process.
So, to sum up, if I were to start out again, I will try and expose myself to those classics instead of subjecting myself to the massive dose of information-cum-noise which hits you these days. It’s such a mammoth task just to filter through noise and keep up with the relevant stuff coming your way. So, I would request everybody starting out to just focus on a handful of classics and internalise the lessons therein. May be I am being too restrictive in this approach but I believe that it still works best. With that background, let me expose you to some noise by way of sharing some books, which I thoroughly enjoyed reading, apart from the classics –
- Books by John Kenneth Galbraith
- Soros on Soros
- Baruch – My Own Story
- What I Learned Losing a Million Dollars – Jim Paul
- It Was a Very Good Year – Martin Fridson
- Guide to Good Life: Ancient Art of Stoic Joy – William Irvine
- How Will You Measure Your Life – Clayton Christensen
- Inner Game of Tennis – Timothy Gallwey
- Market Wizards – Jack Schwager
- Books by Dostoevsky (I think he is a genius when it comes to dissecting human nature)
SN: You worked on a wonderful book with Late Mr. Parag Parikh. How was the experience? While words may be difficult to come by, how would you describe your association with and learning from Mr. Parikh?
AR: As for my association, in early 2007, I reached out to him and requested for a meeting after reading his first book, Stocks to Riches. I got a glimpse into his generosity when despite his busy schedule he agreed to meet a 22 year old novice like me, who also happened to be a complete stranger to him and engage in a discussion so that I can learn something from his 30 years of experience as a value investor.
I quickly got to understand that he was not only generous but also unconventional when 10-15 minutes into the conversation, he offered me a job. No questions asked and no real insight into my academic qualification except that I had studied under Prof. Bakshi and was eager to learn. He just said, “Prof. Bakshi used to write for our newsletter in early 2000s and I have immense respect for him. And I think you are very passionate. We at PPFAS welcome and encourage people, who are genuinely interested in pursuing a career in value investing.” And that is how my association with Parag bhai started.
Later on in 2008 and 2009, he involved me in the writing of his second book, Value Investing and Behavioural Finance. The extent to which he trusted me to be able to contribute and come up with ideas surprised and inspired me immensely. It won’t be a mistake to say that he had more confidence in me than I had on myself. That was the time, when I truly realised – true leader is somebody who can help you discover your untapped potential and is often magnanimous enough in giving you more credit than is due.
It was not easy to win his confidence but once somebody did that, he would back him up whole heartedly and helped him push boundaries. Not many people can do that and I am glad I ran into somebody like Parag bhai, who excelled at that!
SN: You used to write a wonderful blog and then you stopped in May 2009. Why did you stop blogging? Do you have plans to start it again?
AR: I think part of the answer is that the state of flow in any activity requires us to be non-judgmental, while we are at it. In this particular instance, I hit a wall in the sense that I started to judge my writing rather than just letting it flow. However, I continue to scribble a lot in my private journal and even otherwise with select group of friends at times. But the idea of sharing it with public at large stops me from expressing myself as I wish to. So, I chose to let the expression flow in private. But I regret missing out on sharing my views with so many like-minded people because I have made some amazing friends thanks to the blog. So, may be in the future, if I have something to share and still retain my equanimity while expressing the same, I shall get down to it again.
SN: Great, Arpit! I’m sure you’ve made a great many followers today, given the way you’ve shared your thoughts so freely. Thanks a lot again for sharing your amazing insights with Safal Niveshak readers.
AR: It was my pleasure, Vishal. Thanks!