Value Investing Workshop: June 2022 Batch
Coming from a Marwari business family, I have grown up on the idea of ‘opportunity costs,’ which is simply the value of the lost opportunity, or the benefit of the thing you could have done instead of what you are doing now.
For a Marwari businessman, opportunity cost is at its most expensive when he misses opportunities. Standing by as something important is happening without him, or not moving funds to where they are most productive, are like wasted opportunities. Most Marwari business houses act like venture capitalists and keep scouting for opportunities to grow and for their heirs to run.
Often, this has served the community well, as Thomas Tinberg wrote in his book The Marwaris –
The Marwaris, while somewhat behind other elite classes educationally, more conservative socially, and later entrants into industry than some other trading communities, now play a dominant role in the country’s industry.
From Birlas and Bajajs, to Bansals and Agarwals, Marwaris have been at the forefront of India’s economic rise over the year. And I believe seeing the world with the lens of opportunity costs has helped them a great deal in their rise as a prominent business community not just in India, but worldwide.
But that’s not the point of today’s post, and I do not want to make it a “how did Marwaris came to rule the world” one.
In fact, the reason I started with Marwaris’ penchant for opportunity costs is that despite its advantages, looking at world from the lens of opportunity costs may also lead us to take it to the extremes (like we do with all good ideas), that may lead us to always be doing something, just because we do not want to miss out on the “next big opportunity.”
Charlie Munger has called opportunity cost as a “huge filter in life” and that “life is a whole series of opportunity costs.”
When it comes to investing, it is a good idea to always make decisions keeping in mind the next best opportunity. But one big problem most investors get into is that they also end up investing in the next best opportunity, and the next one, and the next one.
“Doing nothing” is looked down upon. Activity is equated with achievement.
Like a typical Marwari businessman, not investing – sitting with cash and not finding stocks worth buying – is painful.
But then, as Charlie also 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.
It’s important to remember that when cash is paying nothing and stocks have a greater probability of losing, then nothing beats losing.
Accepting this should make you more willing to hold cash when you do not find (much) value in the stock market, instead of force-fitting the opportunity cost mental model to the ‘cash vs stocks’ equation.
Of course, this is not with the intent to time the market – which is impossible. The intent is to avoid acting when you find no reasons to act.
So, even if the ‘markets’ are down 15% or 20%, but you do not find opportunities within your investible universe – like, for me, it is made up of sound businesses with good long-term fundamentals and managed by high-quality managements – do not invest.
I have managed to survive the last 19 years of being in the market by not going after mediocre opportunities and sticking to my circle of competence. Also, “often do nothing” is an integral part of my investment process which holds me tight when I see others around me going berserk with too much activity.
Stock market investing has a lot of shades of grey, but there are some things that are plain black and white. For me, avoiding mediocre opportunities and too much activity most of the time, are the latter.
Anyways, responding to quiz master Barry O’Brian’s comment that he was yet to come across a ‘lazy’ Marwari, HM Bangur, the MD of Shree Cement, said –
The road to success is always under construction, so we always keep working. If the road is ready, it must be leading downhill.
Being a Marwari, and having seen my father and grandfather practice what Mr. Bangur said, I am in complete agreement with him on how to build a business.
But when it comes to being an investor or an allocator of my own capital, I am that lazy Marwari who you will sometimes find working hard on constructing my ‘road,’ but often find napping around on its sides.
And I have no guilt in being that way, for that has served me well for 19 odd years.