If you are a budding cricketer, and suddenly find yourself in the company of Sachin Tendulkar, Rahul Dravid, and Kapil Dev, what would you feel like? Great, isn’t it?
Also, what if they spend the entire day with you, sharing the simple batting and bowling tactics that made them immortals – tactics that are so simple that you can learn them yourself to make your own mark as a cricketer? Amazingly lucky, isn’t it?
Well, I felt something like this yesterday, while attending a value investing conference organized by a leading Indian financial advisory company.
I found myself extremely lucky to be in the company of the doyens of value investing in India – Chandrakant Sampat, Chetan Parikh, Prof. Sanjay Bakshi, Prashant Jain, and Parag Parikh – and several other practitioners of this beautiful art.
In my nine years of being an analyst and investor, I have never attended a gathering of such humble teachers and learners.
Anyways, I have compiled some notes from the conference, which I want to share with you via this post.
I would be doing injustice to the teachers (speakers) if I say that these notes capture everything they said. But it’s my small effort to bring to you some simple ideas that I heard yesterday.
You might already know a lot of these simple ideas and might be practicing them yourself, but then that’s my point – simple ideas (and their execution) are all you need to become successful as a value investor.
Prof. Sanjay Bakshi on “Floats and Moats”
Prof. Bakshi was at his best in simplifying the one big idea (low-cost float) that makes Warren Buffett what he is today, and what we as investors much look for in companies to identify great investments (with moats).
Some specific ideas from his presentation are:
1. Three sources of a company’s profits:
- What assets earn
- What liabilities cost
- Extent of leverage
2. One great source of moat for businesses is the “revolving credit” from suppliers, distributors, and customers (in the form of advances and deposits). This is like interest free capital for the company. Sustainability of this is the key. In some sense, negative working capital is like this interest-free capital.
3. Best businesses are those that can employ interest-free capital (float) at high incremental rate of return for a long period.
4. Cash is not easy to value. The key is to understand the past capital allocation track record of the managers who own the cash.
Prashant Jain on his simple investing secrets
For the uninitiated, Prashant Jain is the CIO at HDFC Mutual Fund, and is one of the best fund managers India has ever seen. He has an amazing track record across market cycles, and I have experienced it first hand by being a long time investor in his funds.
Prashant’s core message for investors was to “keep it simple” (like he kept it simple by not using a power-point presentation to share his ideas).
Here are some ideas he shared:
1. How to find a good business?
Look for return on capital greater than cost of capital. Over long period of time, this suggests presence of competitive advantage, which is a source of moat.
2. How to identify a good management?
Given the very small number of great managements to choose from, it’s important to be pragmatic and not very choosy about management quality. Start with avoiding bad managers – those who have destroyed shareholder value in the past.
3. Good value is available when…
- Macro economic situation is bad (like in 2003 and 2008)
- People are not talking about stocks
- Markets are focused on few “hot” sectors (like IT in 2000 and real estate, power in 2007)
4. How to spot good value?
- Focus on value and not news flows
- Think long term
- Perform scenario analysis (“What could go wrong?”)
- Have some amount of self-doubt. Don’t be over-optimistic about your analysis
5. Value pays over time, so be patient.
6. Value investing is difficult to practice in the mutual fund industry due to institutional imperatives. (such an honest opinion!)
7. How to stay away from risk?
- Never invest in early-stage businesses
- Never let stock price dictate terms
Interview with Mr. Chetan Parikh
Now for something even nicer for you! Mr. Chetan Parikh, one of the oldest (not in age, but practice) and most successful value investors in India has agreed for an interview to share his ideas with Safal Niveshak tribesmen.
The interview is scheduled for next Wednesday, 17th October 2012.
Now I need your help in finalizing the questions for Mr. Parikh. Given his extraordinary level of knowledge and experience in investing, I know I will be doing injustice by sending him a set of questions instead of letting him speak his own mind. But still, I would be happy if you can share your questions for him.
We’ve already discussed questions like “How do I get started as a value investor?” and “What are the key habits I must practice to become a value investor?” in the interview with Prof. Bakshi.
So it will be great if you can rack your brains and come up with some deeper questions for Mr. Parikh.
I need to send him the questions in a couple of days, so please add your questions to the Comments section below as soon as possible.
Also let me know what you think of the ideas from the Value Investing Conference that I discussed above.