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Notes from Value Investing Conference

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).

I won’t write much about his presentation, as all the learning are contained in his three part series on Flirting with Floats – Part 1, Part 2, Part 3.

Some specific ideas from his presentation are:

1. Three sources of a company’s profits:

  1. What assets earn
  2. What liabilities cost
  3. 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.

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About the Author

Vishal Khandelwal is the founder of Safal Niveshak. He works with small investors to help them become smart and independent in their stock market investing decisions. He is a SEBI registered Research Analyst. Connect with Vishal on Twitter.

Comments

  1. Sanjeev Bhatia says:

    wow. Bhai, I am already drooling. This is a great jump for all the tribesmen. First, the interview with the revered Prof. Bakshi and now this. It is getting better and better. 🙂

    Will try to come up with some questions today itself.

  2. Hello Vishal

    When we read simple, distilled but powerful thoughts of great value investors, it makes us believe that investing is not tough at all. Just like Sachin Tendulkar makes batting look like a child’s play. 
    But fact remains that investing is tough, but not easy.
    One of the questions which we would be interested in getting answered is about Utilities like Powergrid, GAIL etc…
    i.e.
    How can one satisfactorily analyze utility companies? Generally these trade at very cheap valuations. So, quantitatively speaking, they can become value traps in exuberant times. Though timing the markets is not a good idea, still which are the valuation parameters which can be used to time one’s investment (for long term) in these boring, dividend paying businesses?

    Thanks

  3. Hi Vishal,

    I have been following your blog for quite some time. I find that your thoughts and structure of your blog are very interesting. Kodos to you for all the effort that you put into your blog!

    Since you have discussed about Mr. Prashant Jain, it would be nice if you would do a post on mutual funds that follow value investing (or ‘proclaim’ to do so). It would be interesting to compare their performance with others. Although, I agree that it can be difficult for a mutual fund to practice value investing since it bears fruits in the long term and most investors are obsessed with the 3/6/12 month performance.

    Once again, sincerely appreciate all your efforts!

    Mayank

  4. Bhavesh Chauhan says:

    1. When he started investing in this way, what inspired him because I believe there would not be many equity investors in India at that point, no big capital market, no internet, no people to guide, not much research etc.
    2. How did he go about research in those days? Did he goto BSE to get Annual reports, etc? Did he meet the Management? Was Management that keen to meet an investor? How about Corporate Governance?
    3. How do you judge Management of a small company in terms of how much it would be investor friendly. Historical numbers are always there but we all know how easily sales are inflated by auditors, accountants? Even if we meet up an employee of the company, dont think he would be willing to disclose the real numbers.

  5. Ayush Aggarwal says:

    To put in my two pennies worth:

    a) Can Mr. Parikh explain the mental process he uses to decide upon, ‘this-looks-an-interesting-opportunity, I-will-investigate-further’ in other words mental checks he uses in short listing companies for further research.
    b) Which valuation metrics Mr. Parikh uses to decide upon whether Mr. Market is offering is a good deal or value traps. Does he look for catalysts, which will unlock value, or prefers buying good companies (FMCG types) at fair or, even better, bargain prices? Why?
    c) Can he discuss an example where he had sheer conviction in the analysis and his thesis went wrong? And the impact of that on the thinking process?

  6. My question:- What makes a business great? What to look at when finding great businesses?

  7. Anil Kumar Tulsiram says:

    Great Vishal. Thanks a lot. For people who are not aware, Chetan Parikh maintains a excellent site here.

    Some of the questions which immediately come to my mind are:

    1) Capital allocation: There are two school of thoughts on capital allocation. One who believes in concentration of investment in 10-12 stocks like Buffet and Charlie Munger and Rakesh Jhunjhunwalla and others who suggest wide diversification like Tweedy, Browne partnership firm and Martin Whitman of Third avenue fund. Is one strategy better than other. Do people need to look at different stocks with these two strategies.

    2) Growth stocks vs stocks in distressed industries: Some people argue that in a market like India one should always invest in stocks which can grow at atleast 20-25% for next five years even if they are available at fair price (Basant Maheshwari of the Equity desk frequently argues this). In simple words whether strategy of buying fair companies (not value traps eg. NHPC and SJVN Utility companies available at book value or broker companies with nil debt available close to their book value) which enjoys decent moat but currently going through cyclical downturn at book value or low price to earnings multiple can work in India.

    These two questions were on top of my mind. Will think over others over the weekend and post it by Sunday evening.

  8. Hardik Kalaria says:

    I would like to ask him to explain how he values a company by giving specific examples with numbers, ratios etc and not just talk about value investing principles. Everybody talks about valuing companies but nobody said anything about how to value them!!

  9. Question to Parikh: If you can distil your experience into 3 questions that any investor must ask himself about a stock before investing in it, what would they be?

  10. selvakumar says:

    I have following questions for him.

    1. In the long run, will all the moats evently vanish? Particularly in the context of India where a growing economy attracts more competition in every field and cause disruption to the existing businesses?

    2. From his readings, any interesting learning & recommended reads from History & interesting biography category.

  11. Hi vishal,
    My question:
    In India we are blessed to have so many companies which are growing at a super high rates of say above 20 percent for not a year or two but a decade and longer. These kind of companies trade at very high premium valuation under normal conditions and during time of general market distress some times are available at reasonable valuation. Examples that come to my mind easily, which may fall under this bracket are itc,Asian paints, Titan, page, etc…
    So my question is even during market distress these huge historical wealth generator may not look cheap for a typical “value investor” Or as is commonly said available at discount to fair value.Then how should a retail investor having regular source of income approach investing in these kind of companies. One more point is, While all value investors highly value the capital allocation capability of company promoter because they understand the risk associated with that. I feel sometimes they overlook the same capital allocation ability and the associated risk as an investor and keep looking for deep value stocks which need to be sold once the price meets value and capital allocation needs to be done again instead of choosin

  12. Saurav Jalan says:

    Thanks Vishal for sharing this post. Just wanted to ask if there is any video recording of this conference which is available on internet ?

  13. Wow..first an interview with Sanjay Bhakshi and now Chetan parikh.Great job Vishal.We owe you a lot for the efforts you are putting into these kind of initiatives.Thank you very much.

    Hopefully some day I wish you get a chance to interview the legendary Chandrakanth Sampat also and share his wisdom to the world.

  14. R K Chandrashekar says:

    Hi Vishal
    You continue to delight us with great wisdom from the masters:
    Here are a few questions i like to pose to them:
    1. What is long term in value investing. As Keynes said in the long term we are all dead.
    2.Margin of Safety: How much margin is enough and is value absolute or a moving target?
    3. Do value investors miss out on opportunities -1. Not willing to pay and lose out on a great stock of a lifetime
    2. Sell too early based on intrinsic value and leave too much on the table.

  15. Dear Vishal,
    Chandra has almost asked what i wanted to ask, few small additions though. 1)The selling levels are equally important as buying levels and make or mar an investment .
    Graham used to sell stocks which moved up by 50% over buy value or didn’t move for three years , which ever happened early.
    Which means Graham would have theoretically sold a stock if it would had appreciated 50% in one- two months which is not long term at all.
    So its more than what meets the eye.
    2) Intrinsic value depends upon host of factors, and all methods like DCF , Grahams’ number EPV. Divident discount, etc rely on mathematically arriving fair value, are there check list / models available through Behavioral finance which gives insight on fair value. So a great stock may still show high PE even during downturn due to behavioral reasons of the large institutional investors invested in that stock and mislead valuations.
    3) Would like answers on ,if there are specific investment personality -investment fits and how to look at them through behavioral finance, could this be another way of being in circle of competence.
    e.g.Some one who is aggressive/ impatient may be only looking at growth stocks and if he tries value investing he may sell early due to his personality which doesn’t suit the waiting game.
    Regards,
    Prakash

  16. Hi Vishal, firstly thanks for the tremendous effort put in by you in gathering all the info. The question I would like to ask is what are the things novice investors can do apart from reading. How do we bridge the gap between theory and practice in order to become successful value investors? How do we identify value traps?

  17. I think questions we will all come up with more or less the same questions.
    You would have heard “Wise men think alike, fools seldom differ.”
    Anyways to Mr Parikh, I would ask :
    (i) how did you learn value investing,
    (ii) what method (if any or framework) do you currently follow/ have improvised from your previous learnings
    (iii) what are the mistakes to avoid.
    (iv) Have you continued to hold your stocks from 2007 to date or did you sell and buy again ?

    • Bhavesh Chauhan says:

      One more vote for the third question from my side. I would particularly like to ask if Mr. Chetan can show with his own examples some mistakes he made. Some that appear value stocks turn out to be value traps. Also, some examples could relate to how earnings de-growth that would have happened was unforeseen. Or perhaps, some case where Management’s poor strategy resulted in de-rating.

  18. Shashidhar Mandewalkar says:

    Great work Vishal!! The tribesmen woe you a lot for sharing your wisdom as well as from other value investors.

    1) How do we take growth into considerations, while valuing a company. Shall we consider EPS growth, Book Value growth or any other thing to arrive at growth. What is highest growth value to account while investing long term.

    2) What multiple do we consider (1x, 2x or 3x)? I know 3x is too high and should never be used.

    3) At what price to exit any stock considering its growth into account.

    4) How does Mr. Parikh identify trouble times ahead and exit the over valued stocks?

  19. ankur bhatia says:

    HI Vishal,

    Thanks a lot look forward to more notes from confrence.

    I would like following questions:

    1. As a small investor how cd I use public information/accesible information and see if there are concerns on corporate governance- which is hot thing these days with DLF,ISPAT?

    2.What decisions for buy or sell he did not timed well ?

    Ankur

  20. priyaranjan says:

    Hi Vishal ji,
    seldom we get the rare opportunity to interact with the thinker, investor who have made remarkable contribution in the field of finance & investment.Finding time constraints I wish I would not lose this opportunity again what I have lost in case of Your interview with Mr. Bakshi..As a learner of investment & finance a lot more still have not discovered to me.You may have framed several questions for discussion with Mr. Parikh yet, if you find it suitable you can give an eye to few of my question….
    • WHAT exactly is the risk to an investor?permanent loss of capital, opportunity cost ,divergence of income or something else?.
    • Do you believe sensex(consisting 30 scrips)and nifty(consisting 50 scrips) truly represent the indian economy?Or a broader index is justified?
    • When a great global financial problem arise many argue that india is resilient to such global problem but does it make any sense in the present context with greater linkage between economies ?
    • Easy access to information ,quick infomation dissemination ,more informed investor still we are looking for great undervalued stocks,Is it a conflicting view?
    • Intrinsic valuation is subjective,so finding a great valued stock is also subjective,Is it true?
    • Earning can be manipulated,Book value differ depending on the industries still we think P/E & P/BV as reliable indicator ,Is it true?
    • If value investment focus on long term growth & there is many buzzing sector where growth is high ,Can we call Value investment a type of contra investment process.?
    • Some times many creats confusion over Under- valuation with permanent depression in a stock ,can you give some light on that fact?
    • What is smaller today it will grow tomorrow ,it is a natural trait yet it is exception in investment while choosing small cap stock & new burn comanies ,what would you say?
    • Beliver of price chaser make arguement that every plus and minus of the economy get quickly absobed into the price of a stock,Then where does value investment stands there?
    • Value invesment is a cool process.but market is very dynamic ,How it balance then?
    • To select few stocks we have to reject many stocks ,Can it be made possible with rejecting a few and finding still a few great stocks?
    • Low GDP growth ,high inflation,low IIP FIGURES still sensex & nifty rising ,why is this anamoly ?Is it because optimism in the market or it is due to sheer speculation?
    • Financial figures can be greatly manipulated in the financial book still we use more financial information from that then can we proceed with great estimates of Intrinsic value,forward earnings & such parameters?
    • Micro prospective or macro prospective which is more useful in finding oppourtunity or Is there some oter way we can find investment oppourtunity?
    • Is margin of safty a space for wrong estimation or it is a cushion for subjective valuation?
    • Indian stock market is more volatile due to external factor (like the FII action,Europe crisis,US crisis etc.)than the internal factor (inflation,fiscal ,trade defecit etc)or it is a cobination of both ?
    • Does value investment theory apply to commodity market,can you exlain?
    • WISHING A GREAT DISCUSSION WITH Mr PARIKH Ji. WAITING for the post of your discussion. .. thanks..(PRIYARANJAN TIWARI)

  21. Thanks Vishal for the insight provided by the champs of Indian Stock Market.

    My question to Chetan: What mistakes did he make in his early days of investment (vicarious learning for us) and where (sector) does he see the explosion of growth coming from an Indian market perspective?

  22. Vishal,

    Charlie Munger says there are around 90-100 mental models which can be learned from multiple disciplines.Mr Parikh being a voracious reader and follower of Munger, I would like to know how many models was he able to identify by himself until now and how has the experience been for him in this process?? I would like him to talk in detail about some the multidisciplinary models that worked well for him in investing and life in general.

    Thanks.

  23. Dear Vishal,
    Many thanks for such an initiative. You are truly putting great efforts to make tribesmen more wise with these knoledge sharing sessions.
    My questions would be:
    1. Mr Parekh being great follower of munger does believe in mental models. Which 8-10 mental models are most important and should be used the most while investing.
    2. How does Mr. Parekh decouples from the noise in the market everyday focuses on fundamentals.

    Thanks once again for the initiative.

    Vikas Kukreja

  24. SG Jaclyn says:

    I am asking these questions based on some of the stocks followed by Mr.Parekh.

    1. For a company like Gujarat Gas which is in the process of ownership change and which could lead to management change as well and regulatory overbearing waiting at the door, what kind of action can be taken when some of these outcomes cannot be judged except on hindsight. This has nothing to do with the financial ability of the company or its past results. So far a investor, how to approach a situation like this.
    2. What parameters would Mr.Parekh would look at financial companies, which have a excellent past track record, but as an investor avoid future pitfalls which may not be obvious based on the statements management puts out. E.g. Axis Bank.
    3. In one of videos, Mr.Parekh has positive opinion about Apple shares. What exactly has attracted Mr.Parekh to fall in love with Apple shares inspite of the risk it carries that it can become the next Palm or Nokia. Is he riding the wave which so many do, based on what they show on CNBC?

  25. I would like to share once article on the same lines. The gravity of research and the behavior quotient of this article influenced me a lot.

  26. Dear Tribesmen,

    The interview with Mr. Chetan Parikh stands postponed to the first week of November.

    However, I’m meeting Mr. Chandrakant Sampat tomorrow (25th Oct.).

    Regards,
    Vishal

  27. Hi Vishal, Was the interview with Mr. Chetan Parikh also posted?

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