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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.

Graham used to talk about protection vs prediction. He used to say that investors should seek protection in the form of margin of safety either through conservatively calculated intrinsic value (usually based on asset value) over market price or superior rate of sustainable earnings on price paid for a business vs a passive rate of return on that money.

That approach works well in many businesses as even though their future fundamental performance is largely unpredictable because one is, in effect, underwriting insurance.

Graham’s methods helped investors deal with the unpredictability problem in security analysis. For example, when you bought the stock of a company selling below net cash and the operating business was not losing money, then you were effectively getting the business for free. Even if the business may have been mediocre, it was free. And the typical Graham-and-Dodd investor absolutely loves freebies.

That kind of approach enabled you to justify a purchase because value was more than price even though one did not know by how much. Poor management quality was dealt with through insistence on an even lower price in relation to value.

For Graham, there were no good or bad businesses, only good or bad investments. And that approach can work if you practice wide diversification and buy out-of-favor businesses which are perhaps not doing very well right now but eventually might.

So there was an inherent belief in the idea of mean reversion i.e., poorly performing businesses would improve their performance over time.

In case of predictable businesses with stable cash flows, I used to talk about “debt-capacity bargains” and still teach that concept to my students. That’s because I think the idea of “debt capacity” is a very powerful mental construct in valuation.

The basic idea here was that the value of a debt-free business has to be more than its debt capacity. I discussed it in detail in one of my more popular lectures titled “Vantage Point” so I won’t get into the details here.

Similarly, buying into businesses where pre-tax earnings yield was in excess of twice of AAA bond yield, and the business had a strong balance sheet was one of the key methods of Graham for identifying a bargain security.

If you had a reasonable degree of confidence that average past earning power will return soon and the business had staying power (that’s why the insistence on a strong balance sheet), then sooner or later the market will recognize that the stock had been beaten down too much and there would be a more than satisfactory appreciation in its market value.

And even if you go wrong on a few of these positions, because you had so many, things would work out well eventually.

But as you move towards enduring moats, you move towards predictability and higher quality. In such situations, the need for protection in the form of high asset value or high average past earnings in relation to the asking price goes away.

Of course, that does not mean that you don’t need a margin of safety any more. Far from it. It’s just that the source of that margin of safety now resides in the quality of the business you’re buying into, its long-term competitive advantages, its ability to grow its earnings while delivering high returns on incremental capital without need for issuance or new shares or significant debt.

It also comes from the superior ability of the management to create a moat and to do all things necessary which will widen it over time.

Finally, the safety margin comes from buying the business at a valuation that would, in time, prove to be a bargain, even though today it may appear to be expensive to many investors.

It’s obvious that the art of making even reasonable estimates of future earning power of businesses a decade or more from now cannot possibly be extended to most businesses.

But I think — and I’ve learnt this over the years by studying investors like Charlie Munger and Warren Buffett — you can do that for a handful of businesses. And as Mr. Munger and Mr. Buffett like to say you don’t need very many.

Then, if that’s true, and I think it is true, you can reach out reduce the problem to just a handful of variables that will help you come with a range of potential future earnings and market values and from that you can derive a range of long-term expected returns. And I tried to explain that in my final Relaxo Lecture.

So, to summarize, if you are going to invest like Ben Graham, then your sources of margin of safety are different than if you invest like Warren Buffett. You just have to be aware of those sources and also of their limitations.

I also strongly feel that when it comes to moats, it makes sense to think in terms of expected returns and not fuzzy intrinsic value.

What will not work is to apply the same methodology to every business.

For example, in my view there is a way to invest conservatively in businesses which are likely to experience a great deal of uncertainty. But you simply can’t use that approach when dealing with enduring moats. And vice versa.

You need to have multiple models to deal with different situations to avoid the “to-a-man-with-a-hammer-everything-looks-like-a-nail” trap.

Safal Niveshak: Stephen Penman, in his book “Accounting for Value” talks about his dislike for the DCF method of valuing stocks. His reasoning is that FCF, the basis for DCF is calculated after reducing capex/investments, even when investments, if directed well, create immense value for companies. His second grudge is against forecasting cash flows for 5-10 years, which he thinks is speculation.

What are your thoughts – good or bad – on DCF? If not DCF, what?

Prof. Bakshi: Prof. Penman’s book is an excellent one and I would recommend it to all value investors.

I completely agree with him when he says that standard valuation models use FCF and FCF is not the same as owner earnings. It’s the owner earnings that really count. That’s the number you’ve to focus on.

A business may have low FCF but very high owner earnings simply because the business is growing and a big part of operating cash flow is going into growth capex. Or a business may have low FCF because it has low owner earnings in relation to tangible capital employed and the business has to spend a lot of money to replace obsolete plant and machinery.

The difference between these situations is night and day, even though the outcome in both is the same: low FCF.

I think investors should spend a lot of time thinking about owner earnings in a variety of businesses and look for good reasons which explain situations where owner earnings are materially different from reported earnings.

They should ignore FCF as well, except when they are evaluating the firm’s need to access outside capital markets to fund growth. That’s the only good reason to look at FCF in my view.

Over the years, Mr. Buffett has written extensively about owner earnings in his letters. See, for example, Appendix to his 1986 letter. There’s also very good book on the subject that I like a lot and I would recommend to your readers. It’s titled “It’s Earnings That Count” by Hewitt Heiserman.

DCF has problems of its own of course. Most of them are behavioral. Investors tend to tell stories quite well using DCF. The most popular software for writing fiction isn’t Word. It’s Excel. 🙂

DCF models must come with standard warning: Use with extreme care. This may explode in your face.

Graham recognized that and warned against such behavior. Prof. Penman does the same in his book as well. While it’s easy to fool yourself, there are ways to prevent that.

The first one is to limit its usage to only those businesses which have predictable business models.

The second one is to exercise conservatism while predicting future growth rates and profitability.

Third, one can side-step the issue about making predictions far into the future and think in terms of expected returns over a decade or so (no more playing around with terminal growth rates). While doing that, when determining value a decade from now, one must not assume a high P/E multiple.

And fourth, when facts change, you must change your mind. No matter how sure you feel about your predictions, when you encounter evidence that proves that you were over-confident, you must change your conclusions and not look for new reasons to justify your previous, wrong conclusions.

I think it’s also a good idea to use the inversion principle which involves taking the current market value of the firm and reverse engineer into the implied assumptions and then objectively question those assumptions. Thinking backwards de-biases you.

Safal Niveshak: Last time we met, you talked about a few behavioral biases that affect investors. This time, can you take us through a few mental models outside psychology that “must” form part of an investor’s latticework? How does one go about developing such models?

Prof. Bakshi: Of course you have to step outside the world of psychology. One discipline which you’ve to read is micro-economics.

Micro-economics is not complete without psychology. They complement each other.

Standard micro-economics textbooks, for example, tell you that there comes a point when a business must be shut down (the “shut down point”).

However, if you read Buffett and psychology, you’ll find that in many businesses the shut-down point comes much earlier. Buffett explained that beautifully in his essay titled “Shutdown of Textile Operations” in his 1985 letter.

Studying micro-economics will provide you with several mental models like opportunity cost, pricing power, creative destruction, Gresham’s law, comparative advantage, invisible hand, tragedy of the commons, economies and diseconomies of scale, Tobin’s Q, specialization and experience curve, and many more.

Within the field of micro-economics, I think you really have to read a lot on competitive advantage. What creates an advantage? What sustains it? What destroys it?

There are many wonderful books you just have to read on the subject to pick up a few very useful models. For example Pat Dorsey’s “The Little Book That Builds Wealth” is a superbly written book which helps you create a framework around competitive advantages.

Another excellent book which summarizes Porter’s ideas on the subject is by Joan Magretta and is titled “Understanding Michael Porter: The Essential Guide to Competition and Strategy”.

I think that there’s a great need to synthesize the ideas of Munger, Buffett and Dorsey on moats and Porter on competitive advantage.

I also loved “Different: Escaping the Competitive Herd” by Yongme Moon and The “The Tipping Point” by Gladwell. And I absolutely loved “Abundance: The Future is Better Than You Think” By Peter Diamandis. All these books will make you think.

Books on evolutionary biology (my favorites are “The Selfish Gene” and “The Blind Watchmaker” by Richard Dawkins) and quantum physics (read “Taking the Quantum Leap” by Fred Wolf) will give you some very useful mental models too.

Read “The Brain That Changes Itself” by Norman Diodge to learn about the plasticity of the brain and you then use what you learn from that book along with “One Small Step Can Change Your Life: The Kaizen Way” by Robert Maurer to learn how the slow contrast effect works on your brain. Read “Hooked: How to Build Habit-Forming Products” by Nir Eyal to learn how businesses condition consumers to choose their products subconsciously.

Read “Business Model Generation: A Handbook for Visionaries, Game Changers, and Challengers” to ignite your mind about a variety of business models.

You can also pick up a lot of mental models by following and reading blogs like Farnam Street.

I could go on about acquiring mental models by reading books but I’ll stop here!

Read annual reports of companies with a curious mind always asking how, why or why not questions.

How did Shriram Transport Finance create a low-risk business from giving loans to used-truck drivers? How did Symphony Limited learn from its mistakes to become India’s most profitable businesses in its industry in less than a decade? Why is Thomas Cook’s integrated business model of travel and forex much more profitable than stand-alone forex and stand-alone travel companies?

As Charlie Munger says you just have to read a lot and relate what you read to what you observe, always with a curious mind.

Try to come up with notions or provisional theories which explain whatever you’re trying to explain and then look for evidence that supports or destroy those notions. Peter Bevelin, author of a wonderful book on Sherlock Holmes would agree. Here are a few quotes from his book.

“Without an idea of how reality works, a purpose, provisional idea of what is important and what to look for, our observation or collection of facts is of little use.”

“A hypothesis is…the obligatory starting point of all experimental reasoning. Without it no investigation would be possible, and one would learn nothing: one could only pile up barren observations. To experiment without a preconceived idea is to wonder aimlessly.” (Claude Bernard)

“You have a theory?” “Yes, a provisional one.” (Holmes; The Yellow Face)

“Nothing can be done without preconceived ideas; only there must be the wisdom not to accept their deductions beyond what experiments confirm.” (Louis Pasteur)

Safal Niveshak: Buffett has said “diversification is for the know nothing investor”. Now if I borrow from Jacobi and invert this, I would think “concentration is for the know everything investor”. The question is – Given the regulatory uncertainties and the extremely large pool of shady promoters, would concentration work in the Indian markets?

Prof. Bakshi: The “know everything” investor is also usually an overconfident investor.

My view is that investors, when they start out, should practice wide diversification and move towards concentrated positions only after about a decade of experience and as they move towards concentrated positions, their propensity to take business risk and management risk will go down but their ability to acquire deep knowledge about a handful of businesses with value creating potential will go up.

As for your question about regulatory uncertainties and shady promoters, I invite you to read a very interesting document I read in the early part of my career. Titled “Recovery Investment” it describes a British fund which…

…never invested in successful, well managed companies such as Marks and Spencer, Sainsbury’s or Shell. The Fund which is called the “Recovery Fund” invests in companies which are experiencing difficulties such as making losses, weak balance sheets, frauds, natural disasters, or a specific industry downturn.

Recovery Fund has been in existence since 1969 and over 26 years till 1994 (when I read the document) compounded capital at 19.9% a year as compared to benchmark return of 13.2% a year.

While I don’t practice recovery investment anymore, that doesn’t mean it won’t work for someone who is focussed on turnarounds. When Buffett wrote that “turnarounds seldom turn,” he did not imply that they never turn.

India has its share (perhaps more than its share) of businesses run by fools or crooks but that fact wouldn’t necessarily prevent a creative, thoughtful, and focussed value investor from making money in them. Such a strategy, however, would require wide diversification.

You’re right about concentration. If you want concentrated positions, you don’t want businesses run by fools or crooks in your portfolio.

Safal Niveshak: Seth Klarman and many others (even Buffett) had mentioned that investors with small amounts to invest should look at things that no one is looking at, the ones that slip through the cracks. Where would these areas be in Indian equities? And given the paucity of data and questionable management that could be running these companies, how does one do the due diligence and get comfortable that the data is correct so that we don’t get blindsided?

Prof. Bakshi: That would be micro-caps. And there are a group of very smart value investors in India doing just that.

They buy stocks of obscure and small but rapidly growing companies run by good managements at very low earnings multiples and then see their market values soar over the next few years. Their excellent returns are a direct result of negligible competition as no institutional investor would want to invest in a company with a market cap of Rs 50 cr. Maybe you should interview some of those guys.

I will give you a list after checking with them. Some of them may provide a better answer to your question than I can.

Safal Niveshak: How do you avoid getting caught with your own reasoning? In other words, how do you look into a business from an outsider/ bystander’s point of view without accepting your internal beliefs about the company?

Prof. Bakshi: Well one way to do that is to have a checklist about the business and the management and keep going back to it to verify if the investment thesis is still intact or not.

Nothing is permanent. Moats get impaired. Managements can make big mistakes which destroy the investment thesis. You also need to keep reviewing your estimate of expected long-term return based on the prevailing market price, and if that becomes mediocre for any given stock, perhaps it’s time to replace it with another, more promising one.

One great book I recommend on checklists is “The Investment Checklist” by Michael Shearn.

Another way is to pay special attention to disconfirming evidence and views of someone you respect who does not agree with you. But it’s also important to not end up in a room full of skeptics. In his latest letter Seth Klarman draws a beautiful metaphor between investing and rowing. He writes:

A good investment team is like a crew team – a mix of talents and personalities that come together to produce a result surpassing what any one individual could hope to muster.

You need generalists, but also some specialized knowledge. You need skeptics, but a room full of skeptics would have trouble “getting to yes.” You need good negotiators, and people who can reach closure on a great deal when it’s offered. You need deliberators and decision-makers. You need contrarians, but sometimes the consensus view is exactly what happens. You need visionaries and number crunchers, outside the box thinkers, and some who can stay within the box when appropriate.

You need those with the arrogance to shout “buy” and “sell” in fast-moving markets, and those with the humility to consider whether they could, in fact, be wrong. Most valuable, of course, are those with multiple skills, those who can occupy different seats, even all the seats, in the boat at different times.

A third way is to conduct post-mortem about your mistakes. And you wouldn’t know the quality of your decisions unless you followed the advice of Shane Parrish, the publisher of Farnam Street who talks about the need to keep a “Decision Journal.” He is overwhelmingly right on that one.

In his monumental book “Thinking Fast and Slow” Prof Kahneman talks about Gary Klein’s idea of “pre-mortem” which goes one step further than post-mortem. He writes:

The procedure is simple: when the organization has almost come to an important decision but has not formally committed itself, Klein proposes gathering for a brief session a group of individuals who are knowledgeable about the decision.

The premise of the session is a short speech: “Imagine that we are a year into the future. We implemented the plan as it now exists. The outcome was a disaster. Please take 5 to 10 minutes to write a brief history of that disaster.”

I have to confess, however, that I haven’t conducted pre-mortems yet!

Safal Niveshak: In The Intelligent Investor, Ben Graham gives considerable importance to dividends. In contrast, Philip Fisher does not find anything important about dividends. It would be great to have your views on the same.

Prof. Bakshi: What matters is total return on the stock over time and dividends are a part of that.

If you’re investing in non-moat, slow growing businesses, dividends often become quite important. The dividend stream alone may explain a large part of the company’s stock price, and so the rest of earnings which are not being paid out may be acquired at a very low multiple.

It’s useful to value that dividend stream like a bond and net off the derived value of that bond from the stock price to determine what the market is paying for the rest of the earnings.

When investing in moats, there are three situations:

  1. Non-scalable moats— businesses which won’t grow a lot over the years but will pay a large part of earnings as dividends over time (one current example is Noida Toll Bridge Company).
  2. Scalable moats which can take in capital i.e., the business can grow rapidly but they need incremental capital for that growth and that capital is usually provided by keeping dividend payout ratio low. So long as returns on incremental capital in such situations are excellent, investors should not worry about low dividends. They will make money though capital gains instead. An example of such a business is Relaxo Footwear.
  3. Scalable moats which don’t need a lot of capital for growth because the business model is asset-light. Such businesses can deliver excellent returns through growing dividends and capital gains. One example is that of Kewal Kiran Clothing which was a case in my class last year.

By the way, I am not recommending any of these stocks and cite them only as illustrations.

Personally, I have moved away from non-scalable moats because I apply a filter by asking a simple question: Can this stock become a ten-bagger? And there is no way a stock can become a ten-bagger in a rational market unless revenues were to grow rapidly over time. So, for me, high dividends in non-scalable moats are not terribly exciting.

When it comes to scalable moats, the relative importance of dividends as part of total return would depend upon whether the business is capital intensive or not. So the correct answer, in my view, is that investors should focus on total return.

Safal Niveshak: Talking about one concern that seems to be on top of most investors’ mind – the currency printing worldwide that’s creating bubbles all around, especially in equities.

  • How does an investor deal with this uncertainty of these bubbles bursting?
  • How does one maintain a “DCF frame of mind” when cash is fast losing value?

Prof. Bakshi: Bubbles are a function of human nature and human nature hasn’t changed much since the days of the South Sea Bubble.

We’re going to see a lot of bubbles over our lifetimes. But that doesn’t mean that there won’t be opportunities to make money in stocks.

Investors should be cognizant about bubbles in various asset classes (real estate, commodities, equities, gold etc) and position themselves to not be hurt when the bubbles burst.

That, by the way, is one reason why I like moats. Companies that buy commodities and sell brands, for example aren’t likely to be hurt by a commodity price bubble occurring or bursting.

If the business has pricing power, then if commodity input prices rise, the business has the ability to pass it on to customers without fear of volume decline or loss of market share.

If the bubble bursts, and commodity prices crash, then the business can either pass all of the benefit to customers to drive volume growth or retain some of it for itself.

That’s the thing about moats. They are resilient. They can withstand shocks way better than other businesses which don’t have moats.

The “DCF frame of mind” is a very useful mental construct. After all, if everyone had perfect foresight, there would be no ambiguity about the value of any productive asset. Simply bring back to present value all its future cash flows.

Of course, no one has perfect foresight and one can have limited foresight about just a handful of businesses out there. Even so, the DCF mindset can help investors deal with understanding other less predictable businesses as well.

Markets can oscillate between extreme optimism and pessimism and having the DCF mindset can be really useful for the thoughtful investors. Stock prices often fall to such low levels that the earnings of the next three to four years alone in a business which is certain to last much longer, start explaining almost all of the stock price.

Conversely, sometimes market valuations go to such extremes that even high earnings growth rate for a couple of decades would not produce earnings sufficient enough to justify a future value large enough to make a commitment today. So, having the “DCF frame of mind” is very useful in my view.

You talk about cash fast losing value because of inflation. Cash is a very hard asset to value. Most people think that a Rs 100 note is worth Rs 100, no more and no less. That would be true if the money was in their hands. But the money is not in their hands. It’s in the hands of a company whose stock they own.

In such situations, what’s the cash worth in an inflationary world? The answer depends on what the company does with that cash. The choices are:

  1. Deploy it in assets which would earn a much higher return than AAA bond yield net of inflation. Even if the deployment is a bit delayed, the prospect of that happening makes that cash worth more than its face value;
  2. Deploy it in assets which would earn a return lower than AAA bond yield net of inflation, in which case value is destroyed and the cash should be valued at a discount; and
  3. Hoard it and keep it in treasury with no intention of deploying it anywhere, in which case, again value is being destroyed and the cash on the balance sheet is worth less than its book value.

Safal Niveshak: Do you continue to believe in the long-term India story? If yes, why? If not, why not?

Prof. Bakshi: Do I continue to agree with the long-term India story? Not only do I agree, over the last one year, my partner and I have made numerous presentations to global investors in an attempt to convince them to make long-term commitments through Indian public markets.

In our view, global investors mustn’t ignore India anymore. Sure, we’d had our Satyams and NSELs but we’ve also had our Asian Paints and Pidilites. The number of companies that have created enormous long-term wealth in India for their stockholders is large enough to be noticed.

India has many fantastic entrepreneurs who, under very difficult circumstances have been able to compound capital entrusted to them at superlative rates for long time periods. They have done it without cutting corners. And they have done it with a sense of capital stewardship that should remind the global investors about Rose Blumkin of Nebraska Furniture Mart.

Like Mrs. Blumkin, many of these entrepreneurs did not get “proper” education in English-speaking schools. Like Mrs. Blumkin, they too can’t articulate their thoughts very well to the global investment community. But boy do they know how to run a business!

They know how to create brands and how to get a sustainable cost advantage. They know how to distribute their products efficiently. They know how to manufacture efficiently. They know how to implement the best management practices. Cost cutting comes as naturally to them as breathing.

They know how to advertise. They know how to make intelligent capital allocation decisions. They know that “growth for the sake of growth alone is the ideology of a cancerous cell” and they they run their businesses for profitable growth and not for just taking market share. They know how to focus on long-term value creation and not short-term earnings.

I believe they are the unsung heroes of India’s capitalism. Partnering with them and showcasing them to the world is something that ought to be done. It’s kind of patriotic, isn’t it?

And, I am doing it…

Safal Niveshak: Would you tell my readers the Nano vs. Jaguar story that you’ve created?

Prof. Bakshi: Of course!

Question: A Nano is about to enter into a race with a Jaguar. Because the faster of the two is Jaguar, to create a “level playing field,” the race organizers decide to give Nano an advantage.

They do this by allowing it to start the race 5 km ahead of Jaguar. Which car will win the race when both are allowed to go at their top speeds? Think before reading further!

Answer: It depends on how far is the finishing line.

A scalable commodity-type business without a moat is like the Nano. While it have an advantage of a “cheap” price in the form of a low P/E or P/B multiple, it’s “engine” sputters quite a bit and may die rather unexpectedly. Nano is not going to win a long race against Jaguar.

On the other hand, a scalable moat business is like the Jaguar. The disadvantage it suffers from is the “high” P/E and P/B multiple one has to pay to get into its driver’s seat. In long races, this disadvantage doesn’t prevent Jaguar from beating the shit out of Nano but in very short races, Nano wins.

The moral of the story is this: If you’re going to be making truly long-term bets, you should buy Jaguars. But you should also ensure that they are not too far behind Nanos when the race starts. Because, if they are too far behind, then it will be very difficult for Jaguars to catch up.

Investors should recognize that when they buy poor businesses (Nanos) at below book value, then while their original investment may have been made on a bargain basis, every successive investment made by them in the business through earnings retention happens at book value. That’s because earnings retention is functionally equivalent to a dividend payout of 100% of earnings immediately followed by a proportionate, compulsory rights issue at book value.

In contrast, when investors buy great businesses (Jaguars) at above book value, then while their original investment may look expensive (and often turns out to be too expensive), every successive investment made by them in the business through earnings retention happens at book value.

Over time, the aggregate earnings retention by a business since its acquisition will start mattering more than its purchase price. In poor businesses, it would hurt. In good ones, it would help.

To illustrate, in the short-run, the stock of a poorly run bank which earns a ROE of only 10% a year bought at 0.5 times book value may outperform the stock of a brilliantly run and highly profitable NBFC (ROE of 25%) acquired at 2 times book value. But in the long run, the NBFC will almost always outperform the bank (assuming the qualities of both businesses remain unchanged).

Safal Niveshak: Amidst the rigours of daily life, small investors often find it difficult to devote much time to reading, which is so essential to develop the right investing mindset. So if you were to suggest them just 3-5 books or resources that can provide them 80-100% of their learning, which ones would those be?

Prof. Bakshi: You should read 3-5 books in a month! And if you don’t get time to read, then pick some tricks from here written by a friend who reads 3-5 books in a week!

But if you put a gun on my head, then I would advice investors to buy a Kindle and then buy all the letters of Warren Buffett (Vishal – You can also download PDF of his 1957-2012 letters from here). They cost just US$ 2.76 (Rs 180) and in my view there is nothing better out there.

Why on Kindle? Because you get access to them all the time. You could be waiting at a traffic crossing in your car waiting for the light to turn green and while you’re doing that you could pick a random passage or two and learn something useful.

Before you sleep at night, you could read a few more passages and then by the time you wake up the ideas you read about would get “fused” in your brain because your mind would be thinking about what you read even when you slept. This works for me. It really does!

Read just that one book slowly and you’ll become wiser.

I also recommend:

  1. The Investment Checklist by Michael Shearn;
  2. The Little Book That Builds Wealth by Pat Dorsey;
  3. Understanding Michael Porter: The Essential Guide to Competition and Strategy by Joan Magretta; and
  4. It’s Earnings That Count by Hewitt Heiserman.

Safal Niveshak: Thank you so much Prof. Bakshi! I also thank you on behalf of Safal Niveshak’s readers for taking out time from your busy schedule to answer so many important questions on investing and how one can form the right mindset to become a sensible, long-term investor.

Hope to meet you soon. Thank you!

Prof. Bakshi: This was fun. Thanks for your patience. Keep up the good work you’re doing. Let’s create some really good investors!

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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.


  1. Akshay Jain says:

    What an amazing interview…..awesome
    Just had one question – How does one figure out numbers of maintenance capex and capex for expansion to help calculate owners earnings??


  2. Saurav Jalan says:

    Thank you Vishal for the amazing interview with Prof. Bakshi. It was really insightful.

    Akshay I came across this formula on net given by Prof. Bruce Greenwald to segregate maintenance and growth capex.

    1. Calculate the average gross property plant and equipment (PPE)/Sales(in percentage) over the last 5-7 years
    2. Calculate current year increase in Sales
    3. Multiply PPE/Sales(in percentage) by increase in sales to arrive at growth capex
    4. Maintenance Capex = Capex figure from the cash flow statement – Growth capex calculated by the above 3 steps

    You can also read it at here for more clarity.

    Saurav Jalan

  3. Wow!! really good stuff.

    Loved the examples of Nano and Jaguar..:-) and his views on India story. Yep, why not invest in selected Indian businesses? If Buffet continues to find opportunities in the US, we can do the same in India..:-)

    They say Srimad Bhagavatam is the “Ripened Fruit of Vedic Literature”. Pro. Bakshi’s thoughts also remind me of a Ripened Fruit when it comes to Value Investing in India. 🙂 It will be relished by all..liberated souls as well as the newbies.

    thanks again, we should pin this interview.

  4. Tamal Bhattacharjee says:

    Great interview. Great insight. Possible learned a little .

  5. Murali Krishnan says:

    Thanks vishal and Professor. It will be really helpful

  6. R K Chandrashekar says:

    Dear Vishal
    You have been able to distill the thoughts of great masters in value investing and present it lucidly.
    Prof Bakshi has covered a whole gamut of ideas running from Protection Vs Prediction to Moats
    and then DCF Vs FCF and the importance of Owners Equity and a nice example of Nano VS Jaguar.
    and yes cultivate the reading habit ; what was left unsaid-imbibe and put these in action!!
    Personally my investment ideas of long ago got a happy validation from the Master- Asian Paints, Pidilite,
    Eicher Motors!!

  7. Nelson Christian says:

    The example of Nano versus Jaguar explained very well what has one to do for long term successful investing. Amazing interview and so many interesting books recommended. Thanks Professor and Vishal for the enlightenment provided. It was indeed food for thought.

  8. Hi Vishal,
    Thanks for taking your time out in writing these wonderful blogs and interviews…There is much to know and much to learn, esp. for novice investors(Nano cars) from Mr Bakshi(Jaguar)…I liked the earlier interviews as well that you have posted on the blog…However it took me a while to find out the old interviews… 1.Value Investing, the Rohit Chauhan Way…and 2. The Analyst Who Sold His Ferrari…In your site, if you can make a link dedicated for Interviews you have taken so far, it would be wonderful(the way you have done for Stocktalk)… Any future interviews that you make can be linked with this. I think few days back you posted one on our tribesman Mr Chandrashekhar as well. Not able to find the link…

  9. Anil Kumar Tulsiram says:

    Thanks a lot Vishal for taking out time in putting out lengthy interview with Prof Bakshi. Selections of questions was excellent.

  10. Chetan Chhabria says:

    Hello Visahal,

    Thanks for conducting this interview with Prof Bakshi.
    Can you please explain what Prof said about buying at a lower book value and then subsequent investments made at back value through retention of earnings. Couldn’t understand that point.

    Chetan Chhabria

  11. Thanks for the interview Vishal 🙂

  12. Thanks Vishal and Professor for the insightful interview. As mentioned by you in Oct 2013 blog that margin of safety is an integral part of value investing, I fully agree that even a good business and quality company can not be bought at any price.

  13. Safal,

    Great Interview. Sanjay is an amazing mind.

  14. Thank you Professor and Vishal !

    I have a question, while calculating owners earning, do we also need to add back working capital requirements. I think yes, but only the incremental working capital required for growth. Am I correct in my understanding?

    If I were to put it by way of a formula, this is how it would look.

    Owner earnings: Cash Flow from operations – Maintenance Capex + Growth Working Capital

  15. Jasmeet Dang says:

    Hi Sir!

    Hope you are doing great. I was actually re-reading this one right now, while i was trying to access the link ” Recovery Investment” the link for; it is not working.
    Please see.

  16. Puneet Khurana says:

    Very Nice Interview and some really well thought questions.
    Keep up the good work.


  1. […] your investing checklist, stick with quality businesses (Prof. Sanjay Bakshi outlines the reasons here), and remain invested for the long […]

  2. […] When I started my investment journey two years back, I was much more attracted to the investment philosophy of partners of Tweedy & Browne compared to Warren Buffet. I found Tweedy & Browne emphasis on buying numerous group of bargain securities easier compared to buying selected few companies with strong moat at fair prices as emphasized by Warren Buffet [But gradually over last few months I am moving towards concentrated portfolio with a mix of both quality companies & special situations]. I fully agree with what Prof Sanjay Bakshi said in his recent interview here […]

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    Value Investing, the Sanjay Bakshi Way 2.0 – Part 2 | Safal Niveshak

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