Vishal Khandelwal

Of Bad Businesses, Unethical Managers, and Stock Market Volatility

“I’m fast losing hope in this world!” my friend Ravi exclaimed as we started talking over desserts after our last weekend lunch.

“So soon?” I asked him. “What happened?”

“Are you reading newspapers these days Vishal? Or are you still abstaining from them?”

“I still don’t read newspapers, Ravi. But tell me what’s the news that has gotten you worried?”

“You read the news about ICICI Bank’s alleged sanctioning of a huge loan to Videocon because its chairman supposedly had dealings with the bank’s CEO’s husband? There are no honest people left in the corporate world it seems!”

“Yeah Ravi, I came across this news on Twitter recently. It’s bad if it’s true.”

My Interview with Jason Zweig

Note: This interview was originally published in the December 2016 issue of Value Investing Almanack. To read more such interviews and other deep thoughts on value investing, business analysis and behavioral finance, click here to subscribe to VIA.

“I wish I could talk to this guy,” I told my wife when I read Ben Graham’s The Intelligent Investor first time sometime in 2005.

“But he is dead, right?” she said.

“Oh, not Graham,” I exclaimed, “But Jason Zweig who has edited this version of Graham’s book.”

“I am sure you would one day,” she said with an air of confidence. But I junked her thoughts saying, “Why would he even want to talk to me?”
[Read more…] about My Interview with Jason Zweig

Process, Practice, Perseverance

Have you ever wondered why a doctor’s clients are called ‘patients’? Even a more interesting question, why do doctors call their work as ‘practice’?

Well, one of the reasons is that you can’t become a good doctor without practicing what you learn in textbooks. For that matter, any work done under any profession is nothing but practice. And that doesn’t exclude investing in the stock market.

I recently read a nice post from John Huber on his investment process. Here’s something John wrote that caught my attention –

…stop trying to read everything under the sun and get out there and actually start investing—start valuing companies, make investments, learn, repeat, etc…Whether you’re playing the piano, hitting a sand wedge, shooting a jump shot, riding a bike, or even driving a car—the way you learned was through repetition. The same can be said for valuation. Reading books is fine, doing case studies is better, but actually valuing companies and making investments—practicing—is the best way to learn.

Lesson from a Dozen Angry Men

In June 2016, I got the opportunity to attend Prof. Sanjay Bakshi’s workshop in Flame University. Prof. Bakshi’s style of teaching is remarkably unconventional. He uses a lot of images, videos and stories to explore ideas. Such method serves three purposes.

First, unlike traditional classroom lectures, Prof. Bakshi’s classes, from start to finish, are very interesting.

Second, a human mind is better at remembering information when it comes via multiple sensory inputs. Understanding of the concepts is much deeper when different sections of the neural machinery are engaged through visual information.

Third, stories make the information stick better. A message packaged in the form of a story has a longer shelf life.

One such video that Prof. Bakshi shared during his workshop was an old Hollywood movie called ‘12 Angry Men.’ It came out in 1957. The story is based on a drama written by Reginald Rose.

The jury system is designed to be a wonderful system for decision making. So, the movie has important lessons on decision making, thinking, and human psychological biases. Interestingly, there’s also a Bollywood version of the same movie titled Ek Ruka Hua Faisla. However, I suggest you watch the original 1957 version first. I guarantee that the 90 minutes you’d spend on the movie will be worth every second of it.
[Read more…] about Lesson from a Dozen Angry Men

Before Your Song Is Over

Warren Buffett wrote this in his 2000 letter to shareholders…

The line separating investment and speculation, which is never bright and clear, becomes blurred still further when most market participants have recently enjoyed triumphs. Nothing sedates rationality like large doses of effortless money. After a heady experience of that kind, normally sensible people drift into behavior akin to that of Cinderella at the ball. They know that overstaying the festivities—that is, continuing to speculate in companies that have gigantic valuations relative to the cash they are likely to generate in the future—will eventually bring on pumpkins and mice. But they nevertheless hate to miss a single minute of what is one helluva party. Therefore, the giddy participants all plan to leave just seconds before midnight. There’s a problem, though: They are dancing in a room in which the clocks have no hands.

Buffett was talking about the irrationality he was seeing around during the heydays of the dotcom boom. What followed next i.e., the bust, is deeply etched in most investors’ memories who participated in that irrationality.

As I was reading this text from Buffett last night – thanks to my habit of reading and re-reading a small super-text each night before I sleep – I could relate this to the irrationality with which most of us live our lives, ignoring the beautiful things that happen around us while we race towards achieving name, fame, and of course, lot of money…

Safal Niveshak Value Investing Contest 2018

Here’s your chance to showcase your analysis skills to the Safal Niveshak tribe, and in the process win a prize if your entry gets chosen amongst the best.

Contest Rules

Write a 3,000 word (max.) report on one listed Indian company of your choice.
You may submit more than one report, but will be eligible for only one prize.
Deadline for report submission is 25th March 2018
Email your report in a Word file to vishal[at]safalniveshak[dot]com with the subject line as – “Value Investing Contest 2018 – Company Name – Your Name”
The stock must have a market capitalization of more than Rs 500 crore
The idea must be well researched (by you). Your analysis must cover these areas:
- Company history and business
- Moat analysis (if moat exists)
- Competition
- Financial strength (provide data/charts to support your analysis)
- Management quality (have they been good or bad allocators of capital)
- Risks (what can go wrong)
- Valuation (no price targets required; challenge the market’s current valuation instead of calculating your own)
The report would be exclusive to Safal Niveshak. But you can post an abstract at other places and link to the full report on Safal Niveshak.

What Not To Do

Avoid hard-selling the idea, especially if you already own the stock. 🙂

Also, in your report, please make a mention whether you own the stock or not.

Evaluation & Rewards

I will evaluate each submitted entry ONLY on the depth and simplicity of analysis, though good presentation and proper language is more than welcome (would save us editing time!)

There are three prizes to be won (delivery in India only) –

1st Prize – Books of choice worth Rs 5,000/-
2nd Prize – Books of choice worth Rs 3,000/-
3rd Prize – Books of choice worth Rs 2,000/-

All submitted entries would be published on Safal Niveshak (the author can remain anonymous if he/she wants).

This contest is now open. Remember, the deadline for submission is 25th March 2018.

Latticework of Mental Models: Benford’s Law

On 25 November 2003, Kevin Lawrence was sentenced to 20 years in prison for pulling off possibly the biggest financial fraud in Washington State’s history. Here’s the backstory.

Kevin Lawrence graduated from high school in 1984. After a brief stint with a brokerage firm Lawrence bought a bowling alley and converted it into a fitness gym. He equipped the gym with modern exercise equipment, computers and hired chiropractors, masseuses and a nutritionist for the facility. But that was just the beginning of his entrepreneurship dreams. Soon he started working on an ambitious business plan to create a chain of high tech health clubs. He pitched the idea to a lot of investors.

Lawrence claimed that his startup would be an industry innovator that integrated fitness and health care into one business model, i.e., consumers could do fitness workouts and obtain health care within the same facility. His proposition also included offerings for design, manufacturing, and marketing of fitness equipments. Plus, he planned to build software to analyze the club member’s physical performance.

Lawrence must have been a good storyteller for he was able to convince more than two thousand investors and raise close to $100 million.

How Much is Enough, and A Few Other Questions

Note: I gave this talk to a group of friends working in Silicon Valley during my recent trip to the US. Surprisingly, they liked what I spoke and wanted me to share the transcript, which I am doing today in a deeper and more refined form.

Hi Friends,

Thanks for inviting me to speak to you today. I have nothing intelligent to say. You guys score much higher than me on the IQ charts. And it’ll be for the benefit of us all that I speak less and that you keep your expectations from me low. In fact, very low.

So, given that I have been given the freedom to talk whatever I want to today, I have smartly avoided intelligent stuff because I completely believe in what Mark Twain said and I quote, “It is better to keep your mouth shut and be thought a fool than to open your mouth and prove it.”

Instead of talking intelligent stuff around stock market, investing, human behaviour, etc., let me focus on a few important questions I have tried to seek answers to at various stages of my life, and that have helped me tremendously in choosing a path that, when I look back at, I am glad I chose.

Latticework of Mental Models: Thinking From First Principles

First principles thinking is one of the most effective mental tools for solving problems, especially the hard ones. And no one embodies this philosophy of first principles thinking better than Elon Musk, founder of PayPal, SpaceX, Tesla Motors and SolarCity.

Musk, in one of his interviews, said –

It’s most important to reason from first principles rather than by analogy. The normal way we conduct our lives is we reason by analogy. We’re doing this because it’s like something else which was done or it’s like other people are doing. It’s mentally easy to reason by analogy rather than by first principles. First principles is the Physics-way of looking at the world. What that really means is that you boil things down to the most fundamental truths and then reason up from there. That takes a lot more mental energy.

For example, somebody could say that battery packs are really expensive and that’s just the way they’ll always be because that’s the way they’ve always been in the past. No! That’s pretty dumb. If you apply that reasoning (analogy) to anything new then you won’t be able to get to that new thing.

For batteries people say, historically it has cost $600 per kilowatt hour and it’s not going to be much better than that in the future. First principles thinking would say, what is the market price of the basic constituents of the battery? It’s got Carbon, Nickel, Aluminium, and some polymers for separation. So breakdown on the material basis and ask, “If we bought that in London metal exchange, what each of those things cost?” Oh! It’s like $80 per kilowatt hour. Clearly, you need clever ways to take those material and combine them into the shape of a battery cell and you can have batteries much much cheaper than anyone realized.

How to Get Rich

“What’s keeping you from being rich? In most cases, it’s simply a lack of belief. In order to become rich, you must believe you can do it, and you must take the actions necessary to achieve your goal.” – Suze Orman

Well, that was the theory of getting rich. Here are the pratical tips, the actions necessary to get rich –

Also Read –
1. Getting Rich vs. Staying Rich
2. How to Get Rich, Stay Rich And Be Happy