Blog on Value Investing | Safal Niveshak

My Email Exchange with Prof. Sanjay Bakshi on Valuations

In the March 2015 issue of my premium newsletter Value Investing Almanack, I wrote on the topic of Valuations as the cover story.

My idea was to bring forth varied thoughts on valuing stocks and especially from the angle of drawing the line between paying up and overpaying for high-quality businesses.

I showed the draft of my note to Prof. Sanjay Bakshi, and he was kind enough as always to share his thoughts on how investors must look at valuations, especially when they are looking at expensive-looking, high P/E stocks in their portfolios.

What follows below is our email exchange on the subject. I am sharing it here so that a wider audience benefits from Prof. Bakshi’s thoughts on the important subject of valuations.

In the meanwhile, if you wish to read the complete March 2015 issue of Value Investing Almanack, and my detailed take on valuations and a lot of other ideas, please click here to subscribe.

Life 2.0: Deliberate Practice

Great habits are built through constant practice. The idea is to take a simple idea, and then take it seriously.

In the previous issue of Life 2.0, we talked about habits as a way of simplifying and taking control of your life. Let’s now take it one step further and explore how we can build skills at an expert level.

Everybody aspires to be really good at something. It could be a sport, an art, playing a musical instrument or any other activity like reading, painting or drawing. Sometimes when we see somebody who displays an extraordinary talent in any of these fields, it not only leaves us awestruck but inspires us.

A common myth about talent is that it’s a genetic gift and talented people are born with it. However, nothing can be further from truth. Some people do have a natural inclination towards few activities but it’s not what makes them talented.

So how do you become good at something? How do you improve your performance in a chosen activity? Well the cliché “practice, practice and practice” isn’t the entirely correct answer.

Talent is an outcome of “deliberate practice”. If you haven’t heard of this term before let me give you the definition first.

Deliberate practice is a highly structured activity engaged in with the specific goal of improving performance.

The idea was made popular by author Malcolm Gladwell in his book, Outliers. According to Gladwell, it takes 10,000 hours of practice to become a world class expert at any skill.
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Ethical Analyst: Conflict of Interest

Reputation is difficult to build but easy to lose. How we hope people in the investment industry respect this for a fact. Sadly, most don’t!

“We’ve given you so much information on our business. Now what can you do for us?” I was stumped to hear this from the CFO of a “reputed” mid-size Indian IT services company when I went to meet him sometime in 2009. I had received several such requests from lower rank managers of other companies in the past, but to expect this from a CFO was like too much!

This harmless-sounding question – “What can you do for us” – means a lot when you are stock market analyst who is preparing to write a report on a company. When a top manager asks an analyst as to what he can do for the former’s company, he is indirectly nudging the latter to write a positive report (a ‘Buy’ recommendation) on the stock. Yeah, that’s true!
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The Painful Decision to Hold Cash

One of the many investing mistakes I made during the early part of my investing career was to be rash with cash.

One salary hike, one bonus, or one big inflow of money (family gifts etc.) and I would invest the same into stocks I liked, irrespective of what the stock markets were doing.

Cash in bank was considered a wasted opportunity and every chance to “let-me-buy-stocks-now” was grabbed upon.

The question I used to ask myself was – “Why should I hold cash when it is paying nothing while stocks can grow my money much faster?”

However, over the years and after learning my lessons (from not holding cash) the hard way, I’ve found several reasons to ‘hold cash’.

Corporate Governance: How Companies Screw Investors

When a CEO combines his ego and willingness to put precious capital on the line to grow his company bigger, faster, it can create disaster for investors.

All of humanity’s problems stem from man’s inability to sit quietly in a room alone.” ~ Blaise Pascal

You must have heard the fairy tale where a spoiled princess reluctantly befriends a toad, who magically transforms into a handsome prince triggered by the princess kissing it.

Well, those were the older times. Today’s capitalistic society has been witness to a large number of spoiled princesses trying the same trick on a large number of toads, only to realize that the tale of them turning into princes they had heard of was just that…a fairy tale.

If you are confused why I am writing about the tale of the toad and princess, let me get straight to the point now.

If there’s one quick way a lot of companies and their CEOs have destroyed a lot of shareholders’ wealth in the past, it is through mergers and acquisitions (M&A).

So in the world of M&A, the spoiled princess is the company that is looking to acquire another company, and the toad is that other company that’s waiting to be acquired.

Now, despite 50 years of evidence demonstrating that most acquisitions don’t create value for the acquiring company’s shareholders, corporate managers continue to make more deals, and bigger deals, every year.
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But the Future is Bright!

Consider this financial statement of a company…

If I were a promoter of this company and asked you to invest your money in it – and you did not know me personally – would you invest?

Okay, to sweeten the deal, I lower my asking price by 10%, would you invest now?

I share with you my optimistic view on the company’s future, and how you are going to earn great returns in the future. But would you still budge?

“Okay, what are you going to do with my money?” you ask me.

Life 2.0: Habits of Life

The key to bringing lasting change in your life is by way of great habits. And the best way to build great habits is by starting small and building up.

I hope you would agree with me that life isn’t all about stock market investing or for that matter just about money. Making money is only a means to a greater end i.e., living a happy life.

It’s true that for many people stock market investing is a passion and they don’t do it just for money. However, it circles back to the logic that the activity of investing in stock market makes them happy. So investing is just a tool to achieve something more important – personal happiness.

The age old wisdom suggests that happiness is brought about by the right balance of financial, mental, physical and spiritual health. What financial abundance does is that it gives you an option to stop worrying about money all the time and focus your energy towards other happiness factors.

But you don’t have to wait till you are financially free to start your work on other areas of life. You can start today. Let’s pick up one area, say health and see how you can bring a change in this part of your life.

Everybody knows that to be more healthy and fit, you need to exercise and eat well. It is a common knowledge and part of everybody’s new year resolution. Problem is that these resolutions are short lived and motivation to carry on the new activity dies down rapidly after few days.
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10 Secrets You Must Know about Financial Media

I have been holidaying for the past two weeks now, and have thus been almost away from thinking about the stock market or accessing any financial media.

In fact, I am currently in one holy city in India, where not many people have an inkling of what the stock market is all about, forget knowing or reading any of financial media. Life is thus good and simple here, largely because people are away from the noise of a big city and its constantly attention-seeking media!

Even I do not have much access to such media here, except when I turn on my laptop. This has given me a lot of time to think about the role of financial media in the life of investors.

I have always maintained that consuming financial media is often dangerous for investors, because almost none of it is good.

But if you are a consumer (most of us are), here are ten secrets I have to share with you on what financial media can do to your mind and behaviour over the long run, and why you must avoid most of it.

The Most Important Thing You Need for Investing Success

Benjamin Graham wrote this in The Intelligent Investor…

The art of investment has one characteristic that is not generally appreciated. A creditable, if unspectacular, result can be achieved by the lay investor with a minimum of effort and capability; but to improve this easily attainable standard requires much application and more than a trace of wisdom.

The ironical truth about investing is that, despite hundreds of rules that guide the practice of being an investor, there is no rule that works all the time, and in the same manner.

Investing is, after all, not like a game of football where the ground and the ball remain the same throughout the ninety minutes of play. It’s more like cricket where the pitch changes its behaviour with every new ball, and the ball changes is shape every time it’s bowled.

So, when you are an investor, the environment in which you play isn’t controllable, and circumstances rarely repeat exactly. What’s most important then is how you behave when others are behaving oddly.

One of the best tools to think and behave better in investing is what Howard Marks calls…

EthicalAnalyst: Ethics in Investment Business

Honesty and ethical practices are of utmost importance in any business, and especially in the investment business that remains clouded under mistrust. What’s wrong and what must be righted is what we discuss here.

The richest one percent of this country owns half our country’s wealth, five trillion dollars. One third of that comes from hard work, two thirds comes from inheritance, interest on interest accumulating to widows and idiot sons and what I do, stock and real estate speculation. It’s bullshit. You got ninety percent of the American public out there with little or no net worth. I create nothing. I own. We make the rules, pal. The news, war, peace, famine, upheaval, the price per paper clip. We pick that rabbit out of the hat while everybody sits out there wondering how the hell we did it. Now you’re not naive enough to think we’re living in a democracy, are you buddy? It’s the free market. And you’re a part of it. You’ve got that killer instinct. Stick around pal, I’ve still got a lot to teach you.