A Brilliant Investor Who Enjoys the Process More Than The Proceeds

“A pleasant and agreeable man, who is not without a certain charm. Of exemplary responsibility in both his professional and personal lives, he is equally a man who can be counted upon. Such maturity and consideration, along with his mild and protective disposition makes being in his presence a pleasant and reassuring experience.”

Well, that’s what I got on the Internet when I searched for the meaning of the name “Ninad”. This is an unusual name, at least for me, and thus I was curious to know what it means.

I don’t prefer generalizations, especially when one word or one date of birth is used to explain the characteristics and future of all people associated with it (like when fortune tellers predict the future just based on a person’s date of birth).

But I was impressed by the above description, because I had recently met someone with the name “Ninad”, and the above description fit him to the tee.

Ninad who?

Well, if you have not read much of Indian value investing bloggers in the past, one name that has been there for long but has on purpose avoided the limelight, it is that of Ninad Kunder.

While I have been reading Ninad’s blog off and on for quite some time, I met him for the first time recently at a value investing conference.

We did not talk much – I speak less 🙂 – but I knew I had to capture his thoughts and share them with you. And thus I requested him for an interview for Safal Niveshak.

He reluctantly agreed, saying that he has a fairly nondescript and incognito existence.

I told him how I had to interview him before he became more successful and famous so that I could boast of interviewing him when he was not that famous. 😉

To this he replied why he had a zero chance of becoming famous as an investor, simply because he finds more joy in taking a walk with his daughter or laughing with his friends, then working hard to become famous as an investor.

Anyways, instead of me going on and on about my interaction with Ninad, let me welcome him to do the talking himself while explaining us the thought process of the investor in him.

Safal Niveshak: Before I pick your brains on investing, please share something about yourself – your education background and career.

Ninad Kunder: I finished my engineering in the mechanical stream and went to do my MBA program in Finance. I then joined the financial services industry in a marketing (product/brand management) role. After a few years, the entrepreneurial bug bit me and I started a venture in the HR domain and continue to run that.

So, in a sense, my professional career has been across functions which have helped me in the investing journey.

SN: What got you into investing, and how did you begin to learn about the market and investing in general?

NK: I started investing, or I would say a better word would be ‘speculating’, very early in my engineering days when a couple of friends used to pool in money to apply for IPOs.

The journey continued through my subsequent education and my professional life without a framework in place. The fact that my speculating style involved zero trading and my inherent conservative nature enabled me to survive this phase with minimal tuition fees.

On the whole, I came out ahead positively.

Though I had read The Warren Buffett Way and Peter Lynch during my MBA days, I don’t think I either internalized or applied rigour to the investing process.

It’s about 7 years back that I discovered value investing. Part of the credit I would lay on the doors of Prof. Sanjay Bakshi’s blog and my friend Rohit’s blog which started me on the journey.

What really took the process to the next level was the discovery of Charlie Munger. To be honest, for me, Charlie Munger has been a greater influence than Warren Buffett.

SN: How would you describe your investment philosophy?

NK: I can bore you with stating the obvious like buying something worth a dollar for 50 cents or investing in the business and not the stock etc.

I want to put it differently. I will borrow Munger’s multi-disciplinary approach in investing to a multi-disciplinary approach to life.

My investment philosophy is to invest in things that make me happy and give me a good night’s sleep. It’s about investing not just in stocks but also in friends, family, interests, self etc.

I have always been surprised on the variety of things that I have learnt from one dimension which have helped me in the other.

SN: What would you say are the 3 most important investing lessons you learned early on?

NK: The key investing lesson that I have learnt is that “you can’t learn 3 most investing lessons early on” :-).

We have to go through the learning process of making mistakes and paying our tuition fees in the process. No matter how much I tell my daughter that a pan is hot, till she doesn’t touch it and burns her fingers the learning will never be internalized.

The most important lesson that I learnt (not early on) or still learning is that investing is “1% Intelligence and 99% temperament”.

Reasonable intelligence is a necessary condition but not a sufficient condition. Unfortunately, most of us continue to invest most of our time towards gaining intelligence as opposed to perfecting temperament. I, of course, continue to remain guilty on this count.

SN: What according to you is the biggest problem most investors don’t succeed in the stock market? Is it due to their inability to value assets properly, or is it due to the difficulty in understanding market’s behavioural cycles? Or is there some other factor at work?

NK: Here I would quote one of the greatest philosophers of our time – Calvin from “Calvin and Hobbes” – “I take it there’s no qualifying exam to be a dad.”

On this planet, you need to take qualifying exams before they allow you touch anything as an engineer, doctor, or architect. There are two things and, in my opinion, two very important things that don’t have a qualifying exam before you are allowed to take the plunge…

1. Any idiot with a basic understanding of biology can go ahead and take on the toughest job on this planet which is to become a parent.
2. Anybody with the ability to sign a KYC form can become an investor and invest (euphemism for ‘gambling’) his/her and the families hard earned money.

I think similar to how we go about adding qualifications to ourselves before we take the plunge in our professional lives, it is important for us to evaluate whether we have acquired competence (largely by reading) before we take the plunge into investing.

Errors will happen along with the way in the form of value traps, overpaying for a stock, misreading the cycle etc. which are really about learning on the job.

Of course, the biggest of them all is our ability to handle our emotions.

P.S. By the way, I also unfortunately didn’t pass any exams before taking the plunge.

SN: Michael Mauboussin, in his book “The Success Equation” writes that much of what we experience in life (and investing) results from a combination of skill and luck. How has been your experience with skill and luck? Can you please explain with a real-life example in investing?

NK: One of the commons arguments that a smoker will put across is that the fact that he knows somebody who has been smoking a pack of cigarettes all his life and still going strong at 85. Whereas somebody who never smoked or drank had a healthy diet and exercised everyday died of a heart attack at the age of 45.

This is a classic case of using an exception and disguising it as the rule with complete disdain for probabilities.

The concept that I use for myself is “positioning for luck” and I have written about it on my blog.

The smoker in my opinion is “positioned for bad luck” as he has a higher probability of having a lower life expectancy than a person who is a non-smoker and maintains a relatively healthier lifestyle. The non-smoker is “positioned for good luck”.

So there would be the occasional smoker who lives till 100 and the non-smoker who dies at 40, but the odds are stacked against the smoker.

I use the same concept in stock picking – How am I positioned in a stock pick? Is there a higher probability of being hit by a black swan or by a positive white swan?

The skill is in ensuring that your portfolio is structured where you are more likely to be positively surprised and then let the odds play out.

An example that I had put on my blog was the case of Abbott Labs where I was positioned correctly and just got lucky when they bought over Piramal and increased their focus on India.

SN: How can an investor improve the quality of his/her decision making? Some successful investors have talked about the importance of keeping a decision-making journal. What is your take on this?

NK: I completely agree with the need to maintain a decision making journal. Having said that, let me tell you I am guilty of omission on this count in terms of maintaining a formal journal.

We don’t lose serious money in the markets when we are wrong. Rather, we lose it when we refuse to take action on the fact that we are wrong.

I think an investment journal helps in overcoming this bias. It prevents you from rationalizing when the pain of loss aversion starts hitting you.

I work on a lot of special situations which require a combination of understanding the business, understanding the situation, and making a guesstimate on the likely behavioral patterns of other market participants.

I always try to put down the end game on paper (create a anchor) because I have realized over the years that, at the crunch point, the dopamine kicks in and prevents rational decision making.

SN: How do you typically find ideas and what is your selection process before an idea gets added to your portfolio?

NK: Ideas come from all sort of sources largely through reading across streams. It could be from newspapers, business magazines, websites, supermarkets, etc. and most importantly from a strategic deal that I have made with my raddiwallah (scrap paper dealer) who provides me with a constant stream of annual reports.

As a thumb rule, I “try” to read one annual report a day.

All these are starting points to interest me into something and then you dig deep from there onward. Each of these go into multiple boxes.

1. Box 1 – “Are you nuts to look at this business / promoter!”
2. Box 2 – “Interesting but not at this price or time of the cycle.”
3. Box 3 – “Oh my God, this one is really hot! Envy the guy who got it cheaply. Don’t think I can afford this one.”
4. Box 4 – “My type of business/valuations. Gotta pursue this.”

Once I reach the stage of pursuing something, then the most important thing before I jump into data is to sit back, clear my mind, and think through the business model and the sustainability of the model and the margins. The numbers follow from there on.

Except for a few annuity type businesses, I’m not a great fan of DCF (discounted cash flows).

I have realized that at a subconscious level, the decision is made up in our mind and our projections just reinforce the decision that has been arrived at.

SN: How important are investment checklists? Can you mention a few key metrics your own checklist consists of?

NK: Atul Gawande’s The Checklist Manifesto is a must read for any investor. In investing, there are three M’s which are the most important – Management, Management, and Management.

I have great respect for the Indian promoters and their ability to run businesses in a complex nebulous environment. But I have greater respect for their ability to siphon out money from their companies and leave nothing on the table for the shareholders.

These exist across both the trader businessman and the smooth-talking IIM/Harvard/Stanford educated promoters. MNC subsidiaries are no better.

Businesses which require promoters to be crooked in dealing with the environment will be crooked in dealing with their shareholders. It’s something that becomes inherent to the gene pool. Real estate is a classic example of this.

To me this is the most important checklist. To use a engineering terminology this is a “Go/No Go” variable.

SN: A lot of successful investors talk about the importance of having a “multidisciplinary approach to investing”. How do you approach this subject, and how can small investors create such an approach in their busy lives?

NK: I’m a great fan of Charlie Munger on this. There is absolute no substitute to reading and more reading across different streams.

I am great believer of history, and to quote Mark Twain, “History does not repeat itself, but it does rhyme.”

History teaches reversion to mean and most importantly 2000 years of it provides great insights into human behavior.

Jared Diamond’s Guns, Germs and Steel is a must read.

The other thing that I consciously do is to try meeting people who come from different streams. We tend to make friends and acquaintances within our own work/education subset. It’s always interesting to meet people who come from a different structure of thinking process and to realize how their brains are wired differently.

SN: How do you define “risk” in investing? How do you take care of that risk?

NK: I think the biggest risk is of not knowing what you are doing and more importantly rationalizing that you know.

Permanent loss of capital is not a risk, but hoping that the loss is not permanent in nature is the bigger risk.

More money has been lost not by booking a loss but by hoping that the losses will disappear.

It think all of it boils down to working on your temperament and the ability to be rational in your decision-making process.

SN: Corporate mis-governance has emerged as one of the biggest risks in investing. How can an investor insure himself against this risk? What are the factors you look out for to get hints of mis-governance in a company?

NK: Is there a fool proof insurance on this? It would be insulting the intelligence levels of promoters by claiming this.

Like I earlier said, industries which require promoters to be crooked to do business rarely will be fair to their shareholders. In an annual report, the cash-flow statement coupled with notes to accounts and related party transactions are important sources for getting hints.

Also abnormal deviance from a industry benchmark is a cause to probe deeper, especially in industries where individual companies do not have significant competitive moat. For example – In a commodity business, if one of the players is demonstrating excessive operating margins.

Similarly, high replacement capex as compared to industry could be signs of siphoning out money.

Sunrise/growth businesses where markets are extremely bullish tend to build skewed incentives for promoters to push the envelope in delivering greater growth on paper.

I think this part of the investing equation is more art than science. As you go through more and more annual reports / AGMs / management communications, you start getting a gut level feel. And nothing like having got fooled by a few promoters.

SN: As investors, one of the most difficult decisions we must make is with respect to selling stocks. What factors help you make “sell” decisions?

NK: Buying stocks is the easy part. Selling decisions are the most difficult and unfortunately we don’t apply as much rigor to this process as we do to the buying process. This continues to be a significant area of improvement for me too.

One clear variable is when the dynamics of the business has changed from what the original investment thesis envisaged; it becomes a clear point to either book your profit or loss as the case may be.

The other end of this equation is when valuations have peaked out beyond your expectation.

The difficult one is to figure out what part of the business deterioration is due to company variables and what part has taken place due to deterioration of the external environment which could be temporary or cyclical in nature.

SN: What are the 2-3 big mistakes that have characterized your investment life? Is there a way for investors to get over such mistakes?

NK: Well I have made quite a few of them from getting conned by promoters to classic value traps. Though one can try hard not to repeat mistakes but there are always the brothers and cousins of the original mistake who are lurking around and make your believe “this time is different”. 🙂

Those, of course, continue to be the four most dangerous words in investing.

One way is to learn from other people’s mistakes but some you have to go through the process to internalize. My daughter doesn’t have to put her hands on the gas flame to figure out that she will get burnt, but the learning from touching a hot pan remains.

SN: What is the best and worst investment advice you have ever received?

NK: The best piece of advice that I got is – “Don’t get your ego involved when your are wrong.”

I don’t think I have received any “worst investment advice”. Most of my stupidities have arisen out of my own intelligence. So it would be selfish to credit somebody else with it.

SN: What are your top five suggestions for investing and related books/resources?

NK: I can run through the usual suspects like reading Nassim Taleb, Howard Marks, Seth Klarman, Michael Mauboussin, Dan Ariely, Daniel Kahneman, etc. which I’m sure most people know. Just listing down slightly different set of thoughts…

• The Complete Calvin and Hobbes by Bill Watterson (Some of most amazing insights on human behavior)
• Listen to Master Yoda in the Star War series (Sample quote that is true for investors – “Many of the truths that we cling to depend on our point of view.”)
• Dilbert by Scott Adams (Great insights on decision making in the corporate environment)
• The Brain That Changes Itself by Norman Doidge (Interesting book in the area of neuroplasticity)
• Guns, Germs and Steel by Jared Diamond

SN: If you were to give “just one” piece of advice to a small investor on how he/she can become a smarter investor, what would it be?

NK: Read, read and read…and most importantly enjoy the process.

If the ups and down of the market is going to make you lose your sleep or make you irritable with friends and family, then it’s not worth it.

SN: Thank you so much Ninad for the amazing insights you shared on your experience as an investor, and especially your thoughts on human behaviour.

NK: Thanks Vishal! It’s been a pleasure sharing my learning as an investor. I hope Safal Niveshak’s readers are able to benefit in some ways out of it.

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