Podcast | Sanjay Bakshi on discovering Buffett, and how investors can profit from inefficient markets
In part one of this interview, Professor Sanjay Bakshi traces his foray into investing.
Part 1 of Moneycontrol podcast with Sanjay Bakshi. Subsequent parts to be published every day this week.
Hello
and welcome to Moneycontrol Podcast. I am Santosh Nair in conversation
with Professor Sanjay Bakshi. Before I get chatting, here is a brief
introduction about him.
Professor
Bakshi is considered to be one of the best minds in India in the fields
of value investing and behavioural finance. Besides these two subjects,
he also teaches corporate governance and forensic accounting at
Management Development Institute, Gurugram.
And he not only teaches value investing, but also practises it as Managing Partner at ValueQuest Capital.
Thank you for joining us on the show Professor Bakshi.
Q: Tell us what got you interested in investing? Was this your first choice as a career?
A:
Well, almost everything that has happened to me in life has been sort
of accidental. In this case, I used to see my dad, who was a value
investor. He is the kind of investor that you profiled in your book--old
school, faith-based investor who would pick up an entrepreneur and
blindly follow him. The entrepreneur my dad picked up was a guy called
Dhirubhai Ambani and he used to have a lot of faith in Dhirubhai’s
ability to compound capital. We all know that Dhirubhai was instrumental
in creating the equity cult in India. So, my father was part of that
cult and he used to talk about him all the time.
I
used to watch him as a kid at that time and it turns out that my dad
did fairly well. He was a bureaucrat in the government and he used to
invest in the stock market and his favourite stock was Reliance and he
made money in that. I am actually grateful to Dhirubhai because he
funded my first motorcycle, because my dad sold some shares in Reliance
Industries to gift me a motorbike. I used to see dad work very hard in
his office and he would go at like 8:30 or 9:00 clock in the morning and
come late at the evening but his investing hardly took any time and I
thought that this is really cool, you can make money and you can fund
bikes from equities. So that’s how I originally got interested in the
idea of investing. I was in school then.
Then
I got into college and there I ended up partnering with a friend and we
ended up investing in some IPOs and we lost money. So that was a big
lesson. Fast forward, after finishing my graduation I ended up doing my
chartered accountancy. In my chartered accountancy course, I learnt
everything about accounting and how transactions end up becoming
financial statements. I could pick up all of that but I had no clue
about the quality of the business or the management.
I
had no idea about that and I certainly had no idea about human nature
in psychology. Then I ended up getting a scholarship to study at the
London School of Economics. It was in the LSE where I accidentally
discovered the idea of value investing. Till then, I had no idea about
what value investing exactly was. I was just watching my dad and I was
just speculating in the IPO market and blowing money.
At
LSE, I was taught that standard academic finance papers that markets
are efficient and there are no mispriced bets, you should just buy the
market portfolio and then I accidentally came across an article in the
newspaper about this obscure guy who operates out of a town called
Omaha. This was 1990 and you know Warren Buffett wasn’t as well as known
as he is right now and that article said a few things which was quite
contrary to what I was being taught.
Things
like he has a wonderful track record, he stays far away from the stock
market and he believes that markets are often quite wrong and the
article also said that you could get his letters in which he explained
his thoughts on investing, about the world of business and you could get
them for free.
I
was very inspired by that and I wrote to him and his secretary wrote
back that they would be happy to send the letters, but I had to send
them the postage money, which is probably the best investment I ever
made. I got those letters in about four or five days and basically I
found the calling when I read those letters because as I mentioned I
already had an accounting background, I was already a graduate from
University of Delhi after having done B. Com (Hons).
So,
I knew business law, a little bit of economics and in my CA, I had
learnt accounting and auditing and when I read through those letters I
could start connecting the dots that there is a way, there is a method
of investing which can create a lot of value, will make you a lot of
money. Through those letters I discovered Buffett’s teacher Ben Graham
who taught him at Colombia University and of course I went and bought
all the books of Ben Graham and all the editions of Security Analysis
and I bought Intelligent Investor. As I was going through those books I
discovered a very interesting piece; it has not appeared anywhere else
to my mind.
In
the third edition of Security Analysis, there is piece called ‘Special
Situations’ where Graham describes how to make money in the stock market
without thinking about fundamentals, without predicting future
fundamental information, without studying balance sheets.
Basically,
he was doing what we now call as risk arbitrage - event-driven
strategies, tender offers and buybacks and recapitalisations where the
outcome of your investment operation is dependent on the happening and
the non-happening of a corporate event, nothing to do with markets. So
that was very interesting to me for two reasons; one you get
uncorrelated returns, and two, you don’t have to predict things. You
don’t have to even do a lot of fundamental analysis. So that was one
piece which was very influential to me in Special Situations.
The
second, essay that I read through was in the Appendix to the
Intelligent Investor. In the 50th year of the publication of Security
Analysis in 1984 Warren Buffett went to Colombia University and gave a
talk that is a famous talk, all early investors know about. It is called
The Superinvestors of Graham-and-Doddsville. In that talk, there was a
certain passage which when I read just blew my mind.
Q: What was that?
A:
That passage was that Buffett uses a metaphor of a gun and he says that
if you have a gun which has got six chambers in it and If I put a
bullet in one chamber and you ask me how much do you want to be paid to
pull the trigger once, I am not going to pull it and even if it’s a
million dollars and if somebody asks you that I will give you two
million dollars, will you pull it now? And that’s a positive correlation
between risk and reward.
But
in value investing, it is the opposite. If you are buying a $100 bill
for $110 it is risky, but if you are buying it at $60 it is less risky.
But the expectation of reward is higher in the latter case that if you
buy it for $60 and it goes back to fair value you make money. If you buy
it $110 and goes back to fair value, you lose money.
So,
over here you have less risk of loss, but the return is higher which
was extremely counter-intuitive to me because as I mentioned I was
studying in the LSE and the professors over there were telling me that
if you want to make more money you have got to take more risk.
This
guy is saying the opposite that if you want to make more money you got
to take less risk and I said, this guy is saying something which is
exact opposite of what I have been taught and I have got to know more
about this stuff. As I worked through the examples of Ben Graham’s books
I basically found my calling and decided that this is what I want to do
and I came back to India.
Q: What was the experience like when you came back to India?
A:
Very tough. Before I went to the LSE, I worked for a company called
American Express for six months and that period of working in American
Express they told me that I am unemployable, I can’t work for any boss
or anything like that. So when I returned from London, I never wanted to
work for another company. I had to be on my own, but I had no money.
And I came back with Rs 3 lakh.
My
net worth was Rs 3,00,000 at the time. If you want to start your career
as a value investor you can’t do much with Rs 3 lakh. By then, I
already had a daughter. I had been married in 1990 and came back with a
daughter. I had a family to support. It was very tough in the initial
years and I started writing columns for money and I used to write two or
three columns a week. So, I did a lot of those and then I started
teaching in a couple of business schools just to sustain myself while I
was building a career as a value investor.
I
then went to friends and family members and I collected a pool of
capital, a princely sum of Rs 20 lakh, which was given to me more out of
pity by my friends and family than out of any conviction, because I had
really no track record at that time. They just knew that this is a
decent person, let’s give him some money, let’s back him.
That’s
what I tell all my students: if you want to start their career as a
value investor and don’t have enough money to begin with, you will need
other people’s money and those people are almost certainly going to be
people who trust you, people who have known you, which is basically your
childhood friends and your family members. So that’s how I started, but
four or five years was very tough.
Q: So you collected Rs 20 lakh and invested all the money in stocks. How did it turn out?
A:
It was very painful, because I had all this theoretical knowledge and I
thought I was a hotshot value investor who has learnt everything, read
up everything on Buffett and Graham and I am a qualified chartered
accountant and I can crack this. In three years I lost 40 percent of the
money and part of the money came from mother-in law.
Q: That’s tough.
A:
That’s very tough. But it is a blessing in the sense losing money in
the early part of your journey is very painful but it teaches you a few
things.
Q: So, how did your friends take to the bad news early on? Did they eventually make a decent enough return on that investment?
A:
Well ultimately, they all redeemed and I bought them out because it was
sort of a loosely held investment partnership. As I became more evolved
as an investor and got more clients, I bought all of them out over a
period of time and they were happy about the outcome. I don’t want to
say that they had great outcomes but nobody lost money and they did
pretty okay.
Q:
What were the learnings from that maiden venture as a professional
money manager? What were the things you felt you did right and where did
you go wrong?
A: If
you recall we just spoke about my experiences even before that I have
speculated in IPOs. Everybody was making money in IPOs and I got in at
the wrong time with the wrong issues and I lost money. When I read
through Graham’s books, I came across passages telling why you should
stay away from IPOs. He wrote that there were lots of salesmanship
behind these issues and there was the timing factor as well.
Entrepreneurs
are not going to come and give you their companies for a song at the
bottom of bear market. Typically, it will be in a bull market cycle that
you will see a lot of IPO activity happening. In the secondary market,
shares trade every day. So, the probability that you will find a bargain
in the secondary market is so much higher than in the primary market. I
could relate as to why those losses occurred by studying the reasons. I
gradually learnt about what to avoid, how to avoid those things. So,
that was one thing that happened.
The
early experience for me was really about learning from losses and one
thing which I have learnt over the years is you are going to have losses
in this field all that time.
Taking
losses or facing losses in the early part of your journey has been good
for me and it is good for almost everybody, provided you can get the
right lessons from that. One thing which I have learnt by reading a
little about behavioural economics is about the power of framing. If you
frame those losses and the money that you lost in those losses and just
give them a label of tuition fees paid then that helps. Psychologically
it helps you, number one.
Number
two, if it is a hefty tuition fee that you have paid then, you are not
likely to make the same mistakes again and it also gives you hope. You
have learnt something, move on and don’t make the same mistake again
because you have already graduated and you paid the tuition fees. So,
education will come from your losses in that sense. The idea of framing
losses as tuition fees has been very helpful to me. That was one thing
which happened.
There
is something else that happened to me and I have rarely spoken about
it. It is the first time I am doing in public. In 1990 when I was a
student at the LSE, one of my father’s friends settled in England took
me and my wife to a casino, Victoria Casino, Edgware Road in London.
There,
I gambled for the first time in my life in a casino. It was the first
time I actually entered a casino and I made money and when I made money I
felt happy. I thought that I had discovered a way of becoming rich
quick. To you and the listeners, it may now sound ridiculous, but at
that time when I made money for the first time I thought I had invented a
new way of life, that I could double my bets and double them again,
using the Martingale strategy that people use. I made money, you could
say it was beginners luck, but I got hooked on to it.
Q: Do you recall how much money you exactly made on that bet?
A:
Initially I made about 20-30 pounds. Because, I was now hooked, I was
bunking classes and going there. I was there before the casino opened
and I was there right till the evening and I would gamble. One day I
made 2,000 pounds which was an enormous amount of money for my net worth
at that point of time. It was an enormous sum of money for a student
living on scholarship…it was huge.
I
felt that this is what I can do for life. I have found a way of
gambling and I was using some methods, so-called methods, which almost
always will make you go broke ultimately, which is what happened to me
too.
But
I got hooked and I gambled more because one thing which happens in
gambling is that if you make money you are going to go back, you gamble
more, very few people actually say that I made money I was lucky, let me
walk away. It’s extremely difficult to walk away. You go back. I went
back and I lost everything and more and then I became extremely
emotional about it because my wife was working early mornings in the
winter to support me, because I didn’t have money for financial support
for living expenses and living in London was very expensive.
So,
she was supporting my education and I blew up all of my net worth and I
felt terrible about it and then I made a pledge that I am not going to
go to a casino or if I go I am not going to gamble and I stayed with
that since then. Many years later, my wife and I went to Las Vegas and I
gave her all the chips that the hotels give you for free, I said you go
to the tables, I am not going.
The
reason I mention this today is that those losses you suffer are
emotionally very distressing, but they are also very instructive. At
least for me they made me aware of risk, as to what can go wrong. In his
book, Ben Graham defines what is the meaning of investing, and he
starts with a very simple definition. He says, “an investment operation
is one which upon thorough analysis promises safety of principal plus an
adequate return”. Safety of principal plus an adequate return. Safety
of principle comes before, the adequate return comes later and this is
very important and lot of people don’t get this and I certainly didn’t
get it at that time. There is another guy called Will Rogers who said
pretty much the same thing in a much more entertaining manner and he
said, “I am more concerned with the return of my money than the return
on my money”.
And
if you look at the history of financial markets, you will find that
there are periods during which people don’t follow this advice. They
would be more focused on the return on their money than the return of
their money.
mathrubhumi.com
manoramaonline.com
