Here are my notes on @Sanjay__Bakshi podcast, "The Art Of Value Investing".
Its important to read different editions of Ben Graham's book as you could see his thinking changing over the years.
3rd edition of security analysis has an appendix at the end tilted Special Situations
Where Graham talked about in some situations where you don't need to pay attention to multiples and your returns on the happening of the corporate event. This is now known as Risk Arbitrage.
The best thing which can happen to a value investor is losing money at an early age as it teaches you about risk aversion.
The universe where the stock which are cheap but will not be in the future is not huge. The stock might be cheap for a good reason.
Therefore, one must differentiate between what is cheap and value trap because the later will always remain cheap.
His experience: Prof. used to invest in holding companies earlier as they seemed very cheap but these companies did not come through IPOs but due to some...
...family settlement and there was never any intention to raise money. The gap between the price and value is high and will remain like that as there is no space for activism there.
Quality Prof. looks for when assessing management:
1. Operating Skills: How good are you in running your shop. This can be learned with peer analysis
2. Capital Allocation Skills: Decision like expanding organically and inorganically, excess cash, diversification?, etc.
3. Integrity: You are not going to get a good deal from a bad guy.
Difference between a good business and a good investment:
You make money in a stock through two ways: Capital Gains & Dividends
Looking at the elementary mathematics, three things matter: Entry Multiple, Exit Multiple, and Growth Rate. If you increase the entry multiple and keep the other two, the same earnings, growth rate, don't change and the exit, multiple, don't change, and...
...clearly the capital gains will drop. Therefore, even great business won't be good investment.
Opposite of that is also true that a bad business can also be a good investment that is what Ben Graham had been doing.
On financial independence:
You have to have the ability to sustain yourself before you can become an investor like a job which provides you with a income stream.
You have to become a miser to become financially independent.
Save every penny and investing that money is the way to go.
First invest then think about your expenses.
Getting money is slow. It is about the reputation. As you will do good in stock picking you would attract capital.
2. Cash Bargains: Its unlikely that one could find a high quality business selling below cash now.
3. Cash pay down: Companies reducing debt.
No valuation can compensate for poor quality of the management or business.
The capital gains is function of three things: Entry Multiple, Exit Multiple, and Growth Rate.
Even if the entry multiple is high the growth rate could compensate for that.
Currently Prof. looks at businesses which causes less stress and satisfactory returns. He would not buy businesses certain business, even though they would earn huge returns, because you are becoming a partner in the business. Like Tabaco, Gambling, Alcohol, Sugar, etc.
How ideas get generated?
You have to allow serendipity to play out. You have to allow that creative insights to come in.
Using screens is fine for finding quantitative data but watching interviews is also a good way, tweets, reading about industries.
Recognize patterns: Patterns of success/failure, competitive edge, etc.
Being in connection with young generation helps you be more creative and having a network of people.
What are advantages of being a small investor?
1. Large universe: These people can look at things way before large investors.
2. Long Horizon: They can hold businesses for long period. As mutual funds are compared with others.
Qualitative analysis difficult. People are used to number from childhood so, quantitative is much easier.
It is difficult to know that there are a lot of bias involved when you do qualitative analysis and takes time to avoid bias to very minimum.
Why everyone uses PE ratio?
Its easy to measure: applying this to whole market its a good way to know whether you are in a bull or bear market. But its not suitable for a individual business. As, earning growth would be so rapid that the PE multiple will look high but is not.
But there are flaws with it. The real E in the PE ratio is not the reported earnings it could be its future earning power.
Like Geico has been spending a lot on advertising on a business model which is growing and is taking away market share, should not be treated as advertisement. only then you get the true earning power.
Relaxo is another one.
Look for people (management) which look for longevity of the business even if it comes at a cost of near term down earnings.
Mentions about a quote from Seneca which he read in the book, I want to know where, where I'm going to die, so I never go there:
"Cherish some man of high character and keep him ever before your eyes, living as if he was watching you and ordering all your actions as if he beheld them"
Recommends reading: The Little Book of Talent by Daniel Coyle
Rule 1: Stare at who you would want to become.
If you visit life of successful people you would be shocked to see how much time they spend observing top performers. Studies show that even a brief connection with the role model can vastly increase unconscious motivation.
So, when one encounters a problem ask yourself how your role model would solve the problem.
Shares his story of an incident when he used to be very arrogant and never used to share ideas. But soon he realized that "Knowledge Grows Through Sharing". (Listen from 1:16:25)
Recommends reading: Give and Take by Adam Grant
Advice for micro cap investing:
1. Think long term: Not only about compounding. He is talking about the temptations. Like you get too close to management and end up getting insider information.
Don't break the rules.
2. Learn to get better at this art through case studies. Don't chase the money. If you do the right things money will follow.
Recommends reading: 100 to 1 in the Stock Market by Thomas Phelps
What should be the first thing to look at when starting micro cap?
Take an accounting class. As it is the language of the business.
You can learn by copying winners and finding out patterns that are common amongst them, but you can also learn a lot by avoiding the losers.
So, visit the graveyard of micro cap companies and don't fall for survivorship bias.
You cannot predict the macro factors but you can protect yourself.
Like business which buy commodity and sell brand have huge pricing power. Ex: See's Candy
Fun Fact: Not many people might be knowing this, Prof. Sanjay Bakshi has also invested in Bangladesh indirectly.
Investing in what you know:
Approach industries which you don't understand as a learning experience. Like Pharma and Chemical sector in India is great but if you don't get it, staying away is better.
Its important to love the process.
You don't have to invest in all the businesses out there. Don't swing at the every ball sent at you.
But don't stop leaning and trying to expand your circle of competence.
On his journey of evolving:
Prof. thinks he is slowing down. ☹️
He has started to give quality of people more importance.
A good business can be hiding under a bad label.
We all carry prejudices of our own role models. Like: Avoiding airlines or a commodity businesses.
First builds argument for having a focus approach towards everything.
Focus in life:
The power of extreme focus:
Swami Vivekana: take one idea and make it your life
Swami Sarvpriyanda: talk on concentration: Dhyana
relates it to lecture: vantage point, "Bhav Bhagwan Chee"
1. Warren Buffett(WB) emphasizes on the importance of luck for short term gains for his partnership in 1957. 2. During the acquisition period WB desires the stock to do nothing or, even better, decline in price.