I remember my very first interaction with Sanjay Bakshi a few years ago. My apprehension quickly gave way to amazement at how quickly he put me at ease. He was just so genuine and down-to-earth.
Not to mention his investing acumen. His mind is such a vast repository of knowledge. He digs deep into it, links seemingly non-related issues and then makes a creative leap. This talent evokes awe and envy.
(In all honesty, my apprehension was not purely about his brilliance, but also about me not coming across as an ignoramus).
This is part of a series where I attempt to understand the behavioural traits and mindset of money managers and investors. At the end of this (slightly edited) transcript, I have listed the 20 individuals interviewed for this series.
SANJAY BAKSHI is the Managing Partner at Value Quest Capital and Distinguished Adjunct Professor of Finance at Flame University.
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Tribalism is such an innate instinct. We all want to belong to a tribe. Co-habitate with a tribe. How does this spillover in the investing world? Do you feel you have to align with a tribe?
Yes and No.
I'm a value investor and even within the value investing field, there are different tribes.
The Graham and Dodd tribe are those who are more mathematically inclined and who rely on the mathematical cheapness of a situation or a business to find it attractive or otherwise. The Philip Fisher tribe is mostly about the quality of the business and the competitive advantage it has. These two tribes are actually quite different.
But there are a lot of similarities amongst all tribes in the value investing community. The similarities come from the basic principles of investing that no matter which tribe of value investing you belong to, you believe in these three key ideas.
First, the stock that you're looking at is not a piece of paper. It's a claim on the assets and cash flows of a business. There's a business underneath every stock and a bond.
Second, markets can often be very irrational. So you have to be independent from the market and not use market prices to determine value. Your determination of value, no matter how you do it, is totally detached from what the market is doing.
Third, look for margin of safety. The sources could be different. For a Graham and Dodd tribe investor, it would come from it being an absolute bargain based on the principles laid down by Graham in his books. If you belong to the Philip Fisher tribe, it comes from the quality of the business, the durability of the competitive advantage, if it has any, and so on.
So you do want to be part of a tribe, but at the same time, there is danger of hanging out with people who are very similar to you.
When I was young, I was very skeptical about technical analysis. And to a large extent, I still am. But I've seen some people who have done very well by combining fundamental investing with technical analysis, and they have effectively jumped the jurisdictional boundary, and they have combined value investing discipline with the techniques often used by chartists. And that's something to learn from. But you won't learn that unless you hang out with people who belong to a different tribe.
We aren't built to disconfirm our beliefs. We feel extremely threatened when someone does so in whatever sphere of life. When it comes to investing, what principles do you use to keep questioning yourself and your assumptions?
Before I buy the stock, there is the due diligence.
Ensure that you are not going just by what your gut feel says. Collect data and gather information. Talk the people who may have a different view, who can play the role of a devil's advocate and challenge your notions.
Once you decide that the investment makes sense, and you have done all the work and looked at all the various moving parts and arguments in favour of and against, and on balance, believe that it does make sense to invest… you go and make the investment.
That part can be taken care of with the help of a checklist.
Making an investment is just one decision, but holding on to that investment or deciding to sell is a decision that you make every day.
With all sorts of information comes in subsequent to you making the investment. You have to deal with this new information, especially if it is negative. Positive information is easier to handle. Negative information challenges your hypothesis and your notions; your own ego is attached to that situation.
There is a framework designed by Thomas Bayes; train yourself to think like a Bayesian. Elements of that process requires you to be able to distinguish between what’s important and what’s not.
Most of the information is just noise. The noise-to-signal ratio keeps going up given the world that we are living in. You have to distinguish between noise and signal and discard the noise. When it comes to signal, you have to really focus on information which is important and will either improve your conviction or dilute it. The amount of weight assign to a new piece of information would depend upon whether it has the propensity to surprise you.
You may think that this is a good business but then things happen. Covid came and there was a stress in the economy. The management had integrity and were great capital allocators but now they've done something, either in terms of integrity or in terms of a business decision, which could be hugely risky. And if the risk did manifest, it could destroy the company.
You have to have a framework to respond to new information. If you don't, you will end up in trouble eventually because the world is uncertain and bad things happen to businesses that you bought into no matter how diligent you have been. The framework to deal with negative developments subsequent to your purchase is a key part of an investment framework.
Has it happened often to you - negative developments subsequent to purchase?
Not often, but I would have liked it to be less often. Yeah, absolutely. And I don't want to say that every time it happened, I practiced exactly what I preach. It's not easy. It's easier to teach than to actually practice it. You do get caught up with the emotional attachment.
There are words spoken in a classroom or in a public forum and you want to stick to that view. Views are very sticky. It's difficult to remove the glue that is attached to your particular view. It's not easy to do, but you have to keep doing it because if you don't then you will have even bigger losses.
What's your view on the statement that investing is art and science combined?
I think it's a spectrum.
There are some basic principles that apply; I mentioned three in the first answer. There are some basic principles of valuation that are applicable. Value of a debt-free business cannot be less than the value of the debt it can comfortably service. The maximum value of the debt cannot exceed the value of the debt-free business with the same assets. The idea that there are bonds embedded inside stocks and sometimes you can buy the whole thing for less than the value of the bond component. These are as close to science as you as you can get. But it's not physics. It's not like the law of gravitation or the movement of molecules or atoms that you can predict with a degree of accuracy to the 10th decimal. We are dealing with human beings. All businesses are human systems. So there is an element of art attached to it. There are all sorts of important things that you can't quantify.
Aspects about the corporate culture are hard to quantify. How they deal with customers. Are they willing to sacrifice near-term profitability to build a durable competitive advantage if they have a very high margin on a business, but the entry barriers are low? In order to deter competition do they consciously lower the margin and pass on the benefits of scale to the customers? Are they thinking about building long term value instead of near-term earnings? The willingness to sacrifice near-term profitability to build long term value is a sort of an attribute.
Eventually all these things do show up in the numbers, but you can't lay them out on an Excel sheet.
To extend that argument outside the spreadsheet, outside the numbers, outside the analytical mindset, what is that you bring to the table? Gut feel? Spirituality? Meditation?
I'm 57 years old and find a lot of parallels between old spiritual ideas and the world of investing.
Equanimity. Equanimity is an idea that you should treat gains and losses as if they were just the same. We call it loss aversion or the inability of people to treat losses exactly the way they treat gains.
In the Bhagavad Gita, Krishna talks about a balanced mind. A balanced mind means that you can take prosperity and adversity and treat them the same. If you study Dhammapada in Buddhism, the concept called upekkha, which basically means equanimity.
These have withstood the test of time and have very strong relevance to the world of investing. We have turned them into concepts which are much more familiar to people who read books on behavioural finance and investing.
The Gita talks about detachment. Focus on your work, focus on the process and not the outcome. Think about investing. Focus on the checklist, focus on the process and don't worry about the outcome.
The ideas of detachment that you find in the Gita and other spiritual texts we can relate them to the commitment bias or the endowment effect, falling in love with what you own.
It's all about how you handle your ego. Look at all the standard psychological tendencies that can make you go wrong, they eventually boil down to the ego. The spiritual texts talk about the absolutely same things.
How has your relationship with uncertainty evolved over the years?
I used to be scared of it initially. But over the years I've learned the importance of asymmetric payoffs.
You toss a coin. Heads, you could win a lot of money. Tails, you can't lose anything or you will lose very little. That's a bet with an asymmetric payoff. You want to play that. You want to engage in those bets.
Value investing, if done right, offers asymmetric payoffs. You're ensuring that if you're invested in a strong business, which may be going through a period of adversity and therefore the earnings are not looking good as of now, and the markets, which are myopic, are looking at near term. They have brought on the value of the business and it's so very cheap. That's the kind of a setup that a value investor absolutely loves. Because now if you look at the future, there could be a turnaround in the industry and then the upside is very significant. But if the downturn continues, because the business has a good balance sheet and the competitors are much weaker, the others are going to get hurt far more than the business that you're looking at. Therefore, the downside is limited.
So, for all sorts of reasons, whether they come from the quality of the business or from low valuation, value investing offers multiple ways of creating asymmetric payoffs for investors. When you are able to do that, you want to seek that uncertainty because you're effectively turning uncertainty into a friend and seeking uncertainty on terms that are favourable to you. That bad news can't hurt you, but good news could turn you and turn your business into a multi-bagger.
These principles that you work by, do they spill over into your personal life?
Absolutely.
It's not easy to get out of your investing mindset and say, now I'm going to be a different person. You always have that investment frame of mind.
You're always looking at the world as an upside downside situation. Or with the lens of psychological tendencies that you're exposed to or others are exposed to.
My mother loves to bargain when she's doing grocery shopping. She would haggle with the fruit vendor over a small amount. I would say, well, what's the point? This amount of money that you will save is nothing compared to your net worth. You're giving into anchoring bias.
And she would tell me to shut up because she actually enjoyed this. So the upside could come from non-monetary reasons.
So you can get into trouble when you overapply your investment mindset to personal life.
When people come to me with problems, I help them think through the problems that they're facing and the attachment they have to certain decisions in life and how to get out of those decisions. Exactly the same thing that we do in investing. You are invested in a business. It hasn't done well. All your assumptions have turned out to be wrong. So what is the next step? Do you go into denial mode and imagine that things will turn around? Or do you just sell, take the loss, turn it into a tuition fee, and hope that you don't make the same mistake again? The same logic that applies in the world of investing can also be applied to personal life situations, and it does help to have that framework.
When you were young, what did you want to become?
I wanted to become rich. Now I want to be healthy. And I've started appreciating tranquility and peace.
Have you always worked on your own?
Pretty much. I worked for American Express for six months, and that experience basically made me aware that I'm pretty much unemployable. Yeah, I don't think you will ever hire me. I think that's a nice headline. Sanjay Bakshi. He's unemployable, if you want to use it.
What is one thing you would love to impart to your young students?
I teach undergrad Gen Z students. You learn a lot when you're interacting with people from a very different generation. They have very different worldviews. They look at businesses in a very different way.
The problem is that their attention spans don’t go beyond that of a goldfish. They're always looking at screens and Instagram. It’s very hard to get them to concentrate on a single idea and do long form writing or reading. They can't read beyond 2 or 3 pages at the most. But it's a very important skill to acquire. To acquire that skill, you have to keep the phone away, keep all distractions away. The world is full of business models which thrive on distracting you via notifications or messages and so on and so forth.
One thing that I would tell my young students is to learn how to focus. Meditation helps. In meditation you put your mind to one thought, one word, a flame, a mantra. Don’t letting your mind wander. It's the practice of holding your thought on one object or idea and going deep inside that idea. That's a skill to acquire.
Individuals interviewed by Larissa Fernand for this series:
- Prashant Jain
- Sankaran Naren
- Nilesh Shah
- Vetri Subramaniam
- Anand Radhakrishnan
- Devina Mehra
- Saurabh Mukherjea
- Raunak Onkar
- Samir Arora
- Kenneth Andrade
- Rajeev Thakkar
- Aswath Damodaran
- Ian Cassel
- Vishal Khandelwal
- Sanjay Bakshi
- Ramesh Damani
- Jim Rogers
- Ben Carlson
- Mohnish Pabrai
- Christine Benz
