Transcript
Private and Confidential – Not for Circulation 11Private and Confidential
Private and ConfidentialNot for Circulation
Paresh ThakkerManaging Partner, ValueQuest Capital
What is Value Investing
Things, I wish someone would have told me 25 years back
St. Xavier’s college, MumbaiFebruary 10, 2017
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What Is Value Investing?
Important Qualities of a Value Investor
Few More Thoughts To Be An Efficient Investor
Q&A
AGENDA
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Everything is value investing...anything to do with a monetary or economic angle is valueinvesting....
“All investing is value investing. What is investing if not an attempt to buy something for lessthan its worth?"
Berkshire Style - When we ownportions of outstandingbusinesses with outstandingmanagements, our favoriteholding period is forever.”
ValueQuest Style - makes long-term, public market investmentsin undervalued, Indian "moated"businesses run by talented andhonest managers
What is Value Investing
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“Only buy something that you’d be perfectly happy to hold if the market
shut down for 10 years.”
&
“If you aren’t willing to own a stock for ten years, don’t even think about
owning it for ten minutes”
&
“Time is the friend of the wonderful company, the enemy of the
mediocre.”
What is Value Investing
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.. “several mediocre short-term investments are (for long period) not the same as one
well-timed long-term investment.”
“Calling someone who trades actively in the market an investor is like calling someone
who repeatedly engages in one-night stands a romantic.”
&
“Successful Investing takes time, discipline and patience. No matter how great the talent
or effort, some things just take time: You can’t produce a baby in one month by getting
nine women pregnant.”
What is Value Investing
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Google Founders’ IPO letter to Investors in 2004
As a private company, we have concentrated on the long term, and this has served uswell. As a public company, we will do the same.
If opportunities arise that might cause us to sacrifice short term results but are in thebest long term interest of our shareholders, we will take those opportunities. We willhave the fortitude to do this. We would request that our shareholders take the long
term view.
You might ask how long is long term? Usually we expect projects to have some realizedbenefit or progress within a year or two. But, we are trying to look forward as far as wecan. Despite the quickly changing business and technology landscape, we try to look atthree to five year scenarios in order to decide what to do now. We try to optimize totalbenefit over these multi-year scenarios. While we are strong advocates of this strategy,
it is difficult to make good multi-year predictions in technology.
What is Value Investing
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Important Qualities of a Value Investor
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A. Long Term Thinking
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1997 LETTER..we can’t realize ourpotential as people or as companies
unless we plan for the long term.
Ability to think long term Customer Centric Thinking
Focus on what is not going to change like customer’s attraction forlower prices
Work Backwards
Importance of Long Term Thinking
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• If everything you do needs to work on a three-year time horizon, then you’re
competing against a lot of people. But if you’re willing to invest on a seven-year
time horizon, you’re now competing against a fraction of those people, because
very few companies are willing to do that.
Just by lengthening the time horizon, you can engage in endeavors that you
could never otherwise pursue.
• Focus on What’s NOT Going to Change This lesson is closely related to the first one
above i.e., long term thinking
Importance of Long Term Thinking
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Compounding is the eighth wonder of world.Compounding interest separates the rich from the broke.
Power of Long Term Compounding
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B. Good Temperament
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“You don’t need to be a rocket scientist. Investing is not a game where
the guy with the 160 IQ beats the guy with 130 IQ.”
Emotional Stability is more important then high IQ.
Buffett “By far the most important quality is not how much IQ you havegot. IQ is not scarce factor. You need a reasonable amount of intelligence
but the temperament is 90% of it. “ “…you do have to have an emotional stability and sort of an inner peace
about your decisions”
EQ is More Important Than IQ
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C. Ability to Survive For The Long Term
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Survive For The Long Term
First take care of your health
Avoid fatal mistakes which can ruin you
Buffett – “We didnt do all the smartest things. We didnt do anything really dumb”
You only have to be right on a very very few things as long as you never make any bigmistakes.
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“Imagine that you had a car and that was the only car you’d have for your entire
lifetime. Of course, you’d care for it well, changing the oil more frequently than
necessary, driving carefully, etc. Now, consider that you only have one mind and one
body. Prepare them for life, care for them. You can enhance your mind over time. A
person’s main asset is themselves, so preserve and enhance yourself.”
The amount of time you have on this planet determines how much you can compound
your knowledge, skill, and wealth.
99% of Buffett’s wealth was earned after his 50th birthday.
Survive For The Long Term
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Few More Thoughts To Be An Efficient Investor
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Few More Thoughts To Be An Efficient Investor
Einstein said “A clever person solves a problem. A wise person avoids it”.Avoid a few other things..
Avoid Negative Mind Set1
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Few More Thoughts To Be An Efficient Investor
Avoid Overconfidence2
• Munger: “smart, hard workingpeople aren’t exempted fromprofessional disasters resulting fromoverconfidence”
• Warren: “I would rather deal with aguy with an IQ of 130 who thinks itis 125 than a guy with an IQ of 180who thinks its 200. that second guywill kill you.”
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Few More Thoughts To Be An Efficient Investor
• Buffett: You can give someone a $ 2 million bonus and they are happy until they seethe next guy got $2.1 million and then they are miserable”
• Envy can lead to imitation. • “What the wise men does in the beginning, the fool does in the end”
Avoid Envy3
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Few More Thoughts To Be An Efficient Investor
• Munger: If you want to get rich, or make some serious money, you have to got to underspendyour income. And you have to got to intelligently invest the money you haven’t spent”
• Invariably things can get worse than people expect. Maybe “worst-case” means the “Worst wehave seen in the past”. But that doesn’t mean things can’t be worse in the future.
Avoid Living Above Your Means4
“I tell my father’s story of the gambler who lost regularly. One day heheard about a race with only one horse in it, so he bet the rent money.
Halfway around the track, the horse jumped over the fence and ranaway.”- Howard Marks
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Having Focussed On What To Avoid...We Can Now Reflect On A Few Things That We Should Do...
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Few More Thoughts To Be An Efficient Investor
Simply Everything
• “We just look for no brainer decisions” - Munger
• “The desire to appear clever often prevents one from being
so.”
1
Focus on Being a Learning Machine 2
• “Just as civilization can progress only when it invents the method of invention, you canprogress only when you learn the method of learning.
• Nothing has served me better in my long life than continuous learning.” Charlie Munger in USCcommencement address 2007
• Confucius: “Real Knowledge is to know the extent of one’s ignorance”
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Few More Thoughts To Be An Efficient Investor
Always associate yourself with those better than you
• Avoid being associated with negative people and people who don’t respect time
• Who we associate with and who we look up to matters. It gives a reflection of who we are and
who we are going to be.
• “Tell me who your heroes are and I’ll tell you how you’ll turn out to be.”
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Prioritise
• “An investor should act as though he had a lifetime decision card with just twenty punches onit.”
• The number 20 is arbitrary, but it shows how little activity is required to do well with yourinvestments. The two Warren Buffett quotes below elaborate further on the disparitybetween action and results.
• “You only have to do a very few things right in your life so long as you don’t do too many thingswrong.”
4
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Few More Thoughts To Be An Efficient Investor
Building Sustainable Competitive Advantage and Identifying When Others Have it 5
Sources of Moats
Intangible Assets High CustomerSwitching Costs
Network EffectsLow Cost
Advantages
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Few More Thoughts To Be An Efficient Investor
Few Guiding Principles to be a Good Stock Picker6
• An Investor should look at stocks as part ownership of a businesses
• Make “Mr. Market your friend rather than your enemy by essentially profiting from
folly rather than participating in it”
• Margin of Safety: Capital Structure, Managerial Practice, Accounting and Price (The
way MOS is perceived in price is dramatically different between traditional Graham
investors and Munger style of investors)
• For Graham: Low Price and Diversification
• For Buffett: Business first, People second, Price third.”
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Few More Thoughts To Be An Efficient Investor
• Operating within the Circle of Competence
• “What counts for most people in investing is not how much they know, but
rather how realistically they define what they don’t know.”
• “We make no attempt to pick the few winners that will emerge from an ocean of
unproven enterprises. We’re not smart enough to do that, and we know it.”
• Doing less can be more impactful…swing only a few times.
• Focus on Downside protection - “Rule No. 1: never lose money; rule No. 2: don’t
forget rule No. 1”
• Buffett – “We think the best way to minimize risk is to think”
• Munger – I think you have to have time to think. It is so easy to get so busy that
you no longer have time to think and you pay a huge price for that.
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As Charlie Munger once wrote, this is simple, but not easy.
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Some Additional Food for Thought
Different Era (Deflationary Risks in developed countries with lesser precedent versus
Inflationary risks which are being taught in business schools globally)
Technology and Automation are reducing jobs and also reducing cost of living
Shortening Business Cycles due to efficient flow of information
Increased Global Uncertainty and Global Linkages
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Q&A
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