Safal Niveshak: Let me start with a question I have been waiting to ask you for some time now. Through a comment on a link I shared on Facebook and through a few of your posts over the past few months, you have suggested that your investment philosophy has moved further towards high quality businesses, and great managements. Can you please elaborate on the same? What has been this transition all about? And why?

Prof. Sanjay Bakshi: On Moats And Value

Prof. Bakshi: I started my career as a value investor in 1994. Over the last twenty years, I have practiced most styles of value investing including as Graham-and-Dodd style of investing in statistical bargains, risk arbitrage, activist investing, bankruptcy workouts, and Warren Buffett style of investing in moats. There have been times when I have owned 40 stocks and times when I have owned just 10.

I teach all these value investing styles in my course at MDI. I tell my students that they need to pick a style which suits their personality.

Some students have a statistical bend of mind and prefer to work with situations that can be evaluated more objectively than others. I tell them to focus on statistical bargains and risk arbitrage. I ask them to practice wide diversification.

Others like to delve deep into the fundamental economics of businesses and are comfortable with dealing with softer issues like quality of management. I ask them to focus on moats and diversify less. It all depends on what you enjoy doing over time and what has worked for you.

I have absolutely enjoyed practicing all these styles of value investing. Over the years, I also learnt a few additional things. One of them was about the idea of returns per unit of stress.

You can make a lot of money by being an activist investor, which I’ve done in the past. But it’s stressful. You can make a lot of money by shorting over-valued stocks of companies run by promotional and fraudulent managements. But it’s stressful.

You can make a lot of money doing risk arbitrage where you have to monitor — perhaps 20 deals at any given point of time and be ready to react quickly when odds change. But it’s stressful.

I found that investing in moats is not stressful. It involves a slow and more meaningful understanding of how a business creates value over the very long term. And boy does it work!

I’d argue that if you pick 100 successful value investors who have compounded their capital over the long term (a decade or more) at a very healthy rate, then the vast majority of them would have accomplished that by first investing in high-quality businesses run by great managers at attractive prices, and then by just sitting on them for a long-long time.

Moats are internal compounding machines. History shows that you get rich by just sitting on them because they do all the hard work for you. And I realized that over the years. Just as Mr. Buffett did when he too moved from classic Graham-and-Dodd to moats.

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