Interview With Professor And Fund Manager Sanjay Bakshi by Ian Cassel, MicroCapClub
Sanjay Bakshi is Adjunct Professor at Management Development Institute (MDI), Gurgaon — one of India’s top business schools — where he teaches a popular paper on Behavioral Finance and Business Valuation. MDI students have elected Sanjay as the its best professor for several years.
Sanjay Bakshi is also a successful value investor with an audited long term track record of of delivering a gross USD return of 24% a year from 2001 to 2012. He is Managing Partner at ValueQuest Capital LLP— a specialist in moats investing. ValueQuest advices some of India’s large family offices in making conservative but meaningful, long-term public market investments. The firm is also the sub-advisor to “ValueQuest India Moat Fund” — an offshore fund which makes long-term, public market investments in undervalued moated businesses run by talented and honest managers. From launch in April 2014 till May 2015, the fund has delivered a gross USD return of 108%, hugely outperforming benchmark indices.
Sanjay Bakshi writes a popular blog called Fundoo Professor and is also on Twitter. He received his M.Sc. (Economics) from London School of Economics and Political Science. He is also a fellow member of the Institute of Chartered Accountants of India.
He lives in New Delhi with his two daughters, wife, and mother.
In 2005, Sanjay Bakshi wrote this great piece on his background, and everyone should read it before reading this interview. I also need to point out a great interview by Safal Niveshak from 2014. I will try my best to ask supplemental questions to these interviews/commentaries.
QUESTION: I found these comments about your early career very interesting, “Whenever I made big decisions…I never had a Plan B” and “I never wanted to work for anyone ever again”. Can you talk a bit more about these two areas in particular and how it helped motivate you and focus you?
Sanjay Bakshi: Oh, I wrote about this in 2005. I went back and looked it up and I find that it’s still valid.There are times, when one should “preserve optionality” and times when one should “burn bridges.” In all the big decisions in my life, the burning bridges model has helped me in intensifying my commitment to a decision because there is really no turning back anymore.
Too much choice is in any case not good because it creates decision paralysis. Remember those twenty-page menus in restaurants and 25 types of ketchups in grocery sores? What you should really be looking for are a few very good choices and then make a decision. No chess grandmaster can figure out all the choices he has on the chess board. Rather, he tries to recognize a few patterns and then makes a choice causing the burning of bridges.
The decision to never work for anyone again came about early in my life when I discovered that I was unemployable. I did work for American Express that helped me reach that conclusion. It took just about six months. I was a total misfit there but I am glad I recognized that early in my life.
You asked about focus. That’s a very powerful mental model. I love Warren Buffett’s quote in which he says that the difference between successful people and very successful people is that the very successful people say no to almost everything. That’s the correct way to get focus.
Many years ago I look up photography as a hobby. I joined a couple of photography workshops and picked up the basic tricks. One of them, of course, is learning how to focus your camera’s lens. You use a lens with a wide open aperture, say f/1.4, and focus on an object. If you do that, the object would appear to be in very sharp focus while everything else around it would be blurry. Anyone who sees the picture knows exactly where to look.
Any expert in any field will attribute his or her expertise to focus.
QUESTION: In 1996, the first year you launched your fund (was it a fund?) with family and friends money, you were down 40%. I too was down a similar percentage the first year after becoming a full time private investor. It is amazing how losing money focuses an investor, and I truly believe losing money is the best educator. When you look back at positions where you lost money were there any common elements or themes?
Sanjay Bakshi: Seems like we have had very similar journeys!I actually started my career as a value investor in 1994 after returning from London. At the time, I had no track record and no money. So, the only people I could approach were my friends and family. I raised about Rs 2 million from them and promptly started applying my ideas derived from whatever I had read up in the Buffett letters until then, and of course the two famous books of Ben Graham.
By about 1996, I was down about 40% and some of the money belonged to my mother in law. You can imagine my situation. It was horrible.
But, in retrospect, it was the best thing that happened to me as an investor. That experience helped me become more risk averse. So, I completely agree with you that losing money is a great educator. Moreover, framing losses as “tuition fee” for lessons learnt has really helped me.
Sometimes, I am faced with a situation when I am clearly wrong about some investment decision I have made. Confronted with the facts which ruin my original thesis, I now face two choices: (1) take the shelter of psychological denial; or (2) pay the tuition fee and move on.
Picking (2) is obviously the correct choice. It’s been a great idea for me to pay the tuition fee and let the resulting pain re-wire my brain so I am unlikely to make the same type of mistake again.
When my students ask for my blessings I bless them by wishing that they lose money early in their career, because they are young and full of energy and have the ability to bounce back and they really need that lesson to rewire their brains to become risk averse and the earlier this happens the better.
Whenever I lost money, it happened because of my own shortcomings. There were occasions when I was focusing too much on the business and too little on the people who were running it. On other occasions, I focused too much on the cheapness of the stock and not enough on the quality of the business or the management.
When thinking in terms of decision making one has to recognize that you are going to make mistakes. Indeed, if you’re not making any mistakes, then you are not innovating enough. Making mistakes is ok, so long as they don’t destroy you and also that you don’t repeat those types of mistakes again. People often behave like the guy who jumps out of a plane with a parachute that opens up 99% of the time. If you develop the mindset of never doing that, you’ll do fine.
I have my own mental “hall of shame” where I display my mistakes I have made, and the tuition fee I have paid. It’s something I look at often. I share it with my colleagues and students.
My hall of shame contains not just mistakes of commission, which I referred to above, but also mistakes of omission. I think it’s terribly important to understand the role of mistakes of omission in one’s career as an investor. Many investors I know don’t do this. Their logic is based on their belief that real losses matter while opportunity losses don’t. In my view, that kind of thinking is deeply flawed. It arises from a P&L account prepared by using accounting conventions which only allow the recording the results of what you did, and not what you could have done, but didn’t. The metaphor of an “Opportunity P&L Account” is a powerful one because it records the true tuition fee paid in return for the education acquired. That’s because it reflects both errors of commission and omission.
QUESTION: You started teaching around the same time you launched your fund, How long was it until you became financially independent and how did it effect you emotionally, psychologically when you hit this milestone?
Sanjay Bakshi: Actually, I started teaching in 1996.I became financially independent in 2001 when, to borrow Robert Kiyosaki’s words, I could say to myself that that I don’t work for money anymore, rather money works for me. It changed me profoundly because now I understood the importance of Upton Sinclair’s words:
“It is difficult to get a man to understand something, when his salary depends upon his not understanding it!”
That quote refers to what Charlie Munger calls as “incentive-caused bias” which is one of the key biases in human cognition. And anyone who is working for a salary is prone to fall under its influence. But becoming financially independent produces conditions that should enable people to escape from the clutches of this bias. That’s one of best things I learnt from Mr. Munger which is that when you are not dependent on someone else to pay for your bread and butter, then you can have to privilege of looking at the world as it really is.
Now, it’s very hard for a graduate student to understand what incentive-caused bias does to people who work in the tobacco industry or the banking industry or the credit rating industry or even the money management industry. But if you are financially independent, you are free to look at the world from a different point of view.
Here is an interesting question: Ben Graham says that when you buy shares in a business you should think of yourself as a partner in that business and not as a owner of a piece of paper to be traded. If you agree with Ben on this, then should you invest in a business if it sells a product or service that on a net basis is bad for civilization?
See full article here.