Value Investing, the Sanjay Bakshi Way 2.0 [Part 2] by Vishal Khandelwal, Safal Niveshak
How can valuations be made easier? How have you made it easier? Or can it not be made easier?
Prof. Sanjay Bakshi: Vishal, that particular problem is equally applicable to large investors!
Anyway, over the years I have dealt with the problem in many ways. As a disciple of Ben Graham, when working on any business and not necessarily moats, I developed my own ways of thinking about valuation.
Graham used to talk about protection vs prediction. He used to say that investors should seek protection in the form of margin of safety either through conservatively calculated intrinsic value (usually based on asset value) over market price or superior rate of sustainable earnings on price paid for a business vs a passive rate of return on that money.
That approach works well in many businesses as even though their future fundamental performance is largely unpredictable because one is, in effect, underwriting insurance.
Graham’s methods helped investors deal with the unpredictability problem in security analysis. For example, when you bought the stock of a company selling below net cash and the operating business was not losing money, then you were effectively getting the business for free. Even if the business may have been mediocre, it was free. And the typical Graham-and-Dodd investor absolutely loves freebies.
In his monumental book “Thinking Fast and Slow” Prof Kahneman talks about Gary Klein’s idea of “pre-mortem” which goes one step further than post-mortem. He writes:
The procedure is simple: when the organization has almost come to an important decision but has not formally committed itself, Klein proposes gathering for a brief session a group of individuals who are knowledgeable about the decision.
The premise of the session is a short speech: “Imagine that we are a year into the future. We implemented the plan as it now exists. The outcome was a disaster. Please take 5 to 10 minutes to write a brief history of that disaster.”
But if you put a gun on my head, then I would advice investors to buy a Kindle and then buy all the letters of Warren Buffett (Vishal – You can also download PDF of his 1957-2012 letters from here). They cost just US$ 2.76 (Rs 180) and in my view there is nothing better out there.
Why on Kindle? Because you get access to them all the time. You could be waiting at a traffic crossing in your car waiting for the light to turn green and while you’re doing that you could pick a random passage or two and learn something useful.
Before you sleep at night, you could read a few more passages and then by the time you wake up the ideas you read about would get “fused” in your brain because your mind would be thinking about what you read even when you slept. This works for me. It really does!
Read just that one book slowly and you’ll become wiser.
I also recommend:
- The Investment Checklist by Michael Shearn;
- The Little Book That Builds Wealth by Pat Dorsey;
- Understanding Michael Porter: The Essential Guide to Competition and Strategy by Joan Magretta; and
- It’s Earnings That Count by Hewitt Heiserman.
Safal Niveshak: Thank you so much Prof. Bakshi! I also thank you on behalf of Safal Niveshak’s readers for taking out time from your busy schedule to answer so many important questions on investing and how one can form the right mindset to become a sensible, long-term investor.
Hope to meet you soon. Thank you!
Prof. Sanjay Bakshi: This was fun. Thanks for your patience. Keep up the good work you’re doing. Let’s create some really good investors!
Full text here Safal Niveshak