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Private and Confidential – Not for Circulation 11Private and Confidential
Private and Confidential
Not for Circulation
Paresh Thakker
Managing Partner, ValueQuest Capital
What is Value Investing
Things I wish someone would have told me 25 years back
St. Xavier’s college, Mumbai
February 10, 2017
Private and Confidential – Not for Circulation 2
What is Value Investing?
Important Qualities of a Value Investor
Few More Thoughts...
Q&A
AGENDA
Private and Confidential – Not for Circulation 3
 “All investing is value investing. What is investing if not an attempt to buy something for less
than its worth?"
 Berkshire Style - “When we own
portions of outstanding
businesses with outstanding
managements, our favorite
holding period is forever.”
 ValueQuest Style – We make
long-term, public market
investments in undervalued,
Indian businesses having moats,
and run by talented and honest
managers
What is Value Investing
Private and Confidential – Not for Circulation 4
“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.”
......Warren Buffet
What is Value Investing
Private and Confidential – Not for Circulation 5
“.. 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 mater 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.”
......Warren Buffet
What is Value Investing
Private and Confidential – Not for Circulation 6
Google Founders’ IPO leter to Investors in 2004
“As a private company, we have concentrated on the long term, and this has served us
well. As a public company, we will do the same.”
“If opportunities arise that might cause us to sacrifice short term results but are in the
best long term interest of our shareholders, we will take those opportunities. We will
have 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 realized
benefit or progress within a year or two. But, we are trying to look forward as far as we
can. Despite the quickly changing business and technology landscape, we try to look at
three to five year scenarios in order to decide what to do now. We try to optimize total
benefit 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
Private and Confidential – Not for Circulation 7
Important Qualities of a Value Investor
Private and Confidential – Not for Circulation 8
A. Long Term Thinking
Private and Confidential – Not for Circulation 9
1997 LETTER..”we can’t realize our
potential 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 atraction for
lower prices
 Work backwards
Importance of Long Term Thinking
Private and Confidential – Not for Circulation 10
• “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.” Jeff Bezos
 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. Jeff Bezos
Importance of Long Term Thinking
Private and Confidential – Not for Circulation 11
“Compounding is the eighth wonder of world.” Albert Einstein
Compounding interest separates the rich from the broke.
Power of Long Term Compounding
Private and Confidential – Not for Circulation 12
B. Good Temperament
Private and Confidential – Not for Circulation 13
“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.” Warren Buffet
Emotional Stability is more important then high IQ.
Buffet “By far the most important quality is not how much IQ you have
got. 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
Private and Confidential – Not for Circulation 14
C. Ability to Survive For The Long Term
Private and Confidential – Not for Circulation 15
Survive for the Long Term
 First take care of your health
 Avoid fatal mistakes which can ruin you
 Buffet – “We didn’t do all the smartest things. We didn’t do anything really dumb”
 You only have to be right on a very very few things as long as you never make any big
mistakes.
Private and Confidential – Not for Circulation 16
“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.” Buffet
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
Private and Confidential – Not for Circulation 17
Few More Thoughts ...
Private and Confidential – Not for Circulation 18
Few More Thoughts...
Einstein said “A clever person solves a problem. A wise person avoids it”.
Avoid a few other things..
Avoid Negative Mind Set1
Private and Confidential – Not for Circulation 19
Avoid Overconfidence2
• Munger: “smart, hard working
people aren’t exempted from
professional disasters resulting from
overconfidence”
• Warren: “I would rather deal with a
guy with an IQ of 130 who thinks it
is 125 than a guy with an IQ of 180
who thinks its 200. that second guy
will kill you.”
Few More Thoughts...
Private and Confidential – Not for Circulation 20
• Buffet: You can give someone a $ 2 million bonus and they are happy until they see
the 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” Buffet
Avoid Envy3
Few More Thoughts...
Private and Confidential – Not for Circulation 21
• Munger: If you want to get rich, or make some serious money, you have to got to underspend
your 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 we
have seen in the past”. But that doesn’t mean things can’t be worse in the future.” Howard
Marks
Avoid Living Above Your Means4
“I tell my father’s story of the gambler who lost regularly. One day he
heard 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 ran
away.”- Howard Marks
Few More Thoughts...
Private and Confidential – Not for Circulation 22
Having Focussed On What To Avoid...
We Can Now Reflect On A Few Things That We Should Do...
Private and Confidential – Not for Circulation 23
Few More Thoughts...
Simplify Everything
• “We just look for no brainer decisions” - Munger
• “The desire to appear clever often prevents one from being
so.” La Rochefoucauld
1
Focus on Being a Learning Machine2
• “Just as civilization can progress only when it invents the method of invention, you can
progress only when you learn the method of learning.” Munger
• “Nothing has served me beter in my long life than continuous learning.” Charlie Munger in
USC commencement address 2007
• Confucius: “Real Knowledge is to know the extent of one’s ignorance”
Private and Confidential – Not for Circulation 24
Private and Confidential – Not for Circulation 25
Few More Thoughts...
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 maters. 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.”Buffet
3
Prioritise
• “An investor should act as though he had a lifetime decision card with just twenty punches on
it.” Buffet
• The number 20 is arbitrary, but it shows how litle activity is required to do well with your
investments.
• “You only have to do a very few things right in your life so long as you don’t do too many things
wrong.”Buffet
4
Private and Confidential – Not for Circulation 26
Private and Confidential – Not for Circulation 27
Few More Thoughts ...
Building Sustainable Competitive Advantage and Identifying When Others Have it5
Sources of Moats
Intangible Assets High Customer
Switching Costs
Network Effects
Low Cost
Advantages
Private and Confidential – Not for Circulation 28
Few More Thoughts...
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” Buffet
• 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 Buffet: Business first, People second, Price third.
Private and Confidential – Not for Circulation 29
Few More Thoughts...
• Operating within the Circle of Competence - Buffet
• “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 atempt 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”
• Buffet – “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.
Private and Confidential – Not for Circulation 30
As Charlie Munger once wrote,
this is simple, but not easy.
Private and Confidential – Not for Circulation 31
Q&A

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What is Value Investing

  • 1. Private and Confidential – Not for Circulation 11Private and Confidential Private and Confidential Not for Circulation Paresh Thakker Managing Partner, ValueQuest Capital What is Value Investing Things I wish someone would have told me 25 years back St. Xavier’s college, Mumbai February 10, 2017
  • 2. Private and Confidential – Not for Circulation 2 What is Value Investing? Important Qualities of a Value Investor Few More Thoughts... Q&A AGENDA
  • 3. Private and Confidential – Not for Circulation 3  “All investing is value investing. What is investing if not an attempt to buy something for less than its worth?"  Berkshire Style - “When we own portions of outstanding businesses with outstanding managements, our favorite holding period is forever.”  ValueQuest Style – We make long-term, public market investments in undervalued, Indian businesses having moats, and run by talented and honest managers What is Value Investing
  • 4. Private and Confidential – Not for Circulation 4 “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.” ......Warren Buffet What is Value Investing
  • 5. Private and Confidential – Not for Circulation 5 “.. 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 mater 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.” ......Warren Buffet What is Value Investing
  • 6. Private and Confidential – Not for Circulation 6 Google Founders’ IPO leter to Investors in 2004 “As a private company, we have concentrated on the long term, and this has served us well. As a public company, we will do the same.” “If opportunities arise that might cause us to sacrifice short term results but are in the best long term interest of our shareholders, we will take those opportunities. We will have 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 realized benefit or progress within a year or two. But, we are trying to look forward as far as we can. Despite the quickly changing business and technology landscape, we try to look at three to five year scenarios in order to decide what to do now. We try to optimize total benefit 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
  • 7. Private and Confidential – Not for Circulation 7 Important Qualities of a Value Investor
  • 8. Private and Confidential – Not for Circulation 8 A. Long Term Thinking
  • 9. Private and Confidential – Not for Circulation 9 1997 LETTER..”we can’t realize our potential 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 atraction for lower prices  Work backwards Importance of Long Term Thinking
  • 10. Private and Confidential – Not for Circulation 10 • “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.” Jeff Bezos  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. Jeff Bezos Importance of Long Term Thinking
  • 11. Private and Confidential – Not for Circulation 11 “Compounding is the eighth wonder of world.” Albert Einstein Compounding interest separates the rich from the broke. Power of Long Term Compounding
  • 12. Private and Confidential – Not for Circulation 12 B. Good Temperament
  • 13. Private and Confidential – Not for Circulation 13 “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.” Warren Buffet Emotional Stability is more important then high IQ. Buffet “By far the most important quality is not how much IQ you have got. 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
  • 14. Private and Confidential – Not for Circulation 14 C. Ability to Survive For The Long Term
  • 15. Private and Confidential – Not for Circulation 15 Survive for the Long Term  First take care of your health  Avoid fatal mistakes which can ruin you  Buffet – “We didn’t do all the smartest things. We didn’t do anything really dumb”  You only have to be right on a very very few things as long as you never make any big mistakes.
  • 16. Private and Confidential – Not for Circulation 16 “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.” Buffet 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
  • 17. Private and Confidential – Not for Circulation 17 Few More Thoughts ...
  • 18. Private and Confidential – Not for Circulation 18 Few More Thoughts... Einstein said “A clever person solves a problem. A wise person avoids it”. Avoid a few other things.. Avoid Negative Mind Set1
  • 19. Private and Confidential – Not for Circulation 19 Avoid Overconfidence2 • Munger: “smart, hard working people aren’t exempted from professional disasters resulting from overconfidence” • Warren: “I would rather deal with a guy with an IQ of 130 who thinks it is 125 than a guy with an IQ of 180 who thinks its 200. that second guy will kill you.” Few More Thoughts...
  • 20. Private and Confidential – Not for Circulation 20 • Buffet: You can give someone a $ 2 million bonus and they are happy until they see the 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” Buffet Avoid Envy3 Few More Thoughts...
  • 21. Private and Confidential – Not for Circulation 21 • Munger: If you want to get rich, or make some serious money, you have to got to underspend your 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 we have seen in the past”. But that doesn’t mean things can’t be worse in the future.” Howard Marks Avoid Living Above Your Means4 “I tell my father’s story of the gambler who lost regularly. One day he heard 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 ran away.”- Howard Marks Few More Thoughts...
  • 22. Private and Confidential – Not for Circulation 22 Having Focussed On What To Avoid... We Can Now Reflect On A Few Things That We Should Do...
  • 23. Private and Confidential – Not for Circulation 23 Few More Thoughts... Simplify Everything • “We just look for no brainer decisions” - Munger • “The desire to appear clever often prevents one from being so.” La Rochefoucauld 1 Focus on Being a Learning Machine2 • “Just as civilization can progress only when it invents the method of invention, you can progress only when you learn the method of learning.” Munger • “Nothing has served me beter in my long life than continuous learning.” Charlie Munger in USC commencement address 2007 • Confucius: “Real Knowledge is to know the extent of one’s ignorance”
  • 24. Private and Confidential – Not for Circulation 24
  • 25. Private and Confidential – Not for Circulation 25 Few More Thoughts... 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 maters. 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.”Buffet 3 Prioritise • “An investor should act as though he had a lifetime decision card with just twenty punches on it.” Buffet • The number 20 is arbitrary, but it shows how litle activity is required to do well with your investments. • “You only have to do a very few things right in your life so long as you don’t do too many things wrong.”Buffet 4
  • 26. Private and Confidential – Not for Circulation 26
  • 27. Private and Confidential – Not for Circulation 27 Few More Thoughts ... Building Sustainable Competitive Advantage and Identifying When Others Have it5 Sources of Moats Intangible Assets High Customer Switching Costs Network Effects Low Cost Advantages
  • 28. Private and Confidential – Not for Circulation 28 Few More Thoughts... 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” Buffet • 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 Buffet: Business first, People second, Price third.
  • 29. Private and Confidential – Not for Circulation 29 Few More Thoughts... • Operating within the Circle of Competence - Buffet • “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 atempt 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” • Buffet – “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.
  • 30. Private and Confidential – Not for Circulation 30 As Charlie Munger once wrote, this is simple, but not easy.
  • 31. Private and Confidential – Not for Circulation 31 Q&A