This document provides a summary of several books related to investing, interviews with fund managers, and observations from experienced investors. It begins with reviews of books such as "Conquering the Chaos" by Ravi Venkatesan about challenges of doing business in India, "Dhandho Investor" by Mohnish Pabarai about his value investing approach, and George Soros' investment philosophy of identifying herd behavior in markets. Later sections discuss concepts like developing sustainable competitive advantages or "moats" around businesses, the importance of capital allocation and patience. Examples of successful companies and investors in both India and globally are also provided.

1. Flame Investment Lab
Handbook 2015-2016
Made by: FIL Members
Complied by: Gopal Vaid

2. “Those who don’t work with their hearts and passion may achieve success but
a hollow and half-hearted success which breeds bitterness all around”
Dedicated to Dr.APJ Abdul Kalam

3. Contents
Book Reviews .....................................................................................................................................4
Conquering the Chaos: Ravi venkatesan.............................................................................................4
DHANDHO INVESTOR- by Mohnish Pabarai........................................................................................8
George Soros - Investment Philosophy.............................................................................................10
The Outsiders........................................................................................................................................11
Moats- Sustainable Value Creation.......................................................................................................15
Breakout Nations – by Ruchir Sharma..............................................................................................21
Interview with Fund Manager Kenneth Andrade .................................................................................23
Observations From a Decade in the Investment Business....................................................................27
Four Lessons from Druckenmiller.........................................................................................................29
Variant Perception is Critical.................................................................................................................33
Quotes from the gods of investing .......................................................................................................35

4. Book Reviews
Conquering the Chaos: Ravi venkatesan
Prepared by – Gopal Vaid
 Ravi Venkatesan is the former chairman of Microsoft India and Cummins India. Prior joining to
Microsoft India as the Chairman of Cummins India, he was instrumental in transformation the
company into the country leading provider of power solutions and engines.
 In this book he has summarized what is needed for a company to succeed in India, especially
for an MNC.
 Large pool of talent which is doing work ranging from managing business process to running
information systems and engineering.
 India has the ability of changing the cost structure of the company and add more to the
profitability
 Most multinational companies in India see India primarily as a talent pool. For example IBM
employees around 142,000 Indians as a part of its workforce, which exceeded the number of
Americans working in the company.
 Same is the case with Dell and Honeywell with employ 28,000 and 20,000 Indians.
 Corruption is not limited to crony capitalism, it is rooted in the Indian system and at every step.
Government officials harass individuals and companies, whether it is to register a land
transaction renew a multitude of licenses, clear shipment through customs or win a public
tender.
 Companies find themselves continuously extorted by inspectors who handle pollution control,
labor laws and indirect taxes.
 Their choice is between spending countless hours defending themselves or paying one more
tax to individuals so they can focus on business.
 There is no uniformity in the policies related to any of the sector.
 For example: GVK reedy whose company was making an Investment in the Mumbai airport, the
developer had to deal with over 220 cases over property, environmental and labour disputes
in the process.
 The author mentions the term VUCCA which describes well the business environment in India.
 Volatility, uncertainty, complexity, Ambiguity and Corruption
 “ If the government does not step in and uphold the rule of law, there was every possibility that
India could become a banana republic” – Ratan Tata, the chairperson of Tata Group
 “This has been the most destructive period of regulatory environment I have seen in 16 years”-
Sunil Mittal, the chairman of the Bharti Airtel”
 “India grows at the night……when the government sleeps”-Gurucharan Das, author of the book
“India grows at night”

5.  According to Indian anticorruption website. www.ipaidbribe.com
 45 percent have paid bribe to judiciary
 61 percent to obtain registry services and permits.
 62 percent have paid off officials in connections with buying and selling of land.
 According to KPMG survey, 71 percent companies felt that fraud is “an inevitable cost of
business and 55 percent have experienced fraud.
 Minimal government intervention:
All the evidence suggests that industries dependent on state policy, government regulations, and
access to public resources, like infrastructure, mining, and natural resources find tough going in India.
Whereas sectors like IT, Pharmaceuticals and consumer goods have flourished because they have been
kept at an arm’s length from the government.
 The winning companies must straddle the pyramid:
By this the author means that the Indian opportunity in most industries is not the small global segment
at the top, but the middle market, and the great companies do not target only the top market but they
focus on the middle markets and develop products tailored for India that span different price points.
Therefore, smart companies will somehow find a way by selling global products to top section of the
society and then find a way to crack down into the middle market.
 In order to capture the middle market companies need to bring innovation, so as to make
products which fulfill the Indian requirements and develop localized business model that allows
them to be profitable at low price points.
 Focusing on the middle markets is true for both the industrial as well as consumer goods.
Example: India commercial vehicles market, sales in the premium segment are around one hundred
thousand trucks a year, while the market volume is around three hundred thousand trucks.
Companies which have fit the model:
 Symphony is a company which is in into manufacturing of air coolers and makes products in
the range of ₹4500-₹17000.
Now, the company target market is not the rich households, but the population which belongs to
Aspirers and deprived section of the Indian Income pyramid. So they have quite successful managed to
place themselves in the middle market which size about 200 million households.
 Having a dominant share in the emerging trend because if one does not identify a shift in the
market, then the company instead of being a leader in the market can become just a
competitor toiling hard to maintain itself in the market.

6.  For Example:
Using low cost-chipsets from Chinese company called Mediatek, companies like Micromax,
Karboon started manufacturing mobile handset that could hold two sim cards. Customers in
India liked these features in India as they would swap out the second sim card every month to
get the best deals on outgoing calls. Nokia which had dominant share in the market, was quite
slow to identify this emerging trend and launched its dual sim phones in June 2011 but that at
that point of time it had already lost 30% of market share.
 Companies must create localized business model, including a supply chain that overcomes local
challenges and delivers margins even at aggressive price points.
For Example: McDonald’s India makes money even at the price point of ₹ 25 for a burger.
The winning companies take a long term view, trading short term profits for growth and
leadership. They make investments in product localization and distribution and create a brand
which is ahead of demand and ahead of competitors.
MNC’s should look to run India as a geographic profit center empowering the local organization
to grow business.
Is Joint venture the right way to grow in India?
 In India joint venture, success rate has been unsatisfactory with nearly 60 percent of the joint
venture being unsuccessful.
 For Example : Tata-IBM, Mahindra-Renault, TVS-Suzuki, Godrej-P&G,
Modi-Xerox.
Whereas, ties between some of family owned companies and MNC’S have been fairly
successful. For Example: Kirloskar Cummins, JCB (Escorts)
Joint ventures are usually successful in the industry where each partner complementary
capabilities can reshape an Industry. For example Volvo came into India with Eicher. Volvo
brought modern technology, a global brand and economies of scale, whereas Eicher brought
frugal engineering, local brand, market knowledge and distribution.
 For Example in Industry such as telecommunication, defense, mining. MNC’s partner with
Indian firm to get permissions, licenses and permits.
 For Example: Telecom Giants Telenor and Etisalat entered into alliance with real estate groups
like Unitech and DB reality.
 For JV to succeed partners need to have patience and need to think for the long term.
 Personal chemistry between senior leaders is essential for JV’s to succeed.
 For Example: In a joint venture, things often get messy; people are imperfect, so disagreements
can lead to distrust. That’s when the two CEO’s must trust each other and cut through the
confusion.
 Companies are unwilling to do things differently for the Indian Markets.

7.  For Example: In, Mahindra and Renault joint venture, Renault launched a low cost car (Logan)
that has been successful in Europe but it was too expensive compared to Indian Market, and it
was not sufficiently localized.
 Also, Renault rivals lobbied successfully to get the excise duty raised from 8% to 20% on cars
longer than 4 meters. Logan was 4.5 meters and in order to reduce the price. Mahindra wanted
Renault to shorten it. However Renault refused to tinker with its product range. This created a
disagreement between the two companies and finally the joint venture ended with Renault.
Are Acquisition better than JV?
 Acquisitions that bring distribution processes, middle market brands and key capabilities can
be useful. The common mistakes are overpaying, inappropriate integration and incompatible
cultures or values.
 Acquisitions create value for a company when it has been too late to enter in the market and
company has no other way to gain market share.
 Rupee being depreciated, opportunity lies for the foreign companies to come and pursue
mergers and acquisitions.
Checklist to adapt with corruption
 Train country manager and senior leaders explicitly accountable for the image, reputation and
influence of the company in India.
 Second is to change practices that causes mistrust and focus on corporate governance.
 Third, step is to embrace a philosophy of doing well by doing good so that over time, the
company is seen as benevolent, trustworthy and good for India.

8. DHANDHO INVESTOR- by Mohnish Pabarai
Prepared by – Gopal Vaid
 Buy Simple Business, with slow rate of change
• FMCG
• IT Consultancy
• Insurance
MOAT- COMPETATIVE ADVANTAGE
• Company must have a durable and sustainable moat.
• “I do not want an easy business for competitors. I want a business with a moat around it. A very
valuable castle in the middle and then a duke who is in charge of the castle to be very honest
and hardworking and able. Then I want a moat around that castle. The moat can be various
things”
- Warren Buffet
WHAT CAN BE MOATS
• Great Product
• Access to certain specific resources
• Operational efficiency
• Large market share, Higher ROE and Profit margins,
FOCUS ON ARBITRAGE
• Grab the opportunity if the spread is available on two different exchanges.
• It is an ultra-low risk game.
However, today this size of the spread has become very less. As mostly stock trade at roughly same
price on different exchanges
MARGIN OF SAFETY ALWAYS
• In the time of distress in the market, you will see great business available at cheap price because
of fear in the financial markets.

9. • If any company which has a sound business model, superior cash flows but is in the bad news
place an Infrequent bet.
Also, at that time place huge bets by following the notion
“Heads I win, tails I do not lose much”
INVEST IN COPYCATS NOT IN INNOVATORS
• Copycats who are smart enough to copy the innovation and scale it up to capture large market
will emerge as winners in long run.
• Current Example:
BMW and Tesla motors sharing electric cars tech.
• Business who will always have a market and the products will always be in demand, even in the
bad times are low risk business.
• So go long on those companies whose business risk is less and uncertainty about them in future
is high
E.g. Stationary, Food, and Healthcare.
Avoid the combination of low risk and low uncertainty offered by the guys on the Dalal Street.

10. George Soros - Investment Philosophy
Prepared by – Gopal Vaid
Identify the Herd Instinct
• A gap always exist between perception and reality
• Buy and selling happens not on the present state of fundamentals, but on the expectations.
• Not only the market participants offer their bias, but their bias may also influence the markets.
Theory of Reflexivity: Belief do is alter facts
• Market prices never offer the rational view of the future events. But rather a biased one.
• Search for an unexpected development
• Try to determine what the market total sum of these investors thought at any given point of
time.
• Flawed perceptions cause markets to feed on themselves
Process of reflexivity
• Unrecognized trend (Track)
• Beginning of the self-reinforcing process.(Buy)
• An increasing conviction(hold)
• A divergence between reality and perception(Sell)
• The climax ( test- Shorts)
• Start of mirror image self-reinforcing sequence in the opposite direction ( Massive shorting)
• Trend continued, the significance of speculative transaction grew.
Reflexivity Equation
• Bias affect not only the market price but also the so called fundamentals.
• P = Price
• F = Fundamentals
• B = Bias
P = f(B)……..1
F = f(P)………2
Conclusion

11. • Look for the events that will bring in cumulative bias and start self –reinforcing loop.
The Outsiders
Prepared by Abhir Pandit
CEO’s Selection & Skillsets
 “Follow the Money” approach
 Buffett Quote
 Capital Allocation pg 7 buffet quote on
 Focus on Cash-flow not EPS
 Buybacks
 Patience + Boldness in acquisitions
 Focus on per share Value not Overall size
 Unorthodox approaches
Comparison of Outsiders vs GE and S&P
Capital Cities (Tom Murphy) vs CBS(Bill Paley)
• X--- 16x , 30 yrs ltr 3x--- x

12. • Focused Roll Up Approach vs Diversification
• CEO + COO Approach
• Broadcasting + Publishing
• Capital Allocation + Efficient Operations
• Extreme Decentralization Approach
• Debt fueled Acqs & later efficient ops
Teledyne – Henry Singleton
• Teledyne Model- Conglomerates
• Select Acqs using Overvalued Stock
• Focus on Cash Flow
• Aggressive Repurchaser
• Unique Approach
• Spin offs and Dividends

13. General Dynamics
• Outsider Ceo – Moon mission Astronaut
• Industry Conditions & Company departments
• GE logic of No 1 or No 2
• Generation of cash & deployment
• Asset sales & special dividends
• Taking adv of Sector cycles
• Correct Diversification.. ..???

14. TCI & John Malone
• Cable Industry Characteristics
• Cycle of scale by acq
• Use of Ebitda vs EPS
• Selective Aggressive Acquisitions
• Focus on programming
• Spin-offs strategy
• (read malone again)
• Tax minimization approach
Bill Stibitz- Public LBO
• Fmcg firms – like ITC
• Divestments and Smart acq
• Using leverage since FMCG business
Berkshire Hathway- Warren Buffett
• Generate funds at 3% and invest them at 13%
• Insurance underwriting & smart investing
• “Greedy when others are fearful and fearful when others are greedy”
• Concentrated portfolios
• “No bad Risks , only Bad Rates”
India Examples?
• Persistent
• Cera
• Symphony
• Ashiana
• Tcs
• HDFC bank
• Marico
• Ajay Piramal
• Edelweiss

15. Moats- Sustainable Value Creation
Prepared by – Abhir Pandit
What is an economic moat?
 Moat is a competitive advantage that a firm has when compared to its competitors that keeps
its market share alive.
 In order to remain in the race businesses should develop an economic moat
 Sustainable value creation is a part of economic moat
There are 3 ways competitive advantage can be achieved
 Production Advantage(Lower costs of production)
 Consumer Advantage(Product Differentiation)
 Government
Sustainable Value Creation
 Sustainable value creation is one of the most important aspect that managers generally tend
to forget
 Sustainable value creation can be broken into two parts, how much economic profit a company
earns and how long can it earn this excess return
 To evaluate how this sustainable value occurs, we have to explore many factors such as Industry
Analysis, Firm Specific Analysis, etc.
Industry Analysis
 Industry Map
 Profit Pool
 Industry Stability
 Industry Classification
Industry Map
 A map that includes all the companies and constituents that might have an impact on the
industry.
 The goal of an industry map is to understand the current and potential interactions that
ultimately shape the sustainable value creation prospects for the whole industry as well as for
the individual companies within the industry.

16. Profit Pool
• A profit pool shows how an industry’s value creation is distributed at a particular point in time.
• Profit pools are particularly effective because they allow you to trace the increases or decreases
in the components of the value-added pie
• It tells whether an firm is creating or destroying value that has been created or existing in the
industry

17. Cash flow return on investment (CFROI) is the indicator that helps a firm to evaluate the
performance of an investment or product. It can also be termed as the calculation that helps
the stock market to set prices on the basis of cash flow.
Industry Stability
 Stability is an important factor because stable industries are more prone to value creation than
volatile industries
 We can measure industry stability a couple of ways. One simple but useful proxy is the
steadiness of market share. This analysis looks at the absolute change in market share for the
companies within an industry over some period of about 5 years. We then add up the absolute
changes and divide the sum by the number of competitors. The lower the average absolute
change in market share, the more stable the industry.
Another way to measure stability in an industry is the pricing trend. If a firm has the power
to charge or change prices without losing its market share to its competitors then one can
say that it has created value

18. Industry Classification
• Classifying industries is an important aspect because each industry has different opportunities
associated with it. For example, for an emerging industry, first mover advantage plays a vital
role. According to me, this opportunity would play a vital role is value creation as the first mover
would hold key advantages when compared to firm that join the industry later. For example,
Technological leadership
Industry Structure—Five Forces Analysis
• An individual company can achieve superior profitability compared to the industry average by
defending against the competitive forces and shaping them to its advantage
• Collective strength of the five forces determines an industry’s potential for value creation.

19. Competitive Rivalry
• Rivalry among firms addresses how fiercely companies compete with one another along
dimensions such as price, service, new product introductions, promotion, and advertising. In
almost all industries, coordination in these areas improves the collective economic profit of the
firms. For example, competitors increase their profits by coordinating their pricing.
• Another influence of rivalry is firm homogeneity. Rivalry tends to be less intense in industries
with companies that have similar goals, incentive programs, ownership structures, and
corporate philosophies. But in many instances, competitors have very different objectives. For
example, an industry may have companies that are public, privately held, or owned by private
equity firms. These competitors may have disparate financial objectives, incentive structures,
and time horizons. The strategies that companies within an industry pursue will reflect the
heterogeneity of objectives.
• Asset specificity plays a role in rivalry. Specific assets encourage a company to stay in an
industry even when conditions become trying because there is no alternative use for the assets.
Assets include physical assets, such as railroad tracks, as well as intangible assets such as
brands.
• Final consideration in rivalry is industry growth. When the pie of potential excess economic
profits grows, companies can create shareholder value without undermining their competitors.
The game is not zero-sum. In contrast, stagnant industries are zero-sum games, and the only
way to increase value is to take it from others. So a rise in rivalry often accompanies a
decelerating industry growth rate
Disruption
Disruption can be broken down into 2 types – Sustainable and Disruptive innovation
• Sustainable disruption is nothing but product development i.e. continuous development to a
product that a company offers
• Disruptive innovation can be further broken down into 2 parts which are - low-end disruptions
and new-market disruptions
• Low end disruptions offer a product that already exists.
• A new-market disruption is providing a new product which is cheap or simple enough to enable
a new group to own and use it.
• The main point is that sustaining innovations operate within a defined value network—the
“context within which a firm identifies and responds to customers’ needs, solves problems,
procures input, reacts to competitors, and strives for profit.” e.g. Change in size of floppy disk
over time. In disruptive innovations, a new value network is created. E.g. Introduction of C.D’s
as data carriers.
• An example of low end disruptive innovation is most airline industries where the product
offered is not new and is not very different from the product offered by its competitors
• Disruptive innovations initially appeal to relatively few customers who value features such as
low price, smaller size, or greater convenience. Initially the product appeals only a group of
people. The incumbents (dominant firm in the industry) neglect this disruption or are not able

20. to reallocate their resources to produce this new disruption. Gradually, market share of the
industry is eaten by this disruptive innovation. The mini mills over integrated mills.
• Firm Specific Analysis
 Creating value mostly is firm depended i.e. it depends on the strategies it pursues and the way
it handles its competitors.
 Value created = willingness-to-pay – opportunity cost
 Four strategies to create more value: increase the willingness to pay of your customers; reduce
the willingness to pay of the customers of your competitors; reduce the opportunity cost of
your suppliers; and increase the opportunity cost of suppliers to your competitors.
 In firm specific analysis companies try to achieve competitive advantage which can broadly be
divided into 2 categories i.e. lowering production costs(production advantage) and
differentiation(consumer advantage)
Production Advantages
 Firms with production advantages create value by delivering products that have a larger spread
between perceived consumer benefit and cost than their competitors, primarily by
outperforming them on the cost side.
 A firm creates value if it has a positive spread between its sales and costs, including opportunity
costs i.e. if it has achieved economies of scale
Some points to consider are
 Distribution
 Purchasing
 Research and development
 Advertising
Consumer Advantages
 Consumer advantage is the second broad source of added value. Firms with consumer
advantages create value by delivering products that have a larger spread between perceived
consumer benefit and cost than its competitors do.
 Features of consumer advantages
 Habit and high horizontal differentiation. A product is “horizontally differentiated” when some
consumers prefer it to competing products
 Experience goods. An experience good is a product that consumers can assess only when
they’ve tried it.

21.  Switching costs and customer lock-in. Customers must bear costs when they switch from one
product to another. The magnitude of switching costs determines the degree to which a
customer is locked in.
Government
 The final source of added value is external, or government related. Issues here include
subsidies, tariffs, quotas, and both competitive and environmental regulation. Changes in
government policies can have a meaningful impact on added value.
Breakout Nations – by Ruchir Sharma
Prepared by – Gopal Vaid
• Poland and Czech Republic are the breakout nations in Europe.
• Low domestic debt and manageable foreign debt.
• Steady momentum behind economic and political reforms.
• Going for the euro union membership but not for euro zone
• They were able to avoid the problem of internal devaluation.
• For the nations who have faced crisis in Europe, must follow the fried rich Hayek theory.
• Asian tigers, have chosen the path of export oriented model.
• Indonesia in particular has exports which are essentially commodities.
• Look for the “Rise of the second city”.
• Those nations which will build new cities having population more than 1 million could be
breakout nations.
• South Korea has been relatively better as compared to japan and Taiwan by having more
diversified manufacturing and strong brands.
• Follow the KOSPI index to evaluate global trends.
• Reliable data, foreigners own one third of Korean stocks and Korean companies are major
players in broad selection of Industries.
• Korea has been largely unique by showing exception to the rule of transition from
manufacturing sector to manufacturing even after attaining higher level of per capita income
• Major emerging markets are now moving in tandem, unlike previously moving according to
their own unique logic.
• Difference between worst and best performing markets was just 10%.
• Frontier nations who will mature their stock markets will grow.
• Watch out for Angola, which is $100 billion economy, but it has no stock exchange. Angola has
been talking about opening its markets.

22. • Srilanka is poised to grow, with investments coming up in infrastructure, srilankan currency
being competitive and high level of educated population with English Fluency.
• Vietnam which was backed by foreign investors to grow, lack of governance, infrastructure has
halted their growth.
• In order to spot credit bubbles, the general rule is that if the banking sector expands by more
than 20% a year for five straight years problems usually follow.
• Nigeria and EAC (East African community) may be breakout nations as high growth success
stories tend to appear in geographic clusters.
• Telecommunication services and internet boom is happening as
• The fiber optic network has increased by factor of 12, and internet capacity has increased by
factor of 100.
After the Ecstasy, the laundry
• Commodity market bubble in progress, (30% of global stock markets is in energy and
commodities).
• Historically prices of commodities have fallen, because with new technology the extraction of
commodity has been more efficient.
• Hype and exponential increase in the prices, have happened because of “Financialization of
Commodities”
• According to the U.S based energy research firm, Cornerstone the total volume of trades in
energy futures in 2011 was nearly two billions barrels a day, twenty two times higher than the
daily total global demand for energy.
• The reason behind the commodity bubble that the price of commodities will rise indefinitely
based on expanding china.
• “China is a big growing fish in a shrinking pond” and therefore, it does not imply insatiable
global demand for oil or any other commodity.
• Rise in the energy and commodity prices are putting billions in production facilities on the
estimate that oil and energy consumption of china will rise by 60% by 2015, whereas clear
message is coming from Beijing that investment surge is about to slow.
The third coming
 Understand nations like individuals.
 Volatility is here to stay.
 As today every percentage point increase in income is matched by a 4 percent increase in trade
flows.
 Return of boom and bust cycle.

23. Interview with Fund Manager Kenneth Andrade
Aarati Krishnan talks to Kenneth Andrade, Head, Investments, IDFC AMC, about his
journey in the mutual fund industry
Jul 28, 2015
Aarati Krishnan talks to Kenneth Andrade, Head, Investments,IDFC AMC, about his decision to
move on from the mutual fund industry while taking some last investment ideas from this
renowned portfolio manager.
Meeting Kenneth Andrade of IDFC Mutual Fund was sheer luck. Given that Kenneth has
recently announced his decision to move on from the mutual fund industry to 'pursue
entrepreneurial opportunities', journalists like me may no longer get an opportunity to pick
the brains of one of the true out-of-the-box thinkers in the Indian investment space.
I realise, as soon as the interview gets underway, that I may have to junk the long list of
questions that I've prepared beforehand. The moment I begin my 'what-do-you-think-of-
markets' questions, he pulls up a large Excel sheet on the screen and offers to explain where
he thinks Indian markets are going and how he's constructing his fund portfolios to reflect this
view.
I quickly discover that Kenneth's take on the market is very different from the views doing the
rounds on the Street. Even as most analysts are now rolling over their Sensex targets and
bravely projecting double-digit earnings growth for FY16, Kenneth holds the view that the
market is being too impatient in expecting a quick turnaround in earnings.
Too much too soon
'At the moment, there is a lot of expectation that the economy will turn track in one or two
years and that earnings will pick up in 2016 or 2017. We have a different take on that. Today,
BSE 500 companies have all-time high debt-equity ratios. Corporate balance sheets don't
have the space to grow. Neither do banks. For economic activity to pick up, you need balance
sheets to expand. So how do you grow?' he asks me.
Seeing that I am somewhat speechless, he pulls up a sheet that maps the assets, debt-equity,
net worth and profits of BSE 500 companies for the last ten years. Basically, the numbers show
that India's largest companies have been on an expansion binge in the last ten years, with their
total assets expanding from `8 lakh crore to `55 lakh crore. The expansion has been funded
mainly by debt and hasn't paid off yet. Corporate profits of India Inc have grown at a mere 12
per cent (CAGR) for the last ten years, while their capital employed has zoomed by 24 per cent

24. a year. As a result, while the aggregate debt-equity ratio has ballooned from 0.35 times to 0.8
times, the return on equity - the key driver of valuations - has dropped from 20.7 per cent to
11.5 per cent over this ten-year period.
This, Kenneth argues, is the real reason why corporate profits are growing at a snail's pace
today. 'I believe that people are building in too strong earnings growth expectations too early
in the cycle. People say that capex cycle will pick up. But from our numbers, it is clear that even
`10 lakh crore of capex may not move the needle much. Therefore, where is the 20 per cent
earnings growth going to come from?' Those numbers have my head reeling, but it is difficult
not to get convinced by Kenneth's conviction and passion for this subject.
Go for quality
As I grapple with all this, Kenneth adds that this doesn't mean he is negative on equity markets.
It is just that the revival that everyone is expecting may take time to materialise. And it is only
during periods of uncertainty that one has the best opportunities to enter into stocks. 'I think
we are close to the bottom of the cycle. Over the next two-three years, India Inc will gradually
increase its profitability. The additional cash flow can be used to pay down debt.' But, he
believes, this revival will be a 'slow grind up'.
So what does this imply for stock choices? Well, Kenneth is avoiding highly leveraged
companies and is negative on banks. 'We are looking for quality companies that dominate their
industry with moderate debt and positive cash flows.' But given that many fund managers are
on the hunt for 'quality', aren't such stocks trading at too-rich valuations? 'They are,' agrees
Kenneth, 'but I would rather take on valuation risks in my portfolios than solvency risks.'
So given this thesis, is there a dearth of good stock-picking opportunities, I ask? He says that
there are plenty of opportunities out there if you don't make market-cap distinctions. He isn't
a believer in small-cap or mid-cap stocks being riskier than large caps.
'Good firms can come from any market-cap range. Smaller firms may have good management
and turn out to be quite capital efficient. Not all large-cap companies have great promoters,'
he points out.
MSME Opportunity
But Kenneth's offbeat market view has meant that the portfolio of the flagship fund IDFC
Premier Equity isn't in sync with indices. The fund has been a middle-of-the-road performer
in the last one year. Given that investors tend to chase returns, will the fund lose out, I query.
'You have to deal with it. It's a competitive landscape. When IDFC Premier was giving a 100 per
cent return, we didn't get 100 per cent of the inflows. I believe as long as there's a structure
and logic to your portfolio construction, investors will understand.' He adds that if one
compares IDFC Premier Equity's returns to the large-cap, mid-cap and diversified equity indices
over the last ten years, the fund outperformed in nine out of ten years - it missed the Nifty by
1 per cent in a down year.

25. He thinks that the process of consolidation that is on in the markets today will lead to good
investment opportunities over the next few quarters. But he thinks it is important not to go
into an expanding economy with the wrong portfolio. He explains that most investors and fund
managers are scrounging in the same set of sectors, which is a mistake. To outperform over
the long term, you needed to be ahead of the curve on what would drive the next bull market.
'The next bull market can be driven by sectors and stocks which are not on our radar right now,'
predicts Kenneth, citing the example of Indian MSMEs.
'I think Mudra Bank can be a real game-changer for Indian MSMEs. If you look at corporate
India, the promoter's personal balance sheet is different from the company's. He usually
leverages the company's balance sheet. For the small business owner, there is no distinction
between his personal balance sheet and his firm's balance sheet. So if you make capital
available to him at much cheaper rates than the current 20 per cent-plus, he can scale up his
business. His personal spending can then boost the economy too.'He believes that such a
resurgence in Indian MSMEs can rejuvenate primary markets and expand the listed universe
of stocks far beyond what we can imagine today.
Watching them grow
So given his sober view on equities, where has he put his personal money? Is he going for the
mattress, I ask, jokingly. 'I am completely into equities. I believe in giving the market time to
deliver,' he says, stating that if you wait for valuations to get really cheap, you will never be
able to invest.
Then, does he own no fixed-income investments? 'I have been an equity investor all my life. In
equities, if you bide your time, you will get to double-digit returns. Fixed income can generate
double-digit returns for short time periods, but that's not sustainable. I look to debt mainly to
generate regular income,' he says.
So how did Kenneth get into this money management business? Was he always this passionate
about stocks? No, he laughs. 'I had no idea what I would like to become. I applied for a job at
Capital Market magazine after college. At that time, the magazine had in-house analysts who
wrote this column called IPO Monitor. I took the job up for 18 months.' He then worked as a
freelance journalist for a while before joining Apple Mutual Fund in 1994.
He has juggled quite a few jobs since then, working at smaller brokerages, before he got
recruited by SSKI in the late nineties. Then came the 'big break' into Kotak Mutual Fund and
then IDFC Mutual Fund about ten years ago. He stayed on at IDFC until 2015. What made him
stay on with IDFC for so long? He says that fund management fascinated him because it allowed
him to really study businesses. 'I love holding onto companies for really long time periods and
understanding what drives their transformation. I am not a votary of earnings growth. I would
rather buy companies which are efficient with their use of capital.'
Good stock-picking, he feels, is not about predicting whether technology will do well or autos
will do well. 'It is all about buying efficient capital.'

26. I switch gears to personal questions with some trepidation because Kenneth has this
reputation for being quite reserved. So what does he do in his leisure time? 'I do some reading,'
he says briefly, clamming up after talking freely about markets so far. Kenneth was born and
brought up in Mumbai and is a 'Kalina' boy. And though he does read in his free time, his
passion really is cars. He owns two electric cars ('all the electric ones available in the market')
and spends a lot of his free time 'keeping them in good shape'. 'Are electric cars a pain to drive?
Do they die on you on the road, just like a smartphone?' I ask, being quite irritated with my
phone for dying when I most needed it.
He vehemently defends his electric cars. 'No, my cars have never died on me. I've done 45,000
km on them and have a charging station at home and also one at the office,' he says. Kenneth
is a gadget freak and loves to replace his phone with the latest launch. Weekends are about
reading and experimenting with music. Kenneth has two teenage daughters who share all their
music with him. As I have a teenage son too, we compare notes on the bands they listen to.
The lyrics are awful, we agree, but the music is very catchy.
And when he has spare time, Kenneth takes his cars out for a drive. Where does he go? 'I just
get into my car and drive. I like to go for long drives at 60 km/hour wherever the road takes
me,' he says. Well, that statement may nicely sum up his latest career move too.
I may not get to meet him in his portfolio manager avatar again, but I'm sure with his passion
for investing, original ideas and keen intellect, Kenneth will make waves at his next stint as well.

27. Observations From a Decade in the Investment Business
It was recently brought to my attention that it’s been ten years now since I started my first full-
time job in the investment industry. More experienced investors might not think this is a very
long time, but it feels like an eternity to me considering my current level of understanding
compared to what I knew when I first started out.
Here a some observations about my time in the world of investments from the past decade:
Everything is getting faster. This includes information flow, trading, instant feedback and
analysis and market cycles in general. I’ve also noticed that performance updates can no longer
wait — investors want up-to-the-minute reporting and the ability to track their market value
in real-time. Time frames continue to shorten.
What college you went to doesn’t matter. The only thing a top tier college is good for is getting
you your first job through connections. But even that’s diminished these days to some degree
because technology makes it easier than ever to network if you know what you’re doing. I went
to a small private Division III school without much of a finance program. Right out of school I
felt this was a disadvantage, but looking back on it now it was actually a huge benefit because
I ended up basically being self-taught. I didn’t start out with any preconceived notions or biases
about the way the markets work based on textbook theories that are more or less useless in
the real world.
First impressions can be misleading. I’ve found that the people that absolutely wow you right
off the bat are usually over-compensating. The ones that try to convince you that they have
everything figured out are not the people you want to be listening to in this business.
Career risk is highly under-appreciated. I could come up with a laundry list of the reasons for
poor market behavior from professional investors. Career risk would be at the top of that list.
Incentives matter a great deal more in the decision-making process than most realize.
Everyone is conflicted in some way. It’s impossible to avoid conflicts of interest in the financial
services industry. It is a business after all. The trick is to understand how incentives drive
people’s actions and look for those firms and individuals that are up front and honest about
any potential conflicts.
Always have a spare suit coat in your office. This one has saved me a few times with last minute
(or forgotten) meetings. Also, never wear a blue shirt with a white collar. The Michael Douglas
from Wall Street shirt just screams, “Would you like to buy an opaque annuity with ridiculously
high fees?”
You get to know people better over dinner or drinks. I’ve always found the standard interview
process to be fairly useless. You will always learn more about potential hires or employers by
going out to eat or getting a drink together than you do from a formal, sit-down interview. HR-
type interviews are too stuffy and rehearsed.
It’s good to have an outlet. Whenever I have the time, I try to workout at lunch. In finance you
spend most of your time in front of a computer, in meetings or on conference calls. It’s helpful

28. to stretch your legs and take the occasional break to re-charge. I find I get the majority of my
best thinking done during this time. My other outlet is writing, which I wish I would have started
sooner.
Communication is a highly under-rated skill. I always assumed my analytical skills would help
set me apart in this business. While you have to have an analytical mind to succeed in finance,
without the ability to communicate with a variety of audiences — clients, colleagues, bosses,
potential employers, etc. — even top-notch analysis can get lost in the shuffle.
There’s always going to be someone smarter than you. While it’s easy to mock the financial
industry for their poor forecasting abilities and potentially damaging advice, there are an
insane amount of brilliant people working in finance. At first I was always in awe of the smartest
person in the room. But it’s worth acknowledging that intelligence without the requisite
common sense does you no good. Brilliance does not always translate into success in the
markets, and in fact, it can be to your detriment if it leads to extreme levels of overconfidence.
The best people in this industry are often overlooked. Many great investors out there are
overshadowed because they aren’t making a never-ending series of outlandish predictions,
they don’t resort to scare tactics, and their main goal is not to push unnecessary products on
unwitting clients.
Information is everywhere but people still choose to ignore the evidence. There are academic
research papers and real world case studies on nearly every investment strategy known to man
yet many investors still choose to wear blinders and only read that which agrees with the way
they do things.
Self-awareness is essential for long-term success. I can’t remember exactly when it was that I
had my aha moment, when I first really “got it.” But it’s made me a more clear-headed investor.
When I say “got it” I don’t mean that I finally figured everything out that there is to know about
the markets. Getting it to me meant that I understood that I would never truly have it all figured
out. Learning would be a life-long pursuit but there was never going to be a time when I could
say, “I’m finished. I’ve figured out everything there is to know about the financial markets and
how to be the perfect investor.”
I think it was a combination of watching people much smarter than me fail at the game of
investing over and over again and learning about the importance of human psychology on our
actions and decision-making abilities. All of these cognitive biases I was reading about I had
witnessed first-hand, either through my own actions or by watching other market participants.
The markets can be a very humbling place, but it’s not until you’re willing to show humility that
you can start to see lasting improvements in your results over time. It can be extremely difficult
for very intelligent people, with years of higher education and professional designations under
their belt to be completely honest with themselves about the markets.
The markets are hard. Slowing down is important. A legitimate decision-making process that
reduces the impact of your emotions is essential. But none of this is possible without the self-
awareness to admit your own limitations.

29. Four Lessons from Druckenmiller
As noted last month, the legendary Stan Druckenmiller officially retiredfrom public money
management in August.The media reaction to Druckenmiller’s exit stage right was a
classicexample of sic transit gloria — glory fades.With a focus on professed tiredness and
stress, short shrift was given tothe fact that Druckenmiller was, undoubtedly, one of the
greatestmoney managers of all time.With a track record in his Duqesne fund of 30%
compound returns over30 years — with no losing years – Stan Druckenmiller is to
moneymanagers as Wayne Gretzky is to hockey, Michael Schumacher is toFormula One
racing, or Jack Nicklaus is to golf.(The “Michael Jordan” moniker is taken by Paul Tudor Jones,
a good buddy of Druckenmiller’s who isstill active.)Druckenmiller also has the distinction of
sharing the most profound piece of wisdom in the entireMarket Wizards series. If you truly
understand this observation, then you understand how tobecome rich:
The way to attain truly superior long-term returns is to grind it out until you’re up 30 or 40
percent, and then if you have the conviction, go for a 100 percent year. If you can put gether
a few near-100 percent years and avoid down years, then you can achieve really utstanding
long-term returns- Stanley Druckenmiller, New Market WizardsAnd of course, that is exactly
what Stan the Man did…Reflecting on Druckenmiller’s retirement — and track record — leads
to four conclusions applicable to traders and investors today.
Lesson #1: SIZE MATTERS
Yes Virginia, size does matter. But not in the way one might think. (Geez, get your mind out
of thegutter!)At the time of Druckenmiller’s retirement announcement, Duquesne Capital
Management LLC washandling $12 billion. That’s a lot of dough. In fact, it’s a bit like trying to
steer an ocean liner.The great global macro managers are known for their ability to nimbly
exploit opportunities in deep,liquid markets. And the more liquid the vehicle the better,
because liquidity allows the manager to turnon a dime — or to step aside and quickly go to
cash if need be.But the bigger you get, the harder it becomes to implement a pure trading
style. Size becomes aheadache in that it’s an impediment to getting in quickly, and sometimes
an even bigger impediment togetting out.Forbes Magazine recently estimated
Druckenmiller’s personal fortune at $2.8 billion. No wonder hewants to just run a “fun”
portion of his own money again, farming out the rest to colleagues through a family office.
Cutting back total size to a measly $500 million – $1 billion or so would feel like a
speedboat in comparison to the full Duquesne load.As an important takeaway here, size
matters to regular investors and traders too, in respect tothe fact that being small comes
with a huge advantage!And what is that advantage, you ask? It is the ability to load the boat
on your best ideas.If you are trading with anything less than $100 million — or, heck, a few
hundred million for that matter — then your highest conviction ideas have a much better
chance of adding outperformance tothe portfolio, due to a practical lack of capacity
constraints.Hedge fund manager Joel Greenblatt, whose Gotham Capital earned 50%+
returns for more than adecade, explains this phenomenon in his book You Can Be a Stock
Market Genius. (A terrible title, buta great read.)To explain the small investor’s edge,
Greenblatt uses the example of “Bob,” a pseudonymous friend ofGreenblatt’s tasked with
allocating billions under strict institutional rules From a practical standpoint, when Bob [a

30. bigtime equity fund manager] chooses his favourite stocks and is on pick number twenty,
thirty, or eighty, he is pursuing a strategy imposed on him by the dollar size of his portfolio,
legal issues, and fiduciary considerations, not because he feels his last picks are as good as
his first or because he needs to own all those stocks for maximum portfolio diversification. In
short, poor Bob has to come up with scores of great stock ideas, choose from a limited
universe of the most widely followed stocks, buy and sell large amounts of individual stocks
without affecting their share prices, and perform in a fish bowl where his returns are judged
quarterly and even monthly. Fortunately, you don’t.Is it any wonder Druckenmiller grew wary
of steering an ocean liner? “I plan on managing a decent
chunk of my money, but only an amount that will be fun,” he told Bloomberg.
The man wanted to be light and nimble again. (Relatively speaking of course.)
Lesson #2: OUTPERFORMANCE IS POSSIBLE
If you’ll pardon the color, we at Mercenary Trader can’t help but fully agree with this
assessment from Helmut Weymar, a founder of the legendary Commodities Corp:I thought
random walk was bullshit… The whole idea that an individual can’t make seriousmoney with
a competitive edge over the rest of the market is wacko.Amen to that. (Paul Samuelson, a
godfather of EMH and the dean of neoclassical economics, apparently didn’t buy the bullshit
either, as fully clarified here.)As Market Wizard Larry Hite once observed, everyone he ever
met who believed in efficient markets was poor. The poor eggheads argue, miraculously, that
markets have some mysterious source of efficiency, unknown in source or sustenance, that
prevents outperformance from being possible, evenfor the alpha dogs supposedly dominating
markets in the first place!This line of thought deserves outright scorn and ridicule, and
perhaps a sense of wonder at the sheer pigheadedness of the assertion. (Man as consistently
rational utility maximizer? No. Talent equallydistributed? No. Information objectively
interpreted? No. As Yale professor Robert J. Shiller has observed, the efficient market
hypothesis is “one of the most remarkable errors in the history ofeconomic thought.”)When
defending EMH in public, academic true believers resort to the “Trained Orangutan”
argument,which basically asserts that money managers are little more than lucky coin flippers
— and that with enough flippers on hand, one is bound to see the emergence of a few
excellent track records solely onthe basis of luck.Warren Buffett, aka the greatest value
investor of the age, took on this argument and demolished it ina tour de force titled “The
Superinvestors of Graham and Doddsville.” You can read the whole piecehere, or otherwise
find it on the web.Buffett’s essential rebuttal was that, if the trained orangutan / lucky coinflip
charge held true, then thewinners with long-term track records should have randomly
distributed styles of varying logic andrationality.One lucky flipper might believe in reading
astrological signs, for example. Yet another might pray to
Vishnu, or buy stocks that begin with the letter “R.” Those might be slight exaggerations…
point being,though, that if the market winners win based on luck, as the random walkers
assert, then thestrategies of the “winners” should be sufficiently varied to suggest random
intellectualdistribution as a group.This is not what happens.As Buffett pointed out, in his
circle — the value investing circle of the Graham and Dodd school — a class of investors did
things the same way, focused on the same things, and applied the samephilosophies and
methodological principles to consistently outperforming the market. As Buffett put it,If you
were trying to analyze possible causes of a rare type of cancer — with, say, 1,500 casesa year
in the United States — and you found that 400 of them occurred in some little miningtown in
Montana, you would get very interested in the water there, or the occupation of

31. thoseafflicted, or other variables. You know it’s not random chance that 400 come from a
small area.You would not necessarily know the causal factors, but you would know where to
search.I submit to you that there are ways of defining an origin other than geography. In
addition togeographical origins, there can be what I call an intellectual origin. I think you will
find that ad isproportionate number of successful coin-flippers in the investment world came
from a verysmall intellectual village that could be called Graham-and-Doddsville. A
concentration ofwinners that simply cannot be explained by chance can be traced to this
particular intellectual village.Now, getting back to Druckenmiller — 30% returns
compounded over 30 years. Was that a fluke, a quirk of genius, or an otherwise
unapproachable result? No.Besides the huge improbability of such a lengthy run via random
chance, there is the fact thatDruckenmiller and colleagues come from an “intellectual
village” similar in spirit to Buffett’s —one that I call “The Supertraders of Global
Macroville.”In other words: Just as a class of value investors has managed to thrive and
outperform over decadesusing the tenets of Graham and Dodd, a class of traders — the
Supertraders of Global Macroville —has done the same thing using the essential principles as
laid down by top practitioners over theyears. Consider the following: Druckenmiller, a global
macro specialist (and the architect of Soros’ career-defining BritishPounds trade in 1992),
earned 30% returns over 30 years with no losing years. Paul Tudor Jones — the “Michael
Jordan” of trading — has compounded at 27.4% annually inhis Tudor Futures Fund since 1984
— more than a quarter century — and, like Druckenmiller, with no losing years. PTJ and
Druckenmiller were known to talk virtually every day when Druckenmiller wasactive.
(Perhaps they still do…?) Druckenmiller was a protege of George Soros, whose legendary
Quantum Fundcompounded at 32%+ between 1969 and 2000 (30+ years).
When Soros published the Alchemy of Finance, Paul Tudor Jones was so enthused by
itsinsights he demanded that all his people read it. The habits and philosophies of
Druckenmiller, Jones, Bacon, Kovner, Marcus, and other macro trading legends all have
traceable links to Commodities Corp, arguably making “Global Macroville” a physical place.
The essentials of the macro trading style can be traced even further back, to the
timelesstenets first expressed via Reminiscences of a Stock Operator in 1923That sounds very
much like an intellectual community founded on replicable strategies andprinciples, does it
not? (Which, of course, is exactly what it is.)And of course, opportunities in the global macro
or “top down” investing space remain as lucrative today as ever (if not more so), the basic
elements of which are laid out in our Integrated MacroAnalysis series. (More episodes are
coming by the way — stay tuned!)What’s more, one of the most attractive aspects of global
macro — that space in which one treats theintegrated combination of “top down,” “bottom
up” and “price action” as Father, Son and Holy Ghost —is its relative imperviousness to
supercomputers, High Freqency Trading programs, and otherforms of short-term
automated churn.No computer program yet devised can match wits with a skilled and
nuanced trader when it comes to isolating, targeting and exploiting the key thematic drivers
of the day. In pulling all the threads together,and applying the accumulated lessons of market
history and economic knowledge as one does so,there is simply too much embedded
complexity for any silicon-based algorithm to handle.As Reminiscences quite correctly
observed so long ago,There are men whose gait is far quicker than the mob’s. They are bound
to lead—no matter how much the mob changes.
Lesson #3: EXCELLENCE TAKES HARD WORK
For years, Druckenmiller had lamented that he couldn’t get away — the markets demanded
too muchof his time, energy and vigilance. At age 57, and after 30 years, he finally felt ready

32. to slow down thepace.To stay on top of your trading game, you have to be aggressively in the
mix. In some respect, being a top-flight trader is not unlike being a top athlete — golfer, tennis
player, NBA star or what have you.To get great and stay great, one must put in the hours,
stick with the training, and maintain a ferociouscompetitive focus. There are simply no
shortcuts (with the possible exception of having other greattraders share their trades with
you in real time).Paul Tudor Jones expressed the core of the trader’s work ethic in this year
2000 interview excerpt:Q: What’s your competitive advantage as a trader?
A: The secret to being successful from a trading perspective is to have anindefatigable and an
undying and unquenchable thirst for information andknowledge. Because I think there are
certain situations where you canabsolutely understand what motivates every buyer and seller
and have a pretty good picture of what’s going to happen. And it just requires anenormous
amount of grunt work and dedication to finding all possible bits ofinformation.
So the #3 lesson from Druckenmiller (and friends) is that it takes a lot of effort to be great (on
top ofthat special spark). This in turn reflects on the fact that, to truly do well in markets, one
has to trulylove the game.When it comes to trading and investing, those who do not love the
game are at a distinct andpermanent disadvantage to those who do.For the individual without
passion — or with insufficient passion — trading is hard and grueling workfor which the
upside does not outweigh the downside.For the individual who loves all aspects of trading,
on the other hand, it becomes the most fascinatingand fulfilling line of work imaginable.
Intensity of engagement makes the yoke easy and theburden light.
(That is one of the many edges that we as Mercenaries bring to the table. Though Mike McD
and I routinely put in ten hour trading days, day in and day out, the vast majority of them feel
like play.Sometimes it feels almost criminal…)Trading as one’s prime vocation is
unquestionably one of the greatest gigs on the planet. For a certainodd breed, there is nothing
better than stepping up and solving the puzzle each day.But sometimes it’s hard — damn
hard — in the way that being an ironman triathlete can be hard. The bone-deep level of
commitment required can seem nutty for those on the outside looking in.An elevated
threshold for psychological pain and discomfort also counts as a “must-have.” You needthe
love to overcome the friction, and the joy to overcome the pain. Druckenmiller had it for
30years straight, and then he finally got tired. (Or rather, the tiredness finally got him.)Note
again too, Druckenmiller didn’t say he’s retiring completely, but only from public money,
withplans to still run a chunk that will be “fun.” The pilot light remains lit.And that leads us to
the final (perhaps surprising) lesson: The money doesn’t really matter. Not once you’ve gotten
past the thrill at least. (“Woohoo, I’m rich! Wait a minute. Now what?”)
Lesson #4: THE MONEY DOESN’T MATTER
If you possess the requisite drive, temperament, and talent — and admittedly very few do —
trading is unquestionably a viable path to getting rich. As Jack Schwager noted in Market
Wizards.Trading provides one of the last great frontiers of opportunity in our economy. It is
one of the very few ways in which an individual can start with a relatively small bankroll and
actually become a multi-millionaire.Yes, but…But at the end of the day, what matters most is
quality of life and overall personal fulfillment, notdollars accumulated, Ferraris parked in the
climate-controlled garage, or fleeting accolades achieved.Sic transit gloria, remember?
This is partly because the pursuit of monetary wealth, in and of itself, is largely a trick and a
trap.Those individuals who pursue money for its own sake are almost invariably chasing some
demon, or feeding some insecurity otherwise masking itself as ambition.And in terms of
personal stature, no matter how much money you have, someone else will always have

33. more. If you delude yourself into thinking you’re the richest guy around, that’s just a failure
to look around.More importantly, one can be “rich” in plenty of ways above and beyond
money. To benchmark one’s sense of self against a bank account balance — equating self
worth to net worth — is an invitation toshallow misery.You get the idea… bottom line being,
it’s not about the money — no matter how many zeroes are tacked on to your net worth.
Besides, as one less-rich-than-before Wall Streeter told the New Yorkerafter the 2008
meltdown: “Once you get above $30 million or so, it’s all philanthropy anyway.”So why did
Druckenmiller play the game for 30 years straight, piling up treasure he will likely neverspend
(or just wind up giving away)?Most likely for a reason we have already touched on, and the
same reason a great athlete fights offretirement until age forces the issue: For the sheer love
of the game.Doing what you love, and doing it every day, is a key ingredient in the secret
recipe for a blessed andfulfilled life.We’ll close with a bit of wisdom from Zen And The Art of
Motorcycle Maintenance:To live only for some future goal is shallow. It’s the sides of the
mountain which sustain life, not the top. Here’s where things grow. But of course, without
the top you can’t have any sides. It’sthe top that defines the sides.
Variant Perception is Critical
In a must-read book “No Bull: My life in and out of markets”, autobiography of
legendary investor Michael Steinhardt, there is a description of his investment philosophy.
“Throughout the market day, I had an open-door policy. Anyone could walk into my office
and interrupt at any time. They could discuss any investment. The immediacy of in-
formation, a trading opportunity, or a change of view on any position in the portfolio took
precedence over everything else. I might be in the middle of a serious meeting with
corporate executives or some investors when I would be unceremoniously interrupted by
a sloppily dressed, boorish sounding trader who saw a large block of stock for sale at a
compelling price. I could not restrain myself from some discussion of the opportunity, even
if my elegant guests were temporarily put on hold. Equally, if my door was open to my
colleagues, theirs was also open to me. I would often buzz the intercom box and have a
trader or analyst come in, mostly when there was a problem. I am told they usually
dreaded the call. "This stock is down three points," I would say, for example. "Why? What
are we missing?" or "What do you know that the world does not know?" If the person did
not have good answers, a discussion, sometimes heated, would ensue. I expected my
analysts to know everything-indeed, to know far more than I, who took ultimate
responsibility for all of our investments.
I spent much of my time listening to investment ideas that covered the full spectrum of
the marketplace-a range of industries about which, in many cases, I knew little. I became
a very careful listener. For me to be effective in understanding these ideas and monitoring
them over time, I constructed a system that overcame the necessity of specific knowledge
across a wide range of industries. In short, I asked the right questions by seeking the
variant perception inherent in each idea.

34. A summer intern reminded me years later of the advice I had given him on his first day at
work. I told him that ideally he should be able to tell me, in two minutes, four things: (1)
the idea; (2) the consensus view; (3) his variant perception; and (4) a trigger event. No
mean feat. In those instances where there was no variant perception-that is, solid growth
recommendations within consensus-I generally had no interest and would discourage
investing. Moreover, I would purposely ask provocative, action-oriented questions. If an
analyst bought a stock at 10 and it went up to 12, I would grill him or her: "Do you still
want to own this stock? Are you willing to pay 12 for it?" If there was willingness to buy it
at 12, then the stock should stay in the portfolio. If there was unwillingness to buy it at
12, then the stock might be sold.
The function of trading went beyond efficiently executing orders. It included being the eyes
and ears of the portfolio. At times, through the flow of trading information, one might
sense important fundamental change. There is great homogeneity in the community of
research analysis, but sometimes the actual buyers and sellers tell a different story. We
tried with our positions to learn what that story might be, particularly when trading activity
was at variance with our expectation. Moreover, via active trading, often trading around a
position, we achieved a feel for the market that could not be attained otherwise. We tried
to coordinate our research and trading activities to take advantage of interim price
movement. I liked to say that if we bought a stock at 20 having an objective of 30 through
trading, we would hope to make profits equivalent to the stock going to 40.
I tried to view the portfolio fresh every day. Indeed, investing toward long-term capital
gains treatment was of secondary consideration for me. Thus, there was an inevitable
conflict between my constant measuring of the portfolio and the accumulated investment
time that my analysts had in their positions and were loath to forgo. Stocks rarely go up
or down in straight lines. Often, because of the intensity of my focus, I would sense that
one of our positions was vulnerable in the short term and would be tempted to act. One
of my favorite expressions was "the quick and the dead," meaning that if you did not
respond fast enough to the newest change, even nuance, you might lose. The analyst,
having spent tens of hours becoming intimate with the company, might resent my
tampering with his or her position. I always felt that if an analyst could not strongly defend
an investment, it should not be in our portfolio. I wanted my analysts to have strong
convictions. Otherwise, their investments should not be held in the portfolio, particularly
when there seemed to be short term vulnerability

35. Quotes from the gods of investing
It's not always easy to do what's not popular, but that's where you make your money. Buy stocks
that look bad to less careful investors and hang on until their real value is recognized."
"I've never bought a stock unless, in my view, it was on sale."
"Successful stocks don't tell you when to sell. When you feel like bragging, it's probably time to sell."
Rule No.1 is never lose money. Rule No.2 is never forget rule number one."
"Shares are not mere pieces of paper. They represent part ownership of a business. So, when
contemplating an investment, think like a prospective owner."
"All there is to investing is picking good stocks at good times and staying with them as long as they
remain good companies."
"Look at market fluctuations as your friend rather than your enemy. Profit from folly rather than
participate in it."
"If, when making a stock investment, you're not considering holding it at least ten years, don't waste
more than ten minutes considering it."
"Psychology is probably the most important factor in the market – and one that is least understood."
"I paraphrase Lord Rothschild: ‘The time to buy is when there's blood on the streets.'"
"One of the big problems with growth investing is that we can't estimate earnings very well. I really
want to buy growth at value prices. I always look at trailing earnings when I judge stocks."
"If you have good stocks and you really know them, you'll make money if you're patient over three
years or more."

36. "I don't want a lot of good investments; I want a few outstanding ones."
"To achieve satisfactory investment results is easier than most people realize; to achieve superior
results is harder than it looks."
" Most of the time stocks are subject to irrational and excessive price fluctuations in both directions
as the consequence of the ingrained tendency of most people to speculate or gamble … to give way
to hope, fear and greed."
"Even the intelligent investor is likely to need considerable willpower to keep from following the
crowd."
"It is absurd to think that the general public can ever make money out of market forecasts."
Profits always take care of themselves but losses never do."
"The average man doesn't wish to be told that it is a bull or a bear market. What he desires is to be
told specifically which particular stock to buy or sell. He wants to get something for nothing. He does
not wish to work. He doesn't even wish to have to think."
"Go for a business that any idiot can run – because sooner or later, any idiot is probably going to run
it."
"If you stay half-alert, you can pick the spectacular performers right from your place of business or
out of the neighborhood shopping mall, and long before Wall Street discovers them."
"Investing without research is like playing stud poker and never looking at the cards."
"Absent a lot of surprises, stocks are relatively predictable over twenty years. As to whether they're
going to be higher or lower in two to three years, you might as well flip a coin to decide."
"If you spend more than 13 minutes analyzing economic and market forecasts, you've wasted 10
minutes."

37. Value investing means really asking what are the best values, and not assuming that because
something looks expensive that it is, or assuming that because a stock is down in price and trades at
low multiples that it is a bargain … Sometimes growth is cheap and value expensive. . . . The question
is not growth or value, but where is the best value … We construct portfolios by using ‘factor
diversification.' . . . We own a mix of companies whose fundamental valuation factors differ. We
have high P/E and low P/E, high price-to-book and low-price-to-book. Most investors tend to be
relatively undiversified with respect to these valuation factors, with traditional value investors
clustered in low valuations, and growth investors in high valuations … It was in the mid-1990s that
we began to create portfolios that had greater factor diversification, which became our strength
…We own low PE and we own high PE, but we own them for the same reason: we think they are
mispriced. We differ from many value investors in being willing to analyze stocks that look expensive
to see if they really are. Most, in fact, are, but some are not. To the extent we get that right, we will
benefit shareholders and clients.
"I often remind our analysts that 100% of the information you have about a company represents the
past, and 100% of a stock's valuation depends on the future."
"The market does reflect the available information, as the professors tell us. But just as the funhouse
mirrors don't always accurately reflect your weight, the markets don't always accurately reflect that
information. Usually they are too pessimistic when it's bad, and too optimistic when it's good."
"What we try to do is take advantage of errors others make, usually because they are too short-term
oriented, or they react to dramatic events, or they overestimate the impact of events, and so on."
"It's not whether you're right or wrong that's important, but how much money you make when
you're right and how much you lose when you're wrong."
"Invest at the point of maximum pessimism."
I have put these philosophies into a simple statement: Help people. When people are
desperately trying to sell, help them and buy. When people are
enthusiastically trying to buy, help them and sell.
"If you want to have a better performance than the crowd, you must do things differently from the
crowd."
"When asked about living and working in the Bahamas during his management of the Templeton
Group, Templeton replied, "I've found my results for investment clients were far better here than

38. when I had my office in 30 Rockefeller Plaza. When you're in Manhattan, it's much more difficult to
go opposite the crowd."