A single conversation with a wise man is worth a month’s study of books.
- Chinese proverb
Continuing with my investing chat series with smart minds, I had a deeply thought provoking conversation with Anshul Khare.
Anshul Khare works as a software freelancer in the IT industry in Bangalore. He studied engineering at IIT Bombay. An avid reader of books from various disciplines including investing, business, personal finance, human behavior, and decision-making, he is a guest blogger at popular value investing blog www.safalniveshak.com. Anshul has also authored a book called Mental Models, Investing, and You. He can be reached on Twitter @anshul81.
Anshul is an engineer, value investor, author and blogger- all rolled into one! When I reached out, Anshul was gracious enough to spare some time for a chat. I believe that many hundred hours spent on reading, thinking and blogging has permeated into this conversation. So dear friends, please grab a cup of coffee; sit back and (hopefully) enjoy the conversation.
Ravi: Hi Anshul, Please tell us something about yourself and how you got into the world of investing/behavioral investing with an IIT background.
Anshul: Hi Ravi. Thanks for inviting me. I come from a place called Bilaspur — a small town in the state of Chattisgarh. In 2003, I graduated with a B.Tech degree in chemical engineering from IIT Bombay. Few months into my first job, which was in a chemical manufacturing company, I figured that I didn’t want to pursue a career in that industry. So I came to Bangalore and joined the IT industry. Since then I have been in here and have worked with companies like AOL, Symantec, and Paytm. Currently, I work as a freelance software consultant.
Around 2010 I chanced upon a book named "The Warren Buffett Way" and instantly got hooked to Buffett’s way of life, business, and investing. But do you know what a bigger discovery than reading about Warren Buffett was? Finding Charlie Munger. Munger’s insights on multidisciplinary learning and behavioral finance punched a big hole in my worldview.
The more I studied Buffett and Munger the stronger I felt that my temperament suited their way of investing — the value investing way. Their philosophy on making investment decisions and the way they defined risk, made a lot of sense. That way, my initiation into the stock market was a bit unusual. Until I discovered Buffett, my exposure to equities had been approximately zero. I got pulled towards value investing as a result of my fascination with Warren Buffett.
Ravi: There is a popular saying which goes like this “When the student is ready, Master appears”. I believe that is what happened here and completely agree that Buffett and Munger have been an outstanding source of inspiration to investors all over the world. I am now curious to know how has your investing philosophy/process evolved over the last 8 years. What has influenced your present line of thinking?
Anshul: I started investing in the stock market in 2010. So I am yet to witness a severe market decline first hand. And I believe, to really call oneself a long-term value investor, one needs to experience one full cycle of the stock market, which includes a bull run as well as a severe market crash. So I’ll only know how fragile or robust my investing process is when I find myself in the middle of a market panic. Which means, it’s highly likely that my investment process might change significantly once I see a crash.
With that disclaimer, let me share a few things about what has changed in the way I invest today as compared to a few years back. I started out looking for bargain stocks. Which means I focused a lot on the numbers and didn’t think much about the qualitative factors. And part of the reason is that it’s easy to focus on what’s easy to measure, e.g., financial numbers. Quality and the intangible aspects of a business are difficult to quantify.
However, that strategy didn’t work well and I ended up investing in quite a few value traps, i.e., businesses that were cheap because they deserved to be cheap. Bartronics is one name that I can recall. Fortis was another. In last few years, I have slowly gravitated towards stocks where the underlying business is of high quality. For example, companies that own consumer brands or companies run by people who are intelligent, smart and have a long history of being ethical and shareholder friendly.
Ravi: Completely agree on investing in quality business run by honest management. Buffett put it best when he said “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.” Based on your current thought process you have mentioned, what are the criteria’s or characteristics you look for in a business for it to be considered investment worthy?
Anshul: Being a part-time investor, if I expect to generate investment returns similar to what Warren Buffett did then I would be fooling myself. It’s maddeningly hard to beat the average market return by more than 10% over the long-term. And that’s true even for a full-time investor. Which means it’s virtually impossible for someone like me who has only a few hours a week to spare for investing.
With those constraints, I think it makes a lot of sense to leverage others who I respect for their investing wisdom. Great scientist Sir Isaac Newton once said, “If I have seen further, it is by standing on the shoulders of Giants.” Which brings me to Cloning — an idea made popular by famous value investor Mohnish Pabrai.
Cloning simply means that you begin with companies that other smart investors are buying, and then you see if those investment ideas fit into your own investment framework. Remember, the gap between cloning and blindly acting on a stock-tip is ten miles wide. Still, many investors miss the difference and invest based on the news on what other famous investors are buying and selling without really understanding what they are getting into. Even I am guilty of making this mistake. Copying an investment idea is just the first step.
So that’s the first characteristic I look for — is this company owned by any of the smart value investors that I know? After that, I look at numbers. Has the business grown its revenue and net profits consistently over the last few years? I prefer more than 12-15% CAGR over 7-10 years. How does the return on invested capital look like? It should preferably be more than 15%. Does the company generate consistent free cash flows and are they growing? How leveraged is the balance sheet? A debt to equity of more than 1 makes me uncomfortable.
All the things that I have listed above are like screening tests. Very few businesses that I pick up for analyzing pass all the tests. Once a business is through these filters, I read the annual report and try to understand what drives the business engine for the company, i.e., I try to answer questions like — how does it generate revenue? Who are the customers and the competitors? I also try to wrap my head around the industry. Is it growing? Is it an organized or unorganized industry? Who are the major players?
And finally, I try to figure out if the people running the business — the CEO or the promoters — are ethical and shareholder friendly.
Ravi: Scanning the portfolio of successful investors is a great starting point for sourcing of your investment ideas. Corollary to the above question, if there were to be “Anshul’s 5 rules for successful stock investing” then what would that be?
Anshul: Before we can discuss any rules, it’s important to lay out two things.
First, investing is a field where rules are very subjective. What works for me may not work for others and part of the reason is that the definition of success differs from person to person. Are you investing to build a retirement corpus? Or are you comfortably wealthy and investing just to preserve the capital? Maybe you are doing it for the thrill because you’re fascinated with the idea of compounding money rapidly. So the term “successful stock investing” is very broad.
That said, my reason for investing is to beat the inflation. So if I can manage to compound my money at a CAGR of 15-18% over the long term (30+ years), I would consider myself a very successful investor.
Second, even if you have defined what success means to you, there are several methods and strategies to be successful in the stock market. In this regards, I had an epiphany when I read the book called "What I Learned Losing a Million Dollars." Let me reproduce an excerpt to make my point –
“Why was I trying to learn the secret to making money when it could be done in so many different ways? I knew something about how to make money; I had made a million dollars in the market. But I didn’t know anything about how not to lose. The pros could all make money in contradictory ways because they all knew how to control their losses. While one person’s method was making money, another person with an opposite approach would be losing — if the second person were in the market. And that’s just it; the second person wouldn’t be in the market. He’d be on the sidelines with a nominal loss. The pros consider it their primary responsibility not to lose money.
The moral, of course, is that just as there is more than one way to deal blackjack, there is more than one way to make money in the markets. Obviously, there is no secret way to make money because the pros have done it using very different, and often contradictory, approaches. Learning how not to lose money is more important than learning how to make money. Unfortunately, the pros didn’t explain how to go about acquiring this skill. So I decided to study loss in general, and my losses in particular, to see if I could determine the root causes of losing money in the markets.”
This idea — learning how not to lose money — rehashes Charlie Munger’s unconventional advice for dealing with problems in life and business. Some problems, Munger says, are best solved backward. So to answer your question, let me use Charlie’s inversion trick and talk about “rules for avoiding loss in the stock market.” And instead of five, as you asked, let me list only three; for in investing less is more.
First rule: Avoid debt.
Personally as well as in the companies that I invest. I never borrow money to invest and I stay away from companies that have unreasonable debt on their balance sheets.
Rule Deux: Avoid bad partners.
Remember, a man who steals for you will steal from you. I avoid investing in companies where the management has a history of corporate governance issues. In this context, I consider government also a lousy partner. Not that government has bad intentions, but the government’s interest is usually misaligned with minority shareholders. So I avoid all PSUs.
Rule number three: Avoid dogmatism.
All my beliefs, views, and rules can change in the future. The famous British economist John Maynard Keynes is often quoted as saying: “When the facts change, I change my mind. What do you do, sir?” Strong opinions loosely held are a very useful principle to follow.
Ravi: I had previously done a compilation of investing rules by successful investors. I must admit that your set of rules is refreshingly unique. Next up, what has been your best investment idea (need not be the most profitable) till date? Can you also elaborate on the thinking that went behind the investment idea?
Anshul: Thanks for pointing out that the best investment idea doesn’t need to be the most profitable one. And it took me a long time to understand this concept. Investing is a lot like poker. In the world of poker, the quality of the outcome of each game is loosely connected to the quality of decisions. A right decision can result in an undesired outcome and vice versa. But over a long term, i.e., over several games of poker, the player with better decisions will come out ahead.
It’s not very different in investing. Which means, a better way to think about your investment decisions is to look at them as a series of bets instead of analyzing every decision and its outcome in isolation. Here’s an excerpt from Anne Duke’s book "Thinking in Bets" that I strongly recommend for every investor.
“Decisions are bets on the future, and they aren’t ‘right’ or ‘wrong’ based on whether they turn out well on any particular iteration. An unwanted result doesn’t make our decision wrong if we thought about the alternatives and probabilities in advance and allocated our resources accordingly…Poker teaches that lesson.
A great poker player who has a good-size advantage over the other players at the table, making significantly better strategic decisions, will still be losing over 40% of the time at the end of eight hours of play. That’s a whole lot of wrong. And it’s not just confined to poker.”
In light of the above insight, if I were to talk about my best investment idea, I would say it was Noida Toll Bridge. I never made any money on the stock. I ended up selling it at no profit and no loss.
It had qualified in all my investment filters, which I have mentioned earlier in this conversation. However, it turned out to be a bad investment because of things outside my control. Government intervention was a low probability event in this case, but it did happen. In my view, it was a case of “good-decision-bad-outcome.” In future, if I get to make that kind of investment again, would I do it? Yes, absolutely.
Ravi: Talking of “Thinking in Bets”, my thoughts went to Michael Mouboussin’s 10 attributes of great investors where one of the key attributes is to “Think Probabilistically” (there are few sure things).
From masterstroke let’s move on to mistakes. Mistakes are sometimes referred to as “unexpected learning experiences.” Can you share any investing mistake(s) you have made?
Anshul: Mistakes indeed are potential learning opportunities. But when I repeat the same mistake, it means I didn’t learn anything from it. So I want to take this opportunity to talk about those “mistakes’, the ones that I continue making even now. The ones which I should be learning from, but I fail, again and again.
It’s the mistake of omission. There have been many instances where I should have bought a stock, but I didn’t because I let the behavioral bias dictate my decision. Anchoring bias is one where I got fixated on a particular price and waited for the stock to drop to that number. Unfortunately, the stock didn’t know that I was waiting for a certain price tag.
Not allocating sufficient capital to a high-conviction stock is another mistake that I continue to make. Some stocks that fall in this category are Cera Sanitaryware and VST Tiller. In both the cases I started with very small positions and then kept waiting for the stock to come back to my buying range.
Mistakes arising out of behavioral biases are hard to correct. But I am working on it. I know I can never eliminate them completely, but I hope I can minimize them.
Ravi: John Templeton put it nicely “The only way to avoid mistakes is not to invest — which is the biggest mistake of all”. Mistakes are a proof that we are at least trying! Related to this, what has been the most important investing lesson(s) you have learnt from your time in the market?
Anshul: There are many. But let me talk about the one that I keep reminding myself frequently. After a few years in the stock market, I learned that there are broadly three types of edges that any investor can exploit to generate superior returns.
First is the informational advantage, i.e., having privileged information. Earlier, only large institutions had this advantage. But today, in the Internet era, everyone has access to almost all the information instantly. When everybody has the advantage, it ceases to be an advantage.
Second is analytical advantage. If you can draw unconventional insights from the public data then you decidedly have an edge over others. But very few people (like Warren Buffett) are wired to have that kind of deeply analytical mind. Moreover, the large institutions (with armies of analysts poring over mountain of market data using sophisticated tools) leave very little chance for a part-time investor to discover any unnoticed insight. So that leaves the small and the part-time investors with only one thing to capitalize on; the time advantage.
As a small investor, if I am investing my surplus cash, nobody is looking over my shoulder and pushing me for quarterly performance targets. Which means, once I have bought a good quality business, no one can force me to sell it if I don’t want to. That gives me the staying power and that creates opportunities for small investors. Patience and willingness to hold for the long term — that is our edge.
This is a valuable lesson that I have learned in the stock market in last eight years.
Ravi: Thinking in terms of years rather than days or months to have a long-term orientation is definitely an invaluable lesson for an individual investor. Seth Klarman put it eloquently when he said, “The single greatest edge an investor can have is long term orientation.” From investing lesson let us move on to investing advices. What has been the most important investing advice(s) you have received on investing? How has it influenced your investing process?
Anshul: It’s hard to single out anyone as the most important. Developing an investment philosophy is an incremental process. Every book I have read, every investor I have interacted with, every investing video I have watched, had some impact on the way I think about investing.
One that immediately comes to mind is a post that Prof. Sanjay Bakshi wrote a while back. It was titled "Return Per Unit of Stress." I always assumed that as investor, my primary goal was to maximize the risk adjusted return on my portfolio. However, I never gave importance to intangible factors associated with that goal, i.e., the stress it brings. If I have stocks in my portfolio that give me sleepless nights, even occasionally, it’s not worth it. And that may not be true for every investor. It’s been an advice that resonated a lot with my temperament.
Ravi: This is the first time I have come across this idea/advice of thinking in terms of 'return per unit of stress'. Sounds interesting. Moving ahead, are there any particular investor(s) or author(s) who have had a significant influence in your investment thinking? How? (In terms of say mentoring or inspiration.)
Anshul: I think what I said for the previous question holds equally well for this one too. Consciously or subconsciously, every single investor or author I’ve met in my life has had some influence on my thinking.
But if I had to take few names I would say Nassim Taleb is one author who has influenced my thinking a lot. Although he is a trader, all his books have refreshing insights on value investing and decision making in general. Mohnish Pabrai is another author/investor who I admire a lot. He is a great simplifier not just in words but also the way he has structured his investment philosophy.
Ravi: Next up is one of my favorite questions. Let us say a bunch of enthusiastic beginners approached you for advice on how to be a successful stock investor. What would your advice for them be? (If you could elaborate on the Do’s and Don’ts, it would be really helpful).
Anshul: In the movie “Wall Street” (the older one), Charlie Sheen’s character — a promising big shot in the stock market—tells his girlfriend:
“I think if I can make a bundle of cash before I’m 30 and get out of this racket, I’ll be able to ride my motorcycle across China.”
Riding a bike across China is passed off as such an impossible dream that most people would believe that one needs to be a retired millionaire before he can live that dream. First, this “riding a bike across China” dream doesn’t really require you to be a millionaire. Second, “riding a bike across China” isn’t all it’s cracked up to be. Most of the times our goals and ideas of success are borrowed ones.
So the first thing I would urge the bunch of enthusiastic beginners is to define what success means to them. Are they really after success or is it something else? Perhaps being a successful stock investor is a stepping-stone to a larger goal. Have they figured that out? It’s extremely important to be clear about what we want. And what we want may keep changing with time and that’s absolutely fine, I guess. However being aware of what is it at this moment, is very crucial.
Am I evading your original question? Yes, because I want to nudge those enthusiastic beginners in the direction of asking a more important question. If they begin chasing the wrong rabbit, it doesn’t matter how well they do it.
Once a person has zeroed on what exactly he’s looking for — the true north — then it’s just a matter of navigating through a maze of trial and error and incrementally stacking the odds in his favor for achieving the goal.
Ravi: Finding “the true north”!! Brilliantly put, Anshul. Remembered the following lines from Lewis Carroll’s masterpiece Alice in Wonderland:
“One day Alice came to a fork in the road and saw a Cheshire cat in a tree. ‘Which road do I take?’ she asked. ‘Where do you want to go?’ was his response. ‘I don’t know,’ Alice answered. ‘Then,’ said the cat, ‘it doesn’t matter’.”
Continuing with my previous question, if they sought your advice on the best book(s) for them to read as a stock market beginner then which book(s) would you recommend? Why?
Anshul: Warren Buffett’s annual letter to shareholders. Technically, it’s not a book but it’s available in book format also. Buffett’s letters aren’t just about investing. They have tremendously useful lessons on business and on life. It’s a super text, i.e., its content is timeless. In my first reading, I focused on what Buffett was saying. In the second reading, I learned how Buffett communicates his philosophy, i.e., by using simple communication style, by using humor, and by using analogies. In the third reading, I noticed what Buffett was not saying. For example, he never makes predictions about the stock market.
The second book I’ll recommend is "The Dhandho Investor" by Mohnish Pabrai. It’s a great book for beginners. It explains various value investing principles in an easy to understand language and lots of real examples and case studies.
Ravi: Moving on, let us say there is a situation where you could retain only three books from your entire book collection, which books would those be and why?
Anshul: The first would be "Sapiens" by Yuval Noah Harari. I consider it to be the best book that I have ever read outside the field of investing. Harari is a gifted writer and an outstanding historian. I wish my history teacher taught like him. Before reading Harari’s books, I never thought that history could be so interesting and so useful. In his narrative, Harari weaves in powerful insights.
Second, Peter Kaufman’s "Poor Charlie’s Almanack" (PCA). As investors, we don’t just invest our money. We invest our time too. And unlike money, time is severely limited and irrecoverable. Which means learning to invest one’s time wisely is much more important skill to learn than investing money. And the principles of wise investing are applicable everywhere - in business, in stock market, at work, and in relationships.
My third pick would be "Antifragile" by Nassim Taleb. Antifragility as such an important idea that I feel it should be compulsorily taught in the schools. Antifragility is not a novel idea. Mother nature is inherently antifragile. If we can arrange our lives to bring in the elements of antifragility, it would not only bring financial wealth but it can make us physically, emotionally, and mentally super strong.
Now that I have already told you my three picks, I want to add another spin to your question. My current library is a reflection of the kind of thoughts and ideas that occupy my mind most of the times. Had I not picked up Warren Buffett’s book back in 2010, perhaps my library would have looked very different. Finding Buffett’s book was a serendipitous event in my life. I sometimes imagine, had I picked up a book on arts or music and had that subject interested me as much as Buffett’s book did, I might be doing totally different things and thinking different thoughts today; and that wouldn’t be a tragedy. It’s just an alternate reality that didn’t happen.
So coming to your question again, if I am forced to retain only three books from my entire book collection, subconsciously I would probably want those three books as the seeds which can eventually become the full blown library very similar to the one I have right now. But that way, I am giving up on the opportunity to experience a totally different alternate reality, isn’t it?
What if I don’t retain any book from my current library and start with a clean slate? That will allow the serendipity to send a totally new book my way and possibly a different but equally exciting future. Wouldn’t that be fascinating?
Ravi: Anshul, it was wonderful picking your brains. I thoroughly enjoyed every bit of this conversation and I am sure readers also would love it. Last question from my end, do you have any special message for the readers of stockandladder.com?
Anshul: Greek philosopher Socrates once said, “An unexamined life is not worth living.” I think there’s a lot of wisdom in those words. Thinking deeply about whatever we do, endlessly questioning the things that seem to be important to us, and an unbiased examination of every aspect of our lives (which is devilishly hard) would probably bring satisfaction and joy for most people.
Ravi: That was an insightful, informative and intellectually stimulating conversation, Anshul. Thanks for sharing your thoughts, experiences and wisdom with Stock and Ladder readers. Wishing you the very best for your life, career and investing journey.
Investing is a marathon where we try to get better every single day and hope that all the daily improvements we make will compound into something big. To that end, dear reader, I sincerely hope that you enjoyed this conversation as much as I did. I also wish that you found at least a little something in this conversation to ponder about or add value to your investing journey.
Keep Learning and Happy Investing!!!
Originally Published in Stock and Ladder