What is Value Investing

Private and Confidential – Not for Circulation 11Private and Confidential

Private and ConfidentialNot for Circulation

Paresh ThakkerManaging Partner, ValueQuest Capital

What is Value Investing

Things, I wish someone would have told me 25 years back

St. Xavier’s college, MumbaiFebruary 10, 2017

Private and Confidential – Not for Circulation 2

What Is Value Investing?

Important Qualities of a Value Investor

Few More Thoughts To Be An Efficient Investor

Q&A

AGENDA


Everything is value investing...anything to do with a monetary or economic angle is valueinvesting....

“All investing is value investing. What is investing if not an attempt to buy something for lessthan its worth?"

Berkshire Style - When we ownportions of outstandingbusinesses with outstandingmanagements, our favoriteholding period is forever.”

ValueQuest Style - makes long-term, public market investmentsin undervalued, Indian "moated"businesses run by talented andhonest managers



“Only buy something that you’d be perfectly happy to hold if the market

shut down for 10 years.”

&

“If you aren’t willing to own a stock for ten years, don’t even think about

owning it for ten minutes”

&

“Time is the friend of the wonderful company, the enemy of the

mediocre.”



.. “several mediocre short-term investments are (for long period) not the same as one

well-timed long-term investment.”

“Calling someone who trades actively in the market an investor is like calling someone

who repeatedly engages in one-night stands a romantic.”

&

“Successful Investing takes time, discipline and patience. No matter how great the talent

or effort, some things just take time: You can’t produce a baby in one month by getting

nine women pregnant.”



Google Founders’ IPO letter to Investors in 2004

As a private company, we have concentrated on the long term, and this has served uswell. As a public company, we will do the same.

If opportunities arise that might cause us to sacrifice short term results but are in thebest long term interest of our shareholders, we will take those opportunities. We willhave the fortitude to do this. We would request that our shareholders take the long

term view.

You might ask how long is long term? Usually we expect projects to have some realizedbenefit or progress within a year or two. But, we are trying to look forward as far as wecan. Despite the quickly changing business and technology landscape, we try to look atthree to five year scenarios in order to decide what to do now. We try to optimize totalbenefit over these multi-year scenarios. While we are strong advocates of this strategy,

it is difficult to make good multi-year predictions in technology.



Important Qualities of a Value Investor


A. Long Term Thinking


1997 LETTER..we can’t realize ourpotential as people or as companies

unless we plan for the long term.

Ability to think long term Customer Centric Thinking

Focus on what is not going to change like customer’s attraction forlower prices

Work Backwards

Importance of Long Term Thinking


• If everything you do needs to work on a three-year time horizon, then you’re

competing against a lot of people. But if you’re willing to invest on a seven-year

time horizon, you’re now competing against a fraction of those people, because

very few companies are willing to do that.

Just by lengthening the time horizon, you can engage in endeavors that you

could never otherwise pursue.

• Focus on What’s NOT Going to Change This lesson is closely related to the first one

above i.e., long term thinking

Importance of Long Term Thinking


Compounding is the eighth wonder of world.Compounding interest separates the rich from the broke.

Power of Long Term Compounding


B. Good Temperament


“You don’t need to be a rocket scientist. Investing is not a game where

the guy with the 160 IQ beats the guy with 130 IQ.”

Emotional Stability is more important then high IQ.

Buffett “By far the most important quality is not how much IQ you havegot. IQ is not scarce factor. You need a reasonable amount of intelligence

but the temperament is 90% of it. “ “…you do have to have an emotional stability and sort of an inner peace

about your decisions”

EQ is More Important Than IQ


C. Ability to Survive For The Long Term


Survive For The Long Term

First take care of your health

Avoid fatal mistakes which can ruin you

Buffett – “We didnt do all the smartest things. We didnt do anything really dumb”

You only have to be right on a very very few things as long as you never make any bigmistakes.


“Imagine that you had a car and that was the only car you’d have for your entire

lifetime. Of course, you’d care for it well, changing the oil more frequently than

necessary, driving carefully, etc. Now, consider that you only have one mind and one

body. Prepare them for life, care for them. You can enhance your mind over time. A

person’s main asset is themselves, so preserve and enhance yourself.”

The amount of time you have on this planet determines how much you can compound

your knowledge, skill, and wealth.

99% of Buffett’s wealth was earned after his 50th birthday.

Survive For The Long Term



Einstein said “A clever person solves a problem. A wise person avoids it”.Avoid a few other things..

Avoid Negative Mind Set1



Avoid Overconfidence2

• Munger: “smart, hard workingpeople aren’t exempted fromprofessional disasters resulting fromoverconfidence”

• Warren: “I would rather deal with aguy with an IQ of 130 who thinks itis 125 than a guy with an IQ of 180who thinks its 200. that second guywill kill you.”



• Buffett: You can give someone a $ 2 million bonus and they are happy until they seethe next guy got $2.1 million and then they are miserable”

• Envy can lead to imitation. • “What the wise men does in the beginning, the fool does in the end”

Avoid Envy3



• Munger: If you want to get rich, or make some serious money, you have to got to underspendyour income. And you have to got to intelligently invest the money you haven’t spent”

• Invariably things can get worse than people expect. Maybe “worst-case” means the “Worst wehave seen in the past”. But that doesn’t mean things can’t be worse in the future.

Avoid Living Above Your Means4

“I tell my father’s story of the gambler who lost regularly. One day heheard about a race with only one horse in it, so he bet the rent money.

Halfway around the track, the horse jumped over the fence and ranaway.”- Howard Marks


Having Focussed On What To Avoid...We Can Now Reflect On A Few Things That We Should Do...



Simply Everything

• “We just look for no brainer decisions” - Munger

• “The desire to appear clever often prevents one from being

so.”

1

Focus on Being a Learning Machine 2

• “Just as civilization can progress only when it invents the method of invention, you canprogress only when you learn the method of learning.

• Nothing has served me better in my long life than continuous learning.” Charlie Munger in USCcommencement address 2007

• Confucius: “Real Knowledge is to know the extent of one’s ignorance”



Always associate yourself with those better than you

• Avoid being associated with negative people and people who don’t respect time

• Who we associate with and who we look up to matters. It gives a reflection of who we are and

who we are going to be.

• “Tell me who your heroes are and I’ll tell you how you’ll turn out to be.”

3

Prioritise

• “An investor should act as though he had a lifetime decision card with just twenty punches onit.”

• The number 20 is arbitrary, but it shows how little activity is required to do well with yourinvestments. The two Warren Buffett quotes below elaborate further on the disparitybetween action and results.

• “You only have to do a very few things right in your life so long as you don’t do too many thingswrong.”

4



Building Sustainable Competitive Advantage and Identifying When Others Have it 5

Sources of Moats

Intangible Assets High CustomerSwitching Costs

Network EffectsLow Cost

Advantages



Few Guiding Principles to be a Good Stock Picker6

• An Investor should look at stocks as part ownership of a businesses

• Make “Mr. Market your friend rather than your enemy by essentially profiting from

folly rather than participating in it”

• Margin of Safety: Capital Structure, Managerial Practice, Accounting and Price (The

way MOS is perceived in price is dramatically different between traditional Graham

investors and Munger style of investors)

• For Graham: Low Price and Diversification

• For Buffett: Business first, People second, Price third.”



• Operating within the Circle of Competence

• “What counts for most people in investing is not how much they know, but

rather how realistically they define what they don’t know.”

• “We make no attempt to pick the few winners that will emerge from an ocean of

unproven enterprises. We’re not smart enough to do that, and we know it.”

• Doing less can be more impactful…swing only a few times.

• Focus on Downside protection - “Rule No. 1: never lose money; rule No. 2: don’t

forget rule No. 1”

• Buffett – “We think the best way to minimize risk is to think”

• Munger – I think you have to have time to think. It is so easy to get so busy that

you no longer have time to think and you pay a huge price for that.


As Charlie Munger once wrote, this is simple, but not easy.


Some Additional Food for Thought

Different Era (Deflationary Risks in developed countries with lesser precedent versus

Inflationary risks which are being taught in business schools globally)

Technology and Automation are reducing jobs and also reducing cost of living

Shortening Business Cycles due to efficient flow of information

Increased Global Uncertainty and Global Linkages


Q&A

What is Value Investing

Economy & Finance

Transcript of What is Value Investing