Journey as a Value Investor – Opportunities, Challenges and Cases

Contributed by: Manan Agrawal, CFA

IAIP Delhi chapter organized a Speaker Event on Mar 22, 2014 where Jagpreet S. Bhatia from Value Architects Capital Advisors discussed his journey as a value investor, different opportunities, challenges, specific investments and his key learnings. He provided practical insights with live examples and case studies from his own Investing experience.

Jagpreet started his investing journey in 2002 after studying various great US based value investors such as Ben Graham, Walter Schloss, Warren Buffett, Charlie Munger under the guidance of Prof. Bakshi at MDI. That led him to study many more US investors of past century such as Bernard Baruch, Lawrance Tisch, Marty Whitman, Seth Klarman, Mohnish Pabrai, Julian Robertson etc. Studying many investors helped him formulate his own investment style, and understanding about different market enivronment and deal structures. The lesson: One must study different investors to figure out what suits his/her temperament or personality and then, evolve his/her own investment style.

He also emphasised on role of mentors – one should have multiple mentors to learn fast and vicariously. He also emphasised on role of “accountability partners” – someone with whom one can share and debate ideas – like Buffett and Munger used to do together. That helps get rid of psychological biases and widens circle of competence. The two people who influenced Jagpreet the most were Prof. Sanjay Bakshi and Mohnish Pabrai. Both evolved in their investment styles over time and have generously shared their thoughts over last decade.

He discussed the role of thinking dually – both as a private investor and a fund manager. A private investor is most worried about preservation of wealth, downside risks, long term compounding and doesn’t worry about market movements everyday. For them, psychotic market is always a good opportunity for long term compounding. As most private investors manage their own money or closed-pools, they think like business owners and operating managers. In sharp contrast, most fund managers, governed by professional incentives, keep a sharp eye on market momentum, fund flows, liquidity of positions and market psychology.

He discussed importance of a manager to start investing their own capital early on, as it will give them decision and allocation skills – which is the most important skill as per Buffett. He discussed evolution of investors like Buffett, Munger, Pabrai who started as fund managers, and finally transformed to become private investors and business owners over time, as it helped them focus more on allocation and management, rather than managing investors. He also emphasised on importance of being in the stock markets with a long time horizon and look for companies with open runway in front, which can compound for decades.

Jagpreet also spoke about the under-appreciation of longevity in the investment management profession. Usually, many investors, ruled by greed and social proof, are looking at short term profit maximisation, without keeping an eye on the underlying risks. The “left-behind” feeling can lead to unfruitful decisions. One must appreciate that one is running a marathon and not a sprint. Therefore, one should pay extra attention to the downside, and ignore all fashions-fads. He mentioned about setting clients expectation clear and choosing temperamentally similar, long-term focused, conservative clients.

Further, Jagpreet discussed 3 components of Portfolio management: 1) Security analysis, (analyzing a business and a security), 2) security allocation, and 3) Allocation between cash and securities at any point of time. He discussed few mental models in each theme.

He discussed few grounds for seeking opportunities like finding temporary distress in markets. As a case, he discussed his investment in Heritage food – a well run company fallen due to temporary problem.

On allocation, he advised that one should concentrate in few ideas, as done by successful investors, who operate within their circle of competence and with deep understanding about the businesses. This ensures tight monitoring and confidence to load up, as the markets falls down. For example, Munger managed concentrated portfolios, within his circle of competence. Buffett also talks about a 20 punches punch-card model over an investor’s lifetime. Also, allocation should be kept dynamic, i.e. one should be able to change allocation, keeping in mind the changes in enterprise value. Usually, investors make mistake of anchoring to some historic price (like 52week high or low figures) – however, investor should always compare price with the value, not with any historic prices.

Jagpreet also mentioned about utility of remaining patient, being inactive and out of market, and keeping tonnes of liquid cash for prolonged periods, as exemplified by Seth Klarman. Alternatively, he favoured the closed-pools with business operations which can generate cash, to plug into markets during time of distress – a strategy followed by most successful investors like Buffett, Munger, Singleton, John Malone, etc. 

Finally, Jagpreet discussed cases like GSFC, to emphasise corporate transformations, price de-anchoring and dynamic allocation. He also discussed a detailed case on KRBL (marketeer of branded basmati rice – India Gate). He presented the methodology to unearth opportunities, analyse a company in details, how to think about balance sheet, how to compare across industries, using porter analysis, understanding corporate transformations, looking for factors to monitor, understanding moats and strategic advantage of company, understanding trigger points, comparing public-vs-private valuations and having various different mental models used in analysis. 

Lastly, he laid emphasis on self-study and scuttle-butt approach and preventing oneself falling for greed, by getting absorbed into noise of stock-market commentators. He advised to keep a focus on reading and learning, rather than falling to envy or despair created by euphoria or depression in the markets.

This event was webcasted live and the video can be viewed here: http://www.spotforge.net/live/iaip220314/