25 Sep 2015

Summary of Sanjay Bakshi Interview With Farnam Street

Recently Farnam Street blog interviewed Professor Sanjay Bakshi in New York.
The entire interview can be downloaded by clicking here
Equity School has summarized the entire interview for the benefit of students of value investing.
Please visit the Farnam Street blog for a wealth of knowledge on investing.

Summary of the Interview:

Learning, Synthesizing and Collating Knowledge
Prof Bakshi discusses that he now mainly uses Amazon Kindle to read books instead of paper books because:  
a) It allows him to search through all the books for any particular phrase or thought, which is impossible with a physical paper book and
b) It allows him to underline important portions of text from the book. These underlined paragraphs (which at times can run into pages) can be synced on the cloud, from where it can be copied and pasted to any other document for further future reference.

How to read books:
Prof Bakshi usually reads 3-4 books at a time as it helps multi disciplinary thinking. One can associate thoughts from one book with other. He takes notes by underlining on the fly on Kindle.  After finishing the book, he syncs the kindle and then copies the notes from the cloud to a separate file for future reference. He maintains a master document of all the notes from different books which have been read. Software used for note taking – Evernote and Thebrain.

According to Prof. Bakshi best way to think is by using multi-disciplinary thinking. We need to ask the question that ‘Why did this happen’ for various events to get the answer using multi-disciplinary thinking. Always try to answer any question with multiple different reasons.

Investing – Early Years:
Started investing in 1994. He was mainly concentrating on Financial Statement Analysis and was influenced largely by teachings of Benjamin Graham. His focus was on bankruptcy investing, risk arbitrage, cash bargains and statistically cheap stocks using Graham’s Screens. Then he discovered in June 2004 Charlie Munger’s teachings on multi disciplinary thinking, mental models and how to distinguish between different types of businesses. This changed his style of investing completely.

Economics and Psychology:
Economics assumes a rational decision maker. Social psychology proves we are not always rational.
Disciplines of economy and social psychology are connected. For example Economics and Cost accounting teach us about shut down point, wherein it is no longer economical to produce a product. But in actual world, where psychology prevails, managers refrain from shutting down capacity as they presume their competitors will blink first. You can think long term only when you are financially independent.
Setting up physical environment to maximize rational thinking:- Prof Bakshi has given up on Television and has also stopped looking at daily quotes from Yahoo Finance.

How to sift out relevant data and keep out the noise:
When analyzing companies, the is real time data available on Bloomberg, CNBC, etc is like noise. If you shut them down, you would have shut out most of the noise. Companies also report quarterly results which should not be overly emphasized upon. For example See’s Candy loses money 8 months in a year, but makes so much money in 4 months, that its overall annual performance is satisfactory.
If your focus is on the competitive advantage of a business, then the impact of quarterly results in the analysis of the business is negligible. The focus is on the durability of that competitive advantage or moat over long period of time.

Most important type of moat:
Low-cost provider of goods and services is a sustainable business model. It’s an admirable model in capitalism as there is less wastage. For example Costco is an amazing business model based on low cost. It feeds on paradox of choice, ie., why do we need to give consumers to much choice and introduce wastage. If instead of 50 different brands of ketchup, he is provided with 3 or 4 at a low cost, there will be significantly less wastage. Costco provides its customers low prices, earns a high return on capital and also pays its employees well. All of this due to low-cost model of operation.
Contrast the low-cost business to a business which sells expensive branded products. Expensive brands sell goods at a very high gross margins and reinvest large sums of those profits in advertising their brands to create a favorable perception in their customers minds. Thus there is an inbuilt inefficiency in this business which is not a very admirable model.

Checklists help you to reduce errors. This involves a trade-off as reducing errors is not always the most optimal thing to do. An investor also has to be creative and has to make some mistakes. Innovative businesses always tend to learn by experimenting and making mistakes. You need to have ability to generate new insights and you also need to reduce your error rates.
There are many entrepreneurs which are learning machines, who have learnt by making mistakes. They are risk averse but not loss averse. For example companies like Amazon are investing small sums in new businesses which can fail, but can also grow into big businesses if they succeed.

Recommended Books:
Poor Charlie’s Almanack (Most influential book)

Pebbles of perception

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