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CIO Interview

CIO Interview

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11/06/2012

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Transcript of Sanjay Bakshi's Interview ConductedIn Gurgaon by Capitalideasonline (CIO) on March 22, 2007
Thank you for giving us the time to talk to you.It's a pleasure to meet you here in my office. We are meeting after morethan four years and I remember very fondly what happened on the previous occasion! Indeed Istill get fan mails from people about the talk I delivered at your invitation at the Oxford Bookstorein 2002. I don't talk to the media. I talk to my students in the classroom at MDI (six months in ayear) and I frequently talk to some value-oriented friends. You are the only one whom I have metfrom the media in the last four years!
 
Many thanks.So it's a pleasure to have you here and I just want to open up thepresentation, which I had given to the invitees at Oxford Bookstore in 2002. This presentationwas titled, "Value Investing - a Conservative Way to Invest." I had started by describing what isvalue investing and why the focus of conservative investor is first one not losing money than onmaking it (downside risk more important than upside potential) and then I gone on to the better part of the presentation, which essentially dealt with three value investing themes. These were:(1) Cash bargains; (2) Debt-capacity bargains; (3) Debt pay-down.I only focused on these three themes in that presentation and gave a number of examples. Somewere past examples whereas some others were current examples at the time of that talk. With thebenefit of hindsight, I can now tell you that things have worked out pretty well for meprofessionally using those three themes.But knowledge is incremental, especially in the profession of security analysis, and experience isa good teacher so I have evolved over the years and there have been many changes in the way Ithink about investing. In my early years I was very influenced by Mr. Buffett. But over the last fewyears, I have become more influenced by Mr. Graham. Hopefully, today we will interpretGraham's bible for this profession, the
Security Analysis
and of course the
Intelligent Investor 
.
CIO:CIO:Prof. Sanjay Bakshi:Prof. Sanjay Bakshi:
01
 
02
Ten Deep Value Themes
So today, I am going to continue with where I left off in 2002 and focus on ten deep value themes.Some of these are old themes and I just want to revisit them. And then I want to talk about other themes on which I have accumulated some wisdom over the years. Specifically, I am going to talkabout:1.The changes in my thought process over the years2.The classic Ben Graham themes3.Capital structure related themes4.FM strategies I won't reveal what “FM” stands for right now - a bit of mystery I want tointroduce to hopefully keep your readers awake!5.Dividend policy related themes6.Event-driven themes7.Availability bias related themes after my last interaction with you I became hugelyinterested in psychology and spent a lot of my time learning it. Indeed, I now teach apaper on behavioral finance which focuses on the “foolish man models” from psychologyrather than “the rational man models” from economics which I had been mis(taught).Over the years, I have developed some themes which arise purely out of biases mostpeople and certainly Mr. Market suffer from. And some of these are hugely important inmy view. One of them, of course, is the availability bias. And I have a whole set of strategies coming out of that bias.8.Mean reversion strategies9.Value-plus-momentum strategies, and10.Over-optimism related strategies. The last one is essentially to do with shortingovervalued stocks as a hedge against a major decline the the prices of deep-valueshares.
The Classic Ben Graham themes:
Let's just go to classic Ben Graham strategy. Of which six of them are:i. Cash bargainsii.Debt capacity bargainsiii.Earning yield bargainsiv.Large, unpopular companiesv.Low-priced common stock, andvi.Special situations
 
03
The subject is vast. Graham's book (Security Analysis) is very useful. And if one really applies in acreative way the essence of what Graham taught in that book, to what is happening around usnow, one can, in my view, build an entire life's career around just a
few 
of the things he taught.Personally, for me it's been
very 
interesting to see how the
same
logic works even seventy yearsafter the book was first published. And Graham put it down his ideas so eloquently and they are allthere and people just don't use those ideas in the way I think they should be used.
i.Cash bargains
I talked about cash bargains in 2002. We
know 
that, if the market value of a company is less thanthe net cash (cash and marketable securities net of current liabilities and debt) in its possession,then you're getting the fixed assets and assets other than cash, essentially for free. But Grahamgave a warning “Be careful about cash being dissipated away if there is a loss-making businessout there.” So you may have a company whose stock sells at a price making it a “cash bargain”and the business is losing money. In such cases, the market is right in valuing the stock at belowcash, because the investors will not see the cash. And that's what I too had said in 2002, but then Ihad some additional thoughts on that subject, over the years.Take holding companies, for example Nalwa Sons or Jindal South West Holdings or Consolidated Finvest, all of which are so-called-cash bargains. My simple question here is whereis the catalyst? Is it a family dispute? Is it the presence of Mr. Soros, for example in the case of Jindal Southwest Holdings? Your know Jindal South West at Rs 225 at present is reallyinteresting because the company holds shares in JSW Steel on which futures and options cannow be traded. So one could technically go long in the holding company and short the underlyingand have a very interesting trade out there. But you can only make money on the trade if younarrow the spread. Alternatively, one could just buy the holding company as a very cheap way of getting an interest in JSW Steel. Well whether Mr. Soros will be able to narrow the spread or whether people who are in that particular situation will be able to do it and whether it make sensefor us to buy into that situation or not, that's debatable.But in the absence of a catalyst, I don't feel very excited about holding companies as I used to atone point of time. I now feel that it takes a huge amount of patience for such situations to work outin the absence of a catalyst. Moreover, the basic structure of holding companies, as Graham hadmentioned in his book, is a very defective corporate structure. It may be a wonderful structurefrom the controlling stockholders' point of view - from the market's point of view it's a verydefective structure. The more layers you put in between the eventual property and the ultimate

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