Meeting the legend
Back in 2016, when I was still a starry eyed first year student at MDI Gurgaon, I remember quite a stir when we found a sparkly new sportscar parked out in front of the professor’s block. That, we figured later, belonged to the Rockstar professor, Sanjay Bakshi! What really made him a Rockstar was no that he drove a cool car, but that he was the five times winner of the student’s choice of Best Professor of the year. Oh, and he also happened to be the Managing Partner of one of the biggest value funds in India – ValueQuest Capital!
So much was the fanfare around Prof. Bakshi, that a few of us first years decided to try attending one of his classes, which were, just by the way, free for all to attend! And man, was I floored by not just his expertise in the subject, but the man’s eloquence and sheer ability to hold in rapt attention an entire auditorium of students. That’s was when I realized that finance professions do not need to be those uptight, pinstriped, glued to their screens of rapidly changing numbers and charts. And that they are not the stereotype they showed in Wolf of Wall Street either, and are actually very kind and generous (more on Prof. Bakshi’s generosity later).
Now, Sanjay Bakshi’s legend as a value investor is quite well known. His partner, Paresh Thakker, and he set up ValueQuest Capital, to implement their learning from their mentors Warren Buffett and Charlie Munger. Their fund, ValueQuest India Moat Fund has an AUM of ~$130 Million, is an offshore fund which focuses on making long term investments in high quality businesses at attractive valuation. Bakshi’s belief that the value of a stock is not in its quoted price but in the cashflows the business is able to generate is again something only a disciple of Buffett-Munger would appreciate.
The Preacher: A brief glance into Behavioral Finance and Business Valuation
The opening remarks Prof. Bakshi makes in his Behavioral Finance & Business Valuation (BFBV) class is “Over the course of the next 20 lectures, I intend to teach you guys a few important life lessons. But because this is a Business school, there is no way the management would’ve let me take these classes had I told them I intend to teach student the value of life. So instead I chose to title it based on my other profession as a value investor”. And that one statement set the tone for the rest of the 2 terms Professor taught. The non-finance folks wouldn’t view it as a boring class which involved a lot of number crunching, and the finance enthusiasts knew they were going to learn a very important lesson in behavioral finance they couldn’t learn any where else in the world. That of Prof. Bakshi’s own experiences!
And true to his words, Prof. Bakshi taught us some valueable lessons about the human psychology, about weapons of influence, reciprocity, social proofing (based on the works of the famous psychology professor, Robert Cialdini). He introduced us to System 1 and System 2 thinking of the mind, of heuristics and biases, about anchoring effect and how it impacts our purchase decisions (based on the works of Nobel Laureate Daniel Kahneman). But best of all, he introduced me to Julia Galef’s work, and that starting point of my love of all things statistics, starting with Bayes Theorem.
Now, the one word that crops up the most in Professor’s class is Moat. Prof Bakshi is a firm believer of investing in companies that have a sustainable moat. What is a sustainable moat? According to Prof, there are 3 conditions that need to be fulfilled for a company to have built a moat.
You have a distinct advantage over your competitors, which protects your market share
This advantage cannot be easily mimicked, like a patent, or high barrier to entry, or a monopolistic situation
Your financial statement is characterized by large amounts of free cashflows, and you have a proven track record of strong returns
Another related concept, is that of Floats. And to explain that he used to narrate the famous Amex- Salad oil scandal. To tell us what an “unencumbered source of value” a float could be. The scandal at Amex took place at a time when Amex was in the warehousing business.
Why? Don’t ask!
But anyway, Anthony De Angelis, a conniving business man, deposits barrels of “Salad Oil” and gets a receipt from Amex, a receipt that stands for the trust and quality of Amex. And against this as a collateral he takes out several loans, and then Puff. Vanishes from the scene. Shit hit the ceiling when upon inspection, when the receipts were due, that the barrels actually contained worthless sea water. Talk about KYC! And analysts, convinced of Amex’s imminent doom, wrote off the stock. But not Warren Buffett. Buffett instead chose to go shopping amongst the main street shoppers, and found that most people there either weren’t aware or didn’t care about the salad oil scandal, and continued to use the Amex T/C. Not only that, he discovers what an unusually attractive form of financing Amex’s T/C actually is. And that led Buffett to put in $13M into the stock for a 5% stake in the company.
Prof. Bakshi also never did believe in buying a business because it was selling at particular PE multiplier. That, in his opinion, was a biased view of looking at value investing. To reinforce his points, he would often quote Charlie Munger “If a business earns 18% + on capital over 20-30 years, even if you pay an expensive looking price you’ll end up with one hell of a result”. A second reason is that in a moated business, reported earning often tend to understate true economic earning. That’s because money spent on moat expansions are charged off to P&L whereas it should be treated as an expenditure with benefits panning more than a few years!
Another principle that he taught us was that Simple is Sexy! What do I mean by that?
Often times there are companies that fly below the radar. These companies, he’d call them Hidden Champions based on the book of the same title by Hermann Simon. Large companies, especially in the unglamourous B2B segment often unknown to the end consumer, and also missed by analysts too.
The way Prof Bakshi taught us about discounted cash flows is something I’d never forget. He used the famous marshmallow experiment to drive home the point that to the kid who couldn’t wait 5 minutes for 2 marshmallows, the discounting factor was obviously quite high to arrive at the present value of 2 marshmallows. To these kids, the PV of 2 marshmallows was simply not worth a marshmallow right now. And this gives a great clue to the irrational behavior of Mr. Markets too. And so you can pay up for quality stocks, without actually over paying for it!
There was this one week where Prof. Bakshi’s classes were cancelled. And while we students were obviously disappointed we were also equally excited. Why? Because we knew the good professor was away at the annual Berkshire Hathway conference. And given the way we were quizzed on the Letter to Shareholder: Berkshire Hathway (1965-2012) in our mid-term, we all knew that upon his return we’d get to hear more anecdotes of Charlie Munger and Warren Buffett from our Professor.
And Sure enough we weren’t disappointed. The class started off with a full-screen display of a selfie Professor shot with his mentor Charlie Munger. And his energy and enthusiasm was infectious. Pretty soon we were feeling like a part of the cult too. He also shared with us his biggest takeaway from the events. One was Mr. Buffett’s advice of staying away from the noise. And looking back today, that is probably the one advice I have followed throughout the pandemic. The single most important thing to focus on is, how sure are we that the business is actually going to do well over the longer horizon? The next point, was something very close to his heart, because it was what Mr. Munger spoke about teachers. And the importance of role models in shaping who we are.
Having connected with Prof. Bakshi on various social media platforms, still the one place where I tend to follow him and his updates periodically is on Goodreads. And its not just to get a sneak peek into what he is currently reading, but also to be inspired, that a man as busy as himself finds time to read hundreds of books a year. His bookshelves have over thousands and thousands of books, and going through them you’re sure to find a few rare gems in the collection which will help you get a broader perspective on the world in general, and on investing too. In fact, being a self-proclaimed book addicts, Prof. Bakshi confesses to quickly catching up on his reading when stuck in a traffic somewhere (note to reader: Please do not try this!)
And his characteristic curiosity and a penchant for reading up on new things, definitely rubbed onto students too. I remember the rush to the library during the lunch hour, just so I could beat my friends to borrow that book that Professor was talking about in class today. True enough that year (2017) was when I read the max number of books in year, beating my reading challenge goal by 34 books, to complete 88 books that year. A feat I have been unable to replicate since!
A Final Gift!
Professor Bakshi has a tradition he has been following ever since he started teaching. At the end of the course he would gift each and every student a book, a book that profoundly impacted him that year. Our batch was the lucky ones to receive Peter Bevelin’s book, A few lessons for investors and managers, fresh off the press for us!
But no, that was not the parting gift I was alluding to. There are times in the corporate world when we wished we had someone to direct us what to do. And that’s when I tend to visit his video lectures on fundooprofessor.wordpress.com/ sanjaybakshi.net and watch his video lectures, shot from Lodhi Garden! Truly inspirational man, spreading the love for knowledge to everyone.