I was recently in Kolkata for my Value Investing workshop, where I received an amazing response. Beyond my expectations, the number of people who attended the same exceeded the count in Mumbai and Delhi as well. And I’m sure they found some value in the Workshop, as their smiles show. 
My next workshop is in Bangalore on 1st November (Saturday). If you are interested to join,
click here to register now.
Anyways, during my Kolkata trip, I also met up with Mr. Basant Maheshwari, founder of The Equity Desk and author of The Thoughtful Investor, for an interview for Safal Niveshak. Given that we talked for almost two hours, I have broken up the interview in several parts.
Before sharing my notes from the interview,
please note that the views expressed herein are those of Mr. Basant Maheshwari and do not necessarily represent the views of, and should not be attributed to, Safal Niveshak.
Over to Mr. Maheshwari.
Safal Niveshak (SN): What are the key factors that shaped your life as an investor? What inspired you take up investing as a full-time activity?
Basant Maheshwari (BM): My maternal uncle was into the investing field. He was actually a broker for the Calcutta Stock Exchange. So, as a kid, I used to go there and look at the Economic Times. I didn't get a hang of it. I won't say it inspired me, but it made me curious of the market, but I knew nothing.
So when I was in college, I had a couple of friends who were badly into stocks. It was the Harshad Mehta era. They would miss classes to look at the stock markets.
One of our friends used to tell me how a stock was selling at an EPS of Rs 20 and that it would get a P/E of 20 and the price will be Rs 400. So I was really attracted to his style. We wondered how this guy knew what price the stock would trade at. Why he was talking about the P/E of 20 was never our thing, because we didn't know what the P/E meant.
Harshad Mehta was a great Pied Piper for the Indian community, because everybody got attracted to stocks in his era. So I had no objective as to why I was in the market at that time. The only thing was that I wanted to make money…and how much money, what to do with that money, there was no sense to it.
I just wanted to do something because it was making money for me. Thankfully, I was not into stocks to such an extent that I left my education. My focus was to make ten, twenty, thirty, and forty thousand. I made it and then I blew it all.
Next era was during the Ketan Parikh period. I was into stocks all this while. One of my friends was a stock broker. We used to look at The Economic Times by running our index fingers to the right of where the stock was. So we used to identify the lowest P/E stock selling at the lowest price.
So the lowest price with the lowest P/E was the most attractive investment at that time. That was how we used to do it. For example, if the P/E was 3 and the stock was trading at Rs 9, it was the best deal. If the P/E was 3 and the stock was trading at, say, Rs 200, it wasn't as good as the stock that was trading at Rs 9.
I was into my family business, which was doing well then. I used to tell my father that I wanted to invest, but he was against it. He said stock market was gambling and that I would blow everything up.
So we struck a deal. He used to give me a salary every month. I used to take that money on the 1st of every month to put into the market, without any serious thought as to what I was doing. Portfolio creation and allocation were far-far away.
I just didn't know what I was doing. If the stock was selling for Rs 50, I used to buy 500 shares. If the stock was selling at Rs 100, I used to buy 250 shares. If the stock was selling at Rs 500, I wouldn't buy it. That was the theory.
Between 1994 to 1998, Infosys came right under my nose. We saw their good results, but there was always these thoughts like – "Who would buy Infosys if you take away all their employees tomorrow?" or "It only has computers and chairs and what are those worth for?" or then "I can create an Infosys by hiring all those people."
That was the only concept at that time, and it was thoroughly foolish. But that is how you start.
By 1998-1999, the tech fever had started, and stocks were surging. That time, I chased the second-liners. Zee TV was the darling of the market at that time. In 1999, there was this company called Shree Adhikari Brothers. They were starting a channel, after having done a lot of good programmes on Doordarshan.
And I though this will also do well because Zee TV was doing well. So I bought the stock at Rs 130. It went to around Rs 2,000. Similarly, I had bought other stocks like Pentamedia Graphics, Silverline, and DSQ Software. I also bought a lot of pharma MNCs, but slowly my portfolio got heavily loaded with technology stocks.
That was when I was really focused on buying the lower P/E – the poor cousins as you might call. So, in March 2000, if Infosys was trading at a P/E of 300, I thought it was too much, so I bought DSQ Software which I bought at Rs 300 and the stock touched Rs 2,800. Now because I could not draw a higher salary from my father's bank account, I borrowed a lot of money from Standard Chartered Bank (owing to our business relationship with them).
I still remember those evenings when I went to the bank to pledge shares and withdraw shares. One fine day, we were in Jammu and I was at the mines (we were a mining company), and there was a complete dislocation of communication there. The market fell in the meanwhile, the bank would have sent me a margin call letter at my home here, there was nobody and the letter got returned, and then the bank sent a telegram, and then they sold all the shares.
In 2000, around April or May, everything got drained out. But that was one part of it. The second part was that when I got to know that my bank had sold all my shares, I went and bought all those shares at Rs 100-200 higher prices. So that is how it happened. This was the background.
After the year 2000, when I had lost everything, including our family business owing to the government taking away the mines from us, we had nothing to fall back on. That was when I started teaching. It was that time I heard about this book called One Up on Wall Street.
Before that I had no clue that there was a "book" on the stock market, because stock market was gambling. How could you have a book on how to gamble?
So I got hold of that book. In it, Peter Lynch talked about 10-baggers, 50-baggers, and 100-baggers. And I asked myself, "Can prices go up 50 times, 100 times?"
That was the first serious thought I gave to investing. I realized then that this was the only place I could have made a lot of money. That was a concept that was clear.
I had seen people make a lot of money. My maternal uncles were here in this field. Of course they were brokers. So that is how it actually started.
And then I started reading. I had just heard about Warren Buffett at that time, but I did not read any of his letters at that time. But the first big break came to me when I read Peter Lynch's One Up on Wall Street.
In hindsight, it looks very amateurish to many people, but that is a very classic way of getting into the market. So that is what really put me there. And after that, it was all on-the-job kind of learning for me.
SN: How would you describe your investment philosophy? Has it changed over the years? What has gone out and what has come in?
BM: First thing, I will never buy a stock unless I think I can make 10-times out of it. Many ideas look good to me for a doubler for next year, or say 50% in six months, I don't touch them.
This is because my thought is that if you play for a 50% game and you get it wrong, you can also lose 30%. But if you play for a 1,000% game and you get it wrong, you will at least get 100%, 200%, or 300%. That is assuming all your analysis is correct. The market externalities that are not in your hands cannot disturb you too much.
So that is my only investment philosophy.
There are many stocks I've sold because I thought those stocks would only double or triple from that point. And by chance, that has almost been the peak.
Like there was a stock called Television Eighteen (TV18), where I made around 16 times. That I sold because I thought at max I would only double it. So why play for a double? If I want to play for a double, I'll go and buy HDFC Bank.
So that is the basic philosophy. Of course, I also look at management quality, return on equity etc, but those are separate things. But my basic attraction to a stock will only come from there.
Now how it has changed is that earlier when I had nothing to lose, I just wanted to be with the stock that would give me the highest possible return and allocate as much to it. That has changed in the sense that now, of course I want to be with the growth companies, but I also look at the risk very carefully. I just cannot afford to lose.
This is because I am willing to put a lot of my own capital and a lot of borrowed capital also. So when you are on leverage, you just cannot take any chances.
I figured out that having 50% of your net worth in equities and 50% in bank FDs, and buying inferior grade companies for a 40% jump on the 50% you put into equities, is not that good a strategy as having 120% in equities in high-quality companies that can give you 20-25% return.
Most people would allocate 50-60% to bank FDs and FMPs and those things, and for the balance 40% they want to maximize returns by trying to chase 40%. Of course, I also aim for 40%, but that has to come with very reduced amount of risk.
I will give you an example. Look at cash flows of companies. It is very hard to lose money on positive cash flow companies.
Let me give you an example of a company that is growing at 40% per annum and it generates free cash flow. What it does is it uses its free cash flow to do capex and to expand business. So when growth slows, and say the growth comes to 15% or 10%, it would not do much capex at that point of time. So all that capex money that it was using from its free cash flow would now be diverted for dividends.
And that is the time when you'll get a protection. And the stock will not fall. It will wait for you to get out whenever you want to.
So initially, I didn't know this. I was holding Pantaloon Retail, a negative cash flow company. And when it fell, it fell like a stone in water. Same with TV18. But I was very lucky in TV18, a game of chance you can say, not so smart enough in Pantaloon where my initial price was Rs 7 and the stock went to Rs 875, and by the time I actually sold it was Rs 300.
So, nowadays, if there is a high growth company and it has got negative cash flow, then I am not too much interested in it, because I need both the buy and sell decisions to go right.
But if it's a high growth company and it has positive cash flows, then when growth stops, the capex will not need to be done because the company won't have a market to grow, so I will get dividends.
So this is a small, but very significant change in my investment thought process. That is how I manage to hold those 30, 40, 50 P/Es because I know I won't lose money as dividends would double up. So that is how it happens.
SN: Value investing requires a great deal of research, discipline, and patience. What do you suggest an investor just starting out could do to practice these habits to ingrain them in his/her investing mindset?
BM: First is, he has to read. There is no substitute to it. Reading also isn't enough. You have to practice what you have read. A person who practices 5 books that he has read is much better off than a person who has read 100 books and practices nothing.
A general investor, in most cases, is a cynic. You tell him anything, and he will come up with an argument why that will not happen. He will use 400 questions for things that are not relevant. Like, how many people have said that Asian Paints and HDFC Bank are overvalued? And since how long? I think it's been 10 years.
At some point you've got to stand up and say that there's something that I can't understand, which people don't do.
And as a young investor, first thing he has to do is that he has to catch hold of his guru (teacher), whoever he is.
You've to catch hold of some guy whom you think is smart enough, and has got a balanced view. Make friends with him.
Also, avoid blogging too much on equity discussion sites because on online forums, the guy who buys 50 shares shouts the loudest. And the guy who buys 5,000 shares doesn't talk and doesn't write. He just reads. So the guy who is screaming the loudest is the one you got to ignore. But he will make sure that you get chickened out of a position.
There is a confluence of factors. First, you got to read and then second is this theory of having passion. It's all linked up. You got to make money first to be passionate about something. So there is no sequence of events here. You got to be passionate, you got to be curious, and then you also have to make money.
So if you don't get success in the first year or two, then it's very likely that you're going to slip into a trap where you'll want to recover your old losses and move away from the original direction.
Now, the young investor, he expects the market to know that he has limited capital. Market doesn't care about how much capital you've got. If you've got Rs 1 lac, or Rs 1 crore or Rs 10 crore, the market does not care. It's not going to make your Rs 1 lac into Rs 10 lac just because you got a lower figure. The market has no emotions.
The market can cut you into half, whether you're at Rs 1 lac or Rs 10 lac.
Mostly, the point is that people don't have a long term view, despite that they all understand compounding.
If you meet somebody and say that you can compound money at 26%, he'll say "Oh, that's a lot of money!" And then you tell him that if you buy this stock at Rs 10 and then next year it will go at Rs 12.6, he will tell you, "No! Tell me some stock at Rs 10 that is going to double in six months."
So the same guy who walks out of his bank with a FD receipt that promises to pay him 8.5% calls up his broker and wants to double his money in six months. How can there be such a dichotomy in returns?
I believe a large part of this can be cured just be reading, making notes, and if possible getting into a group of smart guys around.
Overall, I think it's the chicken and the egg race. You got to make money also. Because if a strategy does not work for you for 2-3 years, you can't be as passionate as like you were when you started.
SN: You've talked about the importance of reading. So, is there one book that has shaped your thought process as an investor?
BM: It is Peter Lynch's One Up on Wall Street, because it told me I can make 100 times in a stock. That's it!
You can dispute that this book was written in 1989 and by then, the US had its best bull market and Peter Lynch had a fantastic time to manage money. But at least he gave you the confidence.
I would put Peter Lynch one notch above Warren Buffett also. Why? Buffett gets very good deals. He is very smart. He won't tell you as to how much of his effort is because of the use of the float that he has.
A lot of people say – "Warren Buffett says we should always hold some cash." But please note that he has got an insurance company. He can't be fully invested. He's got to pay the claims also. So this is called selective listening and myopic thinking.
Go and see what Buffett used to do during his earlier ears. Read the partnership letters from 1958, and you'll get a sense.
You see, you cannot follow one person at all times. You've got to borrow something from everyone.
"How to find a stock" has to be borrowed from how Peter Lynch did it. "How to analyse a business" has to be borrowed from how Warren Buffett does it. And "how to hold on to a position", if it goes up 20, 40, 50 times, you've got to fall back on Jesse Livermore, irrespective of whether you are a fundamental investor or a technical chartist. In fact, chartists don't follow Livermore as much as they should, because Livermore was a trader.
A chartist you see on TV will tell you, "Sell this is this goes up 10%!" Hey, you are a chartist, a trader, how can you sell it when it goes up?
I think you should mention this specifically. Any stock that you buy can go down 100% only. How much can it go up? 200%, 500%, 1000%, right? But still people lose money.
Why? Because when it goes up 20%, you want to book profits, when it doubles, you want to sell half of it and get the other half free. Do you do this with your home?
You bought a home in Gurgaon, and it went up 5 times. Would you sell the verandah and say now my kitchen is free, or sell your kitchen and say my living room is free, or sell your bathroom and say my bedroom is free? You don't do it!
So that's the problem because we all try and cap our profits.
So, overall, One Up on Wall Street is a fascinating book. Though it's written for the US market, but I got many of my ideas from this book. I read it once every 2-3 years.
This is a wonderful classic. And then there are so many of them.
But then, as I mentioned, beyond a point, books won't help much. You got to practice what you read.
To be continued…
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