Investing chat with the calm investor

My Interview with "The Calm Investor"

A Single conversation with a wise man is worth a month’s study of books  Chinese proverb

There are some conversations that are vividly remembered long after the actual conversation has taken place for their lasting impression on you. If it also makes you “think” then such conversations are treasured. Continuing with my investing chat series with smart minds, I had one such thought provoking conversation on investing recently with Anoop.
Anoop needs no introduction for those following the stock market blogosphere. He is an ISB Business school Alumni, CFA level 2 certified with more than a decade of experience in the market, Strategist in corporate leadership role and more importantly runs one of the premier Indian stock market blogs “The Calm Investor”. He is a smart investor, thinker and blogger all rolled into one.
I have been a regular reader of his blog for over three years now and love reading his thoughtful posts. When I reached out, Anoop was gracious enough to spare some time for a freewheeling chat around investing, stock markets and his experiences investing in the Indian share market. The distilled essence of hundreds of hours spent on reading, blogging and investing in the market has permeated into this conversation.
Dear Readers, please grab a cup of coffee; sit back; enjoy the wit and wisdom from Anoop.

Ravi: Hi Anoop, Please tell us something about yourself and how you did discover your passion for stock investing?
Anoop: It all started when, as a baby, I was dropped by mistake into a cauldron of magic potion and…Oh wait, that’s the story of Obelix from Asterix Comics.
Actually, like a lot of Engineers, I started off far from investing, as a software programmer back in 2000. After a few years in the US, I came back to India to do my MBA, after which I became a management consultant advising companies on strategy and operations.
My consulting engagements required me to analyze industry value chains and prospects of companies in those industries. That’s when I got curious about the linkage (or lack of) between business and stock price performance. I started reading about investing and was hooked, haven’t stopped since then.
Ravi: Loved the Obelix reference and para-phrasing Obelix, you must be thinking “These Stock market men are crazy!”. From the fictional world to the real world now, tell us something about your current investing philosophy and how it has evolved over the years?
Anoop:  I started off in 2006 having read the classics like Graham’s Intelligent Investor, Damodaran’s Valuation. But I quickly saw that Indian stocks traded way off quaint concepts like book value and Discounted Cash Flow, so I became a “quality at any price” buyer, which seemed to work well for some time. Then 2008 came along.

“Everyone has a plan till they get punched in the mouth” – Mike Tyson

A 60% drop in portfolio value got me questioning my philosophy or lack of one grounded in time-tested foundations. That’s when I started to read with intent about investing strategies, and the value investing school of thought naturally appealed to me. It was also when I started reading about the impact of behavioral biases in decision-making and stock prices.
Now my philosophy is built on regression to the mean i.e. to buy “good” companies from deeply unpopular sectors and to hold them for “reasonable” periods of time, i.e. until they are no longer unpopular.
Ravi: Again, loved your Tyson reference. But with your current philosophy it’s highly unlikely to get punched and have a “knock out” by the market. Based on your current thought process you have mentioned, what are the criteria’s or characteristics you look for in a business for it to be considered investment worthy?
Anoop:  First, I’d like to clarify, I do not know how to identify “multi-baggers”. My objective is to design a portfolio that gives me the best chance to beat the broader market over the long term.
stock investing checklist
So, when looking at a company, I break it down into:
Franchise Power: Long-term view of Return on Assets, Return on Capital Employed, Margin Growth & Stability, and Cash Flow Generated as a % of Assets
Leverage / Equity Dilution: Debt-Equity Ratio, whether it needs to keep issuing more equity, Current Ratio
And then see how expensive it is relative to the universe, EV / EBIT.
The consistently high ROA, ROCE, growing / stable margin companies with low debt and stable equity base trading at reasonable valuations form my shortlist.
Ravi:  A wonderful set of criteria there. What has been the single most important investing lesson you have learnt from a decade in the market?
Anoop:  Investment success is 15% about valuing and identifying the right companies and 85% about being aware of overcoming our behavioral biases.
Developing the most sophisticated stock-picking process will only go so far unless we also understand that our lizard brains react to a stock ticker filled with red the same way that it did thousands of years ago when seeing a saber-tooth tiger approaching, i.e. to run away by selling everything.
Ravi: I agree that the investor’s worst enemy could be themselves. Deciding not to panic and to be a skilled contrarian investor requires us to overcome our behavior biases. Mark McCormack wrote a famous book “What they don’t teach you at Harvard Business School”. As a B-school alumni what do you feel one needs to learn additionally w.r.t investing (apart from the text books) so that one immediately takes to the market like a duck to water?
Anoop:  Although I haven’t read Mark’s book, I’ll say when it comes to investing, B-School probably does more harm than good.
What is not taught in B schools
We’re taught:

  • risk is the same as volatility (it’s not)
  • markets are efficient and there is no scope for incremental returns i.e. Efficient Market Hypothesis (markets are mostly efficient but inefficient for brief periods of extreme optimism or pessimism)
  • that market participants are all rational economic decision-makers (try convincing someone to choose a 5% chance to win 10L over a sure 10k)

So, anyone who’s been to B-School needs to first unlearn a lot of what they learnt about investing and think from first principles.
Ravi: As a fellow B-school product, I can’t agree with you more especially on the efficient market theory. Remembered what Buffett said “I’d be a bum on the street with a tin cup if the markets were always efficient”. Let us say you were given a time machine and you could start your investing journey again afresh. How different would that journey be? Why?
Anoop:  That’s easy, I’d start investing at least a decade earlier than I actually did, maybe earlier. Two reasons, investing is something you learn by doing, especially learning to understand your own emotions and their impact as markets move and the second reason, of course, compounding.
Morgan Housel of Collab Fund wrote this interesting piece where he estimated that if Buffett had started investing at 22 years instead of at 10 years like he did, at age 30, he would’ve been worth $24,000 instead of $1M. From then, if he earned the same returns, he’d be worth $1.9B today.
Not bad at all, but compare that to the $81B he’s worth today. Time-in-the-market matters more than almost any other parameter for investing success.
Ravi: Absolutely. As they say “Time in the market is more important than timing the market”. What has been your best investment idea (need not be the most profitable) till date? Can you also elaborate on the thinking that went behind the investment idea and how it all panned out?
Anoop:  My best investment idea is something I didn’t do more than something I did. Diwali 2008, markets were down 40% from September levels after several falls in the year. My portfolio was down even more.
As an inexperienced investor, I was looking for guidance, and every expert resource on financial media was talking about how this was “a new normal” and equities were likely to be depressed for a long time. I knew people who had sold everything earlier in the year and were sitting on cash. I found the idea of selling absurd and resolved I wouldn’t sell a single stock.
I remember logging in to my trading account for Muhurat trading, and using whatever cash I had to buy Hindalco at Rs 39.10, then trading at the Net-Net values Graham was famous for. I continued buying a basket of stocks for the next few months. I exited Hindalco at Rs 210 in 2010. More than the gain, that experience gave me the confidence that I had the temperament to be an investor.
Ravi: From master stroke let’s move on to mistakes. Mistakes are sometimes referred to as “unexpected learning experiences”. Can you share any investing mistake(s) you made and the lessons we can learn from it?
Anoop:  That’s a long list !!! A year or so ago I sifted through all my holdings to identify all the losers to understand the pattern of mistakes I could potentially learn from.
Stock Investing mistakes
There are three categories I classify my investing mistakes into:

  1. Going contrarian on price alone: After buying a stock, I’d look at every dip as a buying opportunity. That’s not a bad idea, except I would ignore changes to the company’s prospects, in spite of being aware of them, rationalizing that the market was over-reacting

Lesson learnt: When the facts change, it’s OK to change your hypothesis and exit.

  1. Not selling losers: I would get anchored to the price I bought at, and would delay selling the stock at a loss. It was a while before I realized it’s the all-too-prevalent bias of loss aversion in play

Lesson learnt: Consider opportunity cost of not selling a loser and buying a better company with the proceeds

  1. Selling winners too early / Not buying more: The other side of #2, where I was happy to sell a stock that had done well to make the gains “real”, which would then rise a lot more after I’d sold

Lesson learnt: Your gains come from a small percentage of your holdings. Let your winners run.
Ravi: That is a wonderful set of lessons we can learn and it is always cheaper to learn from others experience!!! Voltaire famously said “Writing is the painting of the voice”. How useful has writing / blogging been in your investment journey?
Anoop:  Prof. Richard Feynman, one of the smartest people to have lived, said there’s a difference between “knowing the name of something”, and actually “knowing something”.
Most of the time when we think we know something, we’re only reproducing words we read somewhere. According to Feynman, the test of whether you know the topic is if you’re able to successfully explain it in your own words to someone who has no prior exposure to the topic.
Writing about a topic forces me to test that difference, and when I find I only seem to know the “name”, I go back to the literature and / or data to understand it better. Writing my blog has instilled the discipline to put in the work to go deep when testing ideas.
Ravi: Is there any particular investor(s) or author(s) who have had a significant influence in your investment thinking? (In terms of say mentoring or inspiration)
Anoop:  Aside from the usual suspects like Charlie Munger, Peter Lynch, Phil Fisher, I’ve found Daniel Kahnemann’s Thinking, Fast and Slow to be life-changing into how we, as human beings, make decisions, often poorly. Michael Mauboussin’s books, “More than you know” and “The Success Equation” also have shaped my thinking about investing.
Ravi: Next up is one of my favorite question. Let us say a bunch of enthusiastic beginners approached you for advice on how to be a successful stock investor. What would your advice for them be?
Anoop:  Leo Tolstoy wrote “All happy families are alike, each unhappy family is unhappy in its own way”. I’d reverse this to say that “All unsuccessful investors are alike, every successful investor is successful in her own way”
My advice to beginner investors will be:

  • Learn the obvious mistakes you should avoid as an investor like chasing trends, buying what the experts on financial media say, not diversifying optimally…
  • Focus on the developing a robust process based on your own hypotheses about the markets, and the outcomes will take care of themselves
  • Become a lifelong learner. Read more books, and less financial news

Ravi: Agree with every single one of them. Continuing with the previous question, if they sought your advice on the best book for a stock market beginner then which book would you recommend? Why? I had recently done some work on finding the best book for a stock market beginner and I am really curious to know your pick.
Anoop:  I’d suggest two “unconventional” picks and 1 tried and tested classic:
best stock investing book

  1. Million Dollar Portfolio by David & Tom Gardner – it has the principles but is specific enough to be used as a practitioner’s guide for someone starting out.
  2. The hour between dog and wolf by John Coates – to understand the role of psychology in driving market movements
  3. Buffett’s letters to shareholders – to build long-term understanding of the core principles of how managements can add shareholder value

Ravi: Interesting “unconventional picks” I should say.  Moving on, Let us say there is a situation where you could retain only ONE book from your entire book collection. Which book would that be? Why?
Anoop:  I’d cheat by choosing my kindle J Ok, I’d keep Sapiens: A brief history of mankind by Yuval Noah Harari because of how fascinating and insightful the book is about the way we as a species have gone from foraging for berries in the forest to designing spaceships.
Ravi: Great Choice! Last question, Other than stock investing you have listed an interesting passion “Improving the mind and body” on your site. Can you tell us something about it and why you are passionate about it?
Anoop:  Once you recognize the power of compounding, you start seeing it in action everywhere, especially on the mind and body.
Minor improvements in your routine like cutting out one out of three cups of coffee a day, using the stairs instead of the elevator, ensuring you read a chapter of a book every day, actions like these seem too minor to show impact, but their longer term benefits are massive, not just in the physical sense but in how well we perform mentally (ever had to take a critical investment decision when feeling exhausted?).
And unlike the markets, here’s something completely in our control! Hence my interest in continuous self-improvement.
Ravi: That was excellent Anoop. I thoroughly enjoyed every bit of this conversation. Thanks for sharing your thoughts with Stock and Ladder readers. Wishing you the very best for your life, work and investing journey.
Anoop:  Ravi, this has been an illuminating and interesting chat. We should do this more often. Thanks so much for this opportunity and do keep turning out your thoughtful pieces on Stock and Ladder.
As a popular saying goes “Fine conversation is food for the soul”. Dear Readers, I sincerely hope you found this investing chat as useful, interesting and insightful as I found, with loads of food for thought. Hope to bring to you many more such interesting conversations.
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