Vishal Khandelwal

Life 2.0: Systematic Idleness

February 28, 2017

Have you heard the famous parable of the Mexican fisherman? Perhaps you have in some form but let me rehash it for it’s such an eye-opener.

An American investment banker was taking a much-needed vacation in a small coastal Mexican village when a small boat with just one fisherman docked. The boat had several large, fresh fishes in it. The American complimented the Mexican on the quality of his fish and asked how long it took to catch them.

The Mexican replied, “Only a little while.” The American then asked why didn’t he stay out longer and catch more fish? The Mexican said he had enough to support his family’s need for the day.

“So, what do you do with the rest of your time?” asked the American.

“I sleep late, fish a little, play with my children, take siestas with my wife, Maria, stroll into the village each evening where I sip wine, and play guitar with my amigos. I have a full and busy life,” the fisherman replied.

The American scoffed, “I am a Harvard MBA and could help you. You should spend more time fishing and with the proceeds, buy a bigger boat. With the proceeds from the bigger boat, you could buy several boats. Eventually, you would have a fleet of fishing boats. Instead of selling your catch to a middleman you would sell directly to the processor, eventually opening your own cannery. You would control the product, processing, and distribution. You would need to leave this small coastal fishing village and move to Mexico City, then LA and eventually New York City, where you will run your expanding enterprise.”

The Mexican fisherman asked, “But, how long will this all take?”

To which the American replied, “15-20 years.”

“But what then?” Asked the Mexican.

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Want to Read More? This content is exclusive for members of Value Investing Almanack. Login to read if you are a member. Else, click here to subscribe.

Benefits to VIA Members

Spotlight: Big ideas from Value Investing and why applying them in your investment decision making will be a great deal
InvestorInsights: Interviews with experienced value investors, learners, and deep thinkers
StockTalk: Thorough analysis of business models of companies (without any recommendations)
Behaviouronomics: Deep analysis of human behaviour and how it impacts investment decision making
BookWorm: Reviews of the best books on Value Investing and related subjects
Free Course – Financial Statement Analysis for Smart People (otherwise priced at Rs 5,900)
Archives: Instant access to our huge archive from the past three years

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InvestorInsights: Jason Rivera

February 20, 2017

Jason Rivera is the Chairman, CEO and Founder of Rivera Holdings, an investment holding company. He is a self-taught deep value, contrarian, and special situations investor. He concentrates for the most part on companies under US$ 1 billion in market cap. In this interview, Jason talks about how he started in the field and his evolution and experience over the years.

Safal Niveshak (SN): Could you tell us a little about your background, how you got interested in value investing?

Jason Rivera (JR): My start in value investing was a bit unusual and accidental. I started learning about investing out of necessity 10 years ago, when I was dealing with severe dizziness issues. At the time, I could do nothing but lay around all day because the dizziness was so bad. So, I could not work or do much of anything. But when my wife told me she was pregnant with our first daughter, I knew I had to do something that would allow me to provide for my family at some point when I got healthy.

At the time, I thought about going into three different lines of work. None of which could require going to college because I wouldn’t have been able to due to the dizziness. One was to become a politician but I figured the world didn’t need any more politicians. 

BookWorm: The Honest Truth About Dishonesty

February 15, 2017

Human dishonesty needs to be investigated using the lens of behavioural biases. For most people, honest behaviour is less of a rational choice and more a function of psychological and environmental forces. Ariely argues that the factors driving dishonesty could be as simple as conflict of interest or even tiredness.

Convenience can sometimes backfire. With auto-locking doors it often does. Usually, I share a spare key with my friend but the last time my house door slammed shut behind me, my friend wasn’t available and I had to call a locksmith to open the door. I thought he would bring a large toolkit of sophisticated instruments and perhaps take his sweet time to open the door. To my surprise, all it took him was a thick piece of plastic sheet to pick the lock in 15 seconds.

“If it’s so easy to hack this lock then I should get a better and safer lock. Isn’t it?” I asked the locksmith.

“Sir, there’s hardly any lock that an expert locksmith can’t open.” He told me.

So why should anyone bother locking their doors? The surprising answer to that question is – “Locks are on doors only to keep the honest people honest.” This shocking sentence has a lot of wisdom in it. What if I told you that one percent of people will always be honest and never steal. Another one percent will always be dishonest and always try to pick your lock and steal. And the rest will be honest as long as the conditions are right – but if they are tempted enough, they’ll be dishonest too.

Behaviouronomics: The IKEA Effect

February 10, 2017

When we put a lot of energy into a task, we tend to overvalue the outcome. As a result, we become attached to things that we invest effort in creating. It’s a very dangerous behavioural bias because it lets us fool ourselves.

In July 1999, I entered my engineering college campus for the first time with a lot of excitement and a bit of trepidation too. I was excited about my new-found freedom. At the same time, I was scared to death about the college ragging. For those who don’t know, ragging in India is a damaging form of interaction of the seniors in college or school with the juniors, new entrants or first years. I had heard nasty ragging stories from my seniors.

Fortunately, the college administration had recently adopted very strict policies to stop ragging. All the freshers were put in a different hostel so there was no direct interaction among first year and senior year students. The strange thing about ragging is that once the new guy goes through it, he experiences a change of heart and starts feeling that ragging is justified. Obviously, the senior students didn’t like the idea of banning the ragging. When I asked some of my seniors about their rationale for ragging, they explained that ragging was a great way for new students to open up to seniors. They argued that it increased the solidarity in the student community.

Ragging isn’t something unique in Indian colleges. In western countries, it’s known as ‘hazing’ and practiced in form of initiation rites for student fraternities. Wikipedia defines hazing as the practice of rituals, challenges, and other activities involving harassment, abuse or humiliation used as a way of initiating a person into a group including a new fraternity, sorority, team, or club.

Spotlight: Investing and the Act of Looking Stupid

February 5, 2017

The act of looking stupid is one of the most difficult tasks of being an investor in stock market. And this is especially when you see ‘smart’ people all around you, people who seem to be making no mistakes and doing nothing wrong.

It was exactly nine years ago (how time flies!), when the Indian capital market was gearing up for its biggest IPO ever. Reliance Power, which was set to raise Rs 11,000 crore, received bids worth Rs 750,000 crore as the offer was oversubscribed by 73 times. Everyone and his brother-in-law who subscribed to the IPO looked smarter, even as my family members whom I had asked to avoid the issue by far, seemed disturbed on my recommendation.

So I looked stupid even as there were stories floating all around how people borrowed money and sold their properties to apply to this IPO that was sure to succeed. In fact, we were the only research house in India that had asked its clients to avoid the IPO and we had received a lot of brickbats for the same.

I, being the power analyst and the guy who wrote the IPO analysis report on the company, did a DCF valuation of the stock discounting free cash flows for the next 25 years (the general norm for DCF is 10 years)! My ideas was to lengthen the DCF calculation period by as much as possible and then see how the stock really stacked up.

The result of my DCF valuation then was, hold your breath, Rs 60 per share. In other words, my intrinsic value estimate for Reliance Power’s stock, after assuming the rosiest of picture for the business, came to Rs 60. The stock was offered in the IPO at around Rs 450.

If you had read my report then, you could have gauged the level of ‘stupidity’ I had shown by valuing the stock almost 85% lower than the IPO offer price.

“An overconfident, stupid jerk!” one of my analyst friends introduced me to his friend while telling him my mis-adventures in valuing the Reliance Power stock then.

Well the rest, as they say, is history. Even after adjusting for the bonus issue Reliance Power offered its shareholders immediately after the IPO, the stock is down almost 85% from its peak of 2008.