The One Percent Almanack

Wit and Wisdom on Investing, Business, and Life

Vishal Khandelwal

Governance: Know Thy Manager

In the original version of his book The Intelligent Investor, Ben Graham began his discussion of a chapter on “The Investor as Business Owner” by pointing out that, in theory…

“…the stockholders as a class are king. Acting as a majority they can hire and fire managements and bend them completely to their will.”

But he changed this part in the subsequent editions of the book. In practice, says Graham…

“…the shareholders are a complete washout. As a class they show neither intelligence nor alertness. They vote in sheeplike fashion for whatever the management recommends and no matter how poor the management’s record of accomplishment may be.

The only way to inspire the average American shareholder to take any independently intelligent action would be by exploding a firecracker under him.”

Well, this is a fact that is true for not just American shareholders, but all shareholders. Most of us overlook the human aspect of operating a business. This is despite the fact that, in most cases, the future success of a business is directly tied to the quality of its people.
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InvestorInsights: Arpit Ranka

This is maybe the first time I am introducing someone here not on my own, but through a testimonial, and that too from a legend himself.

Here’s how Prof. Sanjay Bakshi describes the investor I am profiling today, Arpit Ranka –

Arpit is one of the finest human beings I have ever met. He is trustworthy, ethical, humble, spiritual, and diligent. Many years ago when he approached me through his wonderful brother Arpan (who was my student at MDI), I allowed him to sit in my class. He was the best student in my class. Later he worked with me for many years.

Arpit is a very successful value investor who loves his craft. Anyone who associates with him should consider himself or herself lucky. I am lucky to have him in my life.

Now for a more formal introduction. Arpit is a value investor based out of Mumbai. He is an avid reader and considers himself fortunate to have found his passion in value investing. He has worked with two of the leading value investors in India, Prof. Sanjay Bakshi and Late Mr. Parag Parikh before starting out on his own. Apart from investing, his interests include movies, music, Buddhism, and travelling.

For whatever little I’ve known Arpit for the past few years, I count him amongst the finest thinkers among the younger lot of value investors in India. That he breathes value investing would be an understatement.

For this interview, Arpit has been generous in letting his thoughts flow freely. And as you would realize by the end of the interview, there are great lessons that we can draw from his invaluable experience.

Let’s now dive straight into the interview.

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

Arpit Ranka (AR): It’s been a roller-coaster ride — growing up in a small town in Tamil Nadu called Tirukoilur, to dropping out of engineering within the first couple of weeks, to spending an year learning the pharmaceutical wholesale business at my maternal uncle’s shop in Jodhpur, to working for a month or two as an operator at a BOLT in Jodhpur, to get to work with two of the leading value investors in the country, to eventually becoming a full time investor and starting out on my own, twice over.

I will not bore you with the details except for highlighting two important developments along the way, which led me to value investing.

Firstly, in hindsight, dropping out of the engineering college is one of the best decisions I have taken as yet. While I had no clue what I would be doing with my life when I made that decision (I had not even heard of value investing then) but I became a voracious reader the very day I dropped out. I was scared to death that I might end up a failure and introducing myself to books seemed like my best bet to avoid that fate. After dropping out, I read like a maniac for a few years.
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Behaviouronomics: Social Proof Tendency

Imagine yourself walking on the side of the road, pre-occupied with your next world changing idea and daydreaming about the possibility of money and fame it might bring to you. Suddenly a panicked group of strangers run past you as if they are being chased by something. What do you do?

Do you stop and then casually turn around to visually scan the area? Do you analyse the threat and then make a decision whether to follow the running crowd or just ignore them?

Well if you are a normal human being, chances are high that you would start running with the crowd and postpone the task of analysing the threat level.

Of course, the likelihood of a lion chasing you on a busy city street is miniscule. And at the same the chances are reasonable that the running crowd will suddenly turn around and start laughing at you and shouting “Bakraa!” (Hindi term for someone who got fooled)

You might end up looking like a fool but the “fight or flight” instinct endowed by nature prefers you to be alive and considered fool instead of being torn apart by a ferocious lion in the middle of the street. And for that matter, lions don’t give any specific concessions to rational humans.

Social Proof

As per Wikipedia, social proof is –

A psychological phenomenon where people assume the actions of others in an attempt to reflect correct behavior for a given situation. This effect is prominent in ambiguous social situations where people are unable to determine the appropriate mode of behavior, and is driven by the assumption that surrounding people possess more knowledge about the situation.

In short, monkey see, monkey do. That’s how you can explain the social proof tendency to your kids. Social proof, also known as herding, is a terribly useful mental model from psychology. So let’s dig deeper.

Humans are social animals. We want what others want and we tend to avoid what others avoid. When we’re uncertain, in an unfamiliar environment, we try to resolve the ambiguity by following others

But why is it so? Why do we follow the herd? The answer is evolution – the theory of natural selection.

In the hunter gatherer environment, if you saw a group of panic struck homo sapiens running past you, the obvious conclusion was that they were being chased by a ferocious lion. It gave you a tremendous evolutionary advantage if you started following the herd behaviour under such circumstances. So that’s how the social proof tendency has been wired in human behaviour.
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BookWorm: The Dhandho Investor

I am sure most of you already know about Mohnish Pabrai. We had reviewed one of his books “Mosaic” in the previous VIA issue. For the benefit of those who haven’t heard about him, Mohnish runs US$ 850+ million US based hedge fund and is a true Munger-Buffett disciple. He is one of those rare money managers who have structured their funds mimicking the Buffett Partnership.

Mohnish has an eclectic background. He has built three successful businesses in last 25 years including a technology company, a hugely profitable hedge fund and a remarkable philanthropic organization called Dakshana Foundation, which educates talented underprivileged children to qualify for IITs. His success across varied fields is clearly the result of his multi-dimensional thought process which is pretty evident from the insights that he shares in his book.

He is a natural storyteller and has an exceptional skill of making the art of value investing look simple and doable.

The Dhandho Investor was one of the very first few books that I read during my initiation into the world of value investing.

Before diving into the book let’s first demystify the strange word called “Dhandho”. Dhandho is a Gujarati word which is best described as – endeavours that create wealth while taking virtually no risk. Like many other value investors, Mohnish too prescribes a low risk betting strategy.

The Patel Motel Dhandho

The book starts with a fascinating description of “Patel Motel” business. The Gujarati community in the US make up less than 0.2% population but they control more than 50% of the motel business employing nearing a million people and owning over US$ 40 billion in motel assets. The distressed motel industry, low initial investment, easy mortgage and free accommodation were reasons compelling enough to attract the Patel community to motel business. With frugality and extremely low operating costs, Patels turned motels into cash generating machines.

The cash generated by one motel was used to buy another motel and very soon Patels began applying their low cost model to higher-end hotels, gas stations, convenience stores (7-Elevens) etc. The snowball effect over time ended up creating amazing results for the Patel community.

The book includes an explanation of this idea with a simplistic DCF analysis (taking into account various possible outcomes) for a motel business and proves that it was a typical “Heads, I win; tails, I don’t lose much!” bet – a dominating theme in this book.

Other Dhandho Investors

Mohnish goes on to chronicle the adventures of few more well known businessmen like Richard Branson and Lakshmi Mittal. Both of them personify the Dhandho approach.
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Spotlight: It’s the Culture, Stupid!

A business’s long-term staying power is determined by its corporate culture. Despite this, most companies pay less heed to building a good one, and more to short term profit making. Let’s explore what you as an investor must look at while assessing how cultured or uncultured a company is.

I was recently travelling with my family in a luxury bus from Goa to Mumbai. I call it luxury because it had a working AC and the seats that adjusted a bit. That’s it!

It was a night journey, which began on a bad note (the bus was late), and ended in a nightmare (the bus broke down in the middle of night near a lonely place called Chiplun in Maharashtra). That we were travelling with four kids added to the nightmare. Twice, the bus got filled with smoke from a faulty electrical system, so twice we had to run out with kids and luggage in our hands.

The next bus was called for only after an hour of getting stranded, and this replacement bus was supposed to reach us only five hours later.

I called up a nearby hotel and the manager there was courteous enough to send a cab to pick us up and then arrange one to send us to Mumbai. In all, a journey that was supposed to take 10 hours, took 18. The cost of travel was higher by almost 75%.

“I want a refund for the breakdown of the bus and the harassment it caused the passengers,” I asked the customer service representative on reaching Mumbai. First, he did not have any information that his company’s bus had broken down, and then when he confirmed with his representatives, he agreed on a refund.

“We will refund you Rs 400 per passenger,” he told me. “Just 25% of the total fare?” I countered. “That’s less than half of what it costs to travel from Chiplun to Mumbai in a similar bus! And what about the trouble the entire episode has caused us?”

“This is what the head office has decided!” he replied and kept the phone down before I could say anything else.

I called up their head office, and got the same answer from their senior manager. And the casual way he and his team dealt with the entire situation was equally sad!

“I won’t ever travel with your bus!” I told him. “That’s fine!” he said, and banged the phone down.

“That’s what you get in the name of customer service,” I told my wife who was constantly asking me to calm down.

Well, the bus I was travelling in was from a company called VRL Logistics, a company that recently came out with an IPO, and which constantly talks about how they delight customers! They were in fact recognized as Service Provider of the Year 2013 by some World Travel Brand Awards (says a lot about how awards are won!)

Damn the Customer!
I am willing to bet my money on the fact that if I ask you to name 10 companies in India that have delighted you with great customer service, and 10 that have troubled you with a poor one, the second list will come out faster and the first would not get complete at all.

I am sure the situation is bad across countries, but the unprofessional way companies treat customers in a populated country like India truly deserves a case study (on how not to treat customers) at Harvard Business School.
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