Intelligence, Skill, Discipline & Wisdom in Value Investing from Bharat Shah

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I am a firm believer of Law of Attraction as well as Law of Simplicity.

Everything we do have to be very simple in understanding and in execution as well. Since the day I entered in Value Investing, it is my quest to have a very simple process of investing that I can follow and I follow it.

Intelligence, Skill, Discipline & Wisdomin Value Investing

As far as Law of Attraction is concerned, coming across this interview was a sheer Law of Attraction. I didn’t know Bharat Shah until my boss told me to read his interviews. # Bharat Shah Interview in Outlook Business

On a Quest of having a simple investment process I started with my Investment Philosophy and Checklists and curated over time. Those things got a further push from the wisdom of Mr. Bharat Shah.

I will quote few of excerpts from his Interview which I liked the most. It is like, I was searching for these things in details and I found my way out. It was like confirmation for me that I am on a right track.

“Once You Have Clarity That Something Does Not Deserve Your Time And Attention, Be Ruthless” (I have news in Mind)

“If You Cannot Value A Business, Then Price Has No Meaning” (Price matters)

“The art of exclusion is a very powerful idea in investing. You must filter out things such as bad management and bad business.” (Invert, Always Invert)

“Investing is both an ‘art’ and a ‘science’. Art must precede science. What to reject comes from the ‘art’. Then comes the character of the business and its valuation, which to my mind, is ‘science’.” (Let’s put an end to Art vs. Science Debate 😀 )

The most important part comes here.

Tell us how has your investing evolved over the years?

Over my 29 year-long investing career, there are four to five elements that have altered. First, the ‘art’ part of investing, which is the difficult part, has been refined. The ‘science’ part is relatively easy to grasp and replicate.

Once you are able to improve the ‘art’ part of investing, then you move ahead. At this stage, for a proportionate effort, you get disproportionate rewards.

Business/Intelligence:  Broadly speaking, you need to understand the character of a business, which means what makes a business work, what makes it succeed and what will happen to it in the future. If you cannot understand diverse businesses; you cannot be an investor.

 

Valuation/Skill : The ability to value a business is more of a skill. If you cannot value a business, then price has no meaning. Only if you are capable of comparing price to a certain value, will it make sense. Price is disobedient, volatile at times and depressed at times. The master is value. Thus, the second important aspect in investing is your ability to value. Without this skill, one cannot be an investor.

Discipline/Quality : Then comes the ‘art’ — the first and most important aspect here is quality. You need to have the discipline to buy nothing but quality. In addition to this, you must purchase quality stocks with a meaningful safety margin. You do not want to buy gold at platinum’s price. Hopefully, you want to buy gold at silver’s price. So it is all about seeking a reasonable discount on its actual worth. Here again, you need discipline.

Wisdom/Hold for Long : The second aspect of the art of investing is wisdom. More than intelligence, the wisdom to stay on course plays a crucial role. Once you have understood the business, valued it, bought it at a sensible price with a sufficient safety margin, then do not flirt. Do not be temperamental, be patient, be prudent enough to realize that when you make a good choice it may not necessarily lead to instant gratification.

The wisdom to foresee the larger purpose of what you have bought is vital. Thus, the ability to remain inactive as opposed to being hyperactive, which is what one usually tends to do, is an improvement I have brought about in myself.

Holy-grail of Investing :

The intellect to understand businesses, the skill to value it, the discipline to purchase at a meaningful price and the wisdom to stay on course are the critical aspects of investing. There is nothing more to it.

I can’t emphasize enough on the power of filtering. The moment you allow your mind to be clouded and make that mistake of staring at the price to earnings multiple, dividend yield, etc, you will end up looking at 90% of unworthy names. The moment you learn to exclude, you will improve your effectiveness. I wish somebody had taught me this early on in my career. That would have helped me avoid many errors. This approach completely liberates you from the tyranny of so many idiotic, unwanted mechanical things that you do simply because you don’t know any better.

Another area where I have improved upon is valuing a business. Here, gathering inputs is an ‘art’ — how long will a business survive, what is the size of the opportunity; therefore, at what rate is it likely to grow, will the growth happen now or later, will it be relatively more consistent or volatile? However, converting all this information to a workable model to compute its value is a ‘science’.

Unfortunately, we do not have a clear-cut way of valuing businesses. This is one area where I have learnt a lot. Overall, I would say, my temperament as an investor is a fundamental change that has occurred over the years.

The moment I read this interview, It was a Eureka! moment for me. You may think that everybody knows this, what’s so great about it? I believe, This para has the crux of 29 years of Investing Career and put the things so simply needs an above average understanding of the subject matter.

I consider this Interview as a turning point in my Investing Life, as I will try to improve “Art & Science” part of my investing journey in this way.

From now on, I will know exactly why I am reading what I am reading. So that I can specifically apply them in real-life.

Lessons learnt from Bharat Shah:

  • Power of Filtering
    • In stocks
    • In news
  • Simplify Your Investing Process
  • Develop a Mental Structure & Improve it overtime
  • If you can’t understand diverse businesses, you can’t be an investor.
  • If you can’t value a business, you can’t be a investor.
  • If you don’t have discipline to buy a good business at reasonable price, you can’t be an investor.
  • If you don’t have wisdom to understand big picture and stay on course, you can’t be an investor.

Lots of learning and so many things to act upon. 🙂

Would love to hear your comments. Thanks.

Picture Courtesy & Source : Outlook Business Interview

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