Sanjoy Bhattacharyya on Value Investing

Sanjoy Bhattacharyya needs no introduction. However for those who have been living in a cave, let me give a brief introduction. Sanjoy Bhattacharya is one of the leading value investors in India. He is an investment rock-star and is considered the guru of stock gurus. As a senior person, he has been in the market far longer than most experts, and what endears him to most people is his straight talk and professor like demeanor. He has many time come on TV and interviews and explained his investment strategy and rationale, and even mentioned some stocks which have gone on to become multibaggers.

His official profile from Bloomberg is given below (5):
Mr. Sanjoy Bhattacharyya is the Managing Partner at Fortuna Capital. Previously, Mr. Bhattacharyya was a Partner at New Vernon Advisory and a Chief Investment Officer at HDFC Mutual Fund. He has vast experience in capital markets and investment management, having managed money across equity and debt including hedge funds for both local and global investors. Mr. Bhattacharyya serves as an Independent Director of Peerless Funds Management Company Limited, and was previously a Director. He was a Director of UBS Equity research. Mr. Bhattacharyya is an IIM – Ahmedabad graduate.

It is our privilege that as amateur investors we have the opportunity of reading his ideas, understanding his insights and applying that to our portfolio. In this article, I will discuss Sanjoy Bhattacharyya on Value Investing and on spotting multibaggers, based on his writings, various interviews that he has given and on forum discussions in various value investing forums.

1. All Investing is Value Investing

According to Sanjoy, all investing is value investing. We put out money today so that at the end of certain period, we get back more money inflation-adjusted. In other words, value investing is that which increases our purchasing power. (1)

2. There are 3 types of Value Investing

Sanjoy says that value can be derived from three types of sources.

  1. Growth – All traditionally growth investing is not considered value investing, Warren Buffet, considered the guru of value investing derives his value from growth.
  2. Price – Investment guru Seth Klarman is an example of the price theme. He not only wants a good business, he wants a good business at the right price for him.
  3. Graham Style – This style of investing was popularized by Ben Graham, the father of value investing. He used to buy a large number of stocks at very low prices, such that even under adverse circumstances, nothing much would change. Focus was on “Safety First”. (1)

With regards to the Graham style of investing, also known as cigar-butt investing, he explains:
“Actually when I started out, I was greatly influenced by the cigar butt approach. In many ways, I still have a great attachment to that style given its simplicity and intuitive appeal. Further, it is easier to figure out and requires less use of judgment than other forms of investing. I have tried to adapt as I have gone along. But even today the lure of a “cigar butt” remains very strong. So in that sense the most important influence in the way I have been shaped is Graham. I would say this –hackneyed as it may sound — that if you really want to figure out what investing is about and you had to read just one book in your life, the book to read would be The Intelligent Investor by Benjamin Graham.” (4)

3. Value Investing is 85% Psychology

According to Sanjoy Bhattacharyya, value investing is 85% psychology and not really much about economics, accounting and balance sheet analysis. (1)

One must unlearn several popular misconceptions like modern portfolio theory and efficient market hypothesis, which is what we MBA guys are taught in our Investment Valuation courses. In a Value investment forum organized by Motilal Oswal, Sanjoy Bhattacharyya explains:

  • Modern portfolio theory, which says higher the risk, higher the return. Value Investing says just the opposite: lower the risk, higher the margin of safety, higher the return.
  • „Efficient market hypothesis – Though all information is available, it is human beings who process the information. And since human beings are not always rational (e.g.driven by emotions such as greed and fear), stock prices cannot always be rational. (2)

In most of his discussions, his skepticism of “popular financial theories” is quite clear, and he insists that such theories are opposed to common sense as well as to how markets actually works. He explains this in detail and says:
” It is widely known that the foundations of probability theory were built by carefully studying gambling outcomes. Two elements of this framework are of significant importance to investors—statistical distributions and expected values. Statistical distributions describe the probabilities of different outcomes of repeated random events. The most ubiquitous and frequently used distribution is the Gaussian Normal distribution, often the most precise descriptor of a wide variety of social and natural phenomena including voting intentions! Economists commonly assume that daily stock market returns conform to the laws of this distribution. While it is illuminating to know that this assumption is at the heart of some of the most popular financial theories, sadly it does not hold true.” (6)

4. Three important determiners of value

Being a proponent of investing common sense, Sanjoy Bhattacharyya reiterates that the biggest determiner of value are:

  1. what one pays
  2. the time horizon
  3. how much one is willing to lose (1)

He explains: If you pay a great price to buy a great business, rarely do you make money. He advises people to treat stocks as groceries and not channel no 5. (3)

He stresses on the importance on patience. According to MOSL report: “Patience is a great virtue. Sanjoy puts it as “Get it right and sit tight.” Patience leads to fewer trading errors, lower transaction costs and lower taxes, all of which improve the return percentage points. ” (2)

In an essay called “Investors Should Defy Conventional Wisdom” he says:
“Lord Keynes was prescient in pointing out that the market can be wrong for longer than you can stay solvent, recognizing the perils associated with ignoring the mind of the market in favour of fundamental value. This idea strikes at the heart of the second advantage enjoyed by the intelligent, individual investor—patience. Clearly, the individual investor does not run career risk if he under-performs an index for a couple of years in his quest for positive absolute returns. Yet most of us spurn the opportunity of being able to take a detached view of fundamental value. Sensible investing leads to a simple reconciliation between market price and fundamental value: Any asset must be worth the higher of its fundamental value and its market price!” (7)

5. Understanding Risk

Value investing is all about downside protection. And downside protection is possible only when one understands risks and all its connotations. With respect to risk Sanjoy explains why he insists on maximizing risk-adjusted returns while minimizing risk, and attributes this to his initial credit rating analyst training.

He says: “My first principle is actually not to take on large risks. One of the things I have learned and which I really believe in, contrary to most people I know is that risk is best defined as “not knowing what you are doing”. This is Buffett’s definition of risk and far superior to what most of us are taught in business school. If you know what you are doing and you have put in a huge amount of work to be sure that you have got it right, then you can make very serious bets and I think that is what leads to long-term out-performance. It is absolutely vital to put in the necessary spadework before making a serious commitment. While most people follow this precept in the rest of their lives, strangely they seem to think that it is unnecessary while investing.” (4)

Sanjoy Bhattacharyya provides a brilliant framework on how to evaluate risk. (4)

  1. One of the best ways to identify riskiness is to look at the long-term volatility of cash flows.
  2. Second is to check out whether the business generates free cash flow.
  3. The third important element is the integrity of management.
  4. Fourth is the level of competitive intensity in the business.
  5. Fifth is to anticipate what can change in a business.

6. Value Investing is idiosyncratic

Value investing is different for different people. Each person’s return expectations is shaped by his buying price, his holding period and his bet size. For example, some investors may be happy with 15% returns including dividends for long periods while others may not. There is no one-size fits all in value investing. (1)

7. Value investing is about judging the quality of business

Sanjoy Bhattacharyya explains that value investing is ultimately about judging the quality of a business. A quality business is one which generates high levels of returns consistently over long periods of time. This can come from some sort of competitive advantage and based on this he categorizes businesses into three types:

  1. Low cost producers – He gives an example of Balkrishna Industries which is a low cost tyre manufacturer
  2. Product differentiation – Nestle is a good example, because people are willing to pay more for real or perceived differentiation of products offered by Nestle
  3. Proprietary advantage – On account of government licensing, or superior technology. He gives an example of Container Corporation of India, which as a spin-off of railways had preferred access to rail wagons, thereby offering it a superior competitive advantage.

8. Value investing is not about seeing the future. It is about mind-set

According to Sanjoy Bhattacharyya, value investing is not about seeing the future, but rather focusing on the present and analyzing the past in a systematic way. (1)

In order to be a proper value investor, the correct mind-set is more important. However most investors do not follow a sound investment framework based on rationality but rather invest based on emotions. He calls this utility and explains:
“A fair number of investors trade stocks because they enjoy the emotional thrill. Liking something, regardless of mathematical outcomes, is called utility. Considering that the future of the stock market is typically uncertain, most investors make decisions based on expected utility rather than value. Decision theorists attribute a sense of utility to:

  •  current feelings
  • the feelings one expects to have after receiving an outcome
  • the process of making the decision itself,
  • and one’s recall of past similar experiences.

Not surprisingly, investors frequently pursue the decision that they expect will make them feel the best.” (6)

In order that one may overcome such feeling-based investment, he provides a very valuable framework for developing proper mind-set.

  1. Commit to a sound investment philosophy,
  2. Find a robust search strategy,
  3. Value a business objectively,
  4. Have the discipline to say no,
  5. Be patient, and
  6. Be willing to make a significant bet at the point of maximum pessimism. (2)

Conclusion

Sanjoy Bhattacharyya is the mahaguru of investing, and his phenomenal track record is something very few have achieved. His greatest trait is that he continuously reminds us of very basic common-sense investing strategies, which get lost in the noise and chatter of wannabe investors in popular Financial channels. It is our great fortune and privilege that Sanjoy has shared such valuable investing pearls, and we can ignore him only at our own peril. Value is there all around us, and we are grateful to Shri Sanjoy Bhattacharyya, the doyen of value investors and a discerning value miner for very kindly providing us these actionable pearls of wisdom to extract such value.

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References

(1) Investing with Sanjoy Bhattacharya [Apr 8, 2015]
(2) The Value Mindset: Value Investing Forum [Mar 19, 2010]
(3) Value Investing Forum – Mr. Sanjoy Bhattacharyya – (Part – 1) [May 14, 2010]
(4) Interview with Mr. Sanjoy Bhattacharyya
(5) Sanjoy Bhattacharyya
(6) Investors Often Play the Odds to Feel Good [Apr 8, 2014]
(7) Investors Should Defy Conventional Wisdom

A Few Last Words

Before making any investment decision, please contact your financial adviser.

I am not registered with SEBI under SEBI (Research Analysts) Regulations, 2014. I do not offer any opinion concerning securities or public offers. Whatever analysis I provide is through public media only on Mkerj. I am not covered under RA Regulations.

I have provided this article for educational purpose only.

I hope you found this article on Sanjoy Bhattacharyya on Value Investing useful. If you have something to add please leave a comment in the post. Please feel free to contact me.

Subhodeep Mukhopadhyay

I am a Management Consultant in the Education Sector. In my previous corporate career, I have worked in Banking, Private Equity and Software industry. I am an MBA in Finance/ Computer Engineer and enjoy doing equity research and financial analysis in my free time.

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