A prolific writer, Vishal Khandelwal spends 75 percent of his waking time in reading and learning.
In his book ‘Poor Charlie’s Almanack’ legendary investor and author Charlie Munger writes ‘spend each day trying to be a little wiser than you were when you woke up. Day by day, and at the end of the day- if you live long enough- like most people, you will get out of life what you deserve.’
Independent investor and investing coach Vishal Khandelwal lives by these words. An analyst who quit his job at the age of 34 to focus on teaching the Aam Aadmi the art and science of investing. Safal Niveshak, Hindi for successful investor, has been his platform where he gives online training on investing. A prolific writer, Vishal spends 75 percent of his waking time in reading and learning.
Vishal does not like to speak about his stock picks and the returns his investment has generated. The fact that he has been able to come out of a job by taking care of all his liabilities gives an insight that he has done well for himself.
Vishal is known more as a teacher of investing rather than an investor. But one fact that he is proud of and one that few other investors in the world have is that Vishal has a signed copy of ‘Poor Charlie’s Almanack’ with his name written on it by Charlie himself.
In an interview with Shishir Asthana of Moneycontrol Vishal talks of his own investment philosophy and talks in detail of how a layman with basic knowledge of investing can identify investment bets.
Q: Vishal, can you take us through your journey of starting your venture Safal Niveshak?
A: Sure, it started with my first job as an analyst with an independent equity research firm after I completed my MBA in Finance from Mumbai University. I actually was keen on a job in the forex market, but then in 2003, there were not too many jobs in the finance sector itself. It is serendipity that I got into equity research than me choosing the job.
It was also serendipity that my job as an analyst was with an independent research firm where we focused on quality research. At times intentions of analysts working with brokers are not aligned with the person taking the research. In that sense, I was blessed to be working with an independent research firm where honest research was encouraged.
While on the job I was introduced to the works of Warren Buffett and Charlie Munger through their books and letters to the shareholders.
Then 2008 happened and I saw many people, friends, and some relatives lose a lot of money. That got me thinking about the need for investment education. Finally, in 2011, I decided to start my venture, Safal Niveshak, with an idea to get on the ground and teach people value investing.
The period 2003-08 saw the best bull-run for Indian markets. If you were an analyst during this period and the only thing that you have seen is a bull market then you would think that you were the master of the universe. Whatever you were recommending it would turn out to gold.
But the market doesn’t work that way. 2008 brought the revelation that it is not such an easy game and markets do not move in a straight line. There are cycles, people need to understand that and people need to understand the risk involved in investing.
This is what got me down to the business of teaching people, who like me were unaware of the risk involved at the start. Why it is not to lose your hard earned money and how to make money in the markets.
That’s the reason why on Safal Niveshak I focus more on the process rather than on recommending stocks. From the start, I was clear what I did not want to do, which is get in the business of recommending stocks.
Q: In 2011 was there a market for investment education?
A: Not really, but then I loved writing, communicating and teaching and found educating a much nobler cause than writing research reports. When I started I do not think there was anyone else and I had to create the market. Though there were some bloggers who were writing on value investing, they were not really active.
I started off by taking workshops and online courses. Things have evolved since then and now I have around 45,000-46,000 regular readers with roughly 10-15 percent of readers being citizens of other countries, who are not NRIs. I recently did my first international workshop in San Francisco and New Jersey, which was well appreciated.
What I teach is value investing which itself is a concept that has come from the west thanks to Ben Graham and Warren Buffett. The content is generic in nature and has global value, I have tried to present it in a way which I believe appeals to the public.
Q: Why focus on value investing when growth is the theme in a country like India?
A: I think there is a misnomer that there is a difference between growth and value investing. Buffett had made it amply clear that they are not different. You find value only in something that is going to grow. In today’s world we have economies like India, where the underlying idea is growing and where the biggest concern is corporate governance, you need to find companies which are growing which have good management only in there you can find value.
You cannot really be expecting to find extremely cheap stock and call it value. Extremely cheap does not mean value. High-quality businesses managed by high-quality people, when you find them at the right or reasonable valuation you go and buy them.
So I don’t think there is a difference between growth and value investing, I think what is worth buying has to have growth embedded in it.
Q: You mentioned corporate governance is the biggest concern in India, how does one rate a management based only on numbers.
A: I think the idea here is to apply the principle of inversion which Charlie Munger talks about when he says all I need to know where I’m going to die so I’ll never go there.
Applied to our context it means we need to avoid companies with bad management. In India where you have a hotbed of corruption across corporate world, it is important to identify companies where you will not invest, where the corporate governance is bad. So when you remove these companies you are left with companies that will be your universe to dig deep.
So wherever you find managers who have a history of cheating shareholders, managers who have a history of capital misallocation, managers who have mindlessly acquired businesses, managers who have leveraged their balance sheet and managers are overpaying themselves, these are companies which should not be in your list.
People I feel do not change. Bull markets may make you feel that managers have changed into a new leaf and this is a turnaround guy whom we should bet on, but in my experience, I have seen people do not change when it comes to running businesses. If there is even the smallest element of doubt on the management I simply say no the idea. Saying no is often a secret to good investing in markets.
Thomas Phelps in his book ‘100 to 1 in the Stock Market’ says ‘Remember that a man who will steal for you, will steal from you.’ This makes a lot of sense in investing.
Q: So many filters for corporate governance would leave only a handful of the company to invest in...
A: That’s fine, that makes the task even easier. I have been running checklists for many years with filters like Return on Capital (ROC), sales growth, profit growth, debt to equity among other filters that I apply for screening stocks, almost always I get down to the same 60-70 companies.
Now comes the case of valuation. So in order to get wealthy by investing you do not need more than one good idea in a year. I think people fall into a problem when they are looking for more than two ideas or five ideas in a year. If you can search and work hard on getting one idea in a year and if over a period of ten years you develop a portfolio of 10-12 stocks, I think that is all that you need. You don’t need to run after 100-200 companies and build a portfoli0o of 30-40 stocks.
You need to just get those 10-12 stocks which have been studied well, you need to know most things about the business and you get them at reasonable valuations.
In my case, I buy companies and do not sell them at all. It’s not saying that I will not accept my mistakes, obviously, I have made mistakes in the past. But till the time I do not see any red flag in the business, I will not sell them at all. Even if the stock has moved up by 100 percent and everyone is selling, I will not sell. If the company is good, if the quality of the business is good and if the management is good I will just hold on to it.
Even if the external environment is changing I will not sell. I did an interview with Prof. Sanjay Bakshi a few years where he discussed the DCF frame of mind just like we do DCF (discounted cash flow) valuations on stocks.
If there are external environment or macro factors which you think are going to hurt the stock market or even the company, then you need to answer the question will this short-term change in the environment going to change the long-term cash flow of the company, if the answer is no there is no point in taking any action. Of course, if you think that the fundamentals of the industry or the company are going to change then you sell the stock.
But short-term events should not necessitate any action. That’s the only advantage that an investor has.
There is three kind of advantages a good investor has. One is information advantage, second is analytical and third is behaviour. Information is no longer an advantage because everyone has the same level of information. Analytical advantage does not exist for most people because there are smart computers who make the decision these days. The only advantage that is left is behavioral. How well you behave in the stock market, what is the investment horizon, I think this is the most important edge than an investor can have or build.
Q: You had worked as an analyst who then moved fulltime to investing and teaching, but most people take up investing as a part-time exercise, how should they go about identifying investment-worthy companies?
A: Whenever I am asked for advice on what should he or she does to invest, my reply is that of course, they should try to benefit from the power of compounding. It is not necessary that you should directly jump into equities, for the first few years trying to identify good mutual funds to invest. But over a period of time, it is important to understand how businesses work, what is a good business what are the bad businesses. You can do this just by observing people around you, what products people are buying, what are the products they are talking about.
After doing this kind of basic analysis, then if you really want to pick stocks you need to understand something of accounting as well.
Doing some basic analysis on sales and profit growth and things like that. Here I think Pareto principle of 80-20 applies as well. The first 20 percent of the time that you spend researching the company will give you 80 percent of the information. So asking those very important question rather than analyzing a company endlessly does not make sense.
Asking questions like is the company growing its sales and profits, is there a long runway for growth over the next 10 years, is the balance sheet clean, how are the management’s capital allocation in terms of return on capital, return on incremental capital good in the past.
Nobody can say what is going to happen in the future in terms of businesses. Industries are fragile these days, there is a lot of disruptions. So all you need to do is take cues from the past, how the company has done over the past 7-10 years and then you need to take a broader view what the industry might look like ten years down the line.
In that case, you need to avoid businesses that are changing a lot, which is prone to a lot of changes, which are technologically and research intensive. Look at simple businesses, look at their broader financial numbers.
As far as valuations are concerned, when I was an analyst we used to build huge financial models. But what I have understood over time is that all valuations are wrong and the second thing is that all valuations are biased. You arrive at valuations at the fag end of your research cycle. By this time you have already fallen in love with the idea and so your valuations are going to be biased and wrong.
My evolution as an investor as far as valuation is concerned is that I have moved towards extremely simple valuation methodology. For me, it is doing back of the envelope calculation rather than elaborate excel models. For me, something has to be obviously cheap.
In broader valuations, DCF has its pros and cons. I have used DCF for companies that have generated positive and growing cash flows in the past. Doing DCF is one way of doing it.
Another way is doing the price to earnings (PE) multiple 10 years forward, it is called the expected return model which I learned from Prof. Bakshi. Here rather than trying out what PE you are going to buy the stock you find at what PE you are going to sell the stock.
Assuming that you are looking at a company that has been growing at say 20 percent for the last 10 years, now of course because of a bigger base rate the company will be growing at a slower pace. If it is a high-quality business that you understand very well you take a maximum 15 percent growth in earning per share (EPS) for the next 10 years.
In the 10th year, you apply a multiple (PE) of a maximum of 20 times which you generally give to the best company. So what we have is the 10th year EPS which is a result of 15% CAGR multiply it by 20 times exit multiple, whatever is the valuation you discount it to the present time and if the return is adequate you go ahead and buy the stock, if the return is inadequate you go wait till it comes to your level.
Q: In terms of your stock picking, what is the process you go through?
A: I am not a macro guy, I do more of a bottom-up picking. I run through more or less the same process that we spoke of earlier, I run through screens of good companies when the debt has been lower, nil debt, good return on capital, decent growth in sales and profits. Then I run a google on the management to check their track record, how long they have been running the same company, the salaries they are drawing, capital allocation track record. I then run a back of the envelope kind of valuation and then identify businesses that are worth buying and I will not be selling.
Q: As far as your investment is concerned, after you have identified a stock do you invest all in one go or do you stagger it over a period of time.
A: There have been some evolutions that have happened here and there have been some mistakes where I have not put in money where I am not highly convinced about.
I generally keep around 15 stocks in my portfolio, maximum of 20 stocks. I do an equal allocation when I am starting but it need not be at one go. I generally I allocate around 6-7 percent in a stock but start by buying around 2 percent. But I trim it when a stock accounts for around 20-25 percent of the portfolio that is one time when I sell a stock and bring it back to around 15 percent.
Q: Theoretically speaking, if markets touch valuations that were seen in 2007-08 will you still not be tempted to sell.
A: Who knows when another 2008 will happen next, we know 2008 valuations in hindsight.
I did a research last year where I picked about 5 high-quality company in terms of businesses and not valuations at the peak of 2008. If you were holding these companies in January 2008 and till last year (mid-2017) the minimum CAGR return was 12 percent and the best was around 25-30 percent. Which means irrespective of market timing you were able to hold on to good quality companies it gave a decent return.
On the other hand, I did another study, where from the bottom of March 2009, if one were holding five of the worst businesses with a horrible balance sheet which in March 2009 were available at ridiculous prices, these companies lost another 95 percent till mid of 2017.
Holding to high-quality business is more important than predicting the next fall or next crash. Nobody can predict that. When the next 2008 type of scenario comes we will be sailing in the same boat.
Q: You had mentioned earlier when you started your business you had learned what not to do to lose money, can you elaborate on that.
A: I think the first thing is to never borrow and invest. Work hard earn more and invest more. Because when the market falls you not only lose the money you also lose your reputation.
Second, do not take the stock market for a casino. Do not trade in and out of a stock. There is a big difference between a casino and the stock market. In the casino the longer you play the more you lose, in the stock market the longer you hold the more chances of you gaining.
Do not take stock markets as a way to get rich, treat stock markets as a way to keep you rich.
Don’t ever think that you have learned it all, the best investors have never learned it all. If I were to draw an island of knowledge in the sea of ignorance the bigger the island, the bigger is the shoreline of ignorance. Never stop learning.
Learn to copy paste well. It is good to copy and learn from good investors but then you have to follow them fully. Do not paste if you cannot copy well.
And finally do not look at stock prices daily. Treat your stocks as businesses.
Q: What are the plans going forward?
We are concentrating on education, we have recently started education for kids. We have done batches for 8-14-year-old kids and are now planning workshops for 14-20-year-old kids where we introduce them to investing, stock markets, compounding and those kinds of things.
Ultimately, I want to be known as a teacher rather than an investor. Going forward, when I am 80 years old I want to be known as a teacher of investing in good decision making.
Q: A side question how did you get an autographed copy of Charlie Munger’s book?A: I wrote an article on Charlie Munger, that was read by Peter Bevelin who happened to have written a lot on Charlie Munger and Warren Buffett. He sends my article (that is what Peter told me) to Charlie Munger who liked it and autographed a book – ‘Poor Charlie’s Almanack’ with my name on it and he send it to me. These are motivators that tell you are on the right track. With these acknowledgements who wants to recommend stocks.