Tag Archives: accounting

Finding That Elusive 90-Cent Dollar

Photo credit: photosteve101 If I offered to pay you a crisp $1 bill for the 90 cents you have jingling in your pocket… well, you’d probably think I was either crazy or a scamster. Or maybe both. But if, after inspecting the dollar bill, you determined the deal to be legit, you’d jump on it in a heartbeat. In fact, you might even run to the bank and take out your entire life savings in dimes in the hopes that I’d give you a dollar for every 90 cents you could throw together. Why wouldn’t you? It’s free money. I’m not going to give you a dollar for 90 cents… so, sorry if I got your hopes up there. But I will point out several pockets of the market today where these kinds of deals (or better) are on offer. But first, we need a little background. “Book value” or “net asset value (NAV)” is the value of a company’s assets once all debts are settled. Think of it as the liquidation value of the company. Now, for most companies, book value is a pretty meaningless number. If you’re a service or information company like a Microsoft (NASDAQ: MSFT ) or Google (NASDAQ: GOOG ) (NASDAQ: GOOGL ), the value of your business is in intellectual capital and in the collective brainpower of your workforce. And that’s something that is a little hard to put on a balance sheet. Likewise, the accounting book values of old industrial companies with a lot of property, plant and equipment – think General Motors (NYSE: GM ) or Ford (NYSE: F ) – are also pretty useless as the numbers on the books reflect historical costs rather than current market or replacement value. And this is further distorted by accounting depreciation. But while NAV is more or less worthless for most mainstream companies, it’s extremely useful in a few pockets of the market, such as mortgage REITs and closed-end funds. In each of these cases, the book value of the companies is based on the real market value of the securities they own, minus any debt used to finance them. What you see really is what you get. And this is where it gets fun. At current prices, many mortgage REITs are worth more dead than alive. Mortgage REITs have an interesting business model: They borrow a ton of money at cheap, short-term rates and invest it in mortgage securities offering a higher yield. When the spread between short-term rates and long-term rates is wide, mortgage REITs leverage up aggressively and make a ton of money. When the spread narrows, they tend to reduce leverage and bide their time. Mortgage REITs usually trade at healthy premiums to book value, which makes sense. The whole is worth more than the sum of the parts, and you’re paying for management expertise, instant diversification and the REIT’s access to cheap and abundant credit – three things you’re going to have a hard time getting on your own. Well, today, it’s not uncommon to see these trading for just 80%-90% of book value, implying that you could hypothetically buy up the entire company, sell it off for spare parts, and walk away with 10%-20% in capital gains… all while collecting dividends. Closed-end bond funds are another quirky corner of the market where it’s easy to find some nice bargains these days. Closed-end funds are very different from what you’d think of as a “normal” mutual fund. In a regular, open-ended mutual fund, the size of the fund changes as new investors buy shares and old investors leave. Shares are priced every afternoon based on the closing prices of the stocks or bonds in the portfolio. So, you can never have a situation where the price of the fund deviates from its net asset value. Closed-end funds are a different animal. They have IPOs like stocks and have a fixed number of shares that trade on the New York Stock Exchange. And these shares are priced throughout the day, just like any stock. So, you can get quirky situations where a dollar’s worth of quality bonds are selling for $1.05, $0.90 or whatever price the fickle Mr. Market wants to assign that day. And right now, we’re seeing discounts as high as 10%-20% in some funds. Today, as an asset class, closed-end bond funds are trading at the deepest discounts since the pits of the 2008 crisis and aftermath. In an otherwise expensive market, we have the opportunity to profit in three ways: Earning a very solid current yield of anywhere from 6% to 9%. Enjoying capital gains as the values of the bonds in the portfolio appreciate. Enjoying additional capital gains as the current deep discounts to NAV start to shrink to something more reasonable. Given how expensive the broad market is right now, these closed-end funds really present us with a nice alternative. This article first appeared on Sizemore Insights as Finding that Elusive 90-Cent Dollar Disclaimer: This article is for informational purposes only and should not be considered specific investment advice or as a solicitation to buy or sell any securities. Sizemore Capital personnel and clients will often have an interest in the securities mentioned. There is risk in any investment in traded securities, and all Sizemore Capital investment strategies have the possibility of loss. Past performance is no guarantee of future results. Original Post

Active Vs. Passive Investing And The ‘Suckers At The Poker Table’ Fallacy

By Druce Vertes, CFA Image credit: ©iStockphoto.com/animatedfunk Warren Buffett sometimes says things that seem… contradictory. For example, in the “You don’t have to be a genius to be a great investor” category: ” Success in investing doesn’t correlate with IQ once you’re above the level of 25.” “If you are in the investment business and have an IQ of 150, sell 30 points to someone else.” He loves tweaking academic proponents of the efficient market hypothesis (EMH): “I’d be a bum on the street with a tin cup if the markets were always efficient.” ” Naturally the disservice done students and gullible investment professionals who have swallowed EMH has been an extraordinary service to us . . . In any sort of a contest – financial, mental, or physical – it’s an enormous advantage to have opponents who have been taught that it’s useless to even try.” And yet Buffett also says most people should steer clear of active investing: Like those same gullible investment professionals and misguided EMH proponents, he recommends low-cost index funds. “A low-cost index fund is the most sensible equity investment for the great majority of investors.” “My advice to [his own self-selected!] trustee could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard’s.) I believe the trust’s long-term results from this policy will be superior to those attained by most investors – whether pension funds, institutions or individuals – who employ high-fee managers.” How can Buffett say passive investing is best for most people and also an “enormous advantage” for active investors like him? If it helps everyone else, how can it also help him? The opposite view is sometimes described as the ” suckers at the poker table ” hypothesis – the theory that an increase in passive investing is bad for active investors like Buffett because the fewer suckers there are to fleece, the less profit there is for smart active investors. So which view is right? The “suckers at the poker table” theory, or Warren Buffett, who says passive investors make his job easier? And how can Buffett be right while at the same time saying most people should invest passively? Let’s do a simple thought experiment: What would happen if everyone was a passive investor except Warren Buffett? As is often the case, we find that Buffett is way ahead of everyone else. He is both correct and self-serving. Anyone can use an index to match the market on a holding period-return basis, and yet Buffett can still crush everyone else on a money-weighted basis. A brief theoretical digression: The Grossman-Stiglitz paradox holds that you can’t have a perfectly efficient market because that requires someone to be willing to arbitrage away any inefficient price. But arbitrageurs have to get paid. So they will only step in if they’re compensated for their time, data services, research, compliance, office rent, overhead, and an adequate after-tax, risk-adjusted return. So markets tend towards an equilibrium where prices are boundedly efficient, where there is no more mispricing than at the level that would make arbitrage profitable. The set of all investors is the market itself and, in the aggregate in any given period, earns the market return. The subset of index investors, by virtue of owning the market portfolio, also earns the market return. To make the indexers and non-indexers add up to the market, the non-index investors in the aggregate must also earn the market return. 1 In the aggregate, those “arbitrageur” active investors aren’t making any excess profits! Before expenses, they are matching the market, and after expenses they are underperforming. In order to have any profitable active investors, it seems you have to posit overconfident, “dumb” active money that loses money trading against the “smart” arbitrageurs. And that doesn’t make much sense. It implies the persistence of a class of irrational investors. If there’s a tug of war between smart money and dumb money, and a priori the dumb money is as strong as the smart money, and it’s to the smart money’s advantage to trick the dumb money whenever possible, why should that make prices efficient? It sounds like a theory of irrational traders and not very efficient markets. Let’s see if another thought experiment can shed some light: What happens if passive investors take over the market so there is only one active investor left: our hypothetical Warren Buffett? Let’s disregard for the moment changes in the composition of the index. We only have Buffett trading with passive investors. The passive investors just want to enter and exit the whole market. They don’t want to trade individual stocks or a non-market-weighted portfolio. And there are no other active investors to trade with other than Buffett, who makes a bid-ask market for the index, selling when it’s above his estimate of fair value and buying when it’s below fair value. A somewhat trivial example, which should be familiar to those who have done the CFA curriculum on holding period vs. money-weighted returns: Cash Flows Index Fair Value Index Price Premium/ Discount Holding Period Return Cost Averaging Investor 1 Dumb Investor 2 Dumb Investor 3 Warren Buffett Corporate Issuance Year 0 $ 100.00 100.00 0% (1,000) (1,000) (1,000) – 3,000 Year 1 $ 105.00 94.50 -10% -5.5% (1,000) – 945 (1,000) 1,055 Year 2 $ 110.25 121.28 10% 28.3% (1,000) (1,000) (1,000) 1,283 1,717 Final value $ 115.76 115.76 0% -4.5% 3,337 2,112 955 – Holding period return 5.0% 5.0% 5.0% 5.0% Money weighted return (IRR) 5.4% 2.7% -5.0% 28.3% The index fair value grows at 5% per year. It starts priced at fair value in Year 0, in Year 1, it trades at a 10% discount, in Year 2, at a 10% premium, and then finally returns to fair value in Year 3. The holding period return, which ignores flows, is 5%, matching the index. Dollar cost averaging Investor 1 buys $1,000 worth of stock each year and has a money-weighted return of 5.4% as a result of automatically buying more shares when they are cheap and fewer when they are expensive. Dumb Investor 2 panics when the market goes to a 10% discount and doesn’t buy that year and ends up with a 2.7% money-weighted return. Dumb Investor 3 panics even worse, sells when the market goes to a 10% discount, and ends up with a -5.0% money-weighted return. Warren Buffett stays out of the market until it trades at a 10% discount, sells at a 10% premium, and ends up with a 28.3% money-weighted return. Everyone gets the same 5% holding period return, which ignores flows. But on a money-weighted, risk-adjusted basis, of course, the returns are very different, and our Warren Buffett crushes the market. One way of looking at it is Buffett increases the size of the overall pie when the odds are in his favor, shrinks it when they aren’t, and outperforms without necessarily taking anything from the other investors, who earn the market return in each holding period. Another way of looking at it is to consider the whole scenario as one holding period during which Buffett took advantage of people who were selling low and buying high. Effectively, our Warren Buffett sets a floor under the market when events or cash flows make the passive investor inclined to sell excessively cheap and sets a ceiling when the market gets expensive. If you examine any individual year, everyone here is a passive investor in the sense of always holding the index. But if you think of the entire scenario as one holding period, only someone who owns the index and never trades is really a passive investor. Everyone else is buying high or selling low within the period. If you’re planning to invest for an objective other than buying and holding forever, you have to make decisions about when and how much to invest and when and how much to withdraw. On a sufficiently long timeline, the probability of being a completely passive investor goes to zero. Eventually, you have to make an active investment decision, and at that point, the shrewd investors are lying in wait. Everyone eventually has to pay Charon to cross the river Styx. It gets even better for Buffett when you incorporate index changes. An IPO comes out. The IPO is initially not in the index. Our hypothetical Warren Buffett sets the IPO price. He doesn’t have anyone to bid against or anyone to trade with besides the issuers since the stock is not yet in the index. Being an accommodating fellow, he sets the price at fair value minus his margin of safety, illiquidity discount, etc. The IPO eventually gets added to the index. Indexers have to buy the stock. Buffett solely determines the price at which it gets added to the index. In his obliging manner, he sets it at fair value for a liquid index stock plus a reasonable convenience premium. What a sweet deal! Pay a steep discount for any security not in the index and demand a big premium when they go into the index. Similar profits are available when securities exit the index. Going back to the Grossman-Stiglitz paradox, the arbitrageur active traders can do pretty well, even without the existence of a large pool of permanently underperforming “dumb money,” which is unnecessary and illogical. They pull a bit of Star Trek’s Kobayashi Maru scenario by going outside the bounds of picking stocks from within the index. The “suckers at the poker table” paradigm goes astray because there isn’t some exogenous fixed size of the investment pie investors are fighting over. The returns are endogenous: They are in part determined by how smart the investors are, how well the capital in the economy is allocated, and by everything else that impacts economic and market outcomes. The size of the profits pie is not fixed. When investors take a risk funding an early Apple (NASDAQ: AAPL ) or Wynn (NASDAQ: WYNN ), they increase the size of the overall pie, getting a bigger slice without taking a commensurate amount from everyone else. Smart money going into appropriately priced investment opportunities grows the whole pie. Dumb money going to bad businesses shrinks the pie. Once it’s not a strictly zero-sum game, you don’t need “suckers at the poker table” to outperform. Sufficiently smart money creates its own suckers. Bill Ackman, in his most recent Pershing Square letter, asked “Is There an Index Fund Bubble?” He pointed out that if index funds generally side with management, they make the activist’s job harder. But increased herding can be a self-fulfilling prophecy with bubble dynamics, and it increases opportunities outside liquid indexes. There are useful parallels between investing and poker , but investing is not a zero-sum game, dumb money is not the primary driver of returns for most strategies, and the “suckers at the poker table” is not a useful analogy for most long-term investors. 1 This accounting excludes issuers of stock, who are kind of important. Companies are net distributors of cash to their stockholders. They pay dividends and they on net buy back stock , these days. So everyone cannot be a passive investor in the S&P and reinvest dividends. If they tried, something would have to give. Investors would bid up stocks until someone capitulated and started selling, or companies started issuing stock, or something. When it’s not a zero-sum game, reasoning from accounting identities tends to be misleading. Disclaimer: Please note that the content of this site should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute.

Value Investor Interview: Huzaifa Husain

Note: This interview was originally published in the December 2015 issue of our premium newsletter – Value Investing Almanack (VIA) . Mr. Huzaifa Husain is the Head of Indian Equities at PineBridge Investments based in Mumbai. Since he joined the asset management company in 2004, Mr. Husain has been a key member of the team advising the PineBridge India Equity Fund (a Dublin domiciled India offshore fund). Prior to this, he was an Equity Analyst at Principal Mutual Fund and SBI Mutual Fund. Mr. Husain received a Post Graduate Diploma in Management (PGDM) from Indian Institute of Management (IIM) Bangalore and a B.Tech from the Institute of Technology (Banaras Hindu University). In this interview for the Value Investing Almanack , Mr. Husain shared how he found his calling in value investing, and reveals key insights about his investment strategy and the underlying thought process. Safal Niveshak (SN): Could you tell us a little about your background, how you got interested in investing so much to choose it as a career? Huzaifa Husain (HH): In 1997, when I completed my management education at IIM Bangalore, SBI Mutual Fund offered me a role as an equities analyst. Thus, began my career in equity investing. My management education did not prepare me for equity investing. We were taught how to mathematically manipulate numbers, especially daily stock prices, most of which had no conceptual backing. I remember in my first year on the job, I tried every possible trick – charts, CAPM, etc. – in the textbook to figure out how to predict which stock will do well. I failed miserably. One day a friend of mine told me to read the letters of Warren Buffett. That is possibly the best advice I ever got in my life. After that day, my investment philosophy has relied entirely on understanding the company, the people managing it and its prospects. Stock prices do not have any information other than what one can buy or sell the stock at. SN: Do you believe in the concept of circle of competence? If yes, how have you built it over the years? HH: Yes, of course. The success rate of doing an activity which is within the circle is much higher than that which is outside the circle. The circle is not a rigid one, though, and keeps expanding, albeit rather slowly. My first task in the late nineties was to research equity stocks in the pharmaceutical sector. So, I bought a drug index book and catalogued nearly all major diseases and the drugs used to cure them. These drugs were then mapped onto the companies which produced them to understand company fundamentals. Then, when Indian pharmaceutical companies started targeting generic markets in US in early 2000, I studied the Hatch-Waxman Act, various generic court case judgments, etc., to understand the potential opportunity and risks. Thus, I gained expertise into the pharmaceutical sector. Slowly I expanded it to another industry – telecoms – and studied the various technologies such as CDMA (Code-Division Multiple Access), GSM (Global System for Mobile Communications), etc. I also then brushed up my accounting knowledge as it plays an important part in understanding financials. In those days, there was a heavy debate on ESOP (employee stock ownership plan) accounting in the US and so I read and understood the corresponding accounting standards (FAS 123). Slowly and steadily the circumference of the circle expanded to include more industries, different accounting policies and different ways to evaluate management. The only way the circumference of the circle expands is by constantly accumulating experiences – either directly or by learning from others. SN: What are some of the characteristics you look for in high-quality businesses? HH: A high-quality business should require very little capital but generate a lot of capital and it should be able to maintain these favorable economics for a long time. The reasons for a business to achieve these economics are numerous. Most important is the management’s focus on improving its competitive advantage compared to its peers. A pertinent question here would be why are such practices not copied by others? One big reason is the culture of an organization. A culture of success is not as common as one would assume. There may still be cases where the best efforts of the management to succeed may still come to nothing. This can happen when competitors are irrational. This can also happen when the business itself is very complex. It is easy to estimate the costs and risks of making and selling shoes. It is probably not so easy to estimate the costs and risks of constructing a dam. SN: How do you assess a management’s quality, especially given that disclosure levels are not high and standardized in India? HH: Management quality is assessed on two dimensions – ability and integrity. Ability encompasses the way the management deploys the cash it generates. It could invest back into the business to strengthen the competitive positioning of the business, it could buy another company in the same business, it could invest in a new business or it could buy a company in a different business. One should be able to assess the ability of the management by evaluating the management’s actions of deploying cash. Integrity encompasses the way it treats shareholders. A management with high integrity will return excess cash back to shareholders. It generally would not overstate its financial numbers; most probably, it will understate them by reporting its numbers conservatively. In my experience, there is a high correlation between usage of conservative accounting policies and high integrity. I think disclosure levels in India are generally quite high and I have not faced any problem in judging the past history of management decisions. A simple discipline can be observed here – if the management is not willing to be transparent and honest, move on. SN: Well, let’s talk about valuations. How do you think about them, and how do you differentiate between ‘paying up’ for quality versus ‘overpaying’? HH: Good opportunities in investing are rare. A good opportunity is like searching for a needle in a haystack. One can, of course, wait for a day when there is a strong wind which will blow away the hay and make it very easy to find the needle. But then one has to be very patient as such days are few and far between. On the other hand, one typically will find opportunities to buy either a lousy business at cheap valuations or a good business at fair valuations. I would go for the latter. How much should one pay for a good business? Of course, I do not believe in overpaying because I can always put my money in a fixed deposit without risk. So, one should carefully evaluate various scenarios in which the investment can make money. I can try and put in some numbers for the future, find out cash flows, discount them with the next best alternative rate you can get and finally add a buffer to the price. It is quite educational if one does this simple exercise which some call reverse discounted cash flow (DCF). One important factor in doing this calculation is to make the right assumption of how much capital is required in the business. Generally, a good business which can generate high returns will not require a large amount of capital. Hence, such a business will have to pay the cash out, which means in applying a DCF model, the benefit of compounding will be absent and that would make a huge difference to the value. SN: How do you determine when to exit from a position? Are there some specific rules for selling you have? HH: One would exit for basically two reasons. First, if the original hypothesis itself turns out to be incorrect. One example is when we bought a company which was a market leader in the domestic industry and was generating a lot of cash flows. The industry was growing very fast and so was the company. It was available at reasonable valuations. Then one day, the management decided to take the cash on the books plus take on debt and buy a company internationally which had poor economics. The management thought it could take such a company and make it competitive. Unfortunately, it paid a price which presupposed that it would succeed in doing so. Hence, there was no upside left even if they succeeded. And the existing domestic business cash flows were now being used for this purpose instead of investing in the domestic business which needed enormous capital to grow. Since, this was a ‘game changing’ event, we decided to sell it. Second, something better can be done with the sale proceeds. This is tricky. It requires two decisions – selling an expensive name and buying a cheap name. We do it rarely as we do not think there are so many good companies out there that one can keep churning without lowering the quality of the portfolio. If we do it, we ensure that the valuation differential between the stock being sold and the stock being bought is quite significant. SN: Do you believe in investment checklists? If yes, what are the most important points in your checklist? HH: I do have a checklist. Broadly, there are three main items on my checklist – quality of business, quality of management, and price of the stock. An important aspect of this checklist is that it is applied sequentially. The reason is because a good manager may struggle to generate good profits out of a bad business. Paying a low price for a lousy business may also not turn out great. Hence, only when a business is deemed to have strong economics and quality management, is the price evaluated for attractiveness. SN: Apart from the qualitative factors, what are few of the numbers/ratios you look for while assessing the business quality? HH: A reasonable idea of how much capital is required to run the business is critical. The nature of capital employed – fixed versus working – makes a huge difference to the way the business is run. The returns generated on the capital employed irrespective of the leverage employed will demonstrate the quality of the business. Aggregating 10-20 years of financials gives one a good idea of how the money has been utilized. Cash flow efficiency (cash flow divided by profit) demonstrates the conservative nature of management in reporting their numbers. SN: When you look back at your investment mistakes, were there any common elements of themes? HH: Among the three things I look for in an investment – business, management and price – most mistakes happen in evaluating management. This happens especially if the management does not have a public history which can be evaluated. The typical management behavior which hurts investors is their overconfidence. Business managers rarely will admit that they cannot deploy the cash which the business is generating. They will find some or other use for cash and eventually deploy it in a poor business. Hence, it is best to use a higher threshold for management quality in case the business has historically retained most of the cash it generates. Also, public history of management is a very good guide. Don’t expect the management’s behavior will change because you bought the stock. It almost never will. SN: What tricks do you use to save yourself from behavioural biases? What are the most common behavioural mistakes you make? HH: Most mistakes in investment stem from lack of knowledge. When one is walking in the dark, other senses become heightened. Similarly, when one is operating in the field of investments and one does not know what one is doing, the basic human survival instincts (being with the crowd – herd mentality, avoiding danger – loss aversion, etc.) kick in. These instincts sometimes may mislead one in stock markets which is a massive melting pot of human emotions. Many advocate changing behavioural responses. I think if you try to do that you are up against thousands of years of evolutionary survival strategies. Instead, focusing energies on accumulating knowledge is a more reasonable task. SN: That’s a wonderful insight, so thanks! Any specific behavioural biases that have hurt you the most in your investment career? HH: Nothing specific. Over time, a better understanding of how incentives drive human behavior has helped me decipher the happenings around me. SN: How can an investor improve the quality of his/her decision making? HH: If the investor’s knowledge of the company is among the top 0.001% of people who have some kind of understanding of the company he/she is investing, the chances are that the decisions would be good. Hence, read everything you can lay your hands on relating to the company and its business. We actually do that when we buy a consumer durable or an automobile. I remember even though my father was no engineer, he used to ask people on two wheelers at a traffic signal what the mileage was before buying one. It is absolutely astonishing how much information one can glean if one puts in a slight amount of effort. The next aspect is that the investor should realize markets are not always rational. I feel this is easier said than believed. Investors while buying believe that the price is mispriced but once they have bought they forget that it can remain mispriced for a long time. Many would want the mispricing to be corrected as soon as they complete their purchase. Many would also pat themselves on the back if it does happen. But short-term movements of a market are near random. Hence, be prepared for the worst. For example, the investor should be prepared for a huge drop in the stock price post his purchase. It may or may not happen but if it does, he should be mentally prepared to act rationally. SN: How do you avoid the noise and the overload of information that is available these days? HH: If you carefully analyze the information overload, most of it is very short-term focused. Hence, if the time horizon of the investment is long, one needs to employ a filter which can eliminate short-term noise. After all, a company publishes only one annual report and declares four quarterly results every year. That is not much. SN: How do you think about risk? How do you employ that in your investing? HH: As an equity holder, one would lose all one’s money if the company goes bankrupt. Hence, avoid companies which have large debt loads. Avoid investing in a poor business. It is bad to lose money investing in a poor company. But it is worse to make money investing in them. The reason is, once you make money playing with fire, the chances are you will be attracted to it more often, and sooner rather than later, it will burn. Hence, avoid investing in such companies irrespective of the valuations. Remember no matter how well you think you can guess the future, it will not be as you predict. Hence, be prepared. SN: What’s your two-minute advice to someone wanting to get into stock market investing? What are the pitfalls he/she must be aware of? HH: Making money by equity investing is very difficult. Treat the stock market as a bazaar. Go with a list of things to buy. Make the list at home just as one would make a grocery list based on your nutritional needs. Don’t make decisions by watching the changes in the prices of stocks just as one would not decide to buy lemons because their prices are going up. Spend a lot of time deciding what to put on that list. One way to do it is to inculcate a phenomenal amount of curiosity in researching companies. SN: Which unconventional books/resources do you recommend to a budding investor for learning value investing and multidisciplinary thinking? HH: It is dangerous to read books especially on investing without reading about business history. It may cloud one’s view. Hence, I would recommend all budding investors read annual reports of companies for as far back as they can find. Read them across various companies over various time frames. They should be able to understand how companies have behaved over business cycles, how their valuations have changed, why did they succeed, why did they fail, etc. Once a vast amount of business history is read and understood, all one needs to read are the letters of Buffett and Poor Charlie’s Almanack to build a framework. Beyond that, remember what our vedas say on multidisciplinary thinking – आ नो भद्राः क्रतवो यन्तु विश्वतः (Let noble thoughts come to us from all sides). SN: What a wonderful thought that was! Any non-investment book suggestions you have that can help someone in his overall thinking process? HH: I find books written by Malcolm Gladwell quite interesting. Living Within Limits by Garrett Hardin has many interesting concepts on growth. The Corporation that Changed the World : How the East India Company Shaped the Modern Multinational by Nick Robins literally chronicles the birth of capitalism. Reading judgments from the Supreme Court of India helps one understand how our Constitution works. An example would be the Kesavananda Bharati case which I believe should be a must read for every citizen of India. Reading various government ministries’ annual reports, regulatory reports (RBI as an example), global central banker speeches, global anti-trust filings – all these help one understand how different aspects interact. Finally, a study of human history is quite important. I would recommend Glimpses of World History by Jawaharlal Nehru. SN: Which investor/investment thinker(s) so you hold in high esteem? HH: Warren Buffett. Many have generated good returns in investing, but he has done it over larger and larger sums of money. He has never paid a dividend since 1967. That is what makes him a genius. SN: Hypothetical question: Let’s say that you knew you were going to lose all your memory the next morning. Briefly, what would you write in a letter to yourself, so that you could begin relearning everything starting the next day? HH: Personal life: Everything Professional life: Nothing SN: What other things do you do apart from investing? HH: Spend time with my family. SN: Thank you Huzaifa for sharing your insights with Safal Niveshak readers! HH: The pleasure was mine, Vishal.