The inaugural event was a scintillating presentation by Prof Sanjay Bakshi, an expert in value investing
On 23rd January, Moneylife Smart Savers’ Network (MSSN) launched its initiative, Moneylife Investor Club, at the majestic International Convention Hall of the Bombay Stock Exchange (BSE) with a superb presentation by Prof Sanjay Bakshi, a well-known blogger and a professor of behavioural finance and value investing. The programme was sponsored by the Bombay Stock Exchange and Kotak Securities.
The event started with Sucheta Dalal, director of MSSN, welcoming the guests and highlighting the objective of the Club, which is to encourage long-term investment in stocks. She then requested the guest of honour, Ashish Chauhan, MD & CEO of the BSE, to share his thoughts. In his speech, Mr Chauhan highlighted BSE’s commitment to and active role in catalysing retail investments into equities and promised to support the initiatives of the Investor Club. This was followed by a brief introduction of Prof Bakshi by Debashis Basu, director of MSSN. Mr Basu highlighted the personal and professional struggles of Prof Bakshi for a few years, after he came back from London in 1994. All he had was Rs3 lakh in savings, lots of wisdom, and a degree from the London School of Economics, after having qualified as a chartered accountant in India.
Prof Bakshi gave a scintillating talk, based on his personal experience of investing over 21 years during which he learned what not to do as a result of personal as well as vicarious experiences. Through video clips, images, charts, innumerable stories and loads of humour, his key message was that we should always try to avoid risk-seeking behaviour.
He exemplified the first through a shooting scene from Expendables 2 that involved throwing a live grenade in water, to create an explosion. Stuntman Kun Liu, only 26 years old, died in the explosion. If you keep indulging in such risk-seeking behaviour, you will end up like these people ultimately, he said.
But why do people indulge in such behaviour? His answers covered insights into human psychology, such as overconfidence, anchoring effect, incentives, commitment bias, social proof (‘others are doing it and getting away with it’) and deprival super reaction (‘I don’t want to miss this chance’) combined with the rules of probability.
Prof Bakshi said, “While investing, we can avoid unnecessary risks by avoiding leverage, seeking protection from nature and being wary of false pitches and promotions.” He explained how leverage causes financial and psychological stress. He learnt this from his personal experience. Long-term buying and holding of quality businesses, bought at reasonable prices, is something that works. He explained his personal experiences with derivatives humorously calling them ‘weapons of mental destruction’. The drastic consequences of leverage can be gauged from the fact that Long Term Capital Management (LTCG), a hedge fund, whose board members included Nobel Laureates Myron Scholes and Robert Merton, failed. The failure was the result of combining complexity, leverage (levered 99 to 1!) and stupidity, according to the professor.
From an investor perspective, the closer you go to pure commodities, like ores, minerals and metals, the more you are playing with fire, said Prof Bakshi. The whole game becomes extremely unpredictable because there are too many variables. Cautioning against putting complex, but ultimately optimistic assumptions, in Excel sheets, as analysts often do, he remarked: “The most popular software for writing fiction is not Microsoft Word but Microsoft Excel.” Finally, he explained how astute salesmen of financial products use a combination of psychological tricks to push financial products because they are paid huge incentives to do so.
The session ended with Prof Bakshi answering questions from diverse areas of investing such as diversification vs concentration, number of stocks in portfolio, investment mistakes, prospects for the airlines sector, etc.