We Study Billionaires - The Investor’s Podcast Network - TIP237: Legendary Value Investor Sanjay Bakshi (Business Podcast)

Starting point is 00:00:00 You're listening to TIP. Hey everyone, welcome to today's show. We're truly honored to have an international value investing legend on the show, Professor Sanjay Bakshi. In India, Professor Bakshi is one of the most famous investors in the country, and not just because he's a famous professor that teaches behavioral finance and business valuation, but also because he has an incredible track record as a practitioner and founder of ValueQuest Capital. So without further delay, we're thrilled to bring you the,

Starting point is 00:00:30 extremely thoughtful Sanjay Bakshi. You are listening to The Investors Podcast, where we study the financial markets and read the books that influence self-made billionaires the most. We keep you informed and prepared for the unexpected. Hey, everyone, welcome to The Investors Podcast. I'm your host, Preston Pish, and as always I'm accompanied by my co-host, Stig Broderson. And like we said in the introduction, we're here with the legendary value investor Sanjay Bakshi, so Sanjay, it's an honor to have you here. Thank you for having me. It's a pleasure to be here speaking to you today. All right, Stig, take it away. Let's just jump right into the first question.

Starting point is 00:01:19 As a student at London School Economics, you read an article about Warren Buffett. It was completely contrary to what you have been taught about efficient markets. Today, it might seem surendipitous that you found value investing, but where would you have been both in your investing career and personal life, if you have applied fully what you were taught at London School of Economics? Well, you're right about the LAC story. You know, when I was at the LAC, I was studying the standard academic finance courses. I was being taught about the efficient market hypothesis.

Starting point is 00:01:51 I was learning the capital asset pricing model and the modern portfolio theory, which essentially revolved around a few key ideas, and one of them was that humans are rational and it doesn't make any sense trying to do any sort of analysis, whether it is fundamental analysis or technical analysis or what have you. There's no point trying to find any sort of market inefficiency because there isn't any. And you should just go out and buy the market portfolio. So while I was studying all these ideas, which are very fascinating, no doubt about that at the time, I accidentally came across an article about this obscure guy. Nobody knew about Warren Buffett except in the value investing circles. Today, almost everybody in the finance circles,

Starting point is 00:02:31 about Warren Buffett. Anyway, I discovered Buffett by reading that article and that article said a few things which were very interesting and, you know, sort of contrary to what I was being taught. Basically, it said that here is a guy who was a wonderful track record. And, you know, I was being taught about all these concepts by professors who were not really rich guys. So I was very intrigued because he was a rich guy who made all his money in the stock markets and he was saying something so different from what I was being taught at the LSC. So I was very, very intrigued by that. The article also said that he has a wonderful track record and he operates out of Omaha, which is in Midwest and it is far removed from Wall Street.

Starting point is 00:03:09 And Mr. Buffett tries to keep very far away from Wall Street. And thirdly, that he is very articulate about how he thinks about the world of business and investing and he writes wonderful letters. And those letters, by the way, are available for free to anybody who writes to Bakshah Hathaway. So I did write to the company and I got those letters. Of course, I had to pay the postage money to get those letters in London. By the way, I think they were the best investment I ever made. It was a monumental discovery for me.

Starting point is 00:03:35 It changed my life. And I did discover this accidentally. And it's sort of hard to visualize a world to coming back to the question that you're asking me as to what my personal life would have been and what my professional life would have been if I had never discovered Buffett or value investing. It's very hard to visualize an alternate scenario where I would never have discovered Buffett. But I do know that if that had happened, then I wouldn't be a full-time investor. I think part of the fun of being a value investor is the sheer thrill of finding and exploiting and inefficiency in stock markets. But when you start believing that there is no inefficiency, which is what the academic

Starting point is 00:04:11 finance papers tell you, then there is no fun left either in my view. Come to think of it, people who believe that markets are efficient and have behaved in accordance with that belief haven't done so bad. They've gone out and made very long-term investments in index funds and index funds tend to beat most active managers, but there is no fun in just buying the index is there. I mean, to be sure, part of the reason why people practice value investing is that they believe that they can spot and exploit inefficiencies and earn high returns than the market with lower risk. But part of the reason, and I think it's a very big part, is the sheer thrill,

Starting point is 00:04:43 the fun of finding bargains before others and then having the pleasure of the market eventually agreeing with you. So, Sanjay, I'm curious, what investment truth do you hold today that very few people agree with you on. Value investing is hard if you think about it as compared to other professions like law or medicine or even trying to be a good sports person. Big part of the reason for that is the feedback is sort of delayed. That makes it very hard to separate skill from luck. So if you're practicing to be a good shooter, for example, then every shot that you take has an immediate feedback. You learn from your mistakes quickly. In value investing, the results of investment operations take a long time, often several years. It's a problem.

Starting point is 00:05:25 a willistic game. I mean, you may have played very well and yet may end up with mediocre outcomes because you encountered some bad luck. Does that make you a bad investor? Of course not. The best investors in the world who have created billions of dollars of wealth by exploiting market inefficiencies also tend to underperform the market, sometimes for prolonged periods of time, and we all know this. At the same time, some lucky gamblers who indulge in reckless gambling operations sometimes hit the jackpot, and they tend to get labelled as geniuses based on outcomes and not process. So this is the world which is clearly inhabited by people who tend to focus on outcomes instead of the underlying processes. But we all know that process is far more important than outcomes. For me,

Starting point is 00:06:05 that's the important truth that very few people agree with me on. I say that in the sense of watch what they do and not what they say. I mean, almost everybody agrees with the idea that process is more important than outcomes, but far few people behave in accordance with that belief. Today we see multiple disruptive technologies like artificial intelligence, internet, mobile, cloud, just to mention a few. We see so much disruption in the way we live alive, the way we work, and the way we conduct business. How do you factor the disruption into your investment strategy?

Starting point is 00:06:41 Clearly, the disruption risk is very real and the pace of change is only accelerating over time. You know, many value investors underestimate the impact of disruption on investment. returns. And I mean, as I'm speaking to you as a professor, I come across a lot of young value investors and my job is to guide them as to how to think about concepts like disruption. Now, one reason why potential future disruption, if it is properly discounted by the market, almost always results in p-multipers. You know, that's a big reason why people tend to underestimate the impact of disruption because naive value investors, they tend to get very attracted by low p-multacles. The earnings are high and you're comparing those high earnings,

Starting point is 00:07:20 past earnings with the current valuation and the market has already figured out that this business is prone for disruption and brought down the value of that company. And because the current earnings are high or the past earnings were high, the current drop in stock price almost always creates a low pay multiple. Big mistake that a lot of investors make because they don't think hard enough about how earnings will evaporate because of disruption. And I think the second mistake that people make is that they underestimate the time over which the earnings of an existing business could be decimated by disruption. They forget that the pace of change is accelerating. This error is costly because it results in overvaluation in the models used by investors. The way I deal with

Starting point is 00:07:59 the risk of disruption coming to your question is basically to avoid it. I mean, try to, you know, avoid situations where are invested in businesses that are prone to disruption. And clearly, there are some industries where disruption risk is higher than other industry. Avoiding trouble is the key here. And Charlie Munger has a wonderful quote and it goes along. the following lines and he said that all I want to know is where I'm going to die so I never go there. I think that's pretty fundamental, isn't it? I love that quote. I don't know how anyone can't love Charlie Munger.

Starting point is 00:08:30 Let's take a quick break and hear from today's sponsors. All right. I want you guys to imagine spending three days in Oslo at the height of the summer. You've got long days of daylight, incredible food, floating saunas on the Oslo Fjord, and every conversation you have is with people who are actually shaping the future. That's what the Oslo Freedom Forum is. From June 1st through the 3rd, 2026, the Oslo Freedom Forum is entering its 18th year bringing together activists, technologists, journalists, investors, and builders from all over the world, many of them operating on the front lines of history. This is where you hear firsthand stories from people using Bitcoin to survive currency collapse, using AI to expose human rights abuses, and building technology under censorship and authoritarian pressures. These aren't abstract ideas. These are tools real people are using right now. You'll be in the room with about 2,000 extraordinary individuals, dissidents, founders, philanthropists, policymakers, the kind of people you don't just listen to but end up having dinner with. Over three days, you'll experience powerful mainstage talks, hands-on workshops on freedom tech, and financial sovereignty, immersive art installations, and conversations that continue long after the sessions end. And it's all happening.

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Starting point is 00:12:46 investing with companies that have moats. And for people that don't understand what we mean when we say moats, it's simply a metaphor for describing a company that has a strong competitive advantage in business. And I've read some of the ideas that you've written out there about moats and competitive advantage. And it's interesting because you're looking for a company that might not have the strongest moat today, but the moat is trending in a direction where it will be the strongest moat in the future. So could you talk to our audience a little bit about this idea? When you think about modes or the idea of a competitive advantage, it has to show up in numbers. If not now, then eventually, right?

Starting point is 00:13:23 And what are those usual suspects? You know, you think about the numbers and people who are very quant oriented. They try to think about ways in which you could measure, you know, quantify it. Then what are the usual suspects? You mentioned one of them, which is a high return or invested capital. Growth is a very important component. You don't want to look at a business that is going to be able to continue to invest incremental capital at high rates of return. if a business could do that without recourse to outside capital markets, you know, no dilution, no need for borrowing money, preferably large, positive free cash flow, which is sufficient to fund all growth.

Starting point is 00:13:56 So there is no need to depend on outside capital markets or what Buffett calls as the kindness of strangers. All of those are very good quantitative markers of quality, of moat, more characteristics. The way the world has moved in the last, you know, several years, you know, people have moved away from deep value investing in cigar butts into high-quality businesses. These markers that I mentioned, they are easily measurable and these are like low hanging fruit and you could easily pull them out from any good database. So everybody loves a high return on capital businesses with low leverage and high growth prospects and no need for access to outside capital markets. The problem is that when you're operating in a competitive environment, these assets tend to

Starting point is 00:14:37 get priced too high. So there isn't any edge left over there. So the future returns of owning those businesses are not going to be as exciting as per would be in a situation where you were to identify a business which is going to turn into a high return on capital business isn't one right now. And you see a path which will lead that business to become a higher return on capital business before your competitors. Clearly, there is an edge over there. There's a potential edge for investors over there. So what are the primary reasons for a low return business becoming a high return one? I mean, there are many,

Starting point is 00:15:09 but I'll just cite four or five of them, which I think are good patterns to look for when you want to move from a business which people believe has no more to a one which potentially has a moat and which will ultimately be seen by the wider audience and will get reflected in higher valuation. One of them is fixing past capital misallocation mistakes. Now this usually happens in conglomerates where businesses have made some really bad decisions in the past and the people who made those bad decisions are no longer involved in running those companies and a new guy comes in and because he is not brain blocked by past dumb decisions and he has the right financial incentives to fix the mistakes made by others and he's pretty quick to do those things.

Starting point is 00:15:48 He could end up restructuring the whole piece. That will ultimately result in removing low return capital businesses, selling them off for cash and then using that money to fund the growth of high return capital businesses. All of that will ultimately be reflected in the quantitative markers of a mode that I mentioned earlier. You will see a high return on capital. So if there is an inefficient operation which is being fixed, that would be a good template to work on. The second pattern that I see here is businesses with the upfront burden on the

Starting point is 00:16:18 P&L of intelligent initiatives that build more brings down the earnings. And when the earnings come down artificially that have brought down those earnings were very intelligent because they build a bond with the customer. They build loyalty. They build brand recognition. The idea is that you don't want your customers to even think about the competitor and you don't want them to do comparison shopping. You want them to just see your product and buy it without even thinking too much about. and that's something that happens to customers of Costco, for example, or somebody who's buying a book on Kindle, it doesn't even think about looking at other alternate e-books.

Starting point is 00:16:51 All of those things, you know, to get to the point where the customer doesn't even think about the competition takes a lot of upfront burden on the P&L, and that brings down the earnings. And the quantitative impact of bringing down that earnings, reported earnings, is that the earnings on invested capital ratios start looking very mediocre or very poor. The way the whole thing works is that upfront pain, followed by back-ended benefits will show up in the numbers ultimately. So that's a very broad category of situations where businesses are investing for the future,

Starting point is 00:17:24 a building phenomenal loyalty which will give them lifetime value, customers getting lifetime value, and it's not showing up in the numbers right now. I think the third big category where this happens is geographical expansion. A business which is already moated and has wonderful high return on capital, cash generating characteristics, is not. able to gradually scale up. You know, it goes to different market geographically. And when you do that, when you open your branches, when you open new retail outlets, all of that, again, is being funded from the cash flow of the existing operations elsewhere. All of that costs money and it

Starting point is 00:17:58 hurts your return ratios. And, you know, when you set up a new retail operation in a different state in a country, the footfalls are not sufficient in the initial period to make that operation very profitable. And that sort of pulls down the return ratios. So intelligent, slow and steady geographical expansion which will increase the size of the market is a good pattern to look for. The last one which I want to highlight is inorganic growth. You know, there are some really good outstanding capital allocators out there who are able to acquire assets at valuation that are quite compelling. And the reason why they're able to do that is because they're basically buying inefficiently managed assets and they have a system of turning them into far more efficient

Starting point is 00:18:36 assets and to even increase the scale of their operations. But when they do that, when you buy a business which has a much lower margin profile than your existing operations, but you have a way to increase the margins of that business over a period of time, maybe two or three years. The moment you buy it, it brings down the average return on capital. It brings down the average margin of the business. And that a lot of people don't like. You know, market participants who are fixated on reported earnings

Starting point is 00:19:00 and reported returns on capital don't like that kind of set up. So I think those are the three or four broad patterns, which I think give an indicator of a more sort of emerging and becoming bigger and better over time. really, really inspiring. Where we as value investors suggest the investing community in general, we talk a lot about risk-adjusted returns.

Starting point is 00:19:19 Then you talk about stress-adjusted returns which are absolutely loved because it's a very profound concept. How do you think through the process of achieving the best possible stress-adjusted returns and being the best version of yourself? The idea came to me about seven years ago and I was looking at my own life

Starting point is 00:19:37 as an investor over the years and I've made a lot of, you know, stupid mistakes over time. And I was really looking at situations where not only was I going to have financial losses, but I would have a lot of stress. You know, there are all kinds of things that people do in financial markets that are very stressful. And I've done many of those things. So I've sort of learned this the hard way. And I started thinking about the idea that, you know, instead of thinking only about returns

Starting point is 00:20:00 per unit of risk, which is the standard metric, why not also think about returns per unit of stress? After all, we only live once, right? So you want to have a good life and you want to have a stress-free life and you want to be able to sleep well at night. So what are the kind of situations where you get sleepless nights? So I thought about those and, you know, I came up with a whole bunch of situations where you can't sleep well at night. It's a high-stress situations. And then I came across the opposite, you know, situations where there is no stress or very low stress.

Starting point is 00:20:27 And clearly, if you are investing in a business which has governance issue where the guy who's running it is a crook and, you know, he has no interest in the interest of the minority shareholders, then obviously even if you buy it at a valuation that is compelling and cheap, you're going to have sleepless night. And if you have a big position in that kind of a situation, you will not be able to sleep at night. You'll keep thinking about what is he going to do to me tomorrow? You know, what is he going to do to me day after tomorrow? You know, I've done that in the past and I've found that very stressful.

Starting point is 00:20:55 In contrast, if you invest with somebody who's a true fiduciary, you know, who has the fiduciary gene and he's not going to do anything wrong by you. I mean, he may make mistakes. That's okay. But he's not going to do anything that will, harm you in a manner which will benefit him personally. I think you can sleep a little better at night if you had those kind of businesses in your portfolio.

Starting point is 00:21:14 Similarly, if you think about leverage, you know, leverage at your own portfolio level or at the level of your investing companies, when you invest in highly levered businesses, it causes stress because they are inherently fragile structures. Whenever there is a economic slowdown or there is some kind of global macro fears, these companies and these businesses tend to get hurt the most. Similarly, if you borrow money to buy stocks at the portfolio level, you are prone to getting wiped out. What's the point? You know, why to take on all that stress?

Starting point is 00:21:44 Shorting is another situation. People talk about shorting and nobody talks about the stress of shorting. Everybody talks about the logic of shorting. Yeah, it's true that there are some manipulative companies and there are overvalued companies and there are fraudulent companies out there. Think about what shorting does to people's lives. You know, you short a stock. theoretically speaking, you may be wiped out. You have an infinite loss potential out there.

Starting point is 00:22:07 Well, that's not the case when you go long. So clearly, shorting is something I've done that. I'm just talking to you from my own experience that I've shorted stocks. I've got badly hurt. And when that happens to you, it doesn't just ruin your health. It ruins your relationships. You know, you get very irritable. And you start fighting with your family for no apparent reason.

Starting point is 00:22:25 And the reason is because you are so stressed out because of the things that you have done, which you shouldn't have done in the first place. So there are all sorts of things when I wrote a blog piece on this. So the basic idea is instead of focusing on only returns or only returns and risk of loss, also think about your health, about your peace of mind, about the need to be able to sleep well at night, about the quality of a relationship with your friends and your family. They are important, right? Now, as to your other point that you ask about, you know, how to become the best version of yourself,

Starting point is 00:22:56 and this is something that I wanted to share with you. This is a lesson I picked up from one of my friends, Ian Castle, and he basically wrote something which was very profound, and he said that compare yourself with an earlier version of yourself. Maybe that version was five years ago or one year ago, it doesn't matter. But you're only comparing yourself with yourself a few years ago or a few months ago or a few quarters ago. That is very fundamental. It's very important to understand what that kind of thinking does to you.

Starting point is 00:23:23 You know, thinking that the other guy is so rich and I'm not rich and I'm miserable because of that and blah, blah, blah. none of that thing matters because you're only comparing yourself with yourself. It also forces you to learn from your past mistakes. So you never repeat them and sort of turns you into a learning machine. I think it's very important to never get into the comparison with other people's sort of game, but always try to think about what mistakes I made in the last year or the year before or the last five years and how can I make sure that I never make those mistakes again and you try to become better at your game over time. Let's take a quick break and hear from today's sponsors.

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Starting point is 00:27:16 So, Sanjay, one of the most important things for our audience is reading. And we're kind of curious what you would describe as the best investing book that you've ever read. And most importantly, what was it that you took away? What was the most important ideas that you took away from that reading? Well, it isn't a book, actually. It's something that is available for free. And, you know, it's such an irony that the best so-called book out there is, in my view, the letters of Warren Buffett. This is how I discovered the idea of value investing.

Starting point is 00:27:44 And I always think that they are the best source of education. for anybody who wants to learn anything about the world of business, the world of investing, the world of human behavior in a corporate setup, there is no better place than to, you know, read those letters thoughtfully. I do have some suggestions about how to read those letters. You know, a lot of people read them in a chronological order, which is fine. But I think it's much more interesting if you were to, you know, convert, have those letters in a PDF document and learn about a specific idea by searching for a specific phrase, let's say buyback. You know, how Buffett's thinking on buybacks has changed over the years.

Starting point is 00:28:20 There are profound lessons to be learned about this. In his earlier letters, for example, he used to talk a lot about the importance of buybacks and how value can be created by buying back shares at a low valuation, how that's a great capital allocation. Over the years, he has gradually mellowed down and I realized that it's a zero-sum game and how it's important to give the right signals to the market and let the partners who are trying, who want to exit from the stock, have full information. So it's very fascinating to learn about the idea of buybacks by just researching the term buybacks in the letters.

Starting point is 00:28:54 You know, the letters will now maybe add up to about a thousand pages. What I'm trying to convey here is the idea that if you want to learn about buybacks, go and download all the PDFs, convert them into a single PDF, search for the term buyback, pull out all the sections where Buffett talked about buybacks, put them in a different document, print that document, and then deep dive into it, and make notes. you will learn more about buybacks or for that matter anything on dividends on executive compensation I mean there are like 50 other things that you could research and learn about what Buffett or Munger or anybody for that matter the letters of Charlie Munger are I think equally important so I think what is important is not to know the names of the books but how to read those books and how to learn from those books and how to apply them in your daily practice of value investing which is more

Starting point is 00:29:41 important we'll definitely link to Warren Buffett's letters we'll also make sure to link to Sanjabaks's Twitter handle if you like to contact him directly and also to his blog post about stress adjusted returns. And Stig, I just want to highlight also that we have one more resource for people out there that are wanting to learn more about Sanjay and his thoughts on value investing. We had our good friend Harri Ramachandra from our mastermind group. He conducted a YouTube discussion and Skype interview with Sanjay about a year or so ago. And he asked some really great questions. So we also want to have a link to that in the show notes for people to reference Harry's interview with Sanjay as well. So with all of that, Sanjay, thank you. Seriously, thank

Starting point is 00:30:25 you so much for making time out of your day to connect with us and our audience. And we're just truly humbled and honored to have you on the show. Thank you so much. It was a pleasure speaking to you today. All right, guys. So at this point in time, the show, we'll play a Christian from your audience. And this question comes from John. Hey, Preston Stig, this is John. I was wondering what your thoughts were on the brokerage industry at large, specifically discount brokers. I know you have a page on your website that kind of goes in depth about them. I was just wondering if you could speak to your favorites, what broker you use and just maybe give us a little more insight into the brokerage industry. Thanks.

Starting point is 00:31:04 Great question, John. And a really relevant question. And it might surprise a lot of our listeners the more than 200 episodes into the Ammasters podcast. We haven't been talking about too much about brokers. And it might seem a bit weird since we talk about stocks all the time, so why not talk about the broker? Like, what's the platform you need to actually buy the stocks? But that process is actually very simple, and the choice in many ways is also very simple, because a stock is the same regardless whether you bought it or interactive brokers or e-trade. So you should really just buy the cheapest. And this also implies the general rule is that you should use an online discount broker and typically not go through your bank, especially if you're doing

Starting point is 00:31:46 more than a few trades per year, it really makes sense to switch to an online discount broker. But again, I really recommend that you find the cheapest for you. And when you do, please make sure you also check out which brokers that has various bonuses. It might be commission-free trades when you sign up for an account. And when I say the cheapest for you, it really depends on how you trade. You have brokers have very low commissions for stocks, and then you have other brokers who are really good if you're primarily by options. Also keep in mind that some of the more expensive brokers, especially banks, they might even charge you for having an account on top of the commissions that they're charging you. So you were asking which broker we use. I reside in Denmark,

Starting point is 00:32:31 and for that reason I have a Danish broker, but it's the same principle. And another thing that's applicable to a lot of the listeners is do not only look at commissions, but also the conversion fee that you might be using if you're juggling different currencies. We'll make sure to link to the show note to the page you refer to John with our favorite American brokers and our thoughts or recommendation about that. We also linked to a video that Preston did about which American broker he uses and why. And we also have a quick discussion there about the best international broker. We typically prefer first trade because it's the cheapest. But whenever it comes to international brokers, it's very difficult because of all the regulation. So it's a bit tricky to have like a one size fits all due to regulation. So John, I really don't have too much more to add to what Stig had already said. I think he really kind of hit the high points there. The only caveat that I would have is the YouTube video that I made from a couple years back about which brokers I use and the methodology and how I think through kind of what Stig described there. This is before Robin Hood was really kind of a broker. And I think that

Starting point is 00:33:39 it's really important for people to, specifically here in the United States, to look into Robin Hood. And I say that because to conduct a trade on the Robin Hood platform is completely free. To even do options trading is completely free on Robin Hood. And I believe, I'm not 100% sure, but I believe there's no annual fees or anything like that. So I would tell you to look into that, in addition to some of the tools and resources that we have out there. And the video that Stig was talking about is still a good resource because it helps the person understand the difference between a discount broker and just a traditional broker that you'd go through.

Starting point is 00:34:15 So, John, thank you so much for leaving such a great question. As a token of our appreciation for leaving your question, we're going to give you access to one of our free courses on the TIP Academy page on our website. The course that we're going to give you is our intrinsic value course. And our Intrinsic Value course teaches people how to determine the value of an individual stock. It also teaches you how to think about the market cycle and when you're buying your stock. And it also teaches you some stuff about options trading. So we're really excited to give you this course.

Starting point is 00:34:45 If anybody else out there wants to check out the course, you can go to tip intrinsic value.com. Or you can just go to our website and click on Academy link at the top of the page and courses right there. So if anyone else wants to leave a question on the show, go to Ask theInvesters.com. and if your question gets played on the show, you'll get a free course. All right, guys. That was all that Preston and I had for this week's episode of The Investors Podcast. We see each other again next week. Thanks for listening to TIP.

Starting point is 00:35:11 To access the show notes, courses, or forums, go to theinvestorspodcast.com. To get your questions played on the show, go to Asktheinvestors.com and win a free subscription to any of our courses on TIP Academy. This show is for entertainment purposes only. Before making investment decisions, consult a professional. This show is copyrighted by the TIP network. Written permission must be granted before syndication or rebroadcasting.

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