Value Investing, The Chetan Parikh Way

Value Investing, the Chetan Parikh Way – Part 1

Whilst Zeno of Citium, a Greek philosopher, founded the Stoic school of philosophy, it was the Roman Stoics – Seneca, Epictetus and Marcus Aurelius – that emphasized its unique psychological component, the methods to attain tranquility.

Some of their techniques are vital for investors too and we attempt to practice them at Jeetay.

a. Negative visualization: Translated into simpler language, it means always asking the question – “What’s the worst that can happen?”

The Stoics believed that all we have is “on loan” from Fortune, which can be taken without our permission or advance notice.

Profitability, margins and growth depend much more on a company’s ecosystem and the forces shaping it than on management. Ecosystems are fragile. Much as managements with a “halo” may dispute this, a company’s good fortune is also “on loan”.

The Stoics argued that “flux and change” are part of the world.

Many company valuations depend on “speculative” developments, and I use this term in a Grahamian sense.

Rather than wanting the things that the company already has (earnings, assets and proven and sustainable growth) as the Stoics would, Mr. Market often asks a price for things that a company desires and promises – but currently does not have – and many investors pay this price. In financial markets, as in life, this is bound to lead to unhappiness in the long term.

Negative visualization can be aided by what Frank Partnoy in his wonderful book “Wait – The Art and Science of Delay” calls “pre-mortems”.

Many investors do post-mortems, or learnings from decision made, but a “pre-mortem” assumes that a decision has failed and asks why.

Let me hasten to add that we do not spend all our time thinking negatively or worrying about it obsessively because we always build a sufficient “margin of safety” in the price we are willing to pay, but we do think of gloom and doom periodically.

A honest confession – when we are sitting on large amount of cash with just a few ideas, we (perversely) wish that it comes to pass.

In the words of Marcus Aurelius, a real philosopher-king (a Stoic philosopher and a Roman emperor), we take care to be “the user, but not the slave, of the gifts of Fortune.”

b. The dichotomy of control: Epictetus’s “dichotomy of control” comes from his statement that “some things are up to us and some things are not up to us”, some things over which we have complete control and some things over which we do not have complete control.

As Ben Graham pointed out that an investor has complete control only over the price he chooses to pay. If he is not a “control investor”, he has no say in managerial decisions reflecting corporate strategy and capital allocation. He has also no control over his exit price.

This one decision and the only thing over which the investor has complete control – the price to be paid – should be thought of with rationality, rigor and facts, but it often surrendered to fads, fashions and rumors.

c. Fatalism: Again in simpler language, it means letting go of the past. This means not being hostage to “if only” thoughts.

These are elements of the Stoic way of thinking that have helped us at Jeetay.