The value investor who walks the talk

About Parag Parikh

Meeting Parag Parikh, veteran value investor and portfolio manager, was like running into Tamil movie-star Rajnikanth. If Rajnikanth intoned ‘En vazhi thani vazhi’ (my way is a very different way) in Padayappa, Parikh has actually practised it in his career.

He has used every opportunity to rebel against market fads. The interaction was peppered with punch lines.

We first met him way back in 2009 when he made a presentation, based purely on valuations, about why US-listed stocks were far more attractive than Indian ones. Parikh impressed us with its logic, but we remained a little sceptical of the idea that India could lag the US. Three years on, Parikh’s call has worked out splendidly, with the US markets trouncing the home-grown Sensex.

Parikh has authored two books on value investing – Value Investing and Behavioural Finance and Stocks to Riches – which bring an Indian context to these concepts. Recently, Parikh, a stock broker for 25 years, has decided to diversify from managing money for affluent clients, to doing it for retail investors.

But his mutual fund is different too. It isn’t actively marketed and manages just one scheme – the Long Term Value Fund. Parikh has got his own money invested in it and argues that every mutual fund manager should have ‘his skin in the game’.

“I don’t want to market my fund, I want to make people buy my fund.” This was just one of the several googlies that Parag Parikh, veteran investor and the CEO of Parag Parikh Financial Advisory Services bowled at us when we met him at Chennai. Dressed informally in a T-shirt with sneakers, he appeared quite relaxed as he greeted us in the lobby of Le Meridien, Chennai, a pleasant departure from other mutual fund managers, who’ve been sporting worry lines of late.

This stockbroker, who practised value investing for over 25 years, flagged off his first fund seven months ago. With just one scheme managing ₹313 crore, the fund is a David in a world of Goliaths. But Parikh isn’t defensive. “We don’t worry about assets or fee structure. Me and my employees have invested in our fund, we have our skin in the game. This ensures that we work in the interest of the investors. We have just one scheme with a wide mandate that ensures that we can invest in the right asset at the right time.”

One of the secrets to his composure could be that he does not watch the ticker with bated breath through the trading day. He claims there are no computer terminals at the Parag Parikh office. “What about TV?”, we ask incredulously, to which he shakes his head with a smile. “Watching prices going up and down is just entertainment and totally unnecessary. Am I there for deriving entertainment from other people’s money?” he quips.

Since it is just a little after 10 am, we order tea, coffee and a sinful plate of French Fries. We set the ball rolling by asking him what he thought about all the international funds being launched now, as he was the among the first to recommend investing in US stocks. He was dismissive: “They are launching feeder funds that invest in international funds. So you first pay management fee to your fund and the fund in turn pays a fee to the fund they are investing in.”

He, however, continues to believe there is immense value in international stocks. “Nestle India is trading at 45 times earnings and the Nestle parent company’s ADR in US is trading at 17 times earnings. So you are virtually buying the Indian arm free. Similarly, we also have 3M in our portfolio. Here is it trading at 55 times earnings, there at 20 times. So if you understand the business of a company, it is immaterial whether it trades here or there.”

Sprinkling our plate of French fries liberally with salt and pepper, he asked us whether we knew what the acronym TIPS stood for. To our puzzled expression, he explains that it stood for ‘to insure prompt service’. If you’re dining in a restaurant, the tip should be paid at the outset. But as the practice is to pay it after the meal is complete, we all follow this unquestioningly. Following the crowd is a human foible, he points out.

This opening lets us delve into the role of behavioural finance in stock-picking, his pet theme.

He explains that you can analyse not just investor behaviour, but company behaviour too.

Behavioural analysis How? “Tracking the company’s behaviour consists of tracking what they say in the press, what the press talks about them,” he explains. “If the CEO of a company is asked in an AGM, “Why did you buy a jet for your wife?” and he replies, ‘This is the way I work. If you don’t like it, sell your shares,’ we will not touch that company."

"We prefer companies that walk the talk,” he adds.

Understanding anomalies in investor behaviour can help you avoid mistakes, he explains. “Consider the example of the Reliance Power offer. Every single mutual fund applied for this. The behavioural anomaly in this was, there was a grey market premium on the stock and it was offered at a PE of about 5,000. But herd mentality was at work. Everyone wanted to be with Reliance group. The greater fool theory got to work. Everyone knew that the issue was wrongly priced, but they all thought they could exit on the listing day.”

So behaviourally speaking, does he think a bull market is on right now? “There are still value-picks in the market. From time-to-time, certain sectors catch the market’s fancy. When you buy such stocks, you pay a fancy price and when the rally ends there is a fancy loss. TV channels talk about improving prospects of a sector and ask you to buy it. But you do not buy a stock when its prospects have improved. You should buy when it is neglected.”

Value investing We divert him towards his favourite theme, value investing. How does he go about it? “Investment is very simple, it is not rocket science. We buy businesses run by credible management, which are sustainable and businesses that have a strong moat around them by way of clients, distribution network and patents."

"We choose businesses that need least capital with little or no debt. And most important, the business must have pricing power. Energy is in shortage in our country, but I will never buy an energy stock because the government, with the stroke of a pen, can reverse their fortune. Similarly, I love State Bank of India. But I will never buy that because a loan waiver can be announced at any time,” he adds.

What about timing your buys and sells? “It is important to buy a stock at the right price, but right price is not what shows in the market. When price of DLF fell from ₹1,300 to ₹700, the anchor of a TV channel was screaming that it had become a value buy. How can you call it a value? Afterwards the stock price fell to ₹130.”He emphasizes that he only tracks and invests in the companies he believes in. “Today if someone asked me what I think of a stock, I will say - Ask Bejan Daruwalla. I can not talk about more than 25 stocks.”

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