What made Parag Parikh a great investor

In a tribute to Parag Parikh, we carry his investing views which he expressed during the Morningstar Investment Conference last year.
By Morningstar |  04-05-15 | 
 

Parag Parikh will always be known as a research-driven, value investor. His company, Parag Parikh Financial Advisory Services, was one of the first Indian brokerage houses to set up a formal equity research desk. Here we share his views which give an insight as to what made him such a great investor.

During the tech boom of 1999, he suffered not because he invested in such stocks, but because he kept telling his clients to sell them. They would buy and see the price go up and tell him he was wrong. He openly confessed that he went through a troubled phase then. However, it did not cause him to waver from the basic tenets of value investing. 

The Warren Buffett way of value investing would really work in India where you maintain a margin of safety when you buy. It is difficult for the Benjamin Graham style of cigar butt investing to work because we don't have corporate raiders here who can unlock value. We have courts of law, but no courts of justice. So if someone attempts to do something, it will take years and years before value is unlocked. So, in this sort of a system I think Warren Buffett philosophy would work very well.

He claimed that his basic investing philosophy is based on the “law of the farm", meaning, you cannot sow something today and reap tomorrow. There are no short cuts in life or in the stock market. 

When investing, you must understand that you are buying a business and not a piece of paper which will tomorrow go up or down depending on market sentiment. When you are buying a business, it is very important that you understand how the system works.

There are certain laws which are made by men. They change and are manipulative in nature. For example, you short and you make money, you buy futures and options and you make money. You give him an upfront commission and you get more clients. These are all short-term manipulative practices.

On the other hand, there are laws made by God-- the universal principals. One of them is the ‘law of the farm’. You cannot sow something today and reap tomorrow. A seed has to go through different seasons, before it turns into a fully grown tree and starts bearing fruit. Value investing is boring. You have to wait for years.

People may want to follow the value style of investing but then miss out on the waiting part—which incidentally is the most difficult. You can learn all the right things and invest, but it will be futile unless you have a long-term view. Imagine growing grass. You water the ground every single day. You may not see any shoots come up for a while. But in the long run, your effort at watering the garden will help.

A great believer in behavioural finance and an author of two books on the subject, he believed that an investor must attempt to profit from various cognitive and emotional biases displayed by companies and market participants. In other words, along with the dissection of financial statements, the study of human emotions is essential.

Value investing is all about buying something which is less than the intrinsic value. So, it's all about common sense, it's no rocket science. Nobody should be buying a stock at a rate higher than its intrinsic value, because then you are looking at the greater fool theory to come into play -- that someone would buy it again from you enabling you to make a profit.

There is a difference between value in use and value in exchange. Water is an essential commodity for us which has got a fantastic value in use, but not many people will give you any money for it. And value in exchange is something like a diamond; it may not be useful to you. If someone is dying, it would be more useful to offer them water than a diamond. But the diamond has got a tremendous amount of exchange value.

So, when we normally look at value investing, we must realise that when chasing power stocks or something like that, the company will not have pricing power. But it has got a fantastic value in use. If you think those companies will be able to make phenomenal profits for you and make you really wealthy over a longer period of time, you could be wrong. Simply because there are certain constraints on how much power can be priced at.

So, from a behavioural finance point of view, you have to be really sure as to the right opportunity. As Warren Buffett said, “Be fearful when others are greedy, be greedy when others are fearful.” If you have the conviction and the patience to really wait for such times, the market will come and give you such times. But the problem is that investors perceive a stock to be more risky when nobody is buying and the price is low and less risky when everyone is buying and the price is high.

You can read more about his views on the subject in his column How not to be your own enemy

He looked at businesses with a long-term view and was patient enough to wait for the businesses to be available at bargain prices. He kept fundamentally sound companies on the radar and when they traded at cheap valuations he bought. “Fortune favours the prepared mind” – another investing tenet of his.

If I had to name the top parameters of a good business as per my philosophy, these are what I would look for.

1) Businesses run by credible management. One of the biggest challenges in India is that you are going to be a minority shareholder so you must invest with a credible management who really treats its minority shareholders well.

2) Businesses which I would be able to understand and which are simple to understand.

3) Businesses which have strong moats around it.

4) Pricing power.

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vishvajit pachpande
May 9 2015 09:16 PM
 Legendary investor in indian market with simple philosophy.
RIP.
ramanathan dwarakanathan
May 7 2015 06:14 PM
 His approach towards investing was simple with no jargons and a great human being.
THANESH MOHAN
May 6 2015 02:05 AM
 We lost a good teacher of value investing....may his soul rest in peace.....now its time for PPFAS team
to carry forward Mr.Parang's Wisdom.....
Maajed Wani
May 5 2015 08:27 AM
 I recently read one of his articles in an online journal where he had written about his professional and personal struggles in life. I liked that article; he was very candid and straightforward in his revelations. By way of that article he wanted to stress that life is not a piece of cake and that there are no short cuts to success. Parag was a strong man who knew how to rise up and get back on his feet after falling. I am sad by his passing away and I wish him peace.
Maajed Wani
May 5 2015 08:26 AM
 I recently read one of his articles in an online journal where he had written about his professional and personal struggles in life. I liked that article; he was very candid and straightforward in his revelations. By way of that article he wanted to stress that life is not a piece of cake and that there are no short cuts to success. Parag was a strong man who knew how to rise up and get back to his feel after falling. I am sad by his passing away and I wish him peace.
Sudeep Srikantawamy
May 4 2015 08:09 PM
 RIP Parag Bhai
Aravind Sankeerth
May 4 2015 02:36 PM
 I am deeply saddened and it gave me a shock when I heard this news. He was the summit of Value investing so much so that his PPFAS tells us how determined he was to separate the case for pure long term ideal deep value investing. He had written top class books on behavioural finance and I am a huge fan of those and actually 90% of my understanding of Indian stocks and how markets are come form his notes, articles, videos and courses on youtube. I salute his cause and hope more value emerges out of his ideas. He passed away in the Mecca of Value Investing, kinda holy in his cause is all I can say. I am sad.
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