Interesting conversation: Mohnish Pabrai with Steve Pomeranz

Came across an interesting conversation that the famous value investor Mohnish Pabrai had with Steve Pomeranz.

He talks about what value investing is, why individual companies matter to him more than broader markets (though not advised for normal passive or ‘defensive’ investors), the importance of temperament which should be a strange mix of patience and decisiveness, and contrary to popular perception – how entrepreneurs are actually looking for low risk opportunities with high potential returns.

You can listen to it at https://beta.prx.org/stories/207163

The audio has many other topics – the Pabrai talk is from minutes 9 to 18, and again from minutes 40 to 55 or so.

Some details of the talk are also at this link: http://www.stevepomeranz.com/mohnish-pabrai/

Lessons from My Journey to Health

I was always what in India is called a “healthy boy”. And I have stayed more or less “healthy” throughout my adult life with a few minor fluctuations. I have been through some ‘before-after’ experiments over the past twenty years, but they have all been in a range.

And every time I ventured down that path, there was no dearth of expert opinions from “Stop oily foods and ban sweets” to “Start jogging with good shoes” or “Be careful with the gym, you must try Yoga” to finally “You don’t need anything, you are quite healthy”.

Over the past 18-20 months, after losing over 25 kgs in 12 months, and then maintaining it for over 6-8 months now, I have actually started realizing what “healthy” really means.

A lot of people who met me after a while are actually surprised on seeing me now, and wonder whether I was ill or went on a crash diet or am under some kind of stress or perhaps, I have some secret to this healthy transformation which I am not revealing.

The reality – like it was said in Kung Fu Panda – is that “there is no secret ingredient”.

And while I am still a beginner on this path, there are definitely some lessons. Lessons which I am hopeful will help a few others to start on their own journey to health. Honestly, it is just a set of healthy practices all put together and adhered to with discipline over a period of time. People who are consciously healthy already know what they are.

It is a bit like investing. The basics are quite simple and there for all to know. That doesn’t mean they are easy to implement, but there’s no secret as such. It is only when you have experts involved in investing that it starts getting complicated.

The same is true with the path to health. The basics are quite simple, but no single person has any incentive to provide them. Some of the issues are structural. For example, the gym trainer doesn’t know (or tell you) much about nutrition. The nutritionist can’t tell you much whether you should run or lift weights. And the doctor doesn’t care about either – as if it is beneath him or her to get into those discussions – all you get is control your weight or cholesterol or sugar or something like that. And the normal person is confused or lives with his own set of theories or myths.

What I understood from my journey to health is that the reality is a combination of all of these. And so, here is a list of things that I learned from my journey to health. Though this is a blog on investing and wealth, the basics of health are not quite different – in fact, I could see some parallel metaphors.

So for those pursuing wealth, hope this list helps prioritize their health.

So here goes:

  1. Food determines 60-70% of your health. What you eat and how much you eat will decide how healthy you end up. We are given other reasons – heredity, genes, lifestyle, body or bone structure, metabolism, but no. Assuming you have no disorders, food IS 60-70% of your health. A bit like – what you do for a living determines the chances of you becoming wealthy.
  2. How much you eat and what you eat are both important. To start with, how much you eat is more important (to determine if you are healthy in the first place), but beyond that, what you eat gains more in importance (to determine how healthy you are and if you will stay that way over long periods). A bit like – how much you earn is important to start with, but what you earn it from is more important over the long term.
  3. Carbohydrates and Fat are as important as Protein and are not to be avoided. Low carb diets or low fat foods don’t work. Normal, regular, even party food is enough. A bit like – all asset types have a role in a portfolio in the right proportions.
  4. Your body needs a fixed number of calories to perform its basic functions and keep you alive and running. This is called the base metabolic rate (BMR) and it depends broadly on your age, weight, height etc. If you want to reduce weight, you must create a deficit to that – meaning the net calories (food – exercise) must be less than the BMR. A bit like – savings are the starting point of wealth. Unless you save, there is no question of getting wealthy.
  5. This calorie deficit can be supplemented by cardiovascular (or aerobic) exercise most measurably i.e. walking, running, swimming, cycling and similar activities. But your body gets used to aerobic exercises quite easily, and they stop having their effect over time. While aerobic exercise has a role, beyond a point it doesn’t burn as many calories, but increases your endurance and does not necessarily make you healthier.
  6. Strength training is the most effective way of losing weight slowly over time on a calorie deficit. It also helps in maintaining the lost weight by increasing lean muscle and hence raising your BMR.
  7. Hence, for a normal person who doesn’t want to train as a athlete, sportsperson or bodybuilder, a balanced exercise routine should consist of both aerobic and strength exercises. A bit like allocating the savings between the right assets will give the most optimal returns. But remember all of this exercise routine is useless unless you get the right food and have a calorie deficit. It is a bit like saying I will optimally invest 5% of my earnings – no point, you might as well spend it.
  8. Over time, adopting healthy food in the right portions most of the time, and incorporating a routine of aerobic and strength training in a disciplined manner is the best way to get and stay healthy.
  9. The best diet is the one you will follow, and the best exercise is the one that you will adopt in your routine. There is no single answer that fits all.
  10. Like it is for investing and wealth, simplicity and discipline are the best answers for food, exercise and health.

So those are some of the lessons I have learned in my journey to health.

As is seen above, the basics of health, similar to the basics of wealth are simple but not easy. It is a set of steps that need to be followed with priority and discipline over a long period of time, like a way of life almost maybe.

Finally – there is no one-shot formula. Like the investment disclaimers, this is also not to be taken as health advice. Refer to your own expert for specific advice based on your health condition if required.

I am no health guru – before the past 18 months, I spent most of my life in an unhealthy state of being. But I am hopeful that with this newly acquired knowledge, the future is healthier for me, and also for whoever that gets inspired to adopt it in their life.

Heads I Win, Tails You Lose

“Do you remember Dr Rustom Pavri that character from Munnabhai MBBS that helps Munna pass all exams and not get caught by answering questions secretly on mobile?” asked my broker friend Jigneshbhai when we met for coffee this morning.

Swami and I had a distinct smile of recognition on our faces, but weren’t quite sure why Jigneshbhai was talking about that comic Parsi character.

“My CA friend felt like him yesterday night” he remarked.

Swami and I were wondering why. Seeing that, our broker friend clarified.

“All his trader ‘Munnabhai’ friends were calling him continuously yesterday night, like students who had suddenly got an out of syllabus surprise question in their paper.”

“But this time even my CA friend had no answer to this question. And there was no time to find an answer too!”

Swami and I then realized that Jigneshbhai was referring to the announcement made by the PM and Govt that 500 and 1000 rupee notes would be illegal tender from midnight of Nov 8-9, 2016.

It was the classic out of syllabus surprise question set by a tough paper setter aimed to fail cheating students, and given 10 min before the bell rings.

“And the best part is” continued Jigneshbhai, “that whatever happens, chances are high that the paper setter i.e. PM Modi and his government, win.”

Jigneshbhai was pretty excited about this new announcement and explained the various scenarios why it was a win-win situation for the government.

“Firstly” he said, “if you are a sincere student, this doesn’t apply to you except for a few days of inconvenience of exchanging now illegal tender for valid notes. For that small price, the government gains tremendously in the minds of the common sincere man.”

“Secondly” he continued, “if you are a cheat with cash, you can take the first choice of going to a bank and depositing it, and somehow declaring it. In which case, government gains with tax income.”

“And if you choose not to do it, then you are left with paper which you can’t do much with. In which case again the government gains because they eliminated some unaccounted money without the hassles of catching it.”

“And Thirdly” Jigneshbhai explained, “if you are a cheat with undeclared assets other than cash, you don’t suffer much immediately, but are going to think twice before generating more black money in cash. Again the government gains.”

“Fourthly” my broker friend wasn’t done yet “if none of this happens, the least that happens is the real criminal, drug, fake currency and terrorist organizations are anyway left high and dry with useless paper.”

“And finally” Jigneshbhai concluded, “beyond the economic benefits, the political gains in terms of clean image, brownie points and leaving the opposition with nothing to oppose clearly are like that MasterCard advertisement – things that are beyond measure.”

Jigneshbhai was truly, genuinely excited today. Perhaps after a long time, there was satisfaction felt that being honest mattered, not having black money was good. And the silent black money holder was probably worried for the first time in years.

But it was too early to celebrate. It definitely seemed like the first major step of many more steps of clampdown on domestic black economy. It seemed like an honest attempt, at the very least, and a genuine transformation, at the very best.

The old man in the sprawling bungalow who had been listening to our conversation from the table next to us, reminded us that of all the calculated risks, this would probably rank way up there for this government, with potential gains outstripping possibility of losses – for itself and for the country.

Like Amitabh’s coin in Sholay, it was a case of “Heads I win, Tails you lose.”

Saboot aur Gawaah

“Tamam gawahon ke bayaanat aur sabooton ko madde nazar rakhte hue” started Jigneshbhai in a very filmy mood when we met this weekend for coffee. “Isn’t that how that dialogue went in the old Hindi movies?”

Swami, a big fan of Hindi movies completed the dialogue that my broker friend had started. “Yeh adalat is natije pe pohochi hain ki, Mulzim bekasoor hain. Lehaza Mulzim ko ba-izzat bari kiya jaata hain.”

And we had a big hearty laugh remembering the troubled judge banging “Order, Order!” in God knows how many old Hindi movies.

proof

My broker friend said “One of my friends, an ardent non-believer in God, has this habit of asking for evidence every time any of us remotely talks about anything suggestive of religious, spiritual or ritualistic things.”

Jigneshbhai seemed to be in his story telling mode today, so Swami and I were all ears. Specially when it comes to proof and evidence, Swami is always attentive.

“And as you know, no one has been able to conclusively prove the existence of God so far.”

“So every time after presentation of tamam gawaah aur saboot, the ‘mulzim’ gets baizzat buried!!” Our broker friend broke into a laugh.

Swami and I were not quite sure why he was laughing so much, specially about touchy matters like proof of God.

After a while, realizing that he was laughing all alone, he stopped.

With a twinkle in his eye, he said “By the way, we believe in God with no evidence, but nowadays, ask for evidence about everything else, right?”

Swami and I got an inkling that Jigneshbhai was probably referring to the demands of proof for the surgical strikes that the Indian Army had done a few days back.

All government actions require documentation and process.

We have to submit proof of identity, proof of residence, proof of domicile, proof of income for so many things like Aadhaar card, admission to government colleges, loan applications, etc. Even to get bills passed in parliament, there is ‘kanooni process’. Audits happen to establish ‘saboot’ of corruption happening or not happening.

So it is natural that in a country that goes so much by ‘gawaah aur saboot’, the Army also needs to provide proof of a surgical strike it performed on the enemy.

I wonder whether it would have been a good idea for our Army to have submitted all the right documents at all the government offices and followed all processes, before performing the surgical strikes.

Maybe that would have left ‘tamaam gawaah aur saboot’.

While we were lost in figuring out what would be the best documentation to ensure that there is enough proof before the next surgical strike by the Army, Jigneshbhai broke that chain of thought.

“So we ask for proof from the Army, but where there is proof and ‘after tamaam gawaah aur saboot’, the judge has given his verdict, we don’t follow it, and evoke emotion!”

Swami and I were again left wondering what Jigneshbhai was talking about, but quickly realized that he was probably referring to the verdicts in the Cauvery Water case and the BCCI Lodha committee.

“Sharing water and establishing corruption and shady cricket deals where there is ‘tamaam gawaahon ke bayanaat aur saboot’, we invoke emotion, and from the Army, where we need a bit of faith, we ask for proof.” Jigneshbhai clarified.

Clearly, in a rational world, evidence and data are paramount, Swami and I thought. But our broker friend was perhaps right in suggesting that there is a place for rationality and there is a place for faith.

While we were musing over this, the wealthy man in the sprawling bungalow, who had been listening to our talk (mainly Jigneshbhai’s today), walked over to our table. He sat for a while today and left us with more food for thought.

“For the Army and government, it is rational to not provide “gawaah aur saboot”. And for the enemy and politicians, it is rational to demand for it. For you, it is wise to determine who to place your faith on! Because Koi saboot nahi, toh Koi gunehgaar nahi!”

Known Knowns and Unknown Unknowns

“Swami uncle, how do you know that Ganpati Bappa goes to his home elsewhere after we immerse him?” asked Jigneshbhai’s son as we were returning after immersing the Swami’s Ganesh idol after this year’s festival.

It was Swami’s turn to be at the receiving end of questions this time from our broker friend’s son. Jigneshbhai was having a naughty smile as he was enjoying the reversal of fortune – from Swami’s questions to Swami being asked questions.

“How can all lakes and seas reach his home?” Jigneshbhai’s son continued. “Do you have proof that Ganpati Bappa reaches home?”

Swami was lucky that we soon reached our coffee-house, and our families left us alone with our weekly coffee routine, and so the questions stopped.

“Your son asks a lot of questions!” Swami finally said, after they were all gone.

“For once, I did not face your questions! Or his!” my broker friend laughed.

“So how would you answer them? Of course, we know the real Ganpati Bappa goes nowhere. But next he would ask me if there was any proof if Ganpati Bappa was real?” an exasperated, god-fearing Swami exclaimed.

Jigneshbhai stayed silent for a while. He was probably lost in some thought.

“Well if we don’t have conclusive proof that he exists, we also don’t have conclusive explanation to negate the theory that he does exist!” Jigneshbhai stated.

That left Swami and I a bit confused. But our broker friend continued.

“There are the known knowns – like oxygen is necessary for life, and then there are the known unknowns – like we don’t know how life originated or if God exists for sure. But there are also the unknown unknowns – like maybe we don’t even know what we don’t know about the possibilities in the endless universe or in the future!”

Swami and I looked at each other, wondering whether our broker friend was fine. He seemed in fine health a few moments back, but suddenly he had escaped into an unknown orbit.

Unlike our normal confused faces in such situations earlier when Jigneshbhai gave some profound theories, this time our faces indicated outright amusement. Perhaps that’s the reason our broker friend too broke into laughter.

“I am not joking!” he said. “Isn’t it right? Even Donald Rumsfeld when once asked if there was enough proof that Iraq had weapons of mass destruction used something like this. Maybe he meant it, or maybe he was justifying the war – who knows!”

Indeed that was true. I distinctly remembered that, and it became a topic of contention for a long time. But it actually demonstrated the realities of taking decisions at the highest centers of power with an understanding of what is known, what is unknown, and an appreciation of how little may be actually known.

While Swami and I were musing about the known knowns and unknowns unknowns in our life, our broker friend, in a jovial mood today, intercepted our thoughts cheekily. “Like whether the markets will oblige him is a big unknown for Swami!”

Obviously that little provocation was enough for Swami to get started. “Maybe” he said sarcastically, “but most else in your investing domain is based on numbers and metrics isn’t it? So it should fall into known knowns!”

“Well” said our broker friend. “Numbers give you a false sense of knowing.”

Swami and I were starting to understand what our broker friend was trying to get at, and why his answers are often in shades of black and white – specially to Swami’s questions on buy or sell. But it still wasn’t fully clear so we were lost in thought.

Jigneshbhai continued.

“There are many known knowns in investing – like high profitability is good, or low P/E is cheap. And then there are known unknowns – like what will the market do in the next month, or who will be the next RBI governor. But there are also the unknown unknowns – like we don’t know what technologies or trends will emerge and impact business.”

“The important thing is to collect as many knowns as you can, and build an appreciation of their limitations due to the possibilities of the unknowns. And then act with openness.”

While we were engaged in this discussion on knowns and unknowns, the wealthy old man in the sprawling bungalow walked over to our table. He had been quietly listening to our conversation, and as we were preparing to walk, he looked at Swami and I and left us with some words of wisdom, emerging from rock music, perhaps?

There are things known, and things unknown, and in between are the Doors.

Of Gardening and Investing Lessons

“To plant a garden is to believe in tomorrow” said Audrey Hepburn. I realized the truth in it over the past few months.

The wife has been venturing into gardening – a small beginner home garden – for the past few months, and as an observer, contributor and co-passenger, the ride has taught me a few things – about gardening of course, and also about how some of those lessons apply to the pet topic of this blog, investing. Here are the top 5 lessons:

A. Learn the rules, Experiment with what you can manage, and it starts working: Clearly there are a set of rules to learn to plant a garden, and it is important to learn them. Get good seeds, good soil and manure and water the plants are as basic as they can get. But the reality is that there are lots of experiments within this set of rules that are possible and can only be learned by doing. And that’s where your own decision on what type of plants, how many of them and how big a garden you can manage becomes important. Once you get through that and experiment with what you can manage within the overall realities of your life, it starts working. Very much like the rules of investing and how your own decision of what kind of investor you want to be will impact what works for you.

B. Plants grow slowly but there is a funny pleasure in it: You can learn the process, get the seeds and plant them. After that there is not much to do but to watch them grow. And plants grow slowly. Everyday we went to the balcony to watch if there are any sprouts, and for a while nothing happens. There is a unique kind of fun in that too, in watching the plants grow slowly, and unless one learns to enjoy that, you will feel it is way too much trouble. The fruits or the vegetables aren’t going to be seen soon, and unless one enjoys the process more than the outcome, patience will likely get the better of you. Very much like long term intelligent investing where as Graham said you buy something using your process, and hope something good will happen.

C. All types of plants and all seasons are important: Not all plants will grow with the same speed, nor will all of them grow in all seasons. There are seasons for planting, and there is a time for harvesting. Every single step in the growing process, every moment of those seasons must be respected. Nothing can be skipped. There are plants that will give vegetables every couple of weeks but then they run out after couple of harvests. And then there are plants that take a long time to bear its first fruit, but then will give you its fruit every season after that. Every type of plant and every season is important. Some plants and seasons are meant for producing great fruits. All others are meant for preparation. Very much like our own investing seasons and plants – where all types of assets and investments are important and bear fruit in different seasons.

smart-investment-garden-quote

D. The final result may not be perfect but who cares: Some plants died midway due to weeds, perhaps due to more or less water, perhaps due to reasons I don’t know. And some plants have grown beyond our wildest imagination. In some cases, all sown seeds sprouted to life, and in some, none came up. As a whole, the garden produced a good variety of vegetables, which though not perfect are good enough for me. Finally I realized that that’s what matters – the result will most likely not be perfect but it doesn’t matter really as long as it is good enough for you. It is difficult to over-engineer outputs in gardening, specially for beginners unless you reach a level of sophistication perhaps. Very much like investing results – it is difficult to predict the future, and with all the bull and bear markets over a lifetime, it is impossible for the result to be perfect. But as long as it meets your purpose, who cares?

E. You plant the seeds, provide the water and the soil, but someone else makes them grow: Now this is a philosophical one. I am sure there is a science to it which I don’t know yet. But despite the science to gardening, I am pretty sure everything is not being done only by the gardener. The gardener perhaps does the best possible to increase the probabilities of a fruitful result, but there are many factors that add up to create the result. You plant the seeds, lay the soil, water them and wait and watch with faith in tomorrow. And it is indeed a miracle that out of that sprouts a plant that not only springs to life and grows but has the ability to bear fruit. It is tough to predict which one will sprout to life, which will grow and which will bear fruit. Hence, leading to my hypothesis that like investing, you master the process to increase the odds, but perhaps someone else makes them grow.

It is no wonder that a learned man like George Bernard Shaw said that “The best place to find God is in a garden. You can dig for him there.”

Motivation and a System

“What was your motivation? Can you give us a few tips?” asked one of Swami’s friends to my broker friend Jigneshbhai when we met him last weekend. It was a slightly different coffee meet last weekend as some of Swami’s and my friends had also joined us for a coffee session with our broker friend. One of them had met Jigneshbhai over a year back last time and on seeing him was obviously surprised.

Reducing 25 kg is a lifetime achievement for someone who has been overweight for most of his adult life, and for Jigneshbhai who was a self-proclaimed foodie and someone who did not have a special talent for any major physical activity or sport, it was a doubly commendable feat.

“This is one question that nobody has missed asking me whenever I have met them over the past month or so” Jigneshbhai remarked nonchalantly on hearing that question from Swami’s friend.

“But the funny thing is I don’t even remember what was the motivation for me to get started”┬áhe continued.

Swami and I had got into this type of conversation with Jigneshbhai a couple of months back when we had seen him reduce his weight substantially, get fitter and look younger over the past 6-8 months. He had told us then that at some level, the starting point was some kind of feeling that life was probably running out. At another level, it was perhaps about setting a healthy example for his son.

Eventually he also told us that it was also about trying out something new and seeing where it goes. He also remembered having a conversation over coffee with another mutual friend who had embraced the healthy lifestyle, that had provided the spark for him to start down the fitness path.

“But honestly, motivation is overrated beyond the start. Motivation is a pretty unreliable partner” my broker friend asserted, continuing his reply.

Swami and I were slightly surprised with this answer from Jigneshbhai. We generally tend to think that someone who has done something remarkable probably had a huge motivation. Or some special secret. Even our mutual friend felt the same. And hence his question on the source of motivation and tips.

But Jigneshbhai continued with his different view.

“Motivation fills you with hopes of tomorrow, only to disappear the next day morning. It fills you with possibilities about the future, only to disappoint you when you need it most.”

motivationhabit

While Swami and I were thinking about it, our broker friend continued.

“Don’t get me wrong – motivation is pretty good to get you started, motivation gives you the initial ‘why’ of anything, but that’s about it – don’t depend on it.”

Swami was listening to this with a sense of surprise. And as usual, was the first to counter Jigneshbhai. Not with anger this time – unlike our discussions on investing – but with a sense of curiosity perhaps.

“So if not motivation, what do you depend on?” Swami finally asked.

Jigneshbhai broke into a smile on hearing Swami’s question. He more or less expected Swami to intervene at some point I think. And now that Swami had spoken, he felt a sense of familiarity maybe.

“Well – what I have learned over the past year is that whether it is wanting to build health or to build wealth, the rules are not very different. All that you need is a system. And once you have figured that out for yourself, that system is what you can depend on.”

This was not what Swami and I were expecting.

We were talking about health, and here our broker friend had somehow managed to connect it with his pet topic of investing. And while we were hoping to hear some motivating stories about his journey to fitness, he was telling us about some kind of system. Obviously not something that could keep Swami silent.

“What is a system?” he blurted almost as soon as my broker friend had finished, and while I was trying to absorb what he had said.

Jigneshbhai seemed to have an answer – almost a definition of sorts – ready.

“A system is something that determines what actions need to be taken, builds a plan around them and structures them into regular habits to increase the probability of producing an outcome.” He defined a system almost as if it was from a book on physics.

“And the rules of the health system aren’t very different from those of the wealth system” he added, leaving both Swami and I a bit lost.

Health, wealth, rules, system – it was all getting a bit confusing. Specially when all that we had asked him for was what was his motivation to get fit. And perhaps share a few tips on it so we could follow them.

Sensing the usual look of confusion on our faces, our broker friend was more enthusiastic than usual to remove it. So he clarified.

“Well – the system is a set of habits that remove the need for motivation every time. And I realized that the top few rules of health and wealth systems are simple and very similar.”

“Firstly – you need to save calories, what they call as a deficit, if you want to reduce weight – essentially the difference between what your body spends and what you earn from food. Unless you have a deficit, everything else is irrelevant. Pretty much like investing starts with savings – the difference between income and expenditure.”

“Second – you create the deficit by allocating calories between a bit less food and a bit more exercise of different types, so that you can manage it. In this process, you figure out the foods and exercises that work best for you without losing sleep and within the calorie budgets. A bit like asset allocation.”

“And Thirdly – you build habits in your life that let you do this day in, day out, week after week, month after month without need for a surge of motivation every time. A bit like setting and automatically following your investing plan via a set of methods that work for you, irrespective of where the market is going.”

“That’s all there is to it. Of course, there are finer aspects of what you eat, when you eat, or what you exercise and how much – running or cycling or weights, and such things. But those are techniques that each must find for oneself – a bit like which stocks or mutual funds to buy and sell.”

Finally, Jigneshbhai had told us – in black and white unlike his investing wisdom – the things that he learned regarding his fitness journey over the past year. There weren’t any specific tips we were looking for. But maybe it was better to learn fishing than get a fish.

While we were absorbing what Jigneshbhai had learned from his one year journey to fitness, the old man in the sprawling bungalow who had been listening to our conversation walked over to our table.

This time he looked at all of us and left us with food for thought – the healthy variety.

“Find your motivation and build a system. Motivation will make you feel like doing something, and a system will make sure you do it even if you don’t feel like it.”

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