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Recollections
A Man Of Value And Wit
A pioneer of value investing in India, Chandrakant Sampat used simple metaphors to explain his philosophy
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Chandrakant Sampat led an exemplary life: full of wisdom, discipline and integrity. He always defined integrity as ‘humility + courage’. I was lucky to have interacted almost daily with him during the last decade of his life. During these daily interactions, he freely expounded his profound wisdom, frequently interlaced with humour and stories from his past experiences in the financial markets and about his life in general. A firm follower of multidisciplinary thinking, his very first piece of advice to me was to not have any heroes in life. “It will close your mind” he always said. “Shakespeare never had any heroes in his plays. Take the best ideas from all great thinkers, from great investment giants, from all the disciplines and then connect for yourself. Think for yourself and reach your own conclusions. And don’t just stop there, open up your mind and think further, think deeper”. To cultivate an open and curious mind, he strongly recommended reading the works of Peter Drucker, Karl Popper, Joseph Schumpeter, Jacques Derrida, Edward de Bono, along with the Bhagavad Gita and texts of Jainism, etc. An autodidact, he was extremely skilled at reading and interpreting balance sheets. Like all truly great people, he could grasp the essence of something very complex and explain it very simply. A great teacher and a great human being, he helped several around him by being lavish with his advice and wisdom. He shall be truly missed.

***

De-rating to re-rating is the game of investing. Buy stock from pessimists, sell it to optimists and be patient in between

Beware of the Spreadsheet Specialists. They mesmerise investors with their rosy projection to justify high valuation

There are no profits, only future costs of staying in business. A real profit is earned when you cover present and future costs

***

Here are some nuggets of his wisdom and advice I jotted down over the years, which I hope shall be helpful to many budding entrepreneurs, investors and students of business.

On Investing

  • Investing is all about conceiving the future. How will it shape up? An investor has to dream, imagine and think like a philosopher.
  • A multidisciplinary approach is most important — it brings common sense and wisdom to the table.
  • De-rating to re-rating is the game of investing. Buy stock from pessimists, sell it to optimists and be patient in between.
  • The formula for great investments is VVL:
  • Vision ­– One has to have some vision and imagination as to what can be the potential of this company and how big can it become
  • Value – Buy stock at a reasonable value
  • Luck – This is extremely important for truly great investment success as many unforeseen and unthinkable things can happen — good and bad.
  • Price/Earnings (P/E) ratio of 15 or lower would be preferred, but focus on the quality and longevity of the business. Don’t be rigid on the P/E ratio. It is just one of the many tools of valuation.
  • Always look at the unallocated capital in the balance sheet and calculate the capital employed on the segmental capital employed.
  • Co-efficient of linear expansion — after a certain point, any more heat supplied to a metal strip is wasted. The metal does not expand in the same proportion to the quantum of heat given. Similarly, a great business does not need additional capital to grow, while a poor business needs capital infusion forever to go on and yet does not grow.
  • There are no profits, only future costs of staying in business. A real profit is only earned when you cover the present costs as well as the future costs.
  • Investing is about durability and the value addition by the companies in their products. Gillette is a good example of this. It used to cost #2 per razor and one could shave with it for 15 days, but now, due to value engineering and innovation, Gillette is selling ‘Mach 3’ razors at #220 per piece, and they each last for 60 days. Thus, volume growth is low, but there is significant value growth.
  • If something compounds at 40% CAGR for a long period, then it’s better to sell and move into an inevitable business which compounds at 14% forever. A child becomes a teen, a teen becomes a man, but a man doesn’t become a tree.
  • It’s all about survival of the fittest ­— Nature is a miserly accountant, pinching pennies and punishing the smallest extravagance. It does not tolerate waste. The market systematically weeds out extravagant and low Return on Equity (RoE) businesses.

On The Current Liquidity Dluge

  • Not all types of growth are good — there is good growth (muscular), bad growth (fat) and growth that ultimately kills (cancer).
  • In an organism, there are three types of genes: 1) A gene that replicates fast, dies fast; 2) A gene that replicates slowly, dies slowly; 3) A gene that does not make mistakes. These three quarrel among themselves for dominance, and the protein molecules keep them in control by maintaining its command. When the protein molecule loses control, the genes replicate anyhow and this is called cancer. (Reference: The Selfish Gene by Richard Dawkins). The central bankers are now like the protein molecules — they are losing control.
  • For 400 years, the Ptolemaic society assumed and preached that the sun revolved around the Earth. It was Copernicus who said that the Earth revolved around the sun, but he was jailed for his view. The lesson to be learned from this is that irrationality can persist for a long time.
  • Future cash flows are difficult to predict due to the very word ‘future’, which is uncertain and unknown. Beware of the Spreadsheet Specialists. They mesmerise investors with their rosy projection to justify high valuation.
  • There are times in the market or business when nothing goes wrong for a long period. Such times are the most dangerous. They lull you into believing that nothing can ever go wrong.

The Touchstone

Inevitable values essential for survival in this turbulent world:

  • High enlightenment
  • High integrity
  • Low expectation
  • Hard work
  • Don’t lose your curiosity. Never stop questioning. Think differently, think differently, think differently — follow the advice of Jacques Derrida who urged us to think beyond and beyond. Never stop thinking of consequences, and the consequences of consequences. Take nothing or nobody for granted. Don’t assume anything.

I have tried my best to capture the essence of his wisdom through these notes. His exact words may have been different. Any errors or omissions here are mine. These points are not sacrosanct. I urge readers to think for themselves as Chandrakantbhai always advised.


The author is managing partner at Kroma Advisors & Trading LLP

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