There seem to be two schools of thought even within the world of value investing. One is the Cigar Butt school, whose ideology was propounded, practised and popularized by Benjamin Graham, and whose modus operandi of investing was to look for very, very cheap stocks (cash bargains, net current asset bargains etc) that automatically implied a reasonable margin of safety by their cheapness, and to invest small amounts in a few such securities. The key is to spread the risk around by investing in a fair number of such securities, and rely on this diversification to compensate for any lack of knowledge or clarity about management, business underpinnings and other such details about the company. You had to rely on the margin of safety and diversification to protect your capital across the entire portfolio, and seek your return on capital on the few securities that should work out if you have a large enough set of securities in your portfolio.
This approach was followed by Benjamin Graham and Warren Buffet in his early day (before he was influenced by Charlie Munger). Sanjay Bakshi has apparently evolved in the reverse direction from Warren Buffet, and now follows the many diversified Cigar butt portfolio method of investing (could this be because of bad experiences he may have had in the Indian stock market?).
There is however a problem with this approach. You are spreading your capital across many securities, so the ability of each investment to impact your total portfolio value is limited. Thus, you do not get the full benefit for being right on some ideas. However on the other hand, you are also protected on the downside, in case some of your ideas do not work out. This appears to be a more conservative way of investing (or maybe it is a lazy way of investing, since you do not want to put in the effort to understand all the required details about the company to determine its intrinsic value and the risk factors that may prevent the market cap of the company from rising above this intrinsic value).
The second school is the Great Business at fair value school. Here, you know enough facts about the business to be very, very sure that the intrinsic value will go higher in the future, so you can afford to concentrate your portfolio, and invest more capital in a few such opportunities. Here, being right brings tremendous rewards, and your portolio value can grow quite fast. It comes with the risk that a few bad eggs in the portfolio and can do a lot of damage to the value of the whole basket. So it all comes down to how sure you are of your facts, and how certain you can be about the intrinsic value going up. Warren Buffet seemed to be quite sure, and so he took more chances and it paid off hugely for him. In the context of the Indian stock markets, is it ever possible to be so sure, without having a direct line to the company management? Is this the reason why Sanjay Bakshi started off in the Great Business at fair value school, and ended up moving more towards the Cigar Butt school?
This approach was followed by Benjamin Graham and Warren Buffet in his early day (before he was influenced by Charlie Munger). Sanjay Bakshi has apparently evolved in the reverse direction from Warren Buffet, and now follows the many diversified Cigar butt portfolio method of investing (could this be because of bad experiences he may have had in the Indian stock market?).
There is however a problem with this approach. You are spreading your capital across many securities, so the ability of each investment to impact your total portfolio value is limited. Thus, you do not get the full benefit for being right on some ideas. However on the other hand, you are also protected on the downside, in case some of your ideas do not work out. This appears to be a more conservative way of investing (or maybe it is a lazy way of investing, since you do not want to put in the effort to understand all the required details about the company to determine its intrinsic value and the risk factors that may prevent the market cap of the company from rising above this intrinsic value).
The second school is the Great Business at fair value school. Here, you know enough facts about the business to be very, very sure that the intrinsic value will go higher in the future, so you can afford to concentrate your portfolio, and invest more capital in a few such opportunities. Here, being right brings tremendous rewards, and your portolio value can grow quite fast. It comes with the risk that a few bad eggs in the portfolio and can do a lot of damage to the value of the whole basket. So it all comes down to how sure you are of your facts, and how certain you can be about the intrinsic value going up. Warren Buffet seemed to be quite sure, and so he took more chances and it paid off hugely for him. In the context of the Indian stock markets, is it ever possible to be so sure, without having a direct line to the company management? Is this the reason why Sanjay Bakshi started off in the Great Business at fair value school, and ended up moving more towards the Cigar Butt school?
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