Sadhana Series - Parag Parikh
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Hello Dear Reader,
Today we will talk about a person whose life and teachings have shaped me a lot as an investor. If you want to learn about market psychology and behavioral biases, perhaps you will not find a better teacher than the Late Mr. Parag Parikh ji. Like him, his two books “Stocks to Riches” and “Value Investing and Behavioral Finance” are also timeless. I would recommend everyone to buy and read them.
Image Courtesy - Flame Investment Lab website
Mr. Parikh setup Parag Parikh Securities Ltd. in 1983 as an equity brokerage firm. In the early days, the delivery system was very time consuming. Being a broker involves much more than mere knowledge.
This led Mr. Parikh to shift his office to Veen Chambers opposite the BSE. In 1994, Mr. Parikh established PPFAS (Parag Parikh Financial Advisory Services). Mr. Parikh moved his office to Great Western Building in 1995 and launched a PMS by the name of Cognito in 1996. Not a lot of people know this but this was the first PMS to be registered with SEBI. In 2013, Mr. Parikh launched the flagship scheme of PPFAS, the Parag Parikh Long Term Equity Fund converting his PMS into a Mutual Fund.
Mr. Parikh always believed in the idea of making the growing middle class of our country rich and making investing accessible to them.
He was a hardcore value investor. His was the belief that understanding markets could only be possible through understanding psychology. He was of the belief that markets, have a mind of their own and to understand them, one has to follow many unconventional techniques not found in finance books. When he failed to understand the premium that was given to software companies in the bull run of 2000, he went to Harvard for an Executive MBA at the ripe age of 40 and kept going back to study behavioural finance in the US and Europe. He has been quoted in a Forbes Interview published in 2015 at the time of his departure saying that,
“I kept on believing that something was wrong in the way the market functioned and told my clients to hold on as I believed this rally will turn to dust. But that did not happen. Many of my investors lost money and it really hurt me a lot,”
- Parag Parikh: The eternal sunshine's no more, Forbes India, 2015
For Mr. Parikh, it was really important to uplift the emerging middle class of our country. Not only was his the first registered PMS in India, He was managing a portfolio management scheme for middle class investors with a ticket size of only Rs 5 lakh when all the competitors were asking for anything between Rs 25 lakh and Rs 1 crore.
While the entire industry was chasing money and building a large AUM, a practice that is rampant even today, Mr. Parikh was more focused on getting everyone included. He was not concerned about how much money he managed or what was his AUM, he wanted that the emerging middle class should get the same opportunity to invest in stock markets which HNIs got.
He believed in typically investing primarily in FMCG stocks or any other defensive sectors where there are long term returns and the volatility was very low. He was always of the belief the insurance should never be confused with investing. He was not interested in the quick road to riches. Mr. Parikh believed that Indian investors ought to look actively for value investing opportunities across the globe and argued that stocks such as Nestle and Google in the US markets were available at much more attractive valuations than many Indian stocks.
Buy defensive stocks and stay with them, no matter what happens. You will end up making money. Be a nice person because if you are not one, then all the things that you do in your life have little value.
- Parag Parikh: The eternal sunshine's no more, Forbes India, 2015
During the time of the dotcom boom, PPFAS clients did not get returns that were equivalent to other PMSes. He felt he was behind the curve and on advice of a friend in 2001, this made him go to Harvard.
On returning from Harvard, Mr. Parikh started to look at portfolio management as an art and a psychology experiment. His entire approach changed.
He started to look at things such as:
how institutional investors buy and sell stocks
triggers that allowed them to take decisions on sectors and companies
role of psychology
could the behavior of these institutional investors be predicted based on past data
Mr. Parikh did not have a terminal in his office. He had a meditation chair and lots and lots of books around him. Almost everything ever written on Mr. Warren Buffett was in his library.
Mr. Parikh was very focused on his clients. He thought of himself as a restauranteur eating at his own restaurant. Even though he was very focused on his clients, he never permitted his work and hobbies to rob time meant for his family and friends.
Recently, SEBI came out with a circular which most people call the Skin in the Game Circular.
In 2013, when he converted his PMS into a mutual fund, he was ahead of his time and announced that every employee of his firm would do their equity investing through the mutual fund. He also announced that he will invest through the same portfolio that he was managing for his clients. To avoid conflicts of interest with the mutual fund, he also shut down his broking business during that time.
Upon doing research, you will find that every fund house has on an average 20-30 schemes with some fund houses having more than 150 schemes.
Mr. Parikh in 2013 made it clear that he will have only one fund and he and his employees will not concentrate on other products. Almost a decade after his announcement, PPFAS still has only 4 schemes.
Image Courtesy - PPFAS Website
Mr. Parikh had a soft corner for the poor and emerging middle class of our country.
For decades now, the middle class community in India is scared of equity markets. There is consensus among them that equity markets are all about insider news and they have no hope in such a market.
Mr. Parikh wanted to beat this belief to the ground. That was one of the reasons why he was talking to a lot of people to invest into equities through his fund. He was of the strong belief that retail investors can create wealth only by picking quality stocks and staying put with them through market cycles. He insisted to his potential investors at PPFAS Mutual Fund that only those who were willing to stay on for five years should invest in the fund.
Even though he did not have the distribution and marketing power of a big mutual fund, he was clear about the kind of customers he was looking for and he had the patience and long term belief to get them to invest in his fund.
The Late Mr. Chandrakant Sampatji had a huge impact on the life of Parag Parikh Sir. It was Mr. Sampat who had, in a way, led Mr. Parikh to the stock market. Mr. Sampat was known to many as the Warren Buffett of India. His philosophy was also simple. He began accumulating shares of blue chips like Hindustan Unilever, Procter & Gamble, Gillette (then Indian Shaving Products), and Colgate, among others from the time they went public.
Consumer goods firms dominated his portfolio all throughout. He had three main parameters when he looked to invest in a company.
Minimum capital expenditure
At least a 25 percent return on capital employed (RoCE),
A record of paying generous dividends
He stayed invested for long term in many of the companies he bought. So much so that after dividends and buy-backs, his cost of acquisition was down to almost 0. He had a simple philosophy while investing.
“Pick up good companies with good managements when their share prices are at an eight year or 10-year low. Alternatively, if you still want to do something, buy good companies that are 40 per cent lower than their 52-week high. I will buy only those companies that are in a business that even fools can understand, have very little debt, have free cash flows or do not have much capital expenditure, which is nothing but deferred cost”.
- Thoughts on Markets and Life : Chandrakant Sampat, Stockifi Blog
In early February 2015, Chandrakant Sampatji passed away. On May 3rd, the same year, Mr. Parikh lost his life in a car accident in the US. He was in the US attending Berkshire Hathaway's annual general meeting at Omaha, Nebraska where the road accident took his life. I regard this day as the Black Day for Indian Equity Markets. Of all the people I could never meet, Mr. Parikh was one person whom I aspired to meet since the time I started my journey as an investor.
Since inception, his flagship fund, the PPFAS Flexi Cap Fund has given an annual return of 21.19%. The fund has a very low turnover of below 20%.
Image Courtesy - valueresearchonline
As a parting gift, I have made an unlisted playlist on YouTube of all of Mr. Parikh’s lectures and videos for you to go through. There are some 33 videos on the Playlist. I hope you learn as much from watching them as I have over the years.
I hope you enjoyed reading this post on Late Parag Parikh Sir. Please feel free to comment and leave me feedback on valueinvestorayush@gmail.com.
Rgds,
Ayush Agrawal
Disclaimer: The author of this publication is not a SEBI Registered Advisor or Analyst. The information on the company and its promotor mentioned in this newsletter is provided for information purposes only. It does not constitute an offer, recommendation, or any investment advice to any person nor does it constitute any prediction of likely future movements in the company’s stock prices or business performance. It should not be used as a basis for any investment decisions or as a proposition to buy or sell any securities. Please seek advice from a registered financial advisor and do your own due diligence before making any investment decisions.