Professor Sanjay Bakshi on Value Investing Styles

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Returns Per Unit of Stress

I have absolutely enjoyed practicing all these styles of value investing. Over the years, I also learnt a few additional things. One of them was about the idea of returns per unit of stress.

You can make a lot of money by being an activist investor, which I’ve done in the past. But it’s stressful. You can make a lot of money by shorting over-valued stocks of companies run by promotional and fraudulent managements. But it’s stressful. You can make a lot of money doing risk arbitrage where you have to monitor — perhaps 20 deals at any given point of time and be ready to react quickly when odds change. But it’s stressful.

I found that investing in moats is not stressful. It involves a slow and more meaningful understanding of how a business creates value over the very long term. And boy does it work!

I’d argue that if you pick 100 successful value investors who have compounded their capital over the long term (a decade or more) at a very healthy rate, then the vast majority of them would have accomplished that by first investing in high-quality businesses run by great managers at attractive prices, and then by just sitting on them for a long long time.

Moats are internal compounding machines. History shows that you get rich by just sitting on them because they do all the hard work for you. And I realized that over the years. Just as Mr. Buffett did when he too moved from classic Graham-and-Dodd to moats.

Read? returns per unit of stress.

If one was to think about stressful way of investing vs. a relatively stress-free way of investing, what would the differences look like? The following table offers some suggestions.

High Stress	Low or No Stress
Investing in Highly Leveraged Companies	Investing in Zero or Low Debt Companies
Borrowing to buy stocks	Never borrowing for buying straight equities
High Frequency Trading & Day Trading	Long Term Investing
Shorting	Long Only Investing
Cigar Butts	Moats
Business exposed to Negative Black Swans e.g. Banking and Commodity Trading	Businesses not exposed to black swans
Corporate Governance Issues	No Corporate Governance Issues
High P/E for Growth Stocks	Low P/E for Growth Stocks
Cyclicals	Stable businesses
Hostile Takeovers	Passive Investing
Dealing in F&O	Staying Away from F&O
Trading on Inside Information	Avoiding inside information
Event Driven Investing	Moats Driven Investing

Once you start incorporating return per unit of stress in your investment thinking, the trade-offs become obvious. You would start settling for investment situations which offer a satisfactory return per unit of risk and stress over those which offer high returns per unit of financial risk but low returns per unit of stress. You will slow down and start appreciating the slow process of long-term, stress-free compounding as opposed to nerve-wracking, adrenalin laden high frequency operations in the stock market.


My advice to those who ignore the stress part of the equation but focus only on returns per unit of risk: You cannot take it away with you, so what’s the point of all that stress, just for the money?