Sanjay Bakshi, Adjunct Professor-Finance, Flame University, says from a fundamental value investing perspective, the key factors that determine an investment's profitability remain constant, even as the number of variables to consider has not changed. However, the amount of information related to these factors, along with other elements affecting stock prices, has significantly increased. This has led to a growing ratio of noise to signal, where the critical factors are a small dot within an expanding circle of noise. In this value investing masterclass, Bakshi says the essential skill is to focus on the signal while avoiding being overwhelmed by the noise.

Q) How did you get interested in the world of investing because when you started investing in equity markets, investing was not the heart of India. A minority of Indians were connected with stock markets and a handful of them understood value investing.

Sanjay Bakshi: You are right. But it is not right to say that there was no interest in equities because I got interested in this field in the early 1990s and India was going through that famous Harshad Mehta scam which happened in 92. I was a student in the London School of Economics, and I discovered the idea of value investing while I was there. I came across the Warren Buffett letters and through those letters I discovered his own teacher, Benjamin Graham.

My interest in value investing started around the same time when India was actually going through a phenomenal bull market, which was actually scandalous. But yes, at the time, people were mostly buying stocks based on tips and there was not a lot of method which has come subsequently. I have been a part of that journey. I feel very privileged and honoured to have been a part of the growth of the Indian equity markets and so here we are.

Q) Not only are you a true blue value investor, you also are sharing your experiences. More importantly, you are very open about teaching the concepts of behavioural finance and market psychology. When did you gravitate towards teaching?

Sanjay Bakshi: Oh, it happened sometime in 1998. I had only spent about four years accumulating some experience as an investor in India. In 1998, I got an opportunity to go and teach and I absolutely enjoyed it. I have done it for more than two decades now. Over time, I realised that I have become a better investor because I am a teacher, because teaching reinforces ideas and philosophies that have worked over time. We all change over time. And my own thinking on the subject of investing in businesses have changed over time.

As you teach what you practice, the things that have really worked for you, they tend to get reinforced because you have to do it over and over again, and that turns you into a better investor. Of course, students love having a practitioner in the classroom because in the class, I teach about my experiences, my mistakes, the successes and what I have learnt over the years both directly and vicariously by studying other investors out there. So, it has been a wonderful experience wearing both these hats.

Q) Allow me to take the clock back. From 30-35 years ago, when you started your journey as a value investor, how has value investing evolved? They say that the rules of the game do not change, like they say that in stock markets courses remain the same, it is the horses that change. In your mind, how exactly has value investing evolved and will evolve?

Sanjay Bakshi: The fundamental principles of value investing are exactly the same as they were when they were expressed by Ben Graham in his books back in 1934. There are essentially three key ideas. The first idea is to treat investing in stocks as if you are buying a stake in a private business which does not have a quotation, basically detached from the quotation, focus on the business and the fundamentals, so that is lesson one.

The second one is to treat the market as a servant and not as your master and to take advantage of mispricing that will occur because of irrational behaviour of the market.

The third lesson is to insist upon a margin of safety and how to go about implementing those ideas. They may have changed and evolved over the years, but those three big ideas we can call them first principles, have remained unchanged. So, yes, evolution is obviously there.

Today, we have a market where we have high frequency trading with average hold periods of a few milliseconds to investors whose holding period, generally speaking, have also dropped over the years. So, yes, all those things have happened, but those three principles that I mentioned, they have not changed and they have stood the test of time and that will continue.

Q) How has technology changed value investing or market behaviour? There was a time when there was paucity of information and information was an edge. Now, there is an abundance of information and how you choose and how you react to information gives an edge. How do you think information and technology has changed the whole dynamics of value investing?

Sanjay Bakshi: I teach that in the class also. From a pure value investing perspective, the things that really matter in determining whether investment in a certain business will make money for you over time or not, those things have not changed. The number of variables, the number of factors that you have to think about when you think about investing in a certain business, have not changed.

But the information surrounding them and not just them, but also many other factors which have an influence on stock prices, but have zero influence on those three or four things that really matter from a business fundamental point of view, have grown like crazy. So, to put it in perspective, if you think about it as noise to signal, the noise to signal ratio has become very large and it is growing exponentially, which means that the signal which is the little dot in a circle about things that really matter, that remains unchanged, but the circle of information, a lot of it is actually noise keeps growing over time.

The key trick to learn is how to focus on the signal, how to not give in to the cacophony around that signal because with all that cacophony, the signal will get drowned out. So, how to identify a signal is the key skill to acquire and it has always been the case, but it is becoming harder because of the growth in the noise to signal ratio and I think the big lesson for investors is to learn how to focus on what truly matters and ignore everything else.

That is the key thing that technology has made harder. Today, there is a world where people have access to real-time information about companies, about data, about the stock prices, but the things that truly matter from a fundamental point of view, are things like the quality of the balance sheet, how much the product is liked by the customers, the competitive advantage it has, and how the business is changing over time.

Those things do not change in a single day whereas all the other things that I talked about, new developments are happening on a daily basis. The technology is making it harder for people to focus on the signal.

In conversation with Outlook Money: Prof. Sanjay Bakshi, Faculty of Finance, FLAME University.