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I m exceptionally proud and honored to present an interview with one of the top va lue investors of India, Mr.

Chetan Parikh. This interview with Mr. Parikh repres ents one of the highlights of my career. Mr. Parikh is a man whom I admire and w ho has extensively contributed to the value investing community (via Capital Ide as Online and his numerous writings). I hope you enjoy the interview. Mr. Chetan Parikh s Background Chetan Parikh is a Director of Jeetay Investments Private Limited, an asset mana gement firm registered with SEBI. He holds an MBA in Finance from the Wharton Sc hool of Business and a BSc in Statistics & Economics from the University of Bomb ay. He has been investing in the Indian capital markets through proprietary inve stment companies and family trusts. Chetan was rated amongst India s best investors by Business India magazine. He is also the co-promoter of capitalideasonline.com, a well regarded investment websi te. His writings have been published in Business Standard, Business World, The E conomic Times, and Business India. He is a visiting faculty member at Jamnalal B ajaj Institute of Management Studies (University of Bombay) for the MBA course. Opening Questions Q. There are many different approaches to investing. What led you to choose the value approach? A. Value investing is a logical, safe and disciplined approach to investing. It requires a lot of patience which fits in with my temperament. Q. Which investors do you admire? Besides these investors who else has influence d you? A. Any value investor can learn a lot from the Masters. In India I ve listened to and learnt from Prof. Rusi Jal Taraporevala and Mr. Chandrakant Sampat. Q. What s your opinion of the efficient markets hypothesis and practitioners of te chnical analysis? A. I believe that the efficient market hypothesis in the various avatars (strong , semi-strong and weak) is not correct. Sometimes prices deviate far away from i ntrinsic values and it is possible to earn high risk adjusted returns. In fact, the lower the downside risk, the higher can be the upside reward. I do not know anything about technical analysis. Q. Tell us about your approach to fundamental analysis-what is your focus? How d o you search for your investment ideas? Where do most of these ideas come from? Describe your evaluation process (both quantitative & qualitative)? How long do you hold on to your positions? A. My firm, Jeetay, principally invests in publicly traded Indian securities and seeks to maximize investors capital by buying securities trading at values mater ially lower than their true business value. Jeetay aims to achieve high absolute rates of return while minimizing risk of ca pital loss. Jeetay combines the analytical vigor of determining the fair value o f a security with a deep understanding of the Indian markets. Jeetay will invest in securities where it can ascertain the reasons for the market s mispricing and the likelihood of the mispricing being corrected. Jeetay follows the value investment philosophy, which means that the objective i s to buy a security trading at a significant discount to its intrinsic value. Si

nce the focus is on discovering undervalued stocks, the fund doesn t base its inve stments on macro-economic factors like GDP growth. Jeetay determines intrinsic value as the present value of the future cash flows of a company discounted at a rate that properly reflects the time value of the m oney and the risks associated with the cash flows. In other cases Jeetay invests in Special Situations which involve the following: Repositioning assets to higher uses Mergers and acquisitions / open offers Restructuring troubled companies Spin-offs Buybacks The fund invests in a company if the market price is quoting at a discount of at least 60% to the intrinsic value. It sells when the market value approaches int rinsic value or it finds a security trading at a steeper discount to intrinsic v alue. Jeetay believes that while in the long term, a company is valued by its fundamen tals, short term mispricing occurs due to investor psychology, liquidity and mac roeconomic factors. This provides opportunities for the diligent and patient inv estor to make outstanding risk-adjusted returns. The time horizon of Jeetay is 3-5 years. It believes that short-term market move ments can be volatile and the market may recognize mispricing only in the medium to long term. Hence the emphasis is on understanding the corporate strategy and the resultant cash flows for a 3-5 year period. The probability of the markets recognizing the mispricing becomes high over the medium to long-term period. The firm does not limit its investments to certain asset classes or sectors. The fund evaluates any sector or asset class where a conservative estimate of intri nsic value is determinable with a reasonably high probability and invests if the security is available at a reasonable margin of safety. The firm does extensive research to arrive at estimates of expected cash flows, asset values and earnings. Jeetay culls information from public databases, quart erly and annual filings, annual reports, meetings with management, competitors, vendors, customers and other industry participants, industry experts, trade jour nals and bankers. Jeetay has extensive networks in India to get data and informa tion for superior analysis. Jeetay believes that a disciplined private equity ap proach to investing that stresses on buying at a discount to intrinsic value wil l deliver consistent absolute above average investment returns and safeguard cap ital irrespective of the state of the markets. Jeetay believes that the following steps are essential to its process: 1. Opportunity Identification. Jeetay identifies opportunities through a multitu de of ways. Jeetay has numerous financial models and screens that are used to fi lter investment opportunities within the framework of the investment philosophy. Jeetay has many contacts and professional relationships. This gives it many opp ortunities consistent with the investment philosophy. 2. Analysis. Jeetay does intensive financial and qualitative analysis on compani es once an opportunity is identified. The analysis is mainly to arrive at whethe r a disparity exists or not between the traded value of the security and its int rinsic value. Jeetay has substantial experience in determining the intrinsic val ue of a company across sectors. Multiple valuation metrics including discounted cash flow analysis, price to earnings, dividend discount model, price to sales, price to book, comparative analysis is used to arrive at the valuation of a comp

any. Other than financial analysis, Jeetay extensively meets every possible associate of the company to understand the opportunity better. These include vendors, cus tomers, middle management, bankers, competitors, large stakeholders and senior m anagement. This helps Jeetay arrive at a closer intrinsic value and also exit an investment if unfavourable events arise or the team s original calculation of int rinsic value was wrong. The analysis would focus on the 3B s, lance sheet and looking for bargains. Take each in turn: Business: What is the nature of the business and its competitive strengths a nd weaknesses? What is the competitive ecological niche that it occupies and how protected are its profits from predators there? What are the nature of the entr y barriers or moats - intangible assets, switching costs, network effects, cost ad vantages? How wide and deep are the moats? Does the business cover its cost of c apital? A qualitative assessment of the business should be made to understand wh ether it is a superior or inferior business. Evidence of pricing power or the ab ility to lower cost of production and distribution should be searched for. Balance Sheet: In order of importance is the balance sheet, the cash flow st atement and the profit and loss account. Bargains: One need not to be able to determine value exactly to know whether a stock is cheap or not. As Ben Graham wrote, To use a homely smile, it is quite possible to decide by inspection that a woman is old enough to vote without kno wing her age, or that a man is heavier than he should be without knowing his wei ght. A discount to value, a margin of safety is paramount, without which an investo r is relying on the whims of Mr. Market for his investment return. Q. As a follow up question, how do you determine intrinsic value? A. The textbook definition of Intrinsic Value is the present value of the future cash flows discounted at a rate that realistically reflects the time value of m oney, risk and volatility of the cash flows. The problem is that it is difficult to: 1. determine the future free cash flows 2. determine the discount rate 3. determine the terminal value There are very few companies, i.e. those that are franchises earning well over t heir cost of capital and growing whose intrinsic value can be calculated using t he Dcf approach. Ben Graham s method of bargain identification is useful in other cases. You don t have to calculate intrinsic value with precision (especially where it is not possible) to know whether a stock is cheap in seldom to its value or not. Q. Do you invest in foreign companies? If so, do you evaluate foreign companies different than those based in India and how do you hedge currency exposure(s)? A. I have not invested in foreign companies as of yet. Sitting in India, I would have to invest in the large cap stocks in foreign markets, and have not as yet Understanding the business, analyzing the ba

found large caps in USA to be cheap in relation to my investing universe in Indi a. Whilst markets may change, valuation principles are universal-they are the sa me whether it s the USA or India. Q. How many stocks do you typically hold in your portfolio? A. In my family portfolio, given the time horizon and tax considerations, there is a heavy concentration on a few stocks that have franchise value and entry bar riers. There are smaller positions, but the bulk of the portfolio is in a handfu l of stocks. In the managed accounts, price in relation to value is of paramount importance a nd many of the businesses are clearly not franchises. The portfolio thus in the managed accounts tends to be more diversified with roughly around 18-25 position s. Cash is carried at all times in the managed portfolios, the level directly co rrelated with the valuation of the broad market. Q. Do you invest in any fixed income? If so, tell us about the role of fixed inc ome investments in your portfolio. A. I do not normally invest in fixed income securities. Cash is usually a defaul t position and varies directly with the level of the market. The cash is usually kept in the bank or in money market funds. I do not like to take a credit risk with money that I know will eventually be opportunistically deployed in the stoc k markets. The key is to be able to sit on your low-yielding cash without losing your patience. Q. . How do you judge a company s management? A. There are three ways of looking at management: 1. their integrity 2. their competence both operational and in capital allocation

3. their corporate governance In the end you want to deal with people who do not make your stomach churn. Inte grity and competence are both necessary in top management. Finally there is the factor of the passion to improve the game by never becoming complacent. Sometimes a good price can cover a multitude of sins, including poor management. But if I had to hold a non-franchise investment for any length of time, managem ent would certainly be an important factor. In many cases, it is the jockey, not the horse that one should bet on. Q. What makes you sell an investment? A. I sell when: My original thesis was wrong Price is reached A better option comes along Ben Graham s criteria should be kept in mind. Switch for: 1. Increased security 2. Larger yield

3. Greater chance for profit 4. Better marketability Q. How do you look at risk? A. Risk is very subjective. Academic theory has one definition of risk namely st andard deviation which is wrong. Actually, if one had to use statistical distrib utions to measure risk, then there are three dimensions, Variance, Skewness & Ku rtosis. I do not think however that risk can only be captured by statistical measures. T o me, risk is simply the chance of permanent loss of capital and an investors job is to eliminate that risk. He may not be able to do so for individual securitie s, even with a margin of safety, but he has to do it in a portfolio context. Q. What s your take on leverage? A. Leverage is one of the two things that can cause a permanent loss of capital to a value investor. Avoid it, unless you are willing to take a risk of a perman ent loss to your capital. The other thing that can cause a permanent loss of cap ital is holding on to overvalued stocks, but I assume that a value investor woul d not do that. I always carry cash for optionality, rather than borrow against my holdings shou ld the opportunity arise. Q. Do you invest in commodities, gold, real estate, etc? If so what has been you r experience with these classes? A. I have legacy investments in real estate. I view it as an inflation hedge and a different asset class in the portfolio. Currently I have investments in gold as a hedge against a highly likely decline in the value of the dollar and a meltdown in financial assets. The economic prob lems in US are severe and the wrong treatment is being given. When fiscal and mo netary insanity prevails, gold always reigns supreme. I m not making a directional bet on gold prices it is only a hedge against my financial investments. Q. Tell us a little more about your involvement with special situations? A. It depends on the definition of special situations . If special situations means a value stock with identifiable catalysts like change in management, operationa l and financing restructuring, buybacks, mergers and acquisitions etc, then we c ertainly do invest in special situations. We have investments in spin offs and i n open offers as a result of takeovers. Q. Have you ever taken the role as an activist investor, would you ever do so? A. I ve never wanted to take a confrontational attitude with management although s ometimes I m forced to. If I m not happy with their policies, I sell - but my aim is to influence management through logic and rationality, not through financial bl ackmail. There is a grey area however. I ve been connected with the press through my column s in various newspapers and magazines and I ve written about instances of corporat e misgovernance there. But I ve never threatened management. I do not have the temperament to fight management or for that matter, anybody. I believe in exiting relationships where there is no mutual respect, rather than

slugging it out for dominance. Q. We understand that you are very focused on bottom up value investing-what has the financial crisis taught you? A. I wrote this piece awhile ago and it would be related to the question above. It may be interesting to use a cross-disciplinary approach to the problems and m istakes made by banks in the sub-prime market. The power of rewards that leads to repeated actions and the flawed compensation structure that led to misaligned incentives could be one mental model. As Raghur am Rajan pointed out in Financial Times (Jan 9, 2008), the compensation practice s in the financial sector are deeply flawed. The compensation is based on the so -called alpha that a manager of financial asset generates. There are three sources of alpha : 1) Truly special abilities in identifying undervalued assets (eg. Warren Buffett ) 2) Activism using financial resources to create, or obtain control over, real as sets and to use the control to change the payout obtained on the financial inves tment. 3) Financial engineering financial innovation or creating securities that appeal to particular investors. Many managers create fake alpha i.e. they appear to create excess returns but are taking on tail risks which produce a steady return most of the time as compensatio n for the very rare, very negative returns ( black swans ). The AAA rated CDOs gener ated higher returns than similar AAA rated bonds. The tail risk , so evident in hin dsight, of the CDO defaulting was not as small as perceived and so the excess re turn was compensation for that. The credit rating agencies that rated these securities as AAA because of their in sured status were themselves wrongly incentivized (compensated by the issuers of the securities). Furthermore once their peers started issuing AAA ratings, social proof came into play and the ratings war as to who assigned the highest ratings for junk became a classic Prisoners Dilemma.. This is proving to be a game of chicken between the regulators and the players ( banks and monoline insurers). In a classic game of chicken, two cars drive towar ds each other. The first driver who turns loses. Of course, if neither car swerv es then there is a crash. The best outcome for each player results when he goes straight whilst his opponent turns. Insane players have a massive edge in a game of chicken. At this point of time, the jury is out given the level of insanity in the system. Q. How have you evolved as an investor? A. I guess the process but efficient markets I ll never leap out of so my ability to widen of evolution is never over. I started out knowing nothing and so the leap to value investing was a big one. I know value investing, but the nuances may undergo changes, as al and deepen my circle of competence.

Q. What is the most interesting part of your job? A. It is searching for investment ideas, working out the odds and reading from a wide variety of sources.

Q. Which books would you recommend? A. Here are a few, but they are by no means exhaustive. Everything by Jared Diamond Everything by Garett Hardin The Road to Serfdom - Friedrich Hayek The Prophet of Innovation More than your know - Michael Mauboussin The Robot s Rebellion The mind of the market - Michael Shermer Try to read all of Mr. Munger s book recommendations and also the books in Mr. Pet er Bevelin s Bibliography in Seeking Wisdom: From Darwin to Munger . I do not think t hat I ll be able to read all the books that have been recommended in my life time but I m going to give it a shot. Q. What is the biggest mistake keeping investors from reaching their goals? How have you guarded yourself against this folly? A. Greed, fear, sloth and envy are the four emotions that are positively inimica l to becoming a better investor. Meditation, detachment from results, but attachment to efforts, yoga, discipline in living and thinking are some of the ways for self-improvement in investing. One must also have an open mind to new ideas and try to become in the words of M r. Munger a learning machine. Q. What should investors understand before investing in India? A. Indian markets are very volatile, so be very careful on entry prices. Growth is a seductive term and stories woven about growth even more seductive, but be ver y careful of paying too much for it. Homework matters. Liquidity can dry up, so be clear whether you can live with relatively illiquid positions. Closing Questions Q. If you could do anything besides allocating capital what would you do? A. I would teach and write more often than I do. Q. What message/advice would you give to readers of SimoleonSense? A. Read a lot, be disciplined, be humble about your knowledge and stay within yo ur circle of competence. Q. What does the future hold for you, your funds, and website? Are you going to do this forever? A. As long as I can, mentally and physically. Miguel Barbosa: Mr. Parikh thank you for taking the time to interview with us.

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