PGP: Format for Course Outline (2017-18)

i. Course title: Applied value investing

ii. Area to which the course belongs: Finance and accounting

iii. Term in which the course is to be offered: Term 5

iv. Instructors’ name(s) with number of sessions by each instructor:

A.N. Seshadri (12 sessions)

v. Course credits: 0.5

vi. Course Open for:

Programme PGP* PGP-FABM PGPX FPM Total
# of students Yes Yes 60

* PGP includes Exchange students on pro-rata basis.

vii. Introduction:
This course will help students learn a practitioner’s perspective on bottom-up, value-
oriented, long-only, long-term, active investing in stocks.
The journey towards becoming a good investor is a life-long one, and this course is only a
beginning. Through the course, students will be exposed to the process of developing
investment hypotheses, conducting diligence on the business and management team,
performing financial analysis, making financial forecasts and assessing buying prices for a
variety of companies.
The course can conceptually be split into 3 parts, which build on each other:
o Building the toolkit: Developing hypotheses, assessing business and management
quality, financial analysis, forecasting and valuation (sessions 1 to 7 below)
o Applying the toolkit: Frameworks for evaluating and investing in different types
of businesses (sessions 8 to 10)
o Managing a portfolio: Moving beyond researching individual stocks towards
understanding the psychological biases / institutional issues to be overcome while
constructing and maintaining a portfolio (session 11 and 12)

viii. Objective:
The objectives of the course are:
(a) helping students build the technical and psychological tool kit required to become long-
term investors, and
(b) aiding the development of sound investment judgement.
The course is most relevant to students with an interest in long-term investing in public or
private companies.
viii. Pedagogy:
The course will use a combination of: (a) reading material (b) lectures and discussions, (c)
exercises, (d) an individual written exam, and (e) a group project.
Reading material will be shared prior to class, and the emphasis in class will be on: (i)
deepening conceptual understanding of the topic, and (ii) practical application of the
lessons learned.
Students who seek greater depth of knowledge and challenge are encouraged to go beyond
the core reading material for a class, by exploring the optional reading material as well as
by taking on optional homework.

ix. Evaluation Scheme:

Grades will be based on class participation (10% weightage), individual exam (50%) and
the group project at the end of the term (40%).
a. Pre-work
Each student individually has to create a paper portfolio for Rs. 1,000,000 on
September 1. Students are encouraged to create portfolios with a 2+ year investment
horizon, but they can buy / sell any stock listed on NSE / BSE, any number of times.
Leverage and derivatives are not allowed.
For each trade (including the initial portfolio), students have to write a short note (as
little as one paragraph, no more than a page) explaining their buy / sell decision, and
submit it to the teaching assistant within 2 days of the trade. More details about the
mechanics of this project will be communicated separately.
The course facilitator and the teaching assistant will evaluate portfolios, for September 1
to November 1, in session 12 (see below). On November 2, each student has to send an
email to the course facilitator and teaching assistant with the following information:
value of their portfolio as of November 1 end, the 3 biggest winners (by value and %),
the 3 biggest losers (by value and %), % of portfolio invested in the largest position, %
of portfolio invested in top 5 stocks, number of buy / sell decisions (after creating the
initial portfolio) from August 1 – November 1, and key lessons learned, in no more than
one page.
b. Group project
Students are to form groups of 6. By applying learnings from the course – assessing
business and management quality using ‘scuttlebutt’, financial analysis and valuation
techniques – each group has to make a ‘buy’ or ‘sell’ investment recommendation on
any company listed on the NSE or BSE, to an investor with a 2+ year horizon.
Students are encouraged to seek a deeper understanding of the company’s business and
management through their efforts, and go beyond focusing only on financial analysis
and forecasting. Efforts made to glean new insights about the business through their
efforts will receive extra credit during the grading process.
Each group will present their recommendation in 7 minutes, followed by 3 minutes of
questions and answers.
The group project presentation will happen after the conclusion of session 12 (see
below).
x. Course Books/Reference Materials:
The course facilitator will share a presentation for reading ahead of each session.
Excerpts from the following books will also be used during the course:
 The Art of Value Investing: How the world’s best investors beat the market, by
John Heins and Whitney Tilson (‘AVI’)
 The Manual of Ideas: The proven framework for finding the best value
investments, by John Mihaljevic (‘MOI’)
 The sleuth investor: Uncover the best stocks before they make their move by Avner
Mandelman (‘TSI’)
 The Outsiders: Eight unconventional CEOs and their radically rational blueprint for
success, by William N. Thorndike, Jr. (TO)
 Quality investing: Owning the best companies for the long run, by Lawrence A.
Cunningham, Torkell T. Eide and Patrick Hargreaves (‘QI’)
 Beating The Street: The best-selling author of ‘One Up On Wall Street’ shows you
how to pick winning stocks and develop a strategy for mutual funds, by Peter
Lynch with John Rothchild (‘BTS’)
A list of good books on investing, financial analysis and popular psychology will be
circulated separately – all the books on this list are entirely optional reading.

xi. Session Plan:

 Session 1: Introduction to long-term oriented value investing
o Core reading: Presentation – introduction to long-term oriented value investing
o Other reading: Chapter 1 (pages 5 to 32) of AVI

Lecture session with exercises

 Session 2: Assessing business quality (1st of 2 sessions)

o Core reading: Presentation - assessing business quality (1 of 2)
o Other reading: Manual of Ideas interview with Pat Dorsey (pages 3 to 13)
o Other reading: ‘Measuring the moat’ by Michael Mauboussin et al (pages 1 to
70)

Lecture session with exercises

 Session 3: Assessing business quality (2nd of 2 sessions)

o Core reading: Presentation - assessing business quality (2 of 2)
o Other reading: Introduction, Chapter 1 (pages 1 to 45) of TSI
o Other reading: Pages 127 to 146 of AVI

Lecture session with exercises

 Session 4: Assessing management quality (1st of 2 sessions)

o Core reading: Presentation - assessing management quality (1 of 2)
o Other reading: Chapter 5 (Pages 117 to 151) of MOI
o Other reading: Pages 147 to 163 of AVI
Lecture session with exercises
 Session 5: Assessing management quality (2nd of 2 sessions)
o Core reading: Presentation - assessing management quality (2 of 2)
o Other reading: Preface (Pages vii to xix), Introduction (Pages 1 to 12), Chapter
9 (Pages 197 to 214) and Epilogue (Page 215 to 220) of TO

Lecture session with exercises

 Session 6: Financial analysis and forecasting

o Core reading: Presentation – financial analysis and forecasting
o Other reading: Selected blog posts from the Bronte Capital blog
(www.brontecapital.blogspot.com) by John Hempton

Lecture session with exercises

 Session 7: Valuation
o Core reading: Presentation – valuation
o Other reading: Competitive Advantage Period by Michael Mauboussin and Paul
Johnson
o Other reading: Pages 184 to 206 of AVI

Lecture session with exercises

 Session 8: Investing in cyclical businesses

o Core reading: Presentation - investing in cyclical businesses
o Other reading: Page 9 (pages 160 to 176) and Chapter 15 (pages 233 to 243) of
BTS
o Other reading: Value Investor Insight interview with Robert Robotti (Pages 1 to
9)

Lecture session with exercises

 Session 9: Investing in good businesses hit by a shock

o Core reading: Presentation - investing in good businesses hit by a shock
o Other reading: Manual of Ideas interview with Charles de Vaulx of
International Value Advisors (pages 1 to 22)

Lecture session with exercises

 Session 10: Investing in high-quality ‘compounders’

o Core reading: Presentation - investing in high quality ‘compounders’
o Other reading: Chapter 1 and Chapter 4 of QI
o Other reading: Interview with Bill Nygren of Oakmark Fund (pages 1 to 14)

Lecture session with exercises

  Session 11: Psychological biases and institutional issues
o Core reading: Presentation – psychological biases and institutional issues
o Other reading: Vanguard note on behavioural finance
o Other reading: Presentation by Richard Lawrence, Jr. of Overlook Investments
at the Value Investing Conference, 2014 at the Ben Graham Center for Value
Investing
o Other reading: Interview with Richard Lawrence, Jr. of Overlook Investments

Lecture session with exercises

 Session 12: Portfolio management

o Core reading: Presentation – building and maintaining a portfolio
o Other reading: Chapter 8 (pages 215 to 231), chapter 10 (pages 257 to 266) and
chapter 11 (pages 281 to 296) of AVI

Lecture session with exercises

Optional homework exercises will be shared with the class separately.

xii. Pre-requisites & Eligibility:

There are no pre-requisites for this course. The course assumes basic knowledge of
financial accounting (balance sheet, profit and loss account and cash flow), ratio analysis
and corporate finance (cost of capital, how companies raise and invest cash).

xiii. Relationship to other courses:

This course directly and indirectly draws on the following courses:
o Financial Statement Analysis
o Valuation Of Firms
o Modern Investment and Portfolio Management
o Behavioural Finance