A PORTRAIT OF A MAN WHO TOOK THE ROAD LESS TRAVELLED

Dedicated to
His grand daughters, Samaira and Kiara.
TIMELESS
 Contents
Foreword

Chapter 01 Breaking Ground, Not Principles 01

Chapter 02 No Shortcuts To Success 13

Chapter 03 Mind on Investing...Heart with the Investor 25

Chapter 04 Time For Everything 63

Chapter 05 PPFAS, Now And Going Ahead 82

Contemporaries Reminisce
Foreword
The human mind is capable of
incredible depth, and to those who
knew him, Parag Parikh was a man
who paved his own path simply by
his fearless vision and desire to
think outside the box. Even when it
seemed impossible, he imagined a
family home—he saw the shimmering
ocean when others were blindsided
by a grimy water tank. He believed in
long-term investments as a means to
wealth creation when others traded.
He explored behavioural finance while
others tackled the highs and lows of
the stock market. His childhood polio
infliction didn’t stop him from living
his dream to become a golfer. He was,
as many fondly liked to call him, a
contrarian. He never went the way he
was expected to go; he imagined the
impossible and then made it a reality.
Always helpful and generous to
those around him, he mentored
and encouraged many to be the
best they could be. In his talks on
various platforms and in schools, he
persuasively engaged young minds to
think differently. Never one to mince
words; and yet, he was always the one
people turned to for advice—even if it
were something they were not ready
to hear. Perhaps what made it easy to
digest was that he walked the talk. He
didn’t live to please people, but to do
what he felt right. While experience,
intelligence and his unending quest
for knowledge made him the perfect
sounding board, what kept his mind
young, supple and tuned in was his
desire to learn. He was a perennial
student—he went to Harvard Business
School (USA) for an Executive MBA at
the ripe age of 40 and kept going back
to study behavioural finance in the US
and Europe; he was attending a talk by
his guru, Warren Buffett, in Omaha, and
studying on Coursera until the end.
Despite being an investor all his life,
he never chased money, rather, he was
driven by the desire to lead a good life.
His life was never defined by a bank
statement, but by the peace and joy
one felt at the end of a day that was full
and rich with things that mattered to
him—a fruitful day at work, enriching
someone’s life, exercising, unwinding
over an evening drink while catching
up with his buddy, a nice home-
cooked dinner or a palate-challenging
meal out with family or friends,
reading, meditating, and most likely,
planning his next holiday…. For him,
money or success simply meant time
and freedom to do the things you love.
This book is a tribute to a man who
inspired those who knew him, a man
who will always be remembered
fondly, and a man who has truly
lived life to the fullest, all the while,
traversing a road less travelled.
The Parikh Family
chapter 01. Breaking Ground, Not Principles

Breaking Ground,
Not Principles
In the late 1970s, the Indian stock markets were in their infancy. There were no
benchmark indices like the Bombay Stock Exchange’s Sensitive Index or Sensex, or
the National Stock Exchange’s Nifty-50. In fact, the Sensex was only launched on
January 1, 1986 and Nifty-50 on April 1, 1996, four years after the infamous Harshad
Mehta scam. The Sensex hit its first 1,000 points in July 1990. It stands at an enviable
34,760 points as of October 10, 2018.

01
Veteran market players, who were could have gone in any direction.
part of the bourse in its early years, Parikh, who did his Masters’ degree
admit that the perception about stock in Commerce (Banking and Finance),
market participants wasn’t very good. veered towards the market after a one-
And if they introduced themselves year entrepreneurial management
as stock market brokers, the usual course left him disillusioned.
response was… “Oh, you gamble?”
He was helped along the way by
For today’s great profit could easily be
some sound advice from his father’s
tomorrow’s monumental loss.
friend – Chandrakant Sampat – one
Few people can turn abject failure into of the foremost practitioners of
grand success. Parag Parikh was one of value investing in India.
those rare people. And it was an arena
he entered purely by chance. Growing
up among South Mumbai’s community
of businessmen, he was not alien to
stock markets and trade. But his career
chapter 01.
“ Unlike the rich of today, who rely on wealth
for everything, Sampat’s philosophy in life was
– how many things can you do without.”
Mentor and Guide
Chandrakant Sampat, referred to by
many as the Warren Buffett of India,
entered the Indian stock market in
the mid-1950s. In those days, the stock
market was regulated by the Controller
of Capital Issues. His investing
philosophy was simple: buy companies
which have a high return on capital
employed, limited capital expenditure
and good track record in paying
dividends. This philosophy led him
to choose companies like Hindustan
Lever and Gillette (then, Indian Shaving
Products). And this was because,
when the government introduced the
Foreign Exchange Regulation Act in
the 1970s, the law required foreign
companies to dilute their equities at
lower prices. Sampat bought shares
of Gillette and Hindustan Unilever at
less than ₹20 per share, stocks which
he held for years. He believed that
individual investors should not buy
more than 6-8 stocks, but should hold
them for decades to get the benefit
of compounding. Also known to be a
fitness freak, he walked from his house
Breaking Ground, Not Principles
Chandrakant Sampat
above the National Garage, Haji Ali, to “Unlike the rich of today, who rely on
wealth for everything, his philosophy
Hindu Gymkhana in Marine Drive –
around seven kilometres – every day. in life was ‘how many things can you
Any conversation with him would do without’,” Parikh would often
be peppered with quotes from Peter say. Incidentally, Sampat passed
Drucker – a leading management guru. away in February 2015 at the age of
86, three months before Parikh’s
His influence on Parikh was immense.
unfortunate accident.
It was his advice that pushed Parikh to
enter the stock market. And Sampat
remained his guide and mentor
during Parikh’s long innings in the
stock market. Parikh was quoted in
newspapers describing how Sampat,
despite his wealth, lived a frugal life.
03
Timeless
After completing his Master’s
degree, Parikh took up a one-year
entrepreneurial management course
at Sydenham College in Mumbai. The
course was the first of its kind. It trained
students to become entrepreneurs
which helped them to set up their own
businesses in the small-and-medium
scale sector. Coming from a business
family, it was natural for Parikh to
opt for such a course.
However, his project on setting
up a plant to manufacture plastic
collapsible tubes for toothpaste which
could replace the then conventional
aluminium tubes, did not pass the
muster of the professor. Consequently,
Parikh was the only one who failed
the course. The professor reasoned
that the project was unviable because
toothpaste was sweet, and if stored in
plastic collapsible tubes it would be
eaten up by rats. Interestingly, in 1984,
Essel Packaging hit the market with a
similar idea and became a stock market
04
favourite. Till date, it has created a lot
of wealth for its shareholders.
Parikh didn’t clear the course, but
the experience gave him a clear idea
of what he wanted to do in his life.
Sampat advised him that if he had such
vision and could study businesses
so meticulously, he should enter the
stock market. Moreover, he reasoned,
running a business meant subjecting
oneself to the whims of government
officials for every little thing right
from power, raw material and so on.
On the other hand, a good study of a
business provided one the opportunity
to enter and exit a company’s stock.
Thus came about Parikh’s entry into
the stock markets in 1979.
But before that, he trained with the
research department of New India
Assurance Company where he learnt
to research stocks, and thereafter
started work as a sub-broker. Most
brokerage firms, in the 1970s and
1980s, were run like mom-and-pop
shops. Even Parikh learnt the business
of the bourse by initially working with
his uncle – Prafulchandra Parikh – for
the first few years before deciding to
set up his own firm.
But being a broker involved much
more than mere knowledge. In 1983,
when Parikh decided he wanted to
become a broker, he faced a serious
hurdle: the Bombay Stock Exchange
trading card cost lakhs – a significant
amount in those days. There was some
help from his mother, while wife Geeta
offered to sell her jewellery. But Geeta
extracted a promise from him – if the
business made money, Parikh would
take the family for a vacation every
year. And it’s a promise he kept...
In the early 80s, the stock market was
dominated by two domestic institutions
— mutual fund behemoth Unit Trust of
India (UTI) and insurance major Life
Insurance Corporation (LIC) of India.
At that time, Unit Trust of India had
only 12 empanelled brokers. To break
chapter 01.

“Geeta extracted
a promise from
him – if the
business made
money, he would
take the family for
a vacation every
year. And it’s a
promise he kept.”
Timeless
into that elite group, Parikh took a
unique route in those days – research.
He would do research on a company
and come out with a one-page report
on it. Geeta, who learnt shorthand and
typing after marriage, would type out
these reports. The reports were then
photocopied and sent out to various
financial institutions. Besides, he
would also photocopy good articles
from international magazines like
the Economist and Fortune and
send them to the institutions. These
initiatives helped him stand out from
the crowd. People who worked with
him for years remember that he could
simply walk in and meet chairmen of
the Bombay Stock Exchange without
any prior appointment.
Besides his research, Parikh had an
edge over local brokers when dealing
with institutions and foreign brokers
because of his superior command over
the English language. At the time, most
local brokers communicated in Gujarati
06
or Hindi and business was based more
on relationships rather than value
addition. The only value some brokers
offered was insider information on
companies or some market gossip.
In 1983, Parikh set up his first office
in what is now called the ‘Rotunda’
building, below the Bombay Stock
Exchange. The office had two floors
– the ground floor handled the fixed
deposits and initial public offers (IPOs)
businesses whereas the first floor
handled the brokerage business. He
had a team of around 12 people.
According to Ashok Pandurang Kerkar,
who worked with him for 27 years,
Parikh entirely handled the aspect
of marketing to institutions. Orders
from institutions like UTI and LIC
would be huge – about 500,000 to 1
million shares. Since the shares were
in the physical format, they required
massive paperwork bringing with it
a fair share of problems. Sometimes,
signatures would be missing on share
certificates, causing a lot of grief. In
such situations, one had to follow up
with brokers from whom the share
certificates were bought. And Parikh
had to use all his marketing skills to
ensure that these brokers either took
back the shares or paid up.
Given that institutional orders were
huge, there would be times when he
would not be able to take up more
business simply because he didn’t have
the means to process them. He kept
a tight schedule: On weekdays, from
Monday to Friday, work was virtually
24/7. He would go to the institutions’
offices at 8-8.30 am (before the stock
market opened) to get orders. He would
then return to his office to execute
those orders. After the shares were
bought, the processing began to check
signatures and other intricacies, a
time-consuming affair. Sometimes, he
had to work well into the night. “Usually
Parag bhai worked till 8 pm. But if the
work continued even after that, he
would come back at 11.30 pm or even
midnight just to sit with us and provide
moral support. We felt good that he was
around,” remembers Kerkar. Next day,
the shares would be delivered to the
institutions who would pay the brokers
once they had authenticated the share
certificates. And it was the same drill
for the entire week.
Despite the hardships, brokerage was a
lucrative enterprise. Research was the
main differentiator, and the firm’s key to
success when the Indian economy was
liberalised in 1991. Foreign Institutional
Investors (FIIs) started entering the
Indian stock market. And they were
keen on working with Indian brokers
who had research capabilities. All of
Parikh’s hard work put in since the early
80s finally started paying dividends.
Since his firm already had established a
good brand name as one with research
capabilities, entry into FIIs became
easy. Thereafter came private sector
chapter 01.
mutual fund houses, opening up
another market for the broking firm.
But stock broking was an oligopoly — its
systems opaque for a layperson while
they held the key to great wealth for an
insider. Moreover, in the absence of any
regulatory authority, systemic abuses
and wrongdoing were prevalent.
This posed a huge challenge for
someone like Parikh, who wanted to
stick to ethical business practices rather
than compromise to make a quick buck
like the other brokers. His mantra: Do
what is in the client’s interest even at
the expense of foregoing substantial
income. And he stuck to this principle
even during the several bull and bear
runs that the stock markets saw in
the next 30-odd years.
Parikh firmly believed that while
speculative business could generate
a very healthy income stream for
stockbrokers, no client could earn
steady income by indulging in
speculation. Hence, he chose to
advise clients accordingly. In his own
words: “I lost on income, but I gained
on integrity and goodwill. When I
look back, I feel that the goodwill
generated by adhering to such value-
based principles has made so much of
a difference. Today, our firm is looked
upon as one of the most ethical firms
which always walks the talk.”
But the entry of FIIs and mutual fund
houses also posed a fresh dilemma.
While it provided a lot of work to
brokerage houses and gave emphasis
on research, there was little demand
for research that would pick good long-
term bets. Parikh, over time, realised
that the value addition which his firm
provided through its conservative
approach wasn’t as appreciated as he
would have liked. Most fund managers
were seeking quick money-making
ideas, which he believed couldn’t be
consistently churned out. It was his
belief that financial institutions and
mutual funds were respected for their
long-term investment approach, but in
reality, they worked quite differently.
While he did not subscribe to the
views or approach of the mutual fund
houses and financial institutions, the
brokerage business was doing rather
well. So, that created a dilemma
— either start giving quick money-
making ideas or continue to focus on
giving advice for long-term bets.
Parikh took the hard decision: he
decided to look at the client’s interest
and gave recommendations only if the
firm felt it was right. Hard decisions have
consequences, and the firm lost some
clients but gained a lot of credibility in
the market. It confirmed his faith that it
was always better to do the right thing
rather than to do things right.
Parikh’s reputation as the man
heading a trustworthy brokerage and
research firm survived 1992, a crucial
year for the Indian stock markets. On
one hand, the markets were rising
steadily after the then Finance Minister
Breaking Ground, Not Principles
Manmohan Singh opened up the Indian
economy. On the other hand, perhaps
for the first time, a well-organised
stock market scam unravelled whose
kingpin was Harshad Mehta.
Mehta and Parikh had parallel career
paths. While the latter became a
member of the stock exchange in 1983,
Mehta became a member a year later.
Mehta’s firm, GrowMore Research
and Asset Management, gained a lot of
prominence and by the early 1990s, he
was known as the ‘Big Bull’. Magazine
covers featured him as a star stock
broker. His flashy lifestyle — a 15,000
square feet sea-facing penthouse in
Worli, a fleet of cars including the
Toyota Lexus, Corolla Starlet — only
added to the aura and made him the
talk of the town. So, how did one man
manage to garner such money and
reputation in a short time?
To understand this, one must take a
close look at the Indian stock markets
in the 1980s and 1990s. The Bombay
07
Timeless
Stock Exchange was the only stock
exchange and brokers, literally, ran
the show. Trading took place in the
trading ring and there was rampant
manipulation of prices. For example, if
you bought a share from a broker and
its price went up sharply, the shares
were unlikely to be transferred in your
name soon because, inevitably, the
broker would come back to you and say
there was a signature mismatch. So, as
an investor, you had to go through the
entire process again. If the share price
fell by then, you were likely to get them
in hand. Otherwise, the seller would
continue to reap the benefits of the
rising stock price in the meantime.
There was little intervention from
financial institutions. Except for UTI
and LIC, who were simply buyers and
sellers, there was little regulatory
control from government institutions.
The Securities and Exchange Board of
India (SEBI), the market regulator, was
08
a statutory authority in existence since
1988, with a mostly benign presence.
Mehta, on his part, had discovered
a weakness in the Indian banking
system. Banks were sitting on huge
piles of deposits but weren’t allowed to
invest in stock markets directly. They
could, however, lend to other banks
and earn interest income. The main
tool in the hands of these brokers was
an RFD (ready forward deals) between
banks. An RFD was a secured short-
term loan, usually 15 days, from one
bank to another. The borrowing bank
would sell the RFDs to a bank and
buy it back at the end of tenure at a
slightly higher price. Mehta was able
to convince bank managers to provide
him capital under the guise of selling
RFDs to them. Once the money was
transferred into his personal account,
he would use this to shore up stock
prices of major companies like ACC,
Sterlite Industries and others.
When the stock prices went up sharply,
he would sell them off and pass on
part of the proceeds to the banks. For
example, a stock like ACC (which was
trading in 1991 for ₹200 a share) rose
to nearly ₹9,000 in just three months.
Thus, he was making hefty profits
both for banks and himself using the
depositor’s capital. And the Sensex
quadrupled to over 4,000 points in
a single year. When the scam was
detected, the markets were rattled
and fell sharply by over 1,000 points
within days. Many bankers were either
arrested or asked to ‘proceed on leave’.
Parikh watched most of this from the
sidelines. He had turned down Mehta’s
request years ago to join hands in doing
business. As the story goes, Parikh and
Mehta knew each other from brokerage
circles and were visiting a bank branch
when the offer was made. Parikh
refused to ride with the ‘Big Bull’, and
the rest is history. Incidentally, when
the scam unravelled, Parikh grumbled
chapter 01.

“I lost on income
but I gained on
integrity and
goodwill.”
His mantra:
Do what is in the
client’s interest
even at the expense
of foregoing
substantial
income. And
he stuck to this
principle even
during the several
bull and bear runs
that the stock
markets saw in the
next 30-odd years.
chapter 01. Breaking Ground, Not Principles

to his wife that Mehta dealt with crores if not controlled, bad deliveries could
but was yet to return him a small permanently shut down the company.
amount of money. “It was around ₹250 In 1996, the crucial decision was made
or ₹500,” Geeta recalled. not to undertake any institutional
business till the issue of bad deliveries
The 1990s left the markets scarred by
was sorted out. No new clients
the Harshad Mehta scam, but it was also
were entertained, and no new sales
a time when many significant systemic
transactions were allowed. For eight
changes were introduced. In fact, 1992-
long months, there was no income.
96 were the most remarkable years
But the decision helped them get rid
in the history of the Indian bourses.
of ‘bad deliveries’. The best thing:
The Securities and Exchange Board of
it helped the company have a clean
India started acquiring its regulatory
slate with institutions and cemented
teeth and was given more powers, the
its reputation as a responsible
financial sector was liberalised, and
organisation. Yes, some institutions
paperless trading was born.
found their approach too conservative.
With the benefits of reforms starting But unlike many brokers who did not do
to kick in, businesses started booming. this, and disappeared, Parikh was able
Brokerage houses were showing to save his relationship with financial
tremendous profitability because of institutions – his core client base.
the advent of foreign institutional
And prove his basic principle
players. But there was a substantial
right: Doing the right thing is
risk of bad deliveries. Fake shares also
always more important than
entered the market. It was a time to
merely doing things right.
be extremely cautious.
When Parikh took stock of the
business, unsurprisingly he found that

11
chapter 02. No Shortcuts To Success

No Shortcuts
To Success
The year 1994 was a decisive one for Parag Parikh. He turned 40...and felt the
urge to study once again. It was also the year that Parag Parikh Financial Advisory
Services (PPFAS) was born.

13
Timeless
The decision to study again was
initially, not received too well by his
father Shirishchandra Parikh, who
believed that they were doing quite
well. But Parikh went ahead.
What prompted his decision to step
out of a thriving brokerage business
and study instead, was the changing
world of finance. The fruits of opening
up India’s economy were showing,
demanding new skill sets from
Indian businesses and a completely
different behaviour from Indian
stock market players.
The liberalisation of the economy in
1991 was aimed at ending the ‘Licence
Raj,’ thereby decreasing government
intervention in business. The decision
opened up the country to the global
economy and paved the way for
competition in the market. It was met
with a lot of criticism from within
the ruling party and the domestic
industry. However, it was perhaps the
14
only way out for India, then facing a
balance of payments crisis.
The results could be seen within the
next few years. In 1992-93, inflows from
foreign institutional investors stood at
$4.2 million. By 1993-94, inflows had
soared to $2.43 billion.
Parikh realised that globalisation
demanded new skill sets and
knowledge to face the competition.
Parikh enrolled himself at Harvard
Business School for the ‘Ownership-
President Management Programme’
from 1994-96. In his own words, this
changed his paradigm of business
as he was exposed to different
concepts in the field of leadership,
change management, finance and
innovative strategies. Parikh later
continued to attend the programme’s
lifelong learning module.
Another major development in
1994 was that the National Stock
Exchange became operational,
giving competition to the broker-run
Bombay Stock Exchange and bringing
more transparency to stock market
operations. Though the exchange was
established earlier in 1992 by a group
of leading financial institutions such
as Life Insurance Corporation of India,
State Bank of India, IFCI Limited, IDBI
Limited and Stock Holding Corporation
of India, it commenced operations in
the wholesale debt market only in June
1994, and the first equity transaction
took place in November 1994.
Parikh was bullish on the NSE from
its very inception. He believed that
the exchange would provide a lot
of transparency to both brokers
and investors. And he realised the
importance of being a player in
both, the debt and equity markets.
Consequently, PPFAS was quick to
jump on the National Stock Exchange
bandwagon and became a member of
both the debt and equity segments.
Parikh’s style of research was not
the typical brokerage report, and
chapter 02.
did not suit many fund managers’
palates, yet most of them relied on
it for making their long-term bets.
Parikh decided to carry on with this
specialised research, but the question
was whom should it cater to? He also
had to decide whether the research
should have its own business model.
Consequently, ‘Cognito’ the flagship
Portfolio Management Scheme (PMS)
of PPFAS was launched in 1996. It
was targeted at both, individuals and
corporates. In fact, PPFAS was one
of the first Securities and Exchange
Board of India - registered firms
to offer a PMS (SEBI).
It could claim to be one of the first
fund management firms in the
country named after an individual,
where investors, whether corporate or
individuals, trusted the fund manager’s
name and reputation for managing
money and followed his vision. This
is different from investing in a big
institution which houses several big
fund managers and has a large number
of sales people whose primary job is to
attract money from investors.
Cognito was a huge step forward for
Parikh’s erstwhile brokerage house
because it actually placed the firm
in a position to put its research and
disciplined financial approach to
a real-time test for the benefit of
a client. Prior to this, the research
was being sent to big institutions or
fund managers who may or may not
have actually applied it. Now with
a single move, Parikh’s belief in his
analysis was to be tested.
But the 1990s was also the decade
when investors had been hit by a
major scam — Harshad Mehta —
and were headed towards another,
Ketan Parekh, of which they then had
little inkling. In the environment of
mistrust, the challenge was to ensure a
portfolio management scheme which
accorded comfort to the client who
was investing significant amounts.
Cognito attempted to provide this
comfort and signalled its credibility by
appointing Deloitte, Haskins and Sells
as ‘auditors to the scheme’.
Another important measure adopted
by PPFAS was to target the not-so-
rich. The typical model in the mid-90s,
or even earlier, was one of institutions
chasing high-net-worth individuals
to manage their money. Even though
Cognito was a PMS product, it had
a threshold limit of only ₹5 lakh –
comparatively a much lower amount.
Its mission statement was, “We do not
chase high-net-worth individuals;
rather, we create them.”
So while 20 per cent of the investors
comprised high-net-worth individuals
who were eyed by institutions, the
remaining 80 per cent who actually
needed sound investment advice
were ignored by most fund houses.
PPFAS chose to target this untapped
80 per cent. While the potential of
this segment was great, but the effort
No Shortcuts To Success
required was significantly higher.
Parikh chose the harder route.
It’s important to note that PPFAS
was established at a time when there
was a significant buzz around the
financial sector. With the government
allowing private sector mutual funds
to enter the financial sector, many
heavyweights were entering the
industry, giving some competition to
the older mutual fund house – UTI
Mutual Fund – established way back
in 1963. UTI Mutual Fund functioned
under the regulatory control of the
Reserve Bank of India. Moreover,
between 1987 and 1993, a large number
of public sector players such as Life
Insurance Corporation of India,
General Insurance Corporation of
India, State Bank of India Mutual
Fund and Canbank Mutual Fund
launched their respective fund houses.
However, the first private sector player
– Kothari Pioneer – entered almost
three decades after UTI Mutual Fund’s
15
Timeless
launch, in 1993. Bigger players like
HDFC Mutual Fund and ICICI Mutual
Fund would soon follow suit.
For PPFAS’ Cognito, the challenge was
to multiply its clients’ wealth utilising
its cautious and sound investment
advice. The approach was simple: Sell
investment as a plan, not a product -
such as a ‘stock or bond’ - or merely
a procedure - like ‘buy low, sell high’.
Each individual has a separate plan in
mind. Consequently, each one needs
to decide their goals, that is, why does
he/she want to save, what does he/she
want to save for and so on... And it is
depending on these goals that they
need to go about investing.
The basic idea that was conveyed to
investors was simple: You are able
to earn when you are young. These
earnings need to be invested wisely
so that when old age comes and the
capacity to earn diminishes, you can
fall back on your investments. This
Nimish Shah is only possible if you have made
16
a plan for yourself and you invest administrative abilities turned PPFAS
according to this plan. into a professional organisation.
Parikh got the much-needed support
In 1995, Parikh met a man who was
to steer his ship through what turned
quite like him in some ways – Nimish
out to be increasingly turbulent times.
Shah. An entrepreneur, Shah had
started a medium-scale business, And the next five years were really
manufacturing home appliances for hard on the economy. The Asian crisis
Philips India and Crompton Greaves, in in 1997-98 was followed quickly by the
the late 80s. However, by the mid-90s, information technology boom of 1999-
he had to shut it down as liberalisation 2000, which was later only to be busted
made the business unviable. Parikh, by the Ketan Parekh scam in 2001.
it seems, had met a man who was cut
from the same cloth — both had the
ability to take tough decisions. He was
very impressed with a person who
was confident and able to abandon
something when it wasn’t working.
Shah agreed to join PPFAS and kick-
start the debt market segment.
Shah’s commitment, hard work and
perseverance helped every section of
the organisation. Soon, he was given
a seat on the board and appointed
the CEO. In Parikh’s own words,
Shah’s unflinching commitment and
chapter 02.

“We do not chase

high-net-worth
individuals;
rather, we
create them.”
Timeless
The Asian crisis had barely blown
over when the next one began – the
rise of information technology stocks.
From a fund manager or investor’s
perspective, it was a good headache to
have. Information technology stocks
were going up sharply. Names did not
matter. Merely the tag of ‘dotcom’ or
IT (Information Technology) made
investors flock to the stock.
As the story goes, when a company
filed a draft red herring prospectus
for an initial public offering in the
late 1990s, a brokerage house decided
to do some research on it. When they
tracked the company’s headquarters
in Mumbai’s suburbs, they were told
that the company made chairs. When
they enquired why the company’s
red herring prospectus had claimed
it was an ‘information technology’
company, the reply was that “because
it made chairs for information
technology companies”. The story
may be apocryphal, but it was actually
18
a time when stocks or companies
with the suffix ‘dotcom’ got great
valuations. At the same time, there
were genuinely good stocks as well.
Infosys, listed in 1993, was beginning
to get attention. The tough call to
make for any fund manager was -
which were the good ones and which
were the ones that were likely to make
them lose serious money.
Parikh chose to keep the whole set of
information technology stocks away
from his portfolio. In hindsight, he
admitted that he missed the so-called
‘information technology bus’. But he
felt it was better to play safe, for who
was to decide between say an Infosys
or a DSQ Software in those heady days.
And there were worse headaches to
come. One of ‘Vyaj Badla’. PPFAS always
believed that investment should be
done from one’s own funds and not
from borrowed funds. Any operations
not meeting these requirements were
speculative. In a strict sense, even
if you purchased a fixed instrument market and returned it to them in
through a loan, it was speculation. early 2001. Many clients were upset
with the decision and the extra-
But speculation, on a standalone basis,
conservative approach. But Parikh
was not a problem either. Speculation
and his team were convinced that
had always been a part and parcel of
this step was necessary to ensure that
the market. And it would always be so.
their clients do not take any hit even
The worry stemmed from somewhere
though PPFAS was losing out on big
else: the inability to distinguish
brokerage income. Just a month later,
between investment and speculation.
the Vyaj Badla scam stood exposed
Paradoxically, there was also a class with the bust in the information
of investors who while shying away technology rally. Many brokers
from speculation, sought ‘safe returns’ defaulted on payments and investors
by lending to other speculators in the lost heavily in a business which had
‘Vyaj Badla’ market. They appeared till then been previously thought to
to be either blissfully ignorant or be very safe and secure, because their
cynically indifferent to this irony. brokers had cheated them by luring
them with high returns. Conversely,
Parikh and his team realised early
PPFAS’ clients were safe.
that this was a recipe for disaster.
They were worried about the modus
operandi and concerned about the
sustainability of the markets. Then,
another crucial decision was made
– exiting the Vyaj Badla business
completely. PPFAS withdrew all their
clients’ money from the Vyaj Badla
chapter 02. No Shortcuts To Success

“ PPFAS always believed that investment should be done from

one’s own funds and not from borrowed funds. Any operations
not meeting these requirements were speculative.”

Vyaj Badla
Demystified
‘Vyaj’ refers to interest, while
‘Badla’ refers to the carry-forward/
borrowing charge paid by the
purchaser of equity shares.
This system prevailed on the Bombay
Stock Exchange up to 2001.
‘A’ buys shares but
does not have the money.
‘B’ lends money to ‘A’, who
pays interest to ‘B’.
‘B’ is entitled to receive ‘A’s shares in money on their own account and then
their Demat Account as collateral. indulging in rampant speculation.
‘A’ may either choose to sell these This resulted in many unwitting
shares in the next settlement or keep lenders suffering losses, and hastened
rolling the purchase over indefinitely, the demise of this system.
paying the ‘vyaj’ prevailing in the
market. Each such settlement
cycle was for 5 days.
All ‘Vyaj Badla’ transactions were
undertaken through the BSE
electronic trading platform.
Unfortunately, in 2001 many brokers
misused it by fraudulently borrowing

19
He took the route
he knew best:
Back to school.
chapter 02.
“He was excited by the opportunities the markets
would offer if one was able to control one’s emotions.”
Back To School
While Parikh’s PPFAS had stood the
test of time in terms of ethics and
being a long-term investor, what
always rankled him was missing the
bus during the technology boom. For
one, they did not anticipate it, and
when they tried to find the reason for
the sharp rally, they were surprised to
see crazy valuations. Parikh, wondered
if they were out of sync with market
reality. Every day, the stock market
was proving him wrong. There were
complaints from clients about Parikh
and his team’s inability to spot the
next winner. They were branded ‘anti-
tech’ brokers. PPFAS lost clients to
competitors. Parikh was frustrated.
He took the route he knew best: going
back to school. In 2001, The Harvard
Business School at Boston was
conducting a course on Investment
Decisions and Behavioral Finance.
He enrolled in it and went to the USA.
There he was very impressed by a
talk by Christopher Browne on value
investing and behavioral finance.
Browne’s speech on the same in
Columbia Business School in 2000 was
an eye-opener for Parikh. This instilled
in Parikh the courage to expand his
knowledge in the emerging field. He
Books authored by Parag Parikh | Publisher: Tata McGraw Hill
was excited by the opportunities the
markets would offer if one was able to
control one’s emotions. He also gained
better understanding of investment
styles which historically outperformed,
and of the traits that distinguished
successful investors from the rest.
This gave birth to a new Parag Parikh
– the thinker on Behavioral Finance.
Parikh now did extensive research,
read literature and met thinkers and
scholars from allied fields. These
included names like Amos Tversky,
Daniel Kahneman, Richard Thaler,
Hersh Shefrin, Robert Shiller,
Benjamin Graham, Warren Buffett,
Charlie Munger, Christopher Browne,
No Shortcuts To Success
Gustave Le Bon, Max Bazzerman,
Gary Belsky, David Dreman, Michael
Mauboussin and Nassim Taleb, to
name a few, some of whom he had the
good fortune to interact with as well.
Armed with this knowledge, Parikh
concluded that successful investing
depended on an amalgam of
analysis and keen observation of the
emotional response of crowds.
Parikh would go on to write two
books on the subject, Stocks to
Riches – Insights on Investor Behaviour
(2005) and Value Investing and
Behavioral Finance (2009).
21
Timeless
In 2001, Rajeev Thakkar, currently
Chief Investment Officer (CIO) of PPFAS
Mutual Fund, joined the company, at
the helm of the government bond desk.
In those days, the government bond
market was like the stock market of
yesteryears in which deals were struck
by calling out the rates. There was little
or no transparency. In Thakkar’s own
words, traders would be sitting in one
room and making buy-and-sell calls.
And in this cacophony, someone who
had made a higher bid was likely to be
missed out. Fed up with this opaque
trading method, PPFAS decided to
change the rules by putting out quotes
on the Bloomberg terminal. For
Bloomberg, it was a coup. Soon other
brokers followed suit.
In 2003, Thakkar took over the equities
side of the business which was till
then managed mostly by Parikh. As
Thakkar recalls, the conversation
regarding the additional responsibility
Rajeev Thakkar was simple. One day, he happened to
22
point out that equities had had an 11- wasn’t convinced about these sectors
year bear run and conversely bonds as they were capital-intensive
had an 8-year bull run. Good stocks industries and could face major
like Hero Honda were available at execution problems. But there was
tax-free dividend yields of 10 per cent pressure from several quarters. “Older
compared to bonds which were at clients who were well-entrenched in
about 5 per cent taxable returns. To the PPFAS philosophy were happy, but
top it off, equities offered the potential new ones were feeling left out. And
of capital appreciation over and above people handling clients were upset,”
recalls Thakkar. Things came to a head
the dividend yields. Parikh asked him
when he went to Parikh and offered
if he wanted to handle the equities
to resign. Parikh brushed it off saying
desk, and the decision was made. A
he had seen enough cycles and asked
presentation containing these details
him not to worry. Within a year, things
was quickly put together and they
turned bad and then worse, when the
started talking to clients about what
Sensex hit 8,000 points (from a high
was blindingly obvious to them — that
of 21,000 points in January 2008) and
the best days of the bond market were
Parikh and Thakkar’s beliefs saved
over and equities were poised to shine. PPFAS from yet another disaster.
Within four years, things turned
ugly again. In fact 2007, according to
Thakkar, was the worst year for the
company. There was tremendous
pressure on Thakkar to invest in the
stock market darlings — infrastructure,
real estate and commodities. Thakkar
chapter 02.

After Harvard,
he was excited by
the opportunities
the markets would
offer if one was
able to control
one’s emotions.
chapter 03. Mind on Investing...Heart with the Investor

Mind on Investing...
Heart with the Investor
In the ‘polite’, euphemism-laden world of high finance, Parag Parikh stood apart...
‘Telling it like it is’ was his forte.
His writings contained an uncommon blend of entertainment and homespun
wisdom. What endeared him to his readers was the absence of a pessimistic streak.
Not pausing at merely lamenting, he peppered his articles either with practical
solutions to seemingly intractable problems or suggestions to cope with what
could not be remedied.
His aura was such that editors refrained from requesting him to tone down his
fervour, even though they may have been uncomfortable with his candour. Also, he
did not hide behind a facade or indulge in ‘role-play’. Parag Parikh, the author was no
different from Parag Parikh, the man - candid, outspoken...and enchanting.
The articles that follow are part of the enduring legacy he leaves behind...with each
one containing something for all of us to mull over.

25
Timeless

ParagSpeak Equanimity, Not Genius,

Lessons he has learnt from
the behaviour of investors
in the stock market
– Times of India ‘Your Money’,
August 7, 2007
Leads To Riches | Times of India ‘Your Money’, August 7, 2007
People make emotional decisions Analysts have a secure job – We always
- This makes the stock market very need someone to come up with an
difficult to understand. One does not excuse for why it (an event) happened.
know which emotion is at work while
A bull phase is always followed by a
making buying or selling decisions.
bear phase – You should keep your
Never envy someone – Most people equanimity in the market.■
see someone’s success and they start
thinking ‘why not me’. This thought
process is behind most mistakes that
people commit in the market.
There are no geniuses – Some people
may sound brilliant at a particular
point. But the real wisdom one
gains from the market is this: To
be a successful investor, you have
to control your urges.
That is, you should not get
sentimental in the market.

26
chapter 03.
ParagSpeak
How investors inability to
control greed and fear result
in huge volatility in markets
– the Saliency Effect
– Economic Times
Penny Wise | Economic Times
A good company’s stock can get hit due to a small hiccup and
vice versa... such is the foolishness of the market
The stock market is currently swaying
between the emotions of greed and
fear. When the markets are in a bull
phase, everyone wants to buy faster
than the neighbour. And stocks hit the
upper circuit for days together, thus,
getting expensive by the day. Investors
are distressed when they are not able
to buy. Then come big corrections and
investors wonder if the party is over.
Now, they want to sell faster than their
neighbour. Stock prices then nosedive,
and we have exactly the opposite
situation. Stocks go on hitting lower
circuits every day and start losing
value. Investors are distressed as they
are not able to sell. We have seen this
cycle being repeated several times, but
investors don’t seem to learn.
How does one explain this behaviour?
The same stock under bullish conditions
was a favourite of all. The same stock
loses flavour just because the markets
are bearish. Are these people investing?
Definitely, no. This is speculation
Mind on Investing...Heart with the Investor
or, in other words, gambling. They
are following the greater fool theory.
Buy what others are buying for there
would be some other greater fool to
buy it from you. You don’t mind being
a fool as long as there is a greater fool
willing to bail you out.
This is one of the reasons for the huge
volatility of the markets. Investors are
unable to control their greed and fear.
Two planes crash into the World Trade
Centre, and the next day, the world
stops travelling. Airlines go empty. The
fear is totally unjustified as planes do
not crash into buildings every day. This
was a one-off event, and people started
giving undue importance to it. In fact,
the next day was probably the safest day
to travel by air. Behavioral economics
calls this the ‘Saliency Effect’. People
lay too much importance on one event
and extrapolate too much into the
future. They overreact to such events
assuming repetitions while evidence
suggests the exact opposite. However,
27
Timeless
fear starts dominating and people are
prone to act irrationally. This is what is
happening in the current situation. If
the market falls on a certain day, fear
dominates and investors are reluctant
to invest. Once the market bounces up,
greed starts dominating, and investors
rush to buy. These are just salient
events taking place on certain days and
in no way should it affect one’s decision
making if one is an investor. Such times
come and go. One needs to have a long-
term view on investments.
Similar instances abound in the world
of investing. An exceptional quarter
earnings announcement by a company
is extrapolated too far into the future,
and the stock starts rising. This is a
one-off event for a company doing
exceptionally well in one quarter.
But these numbers are assumed
to set the trend for all the coming
quarters and people start buying.
Conversely, investors are quick to
punish a stock on just one quarter’s
28
dismal performance. Such is the fickle-
minded behaviour of investors.
Always remember that the brain takes
a shortcut in processing information
and doesn’t process everything. We
are subjected to huge amounts of
information and what sticks in our
mind is that bit of information which
we can readily recall.
Heuristic is a mental shortcut the brain
takes when processing information. It
does not process the full information,
and this leads to biased or faulty
decision making. Human beings are
prone to follow certain rules of the
thumb when making decisions. These
decisions may not be rational, but since
they are followed by all, they become
benchmarks. A very good example of
this is when we tip the waiter who serves
us in a restaurant. The acronym ‘Tips’
stands for ‘To Insure Prompt Service’. If
that were the case, tips should be given
at the start of the meal. However, we
follow the rule of thumb and always tip
the waiter at the end of the meal.
There are different types of heuristics
and we shall try to understand the
Availability Heuristic, as it is very
relevant in the stock markets. Investors,
biased by the availability heuristic,
stake huge amounts of money. We
are subjected to huge amounts of
information and what sticks in our
mind is that information which we can
readily recall. Value comes with it being
continuously and vividly displayed.
Let’s take an example of an
announcement by a company on its
discovery of gas. The stock starts
spurting as everyone starts buying
on this news. Newspapers start
flashing stories giving the size of this
discovery, among other things. But
let us analyse the situation without
falling prey to mental heuristics. Gas
has been discovered, but it needs to
be drilled and it takes a lot of time and
money. What is the quality of the gas?
How many wells would be needed for
drilling? How much time will it take?
How much money would be required
and what are the plans to finance
it? These are all very important and
pertinent questions. In the meanwhile,
the company will have to go through
so many uncertainties before profits
are reaped. However, analysts start
predicting the future profitability and
investors start chasing the stock. This
is how mental heuristics work when
the brain takes a shortcut in processing
information and does not process the
full information and its implications.
The technology boom was built on
the same logic. Everyone talked of
‘eyeballs’, and ‘profitability’ of the
company did not matter. Companies
with more eyeballs commanded
better valuations than their profitable
counterparts. All available information
was on the ‘eyeball’ theory, and most of
the investors believed in the emerging
new economy. Availability Heuristic
chapter 03.
led investors to make irrational
decisions and lose money.
The wish to avoid loss can also lead one
to take more risks and become reckless.
It makes sense to ride the winners and
sell the losers, but loss aversion makes
people do the exact opposite. If it were
true that investors are risk-averse,
stock markets would really be deserted
places. The truth: Investors are not
risk averse but loss averse. Evidence
suggests that the pain of a loss is three
times more than the pleasure of an equal
amount of gain. Say, you get an electric
shock from a damaged light switch. The
pain and fright will dissuade you from
touching the switch until it is repaired.
The memory of that painful experience
is scary, and it lingers. Now, say you
acquired a new two-wheeler. You were
delighted when you bought it. But the
pleasure doesn’t last.
Pain over time becomes terrifying, and
pleasure becomes boring. That is why
we suffer from the behavioral anomalies
of ‘loss-aversion’ and ‘aversion to a sure
loss’. Loss-aversion makes us avoid risk
and flee to safety. But the aversion to a
sure loss is what makes us take more
risks and become reckless. In the world
of finance, these anomalies play an
important role in decision making.
Loss-aversion is the reason we choose
fixed income over stocks. After the tech
bust, investors avoided equities and
chose bank deposits and liquid funds.
In 2003, the equity markets were at a
low, and there were good opportunities
everywhere. Loss-aversion created
great opportunities for those who
understood such behavioral trends.
Why do most portfolios have a few
winners but a long list of losers? Why
are your profits from your winners
smaller than your losses from your
losers? Due to loss-aversion, investors
sell their winners fast and hold on to
the losers. Investors behave as if the
loss occurs only when the loss is booked
through the sale. In fact, the loss has
already occurred with the depreciation
in price. Offsetting a loss against other
income has tax benefits too – it makes
good sense to ride the winners and
sell the losers. But loss aversion makes
people do the exact opposite.
Aversion to a sure loss leads us to
throw good money after bad money.
How many times have you heard this
argument: “The stock is down. I will
buy more so that I can bring down
my average purchase price. I know
the stock will go up.”
Aversion to a sure loss, also known as
the ‘Sunk Cost Fallacy’, makes investors
average the cost of purchase. Our ego
clings to our original commitment,
and we go to great lengths to justify
the same. To be sure, if you have
identified a great stock, you should
accumulate it when it’s cheap. But the
focus should be on buying a great stock
at a low price, not solely to lower the
average purchasing cost.
Mind on Investing...Heart with the Investor
Expensive repairs on ageing assets are
another example of aversion to a sure
loss. Sometimes, it’s cheaper to replace
the assets. Casinos do roaring business
due to this human behavior because
losing customers tend to take more
risks and increase their bets. So is the
case with traders speculating on the
futures and options market.
Here are some tips to overcome the
above anomalies. Check your threshold
for taking a loss and stay within those
limits. Invest across assets rather than
concentrating on a single asset. Look at
your portfolio performance as a whole
rather than individual asset classes.
Re-frame losses as gains considering
the tax advantage you get. When
you speculate, keep one eye on your
loss-taking capacity. ■
29
Timeless

The basic idea that was conveyed to

investors was simple: You are able to
earn when you are young. These earnings
need to be invested wisely so that when
old age comes and the capacity to earn
diminishes, you can fall back on your
investments. This is only possible if you
have made a plan for yourself and you
invest according to this plan.

30
Timeless
ParagSpeak Evergreen Equity | DNA Money, July 31, 2006
Don’t expect to sow today and reap tomorrow
Why equities are the
best option for investors Equity may be down after the recent
over the longer term roller coaster ride, but it’s definitely
not out. Equity shares confer
ownership rights of a company to the
– DNA Money,
shareholder and generate income for
July 31, 2006
them, either in the form of dividends
paid out by companies or through
capital appreciation when stock
prices rise. Many studies conducted
worldwide have concluded that over
the long term (10 years or more)
equities provide higher risk-adjusted
returns compared to fixed income
securities. There are over 6,000
companies listed on Indian stock
exchanges. However, only a few of
these can be considered investment-
worthy at different points of time.
Risk and Rewards: Equities are
more volatile than fixed-income
securities over the short term.
Hence, the probability of suffering
losses is higher. Having said this,
they are an ideal investment for
meeting long-term goals.
32
Equities in all emerging markets have
performed superlatively over the past
three years. In India, the bellwether
indices have given excellent returns
over this period. While this is
impressive, many individual stocks
across various sectors have performed
better than the indices. Also, several
stocks and sectors which were
shunned by investors as recently as
five years ago came into their own
once again, thereby highlighting the
point that merely purchasing the
‘flavours of the season gone by’ is
not the best approach.
However, it is important to keep your
emotions under control and trust
the universal principles of nature —
whatever goes up must come down.
With the stock markets going up for the
last three years, there is considerable
interest in equity investing. Investing,
as the name suggests, is a must for
any individual. We all need to invest
our savings wisely so that we can
chapter 03.
maintain our standard of living when
our ability to earn diminishes.
There are two ways of earning
returns from equities. One, investing
in companies after looking at the
fundamentals represented by earnings
and dividends. The second way is
‘speculation’. The first is reliable and
sustainable over the long run while the
second one is risky and dangerous.
From 2003, when the Sensex was
around 3,000, we had good investment
opportunities. The Sensex’s dividend
yield was around 2.40 per cent. The
price-to-earnings ratio was around
12 and price-to-book was around 2.
However, there was fear in the minds
of people and no one was ready to
invest. When the markets started going
up, investors holding stocks started
selling. Even those who had bought
at 3,000 levels started booking profits
when they saw the Sensex inching
upwards. This fear increased with
every rise in the Sensex till it reached
around 7,000 points.
Thereafter, investor frustration started
building up and the herd mentality
became so strong that just within a
span of 10 months, the Sensex surged
from 7,000 points to over almost 11,000
levels. Another way of explaining this
phenomenon is the excess liquidity,
which is nothing but the so-called
sophisticated institutional investors
pumping money into the market.
Since they are guided by their rules
and peer pressure, which makes them
a part of the herd as well, they do what
others are doing. So, everyone became
a buyer. Similarly, they come to sell
together. They created havoc in the
Asian markets when, all of a sudden,
such portfolio money began to flee.
When the markets go up consistently,
fear is quickly replaced by greed. And
even penny stocks find aggressive
buyers. In the mid-2000, there was
a demat scam in which banks and
Mind on Investing...Heart with the Investor
depositories were involved. It pointed will carry you for a few days or
to the fact that greed has no bounds. months, but wisdom and common
sense will endure. Keep your emotions
Another phenomenon during boom
under control and trust the universal
times is that there is a big appetite for
principles of nature. Whatever goes up
stocks and smart investment bankers
must come down and you cannot sow
pushing in initial public offers at
today and expect to reap tomorrow.
exorbitant prices. But they all get
There are no shortcuts in life. ■
overwhelming responses because
people want to make quick listing
gains. While I am bullish on the Indian
economy and its long-term growth,
but when equities run up fast, there
are corrections as well. The excesses
will have to be corrected. Always
remember that you cannot and will
not make money every day. Nor can
you have investors buying stocks at
any price, which is happening today.
History has taught us several times
that in every bull market people say
that “This time, it’s different and
backed by strong fundamentals.” At
present, we are living in an irrational
world and no one knows where we are
heading. Intelligence and brilliance
33
Timeless
ParagSpeak
What do you get when you let
greed run over reason, all that
happens is that you get trapped
– Economic Times,
October 31, 2005
– Economic Times,
September 26, 2005
34
Penny For Your Thoughts |
When a stock hits upper circuits, there is the greed to acquire it
There are some universal principles
which are timeless. But we tend to
forget them in good times. Take the
last two years, for instance. With the
stock market being northbound, all the
available heuristics in such a situation
were only positive. And there are huge
targets set for the Sensex such as 50,000
or even 100,000 points.
But there are times of drastic erosion
in stock prices. And even when the
economy is growing and will continue to
grow, there is still fear and despair. One
reason that is often given is that foreign
institutional players are selling. But is it
not common sense that anyone who buys
will someday sell? This was a predictable
surprise. Were you not warned that
getting into penny stocks was very
dangerous? You also knew the dangers
but you wanted to ride the wave thinking
you will exit at the first sign of weakness,
but then everyone was thinking in the
same way. So, when the time came, every
one sold. And you got trapped. Why?
Economic Times, October 31, 2005
It was because of your greed. You wanted
a ten-bagger, you wanted to make a fast
buck. While now you will go and blame
the penny stock companies for your woes,
the fact remains that someone smarter
than you exploited your greed and while
you are holding worthless stocks, he may
have made a killing. Had you not been
greedy and had the common sense to
understand that there are no shortcuts
in life, you would not be nursing your
wounds today. We all make mistakes, but
the important thing is to learn from them
and not repeat them.
Now, we come to this crucial question of
why the stock market is so unpredictable.
Why is there so much of volatility? Why
are stocks going down in spite of the
good results? What has really happened
to wipe out crores of rupees worth of
market capitalisation? Why are stocks
recommended by reputed fund managers
and analysts also going down? ■
chapter 03.
Penny-Wise, Pound Foolish |
Time to get back to some old pearls of wisdom
The pendulum of greed and fear has
once again triggered huge volatility
in the stock market. When the index
was touching new highs, there was
jubilation all around and every
investor, be it an individual or an
institution, was hunting for good
investment stories. They all wanted to
buy a stock that would go up and all
were confident that the market would
go up. Now all of a sudden, everyone
wants to desist from making further
commitments or wants to exit. Even if
the market goes down a few hundred
points, there is panic.
Why the sudden change of sentiment?
Investors are losing in penny and
junk stocks. Wise men have always
cautioned investors to avoid such
investments, but the lure of the quick
money was so powerful that they did
not heed any wise advice.
We need to understand the
behavioural concept of herd mentality
and how it affects our actions. To
Economic Times, September 26, 2005
add to the confusion, we have this
regulatory stipulation of circuits. It
is these circuits which distort our
thinking by swaying us between bouts
of fear and greed. This is how people
get trapped. When there is a story
of a penny stock doing the rounds
investors check on the stock price
and buy. When the price reaches a
certain limit, it attracts the upper
circuit. There are only buyers and
no sellers. This creates a scarcity
syndrome and investors get attracted
to the stock. Next day, they try to buy
the stock and it again hits the upper
circuit. Thus, the price starts going
beyond the reach of those investors
who want to own the stock. The
more scarce the stock becomes, the
greater the number of investors who
want it. In this mindless chase, the
spiralling price of the desired stock
is completely overlooked. This is how
their greed makes them pay a fancy
price for a worthless stock and their
Mind on Investing...Heart with the Investor
fear of being left out makes them buy your stocks. During such times don’t
what others are buying. ever look at the stock prices or else
your emotion of fear will make you do
This is precisely what happens in all
things for which you will repent later. ■
bull markets. A little reaction and
the sentiment of the market changes
overnight. The reason: lower price
band circuit. Now, everyone wants
to sell because others are selling.
There are only sellers and no buyers.
When one is confronted with such a
situation, one tends to join the herd
and also wants to sell at any price, and
this can lead to the stock price falling
every day due to a queue of sellers. But
does that mean that the India story
is over? Not at all.
But the stock craze of ‘buy today and
sell tomorrow’ and make a profit is
definitely over. This is a good warning
to investors. Investment is a game of
patience. It is all about buying the right
sustainable businesses run by credible
management at the right price.
Ups and downs are a part of investing
when the sentiments improve so will
35
Timeless
ParagSpeak Why Is Investing So Confusing? |
We get so involved in the nitty-gritty that we miss out on the bigger picture
Different needs of
investors make investing Why is investing such a confusing
a difficult proposition concept? Because it means different
things to different people. What most
people call investing is not really
– DNA,
investing. Different people invest in
August 29, 2005
different things. Some people invest
in large families, a way to ensure
care for parents in their old age.
Others invest in good education, job,
security and benefits. Some people
invest in external assets like shares of
companies, real estate, gold etc.
There are different investment
products such as stocks, bonds,
mutual funds, real estate insurance,
commodities, precious metals etc.
Each is designed to do something
different and that is another reason why
the subject of investing becomes more
confusing. And then there are different
investment procedures. These are
nothing but a technique, method or
formula for buying, selling, trading or
holding investment products.
36
DNA, August 29, 2005
The following are the different
investment procedures: Buy-hold-
and-wait (long), buy-and-sell (trade),
sell-and-buy (short), options (trade),
broking (trade no position) etc.
These are all examples of different
types of investors who are known
by their product specialities and the
procedure adopted by them. All this
adds to the confusion on the subject
of investing because under the banner
of investing we have people who are
really gamblers, speculators, traders,
savers, dreamers and losers. Investing
is confusing because it is a very large
subject. If we look around us, we
will see that people have invested in
many different things. Look at the
appliances we use. They are produced
by companies where someone has
invested in. The electricity we use is
produced by a utility company where
someone has invested in. Look at
the car we drive, the soft drinks we
chapter 03.
consume, the clothes we wear, the
furniture, the airplane etc.
All things are there because someone
invested in the business that delivers
these products. This is what investing
is all about. Investing is a plan, not a
product or a procedure. It is a very
personal plan. The individual has to
decide as to what are his goals and
how he has to go from one level of
comfort to the other level.
He needs to make a plan to go from
comfort level A to a higher comfort
level B. One is able to earn when one
is young. These earnings need to be
invested wisely because when old
age comes and when the capacity to
earn diminishes one can go back to
the investments. This is only possible
when one has made a plan for oneself,
and one invests according to the plan.
Why do we find so many different
types of cars and trucks? Because
different people have different needs.
These vehicles are made to suit their
needs. For a farmer in the village, a
Tata Sumo is more useful than a sports
car. Similarly, a car like Toyota Qualis
is more suited for a large family than
for a couple staying in the city.
Likewise in the investment world,
the investment products are called
investment vehicles. Different people
have different needs and different
investment goals and thus they use
different investment vehicles. Let’s
say if one has a plan to go to a hotel in
Delhi. He either takes a train or flies
to the city. From there he either takes
a rickshaw, a bus or a taxi to go to the
hotel. In this plan, he has a choice of so
many vehicles and will decide the best
choice suitable for him.
Similarly, when one has an investment
plan, one chooses the investment
vehicle according to one’s need and
means. We find so many people
focusing on a product, say stocks and
then a procedure, say trading, but
they do not have an investment plan
in place. Most people are thus trying
to make money by what they think is
investing. But trading is not investing:
It is a procedure or a technique. When
people are not clear on their own
personal investment plans, all these
different products and procedures
become overwhelming and confusing.
Investing with the mind: The current
rally in the stock markets has created
a feel-good factor within the investing
fraternity as its net worth has soared
along with soaring stock prices. This
could fuel one’s greed and one must be
careful when one thinks of investing
in such markets. The following are a
few realities of the stock markets and
it would help one to be aware of the
same and make wiser decisions.
There are no geniuses in this market.
Any investment manager can be right
on his call on a stock at one point of
time and wrong at another on the
same stock. He could be selling a stock
because the valuations are way too
Mind on Investing...Heart with the Investor
high. But at the same time, a huge fund
could be buying the stock as it needs to
deploy its resources because of certain
regulatory requirements quickly. The
stock starts rising and the investment
manager is made to look like a fool in
spite of the absurd valuations of the
stocks. However, in the long run, he
will be proven right.
The problem here is that the yardstick
to judge his performance is the market,
which is based on emotions and the
sentiments of investors.
On some days, when the market is
intoxicated, it is not willing to sell
a particular stock at less than ₹100,
and on other days, when the market
is in a hangover mood, it is willing to
part with the same stock at ₹20. Why
does the market behave this way? It is
because of the emotional behaviour
of its participants. They are driven by
greed and fear at different stages and
this affects their behaviour. Irrational
37
Timeless

behaviour is judging rational actions the only genius would be the one who
and hence the short-term distortions. is able to control one’s emotions.

Why do we humans behave in such a One needs to be emotionally intelligent

way? The reason is very simple. We to be a successful investor because the
have a heart and a mind. The mind is investment game is made up of a lot of
the intellect and the heart is emotional. uncertainties. As Peter Drucker says
“Intelligence and brilliance carries the
We do not always use our minds to
day, but it is wisdom that endures”. ■
make decisions. As rational beings, we
are supposed to use our minds. But
we are human beings, and we have a
heart and that makes us emotional.
We do not always make decisions with
the help of the mind; we also make
decisions out of our hearts. Hence, our
emotions do the decision-making, and
that is the reason why smart people
also make big money mistakes.

We have forgotten what investment is

all about and the wise would do well
not to be carried away, or make rash
investments on such forecasts. It is
not the right long-term strategy. As
we all know, there are no shortcuts to
making money. In the stock markets,

38
chapter 03.

“I am neither an
economist nor an
academician. I am
an investor first. I
run stock broking
and portfolio
management as a
profession rather
than a business.”
Timeless
ParagSpeak
High-net-worth individuals,
who earn 10 per cent margins
on their own businesses,
expect doubling and tripling
of their monies from a bank
relationship manager
– Outlook Money,
November 16, 2011
40
Simply Silly | Outlook Money, November 16, 2011
Take an informed decision while investing in fancy products, otherwise
you just might end up playing into the hands of your fund manager
The death of Steve Jobs moved me
and millions of other fans of Apple
products. It was also lamented by
several luminaries who conferred
various sobriquets on him such as the
‘magician’ and ‘master innovator’. It
seemed as if Apple Inc was a one-man
show and not a mega-corporation.
Why was he revered so much? I
think it was because he was a master
architect who had found the way to
marry technology with elegance and
simplicity. Consumers loved Apple
products because they are easy to
use and cool to flaunt.
Alas in finance, it would appear that
we are going the other way. Simple
products such as regular diversified
Equity Funds and Public Provident
Fund are frowned upon by many, while
the demand for complex products is
on the rise. Some of these complex
products are so arcane that they often
cannot be deciphered by anyone other
than the product manufacturer.
But why is this trend gathering
momentum? Probably because certain
investors feel that if they are handing
over their money to someone else,
this person, or one may say an expert,
should be able to do something which
they themselves cannot. If the fund
manager conjures up an image of
being able to make money for them
by performing complex financial
feats, they feel that they are getting
their money’s worth.
This has given rise to a panoply
of structured products, trading
strategies and algorithmic trading,
among others. For every producer
of such products, there are two
managers to market them and four
‘investors’ to lap them up. The usual
pitch while selling such structures
is to offer outsized returns vis-a-vis
plain vanilla products.
Strangely, most such customers who are
seeking such fanciful products belong
to the ‘high-net-worth’ category.
chapter 03.
They are supposed to be successful
people who have excelled in their own
business or profession. It is surprising
indeed that entrepreneurs who earn
net margins of 8-10 percent in their
business believe their relationship
managers who promise to double their
money in a short period of time by
using complex derivative strategies
(with alien sounding concepts such as
strangles, bull-spreads etc.) can do so.
They are even willing to invest large
sums in apparently ‘less correlated’
assets such as art and wine.
Unfortunately for them, nobody
reveals that these assets are always
accompanied by low liquidity
and valuation practices which
are not transparent. Besides,
many of these products are not
monitored by any regulator.
Simplicity and low cost are two of the
pillars on which a good investment
product rests. Complex products
often fall short on both these counts.
Mind on Investing...Heart with the Investor
These are usually opaque, high- After all, you would surely not like to
cost products which are peddled at be saddled with a whole lot of ‘trophy
precisely the wrong time from an investments’ which merely end up
investor’s point of view. For instance, enriching your distributor rather than
investors are attracted to capital- you. Silly, isn’t it? ■
guaranteed products after a bear
market is well underway and the fear
factor is dominating.
Distributors know this too well.
Hence, when low valuations should be
inducing you to aggressively invest,
either directly in equities or in a low-
cost mutual fund, distributors will
approach you with such fancy products
which benefit them and the product
manufacturers more than you.
If at all you must invest in complex
products, investigate thoroughly
before you do so and choose the ones
with low-cost structures. The sooner
investors (especially rich investors)
stop having that ‘infra-dig’ feeling
regarding conventional investments,
the better it may be for their long-
term financial health.
41
Timeless
ParagSpeak
When markets are going
up and valuations are rich,
companies exploit irrationality
of investors through overpriced
initial public offers
– Outlook Money,
June 29, 2011
42
Time To Dissociate | Outlook Money, June 29, 2011
Education, not exploitation of investors is the need of the hour
I believe that associations in one
form or another are also a type
of irrationality. These refer to the
mental linkages that the consumers
immediately make when they
come across something. While
such associations may be seen as
an extension of the cognitive bias
of heuristics or mental short-cuts
taken to process information, some
of them could be the outcome of
our own experiences. Whatever the
antecedents, manufacturers and
distributors of financial products
find it convenient and profitable
to integrate these associations
in their marketing strategies.
Here are a few examples:
Monthly Income Plans (MlPs) by
mutual fund houses: Most investors
are familiar with the Post Office
Monthly Income Scheme (POMIS)
which guarantees a predetermined
amount of interest each month
and is favoured by conservative
investors. Since 1997, various fund
houses have launched products with
a similar name, promising investors
regular income and an opportunity
to participate in the upside offered
by equity markets. However, there
are two major differences when
compared with POMIS: First, such
schemes declare income in the form
of dividends rather than interest. This
means that income will accrue to the
investor only if there is a distributable
surplus. There are very few MIPs
which have declared dividends every
month since inception. Second,
unlike in the POMIS, the investor
does not earn a uniform amount of
income per month. Of course, offer
documents mention that there is no
guarantee of a monthly income, but
such disclaimers are often in the
fine print. Fund houses would be
doing greater service to investors if
they marketed these funds as debt-
oriented balanced funds suitable
for a certain section of conservative
chapter 03. Mind on Investing...Heart with the Investor

investors. By doing so, they would example. One reason for this is that
be able to manage the expectations equities are viewed as instruments
of investors better. for trading while debt instruments
are usually held to maturity. Wealth
Life insurance sold as a ‘happiness’
managers also encourage their
product: You must have seen
clients to purchase ‘safe’ investments.
advertisements of insurance
While they may genuinely believe that
products that depict a happy family
the client could benefit more in the
playing in the garden, a young man
long run through equity investing,
thinking of his retirement, or a young
they also fear losing him in case he
girl donning the graduation cap. They
suffers short-term losses.
hardly contain any information on the
policy on offer. In India, many people Although it is tough to break long-
view insurance policies more as an standing association, it does not
investment tool than a protection mean we should not try to. As
product. In fact, some of them are not we have seen in the case of unit-
linked insurance plans, a sustained
in favour of purchasing term plans
educational effort on the part of the
fearing it is inauspicious to do so. So,
media and the certified financial
rather than make efficient processing
planners’ community motivated
of death claims their unique selling
even the regulator to bring in more
proposition, insurers focus on
policyholder-friendly norms. To sum
how their policies will help the
it up, education and not exploitation
policyholders (and not necessarily the
of clients is the need of the hour. ■
nominees) meet their financial goals.
The notion of equity being ‘risky’
and debt being ‘safe’ is another

43
chapter 03. Mind on Investing...Heart with the Investor

“The inability to delay instant

gratification is the primary reason
for economic failure in life.”

45
Timeless
ParagSpeak
Why investors face decision
paralysis despite knowing
their strategy is wrong
– Outlook Money,
July 28, 2010
46
Biting The Bullet | Outlook Money, July 28, 2010
Though making investing decisions can lead to some stress, it is rewarding
nevertheless
In the real world, making a decision
and standing by it is difficult. Often,
people cite one reason or another
for maintaining the status quo. The
world of investing is no different.
In fact, it entails making more such
decisions that come without any
concrete guarantee of enabling us to
achieve our long-term financial goals.
Advisors, for instance, may counsel
clients on several worthy objectives
such as optimum asset allocation
or the need to weed out duds from
their stocks portfolio.
Although clients concur on the
importance of these, they often
flinch from taking remedial action.
In behavioural finance, this is
called decision paralysis.
The common reasons for not
taking decisions are:
• The fear of going wrong
• The reluctance to take risks
• The chances of losing
• The fear of looking foolish
While the fear of crystallising losses
prevents us from jettisoning poor
investments, we may also experience
‘paralysis’ while booking profits. Apart
from the fear of losing monetarily if
the stock keeps rising after we sell,
we also want to avoid looking foolish.
Hence, status quo may appear to be
the best recourse. Inheritances in
kind are another example. People who
inherit a real estate or a portfolio of
stocks are faced with the dilemma of
either selling it and converting it into
money or reshuffling it. The greater
the number of choices, the tougher the
decision. This often leads to inaction.
Professionals, too, are not immune
to decision paralysis. A new fund
chapter 03.
manager who ‘inherits’ a portfolio
from a well-known fund manager
may desist from revamping it despite
having full freedom to do so. He may
think: “Why fix something when it is
not broken?” If the portfolio falters
after the changes are affected, he
would be held solely responsible.
Of course, not taking a decision is also
a decision. However, it is unwise to
constantly be in this state of mind given
that we are in a fast-changing world.
But why is change so disconcerting?
Another behavioral finance concept
called the ‘endowment effect’ provides
the best explanation. When one
acquires the possession of something,
its value increases in his mind. That’s
why people prefer to maintain the
status quo. However, they often ignore
the opportunity cost of not changing.
Brokers, fund managers and even
companies become victims of this
mentality, which can manifest
itself in many forms:
Mind on Investing...Heart with the Investor
Overvaluing one’s holdings: Owners How can you curb the negative
of assets accord an inordinately high effects of decision paralysis and
value to their holdings and expect endowment effect?
others to pay this perceived value • Automate your investment
when they sell them. decisions through vehicles such
as systematic investment plans
Trial and money-back guarantee
in stocks. This will remove
schemes: Businesses come up with
the discretionary element in
such schemes, knowing that more
your investing and help you
often than not, once a customer
profit from volatility.
owns such a product, his perceived
• 
Let go of stocks once your
value of it increases and he does
goals are achieved.
not want to return it.
• 
Consider the opportunity cost
Confirmation traps: When investors
of not investing and leaving your
hear good things about a company money idle in a bank account. ■
they have invested in, it reaffirms their
belief in their investment decisions.
Hence, events such as analyst/investor
meets often disseminate positive
news about a company.
47
Timeless

ParagSpeak
Why buying a great company at
expensive valuations can be as
bad as buying a bad company
– Outlook,
March 23, 2009
The Bull Is A Lonely, Contrary Beast |
A course on how to make money in bad times by avoiding the mistakes that got
us here in the first place
What are your options now? Bank
fixed deposits or other fixed-income
instruments? The favourite of an
investor is debt instruments as they
give a comfort level that their capital
is intact and they get a fixed return on
investment. But investors miss out on
one very important factor – inflation.
They derive safety in fixed income
investments, harbouring the illusion
that capital remains intact even after
two-three years. That may be the
case, but if inflation is taken into
consideration, the purchasing power
of the same amount of money will be
highly eroded in times to come.
Why is that so? Every government
is pumping in money to revive the
economy and this has led to too much
money in the markets. Although at
present inflation continues to show
a downward trend, I’m not confident
about inflation being in control in the
future. The effect of all these bailouts
is bound to increase inflation in the
Outlook, March 23, 2009
future. When that happens, bank
deposits and fixed income investments
would take the biggest hit.
Another option is gold. Now, if one
believes in the security that gold would
offer, which it has in tough times, the
mistake would be buying gold when
everyone is doing the same. The
investor, thus, ends up paying a higher
price for the asset. Investors make the
same mistake with stocks as well.
As we all know, stocks are the best
hedge against inflation. An investor
will be very well-secured in the future
on his equity portfolio. Moreover,
these turbulent times offer stocks at
ridiculous valuations.
Given the current economic events,
it’s important to have some insight
into our behaviour. Mental heuristics
have played an important role in our
financial disasters.
What is a mental heuristic? It’s a
shortcut the brain takes in processing

48
chapter 03.
information. In the process, the
brain does not take into account the
full information, leading to bias in
decision making. Of course, there
are many kinds of mental heuristics
the brain lapses into.
Investors’ wealth has evaporated with
the current meltdown. How could they
lose when they had entrusted their
investments to big banks having a
global presence and mutual funds of
reputable organisations? What they
thought was these banks had all the
expertise to manage their money.
This was the mental heuristic that was
their undoing. Yes, banks are good if
you are looking at the safety of your
deposits. However, investors thought
these banks were also good at managing
their money. They also bought from
complex-structured products from
banks that they did not understand.
These banks had the smart men who
claimed to know the markets.
Similarly, investors went to mutual
funds under the impression that they
were run by smart professionals. But
they lost in mutual funds too. The
reality is that business schools churn
out management graduates, but don’t
teach investing. It is an art that one
can only learn by going through bull
and bear cycles. Enduring this grind
requires the humility to learn and to
control one’s emotions. Unfortunately,
the heuristic of blind belief in expertise
imagined to be possessed by others
has got a lot of people into trouble.
So the next time you look at investing in
stocks, look for a professional advisor
or a portfolio manager who has been
in the business for a long time and is
an investor himself. It is a passion for
stocks, plus experience that makes for
a good investor and advisor. And it is
very important to understand where
a person’s core competency lies. Do
you, after all, go to a barber to get
your clothes stitched?
Mind on Investing...Heart with the Investor
Then, there’s the representative
heuristic which makes it difficult for
investors to differentiate between a
good company and a good stock.
For most people, a good stock is
representative of a good company and
vice versa. But investing is all about
buying a good company at a reasonable
price. However, investors pay the least
attention to the price they pay for the
stock. They end up paying ridiculous
prices and hence, tend to lose even
after investing in good companies.
Take a great company like Wipro. If
one had bought the company during
its earlier days or during the period
1996 to 1998, one would be very
wealthy today even though the price of
the stock has stagnated or even gone
down from its peak in 2000. However,
if one had bought this great company
in 1999-2000 when its stock price
was very high, one would be a loser
even after eight years. One bought
a great company but a lousy stock.
49
Timeless
Long-term investing brings profit
only when the price you pay for the
stock is reasonable.
The other heuristic working against
people is the availability heuristic.
People make decisions based on the
current available information. With
the global meltdown, all the news and
information we get is negative.
We do not feel like investing in stocks,
although they are available cheaper
than their fundamental value. These
are the same stocks investors were
willing to buy six months ago at
fancy prices. Why the U-turn? The
availability heuristic is at play. Human
beings normally try to follow the herd,
and today the herd is avoiding stocks.
For the contrarian willing to wait for
the next two years, the current times
offer great bargains.
Then, there is the saliency heuristic.
Consider this: Two planes crashed
into the World Trade Center in 2001.
Has it happened again? It was a salient
50
event, but the world curtailed flying for
a few months, thanks to the saliency
heuristic whereby people overreact
to a one-off event. A clip in the profits
of a company, the current slowdown
at home and the global meltdown is
extrapolated too much into the future.
A few months back, oil was $140 a
barrel and there was fear it would
reach $200. Did that happen? On the
contrary, it’s down to $40. Similarly,
the current recession will end one day
and things will improve. The way the
markets are going down, the indices
should go to zero with a couple of
months! Now, is that possible?
Let’s see why you lost money? You
were trapped as you followed mental
shortcuts. The trick is to understand
these heuristics and use them to
your advantage. All the available
information on stocks is negative, so
everyone is selling, thereby making
stocks cheaper by the day. Buy stocks
when no one is buying. You get the
advantage of value-picking plus the
opportunity to buy them cheap.
In the last three years, you followed
the herd and lost. Now, the herd is
selling stocks. Do not follow the herd.
Buy stocks. Investing is about having
a long-term approach. So if you are
investing in the current pessimistic
times, you must do that with at least a
two- or three-year view. I am sure you
will not regret it, provided the choice
of stocks has been good. Go to the right
professionals, not the most advertised
and sales-oriented organisations.
One last thing: You don’t buy life
insurance and reassure yourself
every day that you are still alive.
Similarly, when you buy stocks, it’s
important you don’t keep checking
their prices every day. ■
chapter 03.

“ Investing
success comes
from following
the emotionally
difficult path.”
Timeless
ParagSpeak
Why going by analyst forecasts
can cause much harm,
especially during a bull market
– Times of India,
November 11, 2008
52
Keep ‘Forecasts’ For The Weather | Times of India, Nov 11, 2008
An analyst’s job is to analyse and not forecast, it’s time individuals used a common
sense approach for picking stocks
We are going through turbulent times
and investors have lost heavily, as they
had based their investment decisions
on forecasts of the so-called experts.
My experience in the markets has
given me the humility to accept that
there are no geniuses in the markets.
It’s the media which makes them
(experts) or a short spell of luck.
Let’s go back just six months in time.
Practically, every brokerage report
was recommending an array of stocks
with very optimistic price targets.
We had mutual fund managers going
on marketing trips and giving a
rosy picture of the economy and the
opportunities in the stock markets.
Stocks were fancied.
Now, the same stocks which
were recommended as ‘buys’ are
recommended as ‘sells’ by the same
broking outfits. Their analysts say
so. How can an investor hope to
make money when he buys when the
prices are high and sells when the
prices are low? He would have been
better off if the brokerage outfit had
given a ‘sell’ call six months back and
gives a ‘buy’ call now.
This brings us to an important
conventional wisdom – can analysts
predict the future? Their job is to
analyse and not to forecast. However,
we have a money-spinning financial
industry where lay investors make their
decisions based on the forecasts or
predictions made by the analysts. And
not only that. Sophisticated investors
also fall prey to the predictions of the
so-called experts or analysts.
The 6th century BC poet Lao Tzu
observed, “Those who have knowledge
don’t predict. Those who predict don’t
have knowledge”. How true is this if
we look at the state of the financial
health of investors today? One would
do well to keep in mind these words
of wisdom when making investment
decisions based on media reports,
chapter 03.
television shows, expert seminars and
lectures, among others.
There have been two strong
behavioural biases that have worked
in poor forecasting by these so-called
experts. One is over-optimism and the
other is overconfidence. When times
were good, and the stock markets were
rewarding mediocre stock picking,
people were very optimistic about the
future of the economy and the stock
markets. The early gains made them
overconfident of the knowledge on
the stock markets and the economic
fundamental. It also gave them the
overconfidence in their own ability to
ride the stock market waves.
These behavioural biases did not even
spare the captains of India Inc who
went on an acquisition spree. Take
the instance of Tata Steel taking over
Corus when steel prices were at an
all-time high, consequently paying an
unduly high price. Similarly, we had
Tata Motors acquiring Jaguar and Land
Rover at the height of an economic
boom. The markets have already
started punishing these stocks. In
the last two years, we had Jet Airways
acquiring Sahara and Kingfisher
Airlines acquiring Deccan. Now, they
are in deep losses and are running to
the government for help.
Does for one moment anyone doubt
the business acumen of the
management of these companies? But
then where did they falter? Was there
anything wrong with their analysis?
Yes. Their analysts were not doing
analysis, but they were forecasting.
They were too optimistic about
the future and the good times had
made them overly confident of their
knowledge and ability.
Another behavioural bias that has
played an important role is anchoring.
We had been so much anchored to the
good times of the last four years that
all the forecasts which were made
were based on the past performance.
Mind on Investing...Heart with the Investor
Hence, there was not sufficient of good sustainable businesses run
adjustment in spite of the evidence that by credible managements and having
the world economy could be affected a healthy cash flow.
by a liquidity crisis. The first ripple of If one is very risk averse and wants to
the subprime was felt in November play safe, then equity investment is the
2007. However, over optimistic and best option. Have a two-year view, you
overconfident investors did not pay don’t buy life insurance and look at
any heed to the first signs of trouble. what will happen tomorrow. ■
They were anchored to the thought
that any crisis would blow away.
We had a four-year bull run, and
now it is foolish to expect that the
bear market will end in four months.
What is the road ahead for investors?
Looking at the above problems how
does an investor avoid them?
The most obvious solution is to stop
relying on such pointless forecasts.
There are plenty of common sense
approaches that one can implement
without the use of forecasts. Value
investing is an idea whose time has
come. In the current situation, there
are eye-popping values available at
6 per cent to 10 per cent dividend yield
53
Timeless
ParagSpeak
When investing advisors turn
into full-fledged businesses,
investors’ interest may not be
paramount for them anymore
– Business Standard,
May 3, 2011
54
When Professionals
Become Businessmen | Business Standard, May 3, 2011
Advertised goods always need not be the best. Go to a professional for advice
rather than a salesman
There is a doctor in our vicinity who
is quite respected and very good at
diagnosis. He shunned home visits
though that meant more money.
His clinic is full at all times, with
patients having to wait an hour before
the doctor sees them. This doctor
understands that he is in a profession
and does everything good for the
patient. If a patient does not require
a particular test, he would never
recommend one. He is doing well and
is worshipped by his patients.
But this was his story three years back.
Now, he has expanded and become
a one-stop shop for health. He has
bought a larger clinic and tied up with
a pathology company where diagnostic
and pathology tests are done. He has
developed in-house capabilities to
take X-rays and cardiograms. He has
got a department for physiotherapy.
Not to miss out on anything, he also
sells certain medical products such as
durabands etc. So, a good profession
where you really require the trust of
people has been turned into a business.
When that happens, one does what
is good for the business rather than
the patient. Now, how many would
trust him when he recommends a
blood test or a cardiogram or an
X-ray? A professional has turned
into a businessman, in the name of
growth and expansion.
So is the case with financial markets.
Stock broking, money management
and financial advisories are all
professions. When people go to
them, the best advice is expected.
However, even these professions have
turned into big businesses. The goal
is to sell to clients at any cost. A new
business model emerges. Sales and
marketing take precedence over right
chapter 03.
advice. Client acquisition and sales
targets become benchmarks.
It’s interesting to see how the stock
brokerages have evolved into huge
businesses. And it’s primarily due to
the fact that competition led to falling
brokerage rates and now, you have
certain companies offering a lump
sum brokerage for trading as much as
one wants. The job of a professional
stock broker is to help the client make
wise investment decisions, and not
speculate. But when one becomes
a businessman, he/she encourages
clients to do exactly the opposite of
what the profession demands. The
more a client trades and speculates,
the more he/she loses and the
more the profits for the broker.
lnstitutionalisation of stock broking
has led to the entry of companies and
banks trying to boost the speculative
traits of investors. Investment advisors
have been replaced by salesmen.
Take the case of the investment
management industry. Devoid of
competition and controlled by a
few, the industry works on the push
model, supported by huge advertising
budgets. Bands of salesmen, burdened
with stiff targets, are not averse
to generating sales in any manner
possible. Fund houses dole out
freebies to intermediaries, who in
turn sell confusing and conflicting
products to the ignorant investor.
The targets are to achieve more
assets under management and better
relative returns. Very few have a good
performance record to justify the
assets entrusted to them.
Big banks, companies and financial
institutions want to be in any
business they can lay their hands on.
Unfortunately, they get preference
because of their size and money
power. The problem is that our society
shows a preference for the big rather
than the good. People get carried away
Mind on Investing...Heart with the Investor
by big names rather than the right
professionals. High networth means
high integrity and credibility. It also
signifies better advertising capability
and, thus, more visibility. Inversely,
a competent professional because
of lack of financial muscle is seen as
unreliable and untrustworthy.
In such a situation, what does an
investor do? Follow your common
sense. Does one go to a barber to stitch
clothes or to a tailor for a haircut? Go to
a bank for your banking needs and go
to an investment professional for your
investment needs. Don’t be carried
away by size and advertisements.
Advertised goods are seldom good.
Learn to distinguish between a
salesman and a professional. There
are no shortcuts in life. Avoid instant
gratification and quick-rich ideas.
If you are greedy, there is always
someone to exploit your greed. ■
55
Timeless

“You cannot sow something today and reap

tomorrow. A seed has to go through the
various seasons before it turns into a fully
grown tree. Such is the case with investing.”

56
Timeless
ParagSpeak
Why fear makes you look
for returns of your capital
rather than returns on it
– Business Standard,
November 3, 2010
58
Stocks The Best Hedge
Against Inflation | Business Standard, November 3, 2010
Fixed-income investors will always be losers because inflation will
eat into your purchasing power
Our brain always takes shortcuts
while processing information, which
results in flawed thinking and faulty
decisions. We make our decisions
based on the most readily available
information or recent events. Here
newspapers and other media play a
big role in the way we think.
At present, the stock markets are
rising, along with a host of good news
coming in. No doubt liquidity is playing
a major role, leading to inflation. We
have a rise in all asset classes, thus an
erosion in the value of money. As soon
as there is news of inflation rising, the
markets react with fear, causing a dip.
Should such news cheer us up if we are
stock investors? In such a situation,
what is the best form of investment?
If you have fixed-income investments,
you are a sure loser. Inflation will not
only eat into your purchasing power
but also erode your capital. Fear
makes you look for returns of your
capital rather than returns on it. Gold
and silver are in the limelight. But one
cannot have steady returns on them,
except for capital appreciation. Real
estate is good but is not divisible and
out of reach for many people.
Stocks are the best form of investment
in a rising inflationary situation. But
why stocks? Stocks represent an
ownership interest in a company. The
company is in the business of selling a
product or a service at a profit. Out of
the said profits, some is distributed to
the shareholders by way of dividend,
and the rest is ploughed back to grow
the business. The company owns
land, machinery, buildings, brands,
patents, goodwill and employs
knowledge workers. When inflation
is rising, the company has the power
to raise prices. Moreover, the value
chapter 03. Mind on Investing...Heart with the Investor

of its assets goes on increasing. is important. Are we paying the right

The replacement cost theory is price? Are we buying a ‘value’? Values
at work. This makes it expensive are available in bear markets or when
for new entrants in the business. bad things happen to good companies
In a rising inflationary situation, or when companies and sectors lose
stocks are the best. investor fancy. Markets offer such
opportunities from time to time if you
But the choice of stocks is very
have the patience and the courage
important. First and foremost is the
to go against the current fancies
understanding that buying stocks
and popular trends. ■
is equivalent to buying businesses.
These businesses need to have certain
important characteristics: The least
amount of capital required, no or
negligible debt, a good and a strong
moat around it like a strong brand, a
good distribution network, patents,
monopoly, a sustainable cash flow
stream and a good business model.
Above all, such businesses need to be
run by a credible management which
respects the minority shareholders.
Management plays an important role
in how safe the investor’s money will
be. Once the choice of business is
completed, it is the price we pay that

59
Timeless
Parag Parikh’s
guide to investment
decisions Why did I purchase this stock?
If your rationale of buying the company
was sound, you can be more confident
All-season answers to of holding on to its stock through this
questions an investor has turmoil and maybe, even purchase
before or after investing more at the current rates. Of course,
if you had purchased the stock merely
in stocks or mutual funds
because your friend recommended it
in a bear market. as a speculative play, or because it had
been mentioned in pink papers, you
might as well sell it. By doing so at least
you could regain your peace of mind.
Will the current developments
have any negative bearing on the
company’s future earnings? For
instance, will crude oil prices
touching $100 per barrel hit your
company’s bottom line?
If the company is managed by a candid
and forthright management, you
may take their words at face value.
Otherwise, do your own research to
arrive at a conclusion. If your rationale
of buying the company was sound, hold
on to it. In fact, you could buy more of
60
its stocks. If there is no pressing need
for funds, or if you believe you would
not be able to effectively employ the
money you get from the panic sale,
hold on to the stock.
Determine the extent of impact the
current development will have on
the company’s future earnings. Do
I require the money?
If the money through this ‘panic sale’
is not going to be used productively,
you might as well hold on to your
investment. Stocks are not meant for
short-term financial goals anyway-
there are less volatile options for
meeting them. Benjamin Graham
likened the stock market to a manic-
depressive person called “Mr Market”.
This fellow will offer you absurdly high
rates for your holdings at some points
in time and depressingly low rates
at other times. Whether or not you
accept his rates will depend on your
judgement, which in turn, could be
coloured by your fear or greed.
chapter 03.
During periods of confusion, it is
tempting to rely on market experts and
the financial media. Unfortunately,
I have observed that their guess is as
good as yours. The southward direction
of stock prices will revert course in
sometime if the company warrants it.
What has been your investment style?
Have you been a value investor with
a long-term view? Or a punter trying
to fish for the next winner in the
short run? If you belong to the former
category there is no need to lose your
sleep. There is no special reason to fear
if foreign institutional investors are on
a selling spree. First, they are as prone
to the ‘herd mentality’ as anyone else.
Second, institutional shareholders
may be selling due to certain internal
constraints, such as redemptions and
not necessarily because they have a
negative view on the company.
Yes, the current times are trying, but
we must remember that the 18 months
preceding the current correction
Mind on Investing...Heart with the Investor
have been exceedingly good. Markets to step back and assess your portfolio
imitate life in the sense that good rather than get unduly influenced by the
and bad periods alternate each other. crowd’s behaviour. ■
Maintaining equanimity during
these periods is what will set you
apart from the crowd.
Parikhtip — Selling when the market is
in a frenzy is plain and simple foolish
Imagine you purchased the latest version
of a Maruti Swift a couple of months
ago. You chose this particular car after
weeks of meticulous research and you
are satisfied with its performance. One
fine day you receive a phone call with an
offer to sell the car for 50 per cent of your
purchase price. Would you sell the car at
that price? I guess not.
Often, there are similar situations in the
stock market. Sound companies showing
steady earnings and offering healthy
dividends may suddenly experience
massive selling pressure. There is
negative news all around and every
additional news byte accentuates this
fall. At such times it may be worthwhile
61
62
chapter 04. Time for Everything

Time for
Everything
“He almost controlled time. He would work, learn music, play golf,
write, swim, gym, meet friends… not once in a while but regularly.”
— Sunil Gautam, best friend

63
chapter 04.
Left – Engagement to Geeta (February 1973)
Below – At their marriage with Geeta’s parents (December 1975)
Time for Everything
Parag Parikh was born on February the same friend. This time, Parikh
12, 1954, in Chowpatty, Mumbai, to tried to talk her out of it, telling her
Shirishchandra and Tarunika Parikh. about his health issues and how it
He also has a younger sister, Saloni. could be a problem for them in the
Parikh suffered an early blow in his future. But Geeta was determined, so
life in the form of a polio attack. While they started dating.
he was acutely conscious about it,
Soon, their families came to know as
throughout his life, he ensured the
Geeta’s brother saw them on one such
affliction didn’t restrict his ambitions
date. He ran to inform Geeta’s mother,
or tamper his dreams in any way.
Urvashiben Shah, who immediately
As his wife Geeta Parikh recalls, their went to speak to Parikh’s mother.
families were friends for a long time. Geeta recalls when Parikh’s mother
And when Geeta’s father, Kanubhai first heard the news, she was so
Shah, was building a 10-storey shocked that she dropped the utensils
building in Walkeshwar, he asked she was working with. However, things
Parikh’s father to shift to the same fell into place, and they were engaged
building. Initially, Parikh’s father felt in 1973 and married in 1975. Sahil, their
that he could not afford it. But later elder son, was born in 1979, and their
on, he decided to shift into a smaller younger son, Neil, was born in 1982.
flat in the building.
Both the Parikh and Shah families
lived on the same floor. Since they
were family friends, they would
often go out for dinners and meet
during get-togethers. In their
college days, sometime around 1970,
Geeta proposed to Parikh through a
common friend. Parikh was very upset
and did not respond. Three months
later, Geeta proposed again through
65
Timeless

Fitness, First & Foremost

Even while they were dating, the couple
faced serious hurdles primarily because
of Parikh’s health issues. When they
would go to a movie or a restaurant, he
would start sweating quite heavily and
feel uneasy halfway through the movie
or meal. Geeta was quite worried about
this and would urge him to take care of
his health. He also suffered a long bout
of jaundice which greatly restricted
his diet. In fact, Parikh’s dedication to
a fitness regime came largely from his
early life health issues.
He was truly a fitness freak. As his
close friend Sunil Gautam remembers,
in the early 1970s they would meet at
the Garware Club (Mumbai Cricket
Association) on most evenings for a
drink. But before Parikh would join him,
he always went for an hour-long swim.
“He was told by a doctor that swimming
would help maintain the fitness level
necessary to counter his polio affliction.
So he went swimming every day. While
we were okay at swimming, he was
Best friend: Sunil Gautam
great,” recalls Gautam. It was a habit
that stayed with him throughout his
life. Even after playing 18 holes of golf,
he would go for a long swim — all this
to ensure he could have his two beers,
which he preferred microwaved for
precisely eight seconds.
Like his beer, Parikh could be quite
fastidious about his food, especially
how his breakfast was prepared. This
left many a hotel chef flustered by his
exacting requirements. Geeta recalls
not only was he a fussy eater, but also
believed the stomach should be only 80
per cent full and 20 per cent empty, so
he would eat accordingly. At the same
time, he would often stop at restaurants
like Cafe Mysore in Matunga (East) to
gorge on traditional South Indian food.

66
chapter 04.
A Passion For Golf, Guitar And Yoga
Parikh was great at convincing people
to think his way. When Parikh started
playing golf in the early 80s, he used
to go to the US Club to play every
weekend. But Geeta would be left
alone as she did not play golf. She
also felt bored at parties or other such
social events where golf chatter ruled,
a topic she could neither comprehend
nor contribute to. Parikh finally
convinced her to learn to play golf.
She not only took his advice but also
won many tournaments. The sport has
stayed with her since.
And Parikh was equally willing to
adapt to the ways of others. Music
had a major presence in his life and
he learned to play English songs on
the guitar. Geeta, however, liked
Bollywood music and would always
goad him to play Hindi songs. One
day, she saw another guitar teacher
coming to their house… this time to
teach Hindi songs. “He would play
Time for Everything
‘Pal pal dil ke paas’ and I would hum organization and a very respected
along,” recalls Geeta. brand, but never sacrificed his health/
hobbies and continued with his gym,
He also included meditation into his
swimming, golf, music, traveling and
daily schedule, practising Vipassana
other activities,” says Parikh’s elder
for an hour every day even during
son Sahil, a software entrepreneur.
office hours. PPFAS, in fact, had a
“His barometer of success was time.
dedicated meditation room and he
Not money, but how much time he
encouraged his colleagues to make
had to pursue other things in life.
the best of it. Hiroo Thadani, his
That was a great lesson I learnt from
executive assistant, remembers how
him which has stayed with me till
Dr Shantanu Nagarkatti would visit
this day,” says Sahil.
PPFAS to teach employees yoga and
how the teachings of the Bhagvad
Gita could be applied to enrich one’s
daily life. Apart from this, Dr
Nagarkatti also conducted sessions on
topics such as ‘Emotional Intelligence’,
‘NLP’, management concepts such
as Edward de Bono’s ‘Six Thinking
Hats’, etc. Dr Nagarkatti is a specialist
in major ambulatory surgery, and
also a spiritual teacher. Parikh
held him in high esteem.
“I admired his emphasis on work-
life balance. He built a successful
67
Timeless
Creating Wealth, Enriching Lives
Thadani remembers walking into
the PPFAS office in the late 90s for
an interview and finding it to be
rather anodyne. It was a contrast for
someone who had worked in more
ornate surroundings in foreign banks.
She began having second thoughts
and was about to leave when she saw
Parikh’s Harvard degrees. She told
herself, maybe she could give it a shot.
And she didn’t regret the decision.
Over the years, she learnt many things
from Parikh, a person she found to be
quite transparent with communication
and willing to share his knowledge.
He sent people from his office to do
courses in Dale Carnegie Institute to
improve their individual and business
skills. Thadani says Parikh taught
her a key lesson: Whatever you earn,
spend only half of it.
Employees of PPFAS remember he paid
personal attention to them and was
always there whenever needed. Ashok
Pandurang Kerker, who has worked
68
with him since the 80s, remembers that to be held by the Certified Planners’
he would quietly help people without Association. Instead, he ended up with
letting it be known. In fact, when an offer letter from Parikh. Later when
Kerkar’s first child was born, Parikh he asked Parikh why he hired him, the
went and bought sweets from one of simple reply was: “I thought you had it
Mumbai’s most expensive shops in in you to do much more.”
those days – Eastern Dry Fruits Store
(near the Bombay Stock Exchange) –
and distributed them to everyone.
Parikh’s younger son Neil, who has
now taken over the reins at PPFAS,
says Parikh’s people skills have
helped the company immensely. In
the mutual fund industry, which
sees a high employee turnover rate,
PPFAS has many employees who have
spent over 8-10 years in the company.
And at the same time, he allowed
people to grow. Kerkar remembers
how Parikh encouraged many to
start their own business.
In fact, PPFAS’ marketing head
Jayant Pai was hired in a rather
unconventional manner. He had come
to invite Parikh for an event that was
chapter 04. Time for Everything

This document, crafted in 1998, is a

visible testament to his avowed belief
that customers were paramount, and
that the Company’s very existence
depended on them. One more
example of him ‘Walking The Talk’.

69
Timeless

Al Pacino & Anger Management

Parikh loved to read, and wasn’t bad temper. But he worked towards
much into television or movies, improving himself. He would talk to
except war movies or Westerns. us about his flaws and what he was
His favourite: The Godfather series. doing to be better. For him, every
His favourite actor – Al Pacino. He day was to better himself.”
could watch the movies anytime
and remembered every dialogue
as well. He would often ask Geeta
whether he looked like Pacino.
Perhaps his legendary temper
also came from his admiration for
Pacino. Like Gautam says, he had
little time for fools and was willing
to call a spade, well, a spade. And
sometimes, a little more.
As Kerkar says, he did not have
time for dishonesty. At work, when
there were signature mismatches
in the early days of broking and
someone tried to hide it, he would
get angry. But he worked on his
anger as well. Neil says he realised
his short temper was a flaw and
would meditate to overcome it.
“When I was young, he had a very

70
chapter 04.
Consciously Conservative
Parikh’s primary trait, whether in life
or business, was caution. Much as he
gave a hard workout to his body and
mind every day, his approach towards
business was exactly the same. He
did not believe that money could
be made in a day, week, or a month.
For him, money or investments
had to go through the rigmarole,
like life, to give dividends. Actually,
when markets did extra-ordinarily
well, PPFAS would be an average
performer. But when markets did
badly, PPFAS would stand out.
It’s not that he would remain unruffled
when markets did not do very well
and investors questioned his wisdom.
Gautam says he was constantly
worried that he was perhaps letting
his investors down and would analyse
situations several times. But he always
chose the safest route because he truly
believed that he was a custodian of his
investors’ money and they had placed
their trust in him. So, even if it meant
earning less than alpha returns, he
never regretted his decisions.
“He was very meticulous and thorough
and never did anything in haste.
He always thought it through and
planned well,” says Sahil. “An intensely
reflective person, in any situation he
analysed every eventuality, reaching
out to experts if need be, to find a
persuasive solution,” remembers
Sahil’s wife, Sitanshi.
A classic example of his vision is the
three-storey building in Walkeshwar,
Mumbai, he bought in a distress sale in
the ‘90s. The building had six flats, five
of which were at the time rented out
on a ‘pagdi’ basis. The ‘pagdi’ system
is one in which the tenant becomes
part-owner of the house and can
even sell it. The only attraction of the
building, for Parikh, was a glimpse of
the sea between two huge water tanks.
Despite some opposition to the move
from his family members owing to the
tenancy issues, he went ahead with the
Time for Everything
deal and even borrowed from friends owns two floors in the building, and
and family for the purpose. there is only one floor occupied by
tenants. Parikh moved into his second
At the time, the entire family of 7
floor flat in 2012. “My brother and I
people was still living in the two-
now have two separate flats on the
bedroom flat the senior Parikh bought
third floor of the building,” says Neil,
in the building constructed by Geeta’s
adding, “Unfortunately, he could enjoy
father, when the family had fewer
his dream house for only two years.”
members. Parikh wasn’t comfortable
with the fact that the family, though
together, didn’t have any privacy. For
instance, his two sons shared the living
room with their great-grandmother
and maid. Bringing the whole family
in the newly purchased building but
different flats meant everyone would
be together but also have their privacy,
which Parikh thought was perfect.
“He also dreamed of a house where
he could have his own library/reading
room overlooking the ocean, and
where he could play his guitar without
any disturbance,” says Neil.
To maintain the building, he let out the
ground floor to a playschool at market
rates. Over 25 years, the family now
71
Timeless

He did not Family And Friends First

permit his work

and hobbies to Parikh placed great emphasis on
personal relationships. Besides
keeping his promise to Geeta and
rob time meant treating his family to a vacation
once a year, he later took them for
for his family trips across the world every year.
Friends and relatives remember
and friends...and him as someone who loved spending
time with them and cherish every

they cherish that moment they had with him.

“One of my happiest memories of him
till this day. was when I got my Class X result. Never
in his wildest dreams did he expect me
to top economics in school. In fact, he
checked my scores with a calculator
multiple times. He was also very happy
when I graduated from the University
of North Carolina in computer science
and many years later, back in Mumbai,
featured in reputed newspapers/
magazines as a tech entrepreneur.
Since we didn’t work in the same
office, he would email me a Keep it
up!”, says Sahil. “Initially, the thinking
was I would go abroad for studies and
With elder son Sahil and his wife Sitanshi

72
chapter 04. Time for Everything

by default join the family business. as he believed everyone needed their

However, when I went abroad for family time. Gautam says he would
further studies in 1997, the internet rather spend his time with his loved
was just fuelling lots of possibilities for ones than on furthering his business.
the future. He was of the opinion that “He could have built a much bigger
I try out computer science. He always business had he wanted to. But
pushed me to try new things and kept he did not think that way. Every
telling me that the ‘only constant in the little minute he could spare, he
world is change’. After my graduation, would spend it with those he cared
I was working in the US for four years for”, remembers Gautam.
and he was quite fine with it. In fact,
he was proud that I was managing well
on my own”, he adds.
“When Sahil and I were in the US,
we regularly communicated with
Dad through lengthy emails, sharing
our thoughts and experiences.
He was always generous with his
time and advice and supported our
entrepreneurial spirit, believing we
would learn the most with experience”,
says Sahil’s wife, Sitanshi.
In fact, after PPFAS became organised,
Parikh encouraged his staff to
complete their work by 6pm every day
Family time...

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Love
To him, ‘love’ went beyond mere tokenisms. He
demonstrated his abiding love for his wife, Geeta, by
according her the highest respect, and considering her
as a sounding-board, pillar of strength and advisor.
Of course, the two did have a lot of fun together too...
during their myriad travels round the world.

74
chapter 04. Time for Everything

75
Timeless

Family Man
A highly responsible son, brother, husband and father...but
also not overbearing. He strongly believed in giving every
family member (especially his sons), adequate freedom to find
their own way in the world. He always felt that it was futile
to try and control others...but at the same time, was readily
available to offer his advice if asked for.

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chapter 04. Time for Everything

With sister, Saloni

77
Timeless

Multifaceted...
He was multifaceted, without being facetious. Strongly
believing in nurturing all aspects, viz. physical, mental,
spiritual and intellectual, he drove himself hard, always
aiming to make the most efficient use of time. He often said,
“Everyone has the same 24 hours...so don’t complain that
you lack the time to do something”.

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chapter 04. Time for Everything

A sports lover, enjoying an evening at Lord's.

79
Timeless

...and balanced
His individual pursuits did not preclude him from
developing a strong inner circle of friends whose company he
cherished. They, in turn, relished his earthy wit and wisdom,
though they ribbed him about it too, at times. His sense of
humour and self-deprecating nature went a long way in
building and maintaining strong relationships.

80
chapter 04. Time for Everything

At younger son, Neil's wedding to Khushboo (August 2012)

81
Timeless

PPFAS,
Now and Going Ahead

82
chapter 05.
‘Best time to buy stocks is when you don’t feel like buying’
Source: Business Line
Stock market investing is not just about
number crunching and balance sheet
analysis. It involves a bit of mind games
too. Excerpts from an interview with
Parag Parikh, published in Business
Line shortly before the launch of his
fund house, on behavioural finance
and how investors can use it to make
investment decisions.
How does behavioural finance explain
the market and its movements?
We all learn that stock markets are
efficient and people make rational
decisions to maximise their profits.
Now behavioural finance says exactly
the opposite. It says markets are not
efficient, especially in the short run.
Suppose you find a ₹5 coin on the road
when you are walking. Now, why do you
think no one saw it, despite so many
people walking on the road? In the
same way, markets are not efficient.
Similarly, take the belief that people
make rational decisions. If this were
true, how would you explain people
giving money to charities, or spending
on parties to celebrate birthdays?
These are not rational acts because
money is going out, but people still
do it from their heart. More often
than not, we make decisions from our
hearts and not mind. That humans
make irrational decisions at every
point in time is also the reason why
markets are so interesting and have a
full industry following them.
How do you integrate behavioural
finance into the services you offer?
My idea is to educate investors and to get
them to know that there are no short-
cuts in the markets. The way markets
are going up, banks are lending margin
money and some mutual fund houses
are advising investors, it all gives
the wrong impression that one can
make money in the market by simply
buying and selling stocks. These are
wrong notions. We cannot sow a seed
today and expect it to become a tree
tomorrow. It has to go through various
stages and seasons to become one.
What we do is adopt a slow-and-steady
approach. Our clients believe in our
philosophy of value investing; we don’t
take money from people just because
they are ready to give it to us.
So why are you entering the mutual
fund business now?
The minimum entry amount for
our Portfolio Management Services
business is ₹5 lakh. By entering the
mutual funds’ space, we can cater to
the small investor. He is the person
who needs it the most. A mutual fund
is a very good vehicle to meet their
needs. Here again, we will be different
and will not concentrate on collecting
assets under management (AUM).
We will concentrate on performance
alone using value-investing and
behavioural finance. This is what
we did in 2008. When the markets
crashed, we went to our clients and
told them to give us money!
PPFAS, Now and Going Ahead
You have to buy when others are
selling and sell when others are
buying. This is the basic concept of
buying value. But unfortunately, in the
stock markets, investors find a stock
less risky if everybody is buying and
the stock prices are going up. And they
find it riskier when nobody is buying
and the stock prices are down. That’s
the challenge we have to work with.
How do you use behavioural
finance to invest?
We don’t have a brilliant team, no one
with capabilities to point out exactly
how the markets will move. What we
instead do is identify a good business,
with credible management and with
a good moat around its business,
strong network and less debt. We only
buy such businesses and at the time
they are available at a discount in the
market. And when is that? When there
is excessive fear in the market. We
buy at that time and stay away from
the market after that.
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Timeless

“PPFAS will
flourish and
grow. It will be the
most respected
and reputed
organisation. It
will be known
for its integrity,
competence,
honesty and
trustworthiness.”
New generation...guided by old values – with Neil Parikh

84
chapter 05.
With so many companies tapping
the primary markets, what is your
view on initial public offers (IPOs) as
an investment vehicle?
I don’t believe in investing in IPOs.
Tell me why are there no IPOs in bad
markets? Why do they come only in
good markets? That’s because in good
markets people are willing to pay any
price for anything. The management
agrees to sell their shares during good
times because they know they will get
much better values for their shares.
And why don’t companies come out
with IPOs during bear markets? Well
because promoters feel that their
share price should be valued higher
than the rest of the market.
Why do you think retail interest took
so much time to pick up?
Interest is how you see it. With the
market picking up, we will certainly
see retail activity picking up as greed
will then set in. Markets feed on
greed and fear. Interestingly, when
PPFAS, Now and Going Ahead
the markets offer opportunities for So what should retail investors do?
investments, there is immense fear in
For retail investors, I would say the
the market. That is also why only a few best time to buy stocks is when they
are successful in the stock markets. don’t feel like buying. And that brings
We all want instant gratification. me to the question — who is a retail
What is your view on the market now? investor? An investor isn’t someone
Do you think it is expensive? who invests every day. He is someone
who invests once in probably two years,
See, here again, we are following the
or whenever there’s an opportunity.
insanity that society has created. Now,
The rest are all punters. And what
Sensex has only 30 stocks while Nifty
advice can you give to punters? ■
has 50. Is that the market? No. There
are over 7,000 listed stocks! We are
looking at the wrong barometer.
Moreover, how do companies get
into these indices? By virtue of their
market capitalisations alone. They are
all big companies but not necessarily
good companies. The market of more-
than-7,000 stocks outside of it is
where the value is. Besides, mutual
funds and institutions play with the
Nifty all the time, and there is no
value per se there. A look at the open
interest in Nifty will tell you that most
institutions are into it already.
85
Timeless
Road Ahead For PPFAS:
Retaining The Core, Changing The Cover
Parag Parikh’s decision to shift focus
from portfolio management services
(PMS) to mutual fund management
was primarily driven by the clash
between his beliefs and what he
saw in the markets. Mutual funds,
technically, are supposed to make
life easier for the lay investor. But
with a large number of fund houses
offering hundreds of products, the
life of the investor has become more
complicated, than becoming easy. At
the same time, the decision was also
a tactical one because the PMS was
becoming increasingly complicated.
As Rajeev Thakkar, chief investment
officer of PPFAS points out, the
minimum investment threshold was
raised from ₹5 lakh to ₹25 lakh in 2012.
Besides, getting a client on board
involved several complications. A large
number of accounts — demat account,
bank account, brokerage account,
custodian account and others — had
to be opened to do business. What’s
86
more, all these accounts had to be
opened simultaneously. Then, for a
domestic client, 65 signatures were
required while for a non-resident
Indian, the number was virtually
100. And for a customer staying in
another city, someone from PPFAS
had to travel to do the verification. In
comparison, mutual funds are simpler
as they involve a single-page form.
The shift significantly helped PPFAS.
From 600 clients, they now have more
than 50,200 clients.
The pitch for the fund house stays the
same as it was in PPFAS PMS: The fund
house is not looking at short-term
returns for clients. So, when the shift
happened, almost 90 per cent clients
stayed put since the basic idea was to
attract the same kind of clients. “We
also decided to put our own money so
that clients realise we have a stake in
the game,” says Thakkar. In keeping
with its avowed philosophy of investing
in businesses and holding them for the
long-term, the portfolio of the flagship
equity scheme of PPFAS Mutual Fund
has one of the most stable portfolios
among industry peers.
Neil Parikh, CEO, PPFAS, says one
of the main reasons the company
transitioned from a PMS to a mutual
fund structure was to find a low-
cost, tax-efficient manner where
they could invest their clients’ funds,
along with their own. The structure
that they desired was a ‘Go-Anywhere
Fund’ where one could invest across
sectors, across market caps and most
importantly across geographies,
wherever there was value. The
portfolio management scheme did not
provide this flexibility.
As per this logic, going forward
whenever the company launches a
new scheme or product or forays into
a new asset class, it will have to be
something different, where the family
and the investment managers will be
excited to invest their own money.
Future launches will be dictated
by the investment environment,
tax and legal structures as well as
technological advancements.
One thing the company promises as
it moves forward – a lot will change,
but a lot will simultaneously remain
constant. The culture, philosophy,
ethics of the company will not be
compromised at all. The foundation
of the company is built on values of
honesty, trustworthiness, integrity,
transparency, consistency and
competency. These will always remain
constant. The current equity scheme
— Parag Parikh Long Term Equity
Fund — will remain the flagship
scheme. “I believe we have a long way
to go with this scheme, as it has a great
opportunity”, says Neil.
The changes will be seen in the form
of newer technologies. Besides, the
company plans to spread its wings
geographically — from a single
office in Mumbai, to other metros.
chapter 05. PPFAS, Now and Going Ahead

Also, instead of retaining its single-

scheme structure, the company has
added a Liquid Fund and will add an
ELSS (Equity–Linked Saving Scheme)
to its offerings in the near future.
“There are other opportunities in
the equity space that we hope to take
advantage of”, adds Neil.
The company wants to do more of
the same while selectively taking
advantage of newer opportunities
that come its way, whereby it can
stand out by offering a great value
proposition to investors.
The core value of PPFAS will thus
remain the same — not necessarily
being the biggest, but being the best in
managing investors’ assets.

Taking PPFAS Forward: Rajeev Thakkar and Neil Parikh.

87
Timeless

Contemporaries
Reminisce

88

Ramesh Damani
The author is an investor who
believes in following Warren Buffett’s
investment approach. His portfolio
choices often comprise relatively mid-
sized companies with high potential
backed by sturdy processes and
managements of high integrity. Many
of these picks, chosen after conducting
diligent research, have subsequently
blossomed and become famous.
He is also a much sought-after
media personality renowned for his
aphorisms on investing in general and
the stock-market in particular.
“You’re only given one little spark
of madness,” said the late actor and
comedian Robin Williams. “You
mustn’t lose it.” My friend Parag,
used his given plug point to pioneer
equity investing in India.
The Bombay Stock Exchange (BSE)
was born 143 years ago, in 1875, under
a banyan tree - as the folk lore goes.
In the 1980’s Parag Parikh planted
another tree – that of value investing.
By 1985, he was among the pioneers
in equity research in India. In 2001 he
started using Behavioural Finance as a
lens to discover hidden anomalies and
values in the markets. For 35 years he
nourished the tree of value investing,
whether through the stocks he bought,
the lectures he gave, the students he
mentored or the business he built.
Today PPFAS, the institution that
bears his name, is among the leading
investment advisory firms in India.
Parag and I were professional
colleagues, both members at the
Contemporaries Reminisce
BSE. Our paths crossed many times many dreams undone while carving
at conferences, committee meetings, out a good life for their family,
television studios and social occasions. friends and investors.
He was invariably gracious and kind to God Bless and RIP, Parag Parikh. ■
me. I always revelled in his sly humour
and his pointed diagnosis on the
current state of markets. Once when
I overheard students complain to him
about mediocre returns he quickly
replied, “The definition of insanity is
doing the same thing over and over
and expecting different results. Try a
different approach,” he admonished
them. That different approach actually
led him to Harvard, from where he
studied behavioural investing.
His death, untimely and tragic, took
away from us “a force of nature.” But
his ideas, happily, still resonate in our
minds and wallets every day. He left us
all “richer” in every sense of the word.
In the Oscar film classic, “It’s a
Wonderful Life”, the lead character
George Bailey and Parag Parikh
have a lot in common. Both left so
89
Timeless
Sanjay Bakshi
He is ‘Managing Partner’ in
ValueQuest Capital LLP, a SEBI
Registered Investment Adviser and
also serves as an Adjunct Professor at
Management Development Institute
(MDI), Gurugram.
Besides gaining renown as an
ace value-investor who has identified
and invested in several multi-baggers,
he is also widely respected for his
academic prowess.
He was in regular contact with Parag
Parikh for over three decades.
90
I Just Lost A Friend
Parag, some of those obits say, was a
contrarian value investor and money
manager who took the high road in
serving his clients, first at his firm’s
PMS and then at his mutual fund.
I want to focus instead on Parag,
the remarkable human being who
transformed many lives.
“Parag” in Hindi means nectar which
is appropriate because I know of many
people who drank the nectar of Parag’s
generosity and kindness. Let me tell
you about just three of them.
Back in 1998, I was struggling to
become a successful value investor.
Having returned from England in 1994,
and being bitten by the value investing
bug, I had started my investment
boutique with a very small corpus
contributed by friends and family
members. It would take many years
before I achieved any real success, but
in the meantime to make ends meet, I
used to write columns in The Economic
Times and a few other publications.
One day I had the opportunity to meet
Parag who, it turned out, had read a
few of my articles. He was running a
PMS scheme at the time — something
I thought I might want to do one
day and so I was excited to get an
opportunity to meet him.
Without my telling him anything,
Parag saw my “situation,” understood
it, and invited me to write for his
firm. I accepted his offer and wrote
13 columns for him on topics such as
a (hypothetical) leveraged buyout of
Bajaj Auto, the rigged market in PSU
stocks, special situations investing
and why value investors should stay
away from IPOs. Those articles got me
a lot of recognition in the investment
community which was very helpful to
me at the time. So, even in my early
days as a value investor, Parag had
propelled me forward.
He never stopped.
Over the years, we had stayed in touch
and Parag had kept himself abreast
of my progress as a value investor
and also as a teacher.
Then, in 2011, he reached out to me
with an idea. He was going to hold
a symposium comprising value
investors. Titled “OctoberQuest,”
the event would seek to be an
“intellectual hotspot for exchange of
thoughts and sharing of experiences
among like-minded peers.”
Parag wanted me to address my peers
in the value investing community
many of whom were much older than
me! When I read his mail, the nervous
and introverted part of me took over.
Speaking in front of students who
know little is nothing compared to
addressing peers who know much
more. That thought made me give
Parag with one excuse after another to
somehow escape from all this.
It didn’t work.
After a series of email exchanges,
Parag called me and said: “Sanjay, you

can do it.” He talked me into it and on
28 September, just a few days before
the conference I wrote to him: “Your
persistence got me! If it’s ok with you, I
will move my timetable a bit and come
to attend your wonderful conference.”
Parag replied: “Dear Sanjay, thank you
so much. Your presence means a lot
to me and also to the value investing
community. We will schedule your
speech first thing in the morning
after the keynote address by Mr.
Chandrakant Sampat.”
Shit! I was going to speak immediately
after the legendary Chandrakant
Sampat! Images of tomatoes and eggs
being thrown at me immediately came
to mind. It was too late though to back
out now as a commitment to a friend
had been made. So, I gathered all the
courage I had and went on the stage and
spoke something unremarkable to my
peers. Afterwards, Parag came up and
announced that from now on I will be
the keynote speaker at his conference.
Parag was doing it again. He was
propelling me forward.
Of the next three OctoberQuest
keynote talks I delivered, two went
viral on the net. (The third one remains
unpublished.) I still get mails from
people from around the world about
them and have made many friends
and earned a lot of respect because of
those talks — something that wouldn’t
have happened but for Parag.
Arpit Ranka is one of my brightest
students. He dropped out of college to
study from me and ended up topping
my class. When the course finished,
he came to me for career advice. I
told him to go get a college degree.
Thankfully, Arpit didn’t listen. Instead,
he went to Parag, who immediately
hired him. Over the course of the next
few months, Parag mentored Arpit
and invited him to collaborate with
him on his second book. That book,
on behavioural finance, contains
Contemporaries Reminisce
Parag’s accumulated wisdom of
more than three decades.
Arpit recalls the experience:
“Sometimes a gesture remains with
you for your entire life. One such
gesture on his part, which greatly
exaggerated my contribution was him
sharing 25% of the royalty of his book
with me. I consider myself blessed
to have worked under somebody like
Parag bhai, who not only inspired you
immensely but then went out of his
way to recognise your contribution,
which was effectively fruit of his trust
more than anything else!”
Years later, Arpit went on to become
a very successful value investor and
I was delighted to learn recently that
one of the world’s largest university
endowments reached out to him to
explore a working relationship with
him. Unfortunately, Parag didn’t get
to know this. Had he known, he too
would have been so proud of Arpit.
91
Timeless
Like Arpit, Megha More is also a
bright ex-student. She went to work
for Goldman Sachs and after a while
when she found herself drowning
in that ocean, she sought my help.
She had an interest in behavioral
finance so I sent her to Parag who
immediately hired her.
“I would sit with him in his office for
about 30 mins to an hour daily and just
rake in all the wisdom that he so freely
and happily imparted,” she recalls.
Megha’s story is inspirational because
it shows how one thing can lead
to another. She recalls how Parag
encouraged her to stay fit: “When I
informed him that I have joined a gym,
he was elated. He knew I had almost
an hour long commute to work. He
immediately said, “I will allow you
to leave one hour early daily if you
promise you won’t skip the gym.”
Megha went to Chicago to be with her
husband and ended up running the
Chicago marathon. A few years ago,
92
she returned to India and started a
fitness company which was recently
funded by a venture firm at a multi-
million dollar valuation.
She recalls: “I had tears in my eyes
when I informed him about my
personal decision to move to US, but he
spoke to me like my father would and
said “This is the first of many sacrifices
that you’ll make in your marriage.
Don’t start this beautiful journey with
a regret. You were meant to be here
with us for this limited time only.”
There is no other way I can justify losing
Parag than by quoting his own words
to Megha: He was meant to be here
with us for this limited time only. ■
And love, Timeless . . .

93
Timeless

Handwritten note by Parag Parikh believed that the most Readers may be astounded at how the
effective way to battle one’s demons same person can alternate between
Parag Parikh would be to expose them to the harsh seeming so fallible and so potent...but
light of day rather than let them that was Parag Parikh.
mutate in the recesses of one’s mind.
We thank the Parikh family for according
The pennings alongside, are an their consent to publicise this note.
apt example of both, his courage
to stare down the fears bedevilling
him as well as his clarity regarding
the actions required in order to
sculpt a better future.
Frankly admitting that he is currently
enveloped by the fog of doubts
and apprehensions, he is equally
resolute that he will overcome these
debilitations through introspection
and fortitude. This is accompanied
by a vivid, purposeful road-map for
himself, his family and his extended
family - PPFAS Limited.

94
95
 About the Author

Joydeep Ghosh is a ‘Senior Associate Editor’ with

Business Standard. An MA in Economics from the
Gokhale Institute of Politics & Economics, Pune, he
has also worked with organisations like The Week,
Business World, Mid-Day and Hindustan Times. He
writes mainly on the financial and corporate sectors,
besides blogging on everything else.
He was acquainted with Parag Parikh for over two
decades.

Joydeep Ghosh
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