Quest for value in time of festivals

October is here. And, Germany has been at the centre of many talks, amid Chancellor Merkel's visit. Hoardings of 'Octoberfests', inspired by the Oktoberfest in Munich, were ubiquitous in markets and malls in the national capital. On their part, e-commerce firms are planning an electronics shopping festival.

Even as the media was busy reporting and analysing these festivities and their impact, a group of investors met at a festival of a different sort. Every year, they meet to discuss and debate the finer aspects of value investing, the art propagated by Benjamin Graham and mastered by Warren Buffett. This year marked the fifth edition of the conclave, named Octoberquest by its founder and late ace investor, Parag Parikh.

In 2011, Parikh, an ardent practitioner and evangelist of value investing, had come up with an idea. "It was a one-day conference he personally hosted. He carefully chose the speakers, the invitees and even the lunch menu. He loved every moment of that day and made sure he spoke personally to every participant at the meeting," recalls Chennai-based investor and participant Shyam Sekhar, in a blog written after Parikh's demise this May. Parikh was killed in an accident in the US, while on a trip to attend Buffett's annual investor conference.

Parikh's friends and followers have decided to carry forward his legacy. Like most previous years, the conference had a well-researched keynote address, by professor Sanjay Bakshi. Bakshi, who runs an investment firm and teaches in Gurgaon, has considerable following among students of finance and investors. He blogs at fundooprofessor.wordpress.com and has a widely followed Twitter handle.

In the talk, titled 'Worldly wisdom in an equation', which he later shared on his blog and tweeted, Bakshi spoke about Bayes' rule and its relevance for investors. The talk was a seven-course one, starting with a short story involving a Martian. It then covered various situations in which Bayesian concepts were relevant. The Street Food plate can't do justice to the entire presentation.

Let's see the six core insights of Bayesian thinking, according to Bakshi's presentation:

Mind your language: Bayesians are careful about the language they use, when they think in terms of probabilities. Words such as 'certainly' and 'probably not' come with specific values and should not be used interchangeably.

Never ignore base rates: Base rates should be used as useful anchors to check one's enthusiasm for a specific story about a business.

Don't ignore the power of a good story: The word 'story' has a negative connotation in value investing but that's a prejudice. Not all stories are bad and to be avoided.

Know the difference between noise and signal: The signal is the truth and noise is what distracts us from the truth. Investors should work towards increasing the signal/noise ratio.

Actively seek disconfirming evidence: The Bayes rule specifically requires one to estimate the probability of an alternative hypothesis being true.

Don't forget you are operating in a pari-mutuel system: In the pari-mutuel system of the stock market, one bets against other investors. In such a system, the behaviour of other investors changes the odds.

While the presentation was a big hit on the internet, there was the odd brickbat, too. Bakshi tweeted this comment he received on his blog: "A Bayesian is someone who, vaguely expecting a horse, and glimpsing the tail of a donkey, concludes he has probably seen a mule- John Hussman."

In all likelihood, Parikh would have had a hearty laugh.