Mohnish’s idea on overcoming commitment bias .. comments on Google, Facebook, Amazon .. why it’s all about compounders .. view on GM now [a cash proxy] .. why more positions in India, he’s buying in Korea, why he likes Tyre companies .. THREE BOOK RECOMMENDATIONS .. when to sell compounders, BUY and HOLD not the same thing ..
I’ve noted the speech below ..
Pabrai asked the question .. “Why does Capital Group’s ‘best ideas’ fund consistently UNDERPERFORM?”
You’d expect a fund with each manager’s highest conviction ideas to do well.. It didn’t do well and they tried it several times and each time it failed
Mohnish suggests two things .. first reason is that the best ideas are the ideas that the manager has spent most time doing the work on .. i.e they are likely too committed to the idea as they have spent the most time analysing this idea they are more likely to like it – a strong commitment bias – they can’t change their mind once they studied the idea .. ‘Charlie Munger says even the temples and churches make you repeat stuff, because as you shout it out, you pound it in’. The best ideas fund were the ideas the manager’s had spent the most time on. They were most excited about them. And when they put them together they didn’t go so well.
Second reason is that each manager is a specialist, they like their ideas in the sector but doesn’t mean they are good investments – you want best stocks not best stocks from a sector. “What you want in the portfolio is not the best coal company, you want the best stocks.”
How to counter biases… conundrum .. can’t make investment without studying companies, but once studied companies you get biased.
1) Being aware of these biases is a huge advantage. Understanding our mind can play tricks on us .. for example the shut-off mechanism. Be fluent in the other side of the argument. If you are going long it’s probably a very good exercise to spend time developing a thesis on why to go short. That will force your brain to think about things it normally doesn’t want to think about.
Over the years Buffett involved in spending very little time on each company .. rapidly looking through thousands of pages in Moody’s data books. What Buffett looking for was very specific patterns and when he saw those patterns he acted. The pattern was it had to hit him over the head by a 2/4. It had to be a stock that just stopped you in your tracks.
2) Just say NO quickly. We have built in bias that once we spend time we get pregnant with the idea. So don’t spend a lot of time. So only spend time on things looking like an absolute no brainer. You can let 100 and 1000’s of ideas that go bye and it doesn’t matter. You can miss lots of companies and it can still work out well. Ity frees up a lot of time. Most businesses I look at I’m done in ten seconds. When I get analyst reports I look for two numbers.. what is stock price and what is person saying its worth. If its at 12 and analyst thinks worth 16, I see that and I’m done in 2 seconds. If it doesn’t hit me with intensity in first few seconds or minutes I move on. So scan a lot of things before letting things in.
3) In the quest for investments be unreasonable. Look for real bargains. Because of auction driven markets, by definition they have wide swings. You can throw a dart at a NYSE company, look at the 52 week range and it will be something like $75 to $150. If you pick a random home in Palo Alto, that is not the fluctuation in the home price. Auction driven markets have this nuance where they either get euphoric or pessimistic, and they might do both in the same year. That’s what leads to distortions and mispricings and that’s what we can take advantage of.
“In value investing there is a free lunch, the free lunch is that the greater the margin of safety the higher your returns”=
“Business/capitalism is brutal, dog eat dog. All these guys want to encroach on your territory all the time. Businesses are not steady state entities, they fight for their survival and so when trying to project the future for business we should demand huge margins of safety”
“I think it is always better to buy compounders, it’s always better to buy growth. If you are buying an asset because it’s cheap your upside is limited. Buying cheap assets in my opinion, it’s not the name of the game. You want to get to high growth, where intrinsic value increases over time. But you want to be extremely unreasonable [in the price you pay]. Any fool can see Amazon, Facebook, Google will grow a lot, it becomes a lot harder to figure out what the returns would be when you’re investing today. They are probably still good returns. These are very durable moats so will be around for a long time so are probably great investments even today. We have 100,000 stocks to choose from why not doing some digging and try and find a diamond in rough”
“Munger read Barron’s for 50 years till 2002, and every issues has 5-10 ideas. So for 50 years he read the issue every week, so that’s 2,500 issues and 25,000 stock tips and he didn’t act on any. He acted on one Barron’s stock tip in 2002. By 2004/5 he had made 8x on that investment. Put in $10m it became $80m then gave the money to Li Li. That money is now $500m or so. This is happening in our time. This is not a 1960’s story. From 2003 to 2017, without riding Google or Amazon, he got there, the 50 X, 30% a year. What caused that .. extreme patience coupled with extreme decisiveness, coupled with being very unreasonable in terms of what he wanted in valuations. That’s the mantra.”
“Buffet at AGM didn’t say it was anywhere near obvious FANG’s were in bubble territory. In the sense these are businesses that all are run on negative capital. Two characteristics, negative capital and high growth. When you have a business with negative capital needs in very high growth markets those are the holy grain are investing. Buffett regretted the fact the founders visited Omaha, wanted to get Warren’s permission to use letters and principles [many Berkshire principles and now Google principles] Berkshire were a customer of Google, they spent money on ad words. It was obvious it was a great business and he blew it. That was a great insight. Value investors have to be cognisant of the fact there is definitive change taking place in the way the world works. And clearly its concentrating into a few companies which are doing an excellent job. Not being able to have exposure to those businesses is negative. But there are 100 ways to nirvana”
“One of the biggest lessons I learnt is do not to be focussed on cheap assets. Historically I always wanted to buy thing cheap. I discounted the value of quality. My take at this point is I want both. I want to get more unreasonable”
He’s focussed more on stocks in India now .. more than 70% cos owned are sitting in company’s domiciled outside the US.. highest number it’s been. None of it is by design as bottom-up stock picker. India 25-30% of the pie.
“One of my principles used to be that I never met management and I never visited the businesses as it was inefficient in time and a negative in meeting management is you are talking to people who are exceptional at sales at that can lead to negative distortion. One of the changes I made in destroying one of my best loved ideas was I decided I couldn’t do India without meeting management.”
Have large position in GM .. have some gain, not huge. Stock is cheap. Reaching realisation that may not get much of a return, even though the cashflows are likely to come in, simply because the market is always concerned about what happens in the future and will always be concerned. My thinking at the point is to think of it as cash, available for something more unreasonable.
On Philanthropy .. “I think of giving back to society, because if you give it to your gene pool it will generally do more harm than good”
Three Book recommendations ..…
2 books he’s about to send to Warren and Charlie .. ‘The Beak of the Finch’ [Charles Darwin related – saw evolution in real time] and ‘Am I being Too Subtle’ by Sam Zell – a lot of lessons for investing, operations, culture etc
3rd book is he is re-reading … ‘Damn Right’ – on Charlie Munger
Average day – try not to put things on calendar .. try and have most of day free .. doesn’t really have an agenda on what to do. Takes a NAP every afternoon! [nice]. Gets folder at 11am with all emails/admin .. done by 11.20am. Agrees with Munger that multi-tasking is a net negative so trying not to do that.
Not much insights Mohnish can gain from market insights into what market will or won’t do as not making market bets. Yes, had a rally since Trump election, a bigger underlying story maybe, that if rates stay low for extended period of time then present valuations maybe a bargain. The market maybe actually cheap. Of course we won’t know that till 2020 or 2025. “The best I can tell is that there are very few bargains, and things fully priced, some things overpriced BUT don’t see things being egregious. Not like 1999, Pets.com etc. Today companies with huge market caps like Google and Amazon or Facebook, there is a lot of reasons you can justify that – an underlying logic that didn’t exist with Pets.com. Best thing is ignore the market and focus on the minutia, the specific business and stock price”.
Why can still find bargains … Speed of access to information is not the determining factor in leading to market efficiency. Because markets are auction driven and because humans involved, they vacillate between fear and greed. Even today lots of bargains in South Korea. He is buying right now. Buying things at 2.5X earnings. We know a lot of changes in way humans travel, now have Uber, Uber Pool etc .. end result is humans have a lot more options available for transport/mobility and prices coming down. So absolute certainty per capita miles being driven will go up. How can you play that? One way you can play that is tyre companies. So whatever happens I’m almost certain there will be more tyres sold 5-10 years from now versus today. If electric cars take off, tyres will be very thin. Don’t last long and cost a lot because they want to keep weight down. They wear out very fast. Bought a company in India which made an ingredient which goes into rubber which goes into tyres and the other is a company in Korea. If buying at 2.5-3X in 3 years I have all my cash back.
“I have never shorted a stock in my life. I will go to my grave having never shorted a stock. I would suggest you follow that same-mental model. Each of us has limited quota of 100 baggers that will show up our portfolio. I have had more than my quota I was smart enough to buy but too dumb to hold. I owned Amazon in 2002 at $10 and it was 10% of my portfolio then. I got 40% in a few months and I was out. What I have learnt is that don’t sell the compounders when they get fully priced or they get over-priced. Only sell the compounders when its absolutely obvious to you that is’t egregiously priced. The big money is in riding the compounders but you have to try to get in at a reasonable valuation and you have to be right on the fact they are compounders. It’s a forgiving business, so you can be wrong quite a few times and still be ok. It was a difficult lesson for a cheapstake for me. It was a very difficult lesson for Warren and Charlie. I think they learnt the lesson from See’s Candy, that was a seminal lesson for them. If you get into businesses where management are exceptional or the moats are exceptions or in the case of Google you get both, then those are businesses you just don’t want to touch”
“I don’t buy the notion that you buy the portfolio every day. To me, buy and hold are different. The cheap skate in me still doesn’t want to not pay up. The key is, you want to ride the compounders for long periods ”