Mohnish Pabrai @Google Talks On Too Much Stock Research [Transcript]

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Mohnish Pabrai talks at Google Moderated by Saurabh Madaan published on Jun 23, 2017. This is the full transcript this might contain errors and should not be relyed upon – furthermore this is for information purposes only

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Book or manuals mentioned

Also see Forty Book Recommendations From Mohnish Pabraioney Masters

Super Money
Moody's Manual
Japan Company Handbook
Korean stock book
The Art of Being Unreasonable
The Beak of the Finch
Am I Being Too Subtle

Video and text below

Also see Mohnish Pabrai Fund Up 57 Percent For The Year


Saurabh: Ladies and gentlemen please join me in welcoming Mohnish Pabrai.

Mohnish: Thank you Saurabh for that generous introduction and great to be back in the Plex. I think this is my third time here and congratulations on the stock getting past the 1000, a little bit behind the other team, but that's okay, you can catch up.

Anyway, I wanted to share some thoughts about a subject that – one of my motivations for sharing this is to try to learn myself, so all of these are not kind of fully formed thoughts if you will. But I am hoping that some of these ideas will get pounded into my brain a little bit better because I get to talk about it and some insights might come from folks like you.

So in Los Angeles there's a large active asset management shop that some of you might have heard of. It's called Capital Group. They've been around for about 85 years and they manage about 1.4 trillion. And the Capital Group has a number of different funds, kind of like Fidelity, but unlike Fidelity which has the star managers like William Danoff or Peter Lynch, Capital Group runs things a little bit differently. So they assign teams of managers to manage a specific fund and each manager will for example, manage a few hundred million or a hundred million or maybe a billion out of the larger fund, and then they collect kind of all the different manager picks and that's what comprises the whole fund.

And so few years back, I was at a dinner at Charlie Munger's house and it's a small group, he posed a question to the group, he said the Capital Group, a few years back had set up what they called a Best Ideas Fund, and so what they asked each of their portfolio managers to give one stock pick, the highest conviction idea, and then they created a Best Ideas Fund, which was taking one pick from each of the managers. And Charlie said that this Best Ideas Fund did not do well. It underperformed the benchmark, underperformed the S&P and so on. And he was asking the group why that was. And then before we could kind of get further into the discussion, dinner was served, everyone kind of moved, the conversation shifted, and this thread kind of just got left unanswered.

And I think this was like five or six years ago, and I would meet Charlie once in a while but either I had forget or there would be a lot of people around, and I thought I had the answer for why this happened, but I didn't know because god hadn't told me why it happened. So earlier this year, I was with Charlie and I said, no, this time, I am going to make sure this is the first thing I bring up so that I bring closure to this issue. So I said, "Charlie you know you might remember five or six years ago," and I brought up the Capital Group, and he beamed, he said, "Oh yeah, yeah, I remember that really well." So I said, "What was the reason the Best Ideas Fund didn't do well?" And then he said, "Well, it wasn't once, they tried it several times, they tried setting up these Best Ideas Fund multiple times and each time it failed."

And so he said, "Before I answer the question why it failed, I want to give you a story from my days at Harvard Law School." And so he said that sometimes when they had classes at Harvard Law, the professor would bring up a case where kind of the facts were such that it wasn't obvious which side was in the right. It could go either way. And then they would divide the class into two halves randomly and one half would argue for the defendant and the other half would argue against the defendant, and then the two sides went off and studied the facts and then they made their arguments. And then after all of that was done, when they surveyed the entire class, overwhelmingly, the people who had argued, the students who had argued for the motion believed strongly that they were right. And the people who had argued against the motion believed strongly that they were right. And again, these were folks that before they had studied the facts, they didn't particularly have a leaning one way or another.

And then, Charlie brought up that basically, he quoted this English actor, Sir Cedric Hardwicke, and Sir Cedric Hardwicke basically was kind of a little bit of a smartass, but he said, "You are already fooled," and he said, "I've been a great actor for so long that I can no longer remember or know what I think about any subject." And Charlie said that even the temples and churches make you repeat stuff because as you shout it out, you pound it in. And basically, the Best Ideas Fund, Charlie said, was simply the picks were the ideas that the manager had spent the most time on. And so when they spent the most time on these ideas, they were the most excited about them, and of course when they put all of these ideas together, things didn't go so well.

And in poor Charlie's almanac, he talked about how the human mind is a lot like the human egg. So once the first idea gets in, just like the human egg, it locks up and seals off any additional ideas from coming in. And so you have this, what he calls the commitment and consistency bias, where basically we get locked into what's taken hold in our brains and we see this even in the political discourse if you will. If you talk to folks who love Donald Trump, they can't see anything wrong with him. If you talk to folks who are on the other side, they can't see anything right with him. And then of course reality probably is some shade of gray in the middle there.

But, Warren Buffett also has a great quote. He says, "What human beings are best at doing is interpreting new information so that their prior conclusions remain intact." So I think there's also a second reason why the Capital Group's Best Ideas Fund didn't do well. So, the portfolio managers, they have specialized. So someone specializes in utilities, someone specializes in the coal industry, someone specializes in artificial intelligence and so on. And so naturally if you go to the guy who's focused on the coal industry, he's probably going to give you the highest conviction coal idea that he has. And it's kind of like a horse that can count from 1 to 10 is a smart horse, it's not a smart mathematician. And what you want in the portfolio is not the best coal company, what you want is the best stocks. And so there's kind of siloed approach to people having specializations can lead to, you know utilities for example could all be overvalued at a particular point in time for example. And so you bring in a utility, you bring in a coal stock, and so on and so forth, and obviously the end result isn't going to be so good.

So anyway, that was I think the second thing I thought might be a reason why the Best Ideas Fund didn't do so well. But getting back to the human mind and the human egg, I thought about how is it that we can kind of counter these biases, because it's obviously important, because on the one hand we cannot make investments until we spend time studying companies but if you spend time studying companies you get biased. So it's kind of an issue, so I was thinking about well, how do I try to build a framework which can get around some of these issues.

And so I came up with a few hacks, I thought they might be two or three things at least I can think about that can be useful. And the first hack was that just being aware of these facts is a huge advantage. So being aware of the fact that we have a lot of biases, our mind can play kind of games, tricks on us, you know the shut off mechanism in the human brain and so on. So being aware of that, being rational – Charlie Munger says that he hasn't been successful because he's smart, he's been successful because he's rational. And another thing that is I think very useful approach is to be fluent in the other side of the argument. So, if you are going to go long on stock, it probably is a very good exercise to spend time developing a thesis on why to go short. And that will force your brain to think about things that normally it doesn't want to think about, and such.

So the first hack is just kind of be aware and let rationality prevail. The second hack is kind of like what Buffett – I just want to go back to Warren Buffett's childhood, when he was a teenager, before I get to the second hack. So Warren Buffett, when he was a teenager used to go to this race track in Omaha called Ak-Sar-Ben, it's actually Nebraska spelled backwards. So at this Ak-Sar-Ben Race Track, what he used to do is after all the races had been run, he'd go and collect all the discarded tickets people had left on you know throughout the race track. He'd collect them all and then he'd go through each ticket carefully to see if they were discarded tickets that were actually winning tickets, because people are having fun, they are drinking and so on and so sometimes they might have a winning ticket and not realize it. And he would always find a few of these free lunches if you will, tickets that are actually winners but had been discarded. And because he was underage, he used his Aunt Alice to go to the window and collect on these tickets.

And so this is what kind of the teenage Buffett did, and then in 1993 there was this author who went by the name Adam Smith and he wrote a few books Money Masters and so on, Super Money, and he was interviewing Warren Buffett, and he said – so Adam Smith says that "If a younger Warren Buffett were coming into the investment field today, what would you tell him to do?" So Buffett says, "Well, I would ask him to do exactly what I did, which is, if you are working with small sums, learn about every publicly traded company in the US." And then Adam Smith said, "But there's 27,000 companies." And Warren Buffett's answer was, "Start with the As."

And so it sounded like a kind of facetious reply but really wasn't. And at the 2001 Berkshire Shareholders Meeting, Buffett said that when he started in '51 he went through every page of the Moody's Manual twice, and it's said Moody's manuals were 20,000 pages. In fact I bought one recently on eBay, and it's got about three or four per page and it goes about 1500 pages. So there's a lot of data there. And he went through that one year two times, and then in 2006 he was talking to students at Columbia University and he was talking to them about going through the Moody's Manual in '51, I will just read that – it was an absolute question of turning the pages. On page 1433 he found Western Insurance, 1949 they earned $22 a share; 1950, $29 a share; and in '51, the range on the stock price was between $3 and $13, kind of less than half of previous year's earnings. And he went to a broker and looked at the [manuals and there was nothing wrong with the company. And then 10 pages later he found National American fire Insurance.

Then he says, this book really got sensational towards the end. In 1950 it earned $29, the share price was 27, book value was 135. And then in 2005, he told the students just a year before he met them, someone sent him a Korean stock market guide – I've actually seen it, it was put out by Citibank – and he spent about five or six hours on a Saturday going through this list of Korean companies with just some of the basic information. And he picked out about 20 companies from that list, and he put about a 100 million of his personal portfolio into those 20 companies. And so for example there was Daehan Flour, which sold about one-fourth of the flour in South Korea, it had earnings of 13,000 won three years ago; 18,000 won, two years ago; 23,000; a year ago; and it had over a 100,000 won per share in equities and the whole thing was going for 38,000 won. So he did very well with his Korean escapades without really knowing a whole lot about the businesses. He just kind of went through them just purely on a quantitative basis.

And then in 2011 my friend Guy Spier and I found ourselves in Warren Buffett's office and you can see on the right there's the Japan Company Handbook. And I was actually familiar with that handbook because I had a subscription to the exact same book; and so when I saw that on Warren's desk, it was quite a surprise. So I asked him about it, because in 2011 Berkshire Hathaway, they can't buy Mickey Mouse companies, and the reason I was going through the Japan Company Handbook was I was looking at Japanese net-nets, companies trading well below their liquidation values and so on. And so, I asked Warren, why he was fooling around with the Japan Company Handbook and of course he puts on a poker face and doesn't say anything. And then I picked up the book and Guy and I dog-eared some of the pages of companies that we had found that were interesting. So without asking him, we kind of mutilated his copy and most of these companies were towards the back of the book. He says, yeah, and it's always the case, it's really the backend is when all the good stuff shows up. And then of course he doesn't tell us anything more about what he did with that, but that was during daytime hours at Berkshire Hathaway is what he's doing.

So, actually the teenager Ak-Sar-Ben and the young adult going through the Moody's Manual and then the much older adult going through the Korean stock book and then the Japan Company Handbook, all of these exercises are the same. They are all exercises where you are spending very little time on either a given ticket or a given company and you are going very rapidly through – I mean, if you are cycling through 40,000 pages with, I don't know, 50 or 80,000 companies in a year, you are clearly not spending much time on any single company. And so what he was looking for when he was going through this was very specific patterns, and when he saw those patterns, he acted. And so the pattern was, it had to hit him over the head with a 2 by 4. And so either it had to be a winning ticket at Ak-Sar-Ben or it had to be a stock where it would just stop you in your tracks, you know 100,000 in book value is trading for 40,000, making 25,000 a year, that sort of thing.

And so that brings me to the second hack, which is basically to paraphrase Nancy Reagan, just say no quickly. So you know, we have this built-in bias where, once we spend time, we get pregnant with the idea. Well, don't spend a lot of time, and so you are rushing through a lot of stuff and only spending time on stuff that is looking like an absolute no-brainer. And one of the things about the investing business which is so much better than baseball is there are no call strikes, so we can let hundreds and thousands of ideas go by and it doesn't matter. So it doesn't matter if we miss something that goes up 10x or a 100x or a 1000x. What matters is what we actually invest in.

So it's a very forgiving business from the perspective that we don't really need to know everything about everything. We don't need to act on everything, we can miss lots and lots of stuff and it can still work out well. And the advantage, so just say no fast is what it does is it frees up a lot of time. So if you are going through companies and many times when I look at a business, most businesses I look at, I am done in seconds, maybe it takes 10, 15, 20 seconds, because I am generally looking you know like for example, on a typical day in the office, people will send me investment ideas which is great, I love to receive investment ideas, so it's [email protected], feel free. And so when I get in and I look at these ideas, I just look for two numbers. I look at what is the stock price or whatever idea is being pitched, and what is the person saying it's worth. And unfortunately, most of the things I receive will be like the stock's at 12 and here's all the reasons it's worth 16. And so when I see something like that, in about 10 seconds I am done. I don't even bother to figure out whether it could be worth more and the person missed it and so on. I just assume there's some intelligent person who thought about it and I will just give him full benefit of doubt that they've got it right.

And so the same thing with most companies, when I look at them, if it doesn't hit me, very strongly with some intensity in the first few seconds or first few minutes, I move on. And if it does have unusual traits, I mean, I think in 2012, I spent a lot of time, probably two months doing nothing but studying Fiat Chrysler and General Motors. And so it frees up a lot of time to study the businesses, but you've scanned a lot of stuff on the horizon before letting things in. So that's the second hack is just say no fast and that kind of leaves room, and of course if you are a voracious reader and you kind of buy into what Charlie Munger says is the latticework of mental models, then many times things will come together in a very rapid timeframe. I mean, Warren Buffett talks about that he got a cold call from a banker who suggested to him that Dairy Queen which was privately held was a company that was available for sale, and so Warren said, "Well, we have our acquisition criteria listed in the annual report. Does it meet all the conditions?" And the guy said yes. He said, "Well, send me the numbers," and I think in less than half an hour, Berkshire had made an offer and they had a deal.

And so there was no way Warren Buffett could have looked at Dairy Queen before because it's not a public stock, but he knew enough of the business to understand that basically franchise restaurants, there's a certain way you can look at them, and you can figure out kind of what they are worth and what you want to be paying for them, and so on and so forth. And he went through that math really quickly. Now, he had an investment at that time in McDonalds which he probably studied at some length, and that probably got him where he needed to be.

So, the third hack, which is kind of related to the second hack, is basically this notion that Eli Broad talks about, the art of being unreasonable. That's the title of his book. It's a great book actually. And so Broad is a very successful entrepreneur and so in the quest for investments be unreasonable. So, don't settle for this thing is at 13 and it should be 18 and that sort of thing. I always tell people, please try to send me things which are PE of 1, because PE of 1 is great, maybe PE of 2, and I can deal with that, single-digit math is easier to deal with, and such.

And so basically, there are over a 100,000 publicly traded stocks on the planet, there are always things going on with different companies, getting into distress or high growth or various other things. And because these are all auction driven markets, by definition, they have wide swings. I mean, you can throw a dart at a New York Stock Exchange company, look at the 52-week range on the company and it will be something like $75 or $150. And if you pick a random home in Palo Alto, that is not the fluctuation in a stock price – in the home price. And so auction driven markets have this nuance where they kind of either get euphoric or they get pessimistic, and they might do both in the same year. And so that's what leads to the distortion, the mispricing and that's what we can take advantage of.

So, those are some of the thoughts I really wanted to share with you. Again, this is kind of work in progress, I am still trying to get better at it and I just want to make sure that I am aware of the fact that spending time on companies is likely to make me biased, and so I am hoping to get better on that. So with that, thank you Saurabh.

Saurabh: Thank you so much Mohnish. So Mohnish, I am going to pick up right from where you said, the stock is at 12, the target price is 18. Let's bring the element of time into the picture as well. Something is 18 today and going to be 36 tomorrow and so on, how do you look at time horizons in your analyses?

Mohnish: Yeah, so, 12 to 18 is not very interesting, because that's again 50%, I know 50% sounds like a lot, but one of the things is that in value investing there's a free lunch. And the free lunch is that the greater the margin of safety, the higher your returns. And so, if a company is worth 18, if I can buy it for 4, I've got a huge downside protection in terms of what might happen. And the thing is businesses, capitalism, you guys see it at Google, is brutal, dog eat dog. I mean, it's – and you are at the cutting edge of all these guys who want to encroach on your territory if you will. And so, businesses are not kind of steady state characters, steady state entities, they fight for the survival. And so when we are trying to project the future of a business, we should demand huge margins of safety. And so that's another reason why the 12 to 18 is not that interesting, because it's not so much the timeframe – yeah so, if there's a catalyst in place, let's say some company is going to be acquired for 18 in two months and it's sitting at 12, well, if that's happening and the odds according to you are 95% that it's going to close, sure, then you can go for it, because that's – everything is encapsulated.

Saurabh: Yeah, I guess, my question is more around quality versus net asset value bargains. So you could be looking at a net asset value bargain that is worth $18, selling at 12 versus looking at a quality company that you think is worth maybe 18 today but five years from now it could compound to a much higher value as well. And that's where – whereas a net asset value bargain or a commodity company, five years from now might not necessarily have the [inaudible 00:29:48].

Mohnish: Yeah. I think that 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. And so, buying cheap assets in my opinion, it's not the name of the game. I think, what you really want to get to is you want to get to high growth where the intrinsic value increases over time, but you want to be extremely unreasonable. High growth at a PE of 1, can we do that? Can we do that? So what you really want is – I mean, what I am saying is that I think any fool can see that Amazon will grow a lot, Google will grow a lot, Facebook will grow a lot. It becomes a lot harder to figure out what the returns would be when you are investing today. There probably still are good returns. I would say that these are very durable moats, and so they probably wouldn't be around for a long time, and they probably are great investments even today.

But, we have a 100,000 stocks to choose from. Why not do some digging without spending too much time on one? And why not try to find that diamond in the rough and then take it from there? Like for example, Charlie Munger said that in 2002 he read Barron's for 50 years, so from the 1950s until 2002 and probably every issue of Barron's has at least 5 or 10 ideas. And so he said for 50 years he read a issue every week, that's 2500 issues and 25,000 stock tips, and he didn't act on any of them. He acted on one Barron stock tip in 2002, which was Tenneco. By 2004-2005, he had made 8x on that investment, so Tenneco was under distress, the stock went to $1.60, eventually it went to $55. He was out at $15 to $20 a share. But he put 10 million, it became about 80 million in two or three years. Then he gave the money to Li Lu and that money is now about, my guess is around 500 million or so.

So, this is happening in our time. This is not some 1960s story. From 2003 to 2017, without riding Google or Amazon, he got there, to 50x, that's 30% a year or something. So the thing is that what caused that. Well, what caused it was extreme patience, coupled with extreme decisiveness, coupled with being very unreasonable in terms of what he wanted in terms of valuations. And that's the mantra.

Saurabh: So one of the nice things to see at this year's Berkshire meeting in Omaha was Mr. Buffett and Mr. Munger being very candid about how you know, they've been changing their own ideas about investing, and also being very candid and open about admitting mistakes. So, in that same spirit, I guess, what we'd be interested in is learning from you, maybe asking you if you are willing to share some of your insights from things that you've learned from over two decades of investing now, specifically from mistakes.

Mohnish: Sure. Well, first of all, just in terms of what happened in Berkshire in Omaha and I think it was an eye-opener for me, and I think what Warren pointed out were these four largest market cap businesses in the US, and I think it's Facebook, I think Amazon...

Saurabh: Google, Apple.

Mohnish: Google, Apple and I think might be Microsoft in that too, I am not sure, but the top four or five of them are about two and a half trillion or so in value, and it's almost 10% of the value of the entire, all the public equities in the US. And he didn't say it was anywhere near obvious that these were in bubble territory, in the sense that, he said, these are businesses, all of them can be run without capital, they run on negative capital. So they have two characteristics, they are running on negative capital and they have very high growth. And when you have a business with negative capital needs in very high growth markets, those are the Holy Grail of investing. And so, he regretted the fact that in the case of Google, the founders had visited Omaha, they wanted to get Warren's permission on some usage of his letter and principles and such, and many of the Google principles are Berkshire Hathaway principles, which is fantastic. And so, he says that they were a customer of Google, they were spending on AdWords, it was obvious for them, it was a great business, but he blew it.

And so that was a great insight, and I think one of the things that us as value investors have to be cognizant of is that there is definitive change taking place in the way the world works, and clearly, it's concentrating into a few companies which are doing an excellent job. And so, not being able to have exposure to those businesses is a negative, but on the other hand there are hundred ways to nirvana, you can get there with Tenneco and Li Lu as well. So in terms of I think the lessons over the last couple of decades, one of the biggest lessons I've learnt is to not be focused on cheap assets. Historically, I always wanted to buy things that were cheap, I discounted the value of quality. My take at this point is I want both. I want to get more unreasonable. I want cheap and good or better yet, cheap and great. And so the idea is that you sit and do nothing for long periods, and you study areas where that maybe possible, and they will show up from time to time, because you are such a large base of auction driven companies that you can get there. So that's... and another learning I've had which has happened more recently is to focus on stocks in India for example.

Saurabh: So tell us a little bit more about specifically outside the US, because I think your US portfolio is very easily seen through a 13F for example, and you are the master of cloning who's popularized this idea, so people are using it for you, but tell us a little bit about that...

Mohnish: Well, I was surprised myself that more than 70% of the assets in Pabrai Funds are sitting in companies which are domiciled outside the United States. And that's the highest number it's ever been. I've usually basically been very heavily in the US. And part of the reason is – I mean, none of this is by design, I am just bottoms up stock picker. I just go wherever I can find opportunity, so it just kind of happens to be that's where it led. And I think India is probably I think around 25-30% of that pie, somewhere in that range. And what I find interesting is that India has probably 5000 public companies and probably 4000 of them are not followed, because they are small, family controlled businesses. Now, there are a lot of governance issues, there are a lot of honesty issues, there are lots of different issues. So one of my principles used to be that I never met managements and I never visited the businesses because all of that was very inefficient in terms of time and such and I think meeting managements, one of the negatives is that you are talking to people who are exceptional at sales and that can distort – Ben Graham said it would basically lead to a negative distortion.

But one of the changes I made kind of destroying one of my best loved ideas was I decided I couldn’t do India without meeting managements, and I think India has a lot more like private equity with some of the smaller businesses. So I started making trips where I've been meeting various management teams in India, and those have been exhilarating. I've really enjoyed – I mean, I've met some companies that are outright frauds. It's kind of fun to sit in a room with the frauds and just see what they look like, kind of horns growing, and then there are others which are exceptional entrepreneurs with great runways and great governance and all of that. So this is very early in that process and I think I've visited maybe or met with maybe a couple of dozen companies.

Saurabh: Mohnish I guess for young students and young individual investors, who are sort of listening to this conversation, maybe later on YouTube, could you share with us an example, it doesn't have to be a current investment, it could even be a past investment outside the US. Could you walk them through how you found something like this so that they get the same inspiration around these ideas?

Mohnish: Sure. Well, like I said, I think on any given day at work, one, two or three, ideas show up, which is great. And most don't take more than a few seconds, but I remember about little over two years ago some person I didn't know sent me I think a 10 or 12-page write-up of a company I never heard of, a company in India called Rain Industries. And I never heard of this company, never heard of the guy who sent it to me, but I did a quick check on the two numbers that I care about, which is the current stock price and the target, and there seemed to be like a zero added to the current stock price, to the target, which got my attention. That's my kind of guy. And so I said, let's read what's going on here and see what kind of drug this guy is on. And so I sat down to read the report and I had to say, it was immaculate, I mean, it was really very well put together, I think the report is on the – it's on the web. If you do a search for Rain Industries and the guy who sent it to me, his name is Rajiv Pasricha, I haven't met him yet, he lives in Delhi.

And so everything he was saying about the business and the way he explained it was awesome. I think, there was nothing I could possibly find – so the only thing that was left for me to do was to ratify the facts. So he was stating, this is the businesses companies and this is where it's going, this is the market cap, this is what it's worth, this is why it's worth so much. So I just spent, probably not more than a few hours just testing that every number was accurate and that everything that was being said in the report was the way it is. And it wasn't a large business. I think the market cap at that time was about $200 million and in India we can't buy more than 10% of the business. So that's what we own, we own about 9.5% of the company. And so far it's tripled in price but it didn't do anything for like what, 20 months, and then in six months it came alive, and I think it will keep going for a while. But that's an example of where unreasonableness paid off.

Saurabh: So Ben Graham used to have this rule, maybe a heuristic more than a rule, if something doesn't do too much for three years or four years, and if I am recollecting correctly, he would just say, let's discard this and rotate. With a company like GM I guess, which hasn't really done much since the IPO, how do you think of this heuristic?

Mohnish: Yeah, I think, it's a very good heuristic and especially it's a very good heuristic when you think about all the biases that can creep into our brains. So, we have a large position in GM, we have some gain, we don't have a huge gain. Certainly, the annualized returns since we've owned it is pretty low. The stock is cheap. I am reaching the realization now, maybe it's right or wrong, we will see how the future unfolds, that we may not get much of a return even though the cash flows and everything are likely to come in, simply because the market's always concerned about what happens in the future, and there will always be concern. So my thinking of the GM position at this point is to think of it as cash and think of it as available for something more unreasonable, and so we will see.

Saurabh: So I have two more questions for you. One is, just a little bit about Dakshana. I think one of your students this year were in the top 50 all India ranks in the Joint Entrance Exam. Maybe could you tell the audience and folks on YouTube a little bit about how Dakshana started and where it is now in its journey because I think that is also a very big compounding engine for you.

Mohnish: Sure, yeah. Well, the thing is like I say, I am a shameless cloner, it's good to be a shameless cloner. And I am probably influenced by Buffett that, probably the best course of action in terms of wealth is to recycle back to society, I think if you are trying to give it to your gene pool in general, you do more harm than good. So, I knew a while back that we wanted to recycle back to society and I was looking for a cause that resonated and delivered kind of high social return on investment. And I ran into a guy in Bihar who ran this program called Super 30, which I was very impressed with in 2006, and so I met him in 2007, I wanted to fund him and scale that program. Basically, he was picking up kids who came from very impoverished backgrounds in Bihar and he was spending about eight months with them, 30 of them at a time, and then almost a 100% of them were going to the IIT. So if you are taking a family where the incomes are $50 to $100 a month and you are getting kids to IIT, who then get basically hooked into the global economy, where they are making thousands or tens of thousands a year in India and even more than that if they venture into places like California, that was a no-brainer. And plus that permanently kind of unshackles a family if you will and extended family if you will.

And so, when he said he didn't want to kind of scale, then I said, okay why don't we just clone his model, so I asked him if he had any concern with me cloning. He said, no that's great, feel free, I will try to help you as well. And so that's what – so Dakshana was set up as a vehicle to try to clone Super 30. And what we do is we basically identify kids who are poor but they are very talented, very gifted. And in India if you get a kid into IIT, there's a very high government subsidy, probably 80-90% government subsidy, so the education is almost free, just a few thousand dollars or probably like $2000 a year is what you pay, and even that you can get loans and so on. So the easiest way to reach or to lift a family from poverty is if there's high IQ in that family, you can get them to IIT and then get them out.

So we've sent, Dakshana has sent about – north of a 1000 kids so far have cracked the IIT entrance exam, been accepted by the IITs. And now, we have about 70% of our kids every year who make it through, which is great. And so we have about 800 or so kids in our program at any given time, and we are scaling that up, I think we will – by next year we will be at over 1100 and then we will keep going from there.

Saurabh: Congratulations on that success.

Mohnish: Well, there's a great team. It works out well.

Saurabh: Awesome. So, one final question and then we will roll it out to the audience. Could you give three book recommendations? I know you read a lot, and I am only going to ask for top three, and they have to be other than Poor Charlie's Almanack and the Buffett biographies for the folks and your audience here as well as on YouTube.

Mohnish: Sure. I mean, I think two of the books I think are books I am just about to send to Warren and Charlie, so I think you guys might enjoy it. One of them is called The Beak of the Finch. I think Jonathan Weiner, I think the name would be of author. It's a very old book. I think it came out 24 years ago. I don't know if you guys have read it.

Saurabh: Charles Darwin related.

Mohnish: Yeah. So I was fascinated by the book. I think that it's talking about a couple of researchers that spent about several months a year on one of the very small islands in Galapagos, and they did this for more than 20 years. And to their surprise, they saw evolution in real time, which something Darwin didn't see. So I think that's a great book, unrelated to investing but I think it's a great read. And then the second one is a book called Am I Being Too Subtle, and that's a book by Sam Zell and some of you might have heard of Sam Zell. And this book, I think, what I would recommend is to listen to it rather than read it. So it's a good way to kill time on the Bay Area expressways...

Saurabh: It's in his own voice, right?

Mohnish: Yeah, it's in his own voice, it's in his kind of raspy Sam Zell voice. So I've been listening to it in my car and I think there are a lot of lessons, there are a lot of lessons for investing and operations and culture and so on, and Sam is very candid, in your face about the sharing, and so I think that's another good book. The third one which I am re-reading and I am learning a lot from is the other biography on Charlie Munger Damn Right! So I know you said don't go there, but Damn Right! came out probably 17 years ago, and there is a lot of good stuff in there in terms of some of the different things, especially some of the evolution Warren and Charlie went through from buying cheap assets to focusing on better businesses and such.

So I think there's a lot of lessons there, and also there's a lot of lessons about – in many ways I think Charlie Munger got dealt a bad hand if you will, a far worse hand than most of us are dealt. He had to deal with the death of his nine-year-old son, he had to deal with blindness in one eye after a cataract operation that went south, and then just the extreme pain of eviscerating that eye. And so there's a lot of human qualities you can see in that book where he's really been very stoic about that, in the sense that when there's kind of pain and suffering. In fact like he's absolutely rational about his eye. He says, at the time for the procedure, he was going through, there was a 5% chance of complications, and so his rational side said, 1 out of 20 are going to get it and if it happens to be me, that's the way it is.

Saurabh: And Mohnish before I roll it out, can I [inaudible 00:52:13] in one little question – what does your average day look like?

Mohnish: Well, my average day – so one of the things I learned from Buffett is to not put stuff on the calendar. So I try to avoid, except when Saurabh calls me, I try not to put things on my calendar in terms of what I have to do. I like to have kind of a very free day if you will and so actually, quite frankly, when I – I usually sleep late so I usually roll into work pretty late, probably past 10 o'clock usually. And I don't really have an agenda of what to do. I just kind of – I obviously have a lot of different reading materials and such that I am going through. I will see what's going to come in the Trans Am over the day if you will, and then decide kind of how I want to spend my time. And one of the things I've added now recently is every quarter I am spending about seven, eight days in India. So those days are usually just kind of filled with meeting companies and such. And in the meantime I am actually trying to learn more about these businesses before I go meet the people and such. So some of that kind of directs some of the reading, but that's basically how the day is structured is to try not to put a lot of things on the schedule and to try to keep it as free form as I can.

Saurabh: So you don't have a McDonalds on your way where you've ordered a [inaudible 00:54:00]

Mohnish: I do. No, I do have a McDonalds on the way, I do sometimes pick up McDonalds, I have never tried to calibrate the spending based on the market, so I leave that to Warren. I take a nap every afternoon, so afternoon naps are great. They've got pods here to sleep.

Saurabh: Yeah, yeah.

Mohnish: Okay. So please make sure you take advantage of those. And yeah, so basically, I am pretty refreshed I think by the evening so I can then spend more time with reading and such...

Saurabh: Your reading, most of it happens electronic or...

Mohnish: Oh no I don't read electronic at all.

Saurabh: Tell us why.

Mohnish: I just have never – I mean, that's a preference, I've just never had a – even my emails, most of my emails don't come to me, they go – I mean, even if it's addressed to me, it goes to my assistant and they get printed out, and I get all my emails at 11 AM, and by about 11 I get a folder every day at 11, and the folder has anything I got to look at, any mail, emails, things to sign, whatever is required in terms of any admin. It all shows up in a folder at 11, and by about 11:15 or 11:20, I am done, I am done with whatever responses, whatever – and my response is usually a chicken scratch, you've already got some of those, the chicken scratch right on the thing [inaudible 00:55:38].

Saurabh: It's not easy to make out what [inaudible 00:55:40].

Mohnish: Yeah, sometimes they bring it back to me, I can't read it myself, so that's really bad, but it doesn't happen too often. So I think that I agree with Charlie that the multitasking that we have going on today in society is a net negative. I think it doesn't – you are trying to do three things, you don't get to deep thought. And I think so I am trying not to do that. And so that's how I've structured – I think Warren and Charlie are even better than that because they don't even have a – I mean, Charlie doesn't even have a computer. I don't know whether he has a cell phone, I don't think he has a cell phone either.

Saurabh: I think Mr. Buffett has sent one email that got into public domain.

Mohnish: Yeah, the one email became part of the Gates Antitrust and he decided after that that was the end of his email writing days. I think he's done three or four tweets.

Saurabh: Yeah.

Mohnish: He's done a few tweets, so he's getting there.

Saurabh: Yeah. All right, so thank you so much. Let's open it up for audience questions.

Audience Member: So Mohnish, can you share your insight on the way market has reacted to the new administration, because, to me it's counterintuitive, I mean, most of the corporations are kind of opposite to the way government is functioning, and still after we have a new President, market has gone gangbuster. Planning is something that the new administration is kind of lacking, and to me things like growth doesn't happen as an accident, but there needs to be a lot of planning for that. So any insight on that?

Mohnish: Well, so the first thing is I think there's not much I can gain from having insights into what the market has done or will do, because I am not making market bets if you will, in the sense that, we are not trying to figure out when to buy the S&P or sell the S&P if you will. So quite frankly, that question is, for me, not very relevant, because it doesn't matter, but I would just say this that yes, we've had a rally since Trump's selection, but I think a bigger kind of underlying story maybe that if interest rates stay low for an extended period of time, then present valuations maybe a bargain, the stock market actually maybe cheap. And of course we won't know that, we won't know that till we get to 2020, 2025 and so on and see kind of where we are. So markets are discounting mechanisms, if the market has a crystal ball which tells it where interest rates are in 2025 or 2030, then you can get to some numbers accordingly. The best that I can tell about the market is that there are very few bargains, and there maybe things that are either fully priced, there may be some things that are overpriced, but I don't see things being egregious, in the sense that I saw valuations in '99, 2000 that were egregious, you know,, and so on, and we lived through that, at least I lived through that.

But, today when you see some of these companies with these huge market caps, like Alphabet or Amazon or Facebook and so on, there is a lot of reasons why you can justify that, because there's a lot of underlying logic which didn't exist with And so, there is premium pricing you can say on some assets, but perhaps those assets deserve premium pricing. So, the best thing is I would say that ignore the market, because it really has no relevance, and focus on the minutia, specific business, specific stock price and hopefully low single-digit PE.

Audience Member: I was very surprised to find out that you and Buffett still use those books to look for stocks. I mean, these days it's so easy to find information, you can just go to GuruFocus, use the Stock Screener, find PE 1, you can do that in half a second. Why does that still work?

Mohnish: Right. So actually, that's a great question because in 2006 when he invested in Daehan Flour in Korea, you could have had Capital IQ, you could have run any screen you wanted, it would have popped up all kinds of companies, and if you believe that there are tens of thousands of people with lots of assets who have Capital IQ subscription, that stock should have not been at that price. But, just like the dollar bill on the ground where the professor says it can't be a real dollar bill because in an efficient market, there wouldn't be a dollar bill on the ground, the reality is that speed of access to information is not the determining factor in leading to market efficiency. I think that markets, because they are auction driven and because there are humans involved, they vacillate between fear and greed. And at that time, in the Korean market for whatever was going on then, there was more fear than greed.

And so I find for example, even today, there are lots of bargains in South Korea, amazing bargains.

Saurabh: Can you give an example?

Mohnish: Well, we are buying right now, so we can't quite go there because these things – I mean, some of these things, I am barely able to get $2000 a day off the stock, and we have a $500 million dollar, $600 million dollar portfolio, so we are nibbling. But we are buying things at two and a half times earnings. And I am two and a half times earnings of a business so like for example I will send you on a treasure hunt, how's that.

Saurabh: Yes.

Mohnish: Treasure hunt is more exciting than giving you the treasure. It's always better to hunt for the treasure. I mean, I have an insight and I don't know whether the insight will be right or wrong, you can tell me. So, we know that there is lots of different permutations and combinations of changes happening in the way humans travel. So we used to have cars and public transport and taxis, that was it. Now, you have Uber, you have uberPOOL, you might get to Autonomous, Waymo, we might – there's a lot of different combinations – some of you might be familiar with VIA in New York which I think is great. So the end result is that humans have a lot more options available for transport and mobility and the price is coming down, and also you have low gas prices and so on.

So, it is an absolute certainty in my mind that per capita miles being driven in some kind of public transport for humans is going up. I mean, I remember when I was a student, I had my bicycle and mobility was very restricted, because I was poor, I didn't have a lot of places I could go. Now, I just see with my kids, they can go anywhere. So, if miles driven per human are going up, how can you play that? Well, one way you can play that is tire companies. So, no matter what happens, I am almost sure there will be more tires sold five years from now or 10 years from now versus today, and actually if we get to electric cars taking off, they want weight reductions, so they make those tires paper thin – how many have a Tesla here? No Tesla owners. It's a value crowd.

Saurabh: Value investing here.

Mohnish: Hard core value crowd, all right. So, you know that the Teslas and the Leafs and all that, they have these special tires which don't last very long and they cost a lot, because they want to keep the weight down. And so those are even better for the tire companies, they keep wearing out very fast. So, my take was that tires will do well, and so I made an investment in a company in India which was really cheap, which made one of the ingredients that goes into rubber that goes into tires and I think that will do very well. And the other was a company in Korea which is in one shape or another in the tire business and it's growing, actually it's going to grow quite a bit. It's actually even without these demographic things happening, it will still grow. And if I am buying a two and a half to three times, in three years I have all my cash back. That's the beauty of PE of 3.

Saurabh: So it's a tire related company in Korea with a PE of 3 for the treasure hunt.

Mohnish: Yeah, have fun.

Audience Member: So I wanted to understand how do you decide when these 3 PE stocks or not even 3 PE stocks, stocks like Amazon and Google, when they rally so much, how do you decide when to sell stocks that have worked for you? And a quick follow-up, do you also short stocks? Do you short-sell?

Mohnish: Yeah, so I have never shorted a stock in my life. I will go to my grave without ever having shorted a stock. I would suggest you follow that same mental model. If the only thing you learn over here is to give up shorting if you are a shorter, then I think it'd be an hour well-spent. So, it's a great question. Each of us I think has a limited quota of hundred baggers that will show up in our portfolio. I think I have had more than my quota of hundred baggers that I was smart enough to buy but too dumb to hold, and there's a long list. I used to own Kotak Mahindra Bank in '94. I don't know, it's 150 times, I probably got like 30% return out of five years, sold it. You know Blue Dart, there's 200 baggers I did capture. I owned Amazon in 2002 I think at $10 a share, and I think it was 10% my portfolio then. And I got 40% in a few months and I was out. So it was great.

Anyway, so what I have learnt is that don't sell the compounders when they get fully priced. And don't sell the compounders when they get overpriced. Only sell the compounders when it's absolutely obvious to you that it's egregiously priced. The big money is in riding the compounders, but you have to try to get in on them at a reasonable valuation and that you have to be right on the fact that they are compounders. And so it's a forgiving business, you can be wrong quite a few times and still be okay.

Saurabh: So Mohnish, does that by corollary mean that your buy versus hold criteria may not be identical?

Mohnish: It is not identical, that's correct. I mean, this is a very difficult lesson for a cheapskate like me, it was a very difficult lesson for Warren and Charlie, I think they learnt that lesson from See's Candy, that was a [inaudible 01:08:40] purchase for them, and they saw in that case because it was a controlled business, they could just see the way it mushroomed. And so, I think that if you get into businesses where management is exceptional or the moats are exceptional. Or in the case of Google, you get both, buy one get one free, which is great, then I think those are businesses you just don't want to touch. I met some folks in India in some of these meetings that blew me away. I mean, in some cases I just looked at it and said, there's tailwinds but in addition to tailwind, there's a phenomenal operator. And the price was below liquidation value. And so those are all good tenets. So that's what you want to looking for.

But clearly, in my opinion, I don't buy the notion that you buy your portfolio every day. To me, buy and hold are different, and the cheapskate in me still wants to not pay up. But I was able to at a point in time get to where Google was just at the edge of making it, so we made it, which was great. And that's the key is that you want to ride the compounders for long periods.

Saurabh: This operator by any chance Piramal because I know you spoke about...

Mohnish: There are many – Piramal is a great operator. That wasn't the one. It's not below liquidation value, but great operator. But no, there are many in India I think who are young and great ethos, great drive. Piramal is an example of a compounder and I think that if you owned something like Piramal, I would just ignore the price for a long time, as long as Ajay is healthy.

Audience Member: A related question, when you first mentioned the best ideas portfolio, I was thinking how that would work in terms of managing positions and bet sizing, I was curious how you think about bet sizing relative to margin of safety and your valuation in the company.

Mohnish: Yeah, it's a good question. I think bet sizing just gets down to conviction, part of it gets down to whether it's other people's money or your money and also kind of where you are in life. I think, if you are a young engineer at Google, you have many decades of productive earnings ahead of you. And so the key there is to spend less than you earn, and put it away into places that make sense. So I would say that probably the mistake to have in

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