An informal transcript of the famous video clip featuring Warren Buffett, John Templeton, and Robert Wilson
Also see 2017 hedge fund coverage
In August, Mohnish Pabrai took part in Brown University's Value Investing Speaker Series, answering a series of questions from students. Q3 2021 hedge fund letters, conferences and more One of the topics he covered was the issue of finding cheap equities, a process the value investor has plenty of experience with. Cheap Stocks In the Read More
Good evening, I’m Adam Smith. What is it that makes a brilliant investor? What are the qualities that enable a man or woman to take let’s say $10,000 and turn it into $200,000 or $300,000. Tonight we’re going to be talking with three of the greatest investors of their generation. At least two of them are legendary. They have very different personalities, different lifestyles, different investment philosophies. But what they have in common is their enormous success. Success measured not only in their millions of dollars but in the respect of their peers. Now, it wasn’t very long ago, that there came about in Universities, a theory after a lot of statistical study that said, “No one can beat the stock market.” That if you up one year, you’re down the next. And that all the information about any stock is in its price. In other words the markets are efficient. But here are three brilliant investors who stood that theory on each year. Because they have one, year after year after year. The most senior in years is John Templeton, who came from the small rural town of Winchester, Tennessee. Went to Yale, graduated first in his class, went to Oxford as a Road Scholar. Made his first investment on the eve of World War II. He thought then that Germany’s invasion of Poland would put the US on a war footing and bring it out of depression so, he called a broker and bought a $100 worth of every stocks selling for a dollar a share or less. All in $10,000 of borrowed money. Four years later he sold them for $40,000 and he has been a bargain hunter ever since. His mutual funds all carry his name, Templeton in there tiles. The oldest of them is now thirty one years old.
Today, John Templeton runs his funds from the Bahamas where he’s built a home reminiscent of the undeveloped mansions of his boyhood Tennessee. It’s very pleasant here at the Bahamas but how can you run a couple of billion dollars worth of investments from the surroundings islands?
We did move here because it is so very pleasant. But we have found that in the twenty two years we live here, the performance of our mutual funds is better, than we live twenty five years we were managing on from radio city in New York.
Well, how do you account for this, you could work it on radio city and do things differently?
Yes, we tried to, but we go to the same meeting as the other security analyst and the people the speaker were sensible but we can’t help being influence. It’s much easier to be odd when you are a thousand miles away.
Trying to be odd, going against the herd has b een a Templeton trademark,as he searches for bargains that mothers have overlooked.
How do you know, you’ve always said that you should sell when the herd is happiest and buy when it’s gloomy? How do you know when the herd is gloomy that didn’t cry?
Hahaha. Sometimes they are and of course we make a hundreds of mistakes all the time. But we have found from the very time we started our investment council operation forty four years ago. We published this Emacto about business to buy when others are despondently selling and to sell when others are avidly buying requires the greatest fortitude and pays the greatest reward. Now, this applies not only to stock market cycles but it applies to particular industries and types of stocks. Basically, we determined that finding out what is selling at a depressed price, if a stock is selling at a quarter or half of what it’s worth, then, it is a bargain. In most cases I’m popular with other investors.
Mainly, you like to buy companies that are out of favor. For example, I noticed that your biggest position is in Royal Dutch. But everybody was expecting oil prices to go down. Does not bother you?
Oh yes, of course it bothers us. But there are so many other factors. We do on a very large amount, in fact I think Royal Dutch Petroleum is largest in hauling in our mutual funds. Because, at the present price it’s selling for only four times what we think it will earn this year. And we estimate that, in the long run, it will earn more. And if selling for less than half what could liquidate for. And only about three times its present annual cash flow and pays a good dividend. So, for many reasons it looks like the best bargain in the energy industry. It’s very widely expected that there will be a decrease in the price of oil and if the low point for share prices is when they most investors are expecting bad news. Not after the bad news comes out. Now, it is possible that it might get lower but, we are long range investors. Our withholding period is six years. Six years. So, in the long run it will be worth much more.
Your global fund looks all over the world for investments and I understand the couple of years ago, you are heavily into Japan and now you brought all the money back into the United States. Isn’t that true? Is that a temporary phenomenon?
Yes, it is temporary. We are worldwide bargain hunters. We search all over the world and make estimates of the values of each corporation and then buy those shares that have the lowest market price at the time in relation to our estimated value. One time that was in Japan, in that one nation alone we had over 50% of our total investments. Because we were buying the finest companies at three time earnings, some are two times earnings. But now, instead of 50% in Japan, we were less than 3% in Japan because meanwhile, the prices there have grown up. The Dow Jones industrial average in Japan is now over 25 times earnings and the index of small companies in Japan over 41 times earnings. So, now they’re very difficult, and very few bargains to be found there and more bargains are to be found in America and other nations.
So, if you are looking around the world, what country or countries would you pick as the best shot?
We never approach it that way. Almost all security analyst ask themselves, which nations and which industry before they make a selection. If no one is doing it that would be a good method. But since, the best results are obtained by in those other security analysts are not working. We just say we will buy the best bargain we can find and later find out what nation that’s in. Now approaching it from that end, we have found an unusual large amount of bargain recently. In the United States, also in Canada, and in Australia, and in Netherlands.
John, three years ago, you said that, you could see the Dow Jones at three thousand within five years, which was almost a triple and certainly a double. You have two years left on that prediction, do you hold by it?
We keep changing, what I said, we do not merely make predictions but, I said that the chances was good as even that would happen. And I am saying today that chances are as good as even that the Dow Jones someday might be about three thousand before the next presidential election three and half years from now. With based it on our long list of reasons partly based on value and partly based on cash available.
How do youfeel personally about the current take over mania?
It’s an illustration that share prices are among the best bargains in the world. This take over mania proves the fact that corporation on the stock exchange are selling from much less from they are really worth. Also the same thing is proven by the fact that more corporations are buying in their own shares. So that, it’s for the evidence that values are unusually low now.
Academicians have a theory that no one can beat the market consistently that the markets are efficient, that every, all in it is the price? And yet, there are handful of great investors who have single handedly disprove that theory by consistently beating the market over a period of many years and you are one of them. How would you distinguish yourself say from say Philip Fisher of Warren Buffet?
Probably in the fact that I look worldwide more than the others are doing search in the wide variety of areas. Probably because, I’m willing to make estimate of earning power further into the future than others are. And certainly because I rely on prayer in everything we do. We open all of our directors meetings with prayer. We pray about every decision we make. And in the long run, that means that you still make hundreds of mistake but less mistakes than other buyers.
Today, I ask you whether you prayed for stocks to go up?
Well, yes. But that would not work of course. If we prayed for something we bought to go up, I would be ridiculous. So, instead of that, I think, we would try to follow Solomon who prayed for wisdom.
Templeton, has offered a price for religious work and thinking but there are elders were they are more secular approach who also been very successful. Let’s take Warren Buffet of Omaha, Nebraska. If you would put 10,000 dollars in 1965 into his company Berkshire Hathaway, you would have 1 million today. Warren was a chapter in my 1972 book, “Super Money.”So, I’ve known him a long time. He learn this trade with Ben Graham, the original dean of security analysis at Columbia University. I don’t think Warren has ever been on television until his interview and he has certainly never courted publicity but recently, he got lot of it when he emerge as the key figure in the takeover of ABC by capital cities. Warren would be the largest shareholder of the new company and his own net worth is now far in excess of $500 million. But when I spoke with him last fall in his office in Omaha, he very characteristically made his investment styles seem so perfectly simple.
The first rule in investment is don’t lose. The second rule of investment is don’t forget the first rule. And that all the rules there are. I mean, that if you buy things far for what they are worth and you buy a group of them, you basically don’t lose money.
Warren, what do you consider the most important quality for an investment manager?
It’s a temperamental quality. You don’t need tons of IQ in this business. I may have enough IQ to get from here from down Omaha but you don’t have to be able to play three dimensional chess or be in the top league in terms of birds playing or something. I’m sorry. You need a stable personality. You need the temperament that neither drives great pleasure from being where the crowd or against the crowd. Because this is not a business for you take pools, it’s a business where you think. And Ben Graham would say that you’re not right or wrong because the thousand people agree with you. And you’re not right or wrong because thousands of people doesn’t agree with you. You are right because your facts and your reasoning are right.
Warren, what do you do that’s different than 90% of the money managers who are in the market?
Certainly most of the professional investors focused on what the stock is likely to do in the next year. They do all kinds of arcane, methods of approaching that. But, they do not really think of themselves as owning of a piece of a business. The real test whether you are investing from a value stand point or not is whether you care about the stock market is open tomorrow. If you are making a good investment, in a security it shouldn’t bother you if they close down the stock market for five years. It’ll all tell me is the price. And I can look at the price occasionally to see whether the price is outlandishly cheap or outlandishly high. But, prices don’t tell me anything about the business. Business figures themselves tell me something about the business. The price of the stock doesn’t tell me anything about the business. I would rather value a stock or a business first and not even know the price. So that I’m not influence by the price in establishing my valuation and I look at the price later to see whether it’s away from the line where my value is.
So, Warren Buffet tells us to say in this world Omaha, Nebraska where corns grows just minutes from the downtown. Now, Omaha is a nice town but nobody claims it’s the world financial center. Here the only pondering herd is actually on four feet.
Don’t you find Omaha a globally patron track for the investment world?
Well, believe it or not we got mail here and we got chaotic also and we got the facts to make decisions and unlike the Wall Street don’t have fifty people coming up in west spring in our area and we should be doing this or that this afternoon.
You appreciate the lack of stimulation here?
I like the lack of stimulation. We got facts not stimulation here.
How can you stay away from Wall Street?
Well, if I were in Wall Street, I probably be a lot for, we got a lot of stimulation in Wall Street and you hear lots of things and you may shorten your focus and a short focus is not conducive to a long profits. And here I can just focus on what businesses are worth. And I don’t need to be in Washington to figure out what the Washington post newspapers were and I don’t want to be in New York to figure out what some other companies are worth. It’s simply,it’s an intellectual process and the less static there is in intellectual process really the better of here.
What is the intellectual process?
Intellectual process is defining your level, defining your area of competence in valuing businesses. And then, within that area of competence finding whatever sells at the cheapest price in relation to value. And there are all kinds of things I’m not confident of value, there are few that I’m confident of value.
Have you ever bought a technology company? No, I really haven’t.
In three years of investing not one? I haven’t understood any of them.
So, you never have own for example IBM? Never own IBM, it’s a great company. I mean a sensational company. But I haven’t own IBM.
And so, here is this technological revolution going on and you are not gonna participate. Just go on and pass me.
Is that alright with you?
It’s okay with me. I don’t have to make money in every game. I mean, I don’t know what coco beans are gonna do. There a lot of things I don’t know about and that maybe too bad but you know, why should I know all about them. I’m working hard on. In securities business, you literally everyday have thousands of the major Americans corporations offered to you at a price that changes daily and you don’t have to make any decisions, you have to make that nothing is force upon you so you, there are no called strikes in the business. The pitcher just stands there and throws balls at you and if you are playing real baseball between the knees and shoulder, you either swing or gotta strike call on and if you gotta call too many call, I mean you’re out. In the securities business, you sit there and I throw, you are still at 25 and I throw General Motors at 60 you don’t have to swing at any of them. There maybe, wonderful pitches to swing at but if you don’t know, you don’t have to swing. And you can sit there and watch thousands of pitches and finally you got it right there what you want at something that you understand then you swing.
So, you might not swing for six months? I may not swing for two years. Is it not boring?
It would bore most people and certainly boredom is a problem with most professional money managers and if they try to sit out in year or two not only do they get someone that sit but their clients started yelling swing your bat from the stands and that’s very tough for people to do.
Warren your approach seems sound simple? Why doesn’t everybody do it?
Well, I think partly because of this so simple and that the academics for example, focus on all kinds of variables. The academics you mean the professionals? Right! In business school? Sure, and the dad is there so they focus on whether if you buy stocks on Tuesday and sell them on Friday, you’re better of you buy before election years and sell them another year, better of you buy small companies are all these variables because the dads are there and they learn how to manipulate them. And there’s a friend of mine that says, to a man with hammer everything looks like a nail. And once you have the skills you just to, are dying to utilize them in some way but they aren’t important. If I were being asked to participate in a business opportunity would it matter if I buy on Tuesday or Saturday or on election years or something? It’s not what a business man thinks about in buying business. So, I think about on buying stocks because stocks are just a piece of businesses.
Both Warren Buffet and John Templeton are interested in the philosophy of value. They are not short term speculators and they aren’t known for accepting high risk. But our next great investor relishes risk. In fact if an opportunity isn’t risky he isn’t interested. Robert Wilson has been tremendously successful following a strategy that focuses on stock whose earnings are growing rapidly and he beat against those whose earnings are going down. Wilson leaves and works in the heart of New York City. When he is not managing his money, he spent his time as an avid patron of the art. He is on the board of the New York City Opera and enjoyed shop talk with general director Beverly Sills as much as stock talk with his brokers. Some of the great investors to better out of New York John Templeton who lives in his flower garden in the Bahamas and Warren Buffet lives in Omaha, Nebraska and both of them say that living out of New York keeps them out of everyday gossiping the hearly barely of flow of every load of information. How do you survive in New York?
Well, in the first place I would be bored to death simply living in either in Bahamas or Omaha. So, the most important thing is to enjoy life. But secondly, I never really did all that well in the market until I came to New York. Unlike these other distinguished gentleman, I am not an original thinker. I tend to rely on other people to feed me if you will ideas and I’m very interested in what a lot of other people are thinking and more bright people are in New York in this business than anywhere else. I think the difference really is that they are original thinkers and I am not. I’m a derivative thinker.
A lot of people say, you can’t beat the stock market consistently and certainly a lot of money managers say that the stock market has beaten them but you have beaten the market and very consistently. What’s the principle that you’ve use to do this?
My philosophy is basically to invest in stocks where earnings are growing rapidly. I put time when I invested in them. Conversely, to short stocks where earnings are contracting rapidly or where the earnings are illusory for one reason or another. I’d live rather a placid personal life that’s been a quite placid life. And the market provides to maybe excitement and drama, I like to be in things that are at great potential for huge gains or in the case of shorts, great potential for losses. I often tell brokers who gave me ideas, I say, I’m not interested in buying if it can’t go down for 30%. I’m not interested in stocks with limited downside risks. If the downside risk is limited, then the upside potential probably is also limited. So, part of it is a way of getting vicarious excitement out of otherwise rather placid life.
How do you find the companies that have the rapidly growing the earnings?
Well, I really rely on brokers to call me, I give a lot of money out in commissions and I tend to sit at my desk waiting for people to call me.
But, rapidly growing earnings those companies are prices that they are scanned for by computer screens emerging growth mutual funds look for them. Isn’t this crowd, already reflected in the price in each of this stocks?
Maybe, I can refine what I said, the only way one makes money in the market is when the markets perception of a stock changes. So, basically I am looking for stocks where perhaps the earnings have not started to improve yet or if they have started to improve they are going to accelerate. There has to be an improve perception of that particular stock and that company to make money. So, you’re absolutely right about that. To buy a stock simply because earnings have been going up 30% a year for the last three years and they just do that on a route basis could be very good way to lose money fast because when the earnings slow down the stock could easily go down.
Tell me about the short side that’s what characterizes you as little bit unusual. Yes, about the short side. Or first let’s better tell the people who don’t know what that is?
Well, when one buys a stock long and later sells it and in the case of a short, one sells the stock first and then buys later. Now, how can one do that? Well let’s say you are bullish on IBM and you own some IBM stock and you think it’s going up in price and I think IBM is going down in price, I say to you, let me borrow your stock can I pay you for borrowing it, just as I would have pay you if I borrowed your money and I buy part of the stock and I will return it to you at some future day we would agree on. And so, I will go out and sell it. And if it goes down, I will make money because I can buy it back and return it to you with a profit. If it goes up, you’re the one who makes money and I lose money.
So, you would sell a stock a 15 and buy back at 25 hopefully. Hopefully, yes. Later. Haven’t you experience on the short side that was at least chastening?
Yes indeed, during the 1970’s when the stock market was buy and large going down, I shorted that I would think a thousand different stocks and they have been wrong about five times. I mean I was almost got like in my ability to pick shorts and you know what happen to god’s who inhabit earth rather than heavens, they begin to think that just because they short of stocks it will go down and this happen to me in the case of Resorts International which I shorted because I did not did think Atlantic City would amount to anything, as a gambling center. And the earnings came in and I was just so sure that because I shorted it, I would be right and its hubris sort of run wide and it’s a very human thing and that happens to all of us. And I think it particularly happens on Wall Street. We tend in this business to be terribly right for a while or terribly wrong. And no matter how long, how often we’ve been wrong in the path, when we have the period when we are right it’s so wonderful and we think we are so good.
What happened? And, well I lost a great deal of money and I made the front page of Wall Street journal. I’d often aspired to make front page of the Wall Street journal but not quite in a row that I made it.
If a young person came to you today just our couch and said to you, when I’m your age I wanna be rich as you are or where you are today, how do I do it? What will you tell him?
Money in the abstract not what money will buy but money in the abstract has to be the most important thing in the world. It is not the most important thing in the world, the vast majority of talented people.
You have an end object in your mind in your investing career?
Yes to make a billion dollars. Really? Yes. I’m not all sure I’ll be able to do it, but I’m going to try. It isn’t really so important that I do it, the important thing is to try to do it.
I think you can see that as different as these three remarkable investors are they have some traits in common. They have independence of mind, they are not afraid to act alone when the crowd is going the other way. They trust their own perceptions. They stick to the style they know and they are all smart. They are all probably would have succeeded at anything they turn their hands to.
And finally and most significantly after decades of investing, they still find it so much fun. They can rarely stand to do anything else. See you next week. I’m Adam Smith.
Article by Adam Smith