[MUSIC PLAYING]
SAURABH MADAAN:
Ladies and gentlemen,
please join me in
welcoming Mohnish Pabrai.
[APPLAUSE]
MOHNISH PABRAI: Thank you.
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 $1,000.
A little bit behind the
other team, but that's OK.
You can catch up.
So anyway, I wanted to share
some thoughts about a subject
that one of my motivations
of sharing this
is to try to learn
myself so all of these
are not kind of fully
formed parts, if you will.
But I'm 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 these 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 $100 million
or maybe $1 billion
out of a larger fund.
And then they collect kind
of all the different manager
picks and that's what
comprises the whole fund.
And so a 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 that the Capital
Group a few years back
had set up what they
called a Best Ideas Fund.
And so they asked each of
their portfolio managers
to give one stock pick, their
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'd forget
or there'd 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.
And so earlier this year, I
was with Charlie and I said,
this time I'm 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 might
remember five or six years ago
and I brought up
the Capital Group.
And he beamed.
He said, oh yeah, I
remember that really well.
And so I said, so
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 facts were
such that it wasn't obvious
which side was in the
right, it could kind of
could go either way.
And then they would divide
the class into 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 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 are 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 so Cedric Hardwicke.
And Sir Cedric
Hardwicke basically
was kind of a little bit of
a smart ass, but he said,
you're 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.
Right?
And Charlie said that the
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 managers 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 sealed
off any additional ideas
from coming in.
And so you have 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
and 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 specialize.
So someone specializing in
utilities, someone specializing
in the coal industry,
sometimes specializes
in artificial
intelligence and so on.
And so naturally, if
you go to the guy who's
focused on the coal
industry he is 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 one 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 this kind of siloed
approach to people having
specializations can
lead to 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 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 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 there 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;
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
a very useful approach
is to be fluent
in the other side
of the argument.
So if you're going
to go long the 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 racetrack
in Omaha called Aksarben,
it's actually in Nebraska
spelled backwards.
So this Aksarben racetrack,
what he used to do
is after all the
races had been run,
he'd gone collect all the
discarded tickets people had
left throughout the racetrack.
He'd collect them all and then
he'd go through each ticket
carefully to see if there
were discarded tickets that
were actually winning tickets.
Because people are having
fun, they're 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 have
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 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're 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 it 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 a set of Moody's
manuals were 20,000 pages.
In fact, I bought
one recently on eBay
and it's got about three
or four companies per page
and it goes about 1,500 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'll just read that it
was an absolute question
of turning the pages.
On page 1433 he found
Western Insurance.
In 1949, they earned $22 a
share; in 1950, $29 a share;
and in 1951, the range
in the stock price
was between $3 and $13,
kind of less than half
of the previous year's earnings.
And he went to a
broker and looked
at the investment manual.
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 actually have 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 $100 million
of his personal portfolio
into those 20 companies.
And so for example,
there was Daehan Flour,
which sold about 1/4 of
the flour in South Korea.
It had earnings of know
13,000 yuan three years ago,
18,000 yuan two years
ago, 23,00 a year ago,
and it had over 100,000 yuan
per share in share and equities
and the whole thing was
going for 38,000 yuan.
Right?
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.
And 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
toward the back of the book.
He said, yeah, that's
always the case.
It's really the back end 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 is doing.
So actually, the
teenager at Aksarben
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're spending
very little time on a given--
either a given ticket
or a given company--
and you're going
very rapidly through.
I mean, if you're cycling
through 40,000 pages of 50,000
or 80,000 companies
in a year, you're
clearly not spending much
time on any single company.
And to 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 two by four.
And so either it had to be
a winning ticket at Aksarben
or it had to be a stock
where it would just
stop you in your tracks--
$100,000 in book values
trading at $40,000,
making $25,000 a year,
that sort of thing.
And so that brings me
to the second hack,
which is which is basically--
to paraphrase Nancy Reagan--
just say no quickly.
So 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.
Right?
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 called 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 100x or 1,000x.
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 the just
say no fast is what it does
is it frees up a lot of time.
So if you're going through
companies-- and many times
when I look at a business,
most business I look at,
I'm done in seconds.
Maybe it takes 10,
15, 20 seconds.
Because I'm generally
looking 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 mp@pabraifunds.com.
Feel free.
And so when I get in
and I look at the ideas,
I just look for two numbers.
I look at what is the stock
price of 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 is all
the reasons it's worth $16.
And so when I see something
like that, in about 10 seconds
I'm 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 that some
intelligent person who
thought about it and
I'll just give them
full benefit of the 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,
the first few
minutes, I move on.
And if it does does
have unusual traits,
I mean, I think in 2012
I spend 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
or 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're worth
and what you ought to be paying
for them and so on and so
forth.
And he went through that
math really quickly.
He had an investment
at that time
in McDonald's, 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 in "The Art
of Being Unreasonable."
It'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 P/E of
one because P/E of one
is great, maybe P/E of two
and I can deal with that,
single digit math is easier
to deal with and such.
And so basically, there are
over 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 to $150.
And if you pick a random
home in Palo Alto,
that is not the fluctuation
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 and the mispricing
and that's what we
can take advantage of.
So those are some of
the thought I really
wanted to share with you.
Again, this is kind
of a work in progress.
I'm 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'm hoping to
get better on that.
So with that,
thank you, Saurabh.
SAURABH MADAAN: Thank
you so much, Mohnish.
So Mohnish, I'm going to pick
up right from where you said.
The stock is at $12,
your target price is $18.
Let's bring the element of
time into the picture, as well.
If something is $18 today
and going to be $36 tomorrow
and so on, how do you look at
time horizons in your analyses?
MOHNISH PABRAI: Yeah.
So $12 to $18 is not
really interesting
because that's kind of 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 Google as
brutal, dog eat dog.
I mean, and you're 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 entities.
They fought for their survival.
And so when we are
trying to project
the future for
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.
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 everything
is encapsulated.
SAURABH MADAAN: I
guess my question
is more about quality versus
net asset value bargains.
So you could be looking at a net
asset value bargain that is not
worth $18 selling at $12 versus
looking at a quality company
that you think is
worth maybe $18 today
but you know five years from
now it could compound to a much
higher value, as well.
And that's where a net asset
value bargain or a commodity
company five years from
now might not necessarily
have the runway.
MOHNISH PABRAI: Yeah.
I mean, I think that
it is always better
to buy compounders.
It's always better
to buy growth.
If you're buying an
asset because it's cheap,
your upside is limited.
And so buying cheap
assets in my opinion
is 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 P/E of one.
Can we do that?
Can we do that?
So what you really want is--
I mean, what I'm
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 will be
when you're investing today.
They probably still
are good returns.
I would say that these are
very durable [INAUDIBLE]
and so they're probably going
to be around for a long time
and they probably are great
investments even today.
But we have 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 five
or 10 ideas.
And so he said for 50 years,
he read an issue every week.
That's 2,500 issues
and 25,000 stock tips.
And he didn't act
on any of them.
He acted on one "Barron's" 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 like $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 the 1960s story.
From 2003 to 2017, without
riding Google or Amazon,
he got there, to 50x.
It's 30% a year or something.
So the thing is that
what caused that?
Well, what caused it
with 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 MADAAN: 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 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 in over two decades of
investing now, specifically
from mistakes.
MOHNISH PABRAI: Sure.
Well, first of
all, just in terms
of what happened in
Berkshire in Omaha,
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, Google, Apple,
and I think maybe Microsoft
in there, too, I'm not sure.
But the top four or five of them
are about $2.5 trillion or so
in value and it's almost
10% of the value of 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're running a
negative capital
and they're 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 principals and such.
And many of the
Google principles
are Berkshire
Hathaway principles,
which is just fantastic.
And so he said that they
were a customer of Google,
they were spending
on ad words, it
was obvious to 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
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 hundreds ways from 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 learned
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 may be possible.
And they will show
up from time to time
because you have
such a large base
of auction-driven companies
that you can get there.
And another learning
I've had, which
has happened more recently, is
to focus on stocks in India,
for example.
SAURABH MADAAN: So tell
us a little bit more
about specifically
outside the US
because I think
your US portfolio
is very easily seen through
[INAUDIBLE],, for example,
and you are the
master of cloning
who has popularized this idea
so people are using it for you.
But tell us a little
bit about this idea--
MOHNISH PABRAI: Well,
I was surprised myself
that more than 70% of the
assets in Pabrai Funds
are sitting in companies
that are domiciled
outside the United States,
and that's the highest
number it's ever been.
I mean, 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'm just a 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
5,000 public companies,
and probably 4,000 of them
are not followed
because they're 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 principals used to
be that I never met management
and I never visited the
businesses because all of that
was very inefficient in
terms of time and such.
And I think meeting management,
one of the negatives
is that you're talking to people
who are exceptional at sales
and that can distort--
Ben Graham said it can 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 management.
And I think India is 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 see what they look like.
There are no horns growing.
And there are others which
are exceptional entrepreneurs
with great runways and great
governance and all of that.
And so this is very
early in that process
and I think I've visited or met
with maybe a couple of dozen
companies.
SAURABH MADAAN: 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, 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 PABRAI: 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 a little
over two years ago,
some person I
didn't know sent me
a 10- or 12-page writeup of
a company I'd never heard of,
a company in India
called Rain Industries.
And I had 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 they 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
drugs this guy is on.
And so I sat down
to read the report,
and I have to say
it was immaculate.
I mean, it was really
very well put together.
I think the report
is 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 mean, I think that 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
business this company is in,
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
not 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'll keep
going for a while.
But that's an example where
unreasonableness paid off.
SAURABH MADAAN:
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'm
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 PABRAI: 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 analyzed
return since we've owned it
is pretty low.
The stock is cheap.
I am reaching the realization--
maybe it's right or wrong, we'll
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'll see.
SAURABH MADAAN: OK.
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 PABRAI: 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 the best course of
action in terms of wealth
is to recycle back to society.
I think if you're
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 and I wanted
to fund him and
scale that program.
Basically, he was
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 100% of them
were going to the IAT.
So if you're taking
a family where
the incomes are
$50 to $100 a month
and you're getting kids to
IAT who then get basically
hooked into the global economy
where they're making thousands
or tens of thousands a year in
India and even more than that
if they went into
places like California,
that was a no-brainer.
And plus, that permanently
kind of unshackled the 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, OK.
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'll try to help you, as well.
And so that's what 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're very
talented, very gifted.
And in India, if you
get a kid into IAT,
there's a very high government
subsidy, probably an 80%, 90%
government subsidy.
So the education is
almost free, just
a few thousand dollars, or
probably like $2,000 a year
is what you pay.
And even that you can
get loans and so on.
So the easiest way to
lift a family from poverty
is if there's high IQ in that
family, you can get into IAT
and then get them out.
So Dakshana has sent about--
north of 1,000 kids so far have
cracked the IAT entrance exam,
been accepted by the IATs.
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 it up.
I think by next year,
we'll be at over 1,100
and then we'll keep
going from there.
SAURABH MADAAN: Wow.
Congratulations on that.
MOHNISH PABRAI: Well,
there's a great team.
It works out well.
SAURABH MADAAN: Awesome.
So one final question
and then we'll
roll it out to the audience.
Could you give three
book recommendations?
I know you read a
lot, so I'm only going
to ask for the top three--
and they have to be other
than "Poor Charlie's Almanac"
and the Buffet biographies--
for the folks in your audience
here, as well as on YouTube.
MOHNISH PABRAI: Oh, sure.
I mean, I think two
of the books I think
are books I'm 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
is the name of the author.
It's a very old book.
I think it came
out 24 years ago.
I don't know if
guys have read it.
SAURABH MADAAN:
Charles Darwin related.
MOHNISH PABRAI: Yeah.
So I was fascinated by the book.
I think that it's
talking about a couple
of researchers that spent
several months a year on one
of the very small
islands in the Galapagos
and they did this for
more than 20 years.
And to their surprise, they
saw evolution in real time
with something
Darwin didn't see.
So I think it'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 MADAAN: It's in
his own voice, right?
MOHNISH PABRAI: Yeah.
It's in his own voice.
It's in his kind of
raspy Sam Zell voice.
And so I've been
listening to it in my car.
And I think there
are a lot of lessons,
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.
And the third one,
which I'm rereading
and I'm learning a lot
from, is the other biography
on Charlie Munger, "Damn Right."
So I know you said,
don't go there,
but "Dan Right" came out
probably 17 years ago.
And there's 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 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 really stoic
about that in the sense
that when there's been kind
of pain and suffering, in fact
he's absolutely
rational about his eye.
He said at the time for the
procedure he was going through,
there was a 5% chance
of complications.
And so his rational side
said, one out of 20 I'm
going to get it and if
it happens to be me,
that's the way it is.
SAURABH MADAAN: - And
Mohnish, before I roll it out,
can I scoot in one
little question,
what does your
average day look like?
MOHNISH PABRAI: Well,
my average day--
so one of the things I
learned form 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, 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 material
and some that I'm going through.
I'll see what's going to come
in the [INAUDIBLE] 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 recently is every quarter,
I'm spending about seven,
eight days in India.
So those days I usually
just kind of fill
with meeting companies and such.
And in the meantime,
I'm 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 MADAAN: You don't have
a McDonald's on your way where
your order depends on them--
MOHNISH PABRAI: I do.
I do have a
McDonald's on the way.
I do sometimes pick up
McDonald's I have never
tried to calibrate the
spending base on the market,
so I'll leave that to Warren.
I take a nap every afternoon,
so afternoon naps are great.
They've got pods here to sleep?
SAURABH MADAAN: Yeah.
MOHNISH PABRAI: OK.
So please make sure you
take advantage of those.
And yeah, so basically,
I'm pretty refreshed,
I think, by the evening so
I can then spend more time
with the reading and such.
SAURABH MADAAN:
Your reading, most
of it happens electronic or--
MOHNISH PABRAI: Oh, no.
I don't read electronic at all.
SAURABH MADAAN: Tell us why.
MOHNISH PABRAI: I
just have never--
I mean, that's a preference.
I've just never had--
even my e-mails, most of my
e-mails don't come to me.
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 11:00 AM.
And by about 11:00--
I get a folder
every day at 11:00
and the folder has
anything I want
to look at-- any mail,
e-mails, things to sign.
Whatever is required
in terms of any admin,
it all shows up in
a folder at 11:00
and by about 11:15,
11:20, I'm done.
I'm done with whatever
responses, whatever--
and my response usually
are chicken scratch.
You already gotten
some of those, right?
Chicken scratch
right on the thing.
SAURABH MADAAN: - It's
not easy to make out.
MOHNISH PABRAI: 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 agree with Charlie
that the multitasking
that we have going on today
in society is a net negative.
I think it just doesn't--
when you're trying
to do three things
you don't get to deep thought.
And I think so I'm
trying not to do that.
And so that's how
I've structured it.
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 MADAAN: I
think Mr. Buffett
has sent like one email
that got into public domain.
MOHNISH PABRAI: 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.
He's done a few tweets,
so he's getting there.
SAURABH MADAAN: Yeah.
All right.
So thank you so much.
Let's open it up for
audience questions.
Yeah.
AUDIENCE: So Mohnish, can
you share your insight
on the way the
market has reacted
to the new administration?
Because to me, it's
counter-intuitive.
I mean, most of the
corporations are
kind of opposite to the
government is functioning
and still after we
have a new president,
the market has gone gangbusters.
So 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 PABRAI: 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'm not making
market bets, if you
will, in the sense
that we're 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 really relevant
because it doesn't matter.
But I would just say
this, that yes, we've
had a rally since
Trump's election.
But I think a bigger
kind of underlying story
may be that if
interest rates stay low
for an extended period of time,
then present valuations may
be a bargain, the stock
market actually may be 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 may be 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 and 2000
that were egregious--
pets.com and so on.
And we lived to 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's
a lot of reasons
why you can justify
that because there's
a lot of underlying logic which
didn't exist with pets.com.
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 ignore the market because it
really has no
relevance and focus
on the minutiae, specific
business, specific stock
price, and hopefully
low single digit P/E.
AUDIENCE: So 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 P/E one.
You can do that
in half a second.
Why does that still work?
MOHNISH PABRAI: 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
can 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
subscriptions, that stock should
have not been at that price.
But just like the $1 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
$1 bill on the ground,
the reality is that the 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 MADAAN: Can
you give an example?
MOHNISH PABRAI:
Well, you know we
are buying right now so
we can't quite go there
because these things trade--
I mean, some of
these things, I'm
barely able to get $2,000
a day off the stock.
We have a $500
million, $600 million
dollar portfolio
so we are nibbling.
But we're buying things at
two and a half times earnings.
And I'm buying two and a half
times earnings of a business.
So for example, I'll send you
on a treasure hunt, how's that?
A treasure hunt is more exciting
than giving you the treasure,
right?
SAURABH MADAAN: Sure, sure.
MOHNISH PABRAI:
It's always better
to hunt for the treasure.
So 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.
Right?
So we used to have cars
and public transport
and taxis, that was it, right?
Now you have Uber, you have Uber
Pool, you might get autonomous,
Weymo.
There's a lot of
different combinations.
Some of you might
be familiar with Via
in New York, which
I think is great.
And 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
and I didn't have a lot
of places I could go.
Now I just see with my
kids, you 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.
OK?
So no matter what
happens, I'm almost
sure there will
be more tire sold
five years from now or 10 years
from now versus yesterday.
And actually, if we get to
electric cars taking off,
they want weight
reductions so then they
make those tires paper thin.
How many people
have a Tesla here?
Not Tesla owners.
A value crowd.
SAURABH MADAAN: Value investing.
MOHNISH PABRAI: They're
a hard core value crowd.
All right.
So you know that like the
Teslas and of the Leafs and all
that, they have these
special tires which
don't last very long but
cost a lot because they
want to keep the weight down.
And so those are even
better for the tire company,
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.
Even without these
demographic things happening,
it will still grow.
And if I'm buying a two and a
half or three times, in three
years I have all my cash back.
So that's the beauty
of P/E of three.
SAURABH MADAAN: So it's
a tire-related company
in Korea with a P/E of
three for the treasure hunt.
MOHNISH PABRAI: Yeah.
Have fun.
AUDIENCE: So I
wanted to understand
how do you decide when
these three P stocks--
or not even three P, stocks
like Amazon and Google,
when they are
valued so much, how
do you decide when
to sell stocks
that have worked for you?
And a quick follow-up,
do you short?
MOHNISH PABRAI: I'm sorry.
AUDIENCE: Do you
also short stocks?
Do you short sell?
MOHNISH PABRAI: 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 here is
to give up shorting
if you are shorter,
then I think it would
be an hour well-spent.
So it's a great question.
So each of us, I think,
has a limited quota
of 100 baggers that will
show up in our portfolio.
I think I have had more than
my quarter of 100 baggers
that I was smart enough to
buy but too dumb to hold.
And there's a long list.
I used to own [INAUDIBLE]
Bank in '94, I don't know,
it was 150 times, I probably
got like 30% return after five
years; so that Blue Dot--
there's this 200
baggers I did capture.
I owned Amazon in 2002,
I think, at $10 a share.
I think it was 10%
of my portfolio then.
And I got 40% in a few months
and I was out so that's great.
But anyway, so
what I have learned
is 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 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 OK.
SAURABH MADAAN: So Mohnish,
does that buy [INAUDIBLE]
mean that your buy versus hold
criteria may not be identical?
MOHNISH PABRAI: 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 learned that
lesson from See's Candy.
That was a seminal
purchase for them.
And the end date
they saw in that case
because of the
controlled business,
they could just see
the way it mushroomed.
And so I think that if you get
businesses where management is
exceptional or the
[INAUDIBLE] 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 tailwinds,
there is a phenomenal
operator and the price
below liquidation level.
And so those are
all good tenants.
So that's what you
want to look 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 it made it, which is great.
And that's the key
is that you want
to ride the compounders
for long periods.
SAURABH MADAAN: Is this
operator by any chance Piramal?
Because I know you--
MOHNISH PABRAI: There are many--
Piramal is a great operator.
That wasn't the one Piramal.
But a great operator.
And 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
own something like Piramal,
I would just ignore the
price for a long time,
as long as Ajay is healthy.
AUDIENCE: On a related
question, you first mentioned
the best ideas
portfolio, thinking
how it would work in terms of
management positions, impact,
sizing.
I was curious how
you think about that
sizing relative to
margin of safety
in your valuation
of the company.
MOHNISH PABRAI: Yeah.
So that'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're 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
or earn and put it away
into places that make sense.
So I would say it's probably
the mistake to have,
in that situation, more
than 10 or 12 positions.
And I think there's nothing
wrong with having money
in an index fund or
a few index funds.
I think that's a good way to go.
And so if you didn't
have a lot of ideas,
then you're going
to sock money away,
especially in a 401(k)
with matching and so on,
you could do that.
And then occasionally
when things show up
on the radar which
are no-brainers,
then you can switch some
of the index fund money
into an actual stock idea and
such and take it from there.
That's how I would do it.
SAURABH MADAAN: Great.
I want to thank you so much,
Mohnish, for being so generous
and for sharing
your time with us.
And thank you all for being
such a wonderful audience.
MOHNISH PABRAI: Well, always
a pleasure to be here.
And I can check a box
that Alphabet is doing OK.
Thank you.
[APPLAUSE]
