2021 Virtual Value Investing Conference | Value Investor Panel: Mohnish Pabrai

[Music] great too uh great to be at your wonderful conference uh it's too bad we couldn't be uh live but uh this is a pretty good substitute uh so uh first i'd like to thank uh uh professor athanasakus and ivy i think they do a tremendous service uh to the value community uh so a big round of applause to you from uh all over so uh thank you for everything you do for us uh uh what i would like to uh like to do you know like the the subject of the talk is uh from graham to fisher and uh uh last year you know 2020 is a year that most of us would like to forget and uh probably even half of 2021 is appearing to be the same way uh but it was actually uh an unexpectedly amazing year of growth and learning for me and and i think it was a period of renaissance so i'd like to share share some of that with you and uh and talk about that so uh there's a there's a book coming out in uh in six days and uh the book is called uh richer wiser happier and it's written by william green who is a former journalist with time and just an excellent journalist and writer and uh and i think i think he did an incredible job it took him several years to write the book and i think you guys will uh would love to read it i got a galley copy of the book maybe close to about 10 months ago and of course there's a chapter one about some yo-yo which you can skip but but chapter 6 to me chapter six was uh uh the most uh eye-opening chapter and uh and chapter six in many ways was uh transformational uh for me so chapter six uh was about uh nick sleep and his partner uh case zakaria uh and they they ran the nomad investment partnership from uh 2001 to uh 2014 about uh 13 uh 13 years or so and um and i've i've actually known nick for close to two decades so so we've we've been friends for a while but i i mean he lives in the uk and we don't [Music] we don't interact that much and what i had not kept up with nick was that he had been on this value investing learning and growth journey uh he got to what uh he considered the pinnacle and i'd say i would be mostly in agreement with that and uh so that chapter uh had a number of uh eye-opening insights and it led led me to hit the reset button in many ways about how i thought about about investing so uh for the long longest time you know the simple math i used to use on investing was that if you bought a dollar for 50 cents or 40 cents and you just patiently waited for that dollar to be recognized as being worth a dollar by market participants uh then you could earn a pretty handsome rate of return even if that even even if that pie did not grow so basically if it took if convergence from 50 cents to a dollar took three years uh then you know you would end up with a 25 26 annualized return and if it took a couple of years then it would be kind of mid 30s and all of that of course is very acceptable but also what we have is we have investing mistakes so probably 40 of the time when we make investments they don't go the way we want so not everything uh doubles like the way we expect and uh so some some businesses will actually end up losing money on some will flatline and some will deliver much lower returns and all of that but but when you mix it all up the end result uh is still very acceptable uh and that's why value investing uh investing works and uh and that you know buying a dollar for 50 cents uh was a bedrock for me and uh and you know it's the bedrock for ben graham and it's bedrock of what we've uh what we've all learned and and and uh used um nick nick posed some uh interesting questions uh so he said that if you if you looked at a business like walmart uh which went public about i think 51 years ago and uh and so in one of his last emails to me he said that um the only people who held walmart's stock for that entire 51 year period was the walton family and and there are as far as i know no public investors who have held the stock for 50 years or 40 years or even 30 years and if you didn't recognize walmart was an exceptional business in 1970 you could have recognized that by 1980 you could even recognize that by 1990 by that time the company had several decades of history behind it but but in spite of all of that data um uh public investors uh did not hold the business for uh an exceptionally long period of time and uh the the second the second question that nick sleep asked was that if you were a portfolio manager say in the mid-80s or you know maybe the early 90s or some somewhere around there and you held walmart stock in your portfolio what exactly were the factors that led you to eliminate that position and he asked a kind of a i would say a mirror question to that which is that in the 80s early 90s if you held came on stock uh what caused you to hold on to that to launch to that stock and not sell it and uh and and then uh nick also pointed out to me and i think he does this in uh in his uh letters as well and by the way now he has made uh those letters public so i think if you if you go to god google and just enter mixed sleep nomad letters i think they'll pull up and uh and those are a exceptional read i think that uh reading those letters and then uh you know in conjunction with william green's book i think is uh is an incredible growth opportunity so so nick did us a great favor by by making those those letters uh public and uh so then the uh the other thing that nick was saying to me in an email but he also says this in his letters is that walmart uh was a company that in the 70s you could have paid you know 150 times earnings for the business and from then until now earned a double digit annualized return with no taxes due for five decades and other than for the dividends and uh so you could have paid what would have looked like a ridiculous price for the business and of course he did not it did not trade anywhere near 100 150 times trailing uh earnings so it was available at a a fraction of that and and of course you know i would say the the opposing view would be that retail is really difficult and the landscape of retailers uh who are no longer with us i mean the graveyard for retailers is overflowing so it is the it is the exception as far as retail goes who actually makes it so i'm not particularly concerned about retail and uh those aspects of it what uh what uh what i was trying to look at is that was there a different and maybe better way uh to approaching investing other than just this you know buy at 50 cents and a dollar and then uh last year i also read another book and i think this book is exceptionally well written and it was written i think uh close to 50 years ago about 49 years ago and it is called 100 to 1 in the stock market and this is written by thomas phelps and thomas phelps actually is a exceptional writer and a uh exceptional journalist he used to be a writer for barons and uh and such so he's uh he's uh he's a very bright guy he's obviously he's passed away uh but he did uh he did a tremendous job with that book so even though that book is uh you know 50 years old it's still uh very relevant and and the writing is still very fresh and there's uh there's a bunch of interesting kind of uh uh areas in the book like he's he's got conversations uh with joe kennedy who was the founding commissioner of the sec and the uh father of uh john f kennedy so there's there's some interesting uh tidbits in there as well but uh phelps phelps basically pointed out that basically if you if you were a very patient investor and held on to these businesses for in some cases many decades there were hundreds of them that would have delivered a hundred to one or better returns for you and uh so the um the frameworks shift i made uh was not so much to look at look at hunting and finding 50 cent dollar bills but to look and try to find businesses that could be a 10 bagger or preferably a hundred bagger and of course the hundred bagger might take a couple of decades uh but that's perfectly fine and uh you know there's a there's a quote uh there's a quote i'd like to share with you uh which is from the upanishads and uh the upanishads are these ancient uh indian uh texts that were written uh more than two thousand years ago and of course they have a you know port lot of wisdom in them but uh for our purposes and i'm not sure they had the idea of making investors wealthy uh the writers of this court but i think it works for us so the quote translated is as is your desire so is your will as is your will so is your deed as is your deed so is your destiny and then they bring it all together and say your deepest desire is your destiny so what i have found by the way i've found that quote to be true uh for several decades for me personally because i think that's just the way the world works but i think it's it's true for um many many people for most of us so if we truly truly want something and we are singularly focused on it and we do everything in our powers to make it happen uh it's going to happen so when i focused on 50 cent dollar bills and i kept going through stock after stock after stock hunting for uh those mispriced bargains of course i'm gonna find them and if i were to set the parameter as i want a 40 cent dollar i'm going to find those two if i said i want 30 cent dollar bills i'm going to find those two so even if you were to set the parameters really tight where you say i'm only willing to pay 10 cents on the dollar for example as long as you were single singularly focused on it uh it would happen i mean they were i think they were investments uh that lilu made when he was a student at colombia you know so when lilu came as a poor chinese refugee to the us and he joined colombia he didn't have any money and uh you know so he was on full scholarships etc and uh and student loans and and so he invested the float of those loans so you know he might get 10 or 15 000 a few weeks a few months before he actually has to pay the money and he would you know invest it and uh from that student uh float that he had by the time he finished at columbia i think five years later or maybe four years later uh he had over a million dollars and uh so so he and he never took a job you know he never worked for anyone because he was from his point of view uh you know doing quite well and uh in that four year period i think if uh if you were to talk to lilu you know there were some russian companies he found which was you know went up 100 x you know so they were uh they were unusual things so whatever you set your baseline to be if you said it to be seventy seven dollars you will find those so i had set my baseline for more than 25 years at this 50 cent mark and you know if i could get 40 or 30 cents that was kind of you know icing on the cake uh so i've changed that i've i've said okay you know that's so 20th century and uh so my my hunt now is for 100 baggers and so when you when you shift the focus from a 50 cent dollar to saying i want hundred baggers you know uh kind of different things become relevant because what you're uh you know when i was looking for 50 cent dollars i didn't really care that much how much that pie grew uh i mean it it could be that i was paying 60 cents for the current buy and there there will be some growth in the next two or three years and the pie might become 25 larger and i'd still get my double and life is great uh but when you when you put on a lens which says that i want to focus on 10 baggers or 100 baggers the equation changes and what you look for changes so for example if i looked at a business like amazon which is a wonderful exceptional business and of course uh nick sleep was very smart to have recognized amazon very early and understood many things about its incredible moat before most of us did and in fact one of the reasons he shut down the fund was that he had made a significant investment in amazon and you know it might have been a fifth of the fund uh in terms of invested capital and uh and and then of course it was going up in value and becoming a larger and larger portion of the fund and the british regulators uh questioned the the risk management and the portfolio management uh two very alien concepts to nick sleep and uh and i think uh that was one factor but his partner and he kind of looked at each other they were managing about three billion uh they had become wealthy beyond their wildest dreams they did not want to sell amazon they did not want to take that concentration down and so what they said is we'll return all the capital and they did so in 2014 they wrote to the investors and said uh we are kind of um hanging up our boots and uh retiring and they were in their you know kind of 40s at that time and uh you know here's your capital back and nick sleep basically told his investors that i am going to take my proceeds and put it into three businesses and the three businesses he uh put his money into all his money into well were berkshire costco and amazon and in 2014 uh amazon was around 300 a share and so even if you ignore what happened to berkshire and costco uh you know if amazon was a third of the pie that would have been an incredible home run while you know having the broker starved with no commissions and and he told his investors when you return the capital that uh you don't need to pay us any fees uh you don't need to read our boring letters just buy these three stocks with the capital we're returning to you and warm regards and of course the institutional investors who they gave this money back to um you know in fact i got calls from some of them i remember one endowment that called me and they were kind of freaked out and they're telling me oh you know do you know nick sleep is returning all the capital i said yeah but uh he told you what to do he told you just take the money and buy the three stocks and they said well our mandate doesn't allow us to buy individual stocks so then i said to them would you like me to set up a separate account for you where i'll buy those three stocks and then you can pay me ridiculous fees so these are the kind of conversations that go on with our enlightened endowments and institutions and needless to say they did none of that you know and they're probably uh grazing at the naval right now wondering why they didn't do so well um so anyway so uh nick's next point was that um an investor an investor in walmart or an investor in amazon or costco or berkshire should have the framework which the founders or the owners of the business have so the walton family basically is not interested in selling walmart stock and they just held it throughout they held it even after sam walton went away and even after the next generation has started going away so it's been a multi-generation hold and uh you know the same thing applies to berkshire hathaway and and to amazon now one of the things that happens that if you are exceptionally good at this if you do really well at this and you're running a pool of temporary capital like nick sleep was running what is going to happen is one stock is going to become 90 or 95 of the pie and uh most uh institutional investors and money managers would choke at that they would never allow that to happen and i think that's ridiculous uh so what what i think should happen is that once you're starting to get concentrated don't let new investors come in so kind of freeze the capital and broadcast loud and clear to everyone that fasten your seat belts uh we're not selling these positions uh we're gonna be holding on and if you don't feel comfortable you can exit but we're not going to cut the flowers and water the weeds and so you know going back to the upanishads you know i shifted my thinking to a hundred baggers and so obviously you know the the amazons and apples and googles of the world if you do a hundred x from their current multiples uh i think it would require quite a stretch of the imagination to get to a point where you thought it was high probability that even in 20 years you would get 100x a year so so certain things so amazon probably is a great investment but at least for me it's not 100 bagger material i mean it was 100 bag of material i was too dumb to take advantage but i don't think it's happening from here in the next two decades and so once you once you shift that framework um you know different things come into focus and so for example in in 2019 which is before my period of enlightenment i had i've been visiting turkey several times and i encountered this business in turkey where the market chap was 19 million and the liquidation value was somewhere between 300 million and a billion somewhere in that range and uh of course you know i tried to buy every share i could um and we ended up investing seven million dollars and getting a one-third stake in the business and uh so my framework at that time was that this is a good business uh it's it's the number one warehouse operator lots of recurring revenue number one operator of private freight uh cars in turkey and a few other very nice businesses very good recurring revenue businesses very good operators and they did created tremendous value over the years so i said you know we'll hang on and we'll see kind of at what point there's a convergence between um you know our equity position and intrinsic value and when we get to intrinsic value we can unload and move on well that framework has changed now so it's been close to two years that we've had the stock and now my thinking is that yeah so it's worth 300 million to a billion when we bought it um could it could it be worth two billion at some point uh because if it's if it gets to a two billion value uh when we were buying it it was a 20 million or 19 million market cap that's a hundred bagger and uh us 300 or 500 million or a billion dollar business today getting to 2 billion isn't that hard and it isn't that hard in 10 or 20 years so my take now with that business is set it and forget it you know and the way we think about that business the way i think about the whole that portfolio position is it's not a portfolio position it is a business we are a partial owner of we are a passive owner we are a junior partner to the family that runs it we have no desire to tell them what to do or how to do things they are doing quite well without any input from us and life is great so we're just gonna watch from the sidelines so the simple the simple uh math here is they're just two things that matter the first thing is a periodic check on is the business getting better and of course you know business doesn't go up in a straight line so you have to take out the noise but in general if you're seeing that the moat is intact and the boat is widening and deepening then forget about the valuation then the second part which is the valuation is like i just said forget about evaluation if it gets egregious not overvalued but egregiously overvalued then you can take a look at it so for example if i think this turkish business is worth two billion at some point and the market is pricing it at 20 billion for example we would probably not be a shareholder at that point or even much before that point but it would have to get to significant egregious overvaluation uh to doing that and so the third part of this journey is that if i can find these 100 baggers or at least companies that look like decent candidates that over a 10 or 20 year period they could get there then we become a portfolio becomes a museum and we become a collector of these hundred baggers it's great from our tax point of view because we just sit on them and and the idea is that we only really need one i mean the turkish business might not do it for us because it was such a small investment you know we put like little over one percent of the portfolio into that but if i could make a 50 million dollar bet and at some point it became a 20 50 100 banker you know it would become a very significant portion of the portfolio and we don't really need the rest of the portfolio to do that much so the rest of the portfolio is still not slouches so berkshire has underperformed the s p for nick but it's still gone up in value costco probably has matched it over this period but it doesn't matter it's it's fine those two have added value and then you have one with kind of high octane returns and so that has worked out really well so these these are some of my blessed covet learnings so in many ways i think maybe i should be grateful uh for covet because it put an end to my travel gave me more time to contemplate my navel and and try to understand what's going on and i told nick that as soon as international travel opens up i'd love to have dinner with him and uh he's excited about that so that would be my first my first trip uh leaving the us will be to uh break bread with nick and zach and that'll be great so thank you professor george i think it's uh delighted to be here you

Channel: Ivey Business School

Views: 28,861

Rating: 4.9731903 out of 5

Keywords: Value Investing, Ben Graham Centre for Value Investing, Ivey Business School, George Athanassakos, Mohnish Pabrai

Id: OmrVUxTGENw

Length: 29min 43sec (1783 seconds)

Published: Fri Apr 23 2021