Alpha Moguls With Mohnish Pabrai #BQ

[Music] [Applause] [Music] holy just business news where news for businesspeople [Music] thanks for tuning in to Bloomberg quint my name is Natasha and you're watching alpha moguls our guest today very special guest all the way from the US needs no introduction Mohnish Pabrai and boy Manish have been looking forward to doing this show with you a bunch of people who knew that you work on the show have already sent me a list of questions so I have a bunch of questions ready for you but thanks for joining in today well Nina I always love hanging out with you I think it's great to have you as one of the key folks at boom Bloomberg quint thank you and I wish Bloomberg went all the best in the future hey thanks so much money for that the question mark also is that do you all of us wish investors all the best in the future as well and I'm going to start off with two things that we discussed that we should talk about and very curiously Mohnish on our show which is meant to educate investors you are starting off or we are starting off by telling them that hey don't go out and buy stocks button buy a stock now let's elaborate and then why did you want to talk about you know because the the the Surgeon General said buying stocks can be injurious to your health but but on a more serious note well so buying buying a stock is is a far more complicated activity than most people seem to think so what's happened with the development of markets is on a smartphone or a tablet or a laptop we can in seconds buy one of thousands of companies and there's no effort required to buy a stock no effort required to sell a stock but in order to do well one really needs to understand the underlying business and to have a point of view on kind of where that is versus the market capitalization so I'll give you an example many times in the u.s. like I'll go to my health club for example and one of the members will ask me hey mounish should I buy Apple should I buy Apple stock and I turned the question around to them I say hey John what's the market cap of AB and they look at me with a puzzled look they said the stock is at 170 I said no no what is the market capitalization and they don't know okay so the first thing if you're going to buy if you're going to go buy some rice in the market you're gonna know what is the price per kilogram so the first thing is that if you're going to buy a stock at least know what you can buy the whole company for and most investors don't have that knowledge which is amazing and so the first the first thing investor ought to ask themselves before they buy a stock even before we get to price and so on is is this within my circle of competence now circle of competence is a very important concept here one of the most important concepts in resting a person like Warren Buffett would consider something like ninety five percent of stocks outside his circle of competence and he says that you know probably 97 98 percent of things that show up on his desk go into a box called the to hard pile he can't figure them out okay so there's just a sliver of businesses now if Warren Buffett can't figure out 95 percent of businesses for the rest of us humans we can't figure out 99 percent of them so most things are going to be outside the circle of competence of most investors so now let's say an investor answers the question correctly yes I understand Apple and I understand it's within my circle of competence right so the next question then comes up is the question I asked what could you buy the whole company for and then the second question investors should ask is so let's say investor knows Apple is worth a trillion dollars for example so the question I would ask them is that if your family had a fortune of four trillion would you be willing to put one-fourth of that fortune into Apple and if the answer is yes buy the stock if the answer is no don't buy a single share and so these are just very simple which is you know look at your net worth look at your family's fortune and are you willing to put a quarter of it buying the whole company that you want to buy a hundred hundred shares off and so these are basic things that most investors unfortunately don't focus on and so I feel that investing in stocks figuring out you know what they're worth what your circle of competence is these are complicated issues so for most investors it's a really good idea to index because indexing you can buy nifty 50 index or any broad index in India four basis points you know the frictional costs for ETFs are not is very low and and the second is you averaged out over time so every month when you get your your salary check take a small portion first put it into favor savings and then don't worry about it what I would say set it and forget it well it shot it forget it exactly and so that's why I think that buying stocks should really be an exception rather than the norm okay the second topic and before we move on to the more nuanced investor a second thing that I wanted to talk to you about again we discussed this on on email about this whole notion of stop-loss that you've defined amusing in India yes apparently in the US nobody deals with the concept of stop-loss now let me tell you a peculiarity here Mohnish because we do this day in day out for a living a lot of technical experts who come in gives stop-loss as they are mandated to as well because they're trading yeah that you have they don't care about the fundamentals they only bother about the charts right you would still believe that the notion of a stop loss from a serious investor's perspective should be done away with we don't find too many people talk about stop losses if they are serious investors but you believe that there is enough and more talk with stop loss happening on fundamental investing as well that's right so just to clarify sure we are not talking about the speculator than traders should owe more power to them but but when we come to investors I actually find plenty of pundits on on TV who fundamental analysis and they give targets and they give stop losses and and I find that really peculiar so the the nature of markets so one of the reasons why we can make a lot of money in equity markets is because their oxygen driven and auction driven markets are very different from almost any other kind of market so to give you an illustration let's say I bought a flat in Mumbai for one crore I don't know if we can get one for one door or not but let's let's play along we got one may be there in the periphery of Mumbai okay so we paid a crore for the for the flat and we did research and we found that it's a right price and reported and now we want to know how the price of that flat changes every day so I have a friend who's a real estate broker and I tell my friend the relative Booker listen we're going to have chai with pepper I every day you and I gonna have a cup of tea and every day just come and tell me what the price market price of my flat is okay so you bought the flat next day you invite your broker friend and he says so I asked him so what's the price on a flat he'll say listen idiot it's still 1 crore okay I call him after 2 days he still sits still 1 crore and after maybe two months he says you know the little change in transactions it's actually 1.05 crores now it's all 1.00 5 crores it's gone up a little bit and if you did this every day and you just wrote down the price he was giving you into it for 365 days you would at the extreme end find that it went to somewhere between 95 lakhs and maybe 1.1 crores or 1.15 crores in that range right now let's say my flat is a listed company on the Bombay Stock Exchange but the only asset is this flat and every day the price is doing what we're doing in the market and we chart that daily price movement what we're gonna find is in a 52 week period the range may be something like between 70 lakhs and 1.3 crores and the reason is that auction driven markets oh shoot and overshoot and it is the under shooting and over shooting that creates the opportunity for people like me right and so so basically the idea of a stop loss would be like I bought the flat for a crore and after six months my broker tells me you know prices have dropped about five percent and I say to him okay that's my stop-loss and I'm now going to sell you my flat for ninety five lakhs please sell it right it would be the equivalent of doing that the reason you bought the flat four crore because you thought that was fairly priced and the second reason you bought it because you wanted to hold it as a long-term asset so the same thing with stocks if you bought a stock for two hundred rupees or it has a market cap of 1000 crores you bought it because you thought it's worth two thousand crores so if it goes from thousand crores to nine hundred crores you will you will sell it with stop losses and it makes no sense so I own a company called Rana industries right and I bought that stock about what two and a half years ago and when I was buying the stock it was at about thirty rupees a share and by the time I finished buying it got up to forty five rupees a share rent of almost fifty percent because I almost bought ten percent of the business and after I finished buying it proceeded to go down just like everything I buy okay the stock know that bought it and it decides mounish is done now let's go down okay if I had engaged in stop losses rain went down to forty even went down to thirty five after I finished buying and I did nothing and so now rain is north off I don't know three sixty rupees and so that whole opportunity would have been gone it would have been no sense for me to put a stop loss at thirty or thirty-five or forty because I thought what a lot more so I think I think investors ought to focus on making sure that that the stock is within their circle of competence that it's worth a lot more than its value that and went once you have those two things a stoploss makes no sense Wow so circle of competence I think that's that's the preliminary the most important thing yes three the three most magical words from Ben Graham okay great now if if circle of competence was were the three most magical words from Ben Graham I think one of the most amazing things I've seen you speak about a lot I've also saved that image I can't find it right now but you'd remember I send that image to you with said something like most of the times when I'm looking for an idea I need the idea to scream at me saying by me until then I don't go out in the in the u.s. you know we have these wooden things called two by fours okay which we use in housing construction I need to be hit on the head by a two-by-four before I should buy a stock yeah so before buying a stock it has to be complete and total no-brainer okay if I have to turn on Excel it's automatic rejection if I cannot describe the idea to a seven-year-old in two or three minutes it's an automatic rejection it needs to be painfully obvious painfully obvious to the village idiot why we should be buying there are such opportunities currently in such an overheated market and I let me rephrase I'm not using the term overheated loosely I'm just saying the markets have readied we may not be in bubble territory for certain markets and all of that is a subject of everybody's individual opinion only future will show whether we were there or no but let's assume for a moment sake we are not in bubble territory but we are in a space where the markets are at worst fairly valued you will probably not get opportunities wherein you get hit by two by four well you know we are in wonderful lower Parral right now and within I would say 10 or 15 kilometers lower per al from here to the next 15 kilometers is a boatload of opportunities in real estate okay fine I didn't want to get down to real estate and we will get to that but you even right now what I'm trying to find out Monisha is that you are still in a market like this looking for ideas which are just too painfully obvious you're not well I think I think I think even in in rampant bull markets there are always misunderstood businesses now rampant bull markets will cause a lot of lower pricing and I think a lot of things are overvalued but there are plenty of things that maybe fairly or deeply undervalued in a market like India with five thousand listed companies more than five thousand listed companies it is just not possible in auction driven markets that all of them are efficiently priced we are going to have under pricing and we're going to have over pricing just the nature of the beast okay the reason why I ask this question is a lot of your peers a lot of people within the same space we did a small series with Ramdev Agarwal some time back in one little guy a good friend yeah okay so and run there says often that I find value in growth so the stock may not be under priced on may not be a screaming buy but if there is growth that he sees over the period of four four five six ten years maybe more and there are other factors attached to his by the reviewers not just growth itself and itself then that becomes an opportunity to are you looking for such opportunities in India because India is per se a growth market you are definitely better off buying a growing company over a cheap no growth company okay so if I buy an asset that is cheap that has very limited growth all I'm going to do is cover the gap between it may be worth a hundred rupees a share I'm getting it for fifty sixty to be the share I'm just going to make the forty or fifty rupees over whatever period of time it takes to get that now if I'm buying a company that has secular tailwind great management and long growth engines as long as I'm not paying up too much it's the best place to be okay and so I think I think ROM they have in my opinion is one of the best investors in the country and I think well the only only I would say critique out-of-round a visit add too optimistic at times but he's got it absolutely right that you bet on the growth engines and you breath on the long-term secular growth engines which have got a lot of Calvin's and and those in general are going to do really well so so I think I think they've got it they've got mostly they've got it mostly right okay now the reason why I ask you this question is very recently in one of the interviews or interactions or quotes that you gave out you mentioned that you know it might be really important to buy in compounders from a long-term perspective and there are some questions that I've gotten with regards to that as well somebody is asking and I have a question of my own as well sure as to how does Moniz decide if a compound and compounder is egregiously prized and has reached the tipping point of selling versus your earlier stance of selling it about 90 to 95 percent of the perceived fair value how do you decide this how do you decide that a compounder has reached a value which is overpriced and therefore you would want to get out of it okay so let's unpack the question a little bit sure so we've got two types of things we got to do with companies right so we're the point at which we buy them and why we buy them and the points of which we sell them and why we sell them sure buying is complicated selling is 10 times more complicated okay so so when we're trying to buy relatively selling is relatively straightforward we want to know what the growth engines are if you're going after a growth company we want to know what we're paying for that growth and we want to try to figure out where is this company in five years or ten years versus what we're paying for it and so those are relatively straightforward compared to the selling question the selling question is a more complicated question because one of the things we're forced to do is we're forced to look out into the future maybe a few years out to try to figure out what is the future of this business and for most companies even the insiders have a very fuzzy idea about the future and so so the thing is that if we buy a compounder at a value price that's a relatively easy exercise because we're not paying up what the difficulty comes in when it goes up in price and it looks fully priced but still has a lot of talents and still has great management it still has a lot of great growth in front of it so the best that I've been able to answer the question is a great company with great growth with great management give them some leeway so don't sell them when they're fully priced don't sell them when they're overpriced sell them when they're egregiously priced okay now what each of these levels are I'll leave to the viewer but it should be obvious you know when is it fully priced when is it all price when is egregious so what I've learned what one of my biggest mistakes has been is selling too early I have watched 100 baggers that I bought who went on to become 100 baggers so many times after I was out and I'd only captured the double or the triple and I didn't capture the remaining 98 or 97 times that it went up but when you buy you don't know it's gonna be 100 back absolutely in fact you learn you learn about a business only after you own it so you may do all the analysis in the world but you're really going to learn the business after you own it and that still doesn't mean viewers that you don't try and learn about the business before you before you go out and buy it okay let's try and relate a couple of real-life examples if you will if you allow me we can completely avoid this question as well sure and I'll come to real estate because I want to know I've use a lot of questions on that too but let's take the classic case of rain industries now you've bought it way earlier this is not a recommendation from Mohnish Pabrai by any stretch of imagination but I just want to know it's an investment that has compounded well for you in a short period of time but it's given you maybe 8 X or 9 X returns already so it's been the compounder that you would probably see most people would be happy with the 10 bagger a large 10 bagger you've gotten one how do you know that this is not the time to get out of it are you giving the leeway to the management or are you studying the cycle of the business so well enough that you believe that there is more in store okay so first disclaimer that my views may change tomorrow of course right so this is a dynamic thing and they're valid at this point in time and the best that I can say at this point so I think first of all rain is interesting because after I bought it for 18 months it did nothing and then and but this is the nature of equities is they go through long periods of doing nothing and short periods when they do a lot so if you even if you study markets over long periods in the US for example from 1965 to 1980 to the index the Dow was flat eight seventy eight to eight seventy eight seventeen year period and the u.s. grew a lot in that period then from from eighty to ninety eighty to ninety nine grew a lot it went from 800 to like twelve or thirteen thousand so equity markets have this habit of not being smooth right and so rain was an example extreme example because it's at doing nothing for eighteen months and then you know went wild and crazy if you will I had a certain understanding of the business before I made the investment and most of the understanding was because someone sent me a very nice report on rain and it made it obvious in fact basically based on that report the price I was paying for the stock in 2015 was likely to be the earnings of the company in 2018 or 2019 so I was basically buying in 2015 at P or one in 2018 or 2019 and it was a profitable company so anytime you can do that you don't need to think about it too much and so I thought at the time before before I bought rain that probably in a five year period we might make somewhere between five and ten times our investment so it was very obvious no-brainer type investment I tried to buy every share I could and in the last two and a half years I've spent more time obviously it's a long time and I spent more time studying the business and trying to understand more about it it's a complicated business there were three different divisions and all that and I've gotten up reasonably better understanding than I used to and what I've concluded is the moat of rain is a why and deeper mode then I had originally anticipated in 2015 and and it has better management then I had thought they had so many things about the business are better than I originally anticipated now just about I think four or five days ago I was in Beijing and the skies were blue clear blue skies and a number of rains competitors are in China and something like a third of them have been shut down by the Chinese government because they are very serious about pollution rain got some extra tailwind which I had not anticipated from for example that Chinese government action so I had no idea about that in 2015 it got an extra tailwind because now the US has changed the tax rate has gone down dramatically so a few more tailwind have emerged for the business which were not present okay a few years ago and I just told you fairly priced overpriced egregiously price so my take on rain is to give it a little more rain if you will yeah and and let it let it let it let it run a little bit and we will see we will see where we end up but I think my sense is it's got some room to run okay but this is remember again I stock tip I wouldn't be buying at present prices here but I'm just not willing to sell at present yeah sure I just wanted to know that buy and sell yeah recommend yeah rain as the screaming buy at this point yeah and we're not looking for that yeah mounish what I'm looking though for is the rationale and let's not let's consciously avoid the stock names here in reality sure but let's look for the rationale that you have or that you had when you bought real estate and you're rational right now again I'm just trying to figure out how is it that you trying to find those miss price opportunities absolutely so you know Charlie Munger talks about latticework our mental models and the lattice of our mental model is that when you have multiple models moving in the same direction you tend to get where Lulu's effects Mongo's lingual lingo 1+1 becomes 11 and so specifically with with real estate I learned a lot of things about real estate from Bruce flat who's the CEO of Brookfield Asset Management and I think probably around 11 or 12 years ago he had given a talk at Syracuse University and since then unfortunately I think they've taken it down but he's got some interviews on Bloomberg so I think you can you can pull up some interviews with with Bruce and Bruce has created tremendous value at Brookfield probably the tens of billions if not close to a hundred billion in his two decades or so that he's been running Brookfield so one of the things that Bruce flat and Brookfield believe is as far as real estate goes they want to buy the absolutely best most trophy properties in the 24-hour non-stop major cities of the world they don't want to buy the second best Tower they won't buy the best tower but they want to buy it at a time and no one's interested and and so they want the best assets but at a time and no one's interested so most of the world across the world real estates overheated I just heard that a 60 square foot apartment in in Hong Kong went for half a million dollars okay I can't even imagine what 60 square feet apartment looks like but but that's the pricing in Hong Kong probably the last room probably the most expensive market in the world while this is happening recent interview of Bruce flat he mentioned that three countries were of specific interest to Brookfield Argentina Brazil and India and they've been putting a lot of money in real estate in India and in Argentina Brazil but they what they do is they'll go into the epicenter of Rio or the epicenter of you know Cyrus and they'll buy the best property then today there is a serious lack of capital in those in those economies so Brookfield basic takes capital into places where there's a lack of capital and they've been doing that in Mumbai and specifically in India if you look at the different cities Mumbai in my opinion is unique so places like Pune or Bangalore or Hyderabad or Delhi these can sprawl out and they have sprawled out and that is actually not good from a real estate perspective what you want you want scarcity you want tightness and you are you have you want inability of anyone else to clone you so if you put up a tower no one should have the ability to put a tower up next to you because they just can't there's no space or land or anything available and the one city in India where that is possible when the only cities is mobile you know we have wall-to-wall people here so there were three events that took place in the last about let's say 14 months or 13 14 months the first were D monetization that was the first nuclear bomb that went off in the Indian religion industry it sucked the oxygen out then we had GST and then we had the trifecta with rarer and before these three things a few years back they actually especially in Mumbai they standardized the rules for slum redevelopment and society redevelopment so actually in Mumbai actually there is not just these three but these two additional things that have happened and the combo of these three has imploded the the market across India but specifically in Mumbai more than the others and the implosion is that real estate used to be heavy black ma about money driven sector cash driven sector you know we took out all the cash in one day and so what you gonna do when you know you're trying to get n crores of cash to close the transaction you're done and so the entire real estate field in India is going through a reconfiguration so a lot of the I would say unscrupulous unethical players sign they've already fallen by the wayside they're struggling for oxygen right now and they've been strong and so they're they're distressed also a lot of players had a large debt they're distressed as well and there's a small sliver of players who actually played by the rules high quality players great brands and so they got some tailwind so the good guys are winning which is great I love it when the good guys are winning and so so we we had this kind of set of unique things going on in a place like Mumbai so I remembered what Bruce Platt said about these if there is a 24-hour city in India it is Mumbai and for most Mumbaikars there is no other city they can happen and so so basically we've got you you know you have to be here and and I'll take one more one more piece so I would say that if you look at a place like Mumbai and you fast forward 50 years so let's say we again are old and gray still around and 20 60 or 2070 we won't be but let's say I I probably won't be around but if we were having this conversation almost every structure in Mumbai that was built more than 20 or 30 years ago is gonna be torn down this city is going to be completely rebuilt we are actually seeing it but it's too slow to see but the entire city is going to be rebuilt and when it gets rebuilt about a dozen players will do about 7080 percent of rebuilding because in real estate brand matters because brands are trusts and in the biggest purchase you ever make in your life trust becomes very important so you need trust when you buy toothpaste because you're gonna put it in a personal space like your mouth but you need trust when you buy real estate and and so we have a combination of constrained supply very valuable land pathetic buildings which deserve to be torn down so the entire cities are tear down and and so so I think that there's a you know in in Ramdev terms we probably have a 50-year runway I was about to ask you that you think this is a multi-year multi-decade opportunities I hope I'm smart enough to never sell any of the real estate holdings we have Wow that's that's quite something money okay so thanks for that information either you are not six-month bet it's not six months that's good to know okay one issue let me ask you them Oh the this the the slate for investing does it look conducive enough in 2018 I know individual bets will do well they always do a little spective the market conditions but having enjoyed such a great market run in 2017 Mead the US markets beat the other world markets or India for that matter are things still looking conducive for investing in 2018 you know actually I would say that I'm a UH normally I'm an I'm an investor in anomalies right so what we talked about in real estate was or just anomalies it took place rain was an anomaly you know sitting at PU one and all of these things so the thing is that when I look at the markets in India and so let's let's focus on India first so but if I look at the let's say the two hundred largest names in India I don't see screaming bargains in fact I see some very stretched valuations amongst those I'm very good companies good tailwinds and they may still become much more valuable in the future but they're not obvious and I focus on the obvious so these are not no-brainers these are not shooting fish in a barrel they may be to overprice they may take a stumble so it's not an area that's of interest to me and I think in India the interesting thing is that there are lots of companies that are less than 500 crores Evan or grows market cap under followed under research great entrepreneurs great tailwind that that universe requires some digging and some some lifting to try to understand those businesses there's also a lot of useless companies in that in that cesspool if you will but in that cesspool there are also 50 baggers of the future $100 of the future so my perspective is I think of myself as a gentleman of leisure I'd like to understand some of these businesses I'm just I'm not assuming that I'm gonna find something but if we find something and suddenly seven moons line up we are happy to take a swing okay my last question to you aside of what we're seeing within the obvious pockets and we've known about these the rain' industries and the real estate are there other pockets of interest within India people who want to know if there are teams or if there are sectors where you think there is an opportunity where people can where people having studied the businesses well enough can invest into yeah see I think the the biggest thing India has going for it is the growth engine right so if an economy is growing at six seven eight percent a year in that type of range a lot of companies get natural tailwind to grow at multiples of that so ROM they would say if the economy grows at seven percent private banking will grow at fourteen percent for example and so there are these multiplier type opportunities I mean I I'd say I see that let's take a asset class like asset management I think asset management will grow at multiples of GDP growth but at least I haven't found obvious bargains so it may well be that the growth engines are so strong in asset management that even if you're playing 30 times earnings there may be a bargain but person like me has difficulty with those types of numbers right so I can see many many areas in India which look great for the future the issue is that the valuations don't make them obvious and and so what I'm looking what I'm looking for is just be a general Asia keep taking in the data keep learning and then once in a while you might find not normally so I feel I was lucky in the last one year that real estate was an area that you know turned out to be a good one I am Not sure at this point if in 2018 I'll find anything at this point I haven't come up with anything you know there's there's no buy list I have in India but but we'll keep looking now we'll keep looking okay let's end this with one final thought a really nice book or a really nice article or a video that you recently saw read that you found very interesting yeah I mean I think that there's a few so one is I think Ray Dalio wrote a great book I think that's worth reading and and then you know a great relationship investor Sam Zell he wrote a book Amma being too subtle and Sam has had uncanny timing on entering and exiting different sectors in real estate done really well and it's a funny book so I think that and in fact that book is available on audible it's available as the audiobook and it's in his voice and the same thing with the Dahlia book case in the Dahlia books also available in in gray dahlias voice so if you're spending a lot of time in Mumbai traffic or in Delhi traffic if you will then you know put these put these books in your car and it's a great way to to get knowledge while you're stuck in stuck in traffic and such so I think these these are these are some recent decent books that I've really enjoyed squeezed in a question here morning have you looked at the crypto currencies anything interesting out there you know the funny thing is I have a I have a friend he's been a friend of mine for like more than 20 years and now he's been a venture capitalist but he's now a venture capitalist who only invests in blockchain and these things so he was coming he lives in Chicago is coming to California wanted to meet me so I spent about two hours with him downloading his brain on crypto currencies and then after aliens leaving he said you're Mohnish i wanted to get you a clamor tides in this world so I'm gonna send you a Bitcoin and the next day I received a whole Bitcoin from him so I said listen I can't it was about four thousand dollars it's a contra four thousand dollar gift no no no I got someone knowledge you please keep it okay so you wouldn't take it back so I said okay my cost base is a zero I'll just hang on to this right then I suddenly blinked my eyes and it's at 17,000 and so I said okay what was enough is enough I I put orders to sell it and then recently I haven't heard it but I think Charlie Munger did a talk at the unity of Michigan and I heard he slammed the cryptocurrencies I think so put me in the monger land or the land of the skeptics is it's not an area where I'm looking for the next opportunity yeah I wanted like a plague I think that's what Jack Bogle said if I'm not wrong that's right okay great Mohnish Pabrai so good having you thank you so much for taking the time on and speaking to us at Alpha moguls and have a great 2018 hope you find the opportunity that you're looking for in India thank you Nero is always a pleasure [Music]

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Keywords: Bloomberg, BloombergQuint, Business, India, News, alpha moguls, mohnish Pabrai, The Mutual Fund Show, SEBI, mutual funds, implications of SEBI, #BQMutualFundShow, mutual fund, business, buisness news, indian business news, #BQ, Latest Updates

Id: XBY6aLezago

Length: 38min 48sec (2328 seconds)

Published: Thu Dec 28 2017