Chai With Pabrai: Mohnish Pabrai Talks To ET Now | Exclusive

okay all of us excited to understand debate deliberate and more important you know get some queries answered some Manish welcome to our studio when a guest comes we always say calangute Shire coffee it's Javits pop right today then we meet in all kinds of strange I was just saying you know telling the coaches well this is not the first time that you coming to India we of course highlighting that this is but this is the trip the timing of the trip is really apt because there's so much happening in the world and for somebody who's based in the US this is the right time that we can you know drawn from your perspective and insights and perhaps join the dots that are concerning the market okay I mean I'll put a gun to your head and ask you what is your market view I know you hate this answer but that's a standard question we have to ask well the answer might disappoint you but I don't have I mean I think for for most for most investors you're better off not trying to answer difficult questions I think I think investing is difficult enough when we try to finally figure out what is the future of one business if you try to say what is the future of an entire market or country and so on the you get too many variables sometimes but but I would say that in general we've got a lot of tailwind in India and we've got a lot of very smart entrepreneurs running a lot of great companies and so I am in India both good lots of you know follow-up questions for you but then we're and maybe you are discussing and interesting you know point couple of days ago that if you look at the great investors Buffett is sitting 100 billion dollars of cash Ray Dalio has gone out in the open and said the 2018 could be a year of transition George Soros two days ago is talking about a minimal in Europe everybody is not very optimistic about the shape of the world Howard Marks is not excited about valuations what is your take in general is this a good environment for a long-term investor to invest in pick up buckets yeah so I think I think we have to slice that a little bit so like in the case of let's say Warren Buffett it's actually last time I checked 116 billion yeah so and and it's increasing by about four or five hundred million a week because of all the operating earnings and Warren does not have the cash because he has a view on the market he has the cash because nothing interesting is showing up to buy so you know whatever the markets are doing they go high or they go low if tomorrow a deal shows up for a particular business to be bought the what's happening in the markets would have very little impact on what Berkshire Hathaway would do and and so that is I think a great way even for investors to think about things so in the long run if you're right on the business and the prospects of the business that is what she's going to drive your returns versus what is happening with markets and economy and those sorts of things but do you think that the challenge still lies for long-term investors I mean with his attempt to buy uber a stake in uber everybody's wondering you know if it's getting tough for mr. Buffett to realize value and he's going into areas which he's never traditionally been in yeah in the past what does that mean for bargain hunting in this sort of a market environment yeah so the uber deal as I understand it was a convertible debt deal it would have been about three three billion or so so it's not exactly the same as them buying a business and they're not taking a really bullish stance and over because they're not going on the equity and so I think I think the thing is that if if we were privy to all the deals that showed up in Omaha and what happened to each one of them we would see hundreds and hundreds of them that didn't get consummated here and there we hear what some of them is just a nature of the of the recent and price is very important so when we're looking at buying an asset obviously we want a quality asset but we have to have price discipline so at some point if that price discipline or the price is not being met either when we're buying stocks or in my whole businesses you you've got to back up back off but for us domicile investor if you're making more trips to India selling nikunj does it mean that you're finding it easier to find bargains in India then you know a mature market like the US so you know I manage about a billion dollars and we only have less than 1 million dollars at this time invested in the u.s. 0.1 percent of my portfolio I never thought in my lifetime I'd ever get to having something like that small estate and I don't have macro views I don't know a macro view that the in fact I'm bullish on the US and generally says that things aren't heavily mispriced and underpriced at the same time India has increased quite quite dramatically it's gone from basically less than a hundred million to three years ago to over 400 million and so so you know we've all of that has happened because I'm able to find opportunity here and I'm not able to find a body percent of your portfolio is invested in India that's correct okay so what we've done is then this is not about Buffett this is all about you and about your investment style I've been you know following you ever since after that you know Buffett lunch I read this book and we talk about this books like it later what we've what I've analyzed over the years and what I've really understood and what has inspired me about your investment style and one thing which stands out for me is that you've got this concept of checklist which is also centered around the fact that you like to buy high uncertainty and low risk yes can you just explain so it's very interesting because stock markets have a perspective that businesses should have extreme predictability they should be able to tell us every quarter what's going to happen and they should just march northward every quarter in a straight unfortunately the real world doesn't work like that the real world is messy and businesses don't go this way they have their ups and downs and and they do that so so the the thing is that when a business has a hiccup or it misses a quarter or something the markets think all hell has broken loose where in reality just might be part of the natural way of business runs and so markets hate uncertainty and so when you have high uncertainty in a business coupled with low risk the end result is high returns so if you have the combination in a particular business where uncertainty is high and risk is low generally speaking that's in a situation you should be worth or willing to dig into and we had that situation for example in in India maybe 15 16 months ago in the real estate space you know that's the example of it was classically low risk high uncertainty you know when you met and we're I think this first last year and I've not been to us I've never attended those a GM's but then we've been there you told on me that a business which you like in India is actually param el Enterprise --is then the pyramidal Enterprise has a balance sheet is pretty much like Berkshire Hathaway you know balance sheet in terms of disclosure in terms of what they indicate and what they communicate now here's a business which is very discovered here's the business which has potential to be a great great compounder so there is no uncertainty but there is great potential so what would you do that yeah I think I I think in a case like pyramid there is some uncertainty not a lot there's some uncertainty around the fact that a J is going into relatively new areas which he hasn't been before and markets always question you know is he is he going to have a stumble if you will but yeah you're absolutely right a business like Rommel is a blue-chip business it's a very high-quality business relatively low uncertainty but in in that particular case that for me wasn't a Laura's high uncertainty bet as much as it was a jockey bet so AJ has a few strong traits one of those traits is he's very driven to deliver shareholder value in a very ethical way and another of those traits is that he's a compounding machine and he cares what those things are very so a lot of management teams don't understand capital allocation and and compounding and taking care outside shareholders those are at the absolute center of pyramid so I think that something like peer Amalia I think riding on AJ's coattails is not a bad idea you know there was a lot of drama that played out between industries and I remember the stock sold out the side talk in the market was check with the Mohnish Pabrai he's selling how do you how do you look at the business out there more than reported in terms of earnings in the Ross quarter yeah so just a caveat is a I'm not into stock tips and I don't want people to take it as stocktake so I think if we if we discuss rain from the perspective of getting educated on kind of how to how to deal with markets actually from my was perspective there is really no drama in rain at all this is a business that when I invested about two and a half years ago versus the price today is a six to one difference in my favor and so I I have no I have no complaints it it used to be ten to one you know two and a half years they diverted over at 10x and so it is in the nature of equity markets in the nature of auction driven markets that we're going to have swings and we're going to have swings in euphoria going too high and in Passman going too low and so rein industries at one point in 2015 was priced at 35 rupees a share then a few months ago it was priced at over 400 rupees a share and now it's priced at you know 200 odd rupee the share the market is there to serve us it is not there to instruct us so this is Ben Graham 101 we are not going to look at the stock price and then trying to figure out Oh what is going on no that's the wrong way to approach it the correct way to approach it is have an internal reference of what the business is worth and if mr. market is is giving you that price or higher sell to mr. market and if it's below that buy from mr. market so from my vantage point there is so I'll disclose this we we have a higher position in rain today then we had three months ago that's and and I'm almost pretty much at the limit of the amount I'm allowed to buy we have to stay below 10% and we have just a hair under that so I wish I could buy more but I can so where do you see this little combination of high uncertainty and low risk but that's your hunting ground like yeah so I think I think rain was a great example of low risk high uncertainty in 2015 and even in 2016 so at that point the the company was you know going for 30 or 40 rupees a share and there was a high probability in the next three four years earnings per share would be equal to the price of the stock P of one so if I'm buying at 30 or 40 rupees and the earnings in 2018 or 2019 every 30 or 40 rupees I don't need a calculator and I don't need Excel and I don't even need a high IQ and so in the case of rain actually from the time I first heard of it to the time I placed the buy order was three hours it took it was a really really obvious investment and and and today I would say that it's probably not as obvious as it was then but I have a better understanding of the business because you know I wound it for a while and we had a similar situation like I said uh twelve or fourteen months ago in real estate in Mumbai and other places so low risk high uncertainty shows up very frequently in auction driven market so that's your only investment loss you know in this country or portfolio you also have a rep go home which is in the housing finance yes it's not it's not a cheap stock in from a price-to-book perspective and there is certainty of growth because housing finance companies have been doing really well so how do you play that story what's the conviction that drives you well again like I said I don't want to want to want to make this water yeah yeah so I think you're getting it so I would say first of all in general levered institutions one should be really careful of levered institutions and I think also in general there is some elements of a bubble in housing finance maybe not amongst the listed players but anyone and their brother with some money wants to start a housing finance company and and we are starting to see some of them having difficulties and so I think lending is a difficult business I think the one of the simple things were remember what landing is when you make a sale the cash leaves it's not good to be in a business that when you make a sale the cash leaves and slow coming back and so we have to have really strong approaches to make sure the cash comes back so I've looked at several of the housing finance companies Repco is a little bit unusual in the sense that the the demographic they're servicing typically they don't have any competition that the only competition they have is the is the useless moneylender in the village who's who's charging 30 40 50 percent and so they are actually taking people from that type of environment into a more sensible environment and so in the kind of rural geographies and the like the ten lakh ticket price type area that they're going into they are they have they have a moat around that the second more important thing with them is that in the last 10 plus years the write-offs approach zero so they've had they've had n pas and all of that but they've always had write backs against that so actual write offs have have been a rounding error and and that's the most important thing and of course one of the things I don't know as an investor and I hope it's the case is we don't know what happens in the future so I'm making an extrapolation that the lending discipline have had in the past will continue in the future I'm in a business where there's a higher every high error rate we you know 30 40 % error rates is is normal even for Warren Buffett and so we will see how it plays out but I think the odds are good you know Buffett also says that we love bad news as long as it is temporary because that gives us an opportunity to invest sure if I look at a classic compounder in India that has been HDFC bank mm-hm it never gave bad news and for those who've waited waited for bad news they've never got one sure for those who've not bought HDFC Bank they've also regretted it so how does one identify a classic compound or like Asian Paints or HUL or HDFC Bank because they don't get bad news yeah so I think it's it's in the nature of markets that we are not going to be able to understand probably 99% of the companies that trade I don't understand probably 98% I probably understand less than hundred businesses in India that that are publicly listed and and and and it is perfectly fine so you know in baseball three strikes on your out and Warren always says that in the investing business they are know called strikes and so I'd love to be a HDFC bank investor I'm not a HDFC bank investor I can't get myself to buy at present prices perfectly fine there are 100 other ways to invest one doesn't need to do it by looking at the past pass rate compounders and and so that's that's perfect so so the investing business is a very forgiving business we can we can do really well in the business even if we don't understand 98% of the markets and they and the companies in them you get the two percent right you very important to stay within circle of competence so what would you define is your circle of competence I mean again we are doing this Buffett examples here because he's known for buying consumer monopolies but if I look at your and whatever knowledge we have based on you know information in public domain in the past you've bought auto companies in the past you've bought companies which are commodity converters you bought a seed company you bought the real estate company so how would you define your circle of competence and what is the starting point which gets you say hello to a stock how do you start analyzing a business yeah that's a that's a really good question so I think one of the things is that what happens in any of our minds in the first 30 seconds when we first encounter a company has a huge impact long-term on our network because in the first 30 seconds you have to make a decision do I spend 30 more seconds and then do I spend another five minutes when do I spend another half an hour so and then three years and so and you keep going right and so so at what point do you say this is out right and so the in and out because the thing is the data set is too large if we were to spend a month on each business we'd never get to you know probably 99.99% of the opportunities if you will so one so the the way I look at the business is the investing business is to be a harsh grader so harsh grader means we have no call strikes it's perfectly fine to say no to a company that ends up being a hundred bagger later that's perfectly fine but it's more important not to have to meet errors in your in your in your portfolio so basically when you when we look at these companies I I just have to ask myself you know is this something I'm able to get my arms around and is this something within my circle of competence and if you take the let's say the auto auto industry I hated the auto industry I still hate the ocean stream 30% of portfolios in the auto industry I've had huge returns in the auto industry I spent about two and a half months studying the auto industry before we actually became significant investors and such and but at the end of the two and a half month period I had certain insights that I felt were correct and that the market didn't understand them so in that case it took a while in the case of rain industries it took a very short period of time so that's the nature of investing some time you can get to the finish line really fast and sometimes it takes a while and I think the thing is that when I look at a rep go home one of the first things I ask when I look at any lender is what is their track record on defaults you know what is their track record on on the ability to collect back and how does how does management internally view that aspect of the business that's very fundamental part of the business you know because everyone can talk about spreads and all that but that's the main main driver or if you if you look at the different companies that's kind of how I try to go at it you know one more quality check that mr. Warren Buffett always runs is corporate governance good copy US government should be morning in one hmm which company is it today and of course at the helm of it all now you know it's the largest private sector lender ICICI Bank as a foreign investor for whom again corporate government standards matter a lot when you're making the choice of making an investment call how what do you make of the corporate government standards followed in India versus other emerging markets you invest in China and some of the other regions and in specific this whole ICICI Bank saga yeah I mean I would say that clearly India the corporate governance ethos is not where the US at this time but but every day it gets better 20:19 will be better than 2080 in 2020 will become better than 2019 one of the things is that enlightened investors are beginning to understand that honesty is not just the best policy this is the most lucrative policy so if you really want to get wealthy being a straight arrow is the path and the second is that now in in India the enforcement the enforcement apparatus is not sleeping and and the media is not sleeping you know so the thing is heads roll when when when things go awry so you know III don't know I think most of us don't know the what's going on under the covers at ICICI for example I know Mark Twain Mark Twain says that through the stranger than fiction because fiction has to make sense and this is the classic case of things not making sense you know the thing is Buffett says that usually it's a mistake to marry for money but it's it's absolutely crazy if you're already wealthy so if I look at someone like the the MD of ICICI mrs. Kochhar she is I would imagine quite well-off she's got a had a great reputation any of these activities if they actually happened is just makes no sense because you know why would you give up what you had because you can't live better you know there's nothing she could do to a lifestyle that would improve what she had so that's what is baffling but you know that the nature of human nature is we see behavior that baffles us so I hope and pray that everything is fine but as I see the story unfold I don't have a lot of confidence that everything's fine would you ever buy Indian peace you stocks across categories the answer's no yeah I was hoping that kind of in reaction I do respect the state-run company it's just the way well I would say i would say i would i would say that it's not just a psu banks i think that i have a good friend in in the u.s. lelou very good in bastard chinese-american and li lu will never invest in any financial services company he will never buy a bank he lived by a lender he'll ever buy any of those because he says that you know if your whole business is that you have a sliver equity and then you have huge want to borrow money there's a hundred ways things can go wrong and there's only one way things can go right so I think that if most investors took the perspective that I'm going to just give a wide berth to any type of bank or an BFC in general they'll be better off public or private the great India story is anchored around consumption the per capita income is going to increase we are consuming more we are traveling more we are you know holidaying more now the way buffett invest and which also has influenced your investment philosophies that you happy to buy a business for five ten fifteen years you don't care about the auction market what happens to it in tomorrow so in that prisoner if you have to bet on a promoter or a business which do you think has a longevity in earnings growth for next five ten fifteen years which will be that india business or that indian company well they're there what happens to stock why student tomorrow that's a function of lot of other fun right we're talking about where do you see longitude bt of the business yeah i think there are there are many many businesses in in india that have nowhere to go but up and and we have the the difficulty is that in almost all cases everyone realizes that you know so if we if we look at Indigo Airlines extremely well one in fact I think indigo is better run than almost most of the global airlines you know for example just one example they only have stewardesses in the cabin they don't have any males in case you didn't notice because males are twenty kilograms heavier and since the conscious color that is a conscious decision by indigo so when you go on India fly next time look for where the men are so next time you will notice because they because you know men may have made the guy men have the tanker once all of them so if on every flight there like fifty kilograms lighter it's you know American Airlines used to not paint their planes for that reason the planes were just silver you know when indigo takes delivery of planes they do the seats themselves they are the lightest seats anyone has so I think that this is a this is a company whose execution is off the charge when I'm traveling within India I don't go for the full service Airlines I always want to go for indigo because they care a lot about on-time and execution and all of that and and and so so so I think the thing is that does a VA Shin have tailwind big time is a top-end player going to do well big time is it at a bargain no okay so that's the nature of the beast if et now was a stock would you buy it absolutely I mean I think I think the thing is that well it's also subject of question of price but but in general these oligopoly type businesses which is what you are because you've got a few channels and and you know the eyeballs have to go amongst those channels and and your you have fixed costs with a huge where with no relationship between cost and revenue any business where there is no relationship between cost and revenue in general is a great business so are they are we gonna have more eyeballs in the future yes is Indian equity markets going to be larger yes and are you gonna have more viewership yes will be a Mohnish Pabrai more in the student future absolutely can i before we wrap just a book which has influenced me personally and I read this book before I actually met mohnish I met Marie in 2012 at an Isaac you know EMC conference but I read the book and I was looking for this opportunity last time I didn't have the book so I'm going to request managed to maybe sign it for means and we and this is a book Mohnish personally I must say it has influenced me a lot and it has totally made me a better investor I'm wonderful thank you I can I just say I was quite impressed by your changes Stan singing the US vs. India now I wish you could tell mr. buffer to do the same 40 percent in India how does that sound well I think I think the problem is that be the size of the Indian markets overall I become an issue but but mr. Buffett is very eager to invest in India and if country you are a deal for him usually on the next NetJets play straight off you know our deal on that things change and what has changed is I this for Manisha's that is good and you look a couple of years ago the most hatches were missing so money that's all picture we have four piers with a new picture with mustache sure conscious call well the mustache was requested by my better half you must go to be Stewart Randall I challenged on the fitness challenge she accepted it and we've seen your fitness charlie okay and it just you know it I always look forward to interacting with ammonia there's so much to learn and use always give us this extra new way of looking at investing and in life as well so you know there's one more question and then my producer is shamelessly telling me to do that but I'll take the liberty right now to ask you one more question sometimes the advantages of being in editor helps you but you've said that you know we all look at buffer as a great investor you've said I think in one of the public forums is that don't look at Buffett as an investor look to him as someone you can learn how to live your life yes yeah so I think I think the qualities of Warren Buffett which are if you look at its qualities outside of investing for example as a business leader or as a citizen or in terms of how he lives his life I think there's a lot more benefit we can get from studying Warren Buffett the human what is Warren Buffett investor and I personally have gained probably more from studying Buffett the human versus buffer the investor yeah so I think that we are get we have blessed to be living at the time of Buffett you know kind of like living at the time of Newton if he wills we're living at the time of Buffett and I think to have someone who's amongst us so accessible and who's an open book and who can serve the role model is incredible thank you Lord is never said about the fact that it's Warren Buffett as a human who has really been instrumental in creating the kind of personality that he has as an investor thanks very much more nice thanks thank you for joining us in our studio thank you very much you know this whole programming try with Barbara it's been great a meet of course be showcasing that to our viewers after this very short break Mohnish Pabrai unplugged all day long on all platforms of ET now Twitter Facebook everywhere YouTube you can catch the interview once again thanks very much for watching it

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Id: T7Qr1Ze8vNA

Length: 31min 36sec (1896 seconds)

Published: Thu May 31 2018