Mohnish Pabrai’s Lecture and Q&A with students of Peking University (Guanghua School of Mgmt.)

[Music] well so first of all welcome to the awesome students of peeking you so welcome to Irvine as you can see we live in Paradise you know life is great and no complaints so a few stories I'll tell you a few stories then we take your questions okay so first I'll bore you with my stories then we'll get into some more interesting things so I have a personal trainer at my health club his name is Jason I've been with Jason for a long time I would look better if I ate toward Jason told me to eat I don't do that so the result is not as good as if I follow Jason's advice because I can only follow the advice for the physical things we do so anyway Jason he's been my trainer for only more than 12 or 14 years long been a long time and I asked Jason you know every time there is a Powerball lottery you you guys know what a Powerball lottery is like sometimes the payout would be like five hundred million seven hundred million and whenever the payout is really big Jason always buys a ticket okay so I asked it's and I said Jason listen what's gonna happen if you win the Powerball okay can you explain what your life is gonna be like one day after you get the 500 million okay so Jason thought about it and he said you know I just want to hang out of the club okay so probably I'll just I said how you're gonna dress are you going to dress after the 500 million he says probably exactly the way I dress right now and then what are you gonna do in the morning is Yvonne probably this one come to the club and I said Jason after you win the 500 million am I going to be a client of yours okay like are you gonna like am I gonna he says yeah keep you as a client some of the clients have a drop okay I just make it a little flexible which one I want but I'll probably just come and hang out of the club and that's it okay so when Jason told me that it reminded me of what Buffett says so what Buffett says is that you should take the job you would do if you were not getting paid okay so it's very important that when you pick in terms of what career or job or company you go for go to work for that if they were the way you could support yourself you know pay your rent etc and this company paid you nothing you still go to work there if you do that you have made the right decision okay if you make the decision based on the highest pay or the most prestigious name or any of those things that's the wrong way to make a decision you will probably later regret that decision so this is the first talk I think I'm giving when I did not put on pants did you notice I did not put on pants okay liked it exposed the legs are exposed terrible okay so why did I not put on pants okay the reason I did not put on pants is I wanted you guys to see me the way I am dressed every day okay I did not wear special clothes for you today I'm sorry okay every day and you know Fahad and Jaya they work with me they've got sick of looking at my legs you know they wished I would cover them but it's the way it is so every day when I go to work I go to work in Shore okay if I am dressed like this okay and why do I do that why do I not have because I am running a investment fund about eight hundred billion dollars it's a serious activity why do I not put on a suit and tie and go to work because I think I'll be less comfortable and I will not be as excited to do that every day okay like I like my Nike sneakers do you like my sneakers you know I think it's better than wearing the like the dress shoes so so the reason I did this is because if a brief ins did not pay me just like with Jason not getting paid I would want someplace to go to work and I would probably dress like this so I don't want to do something which I am doing because I am getting paid because that's the wrong decision and and also I learned many things from Bourne and Charlie but especially for mourn one of the things I learned is to run an empty calendar okay nothing on the schedule like Warren will show you this calendar for days and weeks he is nothing on the schedule just comes to work he reads if he wants to call someone he'll call someone but there is nothing that at 10 a.m. he has to do something and 10:30 something else he doesn't work like that neither does Charlie work like that and when I saw that that's how these guys work I said that's really good and I'll copy that okay so I copied the fact that like today I had peeking you on the schedule okay I think it's the only thing on my schedule this week okay usually they might match on like one thing or something sometimes there is nothing on the schedule and so how does Buffett operate you know such a large company with so many CEOs so many things with nothing on the calendar because you know what will happen with him is some senator will call him mr. Buffett can we meet tomorrow for lunch for example right or like Jeff Bezos so Colin can we meet okay and what Buffett said is you have to be really good at saying no really good at saying no so if I wanted to fill my calendar it's very easy to fill every day people would make all kinds of requests okay so so I have about 400 investors okay all over the world I can't even remember the last time I ever had a phone call with any of them or ever had an email with any of them or when I last met them okay the so I learned from Warren Buffett when he ran the Buffett partnerships he told his investors I am open for one day of the year when we have our meeting and you can come to the meeting and on that day we can talk about whatever you want to talk about and the other 364 days I'm working I'm not available to you so if you want to ask me something come on that one day and I'll give you an annual letter which will explain what's going on so Buffett fed my his communication to his investors was actually he did two letters a six-month and one-year letter to investors and once a year an annual meeting now when he did it like that what happened is that his time got freedom right because he doesn't have to like let's say my fund goes down 20% I don't want to sit there all day answering questions why it's down okay so actually what happens is when the fund is down nobody called because they are very well trained I spent a lot of time training them because they know even they call they get no data so there's no point calling ok so so basically what happens is that and I did all of that because I wanted to have a lifestyle which was set up so that I would do this if I was not getting paid if I have to go to work and I have 30 calls to answer or a lot of emails to look at or whatever else it just becomes a drag so we don't also so I I could not come up with these ideas on my own I came up with this idea from Warren and Charlie and I copied it so one of the most important models that you can adopt is the model of cloning when you see someone doing something smart just incorporate it you know that's a good way to go there's a friend of mine guy Spier he came to piquing you with me I think two three years ago and and guy and I are good friends and in fact he was just in Irvine last week and we were in Vancouver before that for the TED conference the big big before that so we are very good friends and he's an investor he manages about 200 odd million and many times we talk about different stocks and ideas to you know just get different perspectives so guy loves to own these great businesses that have very strong moats and they are blue-chip really good businesses okay the problem is that when you own these really great businesses everybody knows they are great ok so the price is very high usually the price is very high and I tell them you know it's not about the great business it's about the great investment so a company can be really good it doesn't mean it will be a good investment and a company can be not so good and it could be a great investment so the the interesting thing about the investing game is if the if the game was simply about finding the best assets or the highest quality businesses it would be a very simple game because we can obviously figure out what business is great and what business is not so great that's not so hard to figure out so I I found this ok business in India which I thought was going to become a better business people haven't heard of about it it's kind of unknown and I told guy this business this quirky unknown business is going to be a great investment great investment and I told him so he owned he owned MasterCard in his portfolio MasterCard is a very good business very high quality you know almost a wholly copy to three players on the market they don't need any capital to run the business I mean like 40% of revenue is profit it's a great business I said this MasterCard is like a thirty times earnings you made a lot of money he already made like 12 times what he put in what a long time back we put 1 million it became 12 million so I said you made a lot of money it's not going to go from 12 million 244 minutes you know if the last 12 years it went from 1 million to 12 million let me just tell you next 12 years it's not going from 12 to 144 so I said guy listen I shook him up it's time to sell to card and by Suntech Realty in Mumbai okay this unknown company and of course guy in polite terms told me get lost so you know what I do when people do that is I like to play mathematical games you know it's just fun to play mathematical games this is a picture of a small poster in my office and I have many of these at any given time I have maybe ten of these because I run into these humans who don't understand the concept of great investment and great company so I don't guy okay here's what we're gonna do it is October 14th 2018 this is when I had this conversation with them in your corner is the phenomenal MasterCard with the impregnable moat all agape business great CEO everything is fantastic and that's called the guy spear pick at that time MasterCard was 204 dollars a share in my corner this small stupid company in Mumbai Suntech Realty no one even heard of it right and MasterCard the market cap was 212 billion ok 212 billion it's a blue chip company Suntech is less than 700 it's it is absolutely I agree with guy the guy running Sun tech is not as good as the guy running MasterCard the moat of MasterCard is a lot better than the mode of Sun tech but that's not what this contest is about this contest is about I gave him twelve years so I said we're not going to like have a one-year contest because anything happened one year because basically one of the things that mother and Wofford say that if you have a business with great economics great economics over the long term your results will match the returns that the business generates over the long term so MasterCard generates great returns and I said guy you've got such a great company I got this useless company we're gonna go for 12 years and every year now when it is October 13th 2019 it'll be a pleasure to go to work in shorts and send guy and email do guy it has been one year here's where we stand so far one round is over another 11 rounds to go so let's look a little further in these in these two businesses look at that this is MasterCard if you bought MasterCard at the IPO when it appeared in 2006 it was four dollars and 23 cents in the IPO in 2006 and now yesterday it's two hundred fifty four dollars more than 50 times maybe fifty five times in 13 years and guy didn't even buy over here I think he bought at maybe around 20 dollars a share maybe somewhere here I into hunt and somewhere here he bought and every time I meet guy I tell that guy have this old MasterCard precious yes how can I sell it look at this yourself you can't sell okay and then we have the sub data okay so it's 261 billion market cap the trailing p/e is 42 I'm almost having like a cardiac 42 times trailing p/e trailing return on equity is a hundred and six we give you all the slides you don't need to take pictures don't worry I send you all the slides trailing your own equity one hundred six percent and annualized return since the IPO 37 percent unbelievable great but that's in the past it's not gonna help I in the future we care about the future we don't care about the past right so now here's Suntech look at the stupid chart okay MasterCard so beautiful Suntech so useless okay now let me tell you why I don't want to make this session about stock tips so don't think the stock tip it's just to explain some concepts okay so in in India about three years ago there was something that known as D monetization that took place some of you may be familiar with it what the government did is they made a bunch of currency notes illegal and you had to put those in a bank and then take different notes because they wanted to wipe out cash transactions and black money and all these things you know the underground economy they want to kill that so real estate transactions in India in 2016 and earlier they were always some portion paid by check and some portion under the table - it's a combination right when when demonization - demonization took place it became impossible to pay cash because the cash is all illegal so what happened is the real estate firms most of them they dealt in a lot of cash and so people thought oh the real estate market is just clobbered it's gone because you can't now you don't have people don't have the money you know they can't come up with money from the banks and so I noticed that in November or December of 2016 that these real estate companies that were publicly traded had collapsed in value because of this thing but the people forgot something when they did that so if we look at that circle when something was trading about 100 rupees a share one could do a very simple exercise at that time I could look at the real estate Suntech owned because was just listed what they owned they had a bunch of finished apartments they have in construction they have land all these things those have a valuation either a market value or a cost value and this was a company there was few companies that never dealt in cash they always did things the right way and so before the modernization it was a disadvantage to them because people would try to tell them no I cannot do this if you don't do cash they said we can't do any other way we have to do everything properly after the monetization what happened is that 90% of the real estate companies disappeared they can no longer function in that economy so there were three things that took place in India in real estate d monetization something known as Brera really straight regular to react and GST goods and services tax the combination of these three the end result was that 90 percent of the developers were out of business and very very few developers were left standing the ones that were left standing with the ones that always conducted their affairs with very high quality you know they delivered them the properties they did everything by the rules they followed everything Suntech was one of them and so at that time when the stock was a number 100 the market value of the company was less than 200 million dollars just one project that they had where they had 60 finished apartments in the heart of Mumbai those apartments were worth about 500 million there's no debt so the market cap is 200 million they have 25 projects one project is 500 million okay another 24 so when I started to look at the value of everything they had it was many times the value of the stock there's no comparison and reason why is there because people when there is a seismic event like this demonization they just run to the exit everyone just sell the stock and run right so the stock is sitting there no one's interested I am interested I could tell the broker every share anyone who has any shares just PI as much as you can okay and now we own nine point nine nine nine percent that's the maximum allowed to all so the maximum that I could buy I bought 110 to the company we owned and you can see what happened after that is in the LA in the last three years it went up almost five times it went from a hundred to almost four sixty goes to five hundred right and in fact I'm not even doing the contest with guy from 2016 I'm not using that 100 rupee price against MasterCard I'm using a price when it's already gone up quite a bit so if I go back I'm not using 100 I'm using 355 right so it's already gone up quite a bit but I said you know guy even with the 355 will keep master cats cards ass no problem okay and I'm hoping that in five or seven years he will understand what is already obvious to all of you so there Suntech these are the numbers the market cap is now close to a billion trailing p/e looks high 30 times ROA is low the returns since the IPO I don't care about but the return since D monetization which is going to be investment for the first time is four hundred percent the antwa has returned since then is about 95 percent and and here's where we stand today so we started October 18th until today MasterCard is up 25% pretty good from October to May 25 percent Suntech is up 38% okay so far mounish is ahead well so far but we have eleven and a half years left to go eleven and a half years now let me just tell you something else about MasterCard Buffett invested in coca-cola he bought coca-cola stock for the first time and from 1988 till 2000 it went up like twelve or fourteen times it went up a lot they put about 1.2 billion or worth like almost 15 billion very nice one from 2000 onwards when so Coke was very cheap in for by 2000 was trading at 40 times earnings from 2000 to 2018 Coke delivered a return of less than 3% a year okay why did it deliver return of three three percent a year it's still a great company the Chinese love cook do not cook there you go okay so coke has a global footprint it does well everywhere the bottling business is separate it makes a lot of money the return on equity is great just like MasterCard it's a great business but the thing is the starting price that you pay manners in 2000 you are paying more than 40 times earnings for that business and by 2018 it's trading at 17 times earnings so the multiple went from 40 to 70 okay so MasterCard actually in my opinion is not adds as good a business as Coke why they're not as good a business because it is subject to disruption you know in China no MasterCard you guys use master got a China no wiped out not allowed to come in okay and the payment systems in China are way more advanced compared to MasterCard and they're much cheaper the frictional cost is much low MasterCard gets 2% on every transaction 2 percent in 2030 I don't know whether they will get 2% you know what I'm saying so now if I go to my favorites talk about I do we love multi yes absolutely what a company the ultimate mode I can't think what another company which has a better mode then louder okay can multi be disrupted how can my eyes business collapse what would cause the business of mountain collapse so we know if I compare MasterCard to Maotai MasterCard can collapse multi is very very hard to collapse because thousand-year history and it's embedded in people's heads and they have so much inventory and you know the thing is it's got all the brand shei China is rising all of those things their lark aliens that keep coming they can keep raising the price you know just keep reading the price so the thing is that multi phenomenal mode so MasterCard one of the issues is that payment systems it may be possible that in 2030 MasterCard is still doing fine possible it's also possible MasterCard in 2030 is not doing fine we don't know so anyway my way of dealing with this is play a game okay let's play a game and I could never get guy to buy even one share of Suntech even after the contest start and everything but maybe in five or seven years we'll go to Q&A in a second we lose them in the end okay so we'll do that later but let me continue so we can finish this off now we have this company so I told you have many of these contests running with many different people okay another person and I you could see it's blacked out here I didn't want to put his name you know protecting our privacy guy we don't care about guys privacy okay other people privacy we care a little bit more okay so a money manager told me recently this is just April 7th this is this game just started 23 days ago mounish mother/son suing is an unbelievable business I said Mr X forget Mother's and sue me the action is in vain industries now in this case both businesses are in India okay and let me just explain something about mothers don't sue me you will enjoy this look at that chart I think I get a stroke our chart right on top of it so mothers and sue me in 1994 when it went public it was at nine cents nine cents now it is at 146 30% analyzed returned over 24 or 25 years it's great what does mother susumi do okay so first of all the name mother's son the guy who runs it who I met he's a great guy I like him a lot charmed started his business with his mother okay since he started with his mother he said the name should be mother son okay mother son and Sumitomo in Japan is a partner of this so mother Sansui that's the name of the company okay but mother consuming is a very unusual company so they make auto parts automobile parts okay but they make but the way they run the business is completely different from any auto parts company in the world so he has acquired over the last twenty five years maybe thirty or forty businesses around the world China Europe India everywhere they've got like you know dozens of plants all over the world but chant who's the owner and CEO says we never call a company to tell them we want to buy them we have never done that and if some company called us and say please buy us we also do not do that so I don't approach any company he says to buy them and any company that comes to me I also don't buy he says my customer is BMW Volkswagen Fiat Chrysler etc BSO he says BMW will call me and say child I have a rear view mirror maker parts guy who is losing a lot of money and they are losing two million dollars a month and I think they're going to go out of business and my seventh series BMW line is going to come to a stop if that guy goes out of business so they say they say the charge charge can you buy that business so Chan says I only have five or six customers BMW Daimler Fiat blah blah blah GM and so so when BMW calls him chance has beamed up don't worry I'll take care of it so in two days he looks at the business and tells BMW you are right this business is losing two million a month it's a worthless business not worth in it so mr. BMW here's what you're gonna do you're gonna write me a check for a hundred million dollars to cover my losses for four years twenty four million a year okay and you're gonna give me a contract that you're gonna buy my product so what is the acquisition cost - 100 million BMW right Simo jack why does BMW write him a check the seven threes line is going to come to a stop they can't stop the light you cannot stop making BMW tell me they lose billions of dollars so child buys the mirror manufacturer and he does not make many changes he only makes two or three changes first change who I was running that plant is fired first change was the owner of running the plant they're gone second change he looks within the organization finds a person no more than 35 years old and tells the person you are now the new plant manager from the same plant he does not send his own people he takes so if they buy a plant in Austria they look at the people in Austria in that plant and they'll pick a guy and say and the person they may pick maybe four levels below the CEO they don't care straight he becomes a pop guy the third thing that typically happens in Madison so we buy the plant in about three months it stops losing money you know he got paid hundred million he only lost six million after that in next three months it's making a little bit of money and after one year very solidly profitable okay and BMW extremely happy and how many companies can BMW call like that not many so child understands that his job who is his customer his customers BMW what is his job take their pain away and they will they will call him and say John this harness company I have a problem John says you have no problem I'm there in one day they do the deal other principles that Madison Sumi uses they have never relocated a plant to save on labor so they don't take a plant in Germany and move it to China never done that because they want to be loyal to the people who are there and they said we'll make it work with those same people we don't need to move the plant the other thing they do is mothers and Sumi runs on ASAP the software platform is si P they don't impose anything on the company the choir so the mirror company is using some other software they will build all the interfaces at Mother so they can deal with them but they don't ask that company to change and over time that comings gonna realize I'm better off being recipe as well so they will change so and then what child has done because he's a very good manager he has his plant managers who are all these young guys talking to each other they meet every six months or something sharing best practices going back and forth and on and on so so mother should sue me I think the last two or three years I met about 200 public company CEOs in India or 200 no one is as good as this guy no best out of 200 but I took a bet I took a bet against child okay just like I took a bet against MasterCard and I told the guy child will lose okay so you know what the fund manager told me mohnish can I share this picture with child okay the CEO of mothers and Susan I said please feel free okay because child is very competitive okay the moment he see the picture like this his blood will boil that he wants to take the other company out I said you share the picture do whatever you want rain is gonna blow him away okay stupid rain that no one's heard of okay so here's mothers and so you see what my job is so much fun you go in the shorts you start the contest and then just watch the drama so much fun that's why I don't need to get paid it's fun without getting paid okay so here's mothers on zooming 6.6 billion market value trailing p/e is 27 high return on equity and since the IP or 30 percent a year okay this is not even the thing what child does John tells you in five years what the revenue is going to be what the profits going to be what everything's gonna be he already told the market so he already told the market that in 2023 my revenue will be 70% more than today so the market tell him child how you gonna get something in order parts he said don't worry the phone call will come phone call will come I'll keep doing the deals right so child already have told the market what he's gonna do then we have rain industries you see all the mother-son Sumi child right just to remind you the mullahs and Sumi chart this is the muslin through my chart here's the rain industry's chart nothing happening from 1991 till 2015 flat okay the opposite of child but I don't care about all this this is when I invested for the first time so I'm gonna make sure I keep you guys on track so rain industries I somebody sent me samples that I don't know sent me an email which had a write-up on grain industry I never heard of this company before that so someone sent me a PDF of our 20 pages explaining rain industries three hours after reading the PDF I'm buying every shader ok told the broker to every share were also sell I own guess what nine point nine nine nine percent of rain industries just like Sun tech nine point nine nine nine they won't let me go over ten so just one shade below ten I just sit there okay and why did I buy rain industries so the thing about rain industries was that when I saw the report I got the market value was two hundred million dollars and it's it's in the aluminum supply chain business like they make you know this coal tar pitch and different products which go into the manufacture of aluminum and it's a nolle copy the only two three players in the to provide that so it's very concentrated the when I read the report I said it's a very high probability that in one year maybe in the next three four years they'll make two hundred million dollars so I'm buying the whole company for two hundred million in 2015 I thought by 2018 or 2019 in single year they'll make 200 million okay of course I won't want to stop that right and that happened so I bought at about 35 rupees a share and for some time nothing happened and then in 2018 it's a four hundred and fifty 50 rupee the share from 35 to 450 okay it and then it comes down comes down all the way right so even if I look at that way it's come down still a three annex it's still 3x in three years but at the peak the peak it was 12x in three years okay why did you do that it did that because people did not understand the business mother/son soomi is the business everyone loves 30 analysts are following it okay John talks to all of them they love him MasterCard 30 analysts following the company you're not gonna get mispricing green industries nobody follows it so and and I realized that the what I realized would rain so rate is very important because it's like something there are moats Malta is about mothers and su means the moat mastercards a moat and there are hidden modes hidden moats are very important rain is a hidden mode so this guy who runs rain he got the business for his father they never had any capital that's why from the beginning they've they were a cement plant they couldn't do anything he borrowed 1.5 billion dollars high-yield debt in the US market and bought to large businesses with nothing down so what he did was he borrowed one and a half billion dollars bought the this business if the business did not work he did not put even one dollar of his own money the bank can just take the business he doesn't lose anything if it works it's his and both the businesses worked and then he prayed under debt now certainly that and and those the one and a half billion by was ten times the size of the company at that time so there's a company that has two hundred million in revenue it goes and buy the company that has two billion in revenue that's what happened with drain the border company there was ten times the size that they were at and they borrowed the whole thing and they borrowed it non-recourse where if the doesn't work it cannot affect them very very brilliantly done then the other thing I noticed with drain was that that when they put up incremental capital they want very high returns like they have a project going on right now where they are spending about seventy million some capex is going on it will increase earnings by forty five million you spend seventy million pre-tax you're getting for example a really good return on equity so anyway the bottom line is rain is another company that is got these things going on and you know market cap now is about 500 million 550 million the P it's only six times earnings unlike 30 times their return on equity and then you know since I invested it's thirty six percent annualized than two hundred forty eight percent overall so and then if we look at what has happened in their contest this contest only started three weeks ago so there's no data but mother/son is down about four percent and we are up about fifteen percent so the ship is going in the right direction but if we meet again I'll give you an update what's going on okay so the main thing I wanted to convey to you was that the interesting thing about investing businesses it is not only about finding great businesses of course it's good to find great businesses and in fact I believe rain actually is a great business it's just sort not known like that maybe in five or ten years the guy who runs brain will get a reputation like the mother-son guy maybe if and when that happens it be at 30 times earnings you know it'll get to that point and in the meantime you know where we own 110 to the business and we just sit on it you know let it ride and so those are the thoughts I wanted to share with you so we can open up for questions and if you just tell me whether you're a grad student undergrad student or if you're working in industry that'd be great so tell me your name and your question and we'll go from there it's very good talk since you compare the Great Pyrenees adding great investment the difference and you mentioned there Warren bought the coca-cola 1980 a and then upgrade written since to Tucson and then do you think it's a mistake he from 2000 to 2003 maybe you'd do the contest with the world into some say so Warren actually talked about the coke investment yes that's the wine yeah when he he actually talked about the coke investment in 99 2000 2001 and at that time right around 2000 he was very euphoric about coke if you go back and look at the Berkshire annual report they put all the meetings online no Buffett or cnbc.com if you go to the 2000 meeting and you hear the discussion on coke at that time from 88 to 2000 just gone straight up nothing else straight up forty-five times earnings doing really well and he was I think euphoric about coke and about three years later now he said you know for Berkshire it's a difficult decision to go in and out of stocks because they're so big and the moment he starts selling the price is gonna drop and all that he he mentioned that in hindsight it was probably a mistake not to sell okay but also you have to remember with Berkshire Hathaway they the math is different because they have so much cash like today they can't sell coke sell coke will go to Treasuries makes no sense but clearly in 2001-2002 it would have been a really good decision to move out of coke and at that time Berkshire did not have has much cash and they could have done something else with it but but Buffett also has a bias which is a good bias his bias is he wants to be a collector of great businesses and he doesn't want to time it so if you think about Berkshire Berkshires Bob investment now it is 31 years old 31 years since they bought it I don't think even for the next 25 or 30 years they will sell it this keep it and of course the returns in my opinion they may now get better because the multiple is lower it may be better for next 10 years the last 10 years but even the best investor Warren Buffett is going to make mistakes and him not selling coke in 2001 probably a mistake just the way it is but in the investing business you can be wrong for tea the time you still do very well so no problem next question thank you for a great talk and so I have two questions the first one is that do you think a great company is the precondition for the great investment the second question is that how did you predict the future growth of rail industry because in the past it didn't grow as much so I think for value investing we usually look at a company to have great performance before and they use how what is competitive advantage so to predict whether it can grow as well in the future for this company it didn't grow a lot in the past so how can you predict it will grow Lots in the future yeah I think that's a that's a very good question please have a seat in in this particular company in the case of rain the the company had taken some very bold steps they took a very bold step in 2000 I think in 2008 when they bought one business in the United States they borrowed about a billion dollars and they bought a business in the United States and what they did was at that time they borrowed high-yield debt which means they were paying about 11 or 12 percent interest but non recourse means if it didn't work they had no liability so they bought this business for 1 billion without putting any money from their side the entire 1 billion came from the bond issue so which means that if it works they have upside if it doesn't work they have no downside ok that 1 billion dollar purchase was 5 times the size of their business in India 5 times it was very significant event and because they have so much interest payment going on earnings are not really coming through on because it's paying on the interest but you could see that they took that that deal was a good deal then about three years later he bought a second business in Europe and again same thing he he borrowed 700 million for the second one but he did something smart he put all the debt on the first business support so if things didn't work the second business he would just own it he was still owned it so for an Indian company in India to convince Merrill Lynch goldman sachs etc to underwrite a bond issue of this time is not easy you know you just can't show up in New York and say hey give me a billion dollars but he was able to convince the bankers to give him the money which means the for the you know borrowing money is much harder than borrowing equity it's a lot more stringent so the first data point was that he was actually able to convince the bankers and they were actually able to raise the capital and buy the companies and what buffett says is that so there are two ways to look at the history of the business you can look at the stock chart that's one history the others look at the actual record what what the what is going on in the company and what had happened was the two businesses were very good but in 2015 the industry was going through a downturn and so their earnings were very very slim and I could see that their cyclicality in that business it goes up and down but we were at a low at a low point in that cyclicality it was hard to see that we would go below that so I said okay even at the low point they're still making money they're still ok if it changes it changes the Lord so what happened in the next three years from 2015 to 2018 is their earnings increased and what they did was they took the 11 percent debt refinanced it now the interest rate is five and a half so they took the debt interest rate to cut it in half and non-recourse and what I noticed is that every time the company will do some project some cap capital project they always execute really well they it all comes in on time they're doing well so initially when I bought the business in 2015 I just thought this is the cheap business I'll make five times my money and I'll sell and go I thought okay buy in 2015 but 2018-2019 make five times your money sell it and go on that's what my thought then as I understood about investing you will only learn the business after you own it you will not know the business when you analyze it when you become an owner that's when you so from 2015 onwards I really started to understand the business and the CEO of this business he's he does not want to meet investors he doesn't meet investors he just wants to run a business so after I think in 2017 I approached a company for the first time to meet them the CFO said I'll meet you the CEO he's not interested so I met the CFO that gave me some information was business then I told the CFO I'm coming again to Hyderabad can you ask Jagan if he will meet me so now they knew that I had held the stock for three years and I have not touched even one share it's just sitting there that position is sitting for three years so the CEO agrees to meet me okay and when he agrees to meet me I could see he's really not interested to meet he wants to be in his plant running his plan but in that meeting I think we have some connection we make some connection so then January of this year I told them I'm coming again he was excited to meet me okay so now I said okay good now we can actually meet sometimes and I was finally able to get into how his brain works you know like with mothers and sue me you have to understand the wait chance brain works like charm will wait for BMW to call he's not going to react until BMW calls so that's so any powerful part of the mode and we train I understood that juggen is a very good capital allocator he understands capital allocation really well he's going to be very careful where he puts his bets and he's architecting the business to become become better and better so I said okay this looks good and I don't think the I think the for the market to understand all this because he doesn't talk to them it may take five years it may take them a long time it's fine but we think of ourselves as owners of the business you know we owned one-tenth of that business and I think of myself as an owner I want to want that business for 10 years 15 years I just want to own that business sometime I'm gonna own that for 10-15 years the other thing that's happening in Mumbai with Suntech realty with efforts is that the whole city of Mumbai in the next maybe 30 or 40 years will get torn down and rebuilt because the land is very valuable and all the buildings are very to three-story so all of those will go away and become big powers like China right and so that tear down and rebuild they're only eight or nine players left in the whole city so Mumbai is expected to become one of the most densely populated cities in the world in 50 years it'll have what like 60 million people and that whole housing of 60 million will get torn down and rebuilt by 10 companies okay Suntech is one of those ten companies you just have to sit we just have to sit for a while and just watch the show and when they tear down and rebuild that that business is really good because you keep selling the apartments before the towers up you know people are put in deposits as the towers coming up so it's a really good business from from that perspective so anyway so the bottom line is that these were what I would call special situations where the business was there it was good but there was kind of a cloud on it so most people will not invest in businesses like that because they just can't see it but I think our job as investors is to peel the onion peel the onion and and the most exciting ones are ones where you find a great mode but no one else can see it yet you invest before people can see it yeah go ahead ah Tommy's looks like the MasterCard and the zantac so a good business but the owning difference there's a good business and great business so if you have 10 4 of money you have right now and would you change the selection when you're shooting the stock and that is means you have different risk of pass and that is also in terms of in term of you have the defining why the investment is could be different could be different would you change the philosophy if you have more money when you shooting the stock at then and first question and second question is a looks likely when you pick up the stocks not after long time in the stock show up a very good uptrend so would you see any significant symptoms or anything happened when you pick up the stocks I think I got you a question if I don't answer it you could we can try and do that we can try and do it again but the thing is so one of the reasons I made this presentation is because I have in the last 25 years as an investor not paid as much attention to great businesses as I should the best way to invest is to buy a great business it's gonna grow for a long time hopefully you can get it at a cheap price if you can get it a cheap price and you can hold for a long time that's the best way to go my initial framework was buy a business at 5060 percent discount it may not be that good but in three years that discount is gone it may be grown a little bit so you can maybe double or triple your money and you can sell it and we want the problem with that approach is that you have to keep finding new ones sometimes you make a mistake and a lot of tax a lot of tax gets made okay and so obviously if you can if you can find long runways of great businesses but so the way I'm the way I am wired is you know I I tell my friend guys fear that to me it appears that you have hung up your boots like you're retired you just want to own MasterCard and American Express and Berkshire Hathaway and don't not do anything it's fine you do pretty well I think my take is I can do better than those so I don't think I have the type of psychological makeup which will allow me to say oh it's enough money now we go into preservation mode mounish will probably never go into preservation mode mounish wants to pound and eat it out of the park that's what we want to try and do but but one of the things I'm trying to learn is I said can I find I don't want to invest in MasterCard on others and sue me there 30 analysts following it what am I going to know that they don't know okay all the story I told your MasterCard and Madison sue me everybody knows it Maotai everybody knows it now I all now tie chicken stock so awesome but the thing is that these are fully priced maybe Oh priced and so for me the key is can I find the hidden load and I think I think reign Industries is an example of a company that ten years from now people will think off differently now let's say in the next ten years something happens to the guy juggen the guy running it that would be serious problem there'll be a problem that is for MasterCard that's not a problem it doesn't matter what happens to the guy running MasterCard mascot we'll keep doing well but for Suntech and grain the person running it is quite critical today so I have more risk in terms of what happens to if something happens to the person so I have to watch that so if something happens to either of those two people I'm I have to get out because then I don't know what's going on in all bets are off because the bet is that this guy is a phenomenal operator even mothers and sue me if something happened to that guy ten years ago it wouldn't get marriages because he's got all the clarity and now today it probably doesn't matter because it is embedded in the company that this is how we operate and so I think that's the as I'm learning more about investing because this is a lifelong journey you definitely want to try to own good businesses great businesses but you want to do the work to invest in them when no one understands it that's really the key I know you're a big fan of Warren Buffett but it sounds like you your velocity is quite different or your practice is quite different than Warren Buffett so I have three questions the first one is about a rain industry it's very rich interesting you mentioned the hidden mode of the company but from my perspective I heard the LBO definitely it's a very phenomena leveraged buyout case here in ring but do you think it is the mode for the company because it is quite like one time or or three times but it's not a recurrent recurring of waiting thing a lot of the comics in traditional classical value investing you have to think about the recurring operating things like revenue or earnings but for MMA's it could be good at this time it's not it I write so let me I'll get to other two questions in a second but let me please have a seat but let me just go through rain in a little bit more detail so you understand it so a company has 200 million in revenue they do what I call a public LBO and by 2 billion of revenue with a lot of debt right 1.5 billion in debt they bought 2 billion in revenue ok what I liked about that normally I don't want that is that I start I spent a lot of time studying can the debt hurt them and the way it was structured the debt in the worst case scenario they just lose what they bought they didn't put any money in it they get back to where they are so they cannot go below where they are they can go above that's the first thing with any lvo you're right that you get a pop from the leverage but rain that's what I thought when I bought rain I said ok they're the leverage is there once this debt they can refi it they can do a few things they can get more equity you can get four or five times your money that's what my original thought but what I realized after owning it for two or three years was that the guy running it because I went back and talked to him so he's about 53 years old and I had a conversation with him about his journey from his early 20s so he went to Purdue University here in the US and most of his career he was very capital constrained he didn't have the money you know he's trying to do things they didn't have the money this which is why he borrowed all this to get this the assets they bought those are oligopoly assets there are only two or three players in the world who can provide those products so they are very critical if Alcoa wants to start an aluminum plant in the US they will not start the plant till they talk to rain rain has to tell them I can provide you the product only after that they will start the smelter so the products are unusual in the sense they are not commodity products they actually have a lot of long-term contracts and stuff the second thing I found out was that I saw him now allocate capital in an interesting meso rain allocated 140 million to two projects capital projects that will generate a hundred million a year pre-tax if I spend $14 on capital capex and after-tax I'm going to get $70 $7.00 a year a year I spent 14 and every year I get seven that is extremely good capital allocation so a company a company which only has a market cap of 200 million when I buy it is now able to add close to 80 or 100 million pre-tax on the reinvested capital and so if you run that engine for a few years the rain in 2019 produces 100 million of extra cash and they reinvest it they'll probably make 5060 million on that then 2020 they make hundred fifty million reinvested they probably make 100 million on that so if you're if you're reinvest in rates are like that I want to run this thing for ten years you know I want to see so in my opinion there's a chance that we will get to a company that maybe makes four or five hundred million a year where in 2015 the market cap was 200 million okay and so even if even if that doesn't happen because my buy price was so low and they have refined everything and all that it's hard to lose but let's go to your next question thank you fair enough yeah I think the two cases you have mentioned Sontag is quite similar to event-driven things like because of the the monetization in India helped Sontag their business and also about mother/son assuming you have mentioned because the suppliers or its clients needs needs to it is like all right it doesn't seem like it's very convincing that it has or it always had the cost because industry it's not a common so okay so just just to give you some intuition why listen to me auto parts manufacturing is a terrible business one of the worst businesses you can be in is auto parts you know why because BMW beaches there's beat you up over and over on your head to drop your margin drop your price drop everything and the other side the union beats you up okay so you get squeezed on both sides Union on one side and BMW on the other side both squeezing you okay and the number of Otto camp or two parts companies that go bankrupt every year is a very long list so so one thing to remember what business is businesses going to the graveyard continuously happening mothers and sue me is very powerful because it is a law of physics that ex auto parts companies will fail every year guaranteed okay and some of those that fail will cause of what BMW tries to do they want second source on everything they want second source right but what happens is that because these supply chains are so efficient so what happens is let's say I have mineral manufacturer and I have two mineral manufacturers the problem is the second guy doesn't have the capacity it's going to take him 18 months to come up with the capacity so we can you know think you could you still have a problem with your line yeah so you did second source you still have a problem so what I'm trying to say is that mother/son sue me for 25 years has non-stop been buying these businesses by phone calls from the auto companies in the next five years he will get more phone calls that is guaranteed to happen because it's such a lousy business and the people running these auto parts operations they get old it gets more difficult the guys made a lot of money he's not that that's why it takes the work I out puts a 35 year old was nothing you know and gets it going again so the thing is that the rebirth of these places is taking place so I would just say this that company's going to the Graveyard companies failing is guaranteed that's a great business to be in mother-son does really well because it rescues graveyard companies the rescue of graveyard companies is an incredible business okay so that's so I think what I'm saying what I'm saying it if you watch Madison in the future I think that they will continue their revenues margins profits will continue to grow I have no doubt about that okay I know that that's going to happen but go ahead with your next question when you are a strong as I BMW you have four or five at least suppliers yeah in the road so I told mother said so mother son has a number of plants in China given to them by BMW same thing it's not that it happened only in Europe it happened in China it happened in Eastern Europe it happened in Russia in India in Latin America there plants all over the world so even in China they got the call take the money take the plant please take it okay they got the call you know because the reason is it's it's very specialized autos you just get you know the thing is that the problem with auto manufacturing is everyone went to the Japanese model which is very very efficient supply chains you know the tire comes 15 minutes before it goes in the car right that supply chain is super super efficient anything off and it all goes in a so the thing is that once you have you start having some issues and many times the BMW can tell the issue is the guy running it is an idiot and BMW does want to buy that plan because they'll lose even more money if BM don't read run as they lose even more money okay so they need and the what mother/son gives them quick clothes mother son says I'll start tomorrow you know what I'm saying so then the trust the more the more they have would be BMW is the trust BMW knows I can wire him the money it's not going anywhere he's going to start and he showing me how many times he's done this in the past so according to me the the mother-son mode is just an incredible mode and that guy I mean I met that guy he's he's an unbelievable leader his people I can see his people they take a bullet for him you know the sign of an unusual guy oh he's a fantastic CEO you know I give you an example I was talking to him and I own a Fiat Chrysler I own the stock Fiat Chrysler so I was just telling her you know by the way I see you do business Fiat Christ I hope so Fiat Chrysler had an auto parts business called magneti marelli okay so Chan says to me he says you know Sergio Marchionne II I met him in Detroit and they wanted mother/son to take over all the magneti marelli India plants they wanted to have them take them over because they knew that if he runs it it'll run better but they wanted what they wanted was Fiat keeps 51% and he if 49% so Fiat has control so chant told the CEO of Fiat Chrysler let me tell you how this deal is going to get done the way this is going to get done is all those plants I will have 51% and you will have 49% so he's telling Fiat Chrysler the big guy you are going to be the minority partner I'm going to be in control Sophia Kaiser said we never do that so he said look here's list of ten companies you call them they will all give you the majority to you I'm the only guy who will not give it to you so I'm here for another five minutes you can either do it my way I leave Fiat did it his way they give him 51 percent which means they gave him full control okay and the reason is again because the trust is there right and he's I mean he's a good negotiator and he got the control because he said I don't want to deal with I don't need to I don't want to talk to Fiat bureaucracy for things I have to change you know I'm going to move and do my changes myself you know I don't need to talk to you guys and so they agreed so I think that the the mothers are more to the unusual mode I don't own the stock but it's very powerful in fact I don't know of any auto parts company in the world that I would say is a better business than mother Sansui I don't know if any this because it this is very unusual because you are part of you basically a part of BMW BMW no the god of my back pocket there's a problem call chance you know so next question all right the last one yeah I'll wait here I watched your presentation last year about the 10 accommodations Ten Commandment 10 commandments it's great but about this one question you don't like analyst teams to help you select how many teammates do you have your company well I pretty much operate myself so I don't be we have tons of funds we have Fahad and there who work on Tonto fund that's a separate business but no so the thing is Aubry funds I got this straight from Warren and Charlie yeah how many analysts is Charlie have zero Warren zero okay Warren has got the whole books I have to buy everything going on still zero analyst okay so actually we don't need an analyst why do we not need analyst I only need to find two or three stocks in a year I have enough time to find three stocks no problem you know to find three stocks why you need 10 people so you know what you do you know how you select you be a cloner i watch what Lilu does yeah but the thing is but the thing is you know you are going to send me an idea you are going to send me and I your best idea dear Mohnish this is really good yeah it is the very ability for you but my email address just so you all have it MP at pub refunds calm don't send me jokes okay please send me your best ideas okay I need ideas I have no team yeah I depend on you yeah just my question yeah my source is open source so the best you depend on the best part is now you know like I I just started buying a stock yesterday some guy in Canada said that god bless him green industries was sent by a guy in Vancouver okay I didn't know it so I went to an Cooper I said listen we make so many million dollars I need to buy you lunch at least let me pay for our lunch and so I met I make sure I buy him good lunch dim sum lunch in Vancouver and so I think almost last few ideas they all come from other people they are not well known you know you have to dig through and all that but then you know we we like those we like those that then they are not known and all that so there are 50,000 stocks in the world there are at least 3,000 of them that are severely under priced if not more I probably cannot understand most of those 3,000 I just need to understand three or four of them that's it so it's not a not very difficult so it's actually good not to have a team you're not forced to do anything if you send me idea I don't like it I just move it away it's okay no problem yeah exactly thank you okay yeah go ahead it seems that you really love small but good business and especially with mine is trading a cheap price and it I found that China has many small companies based in Hong Kong in stock market issues and many of them have management issues or management province so my question is how do you make sure that your company at the air management act on the act to maximize the shareholders value yeah so actually it's not true that I'm always buying small companies recently we we took a stake in micron they make memories the market cap of my chrome is more than 40 billion okay so we're not always buying small companies I mean Fiat Chrysler now I think the market cap is about 20 billion for example one of the things about capitalism is that many many small companies will never become big companies they will always stay small okay a very small number of companies actually have something unusual that will allow them to grow because capitalism is very brutal okay so like you said in Hong Kong these companies have issues the moment they have issues we are moving on so if the issue is with the people I'm definitely not interested so if you notice the Suntech and rein industries the people are very high quality okay I don't have governance issues or anything with the people there are very high quality people the businesses are you know it is it is possible now like I'll give you the example of Suntech the guy who is the promoter of sundeck he owns 68% of the company so if it has a 1 billion dollar value his family has 680 million in wealth in the company so one of the questions I have is he's in India 600 million there's a lot of money in India right it would be like 680 million in China so one of my questions is is this guy going to still keep working hard right because it's a lot of money right and I have to make the assessment and my assessment with him was yeah because I talked to him I said listen your company is a billion dollars do you have aspirations for it to be 10 billion he said yes I said what you gonna do with the money he's that I had not thought about that you know but he wants you to drive right he wants to drive now doesn't mean he'll get there but at least he needs to have some vicious to go there the same thing with with the bid rain I am convinced that he has zero interest in money I think rain the family owns 40% of about five hundred million so they have family has work 200 million today but they don't care about that they just want to keep going so yeah so I think I think it is true that a lot of small companies will never become big companies it is true that if if you have governance issues with the people I think you should just take a pass because I think that then you're playing uphill battle and such but as long as you can find the business economics are good and the people are good and the value is low then we can make something happen and the good thing with investing is there are so many stocks that one of my Commandments was to be unreasonable okay there's so many other stocks that if it's everything is not perfect just say no toss it go to the next one again say no toss it so keep tossing be a harsh grade and that'll generally work out well I think maybe one more question I think the Indian stock market is quite different from the US stock market right so I I guess my question is how do you see the key difference of doing value investing like between the Indian stock market and US stock market yeah yeah that's a great question so one of the one of the big differences is that when I invest in the US I probably never ever meet the investment never ever meet the people like you know we bought micron technology I've never met the people I've never met the company in India we will not invest unless we've really kicked the tires because one of the problems we have in India is we have a lot of fraud okay so in the u.s. I I lose money because I'm stupid but I'm not going to lose money because of fraud okay so I have actually met with companies in India which are total frauds I'm in the room meeting them and it's obvious the whole thing's a fraud you know once you start looking at what's going on so so far in India we have never lost money because of fraud and that's one of the things I want to protect against the second thing is that in India most of the companies they are majority promoter owned okay and so then one of the issues is that many of them don't think it's a public company they think it's their own company and the fact that they're public they ignore it sometimes that's a negative because they don't care about the outside shareholders and and such so I definitely want to want to make sure that the business that we're investing in the accounting is clean the auditor is correct the money is actually there the guy is honest and the person is provide you know governance best practices for the outside shareholders so all those things become relevant but the advantage of India has was the u.s. is a lot of companies are under followed or they are not well understood and so I can find more gap between price and value in the US what has happened is that we used to have eight thousand public companies about twenty-five years ago now that number is thirty six hundred so it went down from eight thousand thirty six hundred and the number of analysts and funds following those companies has skyrocketed so it's much harder to find value gaps in the u.s. versus India so you have to adjust so you have to adjust the tool set and I think probably similar adjustments in India in China as well because you've got to make sure that the baseline is set where you're you're not looking at a fraudulent company it's a real business and the people are high quality and so on so thank you very much for your time and I hope you have a great time in Omaha I know you will enjoy that a lot it's wonderful and I think Peking University is giving you a tremendous education and high mallya capital you know give them our applause thank you for for helping sponsor your trip and so on so thank you okay [Music] [Applause] on three one three o'clock and then hold your hand okay on three [Applause] [Music] you [Music]

Channel: Mohnish Pabrai

Views: 106,601

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Id: Kax8XnBU1ik

Length: 91min 32sec (5492 seconds)

Published: Fri Jun 14 2019