Mohnish Pabrai’s Q&A with members of The Babson College Fund (Babson College Students)– Feb 9, 2021

[Music] [Music] [Music] good evening everyone my name is patrick gregory i'm the managing director of the cutler center for investments in finance and the director of the babson college fund it's my pleasure to introduce tonight's speaker monis investment funds which has more than 500 million in assets under management and invests in public equities using a focused value approach with this approach his fund has delivered annualized returns of 12 since inception in 1999 versus 8 percent for the nasdaq index monish has been profiled on forbes and barons appeared frequently on cnn cnbc and bloomberg tv and is the author of two books on value investing those are the dundo investor and mosaic perspectives on investing we expect tonight's discussion to last approximately 60 minutes he's going to be interviewed by annae gawande who is an undergraduate student and one of the sector managers in the babson college fund and they will spend the first 20 to 30 minutes on prepared questions and then open it up to the audience for q a i should note that recently a 30-minute zoom call with monash raised six thousand excuse me seven thousand six hundred dollars on ebay for the dakshana foundation which he founded for gifted but underprivileged children put differently the next hour is valued at just over fifteen thousand dollars we're certainly in for a treat and grateful to mr preprice for taking the time to speak with us this with that i'll turn it over to an a thank you for that patrick so just to kick things off monish value as a style class has been underperforming growth for several years how has this changed your investment philosophy and can you expand on the idea of compounders that you started to talk about and how do you go about looking for those so uh anyway it's a pleasure and honor to be here and just before i answer your questions i just want to state that babson is a very unique place in the universe and its focus on entrepreneurship is one of the reasons why it's so unique so generally speaking in business schools entrepreneurship is a neglected area and it's a neglected area because generally business school professors will generally find it hard to get consulting assignments if they specialize in entrepreneurship if you're a business school professor you specialize in branding or leadership or organizational development or marketing you will have a lush consulting career on the side but if you specialize in entrepreneurship us entrepreneurs are too cheap and scruffy to engage b-school professors to tell us what to do because we also think we know what to do so basically it ends up that most and also the other the other thing is that to teach the subject well you would have needed to be a practitioner and generally speaking the entrepreneurs usually don't have the phds and the credentials so you know they would have a harder time with tenure tenure and you know getting appointments and so on so for a multitude of reasons basically entrepreneurship gets ignored and i think that it is the engine that drives it drives everything it's the engine that created these united states made us one of the richest large countries in the world and the most powerful nation in the world so at the core of all of that is an entrepreneur with an impossible dream that he's chasing he or she is chasing so anyway after more than two decades babson finally called i was ready for the call so thank you anyway i think that your first question if i can still remember it you know value and growth are two sides of the same coin you cannot really separate them and you cannot say for example value has underperformed and growth has done well any business is worth the sum of all the future cash it's going to produce from now till judgment day discounted to a present value and so if a business is growing ten percent a year growing fifteen plus fifteen percent a year growing fifty percent a year or declining five percent a year all of them have future cash flows coming out which drive the result in terms of what that business is worth and if we are paying less than those discounted cash flows meaningfully less than those discounted cash flows then we are engaging in value investing and i think that is timeless if we are willing to pay anything for those future cash flows then usually that has led to not such good results in the long term and so some of the things that we are seeing currently in the markets are frothy and some of the things you know eventually we will find out who's been swimming naked when the tide goes out so that will become apparent but i'll just give you an example in early 2000 i visited uh microsoft headquarters in uh in redmond and one of my in early investors the funds were just about a few months old then he had said to me hey listen uh he was he was very early employee at microsoft done well at risen and that one he said look if you ever find yourself in seattle i could probably introduce you to some current and former microsoft employees who might have an interest in your fund so i said what a coincidence i'm going to be that day after tomorrow and so he said oh that's great so i spent a day where he took me to different offices in microsoft and i met with a bunch of current and former employees and you know when i was uh you know suggesting that for iphones maybe a place they they could put some money most of them had almost all of their assets in microsoft in stock and options and of course their paychecks came from the company and microsoft in 2000 when i looked at it it was a very successful company but was very overvalued so i told them look i don't think it's a good idea to have this much exposure to microsoft because i think quite frankly the future results aren't going to be that great so their their perspective and their response to me was that one if you really don't understand technology well and you don't understand our company well uh we have done nothing but go straight up for 24 years and that's all we've always done the stock always does well and uh it will continue to do well so i said well you know the math is against you because you're producing less than 10 billion a year in cash flow and your stock is valued at 600 billion you know probably the second most valuable company on the planet or something at the time and i just said that unless those cash flows go up quite dramatically it's just not going to be worth that money and it turned out that right from 2000 till about 20 or 2016 or so microsoft was a terrible company to own even though the business did really well so the company did well the business did well but the stock was just too overvalued and so even though cash flows were higher in years after 2000 it just wasn't enough to keep that so in fact at one point you had a 70 80 drop in market cap so it was a it was a rough ride and cisco had the same issue and so these were not you know these are not fly by night patch.com type businesses which had no business model and we see some of that today where there are companies where the valuations look quite extreme i haven't studied them in detail but if you were to do these future cash flow calculations so if you take a company like let's say snowflake i mean i would love to see the future cash flow calculations on snowflake for the next 20 years and that would just give you the answer whether it's overvalued or not so value and growth are the same one in the same joined at the hip and it's all about buying those future cash flows and well below what they're worth thanks for that money and i guess moving on to the second question you spoke about how microsoft's market cap at one point five sixty seventy percent there was a similar story where your fund lost sixty five to seventy percent in the great financial crisis i think as a young investor what i want to know is you know how do you maintain your conviction your so-called intestinal fortitude and continue to remain to hold when you know things aren't working out for you yeah well that's a good question so i think that in uh in general if you are going to be a participant in auction driven markets you have to understand that these markets overshoot and undershoot all the time and so there are times when markets get euphoric and there are times the market gets pessimistic i think like charlie munger says that three times in his life so far berkshire has dropped 50 or more from the previous high and he just considers that like kind of power for the course so at the time in uh 0809 when we lost two-thirds of value the intrinsic value was a lot higher and uh so one has to have the right framework in those times and uh i mean so let me take a step back so if you look at any stock on the new york stock exchange on nasdaq and just look at the 52-week range on that stock you will find like something is traded from 50 to 100 in the last 12 months and currently valued at 80 or something or 40 to 90 and currently valued at 85 or something so the the thing is that uh you'll almost always across all these stocks see like a 100 percent delta between the the high and low price in a 12 month period and these are not 12 month periods with a stretch like you could go back and look at any 12-month period you could look in 2008 or you could look at 2007 or 2006 so to 2015 you will find the same phenomena so auction-driven markets causes this attenuation because prices are set in the near term by people voting with their by buying and selling their shares and in the long run they get weighed appropriately they get weight based on what they're worth so in 2008 and 09 when we were down two-thirds our funds were very undervalued in nine months i think in the year in 2009 we were up i think the funds were up over 110 for example so it's not like those businesses did a lot better it's that we were sitting very undervalued at that point and i think for the next few years the funds did very well so i think that if you're going to participate in auction-driven markets you have to understand volatility is is part and parcel of that so there are a few rules on that front the first rule is not to be leveraged so leverage becomes lethal when you are going to have large drawdowns because then your broker is going to tap you on the shoulder and ask you to send more cash just as the moment you happen to be short of cash and that's not a good situation to be in so first is avoid leverage at all times and the second is that you know i always remember this old saying if wealth is lost nothing is lost and if health is lost something is lost and if character is lost everything is lost so we are only talking about a temporary loss of wealth so it has never bothered me when my portfolio has dropped a lot or the funds are down a lot because in general those very times when that is happening generally tend to be very orgasmic periods in terms of opportunities to invest in so i'm more interested in hey this is a good time to improve my portfolio can i get rid of a lesser quality business and maybe a better quality business because when everything's being thrown out they're getting thrown out in different ways and so some things get more deeply undervalued than others and so you can do some reshuffling i mean like in 2008 09 commodity prices and commodity stocks got crushed i mean they just went to numbers that made no sense and it was happening at such a furious place that i created a basket of commodity bets i mean companies in the commodities area and i just kept putting two percent into each bet because i didn't have that much time to really drill down on the businesses and uh so we had like seven or eight different commodity bets not one of them did not work i mean every single one of them was at least a double in a relatively short period of time and some of them went up seven eight times so they went up a lot so it was just a great time so i think that's uh that's just par for the course with auction driven markets you're gonna have uh volatility and you should just be comfortable with that that totally makes sense and i think to expand on your point um you're very famously known to run a very concentrated portfolio i'm wondering if you can you know lend some insight into how you think about structuring your portfolio and some of the other portfolio management related issues that a portfolio manager may face yeah so i think i think you should think of yourself not as a investor but more as a partner in in a business i think that's a a better way of looking at the business so you might say you might own like you know 0.1 or 0.01 of the company but you should think of yourself as a co-owner of the business and so once you kind of take an approach where you think of yourself as the owner of a company when you look at entrepreneurs and you look at you know great entrepreneurs like sam bolton or steve jobs or bill gates any of them one thing you'll notice is that in in general they are extremely non-diversified so when they are building their businesses sometimes 99 of their wealth is in a single business many times that single business is privately held illiquid cannot be sold etc you know some couple that own the chinese restaurant for example you know they may have everything in in that business and they're not diversified they're just all in on so we as investors have a better kind of play of a set of hands to play than the typical entrepreneur so the entrepreneur is almost naturally driven towards extreme concentration right 90 plus percent of assets in one particular business charlie munger and warren buffett both believe you know buffett says that if you understand a few businesses well it is madness to put any money in your 25th best or your 30th best idea and charlie munger would be more direct and he would say that there's no need to have a portfolio of even more than five stocks so his perspective is a three stock portfolio is more than enough so in my personal accounts or my iras and things like that i rarely have more than two or three stocks sometimes i just have one stock my highest conviction idea in public funds because it's opm other people's money i have told my investors that i won't put more than 10 at cost into a single idea so i stick to that but it has happened in the past that we've had a single position or two positions become 60 70 of the portfolio and because they've gone up so much and such and at those times i've been reluctant to cut them back so i don't think you need to have too many positions i definitely think that it it is very hard to outperform the index if you have a 20 stock portfolio with five percent going in at the max in any company and that sort of thing i think you should if you understand a bunch of businesses there are clearly a set of businesses that you understand extremely well and there's a difference between the ones you transition extremely well and not so well and then also kind of there's a convergence between a business that you understand really well and that particular business being very undervalued then you need to step up to the plate or like buffett says that when it's raining gold don't put out a thimble put out a bucket that's certainly helpful and i'll ask my last question before we open it up for q and a when you build a checklist to screen for new companies and now as you start looking for long-term compounders what are you looking for in other words in the story of arjuna when he aims for the fish's eye what is that center of what is that one piece that every company you look at has to have yeah so actually that's a great question because i went through a significant change on my thinking last year on that so for most of my career as a professional investor i took the approach of trying to buy a dollar bill for 40 or 50 cents or less and sell it for 90 cents or a dollar kind of capture that arbitrage and hopefully if the intrinsic value went up in that period then it could be more than a 2x or if i bought it at like for example 20 cents on a dollar it could be a 405x like in the during the financial crisis you know those commodity plays were pennies on the dollar they were very cheap the change in thinking i went through last year was to switch from looking at these undervalued businesses to looking at great compounders and the one difference is that i've made many investments in the past in great compounders but the problem was that they would get to full price or maybe even get to a little bit overpriced and i would see it as as risky to keep holding and i'd want to go put it into some other investment of course the the negative with that is that in taxable accounts it's tax inefficient and in great states like massachusetts and california we have even more extreme results because of all the of the high state income taxes so so it's very tax inefficient if you are in taxable accounts and the second is that if you can identify businesses with very long runways that you can buy even at small discounts for intrinsic value it may not be 50 off and then you are right on the runways and the long term uh value creation then those can turn into 10 baggers or 100 baggers and in those scenarios just a couple of positions can make a big difference so i'll give you an example you know in the in the late 60s early 70s there was this notion of the nifty 50 which was that you identified these 50 great businesses which were quite richly valued at the time but they had great future prospects and the thinking was just buy this basket of these 50 businesses don't worry about the price and everything will take care of stuff and so this basket included things like mcdonald's coca-cola it had um you know polaroid xerox kodak so they were these were some you know i mean if you look at a company like mcdonald's in 1970 i mean you could not see the end of that runway i mean just such a huge massive runway and even now it's growing you know it's been 50 years since then and it's growing coke is still growing and so on but the end result of that nifty 50 wasn't great because some of these companies were trading at 70 80 100 times earnings and first of all you had to crash in 73 74 which really i mean 73 zero combined the market lost like two thirds of value so these companies just got crushed so first of all if you had strong intestinal fortitude and you know you saw your portfolio go down 75 and you decided i'm well it's not a big deal i'll keep holding even after that the pain wasn't over because they were just so overvalued but there's a small ignored footnote in the nifty 50. there's a controversy whether walmart was in the nifty 50 or not so walmart had come public in 1970. if you put walmart in the nifty 50 and you put 2 percent into walmart and you run the numbers the nifty 50 beats all the indices by a mile okay so it does really well if you take out walmart it performs terribly okay and walmart is in there at just two percent weightage at the beginning so one business one business at two percent weightage causes this because walmart in 1970 when they had come public i mean the market cap was less than 30 40 million it was very small business at the time and look at the runway you know it's a 50-year runway it's still going and so one of the things that took me a long time to figure out actually learned this long time ago is if you are like if i have a portfolio of 10 stocks carefully picked and they're all compounders with long runways and they aren't bought at ridiculous valuations etc like the nifty 50 was you may not need more than one or two of those to have a good run as long as the rest of them don't cause you too much heartburn so it is a given that when you make 10 bets at least four of them are not going to work the way you think they are so predicting the future of businesses is not a easy thing to do but even if you have a 40 error rate in the case of the nifty 50 you had a 98 error rate and you still did well if you were right on the two percent right so that's something to keep in mind and the other thing is that when you think of yourself as an owner of a business because that's the mindset you have to because the only way you'll be able to keep no one other than the walton family has kept walmart stock from 1970 till now or even 1980 till now or even 1990 till now and why is that you know is it not obvious it's a great business is it not obvious that it has you know very strong ethics and moat and all of that you know there's a lot of things very obvious about about sam walton and walmart so just to give you uh and a little bit of example there is i made an i made an investment in uh before my enlightenment of 2020. i made an investment in 2019 in this company in turkey in istanbul and when i made the investment the market cap of this company was 19 million dollars one nine and uh the best that i could tell the liquidation value of the business because they they were 12 million square feet of warehouses they have got the the largest freight operations network the largest truck fleet in turkey and so on there were a bunch of businesses liquidation value was at least around uh 500 million dollars or so and that wasn't even the best part the people who ran the business were exceptional capital allocators so i was buying a business you know probably less than five cents on the dollar you know the kind of opposite of the nifty 50 you can say and um so i said okay this is great you know we'll hold this for a while and and i was lucky i think that because turkey has got so much trading volume the average holding period for most of the retail investors is a few hours or a few days they've got very high stock volumes and buffett has another quote that the stock market is a mechanism to transfer wealth from the active to the inactive and so my funds own one-third of this company now and we bought the one-third for about seven million dollars a little less than seven million it's gone up about seven or eight times in the last let's say 20 months or so but when i look forward maybe 10 or 20 years and i say okay you know the intrinsic value is 500 million what do i think this father-son team that runs it can do in terms of growing intrinsic value so i'm thinking you know probably on a bad day they probably triple it in 10 years or something or maybe they might even do more than that so it might it might be worth maybe a billion and a half or something in 20 30 maybe 10 you know 3x from where it is so what do i need to do i just need to be really good at sitting on my ass and nothing else the main challenge that i have is to just spend all my time talking to students at babson for the next 10 or 15 years and let the father to sun team so they they own like 40 odd percent of the company i'm their you know idiot passive minority investor and uh happily cheering them on from the sidelines and their son is very young he's about 35 so i think this could have been a three or four decade runway so my first stop on this business will be in 2030 to look like rip and rip van winkle wake up and say oh where are we at oh we had a billion and a half market cap okay that sounds good and uh are they still kicking ass yeah they're still kicking ass okay let me go to sleep for another 10 years and uh we'll wake up and see what's going on after that so this company was one and a half percent of our assets when we invested right and the other 90 and a half 98.5 is not exactly slouches you know it wasn't invested in kodak at 100 times earnings i think those other bets have some legs as well and so my the number one skill you need to do well as an investor is extreme patience so if you are the kind of person who loves to watch paint dry this is the business for you if you get really excited about watching a white wall drying this is just perfect for you thank you for that i love that story and i'm going to invite everyone in the class to raise their virtual hands and i'll call on i'll call on to you to unmute and ask a question to okay we got manny and then we'll follow that with shasha and john hi monish thank you for taking the time to come speak with us today i was just curious to see your opinion on the current macro state of the global economy we have around 14 trillion negative yielding sovereign debt you know equity markets are all-time highs in terms of pe ratios on average indices do you think that we're going to see a significant correction what are your views on current valuations and how are you personally handling this with your funds okay yeah so 99 of what goes on on this planet i do not understand most of what you said just now went way above my head you know so my little brain can only handle little things it cannot handle these big thoughts like you know what's going to happen with the federal reserve balance sheet and what's going to happen with all our debt and what's going to happen with all these strange things going on around the world the at the end of the day what mattered for walmart was sam walton and his principals and his work ethic and his team that's what drove the end result for walmart so if you look at walmart from 1970 to now you know right as they got going they had the oil shock they had the impeachment of a president they had sky high interest rates you know price controls huge lines at gas stations and then we had all these you know we had the vietnam war and then we had the gulf war and we've got this endless afghanistan war and iraq and so on so there's endless stuff going on all around the world but through all of that walmart did just fine and through all of that in the last 27 years mr bezos did just fine right so i think the the important thing i think for investors is to focus on the micro don't focus on the macro try to understand certain businesses that you think are understandable and try to get a sense of where those businesses are headed and if you have a very high degree of conviction about where those businesses are headed so like for example when i went to turkey in july of 2019 the macro scene was like this they thought the currency was going to implode okay foreigners were pulling their money out and mass from the turkish market like there's all these fund managers saying turkey is done leadership is questionable currency is going to uh go bananas they've got weird fiscal policies all of that and i'm going in as the theater is empty you know there's a fire in the theater and everyone's exiting through all the exits and i'm going into this burning theater right and my take was that okay so we have this 12 million square feet of warehouses and we're going to convert dollars into a certain ownership stake of those warehouses we don't really care whether it was for three days in turkish lira before it went into the warehouses because now my stake is certain ownership of those warehouses what the currency is is irrelevant those warehouses have enduring value and their leases were you know indexed to inflation and all of that they were 100 percent leased and they were leased to amazon and carrefour and ikea and all these companies so my take was that i'm buying the warehouses for one year's rent okay i'm paying three dollars a square foot to buy the the warehouses the rent is three dollars a square foot okay so you know you're giving me it's like going and buying some apartment building in in la where i can buy for one year's rent you know who's crazy to give that to me nobody but they were giving it to me in istanbul in 2019 and so i couldn't care less what was going to happen to the lira i said the lyra can do whatever it wants it's irrelevant so we went in we didn't care what happened to the lira the leader went down 40 within six months after i invested okay didn't matter because in dollar terms we're up 7x in lira terms we're up like 12x but who cares because those the cement prices if the lira goes down dramatically cement prices are going to go up and if cement prices go up the cost to make a new warehouse goes up quite dramatically which means the cost of the existing warehouse goes up so i said it's not going to matter none of this is going to matter so the thing is forget all the macro mumbo jumbo whatever else is happening and all this you know noise with bitcoin and you know the the shorting of jamestop and all that this is all just to get the popcorn with a lot of butter and just watch the show that's all you want to do watch the show and then the real stuff is elsewhere where no one's paying attention and something's just being ignored and whatever else thanks sasha you can ask your question yeah well thank you so much again for the time to speak with us i'm ashamed i'm a graduating senior uh my question is kind of similar to i guess in his question um i guess i'm just more focused on your whole process it sounds like you know investment stocks medically internationally across all asset groups of possible industries like that's a huge basket of options and how do you even like narrow it down to smaller now that all of them will come from one but like i find it really hard to just narrow narrow everything down so like what is the screening process and how does that how did yeah so uh both approaches are valid so if you take a very narrow view of the world and you say that okay i understand a certain few things so i'll give you the example uh charlie munger has a very good friend john ariega he's a billionaire and he only invests in real estate within two miles of the stanford campus right i mean that's all he's ever done in his whole life if you went to john rieger and said hey we've got this uh strip mall in sacramento he wouldn't even let you finish the sentence he'd say i'm not interested and he said no no it's really cheap or if i went to him said listen john i got this this warehouse is in turkey i would not be able to finish the sentence okay he's not interested okay and that's fine because when people come to him with stanford real estate around the campus who knows it better than him nobody else knows him better than i mean if you walk down the street with him he can just point to buildings and tell you exactly what the rent is exactly what the value is exactly where the cash flows are i mean he has it wired and so when things get euphoric he exits his portfolio and then when things get you know very pessimistic he buys it all back and he's done that several times in his career and he's done really well so to do well as an investor you do not need you do not need a large circle of competence what is most important is to stay within the circle right so it doesn't matter how much you understand but it's important to understand the boundaries of what you understand and to stay within those boundaries what i was finding is i was finding that when i'm looking at things in the u.s i was just not able to find things that looked undervalued i just couldn't and i'm talking about before corporate in 2018 2019 i was finding it so what i did is i over the years these people have contacted me like for example there's a very good investor in korea and it's very clear from the interaction we had that he's extremely well trained and deeply worse in the gram buffett monger way of thinking and what he invests in korea is just you know those deep value things so i told him hey david listen uh would you mind if i came to seoul and we spent a few days just visiting all the companies in your portfolio and he said oh man it should be a fun fun experience to hang out and uh so i said okay so i made several trips to seoul where i just went through the businesses that here and because it's already pre-selected right already been through one set of filters with him i could clearly see how he thinks and so i say okay and then similarly in turkey my man in turkey god bless him i did the same thing with him okay i just said hey listen can we just hang out in istanbul i hear the tea is great i heard that here the turkish coffee and the baklava is great and in between those we'll go meet a few companies and he said oh yeah that's great we did that now i had to do some tweaks because these guys in these places they tend to be more heavily graham than monger which means that they are much more focused on these deeply valued businesses versus the compounders right so i'm more interested in the compounders but i still wanted to just see what they had what i did is i tried to educate them about moving from the deep value to the compound because these are very cheap markets korea is a very cheap market turkey is a super cheap market and was even cheaper in 2019 i mean you could buy the coke bottler in turkey for i don't know seven times earnings okay you cannot buy a coke partner in the united states for seven times earnings coca-cola company owns a stake in that business in turkey okay there's nothing wrong with it it's it's similar to the bottler here it's got it's in fact it's got better economics because it's got higher growth than we have over here so there are lots of great businesses like that and uh what i was able to do is in in a few geographies using these friends of monish i was able to expand my circle a little bit right because i was able to because i could rely on them i said look are they honest what's the local kind of know-how on these people and you know the auditor and that sort of thing so you know just the the things that would take me a much longer time to figure out was easier because they had done a lot of the work already so but i would say that you don't need to try to figure out the whole world just focus on what you easily understand and one of the things that you most easily understand are the things are the products and services that you use so if you use amazon that's a starting point just trying to understand that company you know if you're you know a fan of peloton that's a starting point to understanding that company so i would say that the starting point should be maybe companies that you have some familiarity with and then then from there you go through and try to understand how does the company make money and what are the runway what's the growth prospects is it at a great price or not and so on and so that money john mcdowell you're next and then if we have time george and matt yeah monique great to have you here i was wondering when you say you're say you're looking at a new market do you look up top at the total addressable market it's something that's just growing by leaps and bounds and then try to narrow down that funnel and find investments in that space because obviously with coronavirus and the pandemic we've had so many structural changes in the economy where 10 years of change have happened overnight the biggest one i'm looking at is connected tv you've got 60 billion dollars worth of advertising still going to old school cable tv only 7 billion going to streaming but the eyeballs are over here on streaming and the ad dollars just haven't caught up so i'm hugely bullish on that space i want to get your thoughts on some structural changes you've seen in the coronavirus and looking did you look at those sectors and then narrow it down to find investments in them as a result of the pandemic yeah that's a good question usually i i go bottoms up i usually don't go top down because i'm much more interested in how a business would work i mean i i'm not saying that your approach has any flaws in it it's perfectly fine there's 100 ways to get to mecca they're all they're all fine i personally have just got more comfort looking at a particular business and first asking myself okay is this something i understand right that's my first question i asked and then if i can say yes i think i understand this then i say okay what's it worth you know because if you understand it then you'll be able to figure out what it's worth so i would say that when you look at ad dollars for example and you look at the you know universal ad dollars if you looked at some streaming play or you know some digital play where the ad dollars are changing i mean i would say that like let's say if we look at a business like twitter right i haven't spent much time looking at twitter i do recognize it's a very powerful platform and i also recognize that they probably have the ability to monetize way more than they are doing today in fact they used to not monetize at all right and google is the same way where there's so many things that they give away for free or so many things where they don't really even try to monetize when you start to kind of tweak those and say okay if i'm running this business and i i don't want to you know kill the goose that's playing the golden eggs but can i get more eggs out of this goose in most cases the answer is yes big time i mean even the other day i saw a notice on my netflix which i said oh by the way we're now going to 17.99 a month okay and uh warm regards right and uh they can go from 1799 to 1999 to 22.99 and i don't think that disconnect rates are going to be anything near the percentage increase that they're so if they bump up prices by 15 for example which is i think approximately what they were doing on that last go around i don't think the disconnects are going to be 15 i think netflix is like an iv drip we all need it i mean how are you gonna you know breathe with our netflix you know so and and they've they've known that they've undervalued and i mean i used to think oh 10 bucks we get all this stuff for 10 bucks this is so awesome and yeah he was just getting us addicted and uh over time that's going to be bumping up you know so yeah so i think both approaches are valid and i think if you you can start with a high-level construct but i think you got to get down to an individual business and then figure out the individual business and take it from there thank you and one last question manish what is your best pick right now what what is your 100 or 95 conviction pick we haven't heard that one yet uh i will duck that question oh come on this is a stock picking stock pickers here right the problem is that there's only downside for me there's no upside for me so one is i do not want to give you guys any names because one of the things is that i i got even the turkish bet could go to zero okay there are weird things that happen in the world so i cannot have babson students lose money on something i tell you so that's just a bad thing bad outcome to begin with and uh the second is that it's a really bad idea to buy something when someone else tells you about it that's you know in general the starting point is bad but i would say this that if you were a know-nothing investor and just getting going then you know dollar cost average s p index over time the important thing about getting wealthy is just two things you don't need to so you know there are three variables that drive the long-term creation of wealth three variables okay so one is the amount of capital right how much money are you putting into the into the pot the second is the length of the runway how much time do you have and then the third is the rate of return right so these are the three variables now the thing is that if for most of you because you are so young the good news is and i think most of you may live past 100 because of the way healthcare is going so the thing is your runway is like 70 80 years or more so you have a really long runway okay now the second variable which is the money you put in so my daughter my younger daughter went to nyu despite my best advice neither of them went to babson such as life you know dad you can only point the horse to the water you can't make them drink so anyway she was at nyu and then you know she'd come back on these late night flights to california and uh one time when she was i think uh 18 and she had just finished working in the summer and she had made five thousand dollars so i told her listen it's five thousand dollars uh can we open like a roth ira and she said yeah that's fine and i said you know can you um give me power of returning to manage that account and uh she said yeah sure no problem okay so i said look uh let's say i'm able to compound that five thousand at fifteen 15 a year right let's say so there's something known the rule of 72 which means that you do 70 to divide by 15 which is approximately five so at 15 your money will double every five years life is all about the number of doubles so i told her listen you're i told momachi you're 18 now what would this 5000 be worth when you are 68 years old if i'm compounding at 15 and doubling every five years and you know i think two in the morning she's like falling asleep and whatever so i said that it's uh five million dollars okay so now she's wide awake she says how did that happen i said well you know one double which means when you're 23 it's 10 000. and then you're 28 it's 20 000. and in your 33 it's 40 000. so it's doubling so 10 doubles which is what 50 years is is 2 to the power of 10. 2 to the power 10 is 1024 so let's throw away the 24 because i cannot handle complicated math so we have 1 000 so you have 5 000 times 1 000 add three zeros and that's five million okay so and uncle sam doesn't get any of it ever awesome okay so and i said then you know when you're 19 and you do another summer job and how much will that be when you're 69 and she said 5 million i said oh that's great so now we have 10 million okay and then i said at some point you will graduate and be able to save more than 5 000 a year so at 22 you know you might get a job 70 80 000 or whatever and you might save maybe 10 000 in a year or something and in your late 20s you might be making 200 000 so i said what is the total of all these numbers she said my head would explode if i could figure that out okay and the the numbers become mind-boggling right and does it take superhuman amounts of saving no you can even reduce the compounding rate so if i take the 15 down to 10 and i increase the period to seven years it's the same thing it doubles every seven years 72 divided by 10 right so seven years so if your runway so instead of a 50 year runway for the 70 year runway the end result would be the same so the the bottom line is we don't need great stock picks that's not where the game's at because if i give you one stock pick it'll run out of steam in two or three years then what are you gonna do i won't be i won't be anywhere to be found okay and uh then you'll be wondering hey where do i get my next stock pick you know so forget all that put it in the s p you'll own apple and amazon and all these other great businesses which is just fine and set it and forget it and that's it you're done and the more important thing than which stock is your savings rate there's a guy called mr money mustache raise your hand if you heard of mr money mustache nobody has heard of mr money mustache oh one one person one enlightened person who's a major ardent are you a fan of mr money mustache i love mr money so can you please can you please invite mr money mustache to speak to you guys okay tell him i told you to get him over anyway so mr money mustache was a software engineer okay so now he has a blog and he's got you know big following and whatever but when he was a software engineer and he graduated at 22. he and i'm sorry i'm going over i know but but hopefully that's uh that's okay we'll be done in a few minutes um i hope that's okay so anyway so when he was graduating with his computer science degree he knew that the gods were not so benevolent to land him at snowflake and then he just rides that coattail into becoming a billionaire he knew that that was not what was going to happen to him so he figured out he said he assumed that when he graduated he would get a generic programming job somewhere and playing a generic salary with a generic basic bonus living a very generic life and his goal was that when he turned 30 that he would be financially independent and he would no longer be working that was his goal when he graduated so he said i've got eight years i'm not going to be making high incomes and i don't need a great amount of you know comfort and such i'm so for example mr money mustache would not be caught dead in a starbucks okay i mean four dollars for a latte that's not happening for him i mean he would just you know he would choke if that ever for him it's like more like five or ten cents max for beverages in a day okay so and the thing is like you know people graduate and they tell you okay spend one third of your income on housing and all that stuff that's only for the the mass uneducated majority so he [Music] if you go to his web his blog you will understand what frugality means okay like he lives on like eight thousand or ten thousand dollars a year a new car not in three generations would he ever buy a new car okay a three-year-old car no and so like now he's in the woods of colorado somewhere so he retired at 30. he made a lot of money he retired because he had no expenses and he's a carpenter on the side so he built himself his own wood shack in somewhere in the middle of nowhere in colorado and lo and behold in his 20s he won he he met mrs money mustache okay mrs money mustache is even more dedicated than him she's even more frugal than he is so it's very important that if you're gonna be mr money mustache that you find mrs money mustache okay so now the two of them completely financially independent quit their jobs he bikes everywhere for everything and i think his annual consumption of gas is like maybe 15 gallons a year okay like one tank a year so to get really wealthy the important things that you can control because the things that we can't control we can control our savings rate okay we may not be able to control our income we can control our savings rate you can also control the runway because you can just assume i'm giving you an 80-year runway you know the gods have told me to give it to you so i'm just giving it to you just a very generous guy so you've got the 80-year runway you've got the high savings rate we don't know the rate of return but it doesn't matter because mr money mustache got it done in eight years and he's quite happy so anyway you can visit his blog and then you might not get any useful work done for a while but that's okay so thank you very much it was a pleasure to hang out with all of you thanks again monique so much and we really appreciate you know the flexibility isn't the time to go over we're really privileged to hear from you and we you know hope that you come every everyday accident give a similar talk to our students it would always be a pleasure to do that it's wonderful thank you very much thanks manish [Music] you

Channel: Mohnish Pabrai

Views: 20,529

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Id: Brt_KOcPrUE

Length: 57min 59sec (3479 seconds)

Published: Thu Feb 25 2021