[Music] Oh Manisha as always thank you so much my credibly grateful I think this is incredibly great thank you yeah one thing one thing first of all I'm excited to be here I think is this the seventh year is it torment yes yeah so first of all Excel it's a it's a pleasure to be with everyone and thank you for for taking the time and I hope this is this is worthwhile I haven't I haven't exactly given this talk in this format before so some of it I'm you know I guess you will be the first time recipients if you will guinea pigs if you will so please bear with me but you know there's a there's a saying I think I think it's an Einstein quote I'm not sure where he says that you know take a simple idea and take it seriously and I think that's a really important thing to to keep in mind and I think even when you look at lots and lots of successful people or extremely successful people right at the pinnacle of their careers when you break it down that quote is at the epicenter of how they got there so usually it's not something earth-shattering usually usually it's something very simple but they were intense about it and they were just fanatical about it and that's usually the fanaticism and intensity around the simple idea that gets you to the promised land if you will and so so I want to just go through a couple of those kind of very simple idea so I know this is a high IQ group and I know that you guys can can handle a lot more than I'm going to give you today but bear with me it's it's not going to challenge your intellect but I think what I'm hoping for is that you will appreciate that these are not these are not ideas that require high horsepower but these are ideas that require an intensity extreme intensity of pursuit to get to the promised land so you know during uh during World War two 1941 there's 11 year old kid in Omaha and he he checks out a book from the Omaha Public Library and Arman can you put up the cover of that book what's the title of the book exactly one of what a beautiful corny title so anyway this this kid in Omaha also known as Warren checked out this book from the Omaha Public Library and the good news for all of you is that you can go on Amazon after the class and order the book it's still available it was published in 1936 five years before Warren checked it out and Warren would tell you that this book is fundamental to his billions in fact the 11 year old kid after he read the book made a statement that by the time he was 35 years old he would be a millionaire and so one thing to understand is the book is not talking about how to become a millionaire it's just talking about how to how to make a thousand dollars and it's a thousand dollars in 1936 dollars which my estimate in 2017 is no more than $15,000 I don't think the inflation from 10 to now is more than 15 X so so it's not it's not teaching you the book is not teaching you how to become a millionaire but the 11 year old kid reads the book is super excited about it still remembers the title and and basically you know makes that statement and actually when he was 35 years old which is 1965 he was well beyond a million I think in 1965 my guess is Warren might have been maybe 5 or 7 million by then which would have been about about 40 40 or 45 million in today's dollars and so so even before he was 11 years old and I'm I'm gleaning some of this data from you know somewhat what some of what Warren has said and I'm inferring from what he's saying in the book is that even before he was 11 years old he had figured out you know that compounding is the 8th wonder of the world which is a another quote attributed to Einstein so the ten or eleven year old Warren had figured out that compounding was the eighth wonder of the world and and then after he had figured it out he needed which I'm going to demonstrate soon to you but he needed seed capital though compounding is magical and it's magical from extremely small slums but you need but you need a seed to start growing and growing over a long period of time and so just hold that thought for a second and we will come back to it and I want to kind of digress and go back about for centuries or actually more like three three centuries and I think 91 years or so now our 89 years and so so in in 1626 which is almost 400 years ago it's it's widely rumored that the Dutch bought the island of Manhattan from the native Indians and at the time that that deal was done without any bankers I might add when that deal was done it was done for $24 and so for $24 the undeveloped land which makes up the island of Manhattan now passed in ownership from the from the Indians to the Dutch and Peter mini-mini where it was the guy representing the Dutch and the reason I bring up this story is that this this story was actually mentioned and I became aware of the story in one of the letters Buffett wrote to his Buffett partnership investors in the late 50s so this this story was relayed by Warren to his investors maybe in early 60s but north of 50 years ago a long time back and the reason Warren brought it up at the time is that it appears when you look at that $24 a transaction price and you look at what is the value of even undeveloped land in Manhattan today one would think that the Indians got taken but but let's just let's just say that the $24 was given by the Indians to their chief investment officer and the chief investment officer was told to invest this amount for the benefit of the private several several centuries or several generations and let's say for argument's sake that our investment officer wasn't too bright and he could just manage like something like a 7% annual rate of return and so if you had twenty four dollars in 1626 and it was growing at the rate of 7% a year one of the things I want to want to do in this class and you think most of you may be familiar with is you may be familiar with the rule of 72 and so one of the important things about compounding is to be able to do the math in your head the whiz kid in Omaha in 1941 then and now does all his compounding math in his head I've been to his office there is no laptop or computer or anything you know he's just doing math in his head even now and doing math in your head is a very big advantage so so if you're if you're compounding at 7% a year rule of 72 in ten years your money is going to double so in 1626 they have 24 dollars and in 1636 they're gonna have 48 dollars and 16 46 they're gonna have 96 dollars and so on and then you know we know that a double comes in ten years if you take a hundred year period that's two to the power of 10 one of my favorite most favorite numbers two to the power 10 is 1,024 so let's throw away the 24 because it makes the math harder we don't want any hard math we want easy math you know Arvind makes all these assignments hard and I just want to make life as easy as possible for you guys so so if you if you go through ten periods of doubles that's true that's a thousand times what you start with so if you have $24 in 1626 it is $24,000 in 1726 and then it's 24 million dollars in 1826 and it's 24 billion dollars in 1926 and it's 24 trillion dollars in 2026 but you know I really will quickly remind me that when we're not in 2026 right now we are in 2017 so I'm gonna take that 26 trillion just to make him happy and cut it in half by making it 13 trillion which would be what it would be in 2016 and so basically if the Indians had gotten the 7% return they'd be at 13 trillion and then the other question in front of us is what would be the cost today of undeveloped land which is let's say in in a place like Manhattan at that size and I don't know the answer to that question you know these are difficult questions that Armen likes to ask but but I do know this that the the total wealth of the United States every man woman and child everything that we have in the u.s. is about 100 trillion and if the entire country everything is a hundred trillion the island of Manhattan even with all its buildings and everything else is way under 13 trillion because we've got a lot of assets in this country and so so the Indians actually negotiated quite a good deal the problem is they had an incompetent investment officer who couldn't bring the bacon home and and of course we're going to make sure that such incompetence his firmly impermanent we banished from places like Herman's class so so the thing is that let's come back to the to the kid in Omaha will come back to the Indians you know in a few minutes but let's go back to 1941 and the kid in Omaha so the kid checks out the book he he's he's he's looking very very intensely in the book to figure out how do I get a thousand dollars and the reason why the thousand dollars is important is because once he has a thousand he already knows the math and compounding he's very smart probably at nine or ten years old he'd figured out what I just told you about the 8th wonder of the world and he just wants to get the thousand dollars as quickly as possible so then he can put it on his compounding engine and he was he was lucky in the sense that his dad was a stockbroker and he used to hang out at his dad's you know offices the brokerage firm with all these kind of handwritten quotes and all that in Omaha and kena was all around kind of stocks and you know ports that were wiggling around all that when he was 11 years old and in fact he bought he bought his first talk when he was 11 years old and Warren likes to say that he was wasting his time until then he says he had a slow start because he bought his first stock at 11 and was kind of you know an underachiever till then if you will and and and what he what he did is that he knew he didn't he didn't have the framework completely but he but he knew that within these wiggling prices and these kind of you know gyrating quotes and all that there was a fortune to be made and he knew that if he had a little a little bit of capital like his thousand dollars and he could make investments in stocks and if those investments so here's what Warren is is saying he's 11 years old he's saying in 24 years I'm gonna take the thousand after-tax to a million now I haven't done the exact number and what the analyze radius on that let me just put it this way it's much higher than the mandate given to the CIO of the Indians it it's probably north of 30 percent a year is my guess might even be maybe low thirties I'd say probably a year but it's a significant rate of compounding so the the 11 year old kid is confident that he's gonna compound at some astronomical rate if he can just get the thousand and and so he goes very intensely reads the book really excited about it and then you know he sets up a whole series of businesses you can read about it in a snowball and you can read about it in Lowenstein's biography but my my my couple of favorite businesses he set up one was the Wilson coin operated company just you know just to make sure I'm not repeating myself raise your hands if you've heard of the Wilson coin operating company I I see Arvin's frantically raising his hand but I also see that he's done you a big disservice he gives you all these difficult assignments and he doesn't talk about the Wilson coin operated company the Wilson coin operated company is one of the more important business lessons to learn so let's go into the Wilson coin operated company since such a great business so first of all I think I'll take a step back Warren was in in Washington DC his father was a congressman he was a teenager he was in high school and of course he was very smart but you know he'd already read this book at 11 he knew the name of the game was not to be the best student the name of the game was to build capital and to build a build capital by having different businesses and since since about 6 or 7 years old he done you know one business after another but he he became friends with a guy named Don Dan Lee and Don Dan Lee eventually was a valedictorian of that high school and I met Don Dan Lee several times in Omaha and he's unfortunately passed away a few years back but wonderful guy and and I have so much fun talking to Don about the teenage war and it was just a blast to to talk to Don about that those a lot of fun times and Don went on to work on on the space program and he was part of the group that put them the you know man on the moon and so there was a lot of horsepower deployed to put man on the moon and Don was one of them and so anyway Warren Warren becomes friends with his friends with Dawn and one day one day he goes to Don's house and Don was a tinkerer I mean you could you could take take to him some beat-up car that doesn't one and he'd figure out what was wrong with it and you make it run and one day Warren went to his house he saw that Don was working on this old dilapidated pinball machine and which didn't work so Warren asked him what he was doing he said oh you know I bought this pinball machine for like I don't know fifteen dollars or something and I think I can fix it and so on just watching Don danly at work fixing this pinball machine and if in a few hours Don then we have that pinball machine working so then Warren tells them hey Don do you think you can fix up more machines can he can we buy more machines and fix them up he said yeah most of these machines there's nothing major wrong with them it's pretty easy to fix and basically they don't work people just want to you know they want to get rid of them they take up space and stuff so he says you know 15 20 bucks 30 bucks you can even buy a machine that doesn't work and so warren sets up a company and of course there's no there's no incorporation or anything done but it's called the win wilson coin operated company and they invented a character a fictional character named mr. Wilson and what they did the two of them the two boys these you know 15 year olds they would go to barber shops in DC and they both tell the barber listen we represent mr. Wilson our boss is mr. Wilson because they knew if they said we had our own bosses they'd be laughed out of the chops this is hello mr. Wilson sent us and we work for mr. Wilson and mr. Wilson has a proposition for you he he wants us to tell you that we're gonna give you this pinball machine for free to put into the corner of your barber shop and we're gonna come by once a week and what were monies in there we're gonna split it 50/50 with you and mr. Wilson told us to tell you that it's a great deal for you and it's a great deal for mr. Wilson so do we have a deal and so these barber said yeah sure put it in the corner you know like they said there's no downside I got the space I put the machine and so they went to barber shop after barber shop and once they'd get the deal done then they'd buy a pinball machine Warren would put Don down Lee to work to Phil to fix the machine and then they'd put in these barbershops and they are like you know 30 of these machines in from barber shops and then they then Warren said we'd go once a week and open up the Machine and pull out the corners and then all the money people have been putting to play pinball while waiting for the haircuts and and he said that the first time he went the first machine had $5 in it and so they gave two and a half dollars to the barber and they kept two and a half dollars and Warren at that point thought he died and went to heaven because he you know I don't know what Ireland's been teaching you about return on capital but if you invest $25 and every week you're getting back two and a half dollars the return on capital let me just put it to you this way it is higher than almost any American business one of the highest return businesses you could ever be in and of course the kid from Omaha who's the whiz at math you know love this and then you know he's thinking okay two and a half dollars from this machine is ten dollars a month from this machine it's $120 a year and I got 25 of these okay I got like you know almost three thousand dollars coming to me and yeah my my buddy Don Dan Lee is getting half that's okay I like him but I'm still kind of cleaning up because you know I didn't have any do it I just I didn't did my deals right and then you know Paul also noticed that Don Dan Lee was really good at fixing cars so he found this ad for this rolls-royce which didn't work didn't move available for sale for $200 and he asked Don you know hey Don you know you think and fix this this car of course this is a guy who put people on the moon in the future of course he can fix the rolls-royce and dawn said oh yeah sure I can fix that no problem so they bought the Rolls Royce for 200 bucks I think they put another 200 bucks of parts into it to get it you know spiffed up and working and then they started renting it on the weekends for weddings at a hundred bucks a weekend you know and of course again return on capital through the roof but that wasn't it Monday through Friday they drove to school in their homes you know so these two kids would would roll into Washington high whatever any of that school was in the Rolls Royce Warren had a forecourt at the time so he'd come out with his fur coat in his rolls with Danny next to him and anyway so you can see that the kid from Omaha at eleven years figured out that he needs a thousand dollars and then by 16 or 17 he's pulling down a few thousand a year and I think when he was when he was 17 or something is when he was he graduated high school really early 16 or 17 he had about 9,000 saved up and and then you know of course he insisted his dad that he was gonna pay his own way through college that the tuition then was slightly less than BC charges now and and and and basically he went through went through college and and he told his dad you know give them give your money to those two years to the to my sisters I don't need it I'm on my compounding engine I got my base capital and so so the the reason the reason why Warren is a billionaire today many times over is not because he came up with something innovative or anything is so tarik I mean you know the Google guys came up with something innovative you know the iPhone is amazing they're lots of lots of businesses which are around some whiz-bang technology and you know some very smart people doing some very smart things but that is not not how Warren made it Warren made it on very commonly known facts and very commonly known mathematics the difference was from the age of eleven till now at 87 he's intensely obsessive about it and he's he's been obsessive about compounding for the whole life and of course what he was missing he was what he was missing at eleven he said you know he he screwed around with technical analysis a whole bunch of different ways of trying to figure out how to predict what stocks would do well in the future because he knew that he had to get kind of high rate to return but he was basically in the wilderness until he came across Ben Graham and you know went to Columbia and and then he got the framework and then of course he was once he had the framework of value investing then he was off to the races because he he has his base capital and he'd figured out how to how to compound at high rates and any you know when that went off and did his thing and so the important thing was that you know there are there are two ways you can kind of I would say ingest you know our our interaction today you know you might go back home or think about tomorrow and you might say oh yeah rule of seven 72 you are compounding yeah eight wonder yeah it was a good talk you know that's one way to ingest the data the second way to ingest the data is to do a 180 which is to become like the 11 year old thin kill in Omaha and become fanatical about it you know when you say listen compounding is is very critical and now let me go about what the people in the second camp back to the Indians okay so the Indians did their deal the 1626 and all that so let's unpack that so why is why is why did Einstein say that compounding is the eighth wonder well the reason it's the eighth wonder is you know I I gave you some assumptions right I told you seven percent I gave you like this four hundred year period but and I gave you the twenty four dollars but you can also if you're fluent in this you can go kind of massage this a little bit so for example if you go backwards in time you know so let's say the deal were done in 1616 instead of sixteen twenty six you could have done the deal in 1616 at 12 dollars the outcome would be the same all you could do it at sixteen or six that I'm sorry yeah at six dollars and again the same outcome 1596 three dollars 1586 a dollar fifty fifty in seventy six seventy five cents and you can keep going back you'll get to one cent okay so you can make one cent become thirteen trillion right or twelve trillion sorry yeah we were not yeah $24 so twelve trillion all what you can do is so the way the the way the the compounding and rule of 72 works is there are three variables right so one variable is the amount of capital you start with the second variable is your rate of compounding and your third variable is the length of the runway right and so if you do 7% a year it takes ten years if you do 10% a year it takes seven years so one of the beautiful thing about reuleaux 72 is the rate of return and the number of years are interchangeable right it still works the math works the same way you can do 7% takes 10 years it doubles or you can do 10% takes 7 years the doubles you know so the thing is this is very elastic and beautiful math so what now now you know the problem we have as humans and this is one of the problems warren realizes so you know if you if you ask Warren hey Warren if you could have any gift that anyone could give you what would you like and he doesn't even hesitate for a second when he says this ok he says look when they look at my corpse they should say man he was old okay and the reason he says that is the only thing he desires is massive runway he he wants a huge runway and why does he want a huge runway he wants a huge runway because he's obsessive fanatical about this so he knows those three variables and he knows the runway is a very important part of that so if you if you look at the 40-year old Warren Buffett so four year old warmed up at nineteen seventy net worth less than 30 million his net worth when he was 40 was less than I think one three three thousand of his network today if he hadn't get a start started giving the money away so the till when he was 50 his net worth was around three hundred million maybe three or four hundred million approximately okay it was less than a third of one percent of what it is today so 99 and 2/3 percent of his net worth has come after the age of 50 okay and so this is the thing one of the things what compounding is that because it's geometric humans are used to thinking geometrically you have to become fluent in thinking geometrically in your head okay and so again let's go back and massage those three variables right so you have length of runway starting capital and compounding rate and this kid with the Wilson coin operated company when he's 16 years old he was looking at the life expectancy tables at the age of 16 to know what the runway was I guarantee you every year of his life he looks at the life expectancy numbers and and he's now I think when he looks at it he gets sad because it's it's not that it's not that long but I think he'll he'll blow past his expectancy levels because one of the things if you're in alignment you tend to do better health-wise and runway wise so that's good but but the thing is that the the you know the important thing is they are in the what is the average age of the class ballpark I would say it's about 26 on average yeah so you know one of the unfortunate things is we didn't have this top 15 years ago you know that's very sad because because we have lost we've lost huge amounts of runway unfortunately but the good news is that I think for most of you you probably going to live past 90 you might even live past beyond that or maybe we have to see what happens in medicine and relax next you know half century or so you you know certainly a good portion of the class might blow past 100 but I think 90 is a pretty safe bet so so if if you look at 90 and you look at let's say 26 so we got you know we got 64 years it's not it's not the best but it's workable you know we can work with 64 years and so here's the thing you got to figure out we know we know length of runway unfortunately unlike the Indians you don't have 400 years you've got 64 years and the second is the second variable is starting capital now the second problem you guys have is you didn't start the Wilson coin operated company when you were 15 and that's very unfortunate but but the thing is that you need to quickly after this class do an analysis of net worth okay very important to analysis of net worth you might be disappointed when you do that analysis because of all these you know high tuition bills and everything else but the thing is that you want to ask quickly if possible get away from the crutches of our wind and start start earning some real money you know you need to you need to figure out a way like like that book said how to get to a thousand thousand is not gonna cut it for you because your runway length is already been cut short we need more than a thousand we need maybe like a hundred thousand or maybe a quarter million and then we can get going but but what the thing is that so we we have we have control effectively we have control over length of runway because statistically that's gonna probably work in your favor the second thing we have control over is our savings rate and so the other thing that's important is you've got to make sure that you're sucking it away and if you have any difficulty socking in a way how many of you heard of of you have heard of mister money mustache raise your hand if you heard of me all right one you a couple of humans have heard of mister money mustache alright then they're not very happy to acknowledge that they've heard of him but they just kind of you know kind of tentatively acknowledging so anyway I have I have a blog it's called chai with debry sometime if you get bored you know you can go to that blog and I've got some of the earliest blogs I did which is about a year ago are on mister money mustache and so mister money mustache he's a software guy he graduated at 22 he didn't have any money and he made up his mind that by 30 he was going to be retired and he was never gonna work again and and I think he accomplished that goal well before 30 I think at 28 or 29 he was retired and if you ever want lessons on actually it's it's worth going through and seeing how he did it it might blow your mind a bit kind of how he lives his life but it's kind of fun to look at it and and you know I see what looks like a few Starbucks lattes in front of humans let me just show you mister money mustache would not be caught dead in the Starbucks he ain't spending four bucks or five bucks or whatever on coffee not happening but anyway so it's worth it's worth looking at mister money mustache you might find his his his ways a bit extreme what you might still be able to you know get a few things out of it I mean you know he I think his his gas usage in a year might be two gallons you know he's he's biking everywhere it's it's a fun it's a fun lifestyle to look at how he how he goes about living his life and the fun part is he's got a wife who's amazingly not left him yet and and actually she's wholeheartedly with him on much of this journey so it's kind of a fun couple but anyway the thing is that the savings rate is important since you didn't do the Wilson coin operated company and and then the third piece which we don't have as much control over is the rate of compounding right and and and of course the reason you're in Arvin's class I would hope is to increase your rate of compounding and hopefully he's been imparting some good lessons to you on that front so so the thing is that a few years back you know my my daughter was had just finished high school and she had she had spent a summer working before she started college and she made $5,000 that summer and I I talked to her about opening an IRA and putting the five thousand in the IRA and I asked her a question I said look you're 18 years old at the age of 68 if if this five thousand grew at 15% a year what would it be now you'll notice you know I pick all these years to make the math easy for me the percentage is the pick to make the math easy for you because you know I'm not the sharpest tool in the toolbox you'll soon realize that and so 15% a year doubles in five years 50 years to to the power of 10 I already told you that's not a favorite number so that becomes 1,024 we throw away the 24 it's a thousand so the 5000 becomes 5 million now when I was talking about this to my daughter I just picked her up from the airport she goes to school in weiu and the flight came and at 2:00 in the morning and I picked her up I said you know this is a great time to impart lessons on compounding and and so as she's dozing off in the car being like a fifty mile ride I said do you know this is just perfect and so I started talking to her about the 5,000 and the IRA and the 15% and you know I'm getting no reactions in there I mentioned I mentioned the 5 million and suddenly she's wide awake you know wait wait how did that happen what happened you know what'd you get - 5 million right and and then I I went through the math again with her and of course the good news was it got seared in so the the following year he did an internship and this cheapskate company in New York which will go unnamed basically likes to use slave labor for interns and it was a very low amount she got paid and I think I think over this over the summer when she worked for them she made like three thousand or something and she already knew that she should have made like six or seven thousand and it was in the three or four thousand it was three or four million that had been taken away from her and without my prompting her during her exit interview at this place she said look I had a great time working here but you guys really need to change your policies it is really terrible to take advantage of students like this not pay proper wages and it was very important for me to make the seven thousand I didn't make it it's terrible shame on you and I was so happy that she did that but the good news is that that that lesson of compounding was seared in and even and share the two-week break or something she's trying to find work to keep pounding that that money in the IRA and so on so the thing is that at 18 with 5,000 it becomes 5 million 19 again whatever she saves you multiply our thousand by 69 it becomes that number at some point she's gonna graduate get off my payroll I think that that date is one a year and a half away and and then she might have real income and and again you know I made her listen to mister money mustache I don't think she's gonna adopt his lifestyle but a few things might have rubbed off on her about mister money mustache and and so the important thing is that I think year she realizes that the savings rate is important and and of course the 15 percent many of you might say well that may be too high yeah you know it may be but what I told her is that we gonna basically go extremely concentrated and I told her if she wants I can manage it for her she said that's fine so I put the first five thousand in one stock you know just you know we're not we're not gonna screw around with this and we're going for a much higher rate than 15 and so far I have not blown up her capital so we haven't had any difficult conversations yet so that's that's going pretty well so far but Armen can you can you put up the second picture you know I prepared so well for this talk I had to come up with two pictures you know people come up with all these powerpoints you guys see that okay they have vacancy M&E okay so so maybe one of you can raise your hand and just read off the letters and numbers right yeah I'll point six yeah so this is the license plate off on my car which my daughter took away it was a BMW 6-series nice car top down and all but anyway what does the license plate mean Manish what one student said compounding my life doctor moving him in the right direction yeah so we repeat that again compounding my life by 26% one student said you know the the thing is when I drive this car in Southern California and in Irvine I'm trying to impart lessons on to my fellow drivers who I share the road with as a community service so I didn't want to make it really come power like complicated for them in order to make it simple so it's it's you're on the right track would be not quite there yet yeah yeah compound compound 26 percent one student said that's perfect yeah the lbs pound isn't that great you know they only gave me several seven letters or numbers convert pound into lb but but the reason I did that compound 26 plate was so that I'm reminded of it as a important important mantra so when I when I first heard about Buffett in 94 it was very exciting you know I I was an engineer I really hadn't spent I mean I don't think it ever really I might have bought a stock or two but never done anything well in the market or anything and and so what I realized when I when I and I was lucky in 94 the first couple of biographies on Buffett had come out and then I I read those and then I was able to look at the book share Hathaway and new letters which opened up a whole big world for me and that was great but what became very apparent very quickly in reading through the biographies was that Warren was all about compounding and and he had had from 1950 to 94 when I when I first heard of him he was compounding at north of 30 percent a year you know and and in 1950 he you know he had about ten thousand and so that 30 percent was on the ten thousand which is very significant but then he got OPM other people's money and he got a cut out of the other people's money and of course that put a turbo path on his on his compounding engine and such and he ended up with you know even at that time in 94 a very significant net worth and and so so I I was very intrigued by both his approach to investing and his intensity on compounding and I said you know the this compounding game looks like a very fun game and it can be a very profitable game and what had happened in at that time in 94 is that sold at IT company I'd sold some some assets and after taxes and everything I was left with about a million dollars which I really didn't have any need for use for and first time I had money ever because you know until that time I had borrowed on credit cards and you know and and always in debt trying to grow the business and such and so this is the first time actually the my personal balance sheet was in the black if you will and there was no there was no no debt and such outside of kind of you know financing receivables and so on and so so I had I had this million and I said you know what did we put it on the Buffett compounding engine and what do we go for thirty years at 26% and 26% doubles every three years and we again get to my favorite number two to the power of ten and the million becomes a billion and I said you know the billion is a lot better number than a million so and and the best part of the billion is I can do this while keep keeping my day job you know keep running my company but I can you know try to see if I can figure out investing and figure out how to get and of course I was being modest for the 26 percent I mean Warren when he was 11 was looking at you know low 30s in compounding and and for the most part that 26 percent I mean I think from 95 to 99 was 2,000 was north of 70% a year I mean really well that money had gone more than 10x in five years and and it continued at a very high rate even after I started for iPhones till 2007 I think from 99 to 2007 for iPhones before my outrageous fees was about 36 percent a year and after my outrageous fees was you know kind of high 20s and and then of course we are the financial crisis we went down a lot we went down two-thirds and so that primped the compounding rate but then from 2009 onwards again it took off and it's it's done well since so so the bottom line is I don't know you know this game I started playing in 94 is supposed to end in 2024 but the thing is 2024 which is about seven years ago away you know one of the things they kind of interesting to me was in 94 I was exactly thirty years old and in 2024 I was gonna be 60 so I said okay you know we kind of compound for thirty to sixty but now that I'm a little bit older and wiser I said you know why don't we compound till one day before dying you know why stop at sixty you know we got to keep maximizing the runway and so I'm also hoping that I get super old before I lose my marbles and don't know what I'm doing but but so so I think I think the the important thing is that just keep these things in mind starting capital savings rate length of runway and and then the fourth variable which is you know the your rate of compounding I think there you just have to if you're Warren was able to do it at high rates because he was very focused on that for him the high rates are very important and so he sought out places and kind of crevices in the markets which gave him high returns and he still he still does the hunt that he used to do when he was you know in his 20s if you will still interested in similar things if you will and so I think with that I would maybe we'll open it up and go on to questions thank you so much maybe we can start as the students kind of assemble their questions I've been asking every speaker this to start this year which is how do you think about your firm's competitive advantage you know what what are its components and how do you see that competitive advantage growing or decreasing over time yeah well I think that's a that's a really good question so when I when I started for iPhones I had never in the investment business I really quite frankly didn't even know exactly what a hedge fund is and and such and I took some pages from Lowenstein's book and took it to this lawyer I said listen I want to sell my investment partnership like the buffett partnerships here's the rules on these pages please convert this into a document that or a few documents that creates a legal structure that we can put you know at that time my friends were investors interested in investing it was not even supposed to be a business so there were eight of us they're gonna put a total of a million dollars into this and I was gonna manage it now or to manage it using Warren Buffett's rules with zero management fees 6% hurdles one fourth over six percent coming to me and so on so forth and similar rule zero redemptions once a year and not talking about the holdings in so whatever rules I could see that he had used during his investment partnership years I cloned those and it took me a few years to realize that the the mindless cloning that I had done in 99 actually gave a brief uns huge advantages and it created an moat that is impossible for my competitors to cross so so for example you know and what I did what I did from 99 till now is I have tried hard to educate my current investors and potential investors about the importance of these attributes whenever they're giving a manager money to invest and of course some of these attributes it'd be very hard for them to find managers who will give them that type of deal or rules so let's let's talk about one of the rules which I copied from the Moffatt partnership which is no management fees and you know the six percent hurdle and taking one fourth over six percent so the thing is more no management fees is a impossible fee structure for almost any investment operation that has a team how you're gonna pay the team and and of course one of the things I learned from Warren Buffett is a team in an investment operation is an oxymoron you know you cannot delegate any part of the investment process you can't kind of look at cliff notes versions of businesses before you invest in there you should know the businesses and you can't know the businesses if you're handless is doing all the work so at PI funds in 99 when we started with 1 million and now with about 840 million there's no analyst there's no associates there's no team I I have a few part-time admin assistants I used to have one part-time admin assistant but now you know we've got our Family Foundation few are the things so there's a little bit more admin back-end needed if you will but there's no there's no full-time employees and I think the total payroll of even all my all my admins everything is probably under 150 200 thousand a year so we don't have really much in terms of fixed cost and most investment operations at my size you know they will charge one and twenty or two and twenty and so at one and twenty you would pick up 8.4 million in fees according to what Bob calls just for breathing you know and it's stupid to pay a manager eight point eight point four million just for breathing you know I can breathe without the eight point four million and and so so one of the things I have made sure and every letter I'd centrum investor's I make sure that I reinforce for them the importance and that the good deal that they're getting when they don't pay management fees and so what happened is that many many of my investors when they came and invested in me it may or may not have been important to them that this was the fee structure for many of them that came to me this was very important but after a few years with me for almost all of them it becomes very important because I'm really good at brainwashing you know I I brain watched them into understanding not to accept one or two percent management fees because they're being taken to the cleaners you know because if if an investment manager earned your 10% a year and is charging two and twenty well you're down to eight percent after paying the two percent then you then you pay twenty percent on the eight percent another 1.6 percent you paid three point six percent thirty six percent of the returns have been swallowed up in frictional costs and when you compare that then to the SMP it's really hard to beat the S&P if you've got three point six percent in frictional costs being taken off the top so so that's the reason why most active managers underperform so I never realized when I cloned the zero fee structure I cloned the zero fee structure because I was starting for iPhones with a bunch of very close friends I thought it was a very fair structure and I thought that if I don't make them at least six percent a year I don't deserve to get anything and so it was it just made kind of sense to me from our perspective but what has happened since then is not only is it ethical it's actually created a moat and it becomes a competitive mode I mean so so even a much larger shop cannot cross the moat and so I think that the the zero fee structure gave me a huge mode I think that copying the the second part of the profit partnerships which was not having analysts has also given me huge Mort basically I love I love figuring businesses out I love hunting for bargains and I love the fact that I have no payroll and you know why give all the great exciting work to someone else and then pay them a huge amount of money to do that when it's so much fun to do it yourself so so I think these are some of the things that have been have been a huge competitive advantages and I you know I would say I'm grateful to warn that I I stumbled into it just by trying to clone and in fact today someone sent me a recommendation of a book and this guy said that the the title of the book was called copy copy copy as soon as I read that title I ordered the book because you know I am mr. copycat I have no original ideas I just want a copy copy copy and so hopefully in a few days that book is gonna show up and I'm looking forward to reading it other questions Arvind we're going to jump into more but just on the investment side the capital base you talked about in your structure that that's really profound in in terms of your investment process do you think think about competitive advantage there or well actually one one thing that has developed recently you know I think I think one of the things is that you know the key the key to doing well I think in investing is to be inactive you know spend time talking to BC and HBS students and talk to them about the Peter Minuit and the Indians and the Wilson of coin-operated company instead of fiddling with the portfolio it's it's the less activity you have in your portfolio in general the better off you are the the single biggest mistakes are made historically is being too active so smaller team sizes will in general lead to less activity because you're gonna have limited time to come up with ideas and things I mean if I had 10 analysts at for iPhones high IQ guys cranking all the time I mean I'd be present with three ideas a week and they'd all look great and you know it would I'm almost sure that results wouldn't be so good so the on the investment side one advantage is smaller team size means that you're gonna have in general is not just going to take you longer to get through stuff which is good I think it's a advantage and the second thing that's been a more recent advantage and I didn't realize that until until just the last few weeks is that I've made a major pivot and I made some changes in the last year we're more like the last I would say 18 months or so where I've very aggressively started moving into investing in India and I I picked India for two reasons one is I would say it's been almost nearly two years that I haven't found much to buy in the u.s. you know when I enjoy now I'm a bargain hunter I like to buy things that half off or less is the US have been very slim pickings from my vantage point been wasting thinking for a very long time and and the things I've been able to find have been kind of these I would say anomalies like I found for example the airlines were miss misunderstood and mispriced about you know 1415 months ago and and so we were able to put some money in the airlines and and then you know I was actually a quarter I had a Warren and then the following quarter Berkshires into Airlines as well so that made me feel good that I wasn't completely you know losing my mind if you will and but the thing is we had to go into an area and a very ugly industry like Airlines where you know pricing is set by your dumbest competitor high capex unions and consumer case and just every every possible thing that is horrible about you know the opposite of the Wilson coin-operated company is the airline industry and and that's where we were finding stuff whereas what I found is that I went and looked at India Indian markets have moved up but I think there are still plenty of pockets in India which have been a lot like shooting fish in a barrel you know warrants partner Charlie Munger says that he wants to shoot fish in a barrel but only after all the waters been let out and so in India I don't think the war has been learned of the barrel but the fish are still in the barrel they're still swimming around there's still some water in there I haven't found a way to get the water out but that's still way better than fishing in the ocean and so so another comparative advantage which is developed I would say in the last year or two has been India and then just to give you some statistics is that this is I found I myself found it stunning is that the amount of refunds has invested in us domiciled companies now is under like thirteen percent of the portfolio on the internet forty million is the lowest number I've ever had I mean historically we were at almost everything in the u.s. and India is like forty five percent of the portfolio so so there's been a huge change going from nothing in India to forty five percent over the last three years and at the same time not finding much in India so this this specific particular advantage with India as I was thinking about it I realized that I had some natural advantages I happened to be Indian which was good good good thing I familiar with the language and you know I've been running a foundation there and obviously been going back and forth and so on so so for me to figure out these businesses and you know I'm in India every six or eight weeks now which is a lot of fun a lot of when I look at the people that I would normally think of as very good investors basically those folks are really good investors but they aren't fishing where the fish are and it doesn't matter how good a fisherman you are if you're not fishing where the fish are so I think the US markets have a problem in the sense that the number of listed public companies in the US is now down to less than 3700 whereas twenty or thirty years ago it was close to eight thousand so the number of publicly traded companies in the US continues to go down which is the problem and the number of brain cells employed picking through those 36 hundred odd companies continues to go up and when you combine the two and then you get you know these huge runs in the market like we've had you get what I would say pricing to perfection I'm sure there are opportunities even in US markets and all opportunities in all markets but I think those opportunities are a whole different kind of lair of a magnitude of difference between us and a place like India so that's a more recent competitive advantage again I'm too dumb to figure it out figure these things out in advance I just stumble upon them you know my full name is Moorish Forrest Gump Papa Roy and I'm very happy about my middle name thank you other questions it's doing quite well just like the CA think that we should know what do you want me to repeat the question that would be great actually Armand okay so the question was if one of your holdings such as Fiat has has grown significantly do you feel the need to sell down the physician to manage the portfolio allocation is that correct yeah even if in the future you think it's gonna go out further yeah well let me let me give you some real data it doesn't make my stomach churn but it might make your stomach churn a bit so one of my funds is the offshore fund OPI f3 and pif 3 has about I think about 240 odd million in assets and about 40 40 plus percent or close to 40% maybe 35 it's about a 87 million dollar position is a company in India so that's one position in that fund so you know we got we got 240 million let's say in assets and you might say let's say 90 million for example it might be close to 90 million in this one company PR isn't even the biggest of my problems it's not it's not the biggest holding in that fund it has another 40-yard million of Fiat so I think maybe forty five million so you take this 240 million dollar fund and you have 135 million sitting in two stocks and and I think that if I if I look at India for example for that fund out of 240 million a hundred and thirty five million is in India okay and out of the 135 million ninety million is one company and my perspective on that is we are not going to cut the flowers and what are the weeds it is a very stupid gardener who cuts flowers and waters weeds so I'm actually going to address this to my investors in my next letter just so that they get some understanding that I haven't completely lost my mind but the good news is that that fund all the funds are closed and so why do we have 90 million in one stock well we have 90 million one stock because 30 months ago we put less than 11 million into it and what am I supposed to do if it going up goes up 9x and I'm not going to sell it because it went up 9x what I'm gonna do is first I'm going to say well done mounish well done you know we you know the Indians would be proud of me if only they'd given me the cash and it's not that chief investment officer we'd be off to the races so so this particular company when I when I first bought it two and a half years ago I thought we would probably get in five years somewhere between five and ten times our money that was my understanding in 2015 when I made the investment and it's been only two and a half years and we are approaching ten times but the thing is that the way it works in investing is you really learn the business after you own it you don't really know the business when you're just analyzing it from the sidelines and in the last two-and-a-half years I've actually spent a good bit of time trying to really understand the business you know I had some good understanding of it I think one before we invested but I would say that understanding is gonna probably 3x or 4x since then because I've understood a lot more and this is one of the fun things about this business is if the the learning is never-ending and the best I can tell is run by better people that I thought were running it the moat is wider and deeper than I originally thought and there's a number of tail winds as far as the eye can see and so at this point my take is that because the funds are closed and of course the people in the front have done really well I don't have this degree of concentration in the other funds because they didn't it was a very small market cap I couldn't get that much money into it we won't pretty much the maximum we can home and so so the thing is that if it goes down 20% it really doesn't matter because it's the same set of investors we don't have new money coming in or money going out I mean there might be some money going out but we don't have new money coming in at these levels so for example let's say and I'll just give a hypothetical number let's say that fund is up 80% this year what does it matter if next quarter is down 20% you know we're not concerned with the volatility we're just concerned with the fact that that I I understand that business I think that business has some legs I think if I were to sell and buy anything else it would probably be inferior both in terms of knowledge and in terms of kind of return possibilities in the future now if you find other stuff that if you find another 5x and we don't have cash and this thing looks like it's only going to double or something left in it we might we might start trimming and do that so that's the best I can I can so so Fiat 20% that just bounces off me 20% is nothing when we get to 60 percent in a single stock then I have to think about it but even then I'm not going to take action just because it's 60 percent so in your book you mentioned making trade-offs between megyn kelly a formula bets and having higher exposure to volatility do you think that this capital allocation strategy that your fund employs is optimal for all investors especially those of us that are young and they're starting off just creating that yeah so one of the mistakes in my book is the whole discussion on Kelly formula so if I were to rewrite the book I would not mention the California so the mistake I made in the book is that everything about the Kelly formula that I wrote is correct except that it only works when you get to do a zillion vents so if I'm going to do a thousand coin tosses and I have 51% odds on heads and 49% on tails and I keep betting heads it's gonna work out for me okay but in the stock market I don't get to do repeated bets very frequently with very well-known ovens it's it's really infrequent and so this was not clear to me when I wrote the book and so what I would suggest is if you're reading the book just ignore the entire section on Kelly formula okay so my apologies the second thing is that I've never invested more than 10% of assets into a single stock you know usually I'm I like a 10 by 10 kind of you know 10 bets a 10 percent or some bets a 5 percent sometimes even 2% just depending on conviction but I'm never willing and definitely with other people's money I've never willing to go beyond 10% and so I think there's a lot of research that shows that you know if you have a 10 or 15 stock portfolio versus a 40 stock portfolio you don't gain much in terms of diversification by going from 15 to 40 but you're going to give up a lot of performance by doing that because you're not going to be able to come up with 40 ideas then all undervalued and look great so my question is regarding and of the economy right now verbs are pretty flat and historically that's been the sign of a good session I was wondering if your takes any like blacks law investment positions or how do you prepare yourself for a potential recession yeah I mean I think that doing any of those things would violate the Bible so we have the commandments laid out by Buffett Munger and Graham we're not going to violate those Commandments and one of those commandments is thou shalt not fixate on macro and thou shalt not try to forecast recessions and thou shalt not short anything and in general thou shalt not hedge so those are the mantra then basically I have no ability to forecast recessions I have no idea what the economy is gonna do I have no idea what a lot of things are gonna do I think it's hard enough trying to figure out what a single business is gonna do in the next two or three years trying to overlay and figure out what you know complex economies and such a going to do is very hard and I think what you want to do is the good news of the stock market is that you can place you can place pets where anything related to the economy becomes irrelevant so I'll give you an example a few years back that he was going along time Ronit 15 years ago I I made an investment fifteen or sixteen years ago in a funeral services company called Stewart Enterprises they've been acquired since then now the part of Service Corps and that stocks but anyway but at the time I made the investment it was training at a PE of two and you know I subscribe to Value Line and one of the things I always like to look at every week is there they were listing of the lowest peace talks it's always that kind of a fun list to look at and usually you know I've been looking at that list for I don't know 15 plus years usually the lowest PE stock is a dog you don't want to touch you know it's it's there for a lot of very good reasons like you know recently we'd find Valiant in there for sample but but even amongst the lowest of the lowest bees you hardly ever get to a PE of two I mean a P of two is you know you're gonna make your money back in two years so in 2002 I noticed this funeral services company which I'd never heard of before sitting at two times earnings so I just thought in my head that hey you know the revenue of this company isn't going anywhere I mean I don't know who's gonna die in Peoria next year but I know how many are gonna die in Peoria Illinois next year and and the good news the other thing I thought about the time was that when your Uncle Fred passes away you're not gonna call ten funeral homes and take the low bid I hope you won't do that what you're gonna try to do is either go to one that has some history with the family or you know just make a call to someone who looks like you did a decent operate on the other end so this is not a business where the lowest price operator is going to kill the higher price operator and it's a recurring revenue business in the sense that it's a franchise and the other thing about the funeral services business is I can almost guarantee no one in this room is aspiring to enter the funeral services industry and so we don't have HBS grads or boston college grads rushing into funeral homes to make that industry vastly more competitive and destroy the economics that's not happening and so when I looked at that I was all these thoughts are going through my head when I'm looking at Stuart enterprises are two times earnings and of course I know that suddenly I was drooling as well you know and so I wiped true love my face and decided to look into the business and and of course you know there were there were issues there was hair on it it had it had a normal leverage and debt but when I sifted through all the details it was obvious that this was bulletproof so you know if you are concerned about a recession why not look at Service Corp of course the problem is that service cough also used to be at $2 a share with earnings of $1 now of course with the Dow 24,000 last time I looked at Service Corp it was at $37 at like 17 times earnings or 15 times earnings or something everyone's really happy to own it but no one wanted to own it when was our two times earnings so so my take is that let's say for example today I had an investment in Stuart enterprises at two times earnings do you think I care that there's some recession coming what would be the impact and in fact this is a funny thing you know this is the kind of the interesting thing about option driven markets you know right after 9/11 we had a major drop in stock prices right I mean equity markets went down you know we had airspace shut down all kinds of ugly things going on you got many of you guys are pretty pretty young at the time but rifles was up and running at the time and so very clear memories of all kinds of ugly things going on there and I I looked at the stock chart for Stuart Enterprises during the period of September to December 2001 now as morbid as this may be if anything the prospects of their business went up after 9/11 you know if you're bearing dead people and people are concerned an escalation of terrorist attacks you should be going all in to store enterprise of stock I mean that's gonna rally right it tanked with everything else and so you explain that to me so this is this is the fun part of the equity markets it took Stuart enterprises down along with United Airlines now United Airlines went down for a really good reason I mean their planes were used to go into the World Trade Center the airspace was shut down all kinds of things were going on which should have left led to united stock prices going down a lot but why should Stuart enterprise the stock price have gone down at that time and this is the nature of option driven market so what I would say is that it is not that hard if you have a concern about recessions or whatever there are ways going long stocks to play that while retaining upside without really having much of a downside you just have to dig and find those things a lot of investing is looking under rocks and seeing which ones that good stuff how do you choose that sort of a base level rock rock stuff actually look under since it's just you don't have a lot of analysts looking under a bunch of things just yet I'm first yeah well that's a that's a very that's a very good question so I was finding it difficult to find rocks with anything underneath them you know and I think in the last two three years the best source of ideas for me has been emails from Joe public so every day when I go to work you know at 11:00 a.m. my assistant gives me a folder with all the emails that have come in for the day unlike most of you my emails don't come to me they go to my assistant they get printed out they get put in the folder and I get that folder at 11 o'clock and get that fold of it any Bills of wires or anything I got a deal with and by 11:15 I'm done with the folder and so it's about 15 minutes of dealing with emails and Joe public is really benevolent and nice to me so Joe public sends me interesting ideas so I mentioned that I have this 9x on this talk in India well that was Joe public thank you Joe public and in fact his name was Perry Paz Rita I still haven't never talked to him I've never met him one of the most elegant analyses of any analyses I've ever received was a analysis very procedure sent me and now we have I'd know 170 million in gains and Counting just because Barry decided to be benevolent and sent me an email thank you so much Barry and so the the rocks I'm looking under I'm just renowned you guys man you got a guy's you guys you know I don't got no analysts I got no payroll I got nothing man I'm dependent on you so I'm totally depending on you sending me the ten burgers please make sure you send them and I'm eternally grateful and and so I think I think and what I what I decided to do in India was that in India I just decided that I'm gonna go every six weeks or eight weeks I'm gonna spend Monday through Friday I want to try to see three to five companies in a day I don't care what they do I don't care what their earnings are I don't care what the multiple is I don't know the industry is I just want to learn and and so basically I I meet about like 10 to 15 companies a week when I'm there and every six or eight weeks I keep doing that and it is an incredible amount of data and info that comes in and through that and I haven't been doing it for that long I've been only been doing it for like a little about a year basically and already we found a whole bunch of stuff that there was there was a misunderstanding or you know things people didn't understand things and one of the things are i have disadvantages in India because I'm not there but I have advantages too because I can take a bird's-eye view that local market might have spent sometimes have difficulty with and sometimes I can overlay things that I've learned in the decades of investing which have given me some mental models that people aren't able to overlay when they're looking at a particular investment so some of those things kind of help out and and such so that's kind of how so right now basically the modus operandi is get on an airplane meet 10 or 15 companies drill down T if there any meat on the bone and then just keep doing that yeah interesting nearly take on passive investing obviously you have very operational costs but do you think that over the next decade or so you'll be able to yeah this makes in return these movies return I addressing in the broad global markets I think I think that globally you have something like fifty thousand stocks and these are fifty thousand entities trade in an auction driven manner by definition they cannot all be efficiently priced I mean markets gyrate between fear and greed I mean I mean I'll just give a very simple example let's say for example I own I own a townhome in Boston and let's say for example I bought that down home for a million dollars okay and let's say I have a knowledgeable realtor who's a good friend of mine and I tell that knowledgeable real - listen I want you to show up every day to have coffee with me and I want you to just tell me what my place is worth every day okay first of all he's gonna think you're an idiot for asking him to do that but let's ignore that for a second and so you bought the pace for a million next day you meet the guy for coffee you ask him hey what's my place worth he says listen idiot it's still worth a million okay and then two days later you ask him the same question again he's gonna say still worth a million man and and then you know three months go by and he would say you know he's getting tired of these coffees and he's gonna say you know you're lucky it's its market moved up a 1% who I'm seeing transactions about 1% higher than where you were or half a percent higher or something and then again you irritate him every day by asking him the same thing he doesn't have much blue and in the course of a year if you just plot the number he gives you every day I mean it'd be hard for you to have a range which would be more than nine hundred and fifty thousand to like 1.15 million at the outer end maybe even tighter than that yeah you might be at a million two million one for example okay or even one or even 5% range in a year in really tight range now if the if the townhome were listed on the New York Stock Exchange okay and every six seconds the price is changing I can assure you that the range on that in a year would be something like 700,000 to 1.3 million okay it would be a much wider range than what you're intelligent broker gave you and the reason for that is you're intelligent broker is looking at valuations in an intelligent manner and auction driven markets by their very nature just aren't that efficient I just gave you the example of Stewart enterprises I mean there is no reason Under the Sun it should have failed at two times earnings there's no reason Under the Sun it should have gone down after 9/11 it should have gone up or at least stayed flat but it went down with everything else and and so markets paint threat paints things with a wide brush so if we have let's say a paint company let's say axalta you know spar from DuPont they were bad corner for some reason you know lot of companies have one quarter means nothing in the life of most companies but they gonna be taken out back and shot okay because because they had a bad corner and no one's gonna care about hey let's look at this over five or 10 years and because of that nuance you always going to have underpricing or over pricing of equities almost everywhere in almost every stock I mean if I look at the stock price of Amazon Amazon stock price or any company stock price is supposed to reflect the some of future cash it's going to produce from now till the time the company is gone discounted to present value by some you know reasonable rate of interest so what cash is Amazon gonna produce the first question when's Amazon gonna be gone okay no idea I don't think any analysts have any idea when Amazon is no longer on planet Earth okay we don't know when that is and then the second question what are its cash flows every year from 2018 let's take a hypothetical case let's say Amazon in 2045 ceases to exist okay so from 2018 to 2045 what are its cash flows I don't have the foggiest idea and I would even go one step further and say I don't think anyone else including Bezos has the foggiest idea what those numbers are and without knowing all those numbers somehow the market is ascribed a price to Amazon it's come up with a very precise number down to the penny of what that business is workd right now the odds that the market has precisely figured it out it is as close to zero as you can possibly imagine so what is my reaction to Amazon well if I know what they gonna produce from 2018 to 2045 and I can discount that back then I can tell you whether to buy it or not but my answer to Amazon is take a pass I have no idea but when I look at Stuart enterprise there are two times earnings I just gotta ask myself a question I humans gonna die this year yes our humans gonna die next year yes after two years of humans dying will we have earned in earnings what is equal to the price of the stock yes okay so then let's buy the stock let's hold it for two years let's ring the register so that now price is equal to earnings and we've already cashed the two years and now let's see if in the third year humans are gonna continue dying that's all I have to do which store enterprises I didn't even have to know whether humans are gonna die in the third year and whether we become suddenly become immortal I just had to know that they were gonna die for at least two years that's it and so that's what you want to do it investing is you want to pick out of the 50,000 the ones that you can explain to a 5 year old or a 8 year old without losing their attention in two minutes or less and then if you can do that then you make the investment finish you thus far you've touched on a broad array of topics you know I just want to explore one or two of them thus far which is you know you you talked a lot about you know this long-term mentality in order to be successful over the long term you're subject to your LP value your investor base so how do you ensure that they have a similar mentality to you how do you go about evaluating them and then and then the second piece is you know you've talked about you know not taking macro risk in the portfolio and the life you know at different moments in time you've raised cash and yet you didn't necessarily put that to work you know day one so inherently you're taking some macro risk or some dread from that how do you think about that yeah so you know let's go back to the book which said how to make $1,000 you know the the thing is we don't need to really be concerned I've never been concerned about redemptions I've never been concerned about LPS i you know i think i think it's only been twice in 18 years when I've actually picked up the phone called an investor and told them look I think it's not a good idea to redeem in both cases there were institutions because I have most of my investor their individual silent worth individuals there were institutions they were take taking our large amounts of money I was ok I could deal with it but I felt that they were taking it out at one of the worst possible times and and I I try to impress upon him not to do it and I failed you know they took the money anyway and so I I I think about the right thing for me to do in that case but generally I'm not a proponent of ever telling people not to take their money I think they should take the money whenever they want to so I've never I've never been concerned ever about redemptions and the reason is that you know the kid in 11 who was trying to figure out how to make a thousand didn't know what a hedge fund is didn't know what LP was he was just looking to compound his own capital and the good news is I've got slightly more than a thousand dollars now and and I can I can compound that capital with zero LPS so so if I have LPS first from you know my my partners it's a really great group I I like the group they're mostly first generation entrepreneurs made the money themselves and all that it's kind of a fun group I like the group they're the good guys good families all over the world but but if if every one of them took away the money it's not a problem you know I never banked on it in the first place and so I'm happy managing their money managing their you know being a fiduciary for them and all of that but if if it the future they decide I'm not the right guy and like for example I'm gonna lay out for them that we've got this you know two thirds of assets in to businesses in companies that you know they probably are not thinking is the next Google and some of them may think that okay you know I've had a good writer for private funds but I think I'm gonna get off the bus that's perfectly fine if you want to get off the bus no problem and so I I think that managers should just ignore redemptions or volatility or any of those things which could lead to flight of capital I think that that's it's just a wrong way to think about it I think you just want to focus on doing the best job you can and you invest the money I'm like for example the fun fun tree if I if I could find three is the only fun that I can't put money in because it's an offshore fund and at the u.s. rather than its I'm not allowed to put money in their fund the other funds don't have the same concentration if I could I would put every penny of for a family assets into front three out of all the funds I have I I think that is the place I want to be with those concentrations because when I look at the future I don't think any of the other funds can hold a candle to what that funds gonna do so if I had a choice that's why I put it I don't have that choice such as life so so the the thing is that I'm now I'm not concerned with volatility and I'm not concerned with people leaving none of those I think it's a privilege they're with me if they leave I'm still gonna be happy I'm still gonna be talking to your class if you allow me to come back with zero assets under management we're grateful to have you every year what will you you're a second part of that question about yeah so the second community yeah so the the second part Manish is you were talking about you know the buffer monger then Graham rules and and you know avoiding macro risk and you know bottoms up and so on and so forth and at different moments in time I think relatively recently you've raised money to put to work in the funds most of the time that flows but sometimes investors are blast to get you know this window to do invest with you and inherently by having maybe 30% or 40% of the funds in cash when you're raising money pro forma of that inflow you're taking market timing risk in some shape or form how do you think about that but I don't I don't think about it that way I think that yeah you gotta think about it in terms of a business I mean drag whatever I don't care about the drag right so you wait for a no-brainer yeah we we started to funds we are we have a we just started an India focus fund there the US and a offshore variant by definition is gonna take time to put that money to work right it's sitting on significant cash position irrelevant I mean so what we may have some you know impact on performance may be a for a year or two eventually we're gonna find places put the money to work right I hadn't heard you address that before so there was a question on yeah so I mean I think you just you know the best way to think about this all of these things is if if your family had a fortune of 100 million and you were entrusted to invest the 100 million I think very few of you will be looking to get a hundred percent of the market in one day you know unless you find an index and willing to hold that for a long time you know if you were gonna pick stocks who cares if it takes you three years to or five years to find all the stocks you need to put the money to work you permanent Apple I mean can you just repeat the question sure the question is Manish what is your managing an insurance float or a vehicle that would give you more permanent capital yeah so you know I bought an insurance company about three years ago and it's a good it's a good company good people but it was a mistake and and thankfully we've we reached an agreement to sell the business it hasn't closed yet but it's going to close soon and it'll probably be a good asset for the for the for the buyer but I I have learned that it's a difficult business and I used to have illusions about the wonders of float all those delusions have been washed away and so I don't think I'll be entering the insurance business again in this lifetime I would like to enter the funeral services business though at one time earnings that'd be great for my entrepreneurial or still an entrepreneur how did that impact how the new management I can repeat the question please so the question started with you know firstly thank you for writing your book it's wonderful and very illuminating and then the question was you know as an entrepreneur and former entrepreneur how does that influence your interaction and learnings for management teams yeah I think it's a it's a it's a huge advantage to have run a big business before and even provide funds to some experience of business but it's a huge advantage to to have done that I think Buffett has a quote he says how are you going to explain to a fish what it is like to walk on land and and he said that looking in at businesses and running a business is the same difference between trying to explain to a fish how to walk on land and actually walk on land so so it is a huge advantage and you know the the good news about this is the scheme doesn't matter so it was very important for Warren to run the Wilson coin operated company it didn't matter that revenues never will even hit a hundred thousand or a million that that's completely irrelevant so there - the two factors one is that the way our brains are wired we regain a huge amount of advantage if we get exposure to running businesses during our teen years specifically between the age of about 11 or 12 - or 20 or 21 that window of time is when the brain is set up to specialize and in our modern society in that window of time we are asked to be jack-of-all-trades you know take classes in all kinds of subjects and all of that and and by the time we start specializing that window is closed so if you if you study people I gauge so Buffett or Leonardo da Vinci or you know a whole bunch of other people you will find that they had some very amazing experiences during that 11 to 20 or 22 period and if they didn't have that experience in that period we would have heard of them and so you know better late than never so for all of you in the classroom obviously that window is is gone but you can still learn it's not gonna be as efficient but you can definitely still learn and so I would say that even if it's a Mickey Mouse business some small thing you're doing somewhere I just think you're gonna learn a lot you mean you'll learn an incredible amount by meeting payroll by paying rent by negotiating at least 100 other things and so I think that the scale is in unimportant but being in the trenches and and especially if you're blessed and the business fails then the learning is exponential so I hope all of you try to start businesses or run businesses and I hope you fail because then that will sow the seeds of greater success download particular guy Spier it's a great area well I think I think I think commodity commodity based businesses can have modes the single the single greatest mode a commodity based business can have is being a lowest cost producer so if you have two ingredients in a commodity producer one is there at the bottom end of the cost curve and the second is that they don't have leverage this is money in the bank especially if you can get it at a low valuation so if if you want to own the oil fields of Saudi Arabia where you're bringing up oil at two dollars a barrel and you're selling it for sixty that's a really good business if you would own you know the iron ore fields in millibar region of Australia we just scoop up earth and just transport it to a port and then send it to China and they pay you for the iron over toughest mining it's a great business so so there are many commodity businesses but there are really good you know in any environment and we've seen that I mean they built the whole economy on that and and so you know if you got I know reserves in Brazil if you've got just no-cost reserves and low-cost operations putting you the notion of the cost curve no leverage and a purchase price which is very low because the world's not interest rate so usually for example let's say for example some commodity price collapses let's say iron ore price collapse or oil prices collapse etc at that point the best thing to do is to focus on these attributes you know so on one end you can buy for example things like the oil fields in Saudi Arabia on the other hand you can buy you know offshore oil oil being sourced offshore than not-not-not C and so on where the cost to bring it up may be north of $60 a barrel right so there's many choices you have and so you're better off staying away from the high cost producers even when they achieve and you're better off focusing on the low cost producers and so for example one of the reasons we've done well with this this company in India which is given us a 9x so far is that there is a moat it's kind of difficult to understand the mode in that business easily but there that they are the lowest cost producers in the market they serve and so that gives them a huge tailwind and that tail wind is enduring for a long time while finding simple businesses with durable boats in distressed industries would obviously be the ideal investment situation some of you already kind of alluded to that this very large number of investors globally searching for those exact investment opportunities which can result in a limited number of companies that do meet all the criteria that you outline as the core framework in your book so which of those factors are you willing to compromise on and which ones he considered deal-breakers yeah that's a good question so actually there's a guy Eli Broad he's a billionaire he's made money in multiple industries he was a founder of KB Home amongst other companies and he wrote a very nice book it's called the art of being unreasonable and it's a great book I love that book and that's what you want to be in equity markets you would be extremely unreasonable and so there's no need to compromise because you always have the choice of just sitting on cash and so so I think the nature of equity markets is that people vacillate between fear and greed and there's a large number of businesses around the world that are in these option driven markets things are gonna show up and I think for example if you focus on looking at places like value investors club or some 0 or any number of these other forums where the value crowd hangs out I just you know read some of the highest rated ideas and such you're gonna find stuff from time to time that's going to increase you and and if you don't it's not aligned in the world just keep reading only act when all ducts line out this is not a business that you need to compromise the questions with your background in the tech area what's your insights on how technology is affecting the investment and what do you see as the future of technology investment I don't think it's going to change I mean I think let's put it this way we are seeing a movement towards passive investing you know we're seeing more assets going and in general that's really good news for top pickers the more drones there are in the market the better off we are because you know the lemmings are going to act a certain way and some things are going to get overpriced and something's gonna get under priced so so I would say that I don't I don't see technology having a particular the thing with investing is it's part art part science you could you could perhaps see AI come in at some point I just think that point is quite far away because again you'd have to blend a lot of different things into into the AI if you will so at least the foreseeable future I don't see technology being a deterrent and I actually think we've got tailwind because we've got a movement to indexing yeah what's your biggest takeaway having mouth and personally denied being misunderstood hey could you repeat that please yeah so you know being friends with Charlie Munger what do you think is the the most surprising and most misunderstood about about him well I mean I think I think Charlie is just if you if you just completely ignore investing he's just an amazing incredible human being very very high quality you know just and you know we see I mean anything I can see in interactions at a one-on-one is not that different from the interactions we see you know at the book shop meetings and so on you know obviously very high quality person and he's surrounded himself with some really high quality people his friends and such so so I think I think he's a great role model and I think he's most of the lessons you'd want to learn from both Warren and Charlie are easy to grasp without knowing them because there's so much in the public domain so so I think that you know I Charlie had mentioned I think I think last year the time before that at the daily journal meeting that he had made an investment in 2002 I think it was a company Tenneco and he had done a you know 8x or something on it in two or three years so that 10 million became 80 million and then he gave that 80 million to Lilu which I think now maybe I'm guessing north of 500 to 700 million or something and so if you think about it you know from 2002 to 2007 teen a 15 year period he did something like a 70 X or a DX on on an investment and on a you know on a significant amount of capital ten million in the sense that so if if some of us had let's say a hundred thousand dollars for example we won't have as much restriction on how aware that could be invested but I didn't do as well in that period and and I brought it up with Charlie you know I actually recently when I met him I said hey you know Charlie I think a lot about that ADX you know that was pretty pretty cool and and then he just he just said legs is that it only happened once in my life you know he said it just happened once you know that's so what he was basically saying is that you know in in 93 years or he's only 90 for another month in 94 years one time there was a 15-year period where he did a 70 X but the thing is that we don't need too many of those you know even if we get one or two of those types of things in a lifetime and so I like to think of that and what I call the slingshot or I'm not sure what the correct word for it is right I think that it's a two-step right so one way you can get the ADX is by just finding Jeff Bezos early you know and figuring out long term cash flows coming out Amazon so that's one way you can get you know 100x or whatever else another way to do it is the Munger way which is this two-step and the two steps are not easy because you know if I wanted 100x I need two 10 axes back-to-back and but the thing is that if you were gonna scan the horizon in his case he read Barron's for 50 years did nothing and then acted once on one particular article in Barents out of you know 2500 issues with each issue having at least 10 stock tips so out of twenty five thousand stock tips coming at him he swung at just one right and then out of all the people he could have given money to manage he picked just one and in both cases he was he was right but but he he didn't make those decisions three times a year he he's picked a money manager once in a 94 year life and he picked a stock to buy once out of 50 years of reading balance so the the shooting fish in a barrel especially when the water is drained out does happen in equity markets and you know many times it's happened to me where I should have put a bucket out to collect the rain when there's a downpour and I put a thimble out right when it's raining gold and and such so I made that mistake many times or it's raining gold I collected but then I sell it that's happened a lot so I'm trying to learn not to sell early and I'm also trying to learn not to buy an insignificant amount so there's a lot of lessons from monger I think the best thing is to just read poor Charlie's almanac I think that said it's a great book and I tried to read read it every year and every time I read it I could swear I found things in there and I never read before so it's great are choosing places in like nonprofit world and charity world I've ever did is choosing places to invest their rotten shoes in places to invest returns okay yeah so it's been a lot of fun duction I just finished ten years which is great hey I think it's it's more difficult to give money away effectively than to make it I think if you're looking for high social returns on invested capital if you will that's a good thing to aspire to and it's a good thing to try to measure but the nonprofit world is a very different world than the for-profit world so we were lucky in reduction in the sense that we were able to find a model that offered a number of things it offered very precise measurements of you know input was an output and it offered very high returns and measurable returns on on you know what was going in which there are many many endeavors in the nonprofit world that are worthwhile doing but we're measurements are very hard and so what my wife and I did was we flipped the problem we basically said we inverted the problem we said that we're going to ignore every endeavor that makes sense if the measurements are hard because we have limited amounts of kind of arrows in the quiver if you will so we can be choosy but if we pick up if you pick an endeavor where measurement is hard then we wouldn't know whether we're succeeding or failing and and so a market system in in the for-profit world has a very tight feedback loop if you start a business and that business does not produce cash eventually you're gonna be out of business and you know the market system will eliminate businesses that are not self-sustaining but in the nonprofit world if I am for example giving away two percent of my wealth every year that can continue forever regardless of whether the endeavor is going into is any good or not so there are no signals automatic signals that come out of an non profit world that will allow you to course-correct in the for-profit world you're going to get signals to course-correct if you ignore those signals you'll go out of business so there's very kind of direct impacts of not doing course corrections one of the issues that we're gonna face is that the endeavor that we are involved with works really well but can you can take a finite amount of capital I think I think once we get past four million or five million a year we cannot put any more capital into that endeavor we run out of grains basically and and so after that I don't know what we will do we will try to find the next highest endeavor we might have to you know let the cash pile up while we're trying to do that or we might find that we need to compromise a bit and lower the returns and go for it so I don't know we haven't reached those points yet and so the nonprofit world is more challenging but I think the intangible rewards are a lot higher I mean I think I think my life would be far less interesting in fact I think I might say there would be much lower quality of life if they was in the duction so I'm very grateful it's there I'm very grateful we found a cause that worked a very grateful there's a great team we've scaled up and also so far we haven't hit that point we gotta hit that point soon I think thanks to rein industries and and Sergio Marchionne II had feared that we need to find the next endeavor which will be great they'd be a good challenge I think other speakers we've had I guess se have time to go it alone mentality okay roll everybody you're on the show and you discuss a little bit about Alice you know you don't want to look at your stops all the time you have all these analysts and you also kind of also as five years paula zahn zero and getting into a public to come keep the information with all that in mind you think then that value investing and investing something you can do I'm not your full-time job right so that sourcing this comes in tech like I'm waiting for that one checking my portfolio and baggers Ireland I'm sorry can't beat that yeah so you know the question was you know for the most part or not for the most part you're completely independent in terms of idea generation waiting for the ten baggers you know with you know benefiting from Joe public and some zero and the Vic etc do you think someone can just do this as a part-time job in fact I think it's a negative to do it full-time I think again because you're going to have more activity you know there's a there's a radiation oncologist friend of mine actually he was my college roommate and you know I I tell him he's confused about what is calling in life is because he's so excitable value investing and sometimes you call me in the daytime and I'm saying you know I hope someone doesn't have some you know radiation going on right now while you're you know shooting the breeze with me here on this talk of that talk or whatever else and and he's done really well actually incredibly well I mean he makes a lot of money the oncologist but I think his his earnings on the investment side at the growth of Network Dwarfs what's happening on the oncology side and and so I I tell him I said and he agrees that oncology at this point is mostly a hobby for him and but he doesn't have that much time I think he might have maybe 10 15 hours a week and for many years I was a part-time investor because I was running another business on like 95 to 99 so it is not a disadvantage to be part-time in fact I think it's an advantage because you don't you have less of a reason to act inside so you can you can be even more patient and and so I think it's an advantage to be part-time we're so grateful for the time you know maybe we can end with just any closing piece of piece of advice that that you may have for the students that you want to share or if you don't have any that's totally I would I would just say that I was very excited to do this talk and I was very excited to share with you the simple concepts of you know the rule of 72 runway starting capital you know you know and you ready to return and all of those kind of things and playing with those numbers and I think having fluency in that and more importantly it doesn't even matter if you go and do that area but I'd say that just what I started with which is that you just have to take a simple idea and but you have to take it very seriously and you have to become obsessive about it very intensely obsessive and thank you very much our wind [Music]
