Mohnish Pabrai Lecture at Boston College

[Music] [Music] [Music] okay monash we're incredibly honored to have you today thank you so much for being here and uh you know the floor is all yours we can't wait okay well uh arvind it's a pleasure and honor to uh to be with your class and i i forget what your this is but it's uh it's getting on in the years that we've been doing i think it's number 10 actually number 10 the 10th anniversary all right you know time flies when you're having fun yeah so i think we did did we do one in in live was it one live and nine virtual or yeah that's right something like that yeah yeah so uh we'll have to try and maybe next year just just to celebrate life uh do it live or something that would be great you know so uh but anyway it's it's always uh it's always been fun to interact with your class and a big round of applause for arvind for the wonderful work he does so thank you for uh what you do for us and uh yeah it's i always i always enjoy the interaction with you and your and your class and usually i'm i'm clueless what i'm going to talk about and uh that was the same situation today but i think i figured out a couple of things i think might be things i haven't talked about much in the past so that'll be fun so without much ado i'll get going uh basically the same format you know i'll go through a monologue and then we'll open up for questions and you know we really don't need to talk about what i talked about unless that's of interest uh whatever's on your mind is is fine you know uh i think this was maybe five or six years ago and uh there's a video on youtube i think where the title is competition is for losers and uh i think in 2015 or 2016 uh peter thiel uh posted that video on on youtube and it's uh it's a lecture it's one of his lectures that he gave at stanford business school and he used to uh i don't know there's still teachers there but he used to teach there in terms of you know uh things along the lines of startups and tech firms and so on so this particular this particular lecture became quite popular i think it has a pretty large view count and i think subsequently some portions of the lecture became part of his book zero to one but but i think the lecture is a is a very good one to attend i don't know whether he would really want to give that kind of lecture again today especially after the roth ira backlash he's faced and such so but he hasn't removed it i don't know whether he has even got the right to remove it but but it's there and i think it's a good one too to take a look at and i'll just go through uh you know a few minutes of what he's what he focuses on in that lecture but i would would encourage everyone to go you know see the see the video directly rather than get it from uh you know secondhand from me but peter basically describes i mean he divides the business world into two sets of businesses he says that businesses are either businesses that are monopolies or near monopolies or there are businesses which are in very competitive spaces and basically a very small sliver of businesses will end up in you know these oligopoly or monopoly type situations and most most of capitalism is a dog-eat-dog world and it's very competitive and such and and he makes the bold assertion uh he's telling his students basically there is no point to wasting your time and forming a business or going to work for a business that deals with serious competitive forces and of course you know probably 99 of capitalism is businesses that are very competitive which have a lot of competition and so on and maybe one percent or less is you know these uh unusual modes and uh competitive advantages which give you uh give you some you know breathing room if you will and um he he says that the businesses that are monopolies go through typically go through some serious uh lengths to try to convince you that they are not a monopoly and because you know they just don't want the added attention and they don't want regulatory changes or you know just people don't like monopolist too much so they like to be under the radar and at least portray and pretend for the most part that they are not monopolies and the 99 that are in hyper comparative spaces spend all their time trying to convince you that they actually are monopolies that they have no competition that they have great competitive advantages and look here's my list of advantages that nobody can touch me on so the basically what the businesses are presenting for the most part is backwards the monopolists just want to tell you oh poor me i'm not a monopoly i'm just one of many competitive businesses and the ones which have the loser business models want to try to convince you that no no i'm a very special business and i have these special qualities and one of the issues that comes up is i think i think your class is going to enjoy uh maybe in the next few weeks when i think maybe nick's sleep might be coming to speak to them we'll see uh i think he i think he spoke last year i don't know you have one on your schedule or not but nick and warren and charlie all these luminaries they read a lot and uh nick especially you know would just sit down in his office arm chair and him and his partner case would just pound through a large quantity of annual reports every year and uh especially case zakaria didn't even have a desk i mean in their setup in london he just had a very comfortable armchair and most of the time he didn't even have shoes on you know heaven forbid and his routine was to be in the office i think nick probably also didn't have shoes on but the routine in the office was just you know be there without any shoes and in the case of case not even a desk and you know have this big overstuffed chair and then pound through a large number of annual reports and maybe when when you have nick you can ask him about why case felt that he didn't need to have shoes on but you know i digress but anyway so when the monopolists have no desire in telling you that they're a monopoly then to some extent when you read what they have to say is a little bit problematic because there are probably two things going on for the most part number one you know a lot of annual reports they're not written by the ceo you know it's a pr firm or you know the ir department whatever just comes up with some document and uh even the letter to shareholders whatever and the ceo just signs it whatever or even if it is uh actually written by the ceo the ceo doesn't really want to reveal his hand especially if he's a monopolist because you know they just don't want the attention so if we look at let's say well let me let me start with like so there's a the obscure company in in india that's been in my portfolio for i think about like six more than six years it's called rain industries and it's it's not really a great business uh please don't go buy the stock but anyway so rain is maybe not even a good business i don't know why i make such investments but such is life rain is uh basically i would say maybe somewhat of an above average business it does have a gifted capital allocator but what it does have is it is a low cost producer they don't really beat their chest and tell you that they're a low-cost producer in fact it hardly ever shows up anywhere in any of their writings or transcripts or anything all you can all i can tell is that when their competitors have pneumonia they just have a mild cold and so they're in this commodity space where their margins fluctuate and sometimes the industry is in bad shape and a lot of competitors are losing money they have plants that are you know bleeding bleeding red ink and so on rain doesn't get to usually red ink plants the plants stay profitable while their competitors plants are bleeding red ink and i've studied the business for more than six years and i have met with them a few times the ceo is a doesn't really like to meet investors and so for the first three years uh i couldn't even get him to take a phone call from me and since then i've i think only i've only met him very like maybe uh twice i think i met him twice but in all these six and a half years that i've followed the business i do not i still do not understand why is it and what is it that gives rain this particular low-cost advantage and this particular nuance of being better than their competitors i also do not understand fully why their competitors cannot clone it uh these are obscure to me i i know it's there because it's there in the numbers i also know that the numbers are not made up because i i know that the people are very high quality uh and uh that's not the kind of games they would play but it remains a mystery it's there it's very tangible it's there but we can't we can't really you know put a finger on it and and and that is actually the nature of many monopolies i think a business like rain industry sees no upside in educating me because if they would educate me about exactly what their competitive advantage is they would also be educating their competitors and that's really not a much interesting so a lot of a lot of public companies they really don't they think that they will lose some of their edge if they openly share how their business runs and what their business model is and so on so this basically flies in the face of case zakaria being barefoot because you know if if these ceos are not telling you exactly what's giving them their advantage then all that reading gets somewhat diluted because it's like you're not really getting to the core because they're not really they don't want to talk about it so you have to then in that case you have to kind of like a jigsaw puzzle you know that their advantage is there and you just kind of have to back in to try to figure out hey how is this actually coming about and is this sustainable and and all these things and um so if we look at a business like amazon right and jeff jeff is a gifted communicator and he's a terrific storyteller a great writer and he has written great letters and he's articulated uh reasonably well i would say probably very well things that he wanted to share with his with his shareholders and investors but he also he also kept many things close to his best and he didn't want to share many things because he understood really well that if he were to share those things amazon would end up being at a disadvantage because it would just invite it will invite scrutiny and competition and so on and we'll get to we'll get to that in a second uh but one of the examples that peter thiel uses in his talk is he uses the example of google and he says that you know we clearly know that in search google has a monopoly we know that and we also know that in digital advertising google and facebook control large swaths of that world you know they dominate and in it'd be hard to argue that they don't have an oligopoly or monopoly type position in those markets but when uh the people from google talk talk to you they say oh listen poor me i'm not really a monopoly look at the size of the global advertising market and then look at me i'm just such a small portion and then look at the size of the internet industry and then look at me i'm just you know anybody's search in that industry and so you know don't really focus on me being this be all and end all i'm just like a tiny two-bit player in this big ecosystem so they want to deflect as much attention away from what is their massive competitive advantage right i mean they just really don't want to talk about it and if we go back to jeff at amazon they stumbled onto cloud you know they were kind of feeling their way in the dark and you know amazon's dna is to throw a lot of stuff against the wall and most of the stuff they throw against the wall uh fails it doesn't work and but they also don't spend much on the stuff that they throw against the wall so they they have kind of these small bets and they're kind of controlled experiments so that if they fail they're not really going to affect the company that much and if they work then they you know end up creating incredible new businesses and business models and stumbling along in in the dark they started to basically uh think about look they said look we've got this great technology for selling all these things can we open this technology up to others on the internet to sell stuff too that was the kind of the beginnings of how they were thinking about it and there was a a lot of pushback within his management team saying no you know these are our crown jewels we really can't go to like a barnes and noble or someone we compete with and just give them our technology because you know that's you know these are our crown jewels and jeff was visionary enough to tell those people in this company that look if bonds and noble has advantages in selling books at a lower price than us and making more money than us in that endeavor just because we enabled the technology end of things for them they deserve to be the ones selling those books so he said it's perfectly fine if they cannibalize us because that means that they have an advantage in an area that we don't and we can become you know great sellers of pickaxes in the gold rush uh we don't necessarily need to be the guys with the pans on the on the river or whatever and uh so they they they started opening up uh different aspects when they had to open their platform up it required them to redo and it was very painful then for them to redo all their spaghetti code into apis which could be then allowed for third parties to write to the apis and then eventually that over time led to what became aws because they just started to find out that they could do more and they didn't really need to be competitors and it didn't really even need to be people who were selling stuff it could be people trying to do different things in the cloud and it just kind of incrementally they finally got there but many years before they came out and said that hey here's aws here's a new business blah blah they had figured out that they had a golden goose and they also figured out that they were ahead of anybody else with that golden goose and there and jeff also understood that the golden goose really did not give him a lot of competitive advantage but that if he was able to keep his competitors at bay and get a time advantage and scale in stealth it would make it very hard for the others eventually to catch up to where he is so they flew under the radar and if you look at his writings etc they really don't talk about the cloud even though they already had customers and they already had a business and all of that i think till like 2015 or 2016 somewhere around then that's when the the whale finally surfaced in the first time amazon actually acknowledged that they had a business unit called aws and they actually released some top line numbers for aws and you know one of the quotes that warren buffett had said to me when i when i met him for lunch with guys fear he and i don't know this is the buffett quote or it's a quote by someone else that he was quoting he said to me a whale only gets harpooned after it surfaces and he said that in the context of ajit chain you know i was talking to him about ajit chain and how ajith is like so quiet and secretive and doesn't really talk much and he has this you know monopoly business and whatever else in berkshire and you know you never hear anything about it it's a huge business and then buffett buffett said well you know varnish available only harpoons when he gets when it surfaces and ajith has no desire to ever surface anyway so aws the whale surfaced in 2015 or 2016 and as soon as it surfaced two companies immediately took big notice of this microsoft jumped on the cloud in a very big way and google jumped on the cloud and they were both actually shocked as to how much growth and scale amazon already had and jeff probably realized that maybe he surfaced too soon or maybe he didn't have a choice maybe his internal people were telling him listen you can't you know public company you're reporting stuff and you can't just you know shove everything under a rug at some point you have to talk about what what you do for as a business and um but anyway the whale surfaced and instantly microsoft pounced on that in a major way and and alphabet google also pounced on that in a major way and the difference in the the two players that pounced on this market is microsoft's been selling to the enterprise for like 50 years long time 40 years and uh google really didn't really have any expertise in selling to the enterprise they were really more a company that you know created great technology and then they you know put it forth in the world and it just virally went forth from there so google still struggles with trying to get to the enterprise and but microsoft microsoft also had a second advantage is they were they had spent more than 40 years understanding how to scale by cloning their masters at cloning and so they they understood they were not in almost all their businesses they're not the first ones but they're really good at copying what people have done and what the situation we find ourselves in today is aws still leads because of that multi-year advantage but microsoft has has caught up quite a bit i mean they're they're still a number two player but they're significantly ahead of google uh which is a distant third uh and then pretty much in the us we don't have any other players uh it's basically a three horse race and it's unlikely that the the positions of these three are going to change uh and such so anyway uh basically what what ends up happening is that when we as investors you know sit down and read a lot this is a handicap we run into where we're looking at different businesses and they the owners or the managers of these businesses really have no desire in spoon feeding us uh on exactly how they make their money and such and it takes time many times i think even i think urban when you did a deep dive on costco there were many facets of what you found and your students found which one wasn't really laid out in costco's annual reports in terms of them explaining hey look these are these are the multiple ways in which we gain advantage you have to kind of sift through and look at their behaviors and gradually try to understand how these pieces fit together and how they led to advantage and and so on so i think the the thing is that many times one of the one of the tools we have to use in order to try to get to the monopolist is in most cases it will eventually show up in the numbers so a great business which has these oligopoly or monopoly type characteristics they they will not be able to mask it in terms of the reporting that they have to do the numbers would show that just like in rain industries i could clearly see it in the numbers i just couldn't see it in terms of you know how and why so the how and why is not always made clear to us and uh we just have to we have to try to figure it out and recently you know i had looked into a number of the large chinese tech company so exam so you know we've had alibaba and we've had tencent we have baidu and then you know so there's you know a few large chinese tech players and then you know we have a a few large u.s tech players we have amazon alphabet microsoft facebook so we have you know maybe seven or ten companies across both of these across the u.s and china and all of these apple for example and all of these companies it is very clear that they have strong competitive advantages regardless of what they tell us in their writings or quarterly reporting it is clear they have those advantages from the either from the net income numbers that they produce or the top-line numbers that they produce or in some cases you know we are consumers we we use search all the time we use amazon all the time we use apple products all the time and and if you're in china you're using wechat all the time and you're using alipay and all that so you know as consumers we have uh we can clearly see that there are monopoly characteristics these uh businesses and the we can also in many cases see that the economics are very favorable and i found 10 cent a really interesting uh case study out of all of these companies so i think someone like jack ma at alibaba at least used to love to talk not anymore but there was a time when he liked to talk but we don't hear much from him and actually he would uh pretty clearly and openly describe the alibaba business models and how he thought about it and you know what and how they got their competitive advantage he was pretty open about it and i i remember that one time i was uh listening to one of the jack ma videos and uh you know someone was asking him about the differences between alibaba and amazon and jack went to great lengths to try to explain that his business was very different from amazon and he also went on to say that the amazon core business model what they started with made no sense to him and uh what he was basically saying is that look if i were to do all the logistics and take ownership of the inventory and own all these warehouses and own all these trucks and own all these airplanes i would need 10 million employees to do what amazon does and he says that at that time i think alibaba had like 25 000 employees he says you know we have 25 000 people and that's a significant amount to manage and handle uh we don't even know how we would possibly handle 10 million people and if you look at amazon on the other side i think just during the pandemic they hired more than a million people and uh i think they're approaching two million or maybe they've gone even beyond two million employees so it's a pretty it's a very large footprint and operationally very intensive and so jack basically took the approach saying look we help people get and buy things that they want and need and so on so forth we just do it in a different way than amazon does so he's he's done it more with partners and uh historically more of a digital control over the digital platforms and enabling a lot of partners and service providers in the ecosystem to get to the finish line which is different from the way amazon did their core business they do some of that with marketplace and so on and with their advertising businesses and such but then when i when i looked at 10 cent and i went through 20 years of 10 cent transcripts you know they've been public since i think uh 2001 i think when they went public i think 2001 or 2003 i don't remember maybe 2001. and uh so you know right from the time they went public till now i looked at every everything that the management team and ponyma ever said about their business and in 18 or 20 years basically pony ma has said nothing you know if i look at everything he said and then i went to the 10 cent annual reports and in the annual reports the letter from pony ma also says nothing so in 18 years there's nothing like for example this is what they would say wechat now has uh 300 million users last year it had 200 million users it grew by 33 okay they would report that fact with no other data behind that and then next year they'd say oh wechat is 420 million users and last year it was 300 million and that's it nothing and then you know wechat would keep growing and you just keep reporting that the numbers are growing till now it's over a billion but there was no there was no talk any time anywhere in 18 years hey listen guys wechat is kick ass it's a great monopoly we have great economics and we make a lot of money and we control payments and we control this whole ecosystem and blah blah blah that's never been talked about okay and so actually i don't think most people who look at 10 cent understand tencent because then uh when i was looking at tencent i looked at this uh south african company called naspers which you know i think they they used to own like 31 percent of 10 before 10 when 10th and been public and they've held that position for the most part i think that i think now naspers which is spun out a company called process process owns like 29 of uh of 10 cent uh cousbecker at naspers i went through because i was really curious so just to digress a little bit i think we have we have sometimes i'll just digress a little bit and then i'll come back to uh the point i'm trying to make so we have this 100 plus year old newspaper publishing company in south africa called naspers it's it's a public company you know family controlled uh kind of a boring little business maybe a market cap of like 100 or 200 million and in 1998 they appoint a hired gun ceo i think that's for the first time ever it was not a family member uh who was going to run the business and they appointed kuspecker a afrikaner as the ceo and coosbacker said to the family listen i don't want you to give me a base salary please make my base salary zero and i don't want you to give me an annual bonus please make my annual bonus zero and i don't want any employment contract anytime you want me to leave you can let me go with no severance and all i ask for is that whatever value i create three percent of that accrues to me so the family said where do we sign you know and uh you know they said hallelujah someone wants to work for free and take three percent of the upside let's go and uh so gusbecker came on board and um he took that business from under 200 million to valuation of probably if you looked at the assets inside the business more than 200 billion and it went from less than 200 million to 2 200 it's like a thousand x is that is that correct like a thousand x yeah uh in about 20 years okay and and the amazing what i found most amazing about that is here you have this you know itty bitty newspaper publishing company in south africa and you get this outsider who comes in and he makes a bunch of crazy.com bets in 99 98 and a lot of them blow up they go to zero but he makes one bet with 32 million dollars and for the 32 million dollars he gets almost half of 10 cent and this was i think i think the bet was made in yeah i think the bet was made in 2001 and i think then and or maybe earlier around that i'm a little fuzzy on the exact dates and then i think tencent went public in a couple of years later but the interesting thing was that when tencent went public that stake was worth already worth in the hundreds of millions if not in the billions and they never sold a single share so very soon the their 10 cent stake would have been 90 of the total asset value in the business and then in a few years it became 95 and then it became 97 and through all of that a higher gun ceo basically decides i'm not selling a single share and i said how does somebody so i would say that whose becker is nic sleep on steroids okay so in the case of nick sleep nick sleep made bets on amazon and and berkshire and costco these were large holdings and the amazon position became quite large i think i'm guessing it was probably maybe one third or more of the pie that he was he was running and i'm just reading between the lines from his letters that he was facing regulatory pressure for the you know non-diversified and large stakes etc and i think one of the drivers that maybe case and he had was that look we are independently wealthy we have more money than we ever thought we'd have why do we need to you know sit here and keep writing letters to all these people we can just you know wrap up shop and we can have as large as take off amazon as we want individually and no one's gonna tell us anything so you know he hung up his boots a long time back and they've outperformed everyone since then because they just kept those stakes in those businesses and if you just kept amazon at one third of your portfolio in 2013 or something and you didn't touch it you pretty much outperformed everybody without doing much real work if you will from them so i found that in the case of cousbecker he didn't like do a victory lap when 10 cent was a 10 billion dollar position and say okay look we invested 32 million it's now worth 10 billion it's now worth 98 of our total assets it's been a great ride let's take some chips off the table or let's take all chips off the table he took no chips off the table right i mean he hired gun he took no chips off the table and he took no chips off the table until 2018. 2018 was the first time naspers sold any 10 cent shares and in fact what they did with the proceeds is they brought back their own stock that was part of the reason they sold because there was a value gap and if you own shares of naspers so you look through shares of 10 that you own for each share of naspers it has actually not gone down from 2001 till today it's actually gone up because they've done buybacks which have given you so basically in effect from an outside shareholder perspective cousbecker has not diluted or sold 10 cent in 20 years so it's it's very very strange some obscure south african company owns 29 of one of the largest most successful chinese not just tech any chinese business ever in the history of china and it just sits there and doesn't do anything so i said okay pony ma is no fun he doesn't talk he doesn't say anything he's like a government bureaucrat if you ever hear him talk you think that some guy who's a member of the ccp is talking to you it's not some entrepreneur talking to you so i then went and read everything cruz becker had to say i said this guy is interesting because for 20 years he doesn't sell this thing and kuspecker talked about punima i said okay this is good because now i can finally understand because naspers has had a stake in tencent and they've had a they've had two board seats for a very long time i mean right from the time they were in public i think maybe after that and so kus becker has been on the board for a long time and if somebody knows pony ma was an outside shareholder it's coospecker and in the naspers letters and the naspers transcripts which i went through about you know 18 years of those there is a lot of commentary on tencent and on purnima and what koos becker said he said look there is no management team on the planet in any tech or non-tech business anywhere in the world that is better than tencent okay these are his and he didn't say this once he said he said this multiple times i said whoa that's a pretty pretty bold statement to make that you know here's this company which is the best management team and now if you look at the numbers for 10 cent you would not argue with that statement okay i mean 10 cent went from nothing to becoming one of the largest market companies anywhere in the world and it has dominated the businesses that they're in they dominate in messaging and payments and video games and so on they dominate a number of categories throughout and so then i said why does cousbecker think that of all the businesses around 10 cent is the best i said is he biased is he that like he's drinking the kool-aid you know because after 18 years of uh 65 annualized return or something like that on your on your investment you would have drunk a lot of kool-aid okay and you would say you know of course you would you would create a big shrine to bonima and you would worship at that shrine every day why wouldn't you do that but i said what if he's actually rational and logical in making that statement it's not just some statement he's making so then i try to understand why does koosbecker think that ponyma is better than jeff bezos or pony ma is better than jack ma or pony ma is better than any tech business better than the netflix ceo or anyone else why do they think that and i kept thinking about this question and then finally it dawned on me why he says that and i had an aha moment i said whoa i think i figured this out and what i figured out i now and then i understood why pony ma doesn't want to talk to anyone about anything he just wants to be kind of buried deep somewhere executing his model so what i realized is if you look at these seven or eight companies you know the three or four in china and you know the four or five in the us there are actually only two of them that understand capital allocation well the two uh large tech businesses in the world that understand capital allocation well according to me are amazon and tencent i don't think the others the others understand it but i don't think they can execute i'll explain why i say that so if you look at the balance sheets of these large seven or eight players they are all drowning in cash except for two companies 10 cent has no cash it has net debt and for the most part amazon has no cash it may not be net debt but basically has almost no cash but if you look at their competitors so if you look at microsoft you know massive dividends and buybacks and you know tens of billions you know i haven't looked at how much cash microsoft has but i have to imagine it's you know up there 50 100 150 billion whatever amazon apple up there google up there alibaba up there massive amounts of cash and 10 cent no cash and amazon no cash so then i said why do 10 cent and amazon have no cash when they have businesses some businesses of amazon are are gushing a lot of cash well the reason is that in the case of amazon they keep throwing some stuff against the wall and they still throw stuff against the wall at such a furious rate in addition to investing in their existing core businesses that they've never been in a situation where there's 30 billion sitting on the balance sheet it's never happened and it's unlikely to happen in the future if you look at a business like apple it generates so much cash but they have no use for the cash so they invest what they can in their core business and then beyond that the only really meaningful thing they're able to do is buy back shares and even after all the buybacks they still end up with you know 100 plus billion just sitting on the balance sheet and it's gushing massive amounts of cash every quarter and then when i looked at 10 cent i find that the cash balance is negative you know and it's been negative for a while and i realized that basically pony ma has a very simple business model and i don't think he's ever going to describe that business model to anyone so here i am the indian guy has to describe the business model because he won't okay and uh we had to do that in irvine's class you know so the business model is really simple he has two businesses one business that he has is his army of software engineers i don't know how many engineers here maybe 25 000 maybe might be 50 000 now but it's a large army of software engineers and these this army of software engineers the the way the software business works is that the productivity difference between an incredible engineer and just a good engineer could be a thousand to one so you you would be willing as a company like 10 cent to even pay 50 million dollars a year to a truly truly incredible software engineer and the run-of-the-mill mill ones you might want to pay a hundred thousand or something like that so there's a you know we just have this massive variance and ponyma understands that really well and he's really good at sifting through you know which other rock star superstars and he made sure that those guys are well taken care of etc so he's got this army of engineers it's got this it's basically a massive bazooka that he has with this army of engineers and he decides where and how he wants to fire the bazooka and they the way they fire the bazooka is for the most part even if they have some missiles they end up with this total dominance so for example they have total dominance on video games okay and i realize that it really doesn't matter what the ccp or the chinese government does regarding video games it is like a pimple on a camel's butt from 10 cent perspective uh they have almost no profits or revenues from within china in video games for less than five percent of their video game top line and bottom line that's coming from china so as soon as the chinese communist party started making noise that this is not such a great thing to have all these people playing all these video games within a femtosecond that bazooka got completely pointed outside china so he just took his army and said okay ignore china let's focus on the rest of the world and in fact i would i would go even a step further and say you could ban video games globally and tencent would still continue to prosper because they would still have the army and the army would just get redirected yes there is a portion of the army is very specialized on video games but they would they would eventually be able to convert that into something else so so he's got basically this army which can do a lot of digital stuff in a variety of fields and uh they're really good at it so when when tencent makes like for example they made 15 billion dollars cash flow last year pony mark goes to his digital army and says what do you need how many more engineers would you like and the math is really simple every billion dollars you spend gets you at least five thousand grade engineers so if you take a average engineer two hundred thousand five thousand engineers would be one billion dollars a year of expenditure okay so they tell ponyva pony give me a billion so pony says yeah that's okay here's your billion but that's not enough can you take five billion and they say no we can't handle that it's hard for us to hire five or ten thousand engineers i cannot hire 25 000 great engineers i just i don't know what i would do with them and how i would deploy them so i cannot take more than a billion so pony says it's so sad but it's okay here's your belly now pony has 14 billion left so then he goes to his business number two his business number two is he's got 30 digital war buffets okay and he says you know these losers in business number one they can't use my money so here's 14 billion have fun and then they go and they invest that in uh some of it will be whole acquisitions but most of it is small minority stakes in a number of businesses okay and that digital warren buffett which is not one guy maybe you know 20 30 guys put that 14 15 billion to work and just to make sure that all the money is used pony makes sure that they spend a little more than the cash he generates because it bothers tony it doesn't bother sundar that 70 billion earns less than one percent and it doesn't bother apple that 100 or 150 billion earns less than one percent and it doesn't bother satya that you know 80 100 150 billion earns less than one percent it bothers ponemah and so ponemah doesn't even leave a hundred thousand dollars with him himself if he makes 15 billion he spends 15.5 billion because he wants to borrow at one percent he doesn't want some checking or savings account giving him one percent so he makes sure that when bazooka number one cannot use the money he puts it into bazooka number two and when he once he's fired both those bazookas he's got no money left and he's very happy okay then the following year maybe he makes 20 billion again he goes to his bazooka number one and they say pony you know you come to us every year and you want to force feed us 50 000 engineers we can't do it okay i can take 6 000 and that's it i can't take any more so he gives them the billion too and then again he goes to the other team and says my loser team number one cannot use any more you go to number two so now here's the economics for the last 20 years which pony ma will never tell you i have to tell you the indian guy in the wonderful blue kurta okay model number one bazooka number one earn 65 percent annualized return on capital invested okay day in and day out any billion he puts in historically has made 65 a year model number two makes 35 a year what a terrible business okay so he's just got these two models one has been pounding out 65 a year and the second one has been pounding out 35 percent a year okay the dna so i told you there were only two companies two large companies that knew how to do this with using all the cash what tencent does actually runs circles around amazon because ponymar is never going to hire a driver or a warehouse operator or some you know freighter aircraft pilot and put them on his payroll he's just not interested he's only going to hire software engineers okay that's what he wants to do and so when some business needs drivers and warehouses and all that pornima is going to have a minority investment in that business through his bazooka number two so he has a stake in pdd and jd.com and mitwan and all these companies that do all this crazy heavy lifting and he still gets the upside on those but they're not on his payroll okay it's a it's an investment jeff loves to have those people on his payroll and i think it's somewhat inferior at the end of the day to now it gives you more of an of a link with the customer the the relationship is tighter and the service levels could be probably better but i would bet that given the superiority of the 10 cent model it would not surprise me that if we look 10 years or 15 years from now that it's the most valuable business on the planet and to a large extent i feel that they may even be able to transcend a bunch of stuff that the ccp is throwing at them and continues to throw at them so i think what they would like if the chinese communist party would listen is listen guys just tell me all the rules right now don't dribble it out every few weeks just tell me all the rules that you want me to play with and if you tell me those rules i will reprogram my two engines to still do well based on those rules and so in the absence of clarity from the ccp telling them these are the rules i think what pony ma has done he just said okay let's fire both bazookas as much as possible outside china and that's i think what they've done they've taken their digital warren buffets and almost instantly moved them completely out of china they've already been doing non-chinese investments forever they're really good at i mean they've dominated in the way they've invested around the world and even anyway the video games and all that will already outside china so in both cases he's doing that and so what i will just do just to come full circle basically what i realized when i went through all of this is that if i had taken my shoes off like case zakaria and i had read 20 years of tencent annual reports i would be clueless it was only because i got kind of cliff notes from coos backer i had to go to a different source which started to enlighten me a little bit about what was going on here and i think i was speaking to the ir guys at naspers a few months ago and one of the junior guys made a comment and i found that comment very very very stunning they've publicly said that for the next three years they won't sell any tencent stock they've made a public statement on on that front this guy says we will never sell tencent okay so i said okay we have this becker saying that ponyma be all and all great management team and then this guy says they will never tell it what's in the water you know what's going on so these statements compelled me to dig in like why would you make a statement like that that you would never sell something and then i realized when i figured out that these two bazookas is going on then yeah why would i sell they're two great bazookas it's got a great engine it's firing [Music] let it rip and so the market basically if you look at it business like then said now i don't want you to think of it as a stock tip okay please don't think of these as stock tips don't go by rain or tencent or any of these things just because me and the kurta is telling you that i'm not telling you to go buy anything all i'm trying to say is that i think that the odds are high that the way that business is configured that it's going to dominate for a long time and it was kind of fun to and and the other thing i just want the bigger lesson i want you to all take home is you can get a sense that a business has an advantage from either being a customer or looking at their numbers or different things it can give you a sense that there is an advantage it may take a lot of digging and it may take a lot of work to actually understand what their advantage is and that can be a big edge once you can figure that out then because uh a lot of people won't spend the time or the effort to do that and then that can also give you very strong conviction to hold on when they have you know temporary headwinds or something and so arvin that's pretty much the song and dance for this year we can now go to questions thank you yeah thanks manish that was that was really interesting and you know i think that uh zach and nick and that entire ethos clearly had a lot of insights into companies for over very long periods of time so you know with that i'll open it up to my students to jump in with with questions so please feel free to raise your hands and let's get started yeah richie hey manish thank you for taking the time to speak to our class today uh i just have a quick question how did you get like initially interested in the financial markets and at what point in your career did you like say to yourself i want to become an investor and that's really what i want to do yeah uh rishi that's a that's a great question so i think it was uh it was about 27 years ago and uh my 1994 my wife and i were vacationing in london i think just before our kids were born and i was looking for something to read at the on the plane back and i was an engineer running a i.t services company at the time and i picked up one of peter lynch's books to read on the flight i think one up on wall street and i really enjoyed the book i said wow this is really really interesting i hadn't really i don't think i ever bought a stock or anything i might have dabbled a bit here and there but i didn't really understand much about investing or markets or anything and i enjoyed that book a lot and i said okay this kind of makes a lot of sense and i said let me read some more there was another peter lynch book i read that and then i was out of peter lynch books and i said what am i going to do now i want to know more and in the second book he was talking in reverential terms what warren buffett and i hadn't talked about buffett before and i said well who's this buffett guy what's he talking about why does he think this guy's so good and i was lucky the first couple of biographies were out on buffett and in 92 93 so i read those and then that led me to the berkshire letters and so on and it opened up a huge world for me and i realized something which was um really compelling for me so what i realized when i read read about how warren invested i found that it it dovetails very closely with the way i would look at figuring out you know the strategy and direction of my company so i was running this it company in every two or three years i had to reinvent the company because otherwise we would get obsolete and so on and i try to figure out you know where to go into which areas this and that and that would take like two or three percent of my time and then 97 of the time would be the blocking and tackling the heavy lifting to try to make it happen right and i enjoyed both aspects the strategy as well as the execution but i enjoyed the strategy a lot more than the execution and what i realized when i read about buffett is that the part of the brain you use to figure out which companies are good investments etc is the same part of the brain i would use to figure out which area to focus on in my business and such it's the same it's almost the same but the difference was in the way he did it eighty percent of his time was spent in areas that would be three percent of my time and i said i want to be like that guy i don't want to be doing this for three percent of my time i want to do this for 80 so i said you know i really want to spend more time on figuring out businesses and business models and less time on hurting a bunch of cats at work the cat herding business was not that much fun and so i had sold a small portion of the company i had about a million in cash after taxes in 94.95 and then i started to invest that money in the equity markets using buffett's approach that you're not buying a stock you're buying a business you know you're looking at the valuations and intrinsic value and you're trying to figure out the competitive advantage of the business and then if when it had all these great characteristics then you went in so that's how i got going with this 27 years ago and that's how it goes today and like what i just talked about with tencent and you know naspers this was so much fun to figure out and i don't have to go run tencent which would be which would be so complicated for me long live pony ma please keep running it okay i just want to be passively on the sidelines you know when i find businesses and and such so that's how i got going on this on this journey thank you very much for sharing and i have one question will you be worried about the political risk associated with investing chinese tech giant because you just mentioned you a lot about tension and alibaba and recently you know the in chinese education industry the venue of the leading company just dropped seriously because of a government announcement so how do you see about this i'll give you a little longer answer i hope you don't mind so let me just just go quickly into the the education tech the education businesses in china i am completely in agreement with what the ccp did with that useless industry and took it out so i run a non-profit foundation in with a lot of the activities in india where we take a bunch of underprivileged kids and try to get them into elite institutions so then they're out of poverty and so on and we've been doing i've been doing that now for about 15 years so i've had a lot of a front row seat observing many indian for-profit education companies and i have a friend of mine guys peer who invested in a bunch of for-profit education companies in singapore and the us and so on and so i've had a lot of interactions and understanding of that space so at the highest level just to just to just quickly go through this there would be two kinds of private education companies in any place there would be one type of company which increases the number of seats available for people to get educated you know like open a private university or open a private school where you actually have increased the opportunities available for people to get educated the second type of company would be one which helps to get people give people an unfair advantage on getting one of the limited seats in existing elite institutions so for example in india we have the iits the indian institute of technology they have maybe 15 000 seats available every year to take incoming freshmen and there are more than one million kids who want to get a seat at iit so the top of the funnel is 1 million and only 15 000 can get a seat and so there's been a very large industry that has come about in india which basically helps you preps you coaches you to try to get one of those 15 000 seats so you pay them money and you go through a lot of intense preparation and then you end up if one basically one and a half percent of the people who are attempting to get these seats get these seats this second engine does not increase the number of people who are getting seats in those elite institutions it mir simply decides who gets those seats okay and so what what happened in china which is which i've seen happen in india and it's a very unfortunate situation is there are not enough seats and because there are not enough seats capitalists have propped up and created businesses which basically help filter who gets a seat and the filtering process is not a completely objective fair process money makes a difference and other factors make a difference on who gets a seat so i think it's a problem it's a problem in india as well the bigger issue is that that 15 000 seats needs to really be a hundred thousand seats okay that's the bigger issue but in india what happens is more money is spent by the million people trying to get these 15 000 seats than what the government spends on those 15 000 seats it's kind of backward system so anyway from my point of view i was i did not like that business model because i had seen it's not a win-win you know if you look at a business like costco everybody wins in that ecosystem the consumer gets a better product the manufacturer doesn't have to worry too much about sales and they get large volumes and the employees get paid more than other competitors the time to play them and the shareholders do well as well so everybody in that ecosystem benefits from costco in the case of the chinese education companies 95 of the people who are paying these companies end up disappointed they don't get a seat that they want they work very hard but they don't get what they want and in the meantime in india we've had issues with suicides and depression it creates uh other issues so there are no easy answers that that funnel is problematic i don't know what the answer to that funnel is but from my point of view i don't want to invest in that area because it's it's it's a win-lose situation so that's my take on the education company so i actually i'm on the same page as the ccp on that front as far as the investing in china etc you're absolutely right you know things can change and someone can come up with rules like they did with the education companies and it can change the dynamics or economics of the businesses that is why we don't have only one bet you know i don't know whether 10 cent will do really well in the future i think probabilistically it may be a decent bet but it's there's nothing like a sure bet in investing capitalism is just hard right hi thanks for coming on i really appreciate it uh so my question is um how has your investment strategy changed from when you first wrote that a honda investor and have you added any additional elements to the honda framework yeah i mean i think this is one of the fun things about about investing is that number one you know if if you are even if you are tom brady eventually you will go into decline i know that tom brady doesn't believe he's ever declined but you know between us girls we know that eventually he will decline uh but in investing one of the good things is that as the years go by and as tom brady declines we keep getting better and so michael jordan you know already had the last stance you know so i think that the kind of investor i was when i was you know 35 years old versus what i know and can do when i'm 45 or 55 or 65 all knowledge is cumulative and especially as we make investing mistakes and we lose money and we try to learn from those mistakes we keep getting better right i mean like like i just had this discussion about for-profit education i don't have much interest in that area right and because of i've had some experiences now there could be some companies there that could do really well in the future but that's the other thing about this business is there's no call strikes so you can let a lot of good businesses go and you still do okay so the frameworks keep changing and improving hopefully because we learn more and such one of the things that i've had a lot of learning in the last maybe 18 months or so maybe because of covent so maybe i should be thankful for kovid gave me more time to contemplate my navel and usually contemplating a naval is a good exercise and when we're in a non-covered world we don't get enough time to look at our navel which is a problem so what i found is that i used to be when i started in the 90s a guy who was looking for great businesses and great business models kind of set it and forget it kind of thing and then when when we got to 99 and 2000 we had the massive techbubble.com bubble i saw things get so crazy that i retreated into the safety of ben graham and basically shifted from buying great businesses that were going to grow a lot to businesses that were undervalued so you know buy a dollar bill for 50 cents 40 cents it doesn't matter if it doesn't grow much and that actually i think in hindsight worked extremely well till maybe 2012 or 13 or 14 somewhere around there and what i should have done around that time was switched back to the great businesses buy and hold and so on and uh i got so used to this gram approach got so entrenched in all these years of practicing it that i missed that left turn and i realized last year especially when i was reading the chapter on nick and zach and richard wiser happier which is a great book to read that basically the holy grail was to find great businesses that had a great future and not pay too much for them and not get them too late in their journey and write write them and those become more it's a better way to go and so i've been shifting away from the gram world that i've been in for so long to the world of great compounders so but the journey continues it's fun hello manish thank you for joining us tonight um you already touched on your how you transitioned from your first business into your investing career but i was wondering your first point your first principle in your book is focus on buying existing businesses so i'm wondering if your experience doing a startup and running your own firm influenced your investing framework yeah i mean i think i think the the advantage of the buffett approach is that we have a lot of trend marks when we look at existing businesses we get to see plenty of history we can extrapolate that history and we can take the risk down anytime you're doing a startup or a brand new venture by definition it's going to be much higher risk and you know i would i would distinguish between venture-backed and non-venture-backed startups so 98 or 99 of startups globally are non-venture-backed you know the the laundromat that starts or the chinese restaurant that starts or you know the neighborhood taco stand whatever these are all businesses that are not venture backable and they don't get venture backing so most startups are not venture backed they are a dream and he goes he or she goes at it and those have high risk so what entrepreneurs do is they do as much as they can to minimize that risk by you know limiting how much they could lose and what would happen if the business didn't work and could they go back and get a job and you know get their finances back on track and and yeah so i think that their venture back startups are a little bit different because they're the entrepreneur for the most part is not putting their own capital up and and so they're getting some benefits there so it's a different approach i think that public equity investing buffett style you get to make a number of bets you need to spread those bets out and that helps you reduce your downside and so it's it's a different framework hey um great thanks for uh coming to our class today really appreciate it um i thought your discussion on kind of identifying you know potential monopolists and competitive edge and stuff was really interesting is wondering how you kind of balance when you're looking at you know companies between having fewer disclosures and being like kind of competitively coy to like maintain like a long-term advantage and potentially kind of under disclosing because you know the numbers aren't as as good as they appear to be or there might be some sort of weakness under the hood like how do you kind of evaluate that when you're looking at different companies and investment opportunities yeah so i think that if you look at it in a different way so let's say let's say you had a portfolio and you know you made 10 bets for example i mean the goal and objective should be that one or more of them gets you to the promised land you know kind of like course becker style where you basically identify a business which has a very long runway where you have figured it out took a lot of work but you figured it out but the rest of humanity has not and if you can even if you found one of those in a year that's plenty because on the flip side if you got a 100 bagger out of one of your portfolio investments it pretty much doesn't matter what happened to the other nine you know the the most of the return would come from the 100 bagger and so i think the the model should be that all of you in this class you all have horsepower very significant horsepower and if you can direct that horsepower towards finding these enduring competitive advantage monopolists which most of the rest of the world has not yet figured out or doesn't fully understand it may not be in their evaluations and such that gives you an advantage and so i think that that should be the game is that the willingness to dive deep to figure out the jigsaw puzzle when the companies are not helping you hi monash um thank you for coming to the class um actually i've been also following alibaba for several years and i'm really glad you also listened that um interview so i have some like a question about what you think about alibaba based on my um there are several considerations i want to share with you and would you might share some of your thoughts just think uh to share about whether my consideration could be a like a turning point or pretty much i want to share what my thoughts and um would you mind uh discuss like how that kind of be oh my god i'm so nervous that sounds great it's okay no i think i think alibaba clearly had some stumbles with different actions that were taken against the company many of those actions might be justified because many of the ways that the company did business would might be illegal in the us for example you know in the way they kind of restricted things and so on but i think that at the end of the day it has a very talented management team and it has a very dominant footprint in the minds of its consumers it's i think the business will do fine and they they're they're pretty smart about the way they go about it i don't think they are i don't think the model is as good in my opinion as a tencent but they but they both both can do very well yeah the same thing i realized the model things when i heard the same interview like that model actually it sounds to me like i believe that host compared with alibaba with amazon is kind of like a misunderstanding like china i have another company called jingdong which the stick ticker i think is jd jd is they are pretty much copy what amazon is doing like they're having all the supply chain system building hire tons of employers about something like amazon so pretty much for alibaba like they're just like a digital platform and why they're so and digital platform is not something brand new in this world is it's just why they're so successful this is why this business model is so successful in china i personally built it's just because they built from zero to into a certain stage they're in fast growing just because china don't have this but right now if you look at it and this now like china have already built the is their business model is really easy to copy like you know the pdd like they're starting growing so pretty much they don't have this competitive advantage and why they're successful just because they're at that time china have nothing on this kind of digital platform and right now um i remember before the selling point for this business model it's just because um you know people are not going for alibaba for buying certain products like amazon but they're buying for surprise or something they haven't expected they may be a good things when the economy is going well but think about the timing the micro economic especially under post pandemic people are starts to you know try to spend money more wisely so seems like this kind of the selling point for buying for lifestyle is no longer popular under the circumstances so this could be a this could be a worse sign for its future growth at least some limitation and also um there's some aspect of the management style like you just compare with pony ma and jake ma one is really like to give the speech in front of public like try to be a teacher not just for common investors but coming for everybody uh one is just be quiet which is very chinese style like be quiet and just generate cash cash flow that's also going to be uh be a really risky thing you know for future growth and also you can see people are very sensitive if jake my is up here to either speak in the public or meet somebody so you can see it's really um a fact alibaba stock price like it's luxury like a speculative stock i can see you can so i would say that better than 10 cent or alibaba because these are very large you know market caps probably uh businesses that will do a lot better in china our businesses today that may be private or businesses that may you know be worth less than a billion dollars of less than 100 million where their runways are huge and they've got competitive advantage and they can grow 100x from here and so i think that if if i were you i would focus i have a handicap i can't do that but it'll be so much outside my circle of competence but i think that if if someone can really figure out a bunch of smaller businesses in china that have great management and great models and teams then that is where a lot of wealth will get created in the next 10 or 20 years i mean what i'm saying is that no matter how well tencent alibaba does it's hard to see them get to valuations more than 10 times where they are today in some reasonable number of years if everything goes well you know so i think i think you're better off rolling up your sleeves and digging deeper into the 10 cent and alibaba of tomorrow um thank you so much for taking the time to speak with us i wanted to ask i've read that you won't invest in a company just because it looks like it's going to do well in the future uh there are a lot of it and energy energy industry companies some of them are trading at 10 times more than the their revenue um i was wondering if you think those and other well-performing companies and industries are overvalued well i want to invest in companies that'll do well in the future i hope that's what i'm trying to do but you know the nature the nature of investing is that very few things will be within the circle of competence of each of us most things will fall outside that circle just the nature of the world is a complicated place we can't figure everything out and uh so if i can figure out a business and if i think it's with myself low competence and i think it's going to do well and if it's trading well below you know underlying intrinsic value i'd be very interested and pretty much everything else i would just take a pass on so i i think there's entire industries that i would take a pass on just because i don't think i have any edge in those areas so we are trying to get to unfair edges in a legal way and edges where the competence understanding can lead to you know conviction to hold a business for over a while so that's that's fine okay hi it's very happy to have you here and thanks for your sharing i have two questions and the first one is you know under the sacrament stances like covet is there any change in your investment strategy and the second one is that could you please talk about some sectors you are currently focusing on and to find some value stocks thank you yeah actually everything about the way covid unfolded was the exact opposite of what i thought would happen so when in march 2000 the world was shutting down i would have never imagined that in october or 2021 indices would be hitting all-time highs i also did not imagine at that time that 18 months later kovit is still with us in a major way and i also did not imagine that there would be these significant permanent changes in human human behavior so many things that have happened with kovid have changed uh things forever so for example i don't think business travel is going to come back the way it was for a long time i think that the footprint the world has for business hotels is too large it will take a while to grow into that footprint because you know people used to travel all the time they needed those barriers and all of that i think that leisure travel will take over some of that but i don't know how much it will the same with business class and first class in air travel you know a lot of that will get reconfigured so i think there's a our lives have become a lot more digital so for example all these delivery companies doordash etc they got massive tailwinds they have changed a lot of behavior in terms of how we so you know business like door dash will not really eventually be a food delivery business it will be a business which whatever you need within an hour or within 30 minutes you know so there's a set of things you need within 30 to 60 minutes there's a set of things you need in a day or two and there's some things you need to know you know one week or one month so there'll be a set of providers which will you know hone in on those pieces so i think kovit has led to a lot of reconfiguration which has significant changes so the space requirements for residential people has gone up you know someone who had a one bedroom one's a one and a half bedroom or two bedroom one two and a half because you need a kind of some more space because you're spending more time at home so uh which is why housing prices have gone up so much is that suddenly the entire country or the entire world wants more living space and you cannot create that much living space instantaneously so the only thing that happens is price goes up so we are going to have more needs and different needs for housing different needs for office space different needs for shopping entertainment so you know we got so used to not going to the movie theater you know and uh i think there's a number of changes that covet has brought about that are very secular and long term and it's important to try to understand those changes and see if there are you know things that can lead to investment opportunities and such from that i think the follow-on manish was around sectors that may be interesting in areas of value well you know i'm like bottoms up you know i'm not really i don't start off saying i want to invest in large tech and let me find the best large tech that's not how my brain works i just kind of you know am opportunistically sifting through stuff that shows up on the radar or someone sends me something and just seeing if it makes sense and then you know go from there so i never i never i mean i think in 2009 i think commodities really collapsed in a big way and i made a bunch of basketballs in that space and they all worked that only happens when world the world goes to extremes most of the time we find ourselves in situations where there are so many investors and so many so much capital that good businesses tend to get fully priced or overpriced and so you really have to find some edge where you have an understanding of a business which is a little different from how the world understands them and that can give you a valuation difference then you could maybe play there make sense right hey thank you for uh thank you for coming to speak with us tonight so so my question was you know i guess going back to something you said earlier around you know cloning and cloners businesses like that and use the aws example so i guess my question is like how do you judge whether a company is going to be like whether they're good at cloning like you know microsoft with azure or whether they're not going to be as successful at google with gcp yeah i mean i think cloning is a is a very powerful mental model to understand and i've been you can say i've been a student of cloning now for i would say more than 33 34 years 35 years maybe it's been a long time and i still don't fully understand so humans the majority of humans overwhelming majority of humans and overwhelming majority of companies look down on cloning they think it's beneath them and they also think that oh they they look at a starbucks and say oh this was a great idea but someone thought we've done it and so that opportunity is gone and what they don't understand is that you could actually have three different players in the coffee space and all three could do well you know you can't have 30 but you could have two or three that could do well i mean it isn't just mcdonald's burger king can do well as well and and so the companies that understand cloning well and are good at cloning have a huge advantage so if you look at a business like microsoft they spend all these billions of dollars on r d and whatever else and most of that has just been money that's been burnt with no return their almost all of their success has come from cloning and so microsoft i consider it isn't even that great a cloner like you know look at how long it took windows to get to the point that the mac was at you know we probably got to like the 15th version of windows before it was you know approaching what what the mac could do in the second version for example and uh but you know they being copied google and didn't go very far and that's fine so a lot of the stuff doesn't work but plenty worked i mean azure worked microsoft word was a copy from wordperfect excel with a copy of notice access copied other relational databases and so on so a large amount of the microsoft ecosystem has come from cloning and even if you if you look at a business like burger king for example you know mcdonald's used to have this huge army of people trying to figure out locations which locations made sense because that's it so in in retail and then restaurant that's a big deal burger king had like two guys and all they would do is put burger kings or mcdonald's for mcdonald's so they would just look at where did mcdonald's open a new mcdonald's and look at oh let's open across the street from there and uh so that's a great model because somebody else is doing the heavy lifting and so the jim senegal at costco you know a lot of the costco business model came from price club sold price and eventually costco acquired uh price club and so jim senegal was asked one time you know what have you learned from sole price and there's a there the biography and so forth was reading that he said it's a wrong question he said there's nothing that i know that wasn't taught to me by sole price and costco pretty much cloned everything from this the price club model and eventually the cloner became better than the original business that they cloned and they became much larger and they actually acquired the company that taught them how to do it so cloning is a very powerful model walmart almost everything over walmart was cloned from sears and kmart and he learned everything from his competitors sam walton was a great cloner so i think businesses that have the cloning dna which is a small sliver of businesses have a huge advantage actually hello thanks for coming in today and sharing a wealth of information my question for you is uh in one of your youtube videos you have mentioned that you don't use analyst at all and you do everything by yourself so what sources do you dwell into to pick your stocks and invest you've already partially answered it by saying you know read a lot try to listen to the top management what they say and stuff other than these uh what uh you know what sources do you delve into also do you attend conferences and what type of conferences that you try to you know network and um get the information and things like that can you share some of those yeah i don't i don't think i get a lot of uh ideas from talking to other humans and that works well for me because i don't like to talk to many humans just the humans in irwin's class are great and uh yeah so for most of the time that i practice value investing i did it alone and that worked well now i have two guys who work with me and i think it's worked really well i think i've always been against teams doing investing because you know if you're paying someone as an analyst etc they're going to constantly be coming up with ideas and it gets frustrating for them because you'll keep saying no to almost everything i mean in a year i might make two investments you know so or one investment and and so but i think that the structure i have with the two guys on my team and i really really love them a lot is they don't come up with new ideas and so they helped me with the deep dives that we do on businesses we're looking at and i think that that model works well it also worked very well when i had nobody so i would say that there are some resources on the internet that are really great i always liked value investors club and and there's a lot of horsepower amongst the members of value investors club it takes quite a bit to become a member and so the write-ups that go on that website tend to be quite thoughtful and well-written and so you know the price is free you don't pay anything it's zero so it works well i also have a subscription to sum zero there you actually have to pay for it so maybe i know 10 15 000 a year or something value line also the subscription that's fine uh but i think that there's a lot of stuff that is i think if someone were to just focus for example on value line and just make you know one or two investments a year when things lined up very heavily uh use that as the starting point of your research into businesses i think one can do really well so you don't need much more than that you don't attend conferences or anything like that right unless you said part of the question i haven't been able to leave home for 18 months but i think yeah historically i don't think i've you know if i go to you know like i go to the berkshire meeting every year i i used to go to the fairfax meeting every year i'd like to kind of resume that and so i think you know we we meet our fellow brothers and sisters of our tribe which is great and uh but yeah i mean i think the i'm not i don't i can't imagine what conference i'd go to i think right right one one is i'm so introverted okay i have a huge loss of energy if i am with a lot of people for a long time okay with which is probably the case with you and most of the people in your class so we would not thrive in a world where we have to constantly interact with people adam hi monish uh thank you for taking the time to speak today um one of my questions was about the application of nlp um with regards to um reading like investment investment and annual reports you mentioned in one of your lectures online that warren buffett used to read about every single company publicly listed and it would take him about a year and it seems like that's pretty tedious in these types of days where nlp is readily available so i was wondering if you see any application for that in the investment world and what you do i missed it what were you saying is readily available uh natural language processing okay so what you're uh what what approach are you suggesting like i was just wondering um nlp can be used to track emotions in people's like sentiments online through um analyzing historical data so i was wondering if you could use that to analyze investment reports or letters to shareholders and stuff like that to cut down the work that you have to do i mean i think it's possible i haven't gone down that route so i can't really give you any intelligent answer on this front i can give you an anecdote that i think i found interesting so you know buffett went through and maybe this might become a little longer answer but uh you might find it interesting so humans the way we are is hard coded by the time we are five years old so between our genetics and the first five or six years of our life experience who we are as people is not going to change from the age of 6 to 96 it's pretty much set our tendencies trades etc gets set i mean like you know i'm going to have like my high school reunion and i haven't interacted with these people in some cases for like you know 30 35 37 years they're the same you know nothing's changed you know all the weirdness they had at 17 is still there at 57 you know so such is life anyway so so the thing is we are hard coded when buffett was i think maybe nine or ten years old he used to go to this race track in omaha called aksarben it's nebraska fell back fell backwards and he used to go there after the races were over pick up all the tickets these people had discarded because a lot of people drunk at those races and then he'd look at each ticket that he picked up to see if some drunk had discarded a winning ticket so he'd pick up all these you know hundreds and hundreds of tickets and process each one and then he would find some which were actually winning tickets that people didn't understand or threw away he would give those to his aunt alice because he couldn't go to the window as 11 year old and then she would go to the window and cash in those tickets and then when he was in his uh early 20s maybe mid-20s when he started uh investing started his buffett partnerships he used to go through these moody's manuals and i bought some i bought one or two of them on ebay you can go on ebay and look at them there's these really thick uh manuals which had you know maybe four or five stocks on a page very fine print giving you a little bit of data on each company and he went through those i mean that's a lot of work he went through those manuals multiple times and he went through thousands of businesses this was purely quantitative analysis with no technology tools of any kind one you know reading at a time and he found some businesses that were just weirdly off like you know market cap is 25 million and earnings last year were 40 million things like that and he made those investments he did really well and then when i was visiting his office so the kid at 26 and the kids 11 were the same the the exercise of going to excitement and exercise with the moody's manuals is exactly the same they're both treasure hunts and uh i was i was visiting berkshire headquarters i was going to have lunch with his assistant and then happened to warn warren wanted to show us around when guy and i went there and i noticed that on his desk was the japan company handbook and the japan company handbook is got two businesses per page in english which is describing the financials so it's like the moody's manual but it's for japanese companies and this is you know with berkshire has 100 billion plus in cash i mean you can't even put 50 million dual businesses that's so obscure but the the kid who enjoyed the treasure hunt still enjoyed it and when i saw the japan company handbook i actually had that handbook and i told warren about some of the companies i found in the handbook and i you know was kind of marking them for him and i think he might have gotten horrified because i was dog-earing you know some pages in his copy so i don't know what he thought about that but you know i said you know some of these come things were towards the back of the book he said all the good stuff is always at the back of the book you know and um and then you know uh capital iq basically allows you to do exactly what japan company handbook does but it allows you to do it a lot faster you know because all the data that's in the handbook is on the capital iq uh servers and you can you know slice and dice it and you can get there so i told him that look uh warren you can actually do this a lot faster with uh with capital iq and his assistant at the time uh tracy britt told me he's never gonna do that so i said tracy what if i showed you how to do it and then you can do it for him okay and so i i spent a little bit of time explaining and showing her how it works on capital iq and she told me he would never spend the 10 or 15 000 or whatever it would cost he said just that would just never happen you know he spends 150 bucks on the japan company handbook and that's about it so so warren is very set in his ways he ended up becoming the richest guy so if i were you my without knowing much about nlp what i would say is that it's not so much dicing the information quickly it's more about the analytics that you put on the information and so i don't know how much of an edge you will get with nlp i think the edge comes from how you look at the data and i don't know whether nlp will help you with that it may i mean i haven't gone to that area but i would say that the buffett has done better than a lot of people with a lot more technology he has no computer on his desk you know nothing he's just sitting there reading a bunch of stuff and that's been enough to make him the wealthiest guy for a long time so that's where i think the game's at yes thank you um this has been great i know you've mentioned a lot of people obviously warren buffett and charlie munger and others but are there any up-and-comers or silent warriors in the investment space that we should pay attention to because clearly your success in part has been due to following really great minds in the space and obviously we'll continue to follow you um because you're clearly a fantastic person in this space but um are there any others that you haven't mentioned that we should keep an eye on or is warren buffett the the one and only the the other you should keep on is the list of people that arvind is gonna have speak to you this semester he knows them all he's the real rock star and he brings in all these rock stars so he's got some new names for you of some guys who are really good and so i think uh yeah i mean i think uh we you know the one thing that i think joel greenblatt mentioned this he said that in investing what happens is when you have very little capital and you're looking in these obscure areas because you know you can go into these areas because you could put ten thousand dollars into them and would make a difference for you but warren buffett can't so what happens is that the people who are really good at this stuff they get wealthier and they have to move up the chain they have no choice but to move up the chain and so constantly you know buffett starts with the excitement tickets and then he goes to the moody's manual and then he goes from there further up the chain the bottom continuously gets emptied out right so the people who were really good at finding the investments less than ten thousand to put to work less than hundred thousand would work if they're really good they move up i cannot look at businesses and make investments where i i would be able to put 000 to just not not worth it it's not going to work doing nothing for me and so constantly that space at the bottom is getting emptied out and it's available it's always available so that's the beautiful thing about investing and uh arvind are we at the end of the road here yes we're we're nearing it um so sean why don't why don't you ask a question and um then i'll i'll end with a couple of last questions if that's okay hi manish um i was wondering if there was anything that you look for uh specifically when assessing the quality of management and i guess in particular with regards to sort of understanding uh sort of core competencies of the business and then strategic vision also well i think i think you know buffett says that when you look at like you know baseball hitters some kind of you know stand low some stand tall they all have different ways they you know swing the bat and so on and there's multiple ways to nirvana so i think that same thing with management's is that you will encounter just with humans a variety of different types of people and i don't think a particular template may be the way to go i think they can be i mean if i look at someone like you know reid hastings at netflix he doesn't have an office okay he says that he he goes to work and he just kind of wanders around okay and he picks up conversations with random people and starts talking to them okay and then one time i was listening to him give a ted talk and he was saying that it's been three months since he made any decisions at netflix and he said that's good he said the longer i can go where i don't make decisions so it's a really different way to manage okay and that management approach produces the squid game okay and here we are you know so and you know i saw a tweet by jeff bezos the other day congratulating them on the squid game i mean this is a direct competitor very competitive guy telling his competitor you guys hit it out of the park and uh jeff doesn't do that very often but i can never run anything like that that'd be too weird for me okay so i think that there are people like you know michael bloomberg who worked both in the city and at bloomberg in the middle of a bullpen you know he didn't want a private office he was in the middle of his team with all his team around him i would find that really hard to i mean i would get so distracted and bruce flatt at brookfield works like that too so i think that i don't think buffett or munger could work like that in the middle of a bullpen and you know andy grove came up with this you know management by walking around so i think there are many different ways to nirvana but different people come up with different approaches that kind of fit there the glove fits different ways and so i don't think we can come up with a template so moon is just a couple of questions just in terms of book recommendations have you read any great books over the last 18 months that excite you that you'd love to share with my students well one book i really uh i think he rambles a lot but i didn't learn a few things from it was it's called the anti-social network and as rich you know he wrote bringing down the house you know the mit blackjack team inside so i think ben wrote that book more from the vantage point that it becomes a movie it feels more like a movie screenplay to me than a book though so you can skim i think it's a it's a skimming book it's not a sit down and read every word and make notes kind of book and uh but i think there were some interesting you know the whole i would say the whole you know robin hood amc and all this this whole saga with gamestop and all that i think this is the unusual sort of things that happened and continued to happen so it was an interesting kind of i learned a few things from that book any others or that's that's the one you died highlight oh that's a recent one i liked i think another one that uh was autobiography done by the bear stearns former chairman you know ace greenberg charlie recommended that and i think that was a good book and she was good to learn from failure and so i think well he's passed away his green book passed away the book came out a few years ago and i don't think he was completely honest in his assessment of i mean part of it was kind of brandishing his legacy but but i think you can sift through all that in the book and give some good data on human nature and different things so i think that was a good read and just you know in you know kind of the always the final question that i have is sort of in this room in this virtual room in this covered world we have students from you know 21 years old to mba students what advice would you leave them with professionally and or personally yeah actually one more book just let me let me give you one more book in there the other book which i read was uh red roulette one of my friends uh who had talked to charlie charlie never gave me that recommendation directly but he told him about that book and i i read the book i think that that author has a number of issues let's put it that way but i think i still think it was a a good read and i think that so that was a also some interesting data points there but i think i think for your for your class i mean i think you guys are in a great place i think you've gotten some great skills from being in a class like irvin's class and i think that if you're interested in in investing i think investing is to me to me it's really interesting because it's one of the broadest disciplines it's you know it touches so many different areas to try to figure out what makes the company great is it goes into so many different areas and competencies that you develop so i think it's it's continuously challenging it's kind of like bridge you know you can never master it in your whole lifetime you could never master it but you could learn the game in 20 minutes and uh so investing is like that it's you know people who get it in terms of value investing and such they get it pretty quickly but then the journey to continuously learn and grow and understand is a lifelong journey it's a fun journey so it's great i would echo that well manish thank you so much this has been a fantastic conversation as always and uh i look forward to next year we'll celebrate and style yeah the only sad part ireland is that i have to now somehow find a way to pass the time for the next 365 days yeah well you have my number so i look forward to it all right but thank you very much i enjoyed the interaction and i think it was fun and uh i hadn't really talked much about the stuff that we talked about today so it was uh you guys were kind of guinea pigs on this i think it went reasonably well so thank you for uh allowing me that thank you it was great thanks manish okay okay cheers [Music] you

Channel: Mohnish Pabrai

Views: 68,333

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Id: _7UfqjD3IEg

Length: 114min 56sec (6896 seconds)

Published: Tue Nov 02 2021

Reddit Comments

[u/wilstreak]

Completely agree with him. This is why i much prefer tencent over alibaba, Pony Ma is such a great capital allocator.