[Music] all right welcome everyone so today we're very fortunate to have Mohnish Pabrai here with us at UC Irvine he is the managing partner of pariah investment funds which manages 535 million dollars if you had invested $100,000 in propriety funds in 1999 when they started it would be worth a little over 1.1 million today that in contrast to if you had invested in the market you have about two hundred and eighty five thousand dollars in 2014 mounish founded and raised 150 million dollars for Dondo holdings which is a insurance focused holding company and last but not least he is the founder of dr. dakshana Foundation which provides educational opportunities to impoverished the talented children worldwide so please join me in welcoming our guest for today Mohnish Pabrai and you professor yang again everyone hear me okay alright let's break me back and just really a quick show of hands I'm not sure how many of you were here last year and you just raise your hand we've got a brand new audience good so we can reuse the same joke that's right oh so don't you might have might have been the talk on YouTube where we focus on coke last year and and so this year we will try to go further back from the because the coke investment approach I have we came from some of the lessons they learned from free candy the first of these candies 22 but will go further back from there into the mid the mid to late 60s and then kind of take it from there and there are a number of rich lessons in some of the journey that some of these folks took over over the years and and I think that there's a lot of that could be applied to the likes of yourselves as you embark on your careers and whether or not you become full-time investors I think it's always good to understand a few things about investing in allocating capital so I'll go back you know into the you know 40 50 60 s there was a company called S&H Green Stamps and most of you probably were not born when the S&H Green Stamps was writing maybe you're not even your parents or users of them because quite a ways back but the S&H Green Stamps were really the precursor to what today we think of an airline - so it was a kickback mechanism to get loyalty into particular merchants so for example if you went to a grocery store and you spend $50 they would give you one of those stamps for every 10 cent that you spent and then you'd stick these stamps in these books and then you could redeem them at various and centers for a variety of things you know toasters or you know tennis rackets or whatever so the wide range of things you could buy and so you know with human kickbacks work and and they worked in the 50s and 60s and 70s and they was today I mean you know a lot of those the way I decide which credit cards are used and so on so forth we've determined by the miles and the deal get really similar to most of you and but but Green stamp had a policy that in a particular geographic area let's say for example Irvine if one particular drug store offered green stamps they wouldn't allow competing drug stores to offer it so they kind of created some exclusivity and it also tended to direct business towards the drug store that carried and offered these stands so they have not drug stores if you will or they have not rosary stores we're not happy about this and so what they did in response to because they understood that the the loyalty programs actually boosted sales in California nine different grocers got together and created something called blue chip stamps and so blue chip stamps basically said we're going to you know allow anyone who wants to offer these stamps offer them any merchants we're not going to have these these exclusive type deals and and so these nine these nine grocers basically own blue chip stamps and and there were a lot of small merchants who felt like they were kind of shut out of the profit stream that came on the ownership ablution so they felt like you know they wave you know we want to warn the mother ship we don't want to be just be kind of giving you money every time we get a bunch of stamps to give to our customers so they sued blue chip for basically saying this is kind of antitrust and it's kind of collusion in all these things and in the early 60s that kind of lawsuit wound its way through the court system and by 1966 the court agreed with the with the plaintiffs that they were right and that blue chip should be more equitable by all the merchants who offered it so what they forced the company to do was offer ownership stake shares of blue chip stamps to all the merchants who were kind of purveyors of these stamps if you will and they gave it to them in the proportion of their volume in the last year so there was a market created of blue chip stamps and as a result of that market being created blue chip stamps started trading on the OTC exchange you know so you could actually going to buy yourself shares of blue chip and there's a gentleman rick warren who was a early partner of Charlie Munger and and and Warren Buffett he kind of in LA reading the newspapers notice that all this stuff was happening with blue chip and he looked at the stock price and you know rick is a very good value investor and he thought that the the the price that the stops of being offered at was quite compelling and so he brought it to the attention of Warren Buffett and Charlie Munger and they looked at it as well but one of the nuances about about blue chip is that every time the merchants gave these stamps to various you know buyers of groceries or drugs whatever else a certain percentage never got redeemed you know they kind of all the back of the drawer or people just forget about them and so on so forth and so the blue chip business was very much like the insurance numbers in the sense that with insurance you collect premium war dollars today and then the claims come in sometime in the future and sometimes - plain clean even 20-30 years after you've taken the premium in but in the case of blue chip it was felt like traveler's checks where people gave you the money today and sometimes those traveler's checks may not be cash for a year or two years or three years or never you know because they just they get lost people now claim them and so on so forth so blue chip had float just like insurance something's have float but one of the things what float the blue chip floor was there was a portion of the float that what I would call phone and float so if you look at the kind of chart behind me you see how the revenue the blue chip is going down because it peaked kind toward the late sixties and then after that it kind of started losing its appeal but you can see the flow is multiples of the revenues and the reason for that is that a certain percentage of the float is permanent in the sense that I don't have the exact number but I would get something like five percent of the blue chip stamps that were issued never ever came back for redemption and in fact my friend Alex is sitting there was a whole bunch of these blue chip stamps that never came back from Redemption and as a gift for you guys coming today he's going to give you some stamps so you know keep one packet to yourself and then pass it on to your neighbor if you will and so there's about approximately fifty or sixty million dollars of these stamps which are now gradually making their way through Etsy and eBay which never got redeemed okay and so in 67 when we go and looked at this company the company had about 50 million in equity which was that you know the book value of the company the stock was trading at 40 million and they have another approximately about 100 million of OPM other money that they were holding which was the flows of butcher and out of that 100 million my estimate is something like 50 million of that was never what we redeemed so that was kind of like found money so basically you were able to buy a company with $1 of assets for 40 cents it was it was available really cheap and so when Rick Warren brought it in to the attention of Warren Buffett and Charlie Munger and they looked at it if it yeah this is great but they also noticed that the way the blue chip flows and equities were invested was useless you know people in grocers who were on the board really didn't have a clue what investing and so they knew that they had to basically ineffective control of the company and then get control of the investing so what they did is from 1967 to 1970 or threa period a number of different entities like the Potter partnerships Warren Buffett personally vulture Hathaway wheeler Munger partners ray Goren and then an entity called diversified retailing all these companies all in entities together invested about twenty four million dollars and they got 60% ownership of blue chip and they got control of the company and first Charlie Munger went on the board then rekar and went on the board and then warren buffett so there were three of them all three of them on the board and then they took control of the investment committee and and sold everything that these guys owned and started to kind of redo everything and one of the things that happened when they took control was one of the entities that bought about six and a half million about approximately a little more than 25 20 kind of look of of the 60% was the company called diversified retailing so what happened is that Warren Buffett a guy named Sandy Guardsman's on the board of all should have renown and Charlie Munger formed this company called diversified retailing 80% was owned by Buffett and Berkshire Papa the public partnerships 10% by goddess women 10% by the wheel among the partnership and they had they had raised five and a half million of debt with the help of Goldman Sachs to buy retail operations and actually bought a department store in in in Baltimore and and what ended up happening with the department stores they realized it was a mistake and they were very lucky and what two or three days later to be able to sell it for what they bought it for but then they'd raises death the death didn't have to be Covenant and they took the six and a half million that originally was meant to go to the department store and they put that into blue-chip as well so basically there was one eighteen and a half million of equity and what filin happened of death that went in and it became the 64 saluted the control and blue chip with this 24 million they invested had well over 100 million of float and it had another you know 4050 million of equity so there's a lot of assets they got a control off without spending that much money and then what they did was that in in 72 he's candy came up for sale and and then took 25 million of blue chips float and they bought these candy so I told you about 50 60 million of the float was never going to be called back because of people were never going to so this book got other free money so there were 56 team free money they took 25 mils and the three money bought these candies then a year later there was a savings and loan that was training well Miller liquidation value were sitting in half of book value restful financial where they again invested about 25 million bought eventually about 80% of Wesco again using the flawed money from blue chip and and then in 1977 the Buffalo Evening News because the newspaper in Buffalo came up for sale and that was bought for what thirty three and a half million and from like 72 to 77 fees candy has generated quite significant retained earnings about four five million a year so they they use the retain earnings of these candies lots of more flowed from blue chips and they bought the Buffalo News and then the Buffalo News ran into large trouble so they had five or six years of losses because he lost four hundred thirty million all of that got covered with with the earnings from these candies so they had not a union problem they had strike then they got their competitor suit then because they started a Sunday paper to compete with the other paper in Buffalo so they went through a lot of turmoil for five or six years of the Buffalo News but in by 1982 everything had settled down the competitor had gone out of business and 82 their earnings were 19 billion pre-tax so on a business they bought for thirty three million five or six years later you were making almost half of that and in a few years the Buffalo News of making fifty million a year pre-tax so it became a nice home run so when you look at what happened with blue chip stamps with these with these three companies you know with these candy and that's for financial and then the Buffalo News you had about you know the original twenty four million in effect gave you all these three businesses and then in 1983 they merged they merged these businesses into bullsháá happily and that's how Charlie Munger get back to owning one and a half percent of OCHA Hathaway sandy Gosselin also got a significant portion and and so on and so every 13 shares of blue chip in 83 gave you one share of what you have which is route you know around a quarter million or so and the 60% of blue chip that cost about 24 million is today sitting at about sixty billion so it was a very significant increase but but when you look at the you know I told you that there's about five and a half and and was dead when they really come to work for retailing tables the group that put the money in from diversified retailing so every dollar you put in the blue chip between 67 and 70 today is worth more $2,500 but every dollar you put in through the worldwide retailing is worth 118 thousand dollars and which is why if you've got a bunch of billionaires or all of this and and so that was basically the the interesting tile with blue chips and how it and the original business blue chip itself when to almost immediate declines so it was it has revenues of about normal 100 million in the late 60s and by the late 70s those revenues were down to about 20 million and then further down I think in the eighties it was down to ten or twenty thousand before they you know basically shut down the company and such and then all we have of the remnants the stamps with all you've got but another another interesting thing that happened then was that they bought they bought vesco for show as a very cheap asset for 25 million whose Bollywood you know 40 50 million in 73 and almost nothing they did with vehicle move the needle that much it wasn't such a great investment but in 1988 14 15 years after they bought wesco the government had set up Freddie Mac and they were going to allow public ownership of Freddie Mac's shares you know Fannie and Freddie were up and running but they only allowed SNL savings and loans to buy Freddie Mac ships so you had to be an SNL to buy Freddie Mac shells and any SNL could buy a savings alone could buy up to 4% of the Freddie Mac Sharon outstanding so West co-owned mutual savings which was a savings and loan and they maxed the 4% so they've invested 71 million into Freddie Mac shares so you make this investment in 73 you do a few things nothing really moves me much 88 you make a single investment 71 million in the year 2000 they sold the Freddie Mac investment so they sold it for 1.4 billion went up 20x plus they have another 600 million in in dividend so it became 2 billion and and and then that that money in 2000 if you you know moved into Berkshire and around that time you know you would have something like a 4x on that so you know 70 million becomes something like a trillion and the P the key lesson with the with all of these stories if you think about it from the late sixties to the late 80s for the most part with these different invest they made five decision there were five meaningful decisions so approximately a decision every four or five years and the five decisions were you know taken control of blue check flying fees candy bonding Westco financial buying Buffalo News and finally the investment in Freddie Mac so a few bets big beds and very infrequent banks and and so if you if you think about kind of what what transpires with with all these different with all these different beds is a there's a wonderful quote by Charlie Munger which encapsulated this really well and I just read it it says a few major opportunity clearly recognizable as such we usually come to one who continuously searches and wait with a furious mind loving diagnosis involving multiple variables and then all that is required is a willingness to bet heavily when the odds are extremely favorable using resources available as a result of prudence and patience in the past and so you know the team the key Bonterra is this is a few bad big bad infrequent best that's I think one of the very core tenants of values vesting but there is another aspect to this which shouldn't get lost in the middle of all this which is none of this came painlessly in fact it came with a lot of pain or as I would say no pain no gain and so Charlie ran the wheeler month of partnership which was hedge fund at the time and in 1972 94% of the fund was in two stocks 61% of the fund was in blue chair and 23% wasn't something known as a new America fund so let me just describe the numeric of one for a second because you understand what's in blue chip because in 72 blue chip was basically had a market gap of well under 100 million but should all these assets you know with the float and such the numerical fund was a closed-end fund was actually originally called the front of letter so a bunch of kind of flamboyant businessmen with the help of a broker raised about 60 million dollars the brokers took about 10% of that to raise the money so off the bat the investors lost 10% so there was 54 million left in the fund and then they started to invest it and it is do a very good job of investing it so what began as $10 a unit and then because the quality of investments is so bad that fund started training at a significant discount to underlying intrinsic value so you could you know like if you look at I don't know if you've discussed clothes and buns so if you if you open Barron's or even even just go google clothes and fund you'll see there's thousands of these funds where unlike typical mutual fund or ETFs they raise the fixed amount of money and and after that they trade like stocks and sometimes you get a variance between the assets in the fund and the trading price it can either sometimes create at a premium and sometimes get rid of this come and sometimes that this comes can get pretty wide so one can actually build a nice little career out of in effect buying clothes and funds and waiting for them to kind of get back on track but so the new of the front of letters had dropped quite a bit in value and well below the the underlying assets so Charlie munzur and rigor and bought enough of the units to get on the board and then they control of the fund so again they got control of sixty million or 50 million in assets with just a few million dollars invested and once they got control the fund again he created the investment and started redeploying the money more intelligently and so in 72 and they renamed it renamed as the America fund 72 the new America fund had had a net asset value of nine dollars and 18 cents and by the end of 74 it had a value of 9 dollars and 28 cents actually went up but the the price it was trading at was $3.75 it dropped a lot because 70 to 74 was when we had the Nixon impeachment and you know all these price controls we had a lot of the oil embargos and thought there was a lot of ugliness going on at that time in the US economy and the stock market had crashed and so a blue chip stamps which had a market cap of not of 80 million in 72 by the end of 74 was trading at a market cap of 27 million so we just think of blue chip stamps at the end of 74 it's already born See's candy we said bought for 25 million and it's also owned Westco financials at the airport for also 45 million both seriously undervalued even then the the market was not willing to recognize that these were great asset so the monger wheeler mother partnership reported over a two-year period about a fifty three percent drop in return it was a huge huge drop and a lot of things like the Charlie Munger recalls that time is a very painful time so what in 1975 I think 1935 the fun was up about 75% but if you're down 50% and then absolutely represent you are still not back up to zero you know if you're down 20% you need to be up 100% and so so so what he did was he liquidated the partnership but what he also did when he liquidated was he distributed blue chip stamps and New America fund to all the investors instead of giving them cash he gave them these stocks and this and he does gave them instruction that listen just hold onto these stock and eventually the New America fund was eventually liquidated in 1986 for $100 per unit so what was training and less than four dollars a unit went up 25 times one of the companies they bought inside New America was the daily journal so they bought the daily journal for two million dollars inside the New America fund and then in 86 when they liquidated numerical fund the daily journal started trading on the over-the-counter now trace of New York Stock Exchange and that's two million dollars in the daily journal is today was almost 300 million so that's also done quite well but but you know the thing is while these assets did well we had a period of serious space where you had huge declines and if you think about it is his investments were the most sensible investment secret names because he was buying he had 94% of his investments in to come needed which he had control knew the business is really well and they were trading at a huge discount even then you had a lot of pain and and so that's the that's the other facet that one has to keep in mind is that none of these things come come that come that easily and then you know some of you might think that these are stories which are so far back different times any time zone exists today how can we take advantage of these things today and such so in 2000 in 2002 charlie munger made an investment that we read about in imbalance and burns in the weekly magazine and he had been reading Barron's for almost half a century so every every issue of parents probably has at least ten stock tips and so if you're going to read them or half a century or something that's about 2500 issues or about 25,000 stock tips after 50 years of reading barrier he made one investment and that investment was in 2002 where he invested ten million dollars in technical and Tenneco invested in the stock as well as their bonds were thirty five cents of the dollar and they converted to source of wealth and and he thought temple a couple years later and the ten million had become what 80 million what would a - 2004-2005 and and then he turned around he'd met a promising young Asian manager Li Lu and he gave the 80 million to be due to invest in a new funding was starting to invest in Asia primarily and that's 80 million I don't know the exact number but it's something like 500 million today is one up you know six or seven times since then so if you think about it you know you have one action in 2002 to buy chemicals do a second action in 2005-2006 to give that the proceeds to redo and you end up the 10 million 500 million 50x in the last 15 years and these are 15 years and we were all alive we could've done the same thing I certainly didn't do the same thing which is why here I'm talking to you instead of you know being up there on the slide but but the thing is that it again it again demonstrates the the importance of making bets when the odds that have lead your favor Charlie was sure because tentacle and all these a dominant brand with Monroe struts and mufflers and Briggs which are all now meaning but at that time they were quite prominent and and and in fact if we had held on he was buying this stock for you know dollar fifties all the 75 it develops eventually when he $55 a share so even if it just held on some more you've repaid even more than what he did and so he the interesting thing is that you go through a multi-decade period of listening to one pitch after another and do nothing then you step in and make make one make one investment and then you will step and make another investment and so in Charlie's words the 500 million we do pretty much came out of nothing and and if you think about you know in 2002 I think I think Charlie was a billionaire by then so so 10 million that he put in were kind of in like 1 percent of his net worth and record likes to say that it's always good to keep 10 million in checking in case something shows up so I would kind of rephrase that as saying that it's always good to have maybe one two or five percent or some single digital cellular networks sitting there waiting to be deployed when when you have extreme odds in your favor with very high return possibilities and they will show up on by the time they show up infrequently and one has to be prepared to act in size when that happens and so these were some of the thoughts I I really wanted to share with you which is you know the core is you know the few bet big bet infrequent bet the ability to take pains and and the ability to to be decisive at the points when you're you're encountering no-brainers and so with that Professor Yan you can be open up for questions and such so regarding your your point about the ability to take pain that's very closely related to this idea of the limits to arbitrage right that when you purchase an investment you have to be financed appropriately because the investment can go the wrong way before it goes to the right way and I'm wondering in your position so you you run a fine provide funds you also run an insurance or insurance focused holding company down low holdings in your investment fund there is the ability of investors to redeem once a year whereas in your insurance company you have locked up capital so closer to the closed end fun example you gave and so I'm wondering what you think about investments do you think about these two pools of money have different maturity in terms of their liability structure right so the provided funds sort of one-year period and the insurance can be a longer period how do you think about you know which types of investments go in which fund which which pull money to deal with this ability to take pain calming venture so I think that's a good question well I think that bundle but no holding you're correct is like it's like a flows then fun if you will and inside sandal we can own private assets so for example insurance company is wholly owned it's a private company and we were a couple other private assets like that we cannot do that in of - because it's subject to annual redemptions but other than that difference I mean I think there's a couple of differences I think the soap opera funds is purely public equity which are liquid and such and if people are redeeming capital they have to give us some notice and you know we can kind of get ready and arrange for that not a problem in the case of Tonto we got a couple layers so we've got investments inside the insurance company and that is very highly regulated capital so we are regulated by the state insurance regulators and and we also have grading agencies that have various kind of mandates and suggestions in terms of how we might want to structure things so there are rightfully so long restrictions on what and how we can invest inside the insurance company so Bryan has a lot fewer restrictions but the biggest restriction would be that it needs to be all be liquid and so they're different they're different rules but we can we can you know certain things can only happen in one vehicle some can happen in both vehicles and we just kind of I just kind of play with it as as it comes if you will um so my name is Kevin I am currently a full-time MBA student here at the Palmer our School of Business so one of the biggest takeaways I got from your presentation is that it takes an inordinate amount of patience in order to find out what are the good investments to undertake it as by your example of the individual who look through 50 years and made one investments within those 50 years so for Millennials such as myself who are used to the generation of smartphones and digital apps who maybe don't necessarily possess you know that type of patience which is probably something that may be developed I'm not really sure what are some tips or what are some words of wisdom that you would have for those within the millennial generation who would like to adopt this type of approach sure that's a good question so what I would say is you know I think investing is a great activity for a gentleman or lady of leisure if you will you should have something else that is your primary vocation if you will and this becomes secondary I think it works really well when you don't have to think about oh I haven't done anything last week or the week before and what am i doing so one way you can you can skin that is you can get all the hyperactivity area system by being involved in fast and which startups for example you know you could you could you could do any any you could have a day job which satisfies those cravings of you know lots of action and activity but in your investing world I think there is no way around the fact that the patient is almost a it's like a law of physics in investing it's unlikely that one can develop a great track record as an investor if one is hyperactive I think the two kind of don't don't jive with each other there are periods of time when lots of investments become available or certain sectors become a try and such and there are many beautiful time when there's not much to do and and and and so investing is a great activity if you have something else that takes away all your cravings for action and and it's very important to I think is very important thing that if you're it's also an activity that probably to some extent is probably there's some genetic predisposition if your genetic predisposition is of a hyperactive trader you're probably not going to have an easy time sitting there like Charlie one we're just reading without doing anything but if you're if you're predisposed to just being a thoughtful person it doesn't particularly crave action then I think it can be a huge positive so it's not easy to be on this path one of the reasons I wanted to give this talk is I wanted to pound these ideas into my head to get to being more patient than I because I think that I have not practiced this degree of patience in my career and I think if I were to be more patient I think the results will be better so I don't have an easy answer for you I would just say split your time into two buckets be hyperactive bucket to get all that hyperactivity out of the picture and then has it second thing on the side which is reading and reading the question is you talked about a few bags big bites infrequent bites and as you know today the markets are if you consider one side this thing is extremely bullish you know we are today we are there talks maybe there is still some growth left but I mean are there opportunities like that in today's marketplace and if there are well would let's say the students or the ones with behavior means you know I don't go $1,000 $5,000 Midwest when would they put that money sure yeah that's a great question and well I hope to I hate to quote Jim Cramer but Jim Cramer has a great quote there's always a bull market somewhere so there are even if you just look at Cobo you created equities there are probably 100 thousands stock around the globe that are publicly traded and there are probably several thousand or maybe at least several hundred of them that at one way or another trading significantly below intrinsic value and so in many ways it's a treasure hunt all or like monger would say why should it be easy to get rich but but I think that if one were intensely focused on that one would get there so I'll just give you a story from from Warren Buffett's childhood when he was a teenager so when he was a teenager in Omaha he used to go to the the horse racetrack it was called a sovereign racetrack it's Nebraska spelled backwards and and he he'd go after all the races had finished and he collects all the tickets that people had left on the ground which were all the losing tickets and he'd collect them all and then he carefully go through each one to see some drunk had discarded a winning ticket and and once in a while he'd be beautifying one two three or a few tickets actually winning tickets that have been tossed and then because he was underage he sent us our palace to the window to collect and and then you know he put that money away and the next Sunday was again there to collect his winning ticket and and so those were free lunches right I mean there was some effort involved but for a kid it was a free lunch if you will and when he was about 21 years old Buffett went through something on the Moody's manual so these Marines manuals covered a number of different industries they were 120 thousand pages in all and they came out every year so he said that in 1951 he went through all 20,000 pages in these manuals twice right so in a year say two thousand working hours probably for war and four thousand working hours he he'd gone through twenty thousand pages now of fourteen thousand pages now if you're going to forty thousand pages how many pages is that per day if you have let's say you have four hundred four hundred days so what would we have a thousand no be 100 pages a day right the approximately hundred pages rate not that much you can do it on the page is not that much and what he was doing even hundred pages a day you're going pretty fast and he was going fast so he he was going through those hundred pages a day the exact same way he went through the Aksarben tickets you can take the kid out of a thousand you come out you cannot take a sovereign out of the kid okay so what was he looking well so for example he he found I think he was saying page of 1433 West and Insurance two years back in a twenty two dollars a share then last year they'd made twenty nine dollars a share and the stock was between 3 and 13 was the range for the last 52 weeks and they had $135 in book well okay so for him wesson insurance was identical to the absorbent tickets at the Braun had tossed it shouldn't be dinner right Western insurance should not be trading at a range of 3 to 13 and then he said he saw this an insurance he stopped you know he's flipping pages stops pulls up the EMF manual which is the insurance manual for turns coming looks at it it is nothing wrong with it talked to a couple of insurance brokers at becoming fine he puts some money into Western short he says 10 pages later he finds another insurance North American something sure deal or casualty or something again very similar numbers and such and then he says the book really got hot and heavy towards the end you know they were all these exciting things going on and and in in 2011 so this was 1951 right and then the sovereign escapades were taking place probably around 1943 or something near thirty fourteen years old 2011 my friend guy spear and I were visiting Warren and we were in his office in his private office and I noticed there was a book on his desk and it was called the Japan company handbook and I was ready to believe this back on the handbook because at that time guys here and I was leafing through that book looking for Japanese net net very cheap Japanese shock the problem is that when you when you find anything English which is great when you find those those talks you'd be lucky to get half a million dollars into it or $100,000 into it I mean it was these are small thinly traded Japanese companies but but the thing is the Japanese come here handled with about 600 pages to start score page so I stood on his death as a warrant what are you doing fooling around with the Japan company handbook I mean books a hat away you're deploying hundreds of billions of dollars is nothing in that book that's going to help Berkshire Hathaway okay so this is Mickey Mouse stuff and so of course he's a poker player he his expression doesn't give away anything so then I picked up the book and I took it to some pages which I knew the stocks that I had found that would warrant let me make this faster for you you know here's some Maharshi car whatever else and without asking him i dog-eared a bunch of his pages in his book mutilated his book and gave back to him and again poker face he doesn't you know say anything and but what he was doing is he was probably going through that more for his personal account and more importantly the reason he was going through it because you can get it started out of the kid he still loves the treasure hunt okay so he can't put money into those things but he loves the hunt in 2006 he told mba students is it the same thing with a some booklet someone sent him City corner put his booklet together of Korean stocks and he found out he made 20 investments off of companies in that book on one Sunday afternoon he put 100 million of his personal funds into 20 stocks on that book and so for example one of the companies he invested in was a de Haan flower they have flower in Korea is got 1/4 of the flower market market you know people have to have to eat and it was training for thirty five thousand won the last three years earnings were like between eighteen and twenty five thousand one and it had a hundred thousand won in cash no debt so it's a one sort of liquidation value there is no business and on top of that there is a business right and so so coming back to your question about what we do with five thousand well quite frankly they're the five thousand is a huge advantage Buffett has a disadvantage at four hundred village that's a problem five thousand is our problem so the question is are you willing to be like the kid at a thousand are you willing to flip through forty thousand pages looking at six numbers per page to see whether you should flip the page or wait and so with a hundred thousand stock in the world and option guerrilla markets there are always missed right securities and not only are they miss priced in some cases there are extremely mispriced two years back someone sent me a stock tip and you know usually when I come into work one of the good things is that every day when I come into work usually my assistants hand me a folder and they are usually two or three stock tips in there okay it's great my email address MP and Fogg response calm please feel free okay so everything every day I come into work I look at my my folder and there they are you know to these stocks and a lot of the people are sent in and I just looked at two numbers and then it goes in the garbage before I send ago and thanks a lot you know appreciate appreciate your sending it but I look at two numbers I look at the price the stock is trading at which is normally mentioned in there and the price the person is saying it should we trading it right if those two numbers are not apart by at least a factor of 5 or 10 under so unfortunately every day when I come in this is what happens some guys send me a 15 page elegant write-up immaculately done a lot of charts etc I'm just looking for these two numbers the stocks at 13 and after 10 pages it says it works 18 what do you think I do Sunday thank you very much warm regards and but the doctor only let that dissuade you all I want to say to you please don't send it to me unless it's at least a 5x and preferably a 10x and ideally a hundred X Delta between Oh soon because you know we need to we need to get to tentacle right but but the thing is almost exactly two years ago some person I had never interacted with set this 10 page very well-written report I looked at two numbers the two numbers were part by a 10x I said lo and behold someone has sent this in right this is great so I have a like a horn speedy chair in my office you know Lynn knows my office accounts I left my desk I went to my economy chair put my feet up and started to read the report because now I was into an orgasmic experience I wanted to make sure we enjoy the experience and I I read the report and I couldn't find anything wrong with it I mean everything I never heard this company but assuming everything he was saying was accurate because I didn't know what they was accurate or not all I knew was use describing some company and blah blah whatever else and there was factor of 10 Delta I said ok the fairy tale looks awesome now let's see the fairy tale is true so I just all I did was I spent about two hours just checking every number I just opened up Google Finance and opened up a few of the website and I just went to the company website and I just said already saying that is so much is the debt so much it's non-recourse in the non very close blob of lies it went through the check and after two hours I looked at says I'm done everything is there there's nothing more to be and I put 20 million of the - into the company it's it's now and I think north of 50 million and I I think we probably will get a hundred maybe not one hundred might even get two hundred million out of it we will see and you know the guy who sent in a sermon madam I just thanked him and I said we keep them coming and I am a first I haven't seen anything else from him but if I see something from him I'll definitely go back to my icon should read what else he has to say so the bottom line is that if one were to be unreasonable and say I only want ten dollars or five baggers or whatever else they all show up it's as long as it will to be patiently and be unreasonable about it but the thing is what it takes it takes the insert it is the intensity of the person and example you know that that's a very unusual teenager who's doing that and that's a very unusual 21 year old who's doing that I don't know any I don't know any investment analyst who pounds the Polycom of babies maybe they knew what I don't know them you know and and who are going through the intensity that Buffett went through and and one of the one of the things is that you know Einstein used to say that compounding is the eighth wonder of the world and the reason he said that is that so sponge a $2,000 and you find one of these five divers let's say even every can use right and you start at the age of 20 and you're dead at the age of 80 for example so you got six decades right every decade your money multiplies 5x so 5,000 becomes 25,000 when you're 30 it becomes 125,000 when you're 40 and it becomes 625,000 when you're 50 it becomes a little over 3 million when you're 60 it becomes 15 million when you're 70 and you've got 75 million when you're 80 and dead at that once that's not $1,000 or $5,000 right so we don't need this is the magic of compounding is can you find one 5 bagger every 10 years you've got you know at least 20,000 hours in 10 years if you just work 40 hours a week to find one one should be able to find one so that's the name of the game other questions if the students aside of the work involved in the Japan example where you were looking at very cheaply priced Japanese dots I imagine you must have looked at a bunch of perhaps other countries or elsewhere in the Japanese market so how many pages or how many hours of work would you say went into for everyone I get it came out to be well so the thing the thing is that the Japan well I would appreciate looking at Japan because at the time you know if you just looked a little bit the Nikkei and what would happen to it I mean it was a long period of doing nothing you know and Japanese companies have governance issues it's a lot of cash they don't give it out this there are definite negatives there but cheapness gets over a lot of negatives so there are faster ways to do that I could do exactly what I was doing the Japan and handle with capital IQ that's I think 118 thousand years or something but if I use Capital IQ which is how it actually got to the company they're marked in warrens book is I had actually taken a shortcut and then I try to get warned to get interested in Capital IQ he had no interest I think the reason he had no interest just love the treasure hunt and such so so it didn't it didn't take that long you know the this is the funny thing about about the about the market so those those bargains should not exist you know you have some portion of your time in the class that goes on efficient markets you know if markets are fully efficient these things shouldn't exist you know it's the classic Latinos you should all the professors walking his student points out there 100 dollar bill on the ground he said that's not real $100 bills because the real hundred-dollar bill it wouldn't be on the ground and so markets are almost fully efficient but they're not fully efficient and there's a huge gap between those two statements and more than saying that I'd be a bum on the street with a tin cup with if market so efficient so it is not so much I don't think it would take that much time I think it's a question of whether one has the fortitude to buy because you will be buying things that you've never heard of companies you never heard of who its stock prices have moved in a long time you would have to sit there and watch paint dry for many years are you the kind of person who loved to watch paint dry how many people love to watch paint dry please raise your hand Alex loves you he's in the real estate business he paints the wall and just sits there and watches that what you do Alex all right okay so if you love to watch paint dry which the Millennials I hate are not too keen on but if you love to watch paint dry this is the field for you because that's what you gotta do you go to your bets and then spend your time talking to students so that's the time you stand there you don't do counterproductive activities go other questions yeah I am farmer we see and the investment banker right big fan of monies since I was doing my cff so great to see you speak here you know the business I mean we spend a lot of time looking at the product and technology and when it's gone and we don't get to see as much but financials and find those things right so when you gave this wonderful examples you know love it that blue chip and tannic Windows and even you know the Moody's manual and dependably book and how you kind of spin it down to a couple financial ratios or multiple and figure that one out but when like Charlie figure of tannic or you figure out you know profanity in blue chip and when you do your work how much once you find that five bagger or ten burger how much work goes into like looking at the product or the business itself besides just the financials right then because you look up for us so many factors or like me you can one cannot be expert of all the sector show it so so what role does that play if at all or yeah are you financially no no that's that's a great question so the answer is there's a wide variance in in some cases the time spent is very short I would say that with the weather with the tip that individual sent me it didn't take much diamonds and the one illegal didn't take much time was was that the quality of that report was extremely high and actually what I discovered because I was really blown away with a high quality of that report so I'll answer a question with just a little bit of a kind of backdrop so I never talk to that company or interacted to them in any way when I when I bought the position very recently I went and I was in the same city as a company I said let's go meet them you know let's see what's happening right and so I arranged a meeting and the CEO wasn't there but the CFO was there and a couple years offered me the investment right and so I go in and you know we own close to ten percent of the company so we're one of the largest owners of the stock outside of the family that controlled it and so I meet the the CFO for the first time he says you know Mohnish all these years all these people have been badgering me about why you invested in our stock and I kept trying to explain to them I've never interacted with this guy okay I've never had any interact and they don't believe me they don't believe that someone will take a 10% solution in a company without ever having met them so they think I'm kind of lying to them but I told them there's nothing there I explained to him that I had received this you know very well written thing and what ended up happening is that he gave me some data that completed the picture so there was a there was an Italian analyst this is a company based in Hyderabad in India this Italian analyst who have also never met visited the CFO from the visitors vo as they would in Hyderabad solving for x over two or three years doing a very detailed drill down on the business and he was really going back several years before bought served the company and then he put together a write-up I haven't seen that right up till later and and then this other individual took that right up and then builds on it right so by the time I got involved I have these two great unpaid animals would done a phenomenal job and and it worked out well and so in that particular case because so many of the pieces were kind of put in place for me there wasn't much I didn't spend more time others had spent hundreds of hours on it to make it easier for me so thank you very much but but you know I was I would say what five years ago I was looking at the auto industry which I always hated and and in that case it took me I think probably about two months of you know staying up to 3:00 or 4:00 in the morning reading to finally get to the point that I was ready to make an investment so in that case it took a significant amount of time probably the most time they get to hundreds of hundreds of hours to get to where we need to get to so there's a range if you were going to build a basket of Japanese net Nets that's only wouldn't take you that much time you probably won't need to spend even more than thirty minutes on a company and also you would probably make the bed size really small and you'd make a bed for ten fifteen or twenty companies becoming a basket back and you could do that and even today you know if you look at for example of the South Korean market the South Korean market today is probably one of the cheapest markets in the world according to me I think the smaller cap Indian market is a South Korean market cells are relatively cheap but South Korea has these preferred and there are lots of them they created huge discounts to the common the only difference in the warning lights which really don't matter and and so in some cases the preferreds of trading and one-third of the common when economically they're identical and this is in 2017 when it shouldn't be happening but it is happening right now so so there are I will say that there is a range sometimes it takes a lot of time sometimes a little time and it's just wherever it forms you know so that's that's probably fine either my name is all explained I'm an undergraduate here so I was wondering if you could speak to the value your philanthropic efforts and why it was important for you to form the doctrine of foundation okay well great well I think it was just because there was no other choice so if you you know I think that if you if you are even a slightly above average investor spending less than you earn or a lifetime you would end up with probably more assets than you could spend and I could see that that that was happening and probably likely to continue to happen in in my family's case and so if you're going to end up with more assets than you're consuming since they're really only two choices left right you can either pass it on to your gene pool or you can in some way recycle it back to society those are pretty much the only thing you can do and large inheritances are a disservice to my kids if you will the next generation if you will I think that if I were to give my kids large inheritances they would have probably less interesting lives than they might otherwise so so it is actually a bad idea to be thinking about passing on large inheritances and so if large inheritance is not an option then the only option you have left is to recycle back to society and one of the things I I realized is that from really from reading warren buffett specific is that giving money away effectively is more difficult than making it because the types of things you know if I'm going to make an investment I can look at a hundred thousand stocks and find something that's kind of weird and no one likes for whatever else and make that investment but if I want to try to improve society you know the kinds of things I have to work on are things like poverty or you know environment or health and these are problems and issues that have been intractable in getting solved even with trillions of dollars being spent by various entities governments and such leaders are problems and so understanding that giving money away is more difficult than making it I didn't want to wait till I was very old before starting to kind of figure it out if you will so we started optional my wife and I shot a sectional about reading about 11 years ago I was in my early 40s then and the reason to start then was to really have at least 10 years where we could fail but learn from the failures and then start getting back so that would be idea is that we started giving away two percent of my net worth diving for 10 years ago and it was small number that wouldn't affect us if it didn't work but it would give us enough money to have meaningful experimentation and what ended up happening was that we didn't have really any meaningful period of not having traction it took off right away and and we were really lucky we got a great partnership for the governor of India and I've got a great team and and it it took off quite well and so now it's it's way past that startup it's getting to scale and such and so and we opened it and ability to others to contribute so I think Ducks are now for example has a annual budget of a little 3 million dollars about half that comes from my family the other half is coming from other folk and and that number will keep growing so it's become it's actually created meaningful change for significant number of people so it's worked out and so that was a kind of thinking was that there was really no choice and now I think the the goal would be one time to gradually kind of increase the percentages or the numbers and so on and see but but the thing is that what I want is assumed with philanthropy is be very willing to fail so in many ways the opposite of investing what one ought to be doing with philanthropy is to swing hard at the fences swing for the fences even if the odds are that you'll miss because this is really the only way you can kind of bend the trajectories and that's what if you look at like for example the Bill and Melinda Gates Foundation you know they're trying to swing for these things like the vaccine from the little area or hundreds of millions of toilets and so on in India so they said they're trying to go after major things with some significant innovations knowing that there's a high chance of failure but the good news is that if you succeed then you move the trajectory which is great so that was the kind of thinking behind it um so one of the takeaways that I got from your presentation with regarding the moonship's where about 50% of people don't ever redeem their tickets with that you know that's one of the habits that you know people have by going through that experience and within the industry you can sort of define that as like a core element and a core result of the business so I sort of take that back to when I think about learning about value investing in my class in my classroom setting which is that you know before I'm undertaking any type of investment you have to like really really know the business inside out like the core about how it operates how does it generate and maintain profitability so on and so forth and so I was wondering from your point of view how does that approach really take place when we look at a diversified business or like a conglomerate like take for example GE as a large company that really diversified into many many verticals how would you really take the principles of value investing and put it onto a large company with that kind of diversification sure that's a great question so what sort of blue-chip the percentage not redeemed that he was closer to 5% half of humanity was not out to lunch just just about a few percentage for 5% and now those four five percent are selling it on ebay and trying to make up for it so it's okay but you know Buffett has a box on his death which says too hard on it and so he says that probably 98% of stuff he encounters goes into the to hard pile which means something he cannot figure out and and he's a very smart guy and so the thing is we don't need to know everything about everything so for example you know gentlemen here have mentioned venture capital and early-stage investments and all of that you can go a lot of moon shots with that approach you can also get a lot of views right not an easy game so for me I was just ate the whole thing and put it into two hot five for me for him it's not the case but he's got some competence inside so this varies by individual so if I look at GE here's the reasons why I would just not even spend two seconds on it so number one is probably followed by two dozen animals who spend a lot of time on GP and I can look at any of the reports and I can see that there's no factor of five or ten between the current share price and what the share price is in fact I would say that's probably the case of the thousand largest businesses in the US forget about so if the companies in the fortune 500 of the SP 500 whatever rounds we're done the beautiful part is we just finished five hundred businesses in two seconds it's awesome you like my speed I have great speed you know I'm faster than Buffett get four pages so so we don't need to understand everything what everything we can just focus on you know Munger says go fishing where the fish are are there fish in the fortune 500 maybe if I spend ten years I might find a couple of fish there that I might have missed but you know let's keep it simple to say no and move on so basically focus on where the fish are focus on sectors that people hate unloved countries that aren't loved you know things that would cause distress for example Qatar has been in the news lately have you looked at stocks in Qatar you know maybe if you're doing nothing tonight you know that the stock market is tanking and I haven't looked at the Cutler stock market I don't know what kind of companies in there but let me put it this way is the highest higher probability of finding value there that in GE and and so that's the name of the game is basically go to where the fish are when you think the fish are and and then the patience and the discipline to you know look look for you know kiss a lot of frogs before you get your prints thank you I so my name is Francisco and I have questions regarding a diversification so I know you're trying to do more equity long value investing but within like an ever-changing world or industry trends might change or competitive advantages might disappear what's your opinion on diversification like how many stocks is enough for your portfolio for example yeah I mean I think it depends it depends on your degree of conviction I mean I would say very few of us can get to mongers degree of conviction that gustafson 94% but you know you know Charlie Munger says that if if you owned in a small town in America the McDonald's franchise and the Ford dealership and the best office building in town and the best apartment building in town let's say those are the four assets you had and you could own fractions of them so you may not be rich enough to own all four completely but you could own fight with an override or nose or 7% over 14 or something like that his perspective was that a portfolio which had those four assets in a place like let's say Peoria Illinois middle of nowhere would be enough to make you quite wealthy over lifetime and and so if if you if some person looked at that portfolio they would say there is extreme geographic risk because everything is in one time right but you know if you meet any entrepreneur in Irvine let's say some Chinese couple running a small Chinese restaurant nearly all of the networks is in one asset not even for assets in one top right and and so that's prolly even more risky than what Munger suggests Xperia etcetera so I think the the answer on how many stocks or how many positions is a function of how well you know the company and and how durable those modes are and you're right that over time almost all notes erode you know almost all companies lose their competitive advantage I mean the Ford dealership I don't know what that looks like in 20 years you know maybe 10 years it's ok but 20 in 25 years it may be fine I can't tell McDonald's life might mind still be there but we again we don't know you know food is an area where if you get to things like what happened in supposedly you can you can hit some some brick walls so so I would say for the mere mortals like us not the mangers of the world I think if you've got to probably something like 10 stocks that you understood really well in a few different industries that's plenty I don't think you should get to 50 stocks in a portfolio I think that's not going to help you but something like you know ten fifteen or eight or something is probably a good number so my name is Elizabeth and I'm an undergraduate here palm Raj and I my question simply was what is the most valuable piece of advice you have received over the course of your career well that's a loaded question let me think about that okay because there's a lots of different kind of things that have come across in my my career but I'll get back to your question maybe after the next question in the meantime I'll give it some thought so I not rambling or something that this comes off to my top my head yeah so my question is it seems like investing really takes up a lot of your time and just like rain your foundation and everything you do how do you manage to balance your life in terms of family personal time and everything else okay well it's that's an easy one you know my wife isn't here but if she were here she would say he doesn't work at all if you asked him what he does she would say he does nothing because the perspective is she really needs me do nothing quite frankly and my daughter's at the back of how like what do I do how I spend my time hi hazel I in fact just before I came here I finished my afternoon nap and so Apple naps are a good thing and so I'm I'm wide eyed and very cheery for all of you yeah so I actually you know investing is an activity that at least as defined by Buffett and Munger and such is not an act is not something that has a lot of you know hyperactivity about it it's an activity that requires a lot of reading and thinking which is fine and and I enjoy that so actually I don't even think of it as work I think of it as fun really just trying to understand the way things work and the way the world works and and so on and so so I think that if if you if you focus on doing things that you love to do then you won't work a day in your life and I think that should be the objective I think the objective all of you should have is to focus on now you know for some of us it's hard to figure out what we are sighing about right I mean sometimes that's not clear it may not be clear your ages what you're excited about but you know increase time on activities that energize you and decrease time on activities that don't energize you and so so for example you know one of the one of the things that Buffett and Munger say is that if you spend time with people who are better than you you will get better and if you spend time with people who are worse than you you will get works as a magnetic pull both ways so one simple thing to to look at is if you look at your kind of close friends and who you spend time with just ask the question you know are these people I really admire and look up to or is so-and-so someone who's kind of pulling me down or has got some negative attributes and such and so if you change your social networks to be more in terms of a crowd that is kind of interesting and ones that you look up to that's what we helpful so I think these are just things that you've got to feel out and figure out what you're excited about what you love doing and then take it from there and you know to answer your question I don't know whether it is advice but I would say that there are what I would say the important thing for me is certain mental models and some of them came about from you know people some of them I read about and different things and these mental models have been very important so for example one of the mental models that anyone be useful to this group is that there are there are 168 hours in a week and when you start working full-time your employer is expecting you to show up around 40 hours 40 or 50 hours from your that and if you live close to where you work and you won't have much time with commutes and such and even if you take out time for everything else you know eating sleeping and etc there's probably at least another 40 hours available to you for other activities you can spend a number of different ways and one way that the second 40 hours can be spent is it can be spent on your passions if you will it could be spent on getting a start-up off the ground it could be spent on in sunjai's cave investing this five thousand so in ten years it becomes twenty five thousand right so there's there is a chunk of time all of us have and in my case you know I only had one employer but when I knew I wanted to do a start-up and leave I didn't I didn't just leave I didn't have any money I use this mental model so what I did is I basically reduced my intensity of work for the employer to be just about firing level you know I was no longer interested in being employee of a month or Employee of the Year or anything like that I wanted to take it down with I was just about that he's not so bad they're gonna fire him but that's about all be able to get out of it and I spent all the time so you know early morning before I went to work in the evening that I came back and weekends on getting my startup off the ground and I put all my energy there and it took about nine months of running this kind of dual life by which time the startup had some revenue I had to 300 months of visibility and I was out and when I resigned of my my boss said you know we couldn't figure out what happened to you the last six or eight months I said yeah exactly I said you know my my my point was we just you know focus because yeah I wasn't so bad they want to fire you but you were just gone there's victory isn't something resetting I said that was exactly what I want to be just about firing level and so the the mental model of that you can do two things at one time within the same week is the important one the mental model of understanding the compounding again is wonder of the world is an important one there are a few of these models which basically become important another another mental model I probably got too late in life probably was my mid-thirties is that humans humans want the truth they don't particularly care what it is so for example let's say I did something untoward or negative or I have some results that were not equate if I am absolutely candid about owning up to those generally speaking as humans we know that very subject to screw-ups and so there's something that I didn't understand was that people don't particularly care that you screw up what they care about is that you're candid about the screw and and so what I found is that when you have candor around screw ups you strengthen relationships and you actually deepen trust and all those things have huge positive impact long-term so these are you know I think that Mugler is kind of what I learned from Charlie is to be a collector of mental models and one of these when is mental models become important because our brains are kind of very screwy in terms of how we process things there's a lot of kind of glitches in it and so these mental models help us get around along these glitches and so that's kind of what I would say is some of the things to to think about yes okay I actually was going to ask us to mute a question like heard this so because as I know as the entrepreneur is really hard to balance it work in line but I think you already gave the perfect answer for that one so another question I have is I'm interesting that do I have any investment in China's Maki and how do you think about that I do I do have I think we have one investment in China and the one investment in Hong Kong and I mean these were the Hong Kong one was one of these years because there's everything more than English it was easy to kind of go through it the Chinese one I got some hand-holding from some benevolent Chinese people which is great but but no wife might biggest handicap with those markets is to a large extent it falls into art file so I would say you would probably have a serious advantage over me on the Chinese market and and so the important thing getting in investing is you know to always stay within the circle of competence and always focus on things that you really understand you know Munger gives the example of one of his friends in the billionaire John Arriaga so John Auriga only invested throughout a career in real estate within a few blocks of the Stanford campus so his whole career that's all he did was make investments around us and usually he was buying when things were pessimistic Sullivan therefore again those sorts of things and he never over levered and over time those investments did really well so if you think about kind of total competence of a person like John Arriaga well it's not even real estate it's not even California real estate it's not even Northern California real estate it's not even really real estate it's real estate just around Stanford and so a person who just understood real estate around Stanford from a standing start becomes a billionaire right and so that's kind of the nature of the of the world is that specialization is a huge advantage and so even something like the Chinese market for too broad so I think the narrower you can get and the more intensity you can bring to it the better off you will be and so that's that's the key is with this circle of competence and depth of knowledge in there hi my name is Lisa Alma Hodge undergraduate and I noticed that one of your investing principles is that to invest in high uncertainty companies and notice that in the market people often interpret high uncertainty at high risk I'm just wondering how would you differentiate or how you interpret the idea of high uncertainty and high risk sure that's a good question so risk and uncertainty are two different things and markets money can get confused between the two things so so for example if I were to let's say let's say look at a funeral services company you know coming focus on either creating or burying the dead and let's say they're in certain geographies we don't know who's going to die in Peoria Illinois next year but we know how many are going to die okay so if you want a predictable business there is probably no more predictable business than a funeral services of in Peoria okay I can tell you ten years now with the cash flow they're going to be even 20 years from now the cash flows are going to be right so a business like that exhibits no uncertainty right it's a very low uncertainty business and generally speaking businesses with low uncertainty extend to be fully priced they almost become like bond you know because I mean if you have if you have a real estate investment trust it has a set of classmate properties in prime locations ninety five percent leased economy doing well you can see those cash flows for a while and you know it's got a lot of stability to them on the other hand there are businesses which by their very nature are subject to very high uncertainty so for example let's say they were an oil company right where the revenues at cash flows are very dependent on the price board they haven't answer anything or less it is a shipping company which is got an entire fleet on daily charters if you will and again in some cases no charges can vary so much that you can get very high deltas in in what the cash flows can be so one of the cues in investing is that one should look for situations where you get the combination of the two where you get a combination of very low risk and very high uncertainty so when you when you see an example of the two together the odds are very high that you can make a lot of money so I'll give you an example I think this was in 2000 in 2001 there's a company I invested in it was called a frontline it was a shipping company and what they did is they transported crude oil so they had these VL cc's very large crude carrier which are transporting oils between let's say Saudi Arabia and the US and so on and these good carriers are huge ships you know at that time they cost about 7080 million dollars apiece and they're there's two ways that people use these ships they either do leases you know fine chargers or they on the spot market so in the case of frontline they had something like 40% of the global fleet of Weald species and they were all a spot market so the spot market of PLCC is range of daily rate varies from something like $10,000 a day to a quarter million dollars a day it's a huge variance and breakeven price for these ships was at that time about their to make at least 20 or 25,000 days to break even so what had happened in 2001 anyone do not want to do when I was looking at frontline is the there was a glut of ships to many ships and not enough crew being shipped shipped around and so as a result shipping rates had collapsed and at that time shipping rates of around 10 or 12 thousand a day so frontline fleet was losing money and the stock price went down to something like three dollars share so these ships also have a active market of being bought and sold so I could locate him for example class turns or the publication I could look at what the distressed selling price of these ships was at that time and in the entire company just sold everything and a distress right they would get something like eleven dollars a share so it was trading at you know few sixty-seven percent discount the liquidation value mainly because there was fear right I mean this is like the they kind of the midnight of the on shipping business if you will and now the the other one you know we talk about mental models since we have some time I'll just make this a little bit more detailed there's a friend of mine who is in the real estate business and you know he was telling me that Class A office towers in major urban areas normally take three to five years from the time someone thinks about them to the time they are ready takes a long time and usually what happens in the real estate business is that when occupancy gets really high and vacancies are very low in the flat eight hours everyone and their brother plans to build them but the thing is it takes three to five years to build it by the time they get built they all hit the market at the same time and then everything collapses so in in these real estate towers you have this boom and bust cycle going on because they're like lemmings you know when everything's jamming everyone and their brother is building and they all come on the market at the same time the wheel PCs are very similar in the sense that it takes a couple of years two years three years to get a real CP built with our Korean shipyard and usually when the rates are really high you know 80 thousand a hundred thousand days everyone in the browser places orders and what happens is that on a seventy million dollar PLCC you can place an order by giving them two million or a million you know we don't put up a lot of money - it's like ordering model $3,000 gets you the model 3 and so on the other side when rates go to 10,000 nobody wants to place orders you know then orders been placed just like there no power speed build and so what happened in the way our PC market these rates go to like 10,000 scrapping increases because they can scrap the ships the old ships and get a lot of instant cash from the ski value so what happened in the be OTC market is that when these ships to the gluttony ships there's excessive scrapping taking place but when those ships get scrapped and then the demand comes back up you cannot instantly have more ships and so the only thing that happens is the price changes so I I bought the front line I just want to capture the liquidation value spread so I quarter than three four dollars and then you know eventually got up to as a range started going up it got caught up eight or nine dollars it was still glow liquidation value I sold the stock at the end six months I double my money or whatever else but then but then the second part which I missed came to bear which is they weren't enough ships raids went to a quarter million they are sitting there with 40 ships and eventually the stock more than two hundred to one you know so if I had been like Sunday and I just put my five thousand there and just you know go on away that would be the thing to do and and that so so I think that that was the case of very low risk and very high uncertainty because of those dynamics and so if one is kind of a student of these things you can find these kind of weird things in different industries and it it's a fun hunt when you find them to look at that massage so so that's what I would I would suggest we had vehicle it Michael here undergrad here at home garage so you've been talking about this for the past hour but you've been stressing a lot about the importance of patience even when the market is down but in your experience have you witnessed like any historical indications that continue to during your career that prompts you to not exercise patience to actually act well I think this is a business where you have to combine extreme patience with extreme disciples you know it's kind of a weird combo but what you need is an ability to sit there long period to nothing and then when the opportunity is there and it's obvious you act in size so you really have to have the tool together and I think that's why to some extent I think that it may be difficult depending on genetic makeup to completely reprogram someone to some extent someone has to be predisposed to some of these traits and then then I think you can build on it from there so that's what I would say that you just need a combination of the two combination of the patient and and one of the reasons I I even like to give talks like this is that it helps reinforce for me the importance of patience as I'm saying it to you it helps me get better at that and inside so the patience and decisiveness need to go together and and that it's not easy I mean I think the thing is that you've got to have this you know extreme action at one point in time with no action for long periods of time and that's that's just a difficult combination if we're together for that that's what is required hi I'm Keeley I am be a student at the former school um so I was really intrigued by hearing that every day you receive a few tips sometimes from people you've never had interactions with as someone who's not employed in the investment industry and someone who's just starting to kind of begin their career with personal investment I was wondering if you have any tips for a way to kind of broaden my network to meet people who are investing to kind of get more information and kind of bounce ideas off of people well yeah I mean I think one way you could do that is you could reach out to people with perhaps you're right now of your best idea and and say hey you know if you find it of interest we would chat etc and take it from there but I yeah I mean I think that some ways to broaden the network might be to go to places where some of the like-minded folks hang out so I don't know if you've been to the Berkshire Hathaway and your meetings in Omaha I would say that's a good place to go and we could pledge to go and get early in line because usually the people around you or even in the airplane I think most people will be heading there or professor yang attends the daily journal meeting in February usually that's another good place to go that's local so I'd say that there's a few places where the groupies hang out there are some message boards and I think some of the message boards also have people who meet up I think there's one called the corner of Berkshire and Fairfax is a message board and so sometimes people as a message board will meet and so yeah I mean I think that in this day and age you've got a lot of digital tools at your disposal that can get you to some groups online and then you can take that further up there hi my name is kena and promotion just have a quick questions about which is keep the same investing strategy and president president Donald Trump and his creation and how would you suggest that yeah that's a great question so actually the good news of the u.s. is a president of regional power so in the entire history of the United States we've got you had a lot of pathetic prevalence we probably had more pathetic presidents and great friends where you could you think back yourself you know who owned the great brother it really might not even get to all the fingers of two hands and so I don't I'm not necessarily convinced President Trump is not going to be a good president time will tell but I was I was at say that I don't make investment decisions I don't think I've ever made any investment decision based on who's an office I think quite frankly we're a de hond flower is trading in Korea has nothing to do with who the not who's in power no no relevance or where front line is trading or any of these other dynamics it has really got nothing to do with who the power and so I've never made investment decisions and I think it's a stupid idea to make investment decisions based on based on you know who's in who the power especially I think given our u.s. system of the strong checks and balances I mean there's a there's a natural tendency to inaction unless a lot of parties agree and and we've seen that over eight years in the Obama administration we are seeing some of that right now and some of that is a negative ways what we need sometimes we do need action but the remarkable thing what the u.s. is that at the same point in time when everyone needs to come together like we do prices and different things and stimulus and all that is magically happened to actually agree and do a few things which is great so so I would say it's generally a mistake too to spend time actually not this is one of these kind of peculiar human traits is that everyone seems to I think spend too much time on the nuances of President Trump it's probably entertaining to spend that time but quite frankly that it's not going to help your network I heard you mentioned the passing about the one word / lever or leverage and I know that's a very dangerous word when it comes to investment so can you share a little more of that and whether it's ever ever a good idea to use leverage to invest yeah I would say the I would say the short answer is probably a good idea to avoid it I do know that you know even someone like probably Charlie Munger used leverage in the very early days probably has no desire to use it at this point or even for the last several decades so I think the simple answer is that it's probably best I mean they can be situations where leverage may may extend but I would say the if one never used leverage that would keep you a lot of trouble so I think generally speaking you know the thing about the power of compounding is there are really three elements which control kind of you know what your end number ends up being so one is you know the amount of money you start with the second is your rate of return and the third is the length of the runway right so the combination of those three elements get you to the end result and the most controllable one of those three is the length of the runway because the thing is especially for most of you in the room if you're in your early twenties you have a probably a 60 or 70 or 80 year runway and and the important mental model there would be spend less than you are and and even if you didn't get spectacular ready to return if you use the entire runway length you're going to get a spectacular end result and so so for example you know I think this is a I think maybe a year ago maybe eighteen months ago I was I picked up my younger daughter she goes to school at NYU and it was late at night about two o'clock the money would drive back to my leg and I thought this was a good time to explain the magic of compounding to her and so she had just done internship the previous summer and she had made $5,000 that summer and the the IRA laws allow you to put all of that into an IRA and which which I had asked to do it we're done and then I told her you know I said you know the thing is that you're you're 20 for example and actually she did that I'm sorry that internship was when she was 18 so I said you're 18 you go to 5,000 and I said what is the value of this 5,000 when you are for example 60 65 or 70 years old for example and and I said let's say for example the returns are decent let's say fifteen percent a year for example so one of the mental models is who looked env2 which is you're doing 15% every five years of money's going to double and so if you go from eighteen to sixty eight that's fifty years and if you're doubling every five years it's two to the power of ten and my daughter is falling asleep while I'm going on this map for her and and 2 to power 10 is 1024 and so you throw away the 24 the 5,000 becomes 5 million tax-deferred at this point you're wide awake okay so I said you know that's that 5018 at 68 becomes 5 million I said but you know at 19 you'll do another internship maybe make another by 6,000 and at 20 is do another one and at 21 another one and at some point you graduate and you might have some savings that might be even more than 5,000 so I said all of this is getting saved and invested what is the net worth at 68 and so she said it's too large you know I can't do the math it's too large and the reality is that most humans don't get it right so most humans don't get to these you know huge numbers at those ages why don't they get there right so one is when they leave their job they take the 401 K and they go on vacation okay so you cannot you know one of the 11th commandment thou shalt not take the 401 K and not roll it off okay very important you can't screw up the compounding engine so so you have to wait I mean the thing is actions required to get to very significant sums without even earning that much money over a lifetime a very simple the first action is that you consistently spend less than you earn and the second action is you even if you don't know investing this put in an index fund and forget about it and so even if you're not even if you're not compounding at 15% I mean you can take the same number and say let's say the double comes in 10 years even then it smells fine in in a 50 year period you'll get five doubles to the five power 5 is 32 and again when you start doing that every year with with all the numbers it will get too big number so so that is the key if you don't need leverage you need to be aware of the fact there are magical properties to compounding and there are negative magical properties to compounding if you borrow at high interest rates so if you have credit card debt then you the whole process is working in Reverse which is terrible and so don't have credit card debt pay off the credit cards always spend less than you earn and start very early it's if you lose if you lose your 20s and you start compounding in your 30s that's a massive loss that's a lot of lost opportunity so I think you really want to get started very early so I'm a really quick question so you're saying that we shouldn't leverage but let's just say we are college student and we're just starting off investing the price offered like 10 grand undergrad when you start for palm is v1 trade let's just say three times on the daily basis to break it hit with a t9 d and you can't trade after that and then if you want to do options you can't do options because you have to open a margin account and then you can't provide safety so when we can't lever because we don't have enough money then how can we really invest if we have to wait for stock at the lowest price in order to see it rise up to top like you're talking about frontline communications at five dollars it amplified all up to two hundred and then yes straight do straight path communications things acting five dollars that also I guess amplified to $200 over the Verizon trade so I'm just kind of curious for people who don't have as much cash flow how do you go about investing when you have so many constraints that block I guess small value investors right well I don't know where to begin with your question because we can have an option account and we can have a margin account we got to get all that vocabulary out of our system and I mean I would say to inward you know bundler say and many problems get solved by version so you know rapid traders how many rapid traders are there in the billionaire club you know it's like you know the thing is that and what percentage of rapid traders made it to the billionaire club and the flip side is how many people who concentrate it or they kind of one thing for a long time made it to that Club for example so I think that the the important thing is that to be patient and not be in a hurry I mean I just pointed out that my daughter has five thousand she does makes nothing more for the whole life on fifteen percent a year which is every five years is doubling she ends up with five million so if you have ten thousand you don't need heroics to get to great numbers you need patience so that's what I would suggest is that take the patient product and that might be the way but definitely I think that some of the paths that you might be contemplating the problem is the problem of those passes that you will or you have high probabilities of blow ups you know if you're levered of you're accusing options and all that the returns look great but so is the risk and so what you really want is low risk and high returns that kind of gets to high risk and high return so probably best to look at another another way of doing that hi I'm Alicia day one so I have a two-part motions way so as an owner-operator and assurance company and you know that the age of autonomy autonomous vehicles well it is darling if you are an owner operator of insurance company would you start an insurance business number one number two as a shareholders of auto companies at what point do you consider exiting the positions of your auto company considering that there is by sharing platforms coming of age and so forth I do yeah so I didn't get that question about the insurance company so the question was if you are able to start an insurance company would you start an auto insurance company oh yes here's an autonomous vehicle sure yeah so I think the auto insurance well that'd be a pretty competitive market to try to go into with all the players out there so we have to have some mousetrap that hangs up advantage so I'm not contemplating starting auto auto insurance companies I think that we difficult one others who came up with some you know probably probably something like pet insurance has a better runway than auto insurance if I get but I would say that the the autonomous driving and all the different facets of ride-sharing and such one of the things that happens with all of those different formats of transport is that miles driven or miles traveled for human are going on because of the flexibility and ease of the different options so so for example when I was a student undergrad student on a bicycle and options for transport very limited but today if you're a student you have relatively cheap options of uber right share different many ways you can rent a car by the hour you can do put your numbers in options so in general miles travelled increases so as well as as cost of mobility drops miles travels increases it becomes so all of these I think are tailwind for auto companies because a miles traveled increase then eventually you have more usage of automobiles or more frequency of purchases where auto companies I think phase disruption is when you get to autonomous where there is no driver which is the definition of industry definition we level-5 driving which is I get my car they take me to Granny's house and it takes you to Granny's house and they don't do anything and my best might be best guess on that is that the vehicles that will eventually get there are unlikely to be dual mode so they may not have the ability have you no passengers of drivers and autonomous driving all in the same car may be separate technologies that do that and the second is that there's a huge difference between almost getting to full autonomy and full autonomy so for example if you say let's say self driving trucks I think self driving troubles can happen very quickly because I can get a truck to a highway with a driver and then get the driver of the truck in California and program it to go to New York and it's all I be driving it so let's be easy to write the code and the software and get the autonomy of that but and then I'll be in other New York at the last interstate and again a driver to meet the truck and take it down to where it needs to be so the last mile on both end can be human and the rest of it can be automated and become an inn trucking it makes them because you have hundreds of hours in the middle which of the products so you can take a lot of cost out of trucking if you do it that way and the ability to do that is imaged that could happen I think that when you're talking about all the different multitude of last mile nuances that we face so for example I'm in Michigan Avenue of snowstorm I can see the lane markings I can't see anything and I don't know how much confidence I'm going to have and sitting in the backseat of a returnable car that is going to get me to Nirvana you know I mean you're starting to get to some issues so I think that is in the drone environment we may get to autonomy without a driver maybe in five or ten years in anything to anything going anywhere to anywhere sitting the back seat a car with no driver I think it's very far away I don't know if we get that 10 15 20 years you'll have to see because there are a lot of challenges getting to 99% or 99.5% working is the big difference between that and getting to hundred percent so that last one or two percent is is a difficult proposition but you know I'm not I'm not a techie this is my best guess as what's happening so in the time scale that we on auto companies none of these are relevant so what I mean by that is you know I have an investment in a company called Fiat Chrysler and we invested in it at a point in time where in a in a year or two they're learning in a single year will exceed what we paid for the stock so if I'm sitting on a pause basis of a pea of 1 on 2018 or 2019 earnings I really don't care what happens in 2025 or 2030 so so I think that from my vantage point it may actually in the end we don't know how it shakes out but in the end of all these different mobility options may end up being tail winds for the auto companies because they they may end up increasing the the fleet usage on our lowly I mean if I can look at my own usage you know I use uber but I also use my car and there are times when my car is more more convenient than work and sometimes when I'm in New York City I use VR which is great sometimes uber pool etcetera so it depends on the circumstance and so I think that the fact that when people say with none of us have an own car and we're just going to call cars when we need them we are ignoring habit and cultural aspects so the automobile is an entrenched part of our culture we eat and our Mobile's women who put up makeup in the automobiles we do a lot of things in automobiles and we've been doing a lot of those things for a century and it's a very personal space that we used so I think that I don't I I find it unlikely that even in a world with every car is autonomous that humans will cease to own cars I think we still might want that personal space and we might want to sometimes drive the car and we might want it to be to drive us at time so we may see different combinations of of that and but but it is very clear that if I take it over from Irvine to LAX today for example over X it's like 60 or dollars for example if that same car didn't have a driver it might be ten or fifteen dollars in cost if you think a cost down a lot because you'll be basically just you know gas and maintenance and amortized cost in vehicle and so you would drop the cost a lot so if you make trips from Irvine to LAX be very convenient at ten dollars door-to-door you would increase usage quite significantly demand you go and so as we drop the price of mobility so you know how did mobility prices drop in the past we had public transport right I mean buses and commuter trains and all that and that has some convenience it has some negatives it's as you get these wide range of different options right sharing cars by the hour and and and pulling and autonomous and such I think that miles driven by humans would skyrocket and so one way to play that which is probably better than the auto companies is that no-brainer way to play that is the tire companies so no matter what happens with the trajectory that we are on from 2017 to 2035 there is no question that every year from now there will be more tire sword than the previous year because miles driven will go up and and and especially with let's say electric cars you know electric cars always try to reduce their weight so they make the tires really pain because they want to maximize the distance and so the electric car tires were not really fast much after the normal tires so that's even better for the tire count so the way to play this in my opinion is the tire comes and and then you know I found just like the the person who sent me that idea was a the TEDx another very nice human sent me a tire condom and God bless and and this tire company was at two and a half times over and so I didn't have to think much you know because at two-and-a-half times earnings in a market that's growing we love that the problem is it trades by appointment it's very thin volumes obscure company you guys probably love it but but the thing is that you know you know five hundred sixty million dollar fun I get sometimes a thousand dollars of the stock sometimes I get $2,000 in a day sometimes I get zero but I've been nibbling I'm just continuing to nibble and now I have I think I think we've got about four million dollars so far but we just keep nibbling at it and see where we can get so I'm excited about that one thanks we'll take the last question over there hi I'm a MBA student from South Korea and then you talked about South Korea and the South Korean stock market is very relatively cheap at the moment you have a huge advantage yeah highly discount discount you know and stuff what you think the main reason is that and if you think someday will be recovered from the discount price I thought maybe you would educate me about it I just want to use thinking oh well I'm not unlearned an export on the South Korean market I think they the one part which i think is kind of an irrational part of the market is the Korean preferred and so the Koreans referred basically are economically similar to the normal common stock the only difference is the voting rights are not I mean could refer to me as little or no word voting right but usually for many of them the economics or the thing but in many cases they are trading at 1/2 or 1/3 of the equivalent common and and so one simple thing to look at is perhaps a basket of the Korean refers crematoriums preferred starters you know the because like like let's say for example Hyundai Motor's so you can buy the Hyundai Motor's common stock but you can also buy the Hyundai Motor's preferred stock and if you pull up the stock prices and charts on the two of them there's a huge difference and the difference should not exist or the difference should be very small because the only difference is though the warding lights and so in a efficient market I mean let me take the example of Google Google has two classes of stock one I don't know close at nine ninety or something today and the other one flows at 970 or something one has more wording right to the other the difference is 2% for example in this case the difference is huge and one of the reasons the difference is huge I think is because the Korean people kind of look at it preferred with some disdain because they were they came out during the crisis and so they don't it was part of bailouts inside so there's a taint to them my understanding is attain to them when the local Korean population looks at those preferred so I think you may be in a better position to understand why Korea trades where does part of it is you know there is a transformation going on right now with the table that the power and I mean there was a lot of abuse in the past some of that is it getting cleaned up a part of it may be the person 40 miles north of Seoul you know there's some issues there so but I would say that's a good hunting ground I say South Korea especially among the preferred the small caps and such I think there's some there's some very good values there I find the South Korean situation kind of peculiar because when I look at I would recently in Seoul when I look at the the price of the real estate it's ridiculous I don't know anyone anywhere in the world is as expensive as you know like some of the like I was looking at that piece of land we doesn't Gangnam that hyundai bought I mean that's incredible so on one hand you have one particular asset that is very highly priced which is also sitting 40 miles from the DMV but other assets in that same area are misplaced in my opinion so it's kind of interesting to see that but I think that you have some advantage I would focus in your backyard okay thanks all right hey well thank you very much rather applaud and hang on to these they might have some value in the future because this was what happened to that 60 million the number would cash okay thank you all for coming [Music] you [Music]
