Mohnish Pabrai's best Interview ever

so buying buying a stock is is a far more complicated activity than most people seem to think so what's happened with the development of markets is on a smartphone or a tablet or a laptop we can in seconds buy one of thousands of companies and there's no effort required to buy a stock no effort required to sell a stock but in order to do well one really needs to understand the underlying business and to have a point of view on kind of where that is versus the the market capitalization so i'll give you an example many times in the u.s like i'll go to my health club for example and one of the members will ask me hey monisha should i buy apple should i buy apple stock and i turn the question around to them i say hey john what's the market cap of apple and they look at me with a puzzle look they said the stock is at 170. i said no no what is the market capitalization and they don't know okay so the first thing if you're going to buy if you're going to go buy some rice in the market you're going to know what is the price per kilogram so the first thing is that if you're going to buy a stock at least know what you can buy the whole company for and most investors don't have that knowledge which is amazing and so the first the first thing a investor ought to ask themselves before they buy a stock uh even before we get to price and so on is is this within my circle of competence now circle of competence is a very important concept one of the most important concepts investing a person like warren buffett would consider something like 95 percent of stocks outside his circle of competence and uh he says that you know probably 97 98 of things that show up on his desk go into a box called the too hard pile he can't figure them out okay so there's just a sliver of businesses now if warren buffett can't figure out 95 businesses for the rest of us humans we can't figure out 99 of them so most things are going to be outside the circular competence of most investors so now let's say an investor answers the question correctly yes i understand apple and i understand it's within my circle of competence right so the next question then comes up is the question i asked what could you buy the whole company for and then the second question investors should ask is so let's say investor knows apple is worth a trillion dollars for example so the question i would ask them is that if your family had a fortune of 4 trillion would you be willing to put 1 4 of that fortune into apple and if the answer is yes buy the stock if the answer is no don't buy a single share and so these are just very simple which is you know look at your net worth look at your family's fortune and are you willing to put a quarter of it buying the whole company that you want to buy 100 shares off and so these are basic things that most investors unfortunately uh don't focus on and so i feel that investing in stocks figuring out you know what they're worth what your circle of competence is these are complicated issues so for most investors it's a really good idea to index because indexing you can buy a nifty 50 index or any broad index in india for basis points you know the frictional cost for etfs are always very low and and the second is you average out over time so every month when you get your your salary check take a small portion first put it into favor savings and then don't worry about it uh what i would say set it and forget it fill it shut it forget it yeah exactly and so that's why i think that buying stocks should really be an exception rather than the norm okay the second topic and before we move on to the more nuanced investor a second thing that i wanted to talk to you about again we discussed this on on email about this whole notion of stop-loss that you that you find amusing in india yes apparently in the u.s nobody deals with the concept of stop loss now let me tell you a peculiarity here manish because we do this day in day out for a living a lot of technical experts who come in give stop losses they are mandated too as well because it's a trading yeah that they have they don't care about the fundamentals they're only bothered about the charts right you would still believe that the notion of a stop loss from a serious investor's perspective should be done away with it we don't find too many people talk about stop losses if they are serious investors but you believe that there is enough and more talk stop-loss happening on fundamental investing as well that's right so just to clarify sure uh we're not talking about the speculators and traders so uh more power to them uh but but when we come to investors uh i actually find plenty of pundits on on on tv who have done fundamental analysis and they give targets and they give stop losses and and i find that really peculiar so the the nature of markets so one of the reasons why we can make a lot of money in equity markets is because they're auction driven and auction driven markets are very different from almost any other kind of market so to give you an illustration let's say i bought a flat in mumbai for one crore i don't know if we can get one for one or not but let's let's play along uh we got one maybe the in the periphery of mumbai okay so we paid a crore for the flat and we did research and we found that it's the right price and we bought it and uh now we want to know how the price of that flat changes every day so i have a friend who's a real estate broker and i tell my friend the relationship listen we're going to have chai with pabrai every day you and i are going to have a cup of tea and every day just come and tell me what the price market price of my flattest okay so you bought the flat next day you invite your broker friend and he says so i asked him so what's the price number flat he'll say uh listen idiot it's still one crore okay i call him after two days he steals it still one crore and after maybe two months he says you know uh there's a little change in transactions it's actually 1.05 crores now it's a 1.005 crores it's gone up a little bit and if you did this every day and you just wrote down the price he was giving you did it for 365 days you would at the extreme end find that it went to somewhere between 95 lakhs and maybe 1.1 crores or 1.15 crores in that range right now let's say my flat is a listed company on the bombay stock exchange but the only asset is this flat and every day the price is doing whatever it's doing in the market and we chart that daily price movement what we're going to find is in a 52 week period the range may be something like between 70 lakhs and 1.3 crores and the reason is that auction driven markets undershoot and overshoot and it is the undershooting and overshooting that creates the opportunity for people like me right and so so basically the idea of a stop loss would be like i bought the flat for a crore and uh after six months my broker tells me you know prices have dropped about five percent and i say to him okay that's my stop loss and i'm now going to sell you my flat for 95 lakhs please sell it right it would be the equivalent of doing that the reason you bought the flat for crore because you thought that was fairly priced and the second reason you bought it because you wanted to hold it as a long-term asset so the same thing with stocks if you bought a stock for 200 rupees or it has a market cap of 1000 crores you bought it because you thought it were 2 000 crores so if it goes from thousand crores to 900 crores you will you will sell it with stop losses and it makes no sense so i own a company called rain industries right and i i bought that stock about what two and a half years ago and when i was buying the stock it was at about 30 rupees a share and by the time i finished buying it got up to 45 rupees a share went up almost 50 because i almost bought 10 of the business and after i finished buying it proceeded to go down just like everything i buy okay the stock knows i've bought it and it decides bonus is done now let's go down okay if i had engaged in stop losses uh rain went down to 40 even went down to 35 after i finished buying and i did nothing and so now rain is north of i don't know 360 rupees and so that whole opportunity would have been gone it would have been no sense for me to put a stop loss at 30 or 35 or 40 because i thought it was worth a lot more so i think i think investors ought to focus on making sure that that the stock is within the circle of competence that it's worth a lot more than it's valued at and when once you have those two things a stop loss makes no sense wow so circle of competence i think that's that's the preliminary the most important thing yes three the three most magical words from ben graham okay great now if if circle of competence was were the three most magical words from ben graham i think one of the most amazing things i've seen you speak about a lot i've also saved that image i can't find it right now but you'd remember i sent that image to you which said something like most of the times when i'm looking for an idea i need the idea to scream at me saying by me until then i don't go out in the in the us you know we have these uh wooden uh things called two by fours okay which we use in in housing construction i need to be hit on the head by a two by four before i should buy a stock yeah so before buying a stock it has to be complete and total no-brainer okay if if i have to turn on excel it's automatic rejection if i cannot describe the idea to a seven-year-old in two or three minutes it's an automatic rejection it needs to be painfully obvious painfully obvious to the village idiot why we should be buying there are such opportunities currently in such an overheated market and i okay let me rephrase i'm not using the term overheated loosely i'm just saying the markets have rallied we may not be in bubble territory for certain markets and all of that is a subject of everybody's individual opinion only future will show whether we were there or not but let's assume for a moment's sake we're not in bubble territory but we are in a in a space where the markets are at worst fairly valued you will probably not get opportunities wherein you get hit by two by four well you know we are in wonderful lower parallel right now and within i would say 10 or 15 kilometers lower braille from here to the next 15 kilometers is a boatload of opportunities in real estate okay fine i didn't want to get down to real estate so soon we will get to that but you even right now what i'm trying to find out monish is that you are still in a market like this looking for ideas which are just too painfully obvious you're not well i think i think i think even in uh in rampant bull markets there are always misunderstood businesses now rampant bull markets will cause a lot of over pricing and i think a lot of things are overvalued but there are plenty of things that may be fairly or deeply undervalued in in a market like india with 5 000 listed companies more than 5000 listed companies it is just not possible in auction-driven markets that all of them are efficiently priced we are going to have under pricing and we're going to have over pricing just the nature of the beast okay the reason why i asked this question is a lot of your peers a lot of people uh within the same space we did a small series with ram devagraval some time back in wonderful guy good friend yeah okay so and ramdev says often that i find value in growth so the stock may not be underpriced or may not be a screaming buy but if there is growth that he sees over the period of four four five six ten years maybe more and there are other factors attached to this by the way viewers not just growth itself in itself then that becomes an opportunity too are you looking for such opportunities in india because india is per se a growth market you are definitely better off buying a growing company over a cheap no growth company okay so if i buy an asset that is cheap that has very limited growth all i'm going to do is cover the gap between it may be worth a 100 rupees a share i'm getting it for 50 60 rupees a share i'm just going to make the 40 or 50 rupees over whatever period of time it takes to get that now if i'm buying a company that has secular tailwinds great management and long growth engines as long as i'm not paying up too much it's the best place to be okay and so i think i think ramdev in my opinion is one of the best investors in the country and i think uh well the only only i would say critique i would have around if he's a tad too optimistic at times but he's got it absolutely right that you bet on the growth engines and your breath on the long-term secular growth engines which have got a lot of tailwinds and uh and those in general uh are going to do really well so uh so i think i think they've got it uh they've got mostly they've got it mostly right okay now the reason why i asked you this question is very recently in one of the interviews or interactions or quotes that you gave out you mentioned that uh you know it might be really important to buy in compounders uh from a long-term perspective and there are some questions that i've gotten with regards to that as well somebody is asking and i have a question of my own as well sure as to how does monish decide if a compounded compounder is egregiously prized and has reached the tipping point of selling versus your earlier stance of selling at about 90 to 95 of the perceived fair value how do you decide this how do you decide that a compounder has reached a value which is overpriced and therefore you would want to get out of it okay so uh let's uh unpack the question a little bit sure so we've got two types of things we've got to do with companies right so we're the points at which we buy them and why we buy them and the points in which we sell them and why we sell them sure um buying is complicated selling is 10 times more complicated okay so so when we're trying to buy relative to selling it's relatively straightforward we want to know what the growth engines are if we're going after a growth company we want to know what we're paying for that growth and we want to try to figure out where is this company in five years or 10 years versus what we're paying for it and so those are relatively straightforward uh compared to the selling question uh the selling question uh is a more complicated question because one of the things we're forced to do is we're forced to look out into the future uh maybe a few years out to try to figure out what is the future of this business and for most companies even the insiders have a very fuzzy idea about the future and so so the thing is that if we buy a compounder at a value price that's a relatively easy exercise because we're not paying up but the difficulty comes in when it goes up in price and it looks fully priced but still has a lot of tailwinds and still has great management still has a lot of great growth in front of it so the best that i've been able to answer the question is a great company with great growth with great management uh give them some leeway so don't sell them when they're fully priced don't sell them when they're overpriced sell them when they're egregiously priced okay now what each of these levels are i'll leave to the viewer but it should be obvious you know when is it fully priced when is it overpriced when is it egregious so what i've learned what one of my biggest mistakes has been is selling too early i have watched 100 baggers that i bought who went on to become hundred baggers so many times after i was out and i'd only captured the double or the triple and i didn't capture the remaining 98 or 97 times that it went down but when you buy you don't know it's going to be 100 absolutely in fact you learn you learn about a business only after you own it so you may do all the analysis in the world but you're really going to learn the business after you own it and that still doesn't mean viewers that you don't try and learn about the business before you buy it should be in your circle of competence

Channel: WeLoveValue Investing

Views: 54,386

Keywords: Mohnish Pabrai, interview, investing, stock market

Id: weemQfbL3kE

Length: 17min 40sec (1060 seconds)

Published: Sun Feb 13 2022