The Kolkata Value Hunters Club; Q&A with Mohnish Pabrai

[Music] [Music] [Music] let me introduce you you don't need introduction but for some people i want to say that monis is indian american investor and philanthropist is managing partner of pobrai funds which was founded in 1999 on principles followed by warren buffett and his good friend of warren buffett and charlie munger he had famous lunch with buffett with his entire family and his friend guy's fire in 2007 or eight and today his fund is doing very well he is following concentrated approach and he is writer of dhando investor and mosaic he invests he invests in india and emerging markets over and over investments he has got deep interest in philanthropic activities and that's not foundation which was founded by him operating very well in pune and other cities and there are several dhakshna scholars who are getting admission in iit and iit and medical colleges which is unparalleled and last year i came to know about this in millennium mem program on 8th of may and there after i wanted to go and see this but because of lockdowns still it is still it is pending so one is how would you like to structure the session will you like to give some opening remarks and then maybe it can be followed with question and answer yeah i mean i'm actually more interested in uh in hearing what you guys have on your mind but first of all you know thank you for the gracious invitation and also for the very generous intro i appreciate that i'm also happy to note the connection with millennium maps it was fun to meet them in omaha i think that's uh that's a good one i was very impressed with them uh having made the journey all the way and uh and i think it's a wonderful group and wonderful organization you know since many of you are from uh calcutta so it is my uh favorite indian city of all the cities in india calcutta is my most favorite city and i think mainly it is my most favorite city because it has the best food in india so uh i always uh look forward to my visits to kolkata because uh it's very varied you know and my cousin i have i have a few relatives who live in but one of them who is more famous than the others is uh my cousin who has a fabrice ice cream in uh in kolkata and uh you know he's got the naland uh ice cream that is done quite well so anyway he's uh he's in the food business and he makes sure that i go to all the hole in the wall dives in calcutta and get all the different like he'll take me one place for sandesh another place for something else it's already specialized so and uh anyway i've always liked cockatai most people don't spend enough time there but i think i would really like to hear from you and what you guys have on your mind and we can keep it free flowing from there yeah one is till recently you were following value approach so last year i understand you went through next sleeps normal letters and you changed your strategy from value to growth can you give us more insight on this change of strategy and with this change of strategy maybe you are getting more time and in any case lockdown gives lot of time so that can also help us to discover what else is being followed up by you in these days yeah so you know actually there's a there's a book that came out recently uh it's called yeah wiser happier yeah yeah yeah so actually the book was uh published almost the same time in india and the us so there's a there's a paperback version available at in india but i think amazon ran out so they probably maybe have done a second printing it's an exceptionally well written book and i think you guys would uh would enjoy the book so if you if you have not got a copy i would say that would be a good investment to make so i received a galley copy of this book about a year ago it just came out end of april but i got it about a year ago and uh because the author wanted me to just check you know fact check everything and all that and uh so he's an exceptional writer so chapter one is mainly on me but my favorite chapter is chapter six and uh chapter six is uh called nick and zach's excellent adventure so nick sleep is a wonderful investor he's based in the uk in london and he's been a friend of mine for maybe close to 20 years i've known i've known nick for a long time but sometimes you know it would be maybe even four or five years between me talking to him or meeting him so we we were in touch but we were not in touch a lot but i always enjoyed the interaction but what i missed is that when i read williams uh williams chapter on nick and zach i realized that nick had gone through an evolution as an investor and he had he had actually transitioned significantly from graham to buffet to monger and then actually he went beyond so i found many things about his journey very compelling and so one of the things that him and his partner case zakaria did is they were they were managing about three billion dollars in 2014 and at the time the i think their largest position was amazon amazon would have been probably close to a third of the entire capital maybe close to a billion dollars and the uk the uk fund regulators were giving them a lot of pressure that the fund is very risky and the fund is not diversified etc so they were kind of putting a lot of pressure on these guys to reduce the concentrations and one of the things that they that was a kind of a bedrock of something they had learned over uh they started running the fund in 2001 uh it was very small fund i think when they started with in 2001 they never had you know 30 40 million dollars in it and uh and it grew investors came in over time and they also did well so the bedrock for them was that they did not believe in having an overly diversified portfolio and there were a lot of core principles that would be violated and both these guys had never imagined because when their funds started in 2001 they were employees of a large fund house in the uk called marathon marathon asset management would have had maybe 50 60 billion under management so they that these guys were analysts and they allowed them to set up a fund just for the two of them marathon basically said fine you guys can have this fund in addition to doing your analyst jobs and then after a few years i think three four years they were able to convince marathon management to spin them out you know let them go on their own which probably marathon management at this point regrets but anyway they they spun them out and so nick and zach never expected to be extremely wealthy but in 2014 when these uk regulators were giving them all this grief they were each worth close to 100 million dollars with all the fees and everything that they had made so they said why do we need to put up with this nonsense so they email their investors and say we're returning all the capital and we are closing the fund and we have other things we want to do with our lives and they were both about 45 years old at the time and i i remember i got some calls like like some endowment in the u.s called me at the time and they said monish do you know that uh nick is nick sleep is returning all our money so i said yeah he's returning your money but he told you what to do so what what nick and zach told them is look we are very concentrated in this business fund and probably even 10 years from now the main positions will not change they're going to stay the same so we are closing the fund but what you guys can do when you return when you receive your the money is uh just invest it the way we had it invested and these are the five six stocks that we have most your money in put it in those stocks you don't need to pay us any fees anymore and you don't need to read our boring brothers you're done you just take your money and put in those stocks so i told the endowment guy i said they told you what to do so what's your problem so they said uh our mandate doesn't allow us to own individual stocks okay so i said let me just understand this so if i set up a fund for you where you are the only investor and i buy the stock that is recommending then that should be okay and uh so this is kind of the craziness that goes on so anyway they got their 100 million each they shut down the funds i would and and what nick did with the 100 million is he put everything into three stocks amazon costco and berkshire hathaway and probably amazon was maybe a third probably each of them was the third maybe amazon may have been little larger and at that time amazon was maybe around 300 a share now it is about 3 300 a share so for the most part and then zach put the money in six stocks so he was a little bit more diversified but from 2014 till now zach has made no changes to the portfolio it's sitting exactly where the way it was in the case of nick when amazon got to 1500 he got a little bit concerned about how much concentration he has amazon so he added a fourth stock and cut the amazon position half that fourth stock a source is also done very well it's done as well as amazon so they have done better than probably any fund manager has done after they shut the fund down while doing almost no work you know i mean he rides his bicycle he loves to race cars he drove uh he took a 50-day kind of car drive with his daughter from beijing going across going across you know europe etc all over so what i realized when i read the next leap chapter is that they had figured out a number of things and in fact even when i had first started as an investor i was a lot more of a person interested in rapidly growing businesses which generated high returns on equity but then uh you know in the mid 90s when i started out that's how i used to invest but then we had the dot-com bubble and i could see that bubble was coming so things were getting very elevated so i shifted to a more a grammy enough approach and it worked well because i think during the bubble i had no losses in fact 99 2000 we were up like 70 a year and uh it went pretty well from there but what i forgot to do was i forgot to switch back so once kind of valuations came back i so first of all growth and value are two sides of the same coin just because you buy amazon doesn't mean it's not a value stock and because you buy some coal company at one fifth the book value doesn't mean it's a it's a great value stock so all businesses are worth the sum of cash flows they would produce over their entire duration discounted by some reasonable interest rate so if you're very rapidly growing business the cash flows are increasing so you can pay more for it because you have a growing stream of cash flow then if you have a declining business or a flat business that also has a value but it'd be different value because those cash flows aren't growing and one of the important things that nick and zach figured out was this concept of scaled economy shared so scaled economy shared is a extremely powerful model so what happens with most businesses is as they scale they get operating leverage and the business gets more efficient and the profits increase so for example if i take a business like let's say mastercard so mastercard uh basically collects like 20 basis points or 25 basis points on every credit card transaction that is charged to mastercard anywhere in the world so that 20 25 basis points comes to them and of course their costs are a bunch of servers and a bunch of networks they don't have much cost and so as more and more transactions are going through mastercard their profitability keeps rising because their costs don't go up with but what a company mastercard does it keeps the spoils from the scaling they don't share the scaling profits with the customers so that is not what nick is talking about what he's talking about is enlightened businesses which as they scale give the benefits of that scale back to the customer and there are very very few businesses that are enlightened enough to do that so a great business which doesn't exist in india yet but maybe some of you might be somewhat familiar with is costco and in fact dmart you know avenue supermarkets took a lot of lessons from costco in their business model the dmart business model is kind of a combination of costco and walmart which is why nobody can touch that and which is why they do so well but the costco model is that costco for example has a rule that any any product they sell the maximum markup that they allow is 15 so they will not have a markup more than fifteen percent on any any product they're selling and the products are really cheap compared to the other competitors so for example walmart or even amazon the typical margin is about 25 percent or 30 and so pretty much almost anything you can buy at walmart or amazon if you go to costco it will be maybe 10 cheaper so it's a significant delta now costco can easily charge more if they charge more their profits will go up but they believe that their lifetime profits will go down and costco does not think of itself as a retailer they think of themselves as a buying agent for their customers so they they charge membership fees you that guy paid 50 or 75 a year to be a member of costco to shop there pretty much all the 15 margin they take is used to run the business they don't make any money on that the only money they make is the membership fee so that the membership fee is actually what shows up in net income and so costco does not think they are in the business of trying to maximize profit they're in the business of trying to serve their customers so for example let's take like a category like wine for example so costco has these specialist wine buyers who have gone all over the world and they have found the best vineyards and then they have told those vineyard owners listen you don't need to do any marketing we will take your entire output for the next 20 years we will take you in you just focus on making great wine but we will take your output but we will pay you a fair price not the you know high price because we are giving you a guarantee you know as long as you keep your quality up you're guaranteed that the business will come to you and so they have great relationships with their their suppliers and when you go to costco to buy wine for example in any wine store the same wine would be two or three times the price so their wines are extremely high quality they don't mark up more than 15 percent and the customers uh you know cannot get that have a deal so each time a new costco opens all the costco's benefit because they have more scale and more buying power so this scaled economy shared model that nixley honed in on he felt it was an extremely powerful model and it leads to very long runways so amazon follows the same model it's also scaled economy shares it believes in sharing as much as it can with a customer keep the price as low as possible all of that and you know look at lifetime value and the third berkshire hathaway you know they have like insurance and so on they are following the same track so his perspective was that if you just had a portfolio that just followed this particular nuance of investing you would do extremely well and so when i read that i was very intrigued i said i have no argument with what he's trying to say i think the guy is pretty enlightened so i contacted nick again because i hadn't been in touch with him then he sent me the all his letters and actually if you just won't go on google and just do next sleep investor letters or nomad industrial letters you can pull up all the letters they're on the internet he's posted them and i think those letters are really worth reading so the chapter six is worth reading but the letters are worth reading and so so i realized that the which should have been obvious to me for a long time is that you are going to do very well as an investor if you can identify businesses that have very significant growth ahead that have high returns and equity treat the customers really well and have a durable moat and a durable competitive advantage you don't necessarily need to just focus on the scaled economy shared that big sleep focused on another insight nixley brought was that he looked at this company walmart and walmart went public in 1970. okay so now walmart has been public for 51 years and the only people who have held the stock for the entire 51 years is the walton family so sam walton died sam walton's children have started dying and the grandchildren are still holding the stock so the walton family pretty much has not sold it got split amongst many different walton family people but they have not sold the stock they just get the dividend but they have held the stock for more than five decades after going public they held it even more if you look at the time it was founded so nixley to ask the question that if you owned walmart stock as an institutional investor in 1980 or 1990 what caused you to sell the stock right why would you sell such a great compounder and the flip side he asked the question if you want the stock of a company like kmart which went bankrupt why would you keep that stock you know what caused you to keep that stock and so if you can answer those questions those are really good uh good questions to answer and so what i realized is that in investing probably the best way to approach it is to think of yourself as if you are the promoter of the business don't think of yourself as an investor in the business think of yourself as a promoter and apply the same kind of mental model a promoter would apply so in india for example we have lots of listed businesses which are more than 50 60 70 owned by the promoter this is pretty common amongst listed businesses and if you look at their wealth the wealth is also very concentrated because so much of the wealth is just sitting in in one business uh but they understand that business well in many cases it's probably the best place for them to keep their money because they don't know where else they would do so well so for example one of the things that um like i was thinking about in in 2019 i had been making uh a number of trips to turkey over the last several years over the last four or five years and i i visited this company in turkey in 2019 where the market cap was uh 19 million dollars one night and uh the liquidation value of the business they are the largest warehouse operator in turkey they have the largest truck fleet in turkey they have the largest rail fleet for rail transport in turkey there are many different businesses that are very good the liquidation value of the business was somewhere between 300 million and a billion dollars so this company was trading at maybe you know somewhere between two percent of liquidation value and uh maybe you know six seven percent of the creation value somewhere in that range and so um i tried to buy every share i could because i i talked to my friend who had helped me understand some of the businesses i said the only question i have here is am i dealing with crooks okay that's my only because i know the assets are good everything is good and there was no nothing to indicate that the promoters were uh were not were not straight and so i i tried to buy every share i could and we were able to because turkey has the investors in turkey turkey's one of the best markets to invest in because the local population and even the local institutional investors have some of the shortest holding periods for stocks so most of the local investors in turkey believe that they will buy some stock at 10 o'clock in the morning and by noon they should be able to sell it and make 10 percent okay that's their so the trading volumes are extremely high so anyway we were able to buy one third of this business for seven million dollars and and i thought okay you know at that time my mindset was okay it's a good business so they are the like you know amazon car four alibaba all these guys are renting warehouses and these guys they're like hundred percent leased uh it's a very good business there they have like 12 million square feet of warehouses and they have a bunch of other businesses so my thinking at that time was that okay i know what the business is worth and when it gets close to valued at that price then let's say the valuation goes to 300 million or 500 million if the intrinsic value has not changed i can sell and move on and it'll be a good good investment after reading on nick sleep etc i think of myself as the junior partner of the promoters of the company you know i don't need to tell them what to do or neither are they interested in hearing from me what they should do because they know better than me what they should do but happy to just cheer them all from the sideline so so now my mindset is not that i'm going to track what the intrinsic value is and then you know when it reaches 90 percent of that or that to sell it my model is that as long as the business is improving and as long as the trajectory of the business is that it's you know over a longer term increasing in valuation and getting better we'll keep owning the business and it could be 10 years 20 years 30 years i don't know how long we will hold it but um so that mindset shifted it shifted from say looking at every position as a okay you know how much is this worth et cetera because if you look at a business like costco if you look at a business like amazon or even if you look at a business like dmart for example the key question you have to ask yourself is what is the destination what is what does this business look like in 10 years or 20 years and what is the probability that it will look like that at that time and most businesses you cannot even try to figure out what that what what it would look like in that time frame because capitalism is so brutal but some businesses you might be able to get some comfort i mean costco's business is so solid they just opened their first store in china and it got marked i mean there were lines mile long lines outside people trying to get into the store and uh if you if you fast forward 20 years costco could have thousand stones in china we don't know you know it could have five stores it may not do well or it could have a thousand stores we don't know but the thing is that it's likely it does well so if you were a shareholder of costco at this point you just say i'll just hold the stock you know there's no need to make any other decision so anyway it's a long-winded answer to a very short question but that's kind of what i got out of the nick sleep uh chapter and his letters and i think you guys would enjoy reading both yeah i just downloaded this book yesterday and you are circulating our group also the monies you have been investing in india and other emerging markets how has been your experience well i think india has been very difficult and i think that probably if i if i had more of a next sleep mindset when i which is what i i focus on now what i would have focused on in india and what i what i will focus on in india in the future would be quite different from the past i mean not that it doesn't work i mean like for example in uh in 2015 i had made an investment in a company in hyderabad called rain industries and uh we still are a shareholder of rain industries and uh in 2015 we had invested and owned 10 of the business that's the maximum i could own nine point nine nine percent as a uh as a foreign investor that's the highest percentage we can own and uh at that time i could not see a kind of a downside you know it looked like kind of like the business in turkey so rain was a relatively small company based in hyderabad maybe their annual revenues were about 200 million or less they did two acquisitions uh before 2015. i think one was in 2008 and the other one was 2011 or so and these two acquisitions increased their revenues from 200 million to 2 billion so they bought two businesses that were 10 times that increased their revenue by 10 times and both the businesses were bought they were not indian businesses one was in the us and the other one was in europe and both these businesses they raised basically high yield debt in the us and the 100 percent debt financed both the companies with no recourse to the parent so what he was able to do jagan reddy who's the who's his managing director and the founding family is he was able to convince the debt markets to give him about 1.5 or 1.6 billion in debt which was the total purchase price of both the businesses and the only collateral he provided to them was that if it didn't work they could take those businesses so basically rain had no downside if this these deals did not work the india business would be unaffected it's like i'm buying a steel mill 400 million dollars some bank has given me 100 million dollar loan and i told the bank you have the steel mill has collateral and if the deal goes upside down with the mr bank here's the steel mill here's the keys warm regards and i just leave okay that's basically how that deal was done and so the first deal he did which was the the u.s business i think that was a 600 or 650 million purchase price uh which was all debt financed in the first year the business produced more than 100 million of free cash flow and and it produced uh continue to produce like 50 60 million a year after that so that business was already doing well and then he used the us business as collateral to do the second deal which was even larger which was about a 900 million dollar purchase which was rutgers in europe so when i looked at this company these two businesses in the u.s and europe were not doing well at that time in 2014 2015 so basically they were barely able to cover their interest expenses and the india business was pretty small so it didn't matter but the market cap the market cap was 200 million so the market was giving them zero credit for these international businesses because they felt like okay we don't know what is the future but i could not see a way that the company is worth less than what it was trading at and i could see so at that time i think the 2015 the share price was like 35 40 rupees per share and i could see that it was easy for them in a single year to make 40 rupees a share so i said okay this is a pretty simple business i'm just going to hold this stock for five six years they're gonna be one year that's going to come because it's a cyclical business where the earnings will be 40 50 rupees per share and i'm done at that point the stock cannot be at 40 rupees and so in 2017 2017 2018 that is exactly what happened their earnings in that year were 200 million dollars and uh the stock went to a market cap of more than two billion so it went you know more than 10x and of course i should have exited but by that time i had fallen in love with mr reddy and and i actually found that he's a very good operator and he's a very honest guy and uh that the business was actually getting better so i felt like okay this is something we want to hold because he's improving the business and all that like for example some of the things they do they spend more money that is required several million dollars a year to make the pollution from their plants be much lower than what is required by by law so that there no one is asking them to do that he's probably spending at least 10 million dollars a year extra just to keep the pollution lower than any of his competitors even though nobody's asking him to do that because he believes it's the right thing to do so it's like he just thinks long term which is why i like the guy and so anyway it went from 40 rupees to 400 rupees actually 40 from 40 to 450 rupees and and then it came all the way down 200 rupees right so and i'm just sitting there holding the stock and then last year during the when covered when covet hit it went down to 50 rupees so again and in fact in 2020 when it went to 50 rupees they've made so much money in the last four or five years so actually the stock was much cheaper than what it was in 2015 because they have added all these retained earnings and so it was ridiculous anyway so now rain is sitting at like 170 180 or something and my love affair still continues but the thing is this is the kind of business that i would not buy with a next sleep framework the reason i bought this business was it was really really cheap and there was no way to really lose money but it is it is not a great business it has a great operator it has a great operator but it's not a great business you know it mastercard is a great business uh costco is a good business berkshire hathaway is a good business you can even say dmart is a good business but i would not call green industries a great business i would say at best it's a good business with a with a great capital allocator so so these are uh some of my learning so i think i think in india one has to be it's a minefield is where i look at it i think one has to be careful and the issue is that i think what i run into in india is that the truly great businesses generally speaking trade at very elevated valuations once in a while you find some dislocations but uh like for example you know if i look at a business like hdfc bank right so hgfc bank is not just a great bank it is probably one of the best banks in the world not one of the best banks in india it's probably one of the best banks in the world just in terms of how it runs and how it's operating and all of that and maybe when you put that lens on it's a value price but it's on normal metrics it doesn't appear cheap and then he also check with you can he can he arrange your lunch with charlie munger and then you found email went there in two days time and since you live in the same city so you have developed great fancy so can you give us some insights on your warren buffett and charlie munger learnings which could help us in investing world well you know sometimes i have to pinch myself i i feel like i'm forrest gump you know so first of all you know it's like if you are living in the time of gandhi or you're living in the time of newton or einstein and you get a chance to have lunch with these guys would you want to take that opportunity right and so what i realized is buffett was every year doing a charity lunch and and basically you could bid the highest bidder will get the lunch and i had made so much money off his intellectual property that i felt like you know there is a tuition view and uh and at that time when i was trying to win the lunch it used to go for 200 000 or 300 000 but in 2007 i think i think at that time my my net worth was around like 80 million dollars most of it because of warren and charlie so i said so i bid on the lunch we won the lunch and then my friend guys peter and i we went with our family so it was a really wonderful so one of the things that buffett tries to do because he has his lunch every year right is he wants to make sure that whoever has won the lunch thinks they got a bargain okay so he comes trying to give you as much value as you can so like like he told us when he came that look we had the lunch in new york he said i have nothing going on all after i'm completely free so whenever you guys are completely bored of me and you want me to leave you let me know and i'll leave but i don't have to be someplace in one hour or something we have as much time as you want so he puts you at ease like you can within 10 minutes you think you're having lunch with your grandfather which is great and um and yeah so he he arranged you know i told warren that you know my my wife reena was a big fan of his but her little love in life is charlie bunger so warren is very competitive he says you know charlie is a very boring guy i am the guy who's interesting he's a useless old guy he's just not even worth talking to and he said you know i'm going to arrange for you guys to meet charlie because then i will know who's the better guy to have lunch with uh so i thought he was just joking about this right but then he set up he set us up to meet charlie for lunch and actually i enjoyed the charlie munger lunch a lot more uh than the buffett lunch which was which was fun and then that uh that led to a nice friendship with charlie which i was surprised at and so now charlie is 97 he's going to be 98 in in january he's uh so i think probably maybe uh about a year ago he stopped he stopped going to his club for bridge so i used to play bridge with him at his bridge club probably every two three weeks you know usually every friday afternoon him and his friends will get together for bridge so i had uh many many bridge sessions with him and his friends which was a lot of fun and you know it's just a surreal experience experience because i'd meet him and rick goran and these guys and i would ask them about things in the 50s and 60s and 70s and uh you know different things that were going on at the time and uh and of course i i think every few months uh charlie invites us at his place for dinner in fact i was just at his place for dinner probably two months ago and uh he's doing great he's uh all vaccinated and everything which is good but yeah i mean just extremely humble guy probably the smartest guy i've ever met and every guy any smartest guy i will ever meet is the most highest i would say that charlie has incredible horsepower and incredible wisdom and great humility and it's a he's a lot of fun to be with so it's great it's wonderful and your inspiration to start dakshna foundation in 2006. what was it i think i think the thing is that the reason dakshina was started is because i had no choice so i think in india a lot of people don't see it this way but but basically large inheritances to your kids and grandkids is actually a disservice to them so for me the journey was fun because uh we started from zero you know kind of built it and whatever and uh you know warren buffett says that if you are uh jesse owen son you know the american sprinter your son should not start hundred meter dash for the at the 40 meter line maybe he can start at the 5 meter line but he should not start at the 40 meter line because he's not going to become a great sprinter if you give him that much head start so basically if you if you buy into the notion that very large inheritances are a disservice to your kids and grandkids then i think there's no choice because you only the only thing you can do with your money is you can either give it to your gene pool or you can give it to society those are your only two choices and if you're not going to give it your gene pool and you want to give it to society then it becomes actually a difficult question because it is much easier to make money than to give it away effectively giving money away is much harder i feel and so what i wanted to do with dakshina is i wanted to not start thinking about giving money away when i am 75 or 80 years old because i felt like at that time i can will have no energy and only thing i can do is just write checks or something and i wanted to try to get started early and i also felt like see in in investing we try to minimize risk in to do philanthropy well you have to go high-risk highwater because you have to try to solve the problems that society cannot solve so you know poverty poverty illiteracy healthcare environment these are all tough problems you know so many so many billion billions of dollars are spent by very well-meaning governments and people and we don't we haven't solved those problems so so in philanthropy what you really need to do is be willing to fail you know uh swing boldly and be willing to fail and so i felt like in dakshina i want i when i started that i was about uh 42 years old so i said you know if 10 years we are just spinning our meals it's okay i'll learn a few things and then we'll uh get going from there and uh and actually what ended up happening is that we got traction right away it actually worked very well almost from the beginning within a few weeks we were we had a good model and we pursued that so it actually worked out uh significantly better than i expected and then what has happened which is really surprising is that some very good people uh you know started to uh support uh dakshina so for example you know rkdhamani he you know d mart d martin and ake the money give us uh seven crores a year and uh and actually he would give even more if we could use the money you know but our model we can't use that for money so he keeps asking you know can you take more i said no i can't take more and then we have prime watsa in canada he also gives us about a million dollars a year so so yeah dakshina has actually worked out exceptionally and basically the idea is that what i want to what i want to get to is that one day before my death uh hopefully there's one dollar left and everything else has been given away so if i can do it perfectly that would be the end result but we'll see how it actually ends up but so as time goes on because of compounding i need to keep increasing the engine production and it's not easy i think our current engine works well but it cannot absorb more than 7 8 billion a year and i think currently we are spending probably three four million a year so it will um once we saturate at the seven eight million then i think we'll have to think about what we can do next after that but so far it's worked out very well as you are aware india is going through second wave of forward 19 and it is quite widespread and there is a lurking fear that even third wave may affect us in such a situation if you were to invest in india would you wait for a deeper correction or still you will look at specific businesses and go ahead and if you were to invest how would you go about finding companies or would you be sector agnostic or you would look at some sectors and then you will look at companies yeah so i think those are good questions well i mean i think that kobet can give you an opportunity that's a possibility because it creates uncertainty i'm always a bottoms up investor so i always look at a specific business and i look at the kind of nuances around that business so so i think the i'm not i've never taken an approaching i need to have exposure to a certain sector or anything like that or even a certain country or anything like that so in my opinion i think the the first question to ask when you look at a business is is it within your circle of competence is it something you understand well and then the second is i think the sec the questions after that become easier because there are some businesses which may not get impacted much by covet you know just the nature of the business they just may not keep i mean let's say for example i look at a business like geo for example right what impact is kovit going to have on jio you know i don't think it makes much difference if people need to communicate they have bigger degree need to communicate when they can't see each other so if anything a business like jio does better uh while cooperate is happening on the other hand if there is some let's say private hospital the government they put all kinds of mandates on them right during covert and it may or may not even be able to make money so it becomes a lot murphier whether what would happen in the next year or two in uh in other businesses so i think i think that the question would be can you see clarity on it like for example i think last year when cove would hit i think airlines were not investable you could not invest in airlines because it was so opaque you knew air travel would go down then you don't know how much the government will have so some businesses will get affected a lot and other businesses actually will do better because of this like you know zoom has done much better because of gold and uh so i think that you know john templeton used to say it a trouble is opportunity so when you have these types of events going on the baby will get thrown out of the bathroom and so if you can identify certain businesses that you understand well and they their prospects near term long term are pretty good then those might be worthwhile and i think especially if they fit into parameters like nick sleep where they are high quality businesses at the core then it's a good way to go so let me give you an example let's say the businesses which have been affected badly by because of kovaid are available at a much lower valuation compared to their past let's take the case of indian hotels say it's available at a much lower valuation currently it may not do well for next one year because of the effect of it but one is sure that the business will last would you invest in such a business or where you see deep value or you would look at businesses which are currently growing but the valuations a little elevated compared to the past so indian hotels is a very interesting business to talk about because i actually looked at them and i had a meeting probably a few years back i think in one of the investor conferences with the cfo and we do respect indian hotels is the poster child of a company that has had extremely poor capital allocation uh very very to put it bluntly horrible capital allocation so for example i'll just give you some one example which uh i brought up the cfo and then his response to me was that he was not in the company at that time that was the only way he could defend it but they bought they bought the pier hotel in new york uh many years ago and they paid a very high price to buy the peer hotel so the pure hotel is a great hotel is iconic property but what had already happened before indian hotels bought peer hotel was many of the most uh the best views the rooms the best views had already been converted into apartments and they had already been sold so the hotel was like 60 65 percent of the real estate had already been sold and given to these private owners and the rooms that were left were not the prime rooms with great views etc but that wasn't even the worst part the worst part was that as part of the transaction all these people who had bought apartments in the pier hotel they were guaranteed for the duration of the time that they own these apartments so anyone else owning the apartments twice a day turn down service will be given to them for free okay so new york has very high very high labor rates you are going and fixing 60 70 apartments every day twice a day it didn't matter what the occupancy was you are losing money hand over fixed so i asked the cfo what is going on here like why would i mean if you just look at a spreadsheet when you were looking at doing this deal there's no way you can justify it the same thing happened with taj boston so i think my conclusion with indian hotels is it's a great place to stay and the guests are very well taken care of and i want to stay there but i don't want to put a penny into so so the thing is it doesn't matter how low the price goes for me in that particular case the the thing is that i have questions so you know the tatas are wonderful but the businesses that bombay house had nothing to do with bombay house had nothing to do with tcs and bombay house had nothing to do with titan those two businesses did extremely well the businesses that bombay house ran carefully with a lot of oversight like for example coral steel and tetley tea and tisco and telco and everything else that you guys know better than me you know what the results yeah so yeah maybe indian hotels was a wrong example but in principle if you get an asset which is currently affected by pov and you know that for next one or two years it may not do well yeah so i mean i think i think if you if you say to me that the company has great capital allocation okay yes and the second thing you say to me is that their balance sheet can more than easily handle whatever hiccup year or two or three is producing and you also say to me that at the core it's a great business i i hate the hotel business okay you go on you know this make my trip or whatever and you you know transparently see all the prices and then you pick the lowest price i mean that's a useless business okay your your dumbest competitor is setting the price but for example you know i hate the airline business too but i have a lot of respect for indigo right now i still probably won't go into the airline business but they are the lowest cost operator they operate really well now covert is hitting them really hard i haven't looked at them i haven't looked at the balance sheet what was happening but yeah so if you can figure out that the core business is a great business run by great capital allocators looking out for the shareholders there could be some great bargains but please be careful some businesses you should only be a customer of not an owner i have a question for you sure there is a saying that when you pay peanuts you get monkeys now if we go by the characteristics of great businesses who should be great capital allocators and cost saving then how do you filter the best value proposition out of such a lot because all those things are known to a lot of people and the business well i mean i think that you know like charlie munger says why should it be easy to get rich you know so the thing is you know be patient and when you when you find something that is you know widely mispriced and you understand the asset well you understand everything well you can go in and that probably may not happen maybe more than two three times in two three years or something these are basically uh let me give a brief background yeah yeah uh i super superintended as chief finance officer and president of sri cement when i joined the company it was six rupees per share when i quit it was 30 000 rupees a share but i could never own it there were two reasons one was that i always used to find it expensive and number two was that i did not want to go into any hassle with the regulators on insider trading kind of a point and there was no esop in that company i agree with your philosophy of great capital allocators and cost savvy but then it has been compounding six rupees to 30 20 sorry not 30 20 000 rupees it was a 0.6 million ton company when i joined it became a 30 million company when i left net cash in books no debt all this was done but then i was always bugged by the valuation the market was giving and me being an insider i knew that maybe this is a great business but does it command that value and that is a dilemma which i face now that there are various great businesses compounding at great rate good capital location but how do you filter them well i think i think you bring up a very good point in the sense that if an insider like you could not forecast future cash flows five or ten years out then obviously when you're an outsider looking into a business the job is that much harder and and the answer is that you only need one of those in your lifetime you have you have 50 years as an investor and you only need to be right once on a business like that so i'll give you an example there's a and i find this example even more compelling than nick sleeps example you know we are we have gone past an hour i'm not sleepy but i don't know what your normal time timings are mr chanduk have you blown past your time or are we okay no we are fine i think that's all right okay that's fine so so there's a company in south africa which is now 106 years old they were like a book book and magazine newspaper publishing company the company called naspers some of you may have heard of it naspers so in 2001 naspers 20 years ago invested 30 32 million dollars into this chinese company called tencent okay so they put 32 million into 10 cent and they got a 43 stake in that business and what is mind-blowing about naspers and the chairman i mean the guy who is the ceo who's now the chairman is through the 20 years that they owned it they never sold the stock and what what ended up happening is the 32 million dollar investment so 10 cent has a market gap now of about 700 or 800 billion uh us dollars and they they sold a little bit i think in the first four five years but basically they held about one third of ten cent so the the ten cent position that they own is like around 200 billion dollars okay so this 32 million dollar investment became 200 billion became 8 000 fold return for them and they have done extremely well on their other investments and other things as well this wasn't just one aberration uh but everything else fails in comparison to tencent so the the company has probably got a value of about 200 300 billion dollars at this point and throughout this 20-year period they got tremendous pressure from every corner you can think of to sell off the 10 centimetres so 10 cent became a billion dollar position they were told to sell it 10 billion dollar position they were told 100 billion dollar position and to their credit the two guys who were at the top pretty much told everyone to get lost and even now i mean you guys may find this hard to believe but at 700 billion 10 cent is deeply underwrapped deeply undervalued which is why they are not selling right so abita kahani so in the case of nick sleep when he bought amazon i mean he made he he made he bought some stock at 30 40 he bought some stock at 100 he bought some at 200 300. he did not get that much return on amazon by the time the fund was shut down or even till today i mean even if you look at where most of the amazon position is up 10 or 24 but in the case of naspers what blows my mind and i and i studied these two guys at mass books i studied and what i discovered when i studied these two guys is this was not a fluke this was not a bunch of gamblers these guys are extremely good at what they do and in fact he understood so one of the things that nick sleep understood is that exactly the walmart story so what they understood is they are like a founder of tencent and you know the naspers has a very close relationship with tencent they sit on their board they actually co-invest all over the world with them it's a very good close relationship they have so basically naspers which was a south african newspaper company and the funny thing is that they bought that 32 million dollar stake from lee kashing okay so li kashing is a multi-billionaire in hong kong has done extremely well really smart guy he's worth 30 billion dollars if he had not sold this position he'll be worth 230 billion dollars okay so he probably is looking in the mirror saying why the hell did i sell this this position at all but anyway the thing is it would have been almost impossible for anyone to hold that stock for the 20 years that this company has held the stock and they're not done yet i mean in my opinion when i look at something like 10 cent it would not surprise me if they hold it for 20 more years and the 8000 x they are not done yet so the thing is that you know you don't need to be right that many times what you do need is extreme patience and when you find something that is incredible you know step up to the bat uh make it a meaningful bet sir i will i will top it up with only one comment the hand of god hand slightly different uh in case we have only 15 minutes so ask one or two yeah just two um first question i have is uh see india for the first time in the last couple of years has grown about 100 to 150 unicorns with a billion dollar evaluations with probably a million dollar 10 million dollar revenues loss making the likes of zomato grow zerada the whole works across the spectrum it's almost like india of late 90s you as of late 1990s what do you think of this unicorn investing because as you correctly said in your introduction value and growth are two centers the same coin and it's up to the beholder how he sees the whole thing so what's your sense whether of these top 150 companies would you look at uh would these be on your radar or what could possibly be the next hundred x talk from here that's my first question second question is a little more interesting how do you spend your day what is your routine day like what are your weekends like i might think of that um and would it be similar to what the what your friends do the big friends do uh well so let me take your unicorn question first it's almost for sure that in that group there are probably a few that will be outlier winners long term and quite a few that may not that may disappoint is my best guess but the thing is that depending on you know your frameworks and circular competence and what you understand you know like i'll give you an example so let's let's take something like food delivery okay so some of my friends who are very good investors they just tell me this whole food delivery business is total nonsense okay it's it's a you know very heavy logistics business you have to have people you've got to do all this point-to-point stuff all this stuff going on and the restaurants are all upset because they have to give you 30 and all of that so there's a lot of issues there but the thing is if you fast forward maybe 10 or 20 years the situation could be quite different so we are going to kind of kind of i mean you're not going through so much uh habit change in india i think in the rest of the world there's a much bigger habit changing for india you already always had the ability for some random restaurant to deliver your food at home and so on the us when i first came to the u.s the only thing you could get delivered was pizza in terms of food that was the only food delivery available now everything can be delivered and you know there are ventures like cloud kitchen and all of these things where they're working on the logistics right so there's one big warehouse which has got like 30 40 different kitchens and then maybe a drive through the middle and you know the driver will maybe pick up 30 orders of one shot and there'll be a very high density that you know three buildings he's delivering all 30 orders and so on so it could change quite radically in terms of scale in the years and then at that point brand matters and and such so it's possible that the the top two three food delivery guys in the end uh become incredible businesses and they become a lot bigger than where they are today and so on what my my take on all this is that there's no need to have envy or scratch your head or even try to say i need to figure out which one over here things need to be at the end they need to be a no-brainer so when you're making an investment in the end before you make the investment it has to be a no-brainer like i i told you that even at 700 billion i don't consider 10 cent overvalued and that's because i looked at all the pieces what's inside those businesses and kind of where things are going and so on and there's just too many ways for them to win and too few ways for them to lose so anyway so the thing is i think that the bottom line is that uh yeah you can look at these unicorns you can in most cases they won't make any sense once in a while you might find something where you have some experience and the pricing or whatever else might make sense and uh maybe it it it makes sense at that point but if you you can live a very good life and you can actually be a very successful investor without making any of those bets so it's perfectly fine there's a hundred different ways to move on my my schedule is pretty uh pretty simple uh i learned from buffett and from monger to run an empty calendar so in a given in a given week or day i usually don't have any calls or meetings or anything scheduled even mr chanda contacted us so many years ago for this talk and then finally here we are i forget mr chandra when did you contact us yeah about two three months back yeah so like for example one of my rules and we extend a lot of emails so what i'm saying like one of my rules is i get so many requests for these things which i which is fine but i only do two a month so once you have party problem yeah once we book two in a month that's about my limit of what i can do then i say okay so i think these these sessions are set up into like for most of the rest of the year you know so so that's fine so basically i i try not to put stuff on my calendar and uh i usually sleep late i usually get up late most of my emails go to my assistant and then she gives me a folder at about 11 am which has everything printed you know he got mr chanda got many notes from me and and so on and basically i i find it if i get a folder at 11 o'clock by about 11 20 i'm done you know with whatever i need to take care of for the day in terms of emails and uh and then whatever responses will come will we deal with the next day and then basically i like to read and so what i read and such just depends on what is going on and uh i grew up in dubai and india with afternoon naps so i take a nap most afternoons i had a very nice nap this afternoon and so basically i read i nap i read dinner i'd like to read again and that's pretty much the the i like to play bridge so i probably play like you know five five seven hours a week a bridge i like to ride my bike so today for example i went on a about a 20 kilometer bike ride and uh usually on the weekends i go on about a 40 kilometer bike ride so i like to play racquetball so now the clubs are open so i play racquetball and tennis so that's basically life so to act to the point of mr venkatas we just talked about about your residuals i understand and sir you don't have any subordinates any research presence down the line to you so then in this world of so many information coming out and the research needs to be done then how you pop up with that individualism uh well i do now have a couple of guys and that was really an accident because we had another business that they were involved in and then i i pulled them in to help me with some research but basically it's very directed you know in the sense that if i'm looking at something i might ask them to to probe into certain areas and such but but warren and charlie didn't use anyone i i didn't have anyone for the first at least more than 20 years so uh i don't think i know i think the thing is that if you invert the problem you basically need to make only one or two bets in a year and you have a whole year your empty calendar you can read all kinds of things many things like indian hotels you're done in five minutes so you can look at other things you can be done with a lot of unicorns also in five minutes so you just look at things that look more interesting and there's onion on those hi manuscripts thank you so much for our sake this will be our last question yeah we are left with five minutes thank you so much for taking time out and speaking with us i have listened to your conversation with the mba students at columbia it was very interesting to know how charlie monger went so you also mentioned that you are bullish on the businesses which cater to the funeral services in india where talking about death is kind of considered a taboo do you find it challenging to convince indians on this country thank you i'm sorry can you just repeat the last sentence can you hear me yeah yeah just the last sentence yeah talking about death is kind of considered a taboo in india so do you think it is kind of a challenge to convince indian investors on this country well so i think that's a really good question uh uh basically the death business it's a metaphor so there are many businesses in the debt business so for example there are now because we have all these bankruptcy laws and all this stuff in india there is a mechanism for asset reconstruction so all this distressed debt which is the loans are upside down you know the essel and all of that that went through there's a process by which that can be cleansed out and come out the other end and you know people can buy it like you know the pila mal's bought the dhfl debt recently and and they were bidding with uh oak oak tree etc so so that business uh the business that the pyramid buying uh dhfl is a funeral services business okay it is a death business because you're you're taking something that has basically died or needs to be given another life and you're bringing it back or some company buying a bankrupt steel company or something is again the same thing so so the businesses that are in the business of either burying the dead or bringing them back to life are both really good businesses and in the in the us we have many examples of businesses that are in the funeral business so for example one of the big us retailers is tj maxx dj max says you know thousands of stores but what tj maxx does is they buy excess inventory that other retailers have made a mistake you know they bought 10 000 more pairs of jeans they wanted and tj maxx will buy them at one third of the bus and then they'll push them into all their stores and the people who are coming to their stores know that they will get it's kind of like a bazaar you don't know what you're going to get because the inventory and what their deals are getting keeps changing but tj maxx is a company that has done extremely well and they basically are flourishing with the mistakes of others right there's a company i own in the u.s called cerritage heritage growth properties so these are the old sears that were that have all been shuttered and shut down and heritage is redeveloping all that real estate okay into other uses you know sometimes they're becoming hospitals sometimes they're becoming strip malls whatever else or apartments and so on so they are in the rebirth business so there is no taboo death is for sure if we didn't think that was for sure for you have got enough data now in the last few weeks the death is for sure and companies that are in that business will do very well so in the u.s when i first started investing there were a couple of actual companies are doing funeral services and they had done a roll up these are billion dollar companies that owned uh thousands of funeral homes and all of that it was an incredible business because i don't know how many people will die i don't know who will die in salt lake city but i know how many okay and so the recurrence of that business uh so funeral services in the u.s they never go bankrupt but they never have any revenue problem nobody ever asks how much you're going to charge okay in every other business people ask like indian hotels how much is the hotel rate nobody asks when your uncle has died let me go find six places it will do the funeral and take the lowest price okay unless it was a really bad uncle no one's gonna do that okay so so basically you have pricing power nobody questions your margins people just want things done quickly and so on so it's a great business actually uh so i think if you if you think of it as a metaphor and look at businesses that are either in the debt business or in the rebirth business like asset reconstruction those are really good businesses to be thank you thank you will you take one more question and then we close uh so you are an admirer of one and warren invests mostly in you you you have large of your investments in india and i i mean in person distance so uh how do you see india in next 5 10 years in terms of gdp or instance of say per capita gdp or in terms of listed market application and where do you see the value in terms of listed base which which industry you see in the real estate space well i mean i think that my uh my experience with india actually is led me to become somewhat skeptical so the thing is that india doesn't grow because of the government it grows in spite of it or like they say india grows at night while the government sleeps so i just find that there are so many low-hanging fruit in india in terms of things that could be unshackled so we went through some unshackling maybe 30 years ago and but still i find that there are huge amounts of market distorting regulations around which really it really crimp what an entrepreneur can do so for me the the main the main uh i would say question or and the optimistic part of me says that i hope and pray that these shackles are removed uh because indians are natural entrepreneurs we we would do really well if we are given the incentives and you know the government steps out of the way so it has happened but i i just when i look around in different companies and different industries and i look around in terms of you know the the times of regulations and things that we have in the us i just see a night and day difference and uh so i hope i hope that the the the thing that is really kind of disheartening for me is india's india and singapore had the same per capita gdp about 70 years ago okay 70 75 years ago it was about the same it is no longer the same as you know okay this is a night and day difference and singapore actually had pretty much no resources this is a small you know swamp infested area without any any infrastructure or anything so i feel that there is so much potential in india and so much further it can grow and can grow so so fast for so long but it would require significant changes uh to happen i don't particularly look at you know which sector or which area i just look bottoms up at businesses so if i can find a specific business which has some nuances that are interesting then definitely i would look at that but i don't start at a high level saying i need to be invested in the software business and let me find the best software company or so on i never look at it like that but um mr chandan this was a lot of fun thank you very much yeah yeah thank you so much for the insights you gave can i ask her to propose whatever thanks [Music] um hi monis thank you so much actually this uh forum has had some phenomenal speakers so i think it's a tough act to follow but i must say that this is this is one of the highest attendance that we've had um in these talks um so this was fantastic thank you so much i mean at this group we all have read your books and uh we followed you for a while uh even like the way you've explained your dhando i think it was just so unique and just you know just like this talk um thank you so much for uh so crisply and succinctly uh talking to us about uh your thoughts and you know your insights and your the way you approach investing this is very helpful thank you so much hope you have a great day in omaha all right thank you very much

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Length: 87min 29sec (5249 seconds)

Published: Thu May 27 2021