The Ten Commandments of Investment Management

[Music] thank you so much for for speaking to what I think is the seventh or eighth year of my classes we're we're incredibly grateful well Arvind it's it's always a pleasure and an honor and you know in spite of all my past past issues and and bloopers you keep calling me back which is great and the other thing is your you and your class are willing to serve as guinea pigs which is also really good so this time I have a a brand new talk that I have never given before so it's a it's a first time first time I'm giving this which is which is exciting for me so but hopefully it'll go over okay on your end and and everyone will will like it as well is the audio good it's all right perfect okay so anyway you know you know a few thousand years ago we were told about Moses going to the top of the mountain and then coming back with the commandments the Ten Commandments and that that story is slightly off so you know I have I have a lot of conversations with God and in one of my conversations you know he said that you know Mohnish when when Moses was coming down the mountain he dropped the tablets and they shattered into many different pieces and so my commandments were lost but he felt really bad and humanity was expecting these Commandments so he made them up and we've never had the real commandment so he he gave me the real Commandments to usher on to the world through Arvin's BC class and so that's that's what I'm going to try to do and so God also said that he really wanted to focus the commandments on investment managers and not humanity and unfortunately Moses cannot broaden the the scope of the of the task he had been given and so these are the commandments or for investment managers and and and Moses was right there exactly ten commandments so that he got that part correct but anyway the the first commandment so you know I don't know I don't know how long these are going to take to go through so I'll try to I'll try to speed them along so that we have enough time for Q&A and and such and and certainly if if if the flock is looking for more clarity on one or more commandments we can certainly do that during the Q&A so anyway the first the first commandment is thou shall not skim off the top and what what the Lord means by that is that you know one of the things with all these commandments is that the reason they are they're being presented is that most most participants in the investment management business violate them and they are sinners and so we are trying to kind of improve the lot if you will so skimming off the top basically is setting up an investment operation where you're either taking you know some percentage of fees as a fixed fee and in the case of hedge funds they're usually taking one or two percent off the top and they're adding performance fees on top and you know two of the the original practitioners Warren Buffett Charlie Munger they practice the art with no fees off the top so Buffett had I think zero 625 once he merged all his partnerships I think in 1962 do where he took no fees off the top end and Charlie I I think had a third I think one third above zero is my my my my belief I think that's what he did but a foodie was that was a kind of specialists operation little different operation that he was running and very little capital but but the bottom line is that both would Buffett and Munger have said that if if you're in the investment management business what should have already happened before you set up your own show up or started managing other people's money is practice the art on your with your own with your own limited assets and and if you if you did well with those assets then you know the power of compounding is such that even a small amount of money becomes quite significant after a few years I mean if you're if you're if you're compounding at anything north of 15 20 25 percent which you should be able to do on small small amounts of capital I mean your your money will be doubling every kind of you know four to seven years type type deal and so even a small amount becomes fairly large in a few years which which gives you the ability to in effect live off that that base while the assets are growing so anyway that's the first commandment the second commandment thou shalt not have an investment team so again you know investment management is not a team sport it's it's really designed to be an individual pursuit and an investing team is in many ways an oxymoron and one of the one of the you know the many reasons why it's an oxymoron but one of the basic reasons is that any two humans are going to have differing circles of competence and so if I were to have for example an analyst on my team and that analyst was very bright and he or she came up with some investment ideas I'm a I'm a reject them simply because I have a different circle of competence and so which is really not doing justice to the analyst if you will and and the second is that we we don't have we don't need that many stocks in our portfolio and so in a year we have plenty of time to research many stocks and to find you know two three or four of them that that kind of fit the bill if you will so they shouldn't and the other thing is a the investment analysis process is really the fun part of the job so you really do want to be delegating the fun part because I wouldn't know what you'd be doing then if you weren't kind of analyzing investments you know that's the most fun part then the third commandment thou shalt accept that thou shalt be wrong at least one-third of the time and you know some of these Commandments leaked leaked out from God over the years and this this this comes from John Templeton and basically the investment the investment process is one where we are we are extrapolating or we are trying to extrapolate the future of a business or the future of many businesses and by definition that is a very inexact science there are a multitude of factors that are going to affect every business into the future and especially when we are trying to forecast or figure out what happens to a business five years from now or ten years from now it is it is an exercise fraught with difficulties and definitely fraught with a high error rate and so basically if I were to pick or in Mike let's say my current portfolio if 10 stocks made up most of the portfolio there are probably at least four of them that will not behave in the future in the way I expect I expected them to behave when I made the investment so it doesn't mean that 40% of the time I will lose money what will happen is that at least 40% of the time I will either not make as much money as as I thought or I might lose money on some investments or they might flatline or they might even do better far better than I thought all of the above and and so the this is a this is an exercise in humility in terms of managing investments and and one has to always accept the fact that the future direct trajectory of businesses is and predicting that trajectory is at at best and it an inexact science and so we have to be kind of humble enough to accept the fact that you know even our highest conviction ideas may or may not get to where we expect to get them to then we get to commandment number four thou shalt look for hidden PE of one stocks and so you know here's the here's the way the world works so maybe they are around let 50,000 publicly traded companies globally and let's say I set up a screen which said I want to look at all companies that trade at 40 times earnings or less the odds are I'll have a you know kind of tens of thousands of businesses that would fit that screen if then I change that to a P of 30 I still have you know several thousand businesses P of 20 still several thousand P of 10 still maybe you know north of thousand maybe well above that and as I keep tightening that news you know 2p or five P of 3 P of 1 there will still be some businesses that'll slip through now those are the the non hidden peo ones but but what we what we want to look for is the hidden p/e of ones which means they they they are a p/e of one but they don't show up as such on a screen so for example and and they can be appear one based on future earnings they may not be appear one on today's earnings I mean in 2012 when I invested in fiat-chrysler you know it was trading at less than five dollars a share and the company had had forecasted in that in a few years actually 2018 that they would make about five dollars a share and actually as we are coming into 2018 you know they spun off Ferrari but if I if I include the whole pie including Ferrari they exceeded that number so what we paid in 2012 po1 materialized in 2018 and and so the I mean the end result is that that that investment went up 708 in that period so generally speaking when you do PE or once in general good things happen to you and another stock I think I mentioned in in your class or in the few years back was if Scott was a steel company and at the time I was its investing in it so I think it was 2004 or there abouts 2004-2005 and if school was trading if you just screened it it was trading at three times earnings but one third of the market cap was in cash and so if you if you kind of adjust it for the cash because they had basically they were trading at two times earnings and the the earnings in the next two years with the company's own own guidance and such was what the company expected to make in cash flows in the next two years and so basically you had a third in cash and two year in the next two years on his coming on and and they would have absolutely no visibility beyond the two years so this is the very cyclical business it was possible that after two years earnings would just fall off a cliff but my thinking then was that if we held the stock for two years we got all our money back and at that point I just wanted to see what the stock would trade at you know it it had to trade for something because it had all these huge plants and infrastructure and everything else and so what happened in that case is a year after I bought the stock the company announced they had one more year of visibility and earnings were going to continue the way they had been happening which means now we had in effect three years of visibility so we were in the in the black and then as we were getting close to two years someone came and bought the company and and we ended up with about a about of 4x return on the original initial purchase in less than two years and so anyway the the P of ones what I what I noticed is that in the last in the last 19 years or so that I've been running for iPhones it's it's happened at least six or seven times that we found P or ones like Fiat Chrysler or like ifs go very early early on had invested in Stuart enterprises which was in the funeral services business that was that actually was sitting at a P of two in value line I opened up value line I as I do every week I always look for the p/e once in value line usually they're not there but you can find P of tools quite quite commonly usually those are businesses that are good to avoid but every once in a while there is a gem that shows up so for example the reason I was kind of interested in Stuart Enterprises when it showed up is that they're in the business of burying dead people and then the funeral services business and one thing I had read a long time ago about the funeral services business is it out of all the business si si codes there you know industry categorizations funerals of funeral homes have the lowest rate of business failure so if you look at across industries across a number of any industry the lowest rate of business rarely has funeral homes and the reason for that actually becomes obvious if you think about it so first of all no one in this classroom all of you gifted people it's planning to go into the funeral services business I can almost bet on that there are no 22 year olds I know of who say you know what I think I'm going to go into the funeral services business because it has the lowest ramier it's such an awesome business that's what I'm gonna do this doesn't happen so first of all the the people entering the business are few and far between and then the second is that when your aunt or uncle who you love so much passes away you don't go about seeking the low bid to have their last rites done you might add the most reach out to typically you reach out to the place that ideally your family has been using for many generations and hopefully get it get it done that way but even if even if that's not the case you'll try to reach out to some neighborhood funeral services operation and whatever they tell you you're not going to start negotiating on the phone and you're probably not even making five calls to get the lowest bid so this is not a business where you're going to seek out unless you hated that particular relative particularly seek out a low bid and and of course you've got all the upsells with air-conditioned coffins and everything else in between to make you feel really good and anyway so so basically the hidden p/e of one's is really good for your health and your financial health I mean and so looking for them is it's a great exercise and in fact I just I just got back from Istanbul last night and I think it was only peor peor ones that I visited I was swimming in fear once it was quite the orgasmic experience anyway so that's commandment number four to go hunting for P or ones then commandment five thou shalt never use Excel so this actually kind of goes hand in hand with commandment four and even it goes hand in hand with not having an invest team but basically if you can figure it out in your head so the investment process is is really quite simple you know if if a company let's say has a market cap of a billion dollars and let's say it's creating at 20 times earnings so it trailing earnings are 50 million for example and let's let's assume though the owner earnings that you can withdraw as dividends and such to keep it simple well the the billion dollar market cap whether whether that is undervalued or overvalued or fairly valued one can only make a judgement of that if one can figure out the cash flows that are coming out of the business over the next I mean it's from now to Judgment Day but you can approximate that to be now between now in the next 10 or 20 years because after that it really doesn't matter the terminal values become too small and so if this business is trading at 20 times earnings and if earnings are expected to grow at let's say 10 or 15% a year then what you can do and and if you have a very high degree of conviction that that 10 or 15 percent rate of earnings growth is sustainable for a very long period of time maybe 15 or 20 years then you can actually you know run the math you can say okay you're one the running the 50 million year to the earnings a 60 million you're three the earnings are you know I mean now if you're growing at 20 percent but if you're going at 10 percent 50 55 60 and a half you know sixty six and change and just keep going from there and and then you have to discount each of those by your expected rate of return you know so for example if I if I want a 20% rate of return on this investment I have to start discounting those future cash flows at that at that 20% rate and then I have to because if I'm getting fifty five million a year from now my cost of capital is 20 million so that 55 million is really worth like 44 million because I'm not getting it today and so as I discount all those future cash flows and and run those numbers it would be very hard to get to 1 billion because because you know the earnings are growing at 10% but your expectation is 20 so it will be a kind of a declining future stream every year will be less than 50 million in effect and in present value and and so the math just doesn't work now if you reduce your return expectations to something like 8 percent it may work if you said I only want a 7 or 8 percent return and that may work but even then the there are some heroic assumptions and we already saw over Templeton say that you're gonna be wrong one-third of the time and capitalism with brutal so unless this is a fast growing funeral services operation it's not going to be they're clocking 20 percent or 10 percent a year for 15 years because it's just difficult in business to have that much of a runway without people coming in to take your motorway and so so the thing is that how do we get around that well the the way the way we get around that is they're making the math really simple and the way you make the math really simple is we go back to Pier 1 and when we go back to Pier 1 all the math comes really easy because then if I want to make like 25% a year well I I get my money back in two or three years and I still have the business system producing cash and you'll find that it'll deliver that return and it might deliver that return at a P of 2 as well or 3 as well and but once you start getting to high single digits or double digits generally speaking the math doesn't work so well it's it's it's a lot harder to make it work and and I think like for example if if we were to look at I mean I think like a simple case is if we look at the business like Apple so let's let's let's take a simple case that Apple is worth exactly a trillion dollars I haven't been tracking everything is little bit above that but let's say it's exactly a trillion dollars and let's say I want a you know I'm an unreasonable guy and I want a like 25 percent annual return on my capital for example you know Arvin knows my license plate says compound 26 so so if I want a 25 or 26 percent return my money the first year that business has to produce 260 billion in owner earnings and I don't think that's what Apple is producing right now I'm not I'm not quite sure maybe someone in the class knows or maybe you can look at our vendor and what is the trailing p/e of Apple approximately is it like 10 times or something yeah so but let's let's be generous let's say it's trading at 10 times earnings let's say that what is what it's saying is that apples making a hundred billion a year okay so I need to 60 billion for my 26 percent 25 percent it's making let's say a hundred billion and then and then a year from now let's say let's say it's a hundred and fifteen billion let's say I'll give it that you know they were a rocking market position earnings grow by fifteen percent equals two hundred fifteen billion and let's say for the next ten years its compounding at fifteen percent even even with a hundred billion and earnings compounding at 15 percent for ten years which means that in the tenth year it will be four hundred billion because in five years it will double to two hundred billion and ten years it will double again to four hundred billion that tenth year four hundred billion is not worth 260 billion today because because you know when I discount that as the 26 percent rate I have to it will it will go down below a hundred because it's just you know needs to be doubling every three years inside so anyway the bottom line is that if your return expectations are something like seven percent a year and Apple is growing at you know six seven percent a year or something it may work so so one of the one of the things that you can do with just playing with these two three numbers which is market cap current earnings and what you expect earnings to grow at and of course you know I think a lot of people would have difficulty getting to assumptions that Apple will grow 15% a year bottom line for 10 or 15 years without any hiccups that may happen it's a very dominant company in a dominant position but we've seen a lot of past dominant companies have problems in in these areas so so the thing is that when I look at something like Apple it doesn't even take a femtosecond to take a pass and now if we had Apple at like something like three times earnings you know like trillion dollar market cap making 350 billion a year growing at whatever you know 15 percent of something even someone like me might get interested you know so so the thing is that P of three and Apple might then get me excited and a PE of 10 not quite as exciting and so oh man that's so hard and and so you know the thing is that you know so if you if you run the same math starting at 50 billion which is where trailing earnings are and even if you take heroic assumptions of 20% growth unabated I still can't get to the promised land you know as you know with the commandments I've been to the promised land but but I can't get to the promised land with it so so that was a fake fifth commandment thou shalt never use Excel and as you saw with all the math we did you know we didn't even need a calculator forget Excel we just did it in our hands so there is no need for Excel and if you find yourself reaching for Excel what that means is is you take a pass the it's an automatic pass the moment you feel or I need Excel to figure this out if you need Excel it means you need to take a pass if you can't do the math on the fingers in one hand you need to take a pass if you're going to two hands there's a problem you need to be doing the math with one hand and no calculator and watch between your years that's it like I said these are all things that are wins will never talk to you about it's only me and you that can talk about such things then commandment number six thou shalt always have a rope to climb out of the deepest well so in case someone who didn't understand that fully let me try to decipher what the good Lord meant by commandment number six though when I was when I was growing up my my dad was an entrepreneur and he was really good at starting a number of businesses with nothing no capital and he was really good at getting them to some-some scale I mean you know some of these would get up to north of 100 employees and such I mean they what they would move pretty quickly but he was always very aggressive with his growth plans and leverage and such an overly optimistic and invariably these businesses will blow up and so he went through a number of bankruptcies you know so I when I was growing up and my parents were very bad kind of financial planners or tables so as the business did so did so did our you know household fortunes if you will so when the business was doing well things were loose and going well at home and when the business blew up we we didn't have money for rent we didn't have money for groceries we were you know asking relatives to help us out asking friends and so it was a it was a tough situation and one time I think when I was like what maybe nine or ten years old and my father had gone bankrupt he had this guy who was a a astrologer show up to our house our apartment every Sunday and this astrologer would have all these you know orange robes with a bunch of marks on his forehead with a bald head and all that and he would have all these different charts and he would tell my father about the future and then my father would pay him and then the guy would come the following week and this was kind of a weekly thing going on and I told my dad after observing this for a few weeks that you know we were my dad with an engineer he was a very rational guy and I said you know you have to know that this person is just talking utter nonsense you know and so my dad my dad said to me that I am I am at the bottom of a well and I need a rope to climb out of the well and this orange rope guy is my rope because when I pay him he makes sure that he tells me that the future is great because he knows if he says that the future is not great he's not coming back the following week so every week when I have my session with him he is telling me about these future businesses that I'm gonna start and all this prosperity that's gonna come and I I need I need something to climb out of the well that I'm in and one of the things that surprised me repeatedly what my dad was that the ability to bounce back I mean I noticed as you as he got older that his bounce back was harder than it used to be when he was younger it was just yeah I think was just harder going through it over and over but but I was always very surprised at the quickness with which as he was you know putting one business you know the the last semblance of it going up going under he was already kind of thinking about the next one and and such so in the investment business we are going to have gyrations and we're going to have periods and performance is great and we could have periods when performance is not so great and so for example in in the financial crisis mm oh eight oh nine Pub refunds from the peak in June of in June of 2007 to the bottom in March of 2009 the funds dropped between 65 and 70% it's a huge drop and and you know when I when I told you what commandment number 1 thou shalt not skim off the top so basically if if my my fun will work let's say 600 million dollars or there abouts let's say in June of June of 2007 basically by June of 2008 in order to collect a fee it needed to be at at least six hundred thirty six million you know 6% return and then I get paid instead the funds were below 200 million so 600 million goes to 200 million the base level required to run a fee is six hundred and thirty six million I am in a very deep well and so I thought back to the guy in the orange robes and unfortunately I didn't have his email address and I don't even know if he was alive then he may have passed away probably so I was looking for the guy in the orange robes but he was nowhere to be found so I said I'm at the bottom of the well and I need a rope I need a rope to pull me out and what I did is I what I violated commandment number five I first sought the forgiveness of the Lord and said you know in order to in order to follow commandment number six I need to temporarily get a pass on command and number five and after many years are fired up Excel and and what I did is I I took my portfolio and I put in prices for all the stocks that were in my portfolio in at the end of 2010 and at the end of 2011 so I I put my best guess as what these companies would be trading at at the end of 2010 and 2011 and of course things that collapse you know I mean they were there were things I mean there were a lot of bargains at that time I mean anything I was investing in went up several times after that and when I looked at the numbers of the aggregate portfolio at the end of 2010 and at the end of 2011 it was well north of 600 million partially because I had control over what went into those cells just like just like the astrologer had control over what he was going to say the future was gonna do and you know like we hear about Steve Jobs is Steve Jobs distorted reality field we need distorted reality to climb out of wells and so what I did is instead of focusing on the 200 million dollar number in my mind I focused on the 2010 or 2011 number when I was going to be in fearing territory and life would be you know great happy days will be here again and and that actually worked in fact I still have I still have the spreadsheet and every once in a while if I feel that that you know we are we are in a you know you know well and we need to climb out I'll always go back to that and so I don't use Excel for doing investment analysis I do use Excel to climb out of wells and it works pretty well so so you always need not only in investing but in life a rope to climb out of deep wells though it is a guarantee that both in investing and in life you will find yourself in deep wells life would be quite boring if that didn't happen so that's a commandment number six and commandment number seven thou shalt be singularly focused like Arjuna and of course no one knows Arjuna better than Arvind because a few years back Arvind sent me a nice painting and the painting showed a guy with a bull firing at a target and I think the guy was Algenol in the painting so anyway there's an Indian epic which was written a few thousand years ago called the Mahabharat and in the mouth on earth there is a one of the heroes is this great warrior and Archer called Arjun and Arjuna and when Arjun was being trained as a as an archer his his teacher one day told all his students that he's gonna have a practical test for them and he basically set up a long pole and at the end of the pole he put a fish you know kind of a sculpture of a fish and the fish had a tiny blue a couple of blue eyes moralize then he put this pole in a in kind of a pool of water a tub of water and he told his students that he wanted them to look at the water to see the reflection of the fish and the eye of the fish and to shoot the eye out so and these were all kind of nobility you know prince princes of different kingdoms so the first print steps up to take his test and before he fires his bow the teacher asks him dronacharya asked him what do you see he says though I see the the water the pole the fish and so the guy says okay sit down you're not ready for the test and then the second Prince stands up and again the teacher asked him what do you see he's that I can see the pole I can see the fish I can see the eye of the fish though the guy tells them you're not ready to shoot sit down and one by one the different princes stand up tell them tell their teacher what they see and they're not allowed to shoot the bow and finally our hero arjuna stands up and he's asked what he sees and he sees he says that i can only see the center of the center of the eye of the fish and so Dronacharya tells him fire at will and and of course he takes the eye out and so one of the things one of the lessons we need to learn from Arjuna is that we need to be focused like him so anytime we're looking at it especially when we're looking at these PE or one businesses usually there's more than one cloud hanging on top of the business there are many clouds and also there are always a lot of macro clouds and also even if there are no macro clouds there are macro concerns and what we need to do is we need to be like Arjuna we need to focus on the business and only the business and we so to figure out the future of an economy is really hard for me to figure out the future of you in state of California is very hard or even the county I live in you know just kind of what's going to happen so those are really difficult questions so we have to simplify the world and one of the way to simplify and just be like Arjuna you focus on the business and you don't focus on the noise and one of the things I I noticed when I was in Istanbul last few days is there's a lot of noise and if if one can get past the noise and focus on the business and just consider the nuances of the business things can become quite clear and quite quite obvious so I did find a few things that I think we will pull the trigger on but but if I were to if I were to look at those the the macro situation the comfort country or even the headwinds that the businesses are facing there I think there are significant headwinds but if I'm if I'm buying at 20 percent of liquidation value or that's such a small fraction of future earnings that and you know like I said these are these are fantastic assets so focusing on the center of the eye of the fish is the name of the game that's what we need to we need to do so do not get yourself distracted by looking at all kinds of macro things I think you're best off ignoring all of them because anyway you can't predict them then commandment number eight commandment number eight is thou shalt never short a stock so I don't think we need to spend much time here but that's pretty obvious is we don't need to figure out what's gonna happen to Tesla that's you know we don't need to go long and we don't need to go short that just falls in a too hard file and so like Tesla for me the stock not the car is there for pure entertainment purposes just to watch from the the front rows as opposed to being in the arena so we just don't need to figure out exactly what's gonna happen and we don't need to go so first of all you know commandment number three is even a wrong be wrong one-third of the time I think we're shorting you're gonna be wrong like eighty percent of the time so both Buffett and Munger say that they've always been right on the stocks that they thought ought to be shorted but they were always wrong on the timing and the timing can get very painful also the math is against you because the maximum you can make if you're right and in a short position is a double and you know we're not going for doubles and the maximum you can lose is you can go bankrupt so there's no point making for making bets where the highest upside is a double and the highest downside is that you're out of the game so I shall go to my grave without ever having shorter the stock and I think you should do the same and then you know commandment number nine comes from Polonius and even though Polonius came long after Moses did you know he was he was the character in Hamlet and Polonius said to his son neither a lender nor a borrower be and so I think I think Buffett's tweaked when Polonius is need neither a long-term lender nor a short-term borrower be so basically you don't want to you don't want to introduce leverage into your life I think that to finish first you have to first finish and we we want to make sure that we get to play the game and we get to play the game for a long time so the key is to spend less than we earn and put that difference in a compounding engine if you're spending more than you're earning then it's not a good good thing and you know I have a I have a blog some of you might have visited the blog but I'll put an ad in for my blog here my blog is called chai with pub rye and so if you ever feel like having a cup of tea with me you can go to my blog and one of the first posts I made when I in fact one of the the the impetus to set up the blog was a guy named mister money mustache some of you maybe you can raise your hands how many of you have heard of mister money mustache this raise your hand if you ever heard of him we have a few enlightened humans in the room which is great so mister money mustache is a good person that you should get familiar with I always expect that I'm gonna hear the mister money mustache got divorced because his wife can deal with him but I think he married mrs. money mustache and so I think she's even more gung-ho about his methods than he is but anyway mister money mustache I think he's in his early 30s now but but he at 22 he was a software engineer and he decided that he was going to be retired at the age of 30 and he was gonna be retired at the age of 30 not because he got some exit from some company but he would retire at 30 being a software engineer having just made a normal software engineer salary for eight years so he ran his life for eight years I mean like for example mister money mustache would not be caught dead in the Starbucks I mean paying four bucks for a coffee ain't happening he's like more like five cents for coffee so I think he was uh he had like a 60% or 70% savings rate so he he has a car but I think he consumes about two gallons of gas a year on in that car and his bike gets a lot of mileage you know he's he's bikes everywhere and he's a carpenter I think he built most of his own house somewhere in the woods of Colorado and and anyway I think it's it's worth going to his blog I think you might have some difficulty with some of his methods but you even follow one third of what he does you'll be on a great path so he carefully looked at every expense as humans have he decided that the way the economy is set up which is we take a bunch of loans when we get jobs which is we buy a fancy car have a loan and buy a fancy house of you know have high rent and all that that was all for the birds he wasn't doing that he took no debt he drove a beater I think and and basically he just looked at every line item that he had expenses with and nothing was going to be spent so anyway and of course now the funny thing is mister money mustache through his blog makes several hundred thousand dollars a year it's so popular and he's a little he's a little disappointed about that you know he's kind of sad about it because he didn't want to kind of be making all this money he wanted to prove that he can you know live the way he does so he claims at least that all that money is going to charity so maybe it is which is great but he's a great example to follow and first story on my blog amongst many other good stories and and then finally commandment number ten is thou shalt be a shameless cloner you know so cloning is very good for your health it's it's just a you know there are many smart people who are great investors in many cases their portfolios are visible to us because it's required by law and it's a great shortcut to look at what are the highest conviction ideas of some very smart people and we have websites like data roma for example in the US which is tracking a bunch of investors and telling you what the highest conviction bets are and so I think cloning cloning can be really good for your health and that's that's the tenth and final commandment and with that Darwin we'll open up for questions so thank you the spoons prepared after seeing as much as they could online about you and the books and reading they've prepared many questions but a common theme was just how you your sourcing ideas across you know India China Korea Japan Turkey how are you finding ideas I don't know if you're looking at the equivalent of 30 laps of Turkish entrepreneur investors or how are you finding these 1pe ideas or you know I think this is oceans 12 maybe with ocean's 13 the movie I forget which oceans it was but it was a I think when Clooney is talking to Andy Garcia was that in Ocean's thirteen ocean 12 I mean maybe it's ocean's 13 but anyway you know Clooney's trying to trying to get his wife back who's now at Andy Garcia and anyway he and Andy are having a talk and you know Andy has some problem with some serious drought and Clooney chasm I know a guy and then Andy Taylor them you know like in disbelief I have all these serious problems and you know a guy and he says yeah I know a guy so what can I say you know as far as Turnbull goes I know a guy who shall go nameless for now but but no I think the thing is that you know we would not be able to survive I would not be able to survive if it weren't for commandment number ten cloning is really good for your health so I think I think in in India I I think in the last two years I have met with about a hundred and met Oh visited about 180 or more businesses that are listed and met with you know a lot of te OS and and teams and visited a number of plants and headquarters and all of that it's just been a great great education and and in some cases there was cloning in some cases it was just you know actually doing the work god forbid and and but but basically you know we we only need like two or three ideas in a year we don't need too many and I think if one is cloning is a good shortcut you know what are the commandments that didn't make the top ten but almost made it was you know when when Buffett was asked the same question no how do you how do you find great stocks and all that and his answer was start with the A's and and Buffett was earning facetious you know in their 50s he went through the Moody's manual and he went through it twice and there were twenty thousand companies in there and he looked at every single one of them and I bought the Moody's manuals a few years back from eBay on eBay just to take a look at them the 50's Moody's manuals and yeah I mean it's kind of like you know they've got like for companies a page and they've got the basic financial information on those companies and you can really quickly get to see kind of what is going on in terms of you know cash and cash flows and all of that and in many cases he was buying well below cash forget the earnings engine he was just lying below cash and and such but but he had to he had to go through a number of you know thousands of pages to get to them but I was fine he had the time to do it and so I think that you know this is a treasure hunt and if you enjoy treasure hunts you'll enjoy being an investor and there are shortcuts in the treasure hunt like like being a cloner but-but-but-but it but it works I think so generally speaking when I've gone to geographies like South Korea or or now Turkey or China I've definitely employed cloning to get some cover and though that has worked well and and in the case of India it's been a lot of kind of looking at things directly but but many times we find in India we find parallels that that have very strong histories in the US or Europe and so then we can we can look at those I mean the like you know the same type of business exists in these countries that has been existed for longer so you can cannot look at the trajectory that some of these businesses have followed and then take it from there so that you really host gets one extra girl investors yeah so I think that that you know one of the things that my my wife told me actually is uh after the financial crisis was that she never realized the degree to which our wealth had dropped and the degree to which I was you know underwater and such and she said I she didn't really notice much change in my demeanor and so I think the thing is that there's a there's a core to that if if wealth is lost nothing is lost if health is lost something is lost and if character is lost everything is lost and so we are only talking about wealth which for the court is means nothing and so quite frankly I think one needs to put things in perspective in terms of what is important in life and you know another thing to keep in mind is that you know if if if you look at the United States you know what is the percentage of people who are unable to you know make ends meet after having a good education and you know in the sense that they are not able to pay rent not able to pay for groceries and those sorts of things you know it's a it's a it's a number that approaches zero and and so the bottom line is that we live in a country which has tremendous safety nets of number of different kinds and so the bottom line is that even if things don't work out the odds are extremely high that you will be able to get contrac you know you know you may have some period where you have to readjust you may not take a job instead of being on your own that sort of thing but but but the bottom line is that you will definitely be able to bounce back and so I think it's it's always good to keep things in perspective about what is important in life and and I think when I was going through the financial crisis I really didn't I mean clearly the Rope helped looking at Excel helped but my my take is that part partially it may be that I had seen a lot of upset downs in childhood so that probably was somewhat helpful just because I'd seen far more extremes and I was going through and so yeah I think temperament is important if you find yourself and on that end of things there is a form of Buddhist meditation called Vipassana you can google that and you can do a 10-day retreat in India where you basically for the most part are silent and having an austere life but that might that's work for many people I know I have a bunch of people who keep telling me that I ought to do it I tell them you know if you already in Detroit you don't need a bus to get there and and and such so but you know there's a number of different ways and techniques of getting there so I think that but some of it is pre-wired I think it might be temperament but I think we can definitely I mean our tendency is not destiny a tendency does not need to be destiny and so we we we all as humans have tendencies but we definitely also have free will and can get past those tendencies so so we can we can look at a number of different tools the bottom line is that you have to figure out what rope works for you that subject you talked about the rope in the well as an excel on the and you mentioned the personal front - with what you have a rope in that scenario I mean I think that I don't know I mean maybe it's just the way I'm wired but I didn't I didn't need much more than then Excel I mean bottom line is I think I think what I when I was going through the financial crisis one of the things that was really exciting was just the sheer number of investment opportunities so you know while your portfolio is crashing and burning on the other and you're seeing all these you know mouth-watering investment ideas and such and and I mean I think like for example I made a I thought you know the whole commodity space just collapsed and I was finding so many ideas of investing and commodities and there were really really simple ideas that I think every single one looked like at least five acts and so because they didn't have a lot of time to study them I made a basket basket bet with a bunch of them not not a single one was a loser almost every single one of them went up at least four or five times I think one one investment I made tech Cominco which I sold after five X went up to a 10x you know so the it was just I mean one of the things that was very attractive about that time was that there was a lot of lot of investment ideas and I was selling cheap stocks to buy cheaper stocks you know so so that's one of the things I did I use that period to to make the I try to widen as much as I could to discount to intrinsic value by by doing that but on the personal side I I mean I I think I think at the at the bottom of the financial crisis my net worth I think was down to 18 million then our worst problems in life that having a net worth of 18 million so I didn't have too many issues with that of course if I looked at you know peak to bottom it was a huge drop I think you know I think peak had been somewhere I think at paid tax and all but something somewhere around north of 80 million so if I looked at her from peak to bottom it was a significant drop but but my take was that things were really cheap I liked what we owned I think that I didn't have any leverage and I I I really didn't see any reason to get I mean I've seen with my dad right that you basically keep your senses about you and just keep chopping wood and move ahead and that's an important thing to do you know outside of investing when you need a rope and you're in a well like in your personal life all right I think that I think the exact exact same thing applies you just need a different rope right so I think we we have to understand that present circumstances never last you know if you're having a really good time in life that's probably not gonna last and if you're having a really bad time in life that's also not gonna last so one is you have to have confidence that when you're the absolute bottom in life that it is it is going to get better it's just a nature of life it's gonna get better and so once once you have that basic confidence that life changes I mean you know we we have this you know number of people kill themselves right I mean we have suicide where people just take their lives and such I was I was reading somewhere that I don't know if I got the numbers right but they've been like more than a thousand people who've jumped off the Golden Gate Bridge and I think they're like something like thirty of them who survived who didn't die and those thirty one hundred percent of them regret the decision to jump okay so basically if if we have a sample size of 30 out of I mean we can't offer the people who jumped and actually actually died but we do have these few people who came back from the dead if you will and if a hundred percent of people who came back from the dead are saying it was a big mistake to do it probably the odds are that if we could talk to all thousand plus of them the overwhelming number would would say were the mistake and so then why did they jump well I think they jumped because at that point they were at the bottom of a well without a rope right so that's that's a very sad situation but they for whatever reason did not have the confidence and this is a this is why you know a certain percentage of humans you know a large number of humans attempt suicide a relatively small number are successful thankfully that's that's one thing good about not not a large number of successful but but i think that i think people people get to bottoms and don't know how to get out of the bottoms right and and III think that the the only thing i can say is that one has to have faith that tomorrow will be better than today and that whatever circumstances we are facing are not permanent and and once we have so it could be finding it could be finding buddhism it could be finding a friend it could be finding a loved one to talk to it could be their their hundred different kinds of ropes one can have I mean I think in in in in the case of a large number of people their spouses are going to be the road you know many times when I have I have issues which I'm I'm just kind of concerned about whatever else I'll just talk to my wife about it and almost always I'm feeling a lot better after that talk so I think we can we can always find the people around us I think definitely if you reach out to friends and family well it is only going to help you yeah I think I think Google Google is a very interesting company because Google is a company that can make its revenues and its cash flows whatever it wants it to be very few companies are in that circumstance so the overwhelming majority of the products and services that Google provides to us it provides to us at no cost I mean it doesn't even monetize those products it just provides it without monetization and they can turn on monetization engines on on a variety of products at will I think in fact the history of the company is really interesting because I find it really interesting that this is the company that when it was founded the founders had no revenue model they didn't they had no idea how Google would ever make money surprisingly the Esther's who invested also didn't understand how this thing would make money and they still invested in the company and eventually the revenue model was not even figured out by the by the founders it was thing figured out by one of the one of the guys they had hired and this guy was not hired to figure out the revenue model he was he was stored after I think a few months or maybe a year or so on the job oh by the way can you figure out how we can make money and and he went off to figure it out and we he came back with Adwords you know and and they were off to the races so AdWords which is you know responsible for a large portion of Google's revenues today was not understood as a way to monetize by the founders when they found the company or even after that so similarly I mean if you look at like when they bought ways the Israeli companies a lot of us use there was no revenue model ways ways was just providing directions without and and they went abroad it and even for a while when they ran it they ran for free was actually a loss because they had no monetization and now of course you see all the ads on ways and they've they figured so I think Google is in a very interesting company because I think they can they have a lot of flexibility in terms of what engines to turn on and and and how to monetize and what to monetize and so on they've got a lot of brain power to do it so I really like the business and I bought it I think when I bought it it was relatively modest in multiple I think I think the forward earnings was in the teens which you know for me is like blasphemy to invest in something trading in the teens but even I got past that and and and it worked I think in about three years we had more than doubled our money and I had actually intended that this is such a great business that I'll just keep it as keep it forever but then I had these PE or one show up and I needed cash and you know as hard as it was you know Google was history I mean once you have PE or ones a lot of things are gonna be history so I think Google will continue to do well I hope they don't prove me wrong in terms of language of the P or once I think the P you want to be taught what Google does over the next several years but company and I think it has a great future yeah that's that's a good question so historically I I never met management you know for most of my career as an investor probably out of the last you know if you take the last 24 years including the time and I was just manage my own money probably at least 20 of those years of 21 22 of those years I never met management's and things worked out fine I didn't think I could do that in India because I think that one of the things I can almost bet on is that the typical US company I might look at if I lose money it won't be because of fraud I can lose money because of my stupidity but not because of fraud so the outright fraud cases in the u.s. in public markets are few and far between and so they're not at least in my in my almost water century of investing I've never lost money I think anywhere because of fraud I've lost money many times because of stupidity but not with other fraud so in India I think there is a there's a much higher risk of fraud than there is in the u.s. oh I I needed to be able to pick the tires so far I don't think we've invested in anything that is fraudulent so I think so far the filter has worked but we will find out over time but I think generally speaking one is you know you can make plenty of judgments when you meet management's I mean I have been in the room with frauds in India that's kind of fun in fact it's uh I think it's been a lot of great learning to be in the room but frauds because you can do try to understand kind of how they work but the other thing is that you can follow the cash so I think one of the best ways to avoid fraud so there's a there's a great book which I think a new edition just came out called financial shenanigans I think schlitt is the guy's name I'm I've been touch with the author now I'm supposed to have a call with him in the next few weeks so looking forward to that I think Howard Strait is his name but I'm not sure but anyway that's a great book I think it's a it does a really good job of explaining how companies can mess with you with their with their accounting and financial statements and I think I think in India one of the things I look for is just follow the cash I think if you follow the cash I mean if you look at even in the u.s. if you look at someone or something like MCI Worldcom which was a fraud it would have been easy to spot if you focus on the cash because basically they were they were converting expenses into capex you know so they were what were ordinary expenses were being capitalized and thus profits were being increased but if you if you look for the cash you know what what is the business producing at the end of the year after all expenses you would just see that it was a widely different number from net income or for welcome for example so I think I think the financial shenanigans book the guy is really good and I think that you can tell a lot with just the numbers and the the vendor the cash is there or not you know in some cases we have fraud in India like I think Satyam is a good example where the guy doctored the bank statements you know so in that case I think Deloitte I think the Lord was the auditor in that particular case you won't have caught it because the cash was a fiction you know what they were showing us cash on the balance sheet didn't exist but that's a very rare case you know and but generally you'll find that the fraudulent guy is basically one way or another playing with debt and you know they've kind of you can you can get to it if you just sift through the financials being that is the company one business CEO but yeah so it was very sad that Sergio Marchionne he passed away great guy in fact I just went to his memorial service in Detroit last week and I you know I would I would say this that Sergio third-g was probably in my opinion amongst the top 20 business leaders to come along in the last hundred years amongst the companies globally and he was a and I think we will see some books and such come out about him in the next few years but he was a extremely unusual leader and I mean I think fiat-chrysler in 2000 Chrysler in 2009 was going to be liquidated it was very close to being liquidated in fact the decision by the US government not to liquidate it was like won by a three to two most by the by the auto task force so it barely avoided liquidation because they pretty much had given up on the business they didn't think the business could be resurrected and and third you I think without Sergio on the scene I'm not sure it would make it I'm not sure surprised know what I made it but but the thing is that what has happened with Fiat Chrysler since then is not only have they proven that they should not have been liquidated they are now outperforming the other two rivals so Pierre Chrysler has now got best-in-class margins higher than GM and higher than Ford coming from you know a distant third getting to basically number one so so I think that if you if you look at if you look at a leader like Sergio so you know I I knew Sergio was a very good leader in 2012 before we invested but I went through about four different recalibrations of Sergio each time and I recalibrated him it was at a much higher level than the last time you know I thought he was great and then he was even greater and just kept going and the last recalibration that happened with him for me happened after his his death so slowed your new a year ago in July 2017 that he was in serious problems with his health and possibly possibly terminal he knew that a year before he died never told anyone just his family immediate family knew and this is the guy would a net worth of several hundred million you know 15 Ferraris or something and he decided he's gonna spend the last year of his life running fiat-chrysler full out to hit the 2018 plan and that's what he did he basically ran a million miles an hour in his last 12 months to push the company to where it needed to be and one of the things he did before he passed away was that he set the plan for 2022 so that their fiat has published a guidance and numbers for 2022 in June on June 1st of 2018 so about four weeks before he left the scene at Fiat and about seven weeks before he passed away he published the blueprint and I even I found it strange when he published that because he was publishing it a year before he was actually going to leave the company and a year before the next guy was gonna be named so if he was anyway going to leave the company in 2019 if he had just left the company in 2019 and retired and so on I think fiat-chrysler would still execute and make the 2022 numbers but he didn't leave the scene and he didn't just pass away he actually martyred himself and the management team you know he had about 35 direct reports and they used to spend weekends together you know because they didn't want to spend weekday time on meetings architecting the future of the company I met some of these people in Detroit I mean I think Mike Manley who's the who's now the CEO Mike Manley is not running the company for financial benefit personally or whatever he is on a crusade and he's on a crusade to keep Sergio's legacy alive he cannot screw it up and he can't screw it up and the 2030 other people around him can screwed up because what I saw what I what I knew before I went to Detroit and what I saw there is GM and Ford just don't they don't have anything like this these these are people on an intense mission and they are going to execute on that mission nothing's gonna stop them so they published at 2022 numbers it's sitting at a PE of two on 20/20 gunam 2022 numbers I think we're gonna just let it ride in fact I think the P of two is understated it's probably closer to P or 1.5 or 1.3 or something because it's heavily sandbagged so anyway the I think that company is in a very different shape than it was in 2009 when Sergio came in and it's not a commodity company they have got written of ridden of almost every commodity product Jeep is about two million units a year a very unique positioning they pretty much killed every single car or product they made that was a me-too product they have no me-too products in their lineup you know Arvind maybe you can maybe even repeat that I couldn't I couldn't tell sure you talked a lot about investing in Turkey and another think about what oh yeah so it's irrelevant so basically basically the bottom line is that if you are right on the business the currency is not going to matter and you know you know like I mean I I my first investment in India which I made personally in 94 basically went up like a hundred and fifty X in five or six years the currency moved like 30 percent against me 30 or 40 percent against me in that period it was irrelevant and and I think even now when we are investing at these p or one type situations I think the currency is well in some cases we are actually investing in assets that actually have an international value and so I'm not really I'm not really concerned I mean I'll give you an example I probably won't make an investment in in this company but one of the things I found unusual about about Turkey was so I visited a cement company in Turkey and cement is a is an industry where you are very tied in geographically you know transportation costs of cement is very high relative to production cost so basically a cement plant typically starts to get non-competitive once you are getting to be a hundred or 200 kilometers or away from the plant so it tends to be very geographically so once you're about 200 miles away another plant is going to have typically have some advantage over you because the transport cost starts eating it and so most cement plants are geographically constrained they can only supply within a region and be comparative so when I when I visited this company I noticed that they had a small percentage but a percentage of exports and I've never seen a cement company exporting cement so I was kind of confused by that you know one of the things I you know the thing what this industry is that all all knowledge is cumulative and I have met with about at least 10 cement companies in India you know and one of the 10 PFOS I met who like a lot just told me this is a business don't invest in it and let me explain why you don't want to invest in it he instantly became my friend and he he ran through the numbers and explained why I should never invest in the business and and anyway I I had already gotten to similar conclusions but not with his his precision so before I even went into the you know I go into these meetings like this cement company I tried to even cancel the meeting I said listen this is gonna be a waste of time I'm just never gonna invest in cement and but the meeting will already set so whatever so we anyway so I said ok you know what I always find with these things I think we I think it's gonna be like an a wasted hour but I it turned out to be like an incredible every time I'm always wrong when I'm thinking that this is a useless business whatever else there's no point it ends up being a great hour of business school you know and this was another great hour of business school so I I'm talking to the company I say listen I'm noticing you got like this you know relatively small percentage but like you know eight nine percent of your volumes are being exported so you know I'm the village idiot you can't run cement you can't transport cement very far can you explain what's going on here like how can you get to actually exporting so so the the CFO says that our plants are sitting on the coast and we have a dedicated port and and and and I didn't realize but Turkey turkey has incredible advantage on production of cement and I think it must be because then I should haven't figured all of this out but I think that two big ingredients of cement three big ingredients are limestone cheap coal and cheap energy those are the three things you need to make cheap cement and they have all three of these are cheap I think I have to reset the limestone but definitely the coal deposits Toki has no no petroleum it has a lot of coal and the the power rates are very low so their cost of production of cement is very low in Turkey and they are able to take that cement put it on a on a ship and get it to the east coast of the US and get it into the Horn of Africa and not on the horn I'm sorry on the other side on the on the west coast of Africa and in both cases they're very competitive and of course when they get into the East Coast they can't go very far but just the way geography is in in the u.s. we have high population density on the East Coast so once you're at the port you don't need to transport very far to get to humans who need cement and so basically when he explained the economics so I told him listen the devaluation makes you even more competitive and so so the CFO explained that their domestic cement business he said listen don't look at our numbers in the past I'm just telling you they're gonna be terrible in the future okay because he says the brunt of the financial crisis has not shown up into our numbers yet I said I'm so grateful for that candor thank you so much and and but he said look what's going to happen is that by 10% or 9% of volume that's being shipped I will it'll take me some time but I will get to 50% being shipped being exported because I was competitive before but I am way more competitive now because the exchange rate and so so this is an interesting business in the sense that it's almost as if the currency doesn't matter so much because if the currency drops further he'll go to 70% exports eventually and such and the other thing is the current equals the other way it probably is because the economy is getting better so his his domestic volumes start increasing so I just found it interesting that you know the only other company that I know of like this is Fosco in South Korea it used to always be that you couldn't really have a steel industry unless you had iron ore in country and what Japan and South Korea proved that you could just bring it in and ship it out and so Fusco if you look at it in South Korea you know their their port infrastructure most one of the most advanced in the world its second a you where the the ships that drop off the or are the same ships that pick up the finished product in just a u-turn very efficient logistics and so Fusco was able to bring all the resources in they needed to make steel and ship them all out and still be super competitive and all of this works very well because ocean shipping has become super cheap over the years so there's a great book you guys might enjoy it's called the box I think Mark Levinson is the name of the author and it talks about the whole incredible transformation we saw because of the container you know we don't pay attention to but container shipping transformed shipping and then I'm reading another another book which is even funnier in the same way I think it's called 90% of everything I think that's what it's called but this this lady goes on these container ships this journalist and she's kind of you know explaining the industry while being a passenger and she has a lot of funny experiences on these ships and it's it's her writing style is quite funny so that's another great book which is kind of a mix of entertainment and education so 90% of everything I think is is that name but that's another great book but anyway so I think one of the things to understand about ocean shipping is for practical purposes ocean shipping is nearly free I mean I can I can get from Turkey to the US cheaper that I can get 150 miles inland into Turkey you know so it's it's the poor commotions shipping so anyway hope that answers it and depressed industries last word I'm sorry I mean I didn't get the second part of the question what what what what was your part for a story yeah I mean I think I think generally speaking you don't want to bet on turnarounds I think you know most turnarounds don't work turn around don't turn around if you will so I think yeah I think generally those are not good bets I think like for example when we when I invested in the auto industry in fiat-chrysler the the industry was distressed but they had been structural changes to the industry which made the recovery almost for sure so I think you don't want to be you don't be investing where you are making heroic assumptions about magic that management is going to do I think that's not a good idea but I think you can you can make investments where we're basically you're you're you are basically you can see you can see the tread marks to where this is going and where it's going to end up so so I think that industries industries do get distressed even countries that get get distressed like Turkey but like for example you know if I looked at this cement business you know I can see how they've got flexibility where I mean actually what's happening in Turkey the exporters are doing great and and the other thing I noticed is that the local prices have not adjusted as much I mean what is adjusted immediately has been the imports those are adjusted but things that are produced locally they haven't fully adjusted yet so the exports are going to have a stronger advantage with the weaker currency and so you want to you want to see obvious things when you're going into these areas you don't want to make heroic assumptions about what management is going to do or what's going to change it should already be in place but it's just that the market is missing it I didn't fully get that competitors who have what companion knows that turn out whether Mozart I'm saying the boat turns out me what yeah yeah well that is very common you know we're mostly dealing with illusions as far as Moscow so I mean I think the the nature of the nature of capitalism is that capitalism is creative destruction and you know they used to be they used to be only one company that had that was in the Dow about 90 or 90 years ago that it was in the Dow today that was ge and the one company is gone now and like what I just saw in the paper is their new CEO has been unceremoniously been removed so I mean GE was a pretty formidable company and I think still in aircraft engines except what they have a plea formidable mode but you can see that even a company like GE basically is having a lot of difficulties and so I think modes modes get filled in far more frequently and far more quickly than most of us would think they should get filled in and so your defense against that is the PEO one so that's the only way to to protect yourself so the P ones are good for your health because you take your cash out after first after the first year or maybe after a couple of years and then you don't you don't particularly care you know one of the things that that I've been doing for the last few months is I set up this this waterproof waterproof Bluetooth speaker in my shower and I listened to the Buffett and Munger annual meeting videos because they posted all the videos from 94 till till last year on on the I think the the CNBC web site Buffett dot C + VC dot-com and so I think now I am at year 2001 I get through about half an hour a day which is great it's actually sometimes it's the most productive half hour of the day I find but one of the things Buffett was mentioning I think in the late 90s he was saying that I think this was in right at when the dot-com bubble was speaking maybe it was the year 2000 or 99 I think 99 basically he was saying that if you looked for companies that are making more than 200 million after tax in the United States and this is let's say in the year 2000 there's like four hundred of them four hundred companies in the US in in around 2000 were making over 200 million after tax a year and he said that the u.s. at the time had been around for like 225 years or 224 years and in 224 years of open capitalism with millions of companies you ended up with just four hundred companies that got to enough success to make 200 million a year and I recently ran that number for today so I said let's change that 200 to like five hundred because you know there's been all these years of inflation and and expenses and all of that and the number of companies today that that make more than 500 million a year in the u.s. is less than 500 and so the thing is that between 2000 and 2008 een a huge number of businesses got formed and there were a lot of businesses that were emerging at that time as well and one of the reasons buffered me at that point was that he said that this these companies making 200 million basically deserve if they were gonna continue making that money probably deserved a market cap over three billion you know if you'd give it a 15 multiple or something but the number of companies making over over three I mean at that time with a market cap over three billion was many times that number was in the thousands and part of it was at that time we had the dot-com bubble going on I think he wanted to prove the point that a huge number of these companies are gonna disappoint because they're not gonna end up with those they're never gonna produce that 200 million to justify the three billion and and so even today 18 more years of passed and we were and all these tech and everything else that's happened and the cloud and you know all these things that have happened and those numbers haven't changed that much and so the the bottom line is that if you're investing betting on the future of these companies growing a lot you have to look at the other side that not that many company may not that many making over the fence and and so the the mortality rate is pretty high and so there are two three lessons from that one is stick with the small and nano caps okay because a lot of companies are basically in capitalism never gonna get to 200 million or 400 million or five hundred million they just never gonna get there they have a higher chance of getting 10 million 15 million 20 million or something that's a lot easier than 200 or 400 million and the second is you know be very take care of commandment number four focus on a PA ones so I think I think modes you have to you have to approach morphs with a jaundiced eye I mean if I go back to this company in Turkey the cement company so one of the issues that comes up in cement and one of the reasons why it's such a terrible business in India is there are limited barriers to entry I mean there are some barriers in the sense that in India the limestone deposits are only in certain parts of the country access to coal also is a little bit you know it's not a given that you may have access to cheap coal or cheap power but a lot of people can get past those three variables and they'll definitely get past those three variables if you're making a lot of money so even in Turkey the this company I mean the thing I have to think about is if they really get into great times I mean today I think the thing is the replacement costs at which I question the CFO on the replacement cost makes it makes it prohibitive for them to put up new capacity but at some point if the numbers change then you know I'm not sure how strong those barriers are you know they may be they may be enduring for a while or they may not I just don't know right now so I think the thing is that you have to recognize that people are constantly looking it's just the nature of capitalism to destroy your mode it is just constantly looking to destroy your motor and so what you really want to look for and they're very few there are very few enduring modes so you have to really look far and wide one of the interesting thing about these enduring modes is many times the market doesn't Kreis them any higher than the non enduring modes you know sometimes market can't distinguish between enduring a non enduring and so if you can really identify an enduring more which are very few and get into those then life could be really good but but I think the pu.1 is your protection against the illusional motes if you will then I understand and getting poverty Flyers expected not even us how do you approach to I didn't get I didn't get that fully maybe admin can you repeat that sure yes in your book you talk about the Kelly formula and that mandates having a view on the odds yeah so the Kelly formula discussion in my book was a mistake if I had to rewrite it or come out with another edition I would just skip that entire I would not mention Kelly and the reason I wouldn't mention Kelly is that the mistake I made was that Kelly really only works if you get to make the same bet a thousand times and we don't get to make the same bet a thousand times in the stock market so if you if you had heads was 51% odds tails was 49% and you get to bet a thousand times and you bet heads every time you know and the payoff is two to one you want to make that bet as heads every time and over time you do well but if you only get that chance twice and it's 51 to 49 it's doesn't make that much sense and the outcomes could be all over the place so I think Kelly does I think is not useful for what we try to do we don't understand 99% of businesses 98 and combining that with the piece of marketing in the direction specifically so they're dead I find these things really interesting how you look at them so this is that one of the reason why you keep trying to find missed opportunities in those specific businesses and challenges I think I got most of that Arvin but can you just repeat just for clarity yeah you know so I think I think I think first of all circle of competence was not in the commandments because you know maybe should be but you know it's it's the baseline so the first filter has to be self low competence so if something is not in your circle of competence it just shouldn't be it should immediately be dropped from consideration regardless of the price so we have to stick to our circle of competence I think once we find that something's within our circle of confidence then we can look at the PIO ones and all of that and take it from there sometimes the peer ones make it easy to get something into a circle of competence because I mean like if I go back to the EBSCO example that the next two years earnings will plus the cash will equal the market cap basically what I needed to do was to handicap the odds of that actually being true does that statement I didn't really need to understand the business that much beyond that because there was no debt and if this was true then any fool could see that I still have the plants I still have the management I still have all the other pieces and the odds are high that it probably will make some money in the future so in that case I didn't need to really you know get into the weeds of figuring out exactly how strong or weak their moat was and whatever else because I needed to spend a lot of energy on the the resilience of the two-year cash flows more than anything else so I think if you get to these very low priced stocks it can make your life a lot easier I mean like I looked at I looked at some some companies in Turkey where I can look at like a at a sliver of their assets and the sliver of the assets exceeds the market cap and there's a lot more asset so I actually you know looked at some of those assets and so the thing is I didn't really need to have a view on every thing that they owned I just need to have a view that there is they own enough that there's a lot of downside protection and so I think the the thing is you first have to have the first filter a circle of competence and then after that you get into all these low price P or one other and and I agree with you that when you start applying all these filters there's not much left and mongers response to that is why should it be easy to get rich did I hear a call for stock tips [Music] well we do not duck that question but I would just say this that you can you can look at my holdings on Dane aroma I think the only one that shows up now is Pierre Chrysler because the only u.s. listed company that we own and that should be enough to get you to be quite rich as in competitive mode are you finding that as in other words yeah I know that that Mort is as close to a permanent mode as you can get so you know the thing is that what what what what I have done is that clearly the zero 625 fee structure is a fee structure that is very favorable point masters and it's favorable to investors for a couple of reasons one is that it takes away any incentives for me to be just an asset gathering machine because I don't get paid more if I have more assets I get paid if I perform and the second thing is that you know I just went through a ten year period I told you that in 2009 I was at the bottom of very deep well and we were down 70 percent and then every year the bar was moving by six percent and we finally crossed the high-water mark including the six percent in 2017 so I went from 27 2007 to 2017 living on fresh air and water and I survived on fresh air and wasn't what it's a very healthy fee so happy days are here again and but but the thing is that some of my investors when they came to me they came to me because they were enlightened about this fee structure being important but what I have done what I do once they become investors is I start brainwashing them and and over the years they become completely brainwashed and like after a few years of my brainwashing they are not interested in putting money with managers who don't have this fee structure so then they will come to me and say Manas you know I'm very happy having you as a manager I have some more money I want to put this with another manager but you know they need to have this fee structure can you recommend someone and I said I'm John you know I'm so sorry but there's no one else but keep looking maybe I don't know and you can find them and so what what ends up happening is that they a lot of them basically even if they put money with other managers they are not happy about the fee structure and they reluctant to put the money so I think that form of a bribe for funds perspective that moat is as relevant today as it ever was because for a sliver of humans and I think an increasing sliver of humans that fee structure is very important and and so i think i think that what i find what i find very instructive is that i can't tell you how many people I know young smart investment investment analysts who become managers or set up their own fund and I always tell them all listen go with a zero fee okay don't mess with that and almost a hundred percent of them violate commandment number one so like I met a manager recently and he's got like I don't know six or seven million and the management he just started and I told him I said you know I told you to go zero fee and you didn't go 0 fee and so he says yeah but moreish I I need the money so I said the money is 70,000 pre-tax and you have to have some savings otherwise if you haven't done well in the investing business you shouldn't be in the investment business managing other people's money when you haven't done well for yourself he says yeah I have I have a few years of runway if I don't get fees but I want to increase the buffer and so I sent over that's not good you you take the fee away and you focus on I said I said ID or 6 million 7 million you should be banging out 50% a year for 40 percent a year because you know there's a huge universe of opportunities you have that I don't have and so I 740 percent a year you don't even need other people's money just on your own money you'll get rich but all of these sermons fall on deaf ears so hence I have decided to put them in commandment form and I'm hoping there's behavior change but my history tells me they won't behavior change yeah I think that it's always it's always very good I mean you really want I mean like I said capitalism is brutal you really want protected modes so I think that I have I have what you would call you know I call it a barbell portfolio I think like about 55 percent of the portfolio which is all-time high is these P of once then it is about 10% cash and then about another 45% is what I call these enduring modes I mean so in some cases I paid up a lot more than PE or one because the mode was so strong but it has to be a really strong mode to pay up so like for example India India has pre credit rating agencies you know after the funeral business the next business that probably is extremely resilient but it's very hard to develop the mode is credit rating agencies but if you look at if you look at the US with Moody's and S&P you know and the financial crisis is a very instructive thing to look at these guys one can argue cause the financial crisis because you know without their triple-a ratings you wouldn't have had nearly as much damage as we had so they were they they precipitated and compounded the the bubble and the damage and they were called to task they were hearings there were all kinds of you know demands for heads to roll and both Moody's and S&P paid very modest fines nobody went to prison and life goes on so even after nearly bringing Western civilization to its knees they continued to endure and thrive what a beautiful business the other thing about the business is it has no capex I mean you know the funeral business you actually gotta buy land and hold it in all this stuff here you hired an MBA give them a desk in a and a computer and maybe your all-in cost is I don't know two hundred thousand or something and that person may do may generate fees that may be several million dollars a year and so like in India these rating agencies they collect about ten basis points typically sometimes I collect less on the instruments they rate and then they collect surveillance fees so they're the revenue then costs have no correlation with each other the 60% plus margin business and and there's no history of these enduring guys going our business even after they screw up really badly I mean the one thing they paid for is to give accurate ratings and so one of the three rating agencies in India we we now own 10 percent which is the maximum I can own I paid more than a PE or one but they've got good good growth engines and we just keep it for a long time for the one you just described them what price we'd have to go to for you say yeah I mean I think I think it's uh so let me give you an example of why buying hold is not such a good idea so from 1988 to 2000 the Berkshire investment in coca-cola which which both Arvind and I are enjoying Cheers Arvind and basically they put about a billion dollars into coke and I'm gonna exclude evidences to keep it simple but the billion in in 12 years went to 12 billion approximately so Berkshire got about 12 weeks return from 1988 to 2000 on the coke investment kind of mid 20s for your return very nice and then from 2000 to 2018 that it went up from a billion I mean from 12 billion to about 18 billion so in 18 years it went up 50% about 2.3 percent a year so they made about 25 percent a year in the first 12 years and they made less than about well including dividends every they made three and a half percent a year clearly and there are almost no modes in fact I would say this probably is no moat that is more resilient than the coke mode you know it's kind of like the ultimate mode and so here you have two guys were really smart you know the smartest guys in investing and they identified a great asset they defined at a great price they had a great run and but it hasn't been a great run for 18 years and I think Warren Warren at one point said I think in the early 2000s that it was probably a mistake not to sell coke of course today it doesn't make much sense for them because they have so much cash they'll just end up going to cash and at least they're getting a few percentage points and there's a new CEO and my change might he looks pretty good after a few decades of idiots running the company we're back to having intelligent life so anyway basically so if you look at if you look at a business like let's say let's say we look at MasterCard so MasterCard has had an incredible run over the last I mean since it went public I don't know the numbers but I think it might be more than 50 X in the last 10 years or so that it's been public it's been a huge home run and a lot of smart investors own MasterCard you go on Dane aroma you'll find a who's who of investors from probably taught Coombes at Berkshire you know we've got well I think I can pull it up if you give me a minute let me just pull up the August list of MasterCard investors give me a second Marvin because it's quite an interesting list yeah so the the people who own it in descending order of percentage of the portfolio Chuck Acura Tom Russo Sequoia owns it it's about seven and 7.6% my good friend guy spear will Niagara and Wally White's Tweedy Brown Tom Gaynor it's wasteful part of its portfolio though and of course Warren Buffett which i think is one of the two managers and such and and so on so it's a it's a it's an August list of people like for Tom Russo it's like twelve and a half percent of the portfolio for Chuck a creating it's a thirteen percent so if you if you ask me what's going to happen to MasterCard from let's say twenty eighteen to twenty thirty I wouldn't be surprised if the numbers are something like Coke you know in fact it would be if you if you run the math I mean I think it's at 50-times trailing earnings if you run the math using you know the market cap versus the the current earnings which is 2% of the market cap and then you start discounting that and then look at what kind of return you want and if I want a 25% return or something I mean it just you just can't get there so so I think the the thing is that it's not about in my opinion buying great assets and holding them forever I think I think probably the best thing to do is some middle ground where if it's a tremendous asset like MasterCard probably not a bad idea to let it run past 40 or 45 times earnings but I would say at present prices I would be a seller you know I would take my money in and also what are some of your personal traits that you believe have intermediate most years exist okay yeah that's a good question well you know I don't really have I don't really have a set schedule in the sense what I what I do try to do is I try to run an empty calendar so the only thing I put on my calendar once a year is the Arvind talk I just keep the rest of the calendar empty and and but basically I mean I think like like this week I think for example our winds the only car my schedule I mean I had turkey earlier this week but I can't think of anything on my schedule next week or the week after or the week after basically I try to make sure you know I don't like I don't enjoy meetings very much I do enjoy the now I enjoy the the company visits a lot because I think it's just you've got great professors better than any professor any business school other than Arvind's and and and you've got tremendous faculty and you are paying nothing you know and these guys are teaching you all kinds of things which is great like I love them the cement lessons I got from the CFO and Turkey was it was a blast and so I think the thing is that the first thing I learned from from Buffett and Munger is that you run an empty calendar as much as possible so don't clutter the schedule and beyond that basically a gentleman of leisure so it depends on what shows up on the radar I mean if I am hot and heavy you know looking at some business or something then I'll drop all the other reading and just go into that and if they I don't have enough of that then I'll go back to the the general reading and and so on so it just goes back and forth and I think that I think that that the traits that have helped me I think it's very important to be excited about life and to be passionate about you know your your day ahead or your week ahead or whatever else and so so I'll give you an example let's say you know I rarely do this but let's say I go have lunch with someone you know and all of other different but usually when I have these lunches after I come back most of the time I'm I'm not that excited about the way the time was spent sometimes I am most that I am NOT and so what I did over the years was I may those types of events very rare so you know you kind of try on different loves and you just see what fits and then based on what fits you just kind of you increase what we really enjoy in your life and you decrease what you don't enjoy so I think if you the part of this you can get to with you know psych testing myers-briggs and maybe with some industrial psychologists and such to really understand who you are and the closer you are to acting out your your inner traits - things are going to happen one is you're going to accomplish more and the second is you're going to be more satisfied and so I think it's very important - I mean all of you are I think urban are they mostly part-time or full-time yeah so I think in most of your cases unfortunately this at this point in your lives you don't have much choice about your schedule you know you pretty much you know you've got a busy schedule a lot of classes a lot of things you're learning but hopefully it's fun I think it should be quite a bit of fun because you have some some choice into what classes you're taking but once you once you get out into taking jobs or in the real world and so on I think then I think you want to be really careful about making sure that on a daily basis you are very excited about life so if you go to work for people don't take the highest offer take the person or group or company that you're most passionate or excited about also Buffett Buffett says that you know don't say I'll do X and then I'll do Y and then I'll do Z and after working for someone I'll do something else he says that's like saving sex for old age so I think you want to you want to get to weigh what your goals are relatively quickly in a straight path rather than a circuit circuit us part so I think those are those are the important things is I I call sternly look at how I spend my day and and I'm trying to always tweak it in a way that makes me energized and excited I mean I I would say that if I you know one of the things that's happening that I notice now is that it's hard for me to find enough companies in India to meet when I'm going to India now because I've met so many of them that now it's the travel you will get more intense to smaller cities and so on probably won't be as much fun I mean it was a lot of fun when I was meeting seven eight companies at a day in one city that will probably drop to two a day or something and and more flights and such so not as much fun but better than zero you know though so I think I think just just just try to get to a lifestyle where the glove fits really well and and tweak it to constant you ask yourself that I you are you energized and excited I think if you're if you're passionate and excited about what you're doing by definition you do it very well I think that's a great place to stop so that thank you so much this has been this has been fantastic and that's that's just a great note to end on to focus on what energizes you alright well I read there was another great session I very much enjoyed it and thank you and wish you all the best thank you [Music]

Channel: Mohnish Pabrai

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Id: 9tGjXPhnp-s

Length: 142min 23sec (8543 seconds)

Published: Fri Oct 12 2018