Mohnish Pabrai: "Intensive Stock Research Can Be Injurious to Financial Health" | Talks at Google

Mohnish Pabrai: "Intensive Stock Research Can Be Injurious to Financial Health" | Talks at Google



ladies and gentlemen please join me in welcoming Mohnish Pabrai thank you Thank You syrup for that generous introduction and great to be back in the Plex I think this is my third time here and congratulations on the stock getting past a thousand a little bit behind the other team but that's okay you can catch up so anyway I wanted to I wanted to share some thoughts about you know a subject that one of my motivations of sharing this is to try to learn myself so all of these are not kind of fully formed thoughts if you will but I'm hoping that some of these ideas will get pounded into my brain a little bit better because I get to talk about it and some of some insights might come from folks folks like you so so in in Los Angeles there is a large active asset management shop that some of you might have heard of its called Capital Group they've been around for about 85 years and they manage about 1.4 trillion and the Capital Group has a number of different funds kind of like fidelity but unlike fidelity which has the star managers like William Danoff or Peter Lynch Capital Group running Capital Group runs things a little bit differently so they assign teams of managers to manage a specific fund and each manager will for example manage a few hundred million or 100 million or maybe a billion out of the larger fund and then they collect kind of all the different manager picks and that's what comprise with the whole fund and so a few years back I was at a dinner at Charlie Mong house and he's a small group he posed a question to the group he said that he said the Capital Group a few years back had set up what they call the best ideas fund and so they asked each of their portfolio managers to give one stock pick their highest conviction idea and then they created a best ideas fund which was taking one pick from each of the managers and Charlie said that this best ideas fund did not do well it underperformed the benchmark underperformed the S&P and so on and and he he was asking the group why that was and then before we could cannot get further into the discussion dinner was served everyone kind of moved the conversation shifted and this thread that kind of left just got left unanswered and I think this was like five or six years ago and I would meet Charlie once in a while but either I'd forget or they'd be a lot of people around and I thought I had the answer for why this happened but I didn't know because God hadn't told me why it happened and so earlier this year I was I was with Charlie I said no this time I'm going to make sure this is the first thing I bring up so that I'm being closure to this issue so I said Charlie you know you might remember five or six years ago and I've brought up the capital groupie and he beamed he said oh yeah yeah I remember that really well and so I said you know so what was the reason the funded the best ideas fund in do well and then he said well it wasn't once they tried it several times they tried setting up these best ideas from multiple times and each time it failed and so he said before I answer the question why it failed I want to give you a story from my days at Harvard Law School and so he said that sometimes when they had classes at Harvard Law the professor would bring up a case where the kind of the facts was such that it wasn't obvious which side was in the right it was kind of could go either way and then they would divide the class into two halves randomly and one half would argue for the defendant and the other half would argue against the defendant and then the two sides went off and studied the facts and then they you know made their arguments and then after all of that was done when they surveyed the entire class overwhelmingly the people who had argued the students would argued for the motion believed strongly that they were right and the people who had argued against the motion believed strongly that they were right and again these were folks that before they had studied the facts they didn't particularly have a leaning one way or another and and then and then Charlie brought up that that basically he quoted this English actor you know sir so Cedric Hardwicke and and so Cedric Hardwicke basically was kind of little bit of a smartass but he said you know you're already fooled and he said I cannot he said I've been a great actor for so long that I can no longer remember or know what I think about any subject right and and and Charlie said that the even the temples and churches make you repeat stuff because as you shout it out you pound it in and and basically the the best ideas fund Charlie said was it was simply the kake's were the ideas that the managers had spent the most time on and and so when they understand the most time on these ideas they were the most excited about them and of course when they put all of these ideas together things can go so well and and you know in poor Charlie's Almanac he he talked about how the the human the human mind is a lot like the human egg so once the first once the first idea gets in just like the human egg it locks up and fields of any additional ideas from coming in and so you have this what you call the what he calls the commitment and consistency bias where basically we we get locked into what's taken hold in our in our brains and we see this even in the political discourse if you will you know if you talk to folks who love Donald Trump they can't see anything wrong with him and if you talk to folks who are on the other side they can't see anything right with him and then of course reality probably is some shade of grey in the middle there but what Warren Buffett also has a great quote he says what human beings are best at doing is interpreting new information so that their prior conclusions remain intact so I think there's also a second reason why the capital groups best ideas one didn't do well so the portfolio managers they have specialized so someone specializes in utilities someone specializes the coal industry someone specializes in artificial artificial intelligence and so on and so naturally if you go to the guy who's focused on the coal industry he's probably going to give you the the highest conviction coal idea that he has and it's kind of like you know a horse that can count from one to ten is a smart horse it's not a smart mathematician and what you want in the portfolio is not the best coal company what you want is the best talks and so this kind of siloed approach to people having specializations can lead to you know utilities for example it could all be over valued is a particular point in time for example and so you bring in a utility you bring in a coal stock and so on and so forth and obviously the end result isn't going to affect so good so anyway that was I think the second thing I I thought might be a reason why the best ideas fun didn't do so well but getting back to the human mind and and the human egg you know I I thought about how is it that we can kind of counter these biases you know because because it's obviously important because on one hand we we cannot make investments until we spend time studying companies but if you spend time studying companies you get biased so it's kind of an issue so so I was thinking about well how how do I try to build a framework which can get around some of these issues and so I came up with a few hacks you know I thought they might be take two or three things at least I can think about they can be useful and the first hack was that just being aware of these facts is is a huge advantage so being aware of the fact that we have a lot of biases our mind can play kind of games tricks on us you know the shutoff mechanism in the human brain and so on so being aware of that being rational you know Charlie Munger says they he hasn't been successful because he's smart he's been successful because he's rational and another thing that is I think a very useful approach is to be fluent in the other side of the argument so if you're going to go long ass talk it probably is a very good exercise to spend time developing a thesis on why to go short and that will force your brain to think about things that normally it doesn't want to think about and so the first HAC HAC is just can I be aware and and and let rationality prevail ii ii ii ii hack is kind of like what what buffett you know i just want to go back to warren buffett's childhood when he was a teenager before i get to the second hack so warren buffett when you the teenager used to go to this racetrack in omaha called a carbon it's actually nebraska spelled backwards so there's a carbon racetrack what he used to do is after all the races had been run he'd go and collect all the discarded tickets people had left on you know throughout the racetrack he'd collect them all and then he'd go through each ticket carefully to see if they were discarded tickets that were actually winning tickets because you know people are having fun they're drinking and so on and so sometimes they might have a winning ticket not realized that then he would always find a few of these free lunches if you will you know tickets that are actually winners but had been discarded and because he was underage he uses on Dallas to go to the window and collect on these tickets and so this is what another teenage Buffett did and then in 1993 there was this author who went by the name Adam Smith and he wrote a few books money masters and and so on super money and he was he was interviewing warren buffett and he said you know so Adam Smith says that if a if a younger Warren Buffett were coming into the investment field today what would you tell him to do so Buffett says well I would ask him to to do exactly what I did which is you know if you're working with small thumbs learn about every publicly traded company in the US and then Adam Smith said but this 27,000 companies and Warren Buffett answer was start with the A's you know and and so it sounded like a kind of facetious reply but really wasn't and that the 2001 Berkshire shareholders meeting Buffett said that when he started in 51 he went through every page of the Moody's manual twice and it you know several Moody's manuals were 20,000 pages in fact I bought one recently on eBay and you know it's it's it's it's got about three or four companies per page and it goes about you know 1,500 pages so there's a there's a lot of data there and he went through that one year two times and then in 2006 he was talking to students at Columbia University and and you know he was talking to them about going to the Moody's manual in 51 I'll just read that you know it was an absolute question of turning the pages on page 14 33 he found Western insurance you know 1949 they on 22 dollars a share 1950 $29 share and in 1551 the range on the stock price was between 3 and 13 dollars you know kind of less than half of previous year's earnings and he went to a broker and and looked at the am best manual to do nothing wrong with the company and then you know 10 pages later he found national American fire insurance then he says you know this book really got sensational towards the end you know in 1950 you don't $29 the share price was 27 book well 135 and then in 2005 he told the students just a year before he met them he someone sent him a Korean stock market guide I actually seen it was put out by Citibank and and he spent about five or six hours on a Saturday going to this you know list of you know Korean companies just some of the basic information and he picked out about 20 companies from that list and he put about a hundred million of his personal portfolio into those 20 companies and so for example there was a date on flower which sold about 1/4 of the flower in South Korea it had runnings of you know thirteen thousand one three years ago eighteen thousand one two years ago twenty three thousand a year ago and it had over a hundred thousand won in Bushehr and equities and the whole thing was going for thirty eight thousand won right so he did very well with his uh Korean Korean escapades without really knowing a whole lot about the businesses you know just kind of went through them just purely on a quantitative basis and then you know in in 2000 in 2011 my friend guy spear and I found ourselves in Warren Buffett's office and you can see on the right there's the Japan company handbook and I was actually familiar with that handbook because I had had a subscription to the exact same same book and it's when I saw that on Warren's desk it was quite a surprise and so I asked him about it because you know in 2011 Berkshire Hathaway they can't you know by Mickey Mouse companies you know and and the reason I was going through the Japan company handbook was I was looking at Japanese net nets you know companies trading well below their liquidation values and so on and and so I asked Warren you know why he was fooling around with the Japan gumming handbook and of course he puts on a poker face and doesn't say anything and then I picked up the book and guy and i dog-eared some of the pages of company that we had found that were interesting so without asking him we cannot mutilated his copy and and most of these companies what words up you know back of the book he said yeah and it's always the case it's really the back end is when all the good stuff shows up and then of course he doesn't tell us anything more about what he did with that but but that was that was you know during daytime hours at Berkshire Hathaway is what he's doing so actually the that the teenager at Aksarben and the young adult going through the Moody's manual and then the much older adult going through the Korean stock book and then the Japan company handbook all of these exercises are the same they are all exercises where you're spending very little time on a given either a given ticket or a given company and you're going very rapidly through I mean if you're if you're cycling through 40,000 pages with you know I don't know 50 or 80 thousand companies in a year you're clearly not spending much time on any single company and so what he was looking for when he was going through this was very specific patterns and when he saw those patterns he acted and so the pattern was it had to hit him over the head with a two-by-four and so either it had to be a winning ticket at Aksarben or it had to be a stock where it would just stop you in your tracks you know 100,000 and book values trading for 40,000 making 25,000 a year that's that sort of thing and so that brings me to the second the second hack which is which is basically two pair of praise Nancy Reagan just say no quickly so you know we have this built-in bias where once we spend time we get pregnant with the idea well don't spend a lot of time right and so you are rushing through a lot of stuff and only spending time on stuff that is looking like an absolute no-brainer and one of the things about the investing business which is so much better than baseball is there are no call strikes so we can let hundreds and thousands of ideas go by and it doesn't matter so it doesn't matter if we miss something that goes up 10x or 100x or a thousand x what matters is what we actually invest in so it's a very forgiving business from the perspective that we don't really need to know everything about everything we don't need to act on everything we can we can miss lots and lots of stuff and and it can still work out well and the the advantage so the you know just say no fast is what it does is it frees up a lot of time so if you're if you're going through companies and you know many times when I look at a business most businesses I look at I'm done in seconds you know maybe it takes 10 15 20 seconds because I'm I'm generally looking you know like for example on a typical day in the office people will send me investment ideas it's just great you know I love to receive investment ideas so you know it's MP at public funds calm feel free and and so when I when I get in and look at these ideas I just look for two numbers I look at what is the stock price or whatever idea is being pitched and what is the person saying it's worth and unfortunately most of the things I receive will be like the stocks at 12 and here's all the reasons it's worth 16 and so when I see something like that in about 10 seconds I'm done I don't even bother to figure out whether it could be worth more and the person missed it and so on I just assumed that some intelligent person who thought about it and I'll just you know give them full benefit of doubt that that they've got it right and and and so the same thing with most companies and look at them if if it doesn't hit me very strongly with with some intensity in the first few seconds the first few minutes I move on and if it does if it does have unusual traits I mean I think in 2012 I spend a lot of time probably two months doing nothing but studying Fiat Chrysler and General Motors and and so the it's it frees up a lot of time to study the businesses but you scanned a lot of stuff on the horizon before letting things in so that's the second hack is just they know fast and that kind of leaves leaves room and and of course if you are a voracious reader and you kind of buy into what Charlie Munger says is the latticework of mental models then many times things will come together in a very rapid timeframe I mean Warren Buffett talks about that he got a cold call from a banker who who suggested to him that Dairy Queen which was privately held with the company that was available for sale and so Warren said well we have our acquisition criteria listed as an annual report does it meet all the conditions and the guy said yes Isabel send me the numbers and about I think in less than half an hour Berkshire had made an offer and they had a deal and so there was no way Warren Buffett could have looked at Dairy Queen before because it's not a public stock but he knew enough of the business to understand that basically you know franchise restaurants there's a certain way you can look at them and you can figure out kind of what they're worth and what you ought to be paying for them and so so forth and and he went to that that math really quickly now he had a he had an investment at that time in McDonald's which he probably studied at some length and and that probably got him where he needed to be so the third the third hack which is kind of related to the second hack is is basically this notion that that Eli Eli bro talks about you know the the art of being unreasonable you know the title of this book is a great book actually and so broad is a very successful entrepreneur and so in the quest for investments be unreasonable so don't settle for you know this thing is at 13 and it should be 18 and that sort of thing I always tell people you know please try to send me things which are PEO one because V or one is great maybe P of two and I can deal with that you know single digit math is easier to deal with and and such and and and so basically there are there are over a hundred thousand publicly traded stocks on the planet there are always things going on with different companies getting into distress or high growth or various other things and because these all auction driven markets by definition they have wide swings I mean you can throw a dart at a New York Stock Exchange company look at the 52-week range on the company and it would be something like $75 $150 and if you pick a random home in Palo Alto that is not the fluctuation in a stock price in the in the home price and so action driven markets have this nuance where they kind of you know either get euphoric or they get pessimistic and they buy do both in the and so that's what leads to the distortion that mispricing and that's what we can take take advantage of so so those are those are some of the thoughts I really wanted to share with you again this is kind of work in progress I still trying to get better at it and I just want to make sure that I am aware of the fact that spending time on on companies is likely to make me biased and so I'm hoping to get better on that so with that thank you sir Rob thank you so much funny so monisha I'm going to pick up right from where you said you know the stock is at 12 your target price is 18 let's bring the element of time into the picture as well if something is 18 today and going to be 36 tomorrow and so on how do you look at time horizons in in your analysis yeah so you know 12 to 18 is not very interesting because that's ahead of 50% of 50% sounds like a lot but one of the things is that in value investing there's a free lunch and the free lunch is that the greater the margin of safety the higher your returns and so if a if a company's worth 18 if I can buy for four I've got a huge downside protection in terms of what might happen and the thing is businesses capitalism you guys see it at Google is brutal dog-eat-dog I mean it's it's a and you're at the cutting edge of all these guys who want to encroach on your territory if you will and so businesses are are not kind of steady state characters steady state entities they fight for the survival and so when we are trying to project the future for business we should demand huge margins of safety and so that's that's another reason why the 12 to 18 is not that interesting because it's not so much the time frame yeah so if there's a catalyst in place let's say some company's going to be acquired for 18 in two months and it's sitting at 12 well if that's happening and the odds according to you are 95 percent IRR is going to close sure then you can go for it because that's everything is encapsulated I guess my question is more around you know quality versus nest net asset value bar games so you could be looking at a net asset value bar again that is you know worth $18 selling at 12 versus looking at a quality company that you think is worth maybe 18 today but you know five years from now it could compound to a much higher value as well and that's where whereas you know a net asset value bargain or a commodity company five years from now might not necessarily have a runway I mean I think that it is always better to buy compounders it's always better to buy growth if you're buying an asset because it's cheap you're upside limited and so buying buying buying cheap assets in my opinion is it's not the name of the game I think what you really want to get to is you want to get to high growth where the intrinsic value increases over time but you want to be extremely unreasonable mmm-hmm high growth at a PE of one can we do that can you do that you know so so what you really want is I mean what I'm saying is that I think any fool can see that Amazon will grow a lot Google will grow a lot Facebook will draw a lot it becomes a lot harder to figure out what the returns would be when you're investing today they probably still have good returns I would say that that these are these are very durable modes and so they probably wouldn't be around a long time and they probably are great investment even today but you know we have a hundred thousand stocks to choose from mmm why not do some digging without spending too much time on one and why not try to find that diamond in the rough and and then take it from there you know like for example Charlie Munger said that in 2002 he read Barron's for 50 years so from the 1950s until 2002 and probably every issue of Barron's has at least 5 or 10 ideas and so he said for 50 years he read issue every week that's 2,500 issues and 25,000 stock tips and he didn't act on any of them he acted on one barren stock tip in 2002 which was tentacle by 2004-2005 he had made 8x on that investment so tentacle was under distress at the stock went like a dollar 60 eventually it went to 55 dollars he was out at you know 15 to 20 dollars a share but he made he put 10 million it became about 80 million and two or three years then he gave the money to Lilu and that money is now about my guess is around 500 million or so so this is happening in our time this is not from 1960 story from 2003 to 2007 teen without writing Google or or Amazon he got there the 50 X 30% a year or something so so the thing is that what caused that when what caused it was extreme patience coupled with extreme decisiveness coupled with being very unreasonable in terms of what he wanted in terms of valuations and that's the mantra so one of the nice things to see at this year's Bookshare meeting Omaha was mr. buffer and mr. Munger being very candid about how you know they've been changing their own ideas about investing and also being very candid and open about admitting mistakes so in that same spirit I get you know what we'd be interested in is you know learning from you maybe asking you if you are willing to share some of your insights from things that you've learned from you know over two decades of investing now specifically from mistakes sure well first of all just just in terms of what happened in Berkshire and Omaha and I think was it was a I hope enough for me and I think what what Warren pointed out were the four largest market captors nurses in the US and I think it's Facebook I think Amazon Google Apple Google Apple and think might be Microsoft in there too not sure but the top four or five of them are about two and a half trillion also in in value and it's almost 10 percent of the value of the entire all the public equities in the US and he didn't he didn't say it was anywhere near obvious that these were in bubble territory in the sense that he said these are businesses all of them can be run without capital they run on negative capital so they have to they have two characteristics they're running on negative capital and they are very high-growth and when you have a business with negative capital needs in very high-growth markets those those are the holy grail of investing and so so he regretted the fact that in the case of Google you know the founders had visited Omaha they wanted to get warrants permission on the on some usage of his letter and principles and such and many of the Google principles of Berkshire Hathaway principles which is which is fantastic and so he says that they were customer of Google they were spending on Adwords it was obvious to them it was a great business but he blew it and so that was a great insight I think one of the things that asset value investors have to be cognizant of is that there is definitive change taking place in the way the world works and and clearly it's concentrating into a few companies which are doing an excellent job and so so not being able to have exposure to those businesses is a negative but on the other hand they're 100 ways from Nirvana you can get there with Tenneco and Lido as well so in terms of I think the the lessons over the last couple of decades you know one of the one of the biggest lessons I've learned is to not be focused on on cheap assets historically I always wanted to buy things that were cheap i discounted the value of quality my my ticket at this point is I want both you know I want to get more unreasonable I want cheap and good or better yet cheap and great and so the idea is that you sit and do nothing for long periods and you study areas where that may be possible and they will show up from time to time because you're such a large base of auction driven companies that you can get there so that's and another another learning I've had which has happened more more recently is to focus on stocks in India for example mm-hmm so tell us a little bit more about you know specifically you know outside the US because I think your US portfolio is very easily seen through a 13 F for example and you you are the master of cloning who's popularized this idea so people are using it for you but tell us a little bit about well I was surprised myself that more than 70% of the assets in public funds are sitting in needs which are domiciled outside the United States and that's a the highest number it's ever been and have usually basically been very heavily in the US so and part of the reason is I mean none of this is by design I'm just bottoms up stock picker I just go wherever I can find opportunity so it just kind of happens to be that's where it led and I think India is probably I think around 25-30 percent of that pie somewhere in that in that range and what I find interesting is that India has you know probably 5,000 public companies and Pali 4,000 of them are not followed because they're small family controlled businesses now there are a lot of governance issues there are a lot of honesty issues there lots of different issues so one of my principal used to be that I never met management and I never visited the businesses because all of that is very inefficient in in terms of time and such and I think meeting management's one of the negatives is that you're talking to people who are exceptional at sales and that can distort been grams that have basically lead to a negative distortion but one of the changes I made kind of destroying one of my best loved ideas was I decided I couldn't do India without meeting management's and I think India is a lot more like private equity with some of the smaller businesses so I started making trips where I've been meeting various management teams in India and those have been exhilarating I've really enjoyed I mean I met some companies that are outright frauds it's kind of fun to sit in a room with the frauds and just see what they look like the no horns growing and and then they're there others which are exceptional entrepreneurs with great runways and great governance and all of that and so this is very early in that process and I think I've visited maybe or met with maybe a couple of dozen companies monisha I guess for for young students and young individual investors who sort of listening to this conversation maybe later on YouTube could you share with us an example it doesn't have to be a current investment could even be a past investment outside the US could you walk them through how you found something like this so that you know they get the same inspiration around these ideas sure well you know like I said you know I think on any given day at work one two a three idea show up which is great and most most don't take more than a few seconds but I I remember about a little over two years ago some person I didn't know sent me I think a 10 or 12 page write-up of a company and ever heard of company in India called 'rain industries and I never heard of this company never heard of the guy who sent it to me but I did a quick check on the two numbers that I care about and which is the current stock price and the target and they seem to be like a zero added to the current stock price to the target which got my attention no that's my kind of guy and and so I said you know let's let's read what's going on here and see what cannot drug this guy's on and and so that's why I I sat down to read the report and I have to say it was a immaculate time it was really very well put together I think the report is on the is on the web if you do a search for rain industries and the guy who sent it to me his name was a name is Rajiv purse Rita I haven't met him yet talking he lives in Delhi and and so everything he was saying about the business and the way he explained it was awesome I mean I think that there was nothing I could possibly find so the only thing that was left for me to do was to ratify the facts so he was stating this is the businesses companies in this is where it's going this is the market gap this is what it's worth to see why it's worth so much so I just spent probably not more than a few hours just you know testing every that every number or was accurate and that everything that was being said the report was the way it is and and I it wasn't a large business I think the market cap at that time was about two hundred million dollars and I in a we can't in India we can't buy more than ten percent of the business so that's what we own we were on about nine and a half percent of the company and so far it's a tripled in price but you know it did it didn't do anything for like about 20 months and then in you know six months it came alive and I think it will keep going for a while but that's an example of where unreasonableness paid off so Ben Graham used to have this rule maybe a heuristic more than a rule if something doesn't do too much much for three years or four years you know in and if I'm recollecting correctly you know he would just say let's discard this and rotate you know with a company like GM I guess you know which hasn't really done much since the IPO how do you think of this heuristic yeah I think it's a very good heuristic and especially it's a very good heuristic when you think about all the biases that can creep into our brains so we have a large position in GM we have some gain we don't have a huge gain certainly certainly the our the analyze returns since you've owned it is pretty low the stock is cheap I am I am reaching the realization now maybe it's right or wrong which we'll see on the future unfolds that we may not get much of a return even though the cash flows and everything are likely to come in simply because the market is always concerned about what happens in the future and it will always be concern so my thinking of the GM position at this point is to think of it as cash and think of it as available for something more unreasonable and so we will see okay so I have two more questions for you one is you know just a little bit about duction er I think one of your students this year will were in the top fifty All India ranks in the joint entrance exam maybe could you tell the audience and folks on YouTube a little bit about how that you know started and where it is now in its journey because I think that is also a very big compounding engine for you sure yeah well that the thing is like like I say I'm a shameless cloner it's good to be a shameless cloner and I probably influenced by Buffett that you know the best course of action in terms of wealth is to recycle back to society I think if you're trying to give it to your gene pool in general do more harm than good so I knew a while back that we wanted to recycle back to society and I was looking for a cause that resonated and you know delivered can a high social return on investment then I ran into a guy and Bihar who run this program called super 30 which I was very impressed with in 2006 and so I I met him in 2007 I wanted to fund him and skate that program basically he was he was picking up kids who came from very impoverished backgrounds in Bihar and he was spending about eight months with them thirty of them at a time and then almost 100 percent of them were going to the IIT so if you're taking a family where the incomes are 50 to 100 dollars a month and you're getting kids to IIT who then get basically hooked into the global economy where you know they're making thousands or tens of thousands a year in India and even more than that if they went to into places like California that was a no-brainer and Plus that permanently kind of unshackle the family if you will and extended family if you and so when he said he didn't want to kind of scale then I said okay you know why don't we just clone his model so I asked him if he had any concern with me cloning he said no that great feel free I'll try to help you as well and so that's what so dr. Shah was set up as a vehicle to try to clone super 30 and what we do is we basically identify kids who are poor but they're very talented very gifted and in India if you get a kid into IIT there's a very high government subsidy probably eighty ninety percent government subsidy so the education is almost free just a few thousand dollars or probably like two thousand dollars a year is what you pay and even that you can get loans and so on so the the the easiest way to to reach or to lift a family from poverty is if there is high IQ in that family you can get them to IIT and and then get them out so we sent duction an accent about north of a thousand kids so far I have cracked the iit interest exam been accepted by the IITs and now we have about seventy percent of our kids every year we'll make it through which is great and so we we have about eight hundred or so kids in our program at any given time and we are scaling that up I think wheel my next year will be at over eleven hundred well and then we'll keep going from there well congratulations on that well there's a great team this works as well awesome so one final question and then we will roll it out to the audience could you give three book recommendations I know you read a lot so I am only going to ask for top three and they have to be other than poor Charlie's are gonna and Buffett biographies for the folks in your audience here as well as on YouTube sure I mean I think to two of the books I think books I'm just about to send to Warren and Charlie so I think you guys might enjoy it so one of them is called the beak of the Finch I think Jonathan whiners in the name of the author it's a very old book I think it came out 24 years ago I don't know if you guys we're all starving related yeah so I was fascinated by the book I think that it's talking about a couple of researchers who spent about several months a year on one of the very small islands and Galapagos and they did this for more than 20 years and to their surprise they saw evolution in real time with something Darwin didn't see so I think it's a great book unrelated to investing but I think it's it's a great read and then the second one is is a book called am I being too subtle and that's a book by Sam Zell and some of you might have heard of Sam Zell and this book I think what I would recommend is to listen to it rather than read it so it's a good way to kill time on the Bay Area expressways it's not in his own voice right yeah it's in his own voice it's it's in is kind of raspy Sam Zell voice yeah and so I've been listening to it in my car and and I think there are a lot of lessons a lot of lessons for investing and you know operations and culture and so on and Sam is very candid in your face about the sharing and so I think that's a that's a that's another good book and the the third one which I'm which I'm rereading and I'm learning a lot from is is the other the other biography on Charlie Munger damn right so I know you said don't go there but but damn right came out probably 17 years ago yeah and there's a lot of good stuff in there in terms of some some of the different things especially some of the the evolution Warren and Charlie went through from buying cheap assets to focusing on on better businesses and and so I think there's a lot of lessons there and also there's a lot of lessons about in many ways I think Charlie Munger got dealt a bad hand if you will far worse hand and most of us are dealt you know he had to deal with the debt of his nine-year-old son he had to deal with you know blindness in one eye after a cataract operation that went south and then just the extreme pain of eviscerating that I and so there's a lot of human qualities you can see in that book where he's really been very stoic about that in the sense that when there's been kind of pain and suffering in fact like like he's he's absolutely rational about his eye he says at the time for the procedure he was going through there was a 5% chance of complications and so his rational side said you know 1 out of 20 I want to get it and if it happens to be me that's the way it is you know so admonish before I rolled it out connects good and wonderful question what does your average day look like oh my well my average day so what I want to think I learned from from Buffett is to not put stuff on the calendar so I try to avoid acceptance so Rob calls me I try not to put things on my calendar in terms of what I have to do I like to have a kind of a very free day if you will and so actually quite frankly when I I usually sleep late so I usually roll into work pretty late probably past 10 o'clock usually and I don't really have an agenda of what to do I just kind of I obviously have a lot of different reading materials and size of them I'm going through I'll see what's going to come in the Trans Am over the day if you will and then decide kind of how I want to spend my time and what I've one of the things I've added now recently is every quarter I'm spending you know about seven eight days in India so those days I usually just kind of filled with meeting companies and such and and in the meantime I'm actually trying to learn more about these businesses before I go meet the people inside so some of that kind of direct some of the reading but that's basically how the day is structured is to try not to put a lot of things on the schedule and to try to keep it as as freeform as I can so you don't have a McDonald's on your way where your order define hi do I know I guess I do have a McDonald's on the way I do sometimes pick up McDonald's I have never tried to calibrate the spending based on the market so I leave that the warned I take a nap every afternoon so afternoon naps are great they've got pods here to sleep yeah okay so please make sure you take advantage of those and and yeah so basically I am pretty refreshed I think by the evening so I can then spend more time with the reading and such our you know reading most of it happens electronic or I don't read electronic at all tell us why you know I just have never I mean that's a preference I've just never had a even my emails most of my emails don't come to me they go I mean even if it's addressed to me it goes to my assistant and they get printed out and and I get all my emails at 11 a.m. and by about 11:00 I get a folder every day at 11:00 and the folder has anything I got to look at any mail emails things to sign whatever is required in terms of any admin it all shows up in a folder at 11:00 and by about 11:15 11:20 I'm done I'm done with whatever a response is whatever and my response is usually a chicken scratch you've already gotten some of those right the chicken scratch right on the thing is not easy to make our work yeah sometimes they bring it back to me I can't read it myself you know so that's really bad but it doesn't happen too often but so III think that you know I agree with Charlie that the multitasking that we have going on today in society is a net negative I think it just it doesn't you know we're trying to do three things you don't get to deep part mmm and I think so I'm trying not to do that and so so that's that's how I've structured I think Warren and Charlie are even better than that because they don't even have I mean Charlie doesn't even have a computer you know III don't know whether he has a cell phone I don't think he has a cell phone either I think mr. Buffett has like sent like one email that according to public domain greater yeah the one email became part of the you know the gates antitrust and he decided after that that was the end of his email writing Dave I think he's done three or four tweets yeah he's done a few tweets here so it's getting there yeah all right so thank you so much let's open it up for audience questions yeah so a bullish can you share your insight on the way market has reacted to the new administration because to me it's counterintuitive I mean so you I mean most of the corporations are kind of opposite to the way government is functioning and still after we have a new president market has gone gangbusters so I mean and planning is something that the new administration is kind of lacking and to me things like growth doesn't happen as as an accident but there needs to be a lot of planning for that so any sure insight on that well so the the first thing is I I think there is not much I can gain from having insights into what the market has done or will do because you know I'm not making market pets if you will in the sense that we're not trying to figure out when to buy the SNP or sell TSP if you will so quite frankly that that question is for me not very relevant because it doesn't matter but I would just say this that yes we've had a rally since Trump's election but I think a bigger kind of underlying story may be that if if interest rates stay low for an extended period of time then present valuations may be a bargain the stock market actually may be cheap and of course we won't know that we won't know that till we get to 2020 2025 and so on and see kind of where we are so markets are discounting mechanisms if the market or the crystal ball which tells it where interest rates are in 2025 or 2030 then you can get to some numbers accordingly the best that I can tell about the market is that there are very few bargains and there may be things that are either fully priced there may be some things that are overpriced but I don't see things being egregious in the sense that I saw I saw valuations in 99 2000 d'etre egregious you know pets.com and so on and we lived through that at least I lived through that and but today when you see some of these companies with these huge market gaps like like alphabet or Amazon or Facebook and so on there is a lot of reasons why you can justify that because there's a lot of underlying logic which it exists with pets calm and so so there is a there is premium pricing you can say on some assets but perhaps those assets deserve 3-month premium pricing so the best thing is I would say that ignore the market because it really has no relevance and focus on the minutia specific business a specific stock price and hopefully low single-digit B so I was very surprised to find out that you and but it still use those books to look for stocks I mean these days is so easy to find information you can just go to guru focus use the stock screener find p1 you can do that in like half a second why does I still work right so actually that's oh that's a great question because in 2006 when he invested in de Haan flour in Korea you could have had Capital IQ you could have run any screen you wanted it were popped up all kinds of companies and if you believe that you know there are tens of thousands of people with lots of assets who have capital IKEA subscriptions that stock should have not been at that price but just like the dollar bill on the ground where the professor says it can be real dollar bill because in an efficient market there won't be a dollar bill on the ground the reality is that speed of access to information is not the determining factor in leading to market efficiency I think that markets because their auction driven and because they're humans involved they vacillate between fear and greed and at that time in the Korean market for whatever was going on then there was more fear than greed and so I find for example even today there are lots of bargains in South Korea amazing bargains and give an example well you know we're buying you know we're buying right now so we can't we can't quite go there because these things straight I mean some of these things you know I'm barely able to get $2,000 a day of the stock you know and we have a 500 billion dollar 600 million dollar portfolio so we're nibbling but we're buying things that two-and-a-half times earnings and I'm buying two and a half times earnings of a business so I'll so like for example I'll send you in a treasure house treasure hunt is more more exciting than giving you the Treasury right sure it's always better to hunt for the treasure so I mean I haven't I have an insight and I don't know whether the insight will be right or wrong you can tell me so we know that there is lots of different permutations and combinations of changes happening in the way humans travel right so we used to have cars and public transport and taxis there was that right now you have uber uber pool you might get two autonomous remo we might there's a lot of different companies we have some of you might be familiar with via in New York which i think is great and so the end result is that humans have a lot more options available for transport and mobility and the price is coming down and also you have you know low gas prices and so on so it is an absolute certainty in my mind that per capita miles being driven in some kind of public transport for humans is going up I mean I remember when I was a student you know I'm a bicycle and mobility very restricted when I was poor I didn't have a lot of places I could go now I just see with my kids you can go anywhere so if miles driven per human are going up how can you play that well one way you can play that is tire companies okay so no matter what happens there I'm almost sure there'll be more tire sold five years from now or 10 years from now versus today and actually if we get to electric cars taking off you know they warn weight reductions so then they make those tires paper-thin only have a Tesla here no Tesla owners is a value crowd an interesting article value crowd all right so you know that like the Tesla's and the Leafs and all that they have these special tires which don't last very long and it cost a lot because they want to keep the weight down and so those are even better for the tire company they keep wearing out very fast so my take was that tires will do well and so I made an investment in a company in India which is really cheap which made one of the ingredients that goes into rubber that goes into tires and that's that's I think that will do very well and the other was company in Korea which is in one shape or another in the tire business and it's going actually it's going to grow quite a bit it's actually even without these demographic things happening you'll still grow and you know if I'm buying at two-and-a-half or three times in three years I have all my cash back so that it's a good beauty of P of three so it's a tire related company in Korea with a PE of three for the second-hand yeah have fun so I wanted to understand how do you decide when when these three P stocks or not in a three piece talk stocks like Amazon and Google when they rally so much how do you decide when to sell stocks that have worked for you and a quick follow-up do you short I'm sorry do you also short stocks you short sale yeah so I have never shorted a stock in my life I will go to my grave without ever having shortlist talk I would suggest you follow that same mental model if the only thing you learn over here is to give up shorting if you are a shorter that I think it'd be our well-spent so it's a great question so each of us I think has a limited quota of 100 baggers that will show up in a portfolio I think I have had more than my quota of 100 baggers that I was smart enough to buy but too dumb to hold and there's a long list you know I used to own court of Mines our bank in 94 I 150 times I probably got like 30% return after 5 years sold it you know blue dot I test to there's 200 bags I did capture I owned Amazon in 2002 I think at $10 a share I think was 10 percent of our portfolio then and I got 40% in a few months and I was out you know so it's great but anyway so what I have learned is that don't don't sell the compounders when they get fully priced and don't sell the compounders when they get overpriced only sell the compounders is when it's absolute usually obvious to you that it's egregiously priced the big money is in writing the compounders and but you have to try to get in on them at a reasonable valuation and and that you have to be right on the fact that they are compounders and so you know it's a forgiving business you can be wrong quite a few times and still be ok so Muniz does that by corollary mean that your buy versus hold criteria may not be identical it is not identical that's correct I mean this is this is a very difficult lesson for a you skate like me it was a very difficult lesson for Warren and Charlie I think they learned that lesson from cease candy that was a seminal purchase for them and and they saw in that case because of the controlled business they could just see the way it mushroomed and and so I think that if you get if you get into businesses where management is exceptional or the moats are exceptional or in the case of Google you get both you know buy one get one free which is great then then I think those are businesses you just don't want to want to touch I met I met some folks in India in some of these meetings that blew me away you know I mean in some cases I I just I just looked at and said you know this is a there's tailwind but in additional tailwind there's a phenomenal operator and and and the price was below liquidation value and so those are those are all good tenants oh so that's what you want to be one look for it but clearly in my opinion I don't buy the notion that you buy your portfolio every day you know to me buy and hold are different and the Chiefs cadance me still wants to not pay up but I was able to at a point in time get to where Google was just at the edge of making it so we've made it which is great and and that's the key is that you want to ride you want to ride the compound us for long periods this operated by any chance Caramba or because I know you care we have any a pyramid is a great operator that wasn't the one is total liquidation value but great operator and but no they're they're many in India I think who are young and great ethos great great dr.p Rommel is an example of a compounder and I think that if you own something like P Rama I would just ignore the price for a long time as long as RJ is healthy hmm related question we first mentioned the best idea portfolio thinking how that would work in terms of management positions and bet sizing as curious how you think about bet sizing relative to margin of safety in your valuation in the company yeah so I think it's a good question I think bet sizing just gets down to conviction part of it gets down to whether it's other people's money or your money and and also kind of kind of where you are in life I think if if you're a young engineer at Google you know you have many decades of productive earnings ahead of you and so the key there is to spend less than you earn and put it away into places that make sense so I would say that probably is a mistake to have in that situation more than 10 or 12 positions and I think there's nothing wrong with having money in an index fund or a few index index funds I think that's a good way to go and so if you didn't have a lot of ideas then you know you go you're going to soft money away especially in a 401k with matching and so on you could do that and then occasionally when things show up on the radar which are no-brainers then you can switch some of the index fund money into into a actual stock idea and such and take it from there so that's that's how I would do it great I want to thank you so much money for being so generous and for sharing your time with us and thank you all for being such a wonderful audience well always a pleasure to be here and I can check a box that alphabet is doing okay [Laughter] you you

27 comments

  1. anyone know the right spelling of piramal & AJAY the manager, the indian co he talked abt? somewhere near
    https://youtu.be/kNAuELYN5X4?t=4214

  2. Mohnish Pabrai is totally genuine, I know him personally. He is one of the humblest and finest human being I have met. He is honest, friendly and down to earth and lives a simple non-extravagant life. As far as investments, his results speak for themselves (outstanding). He has given more money to charity than most would make in their lifetimes. As far as some of the negative post's on Pabrai, I am skeptical of the character of these individuals.

  3. https://www.youtube.com/watch?v=OSi3TTKk0rI&list=PLngpzNxcKv5RSge9PHV7fRF9oNlPHNTBD

    Dhandho Investor audio book

  4. If you could steal someone’s personality, this guy has successfully done that by pretending to be Warren Buffett. He picks up a book, reads it, then decides he needs to go on the lecture circuit and tell people about his “wisdom”. It’s total BS.

  5. This guy is a clown. If you call him out on Twitter, he blocks you. He wouldn’t last a second with a real financier.

  6. Year to date fund returns as of June 30 (2017) were 28.9% for Pabrai's PIF2 fund, 28.6% for his PIF3 and 20.4% for his PIF4

  7. The idea of CLONING … sound Good Is it really.. worth as it seems to be … What's ur views
    plz COMMENT

  8. I am a Korean Auto analyst and wondering which Korean tire company he is saying is. There is no such chip tire company with P/E of 3.

  9. Everyone believes they have an angle and then further believe they can make a buck broadcasting it to the public. If you believe you fit the bill researching any company and they falling pray towards buying it because of that fact, you lack something! The astute investor is not into holding stocks because he loves a company. This has some deep ramifications every investor should be knowledgeable about — learn about these and become more aware of self.

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