Podcast Memo : Mohnish Pabrai on Cloning & Compounding
Value investing
Link: Episode #495: Mohnish Pabrai on Cloning & Compounding
談教育
Mohnish:
Yeah, I mean, I think the correct age to start this is in high school, I think ninth or 10th grade is just perfect. And it’s really a big failing of the education system that it’s not given… Because it wouldn’t take much time. It would not be a very long curriculum, or course, or even a discussion. But the important thing to really get across is the power of compounding, and what Einstein says, the eighth wonder of the world. And the thing about compounding is, we are all taught compounding in math. We understand from, a mathematical point of view it is, but from a money point of view, and impact on your life point of view, because it’s on a log scale, and because of how the numbers change over the decades, no one ever goes through that.
So just the simple thing about the rule of 72, about telling people, “Look, if you have a 10% return a year, your money doubles every seven years. If you have a 7% return, it doubles every 10 years.” And even if you get a 7% return, the power of starting early, basically it’s how many doubles. We know that, but the high school kids need to know that. And what is lost in all of this is that if an 18 year old is fully familiar with this, and he or she knows they have a 60, 70, 80 year runway, and the 60 or 70 year runway, you are even doing 10% a year or something, or somewhere around that, you could have close to 10 doubles in a lifetime.
10 doubles is 1,024. I mean, whatever you save at the age of 18, it’s multiplied by 1,000. If you saved $1,000 when you were 18, that would be a million 70 years from now. And at 19 you would save some more, and 20 you would save some more. So the important thing about spending less than you earn, putting it into a compounding engine, and not messing with it. People have 401(k)’s, they leave jobs, they go to Hawaii, they pull all the money out, they pay a penalty, and then it’s gone. And then by the time you get to 70 year olds, their 401(k) is $40,000, or $100,000, and it should be in the millions. And so this is such a simple low-hanging fruit.
談投資勝率
Mohnish:
Well, there’s several that come to mind. Well, the first one that comes to mind would be investing in a place like Turkey. I’ve been going there for about five years, and I’ve talked to a lot of smart investors about what I think were total no-brainer investments, and they can’t get past the country, I can’t even get to the company. The second thing, which took me also a long time to figure out, and I realized actually this year when Buffett’s letter came out is, even Warren Buffett has only made most of his money on about 4% of the bets that he’s made. It’s one out of 25 bets that has moved the needle for him. And this is Warren Buffett, he doesn’t make mistakes, and is so particular, and so careful.
And so investing is a very unusual art, where it can tolerate a very high error rate. But in order for it to work with a very high error rate, you have to have held the ones that you truly had high conviction and truly understood for a very long time. And so I think one of the extreme cases of this is Shelby Davis, The Davis Dynasty, and Shelby was very early in investing in international insurance companies, and he bought a zillion of them, I mean lots, and lots, and lots of bets, they were not concentrated bets. A lot of them were less than 1% of the assets you were managing. And almost nothing worked, but The Davis Dynasty, they ended up with a very large net worth, because one worked. They were very early in AIG.
And the thing is, whether he made a great bet or a lousy bet, he just kept them all. He never sold. And so the one great bet, which was AIG, which was less than 2% of the total amount of money they had ended up becoming 80, 90% of the fortune, and it was a big fortune. And so basically, this particular notion about investing, which is… I mean, anytime we look at a business, we have a view on what it would look like five years, 10 years, 15 years from now, and most of the time we’re going to be wrong. That’s just the real candid answer on that, and sometimes you’ll be right. But to actually harness and collect the fruits of that labor, you have to have held all the wrongs and the rights for a very long time.
And that’s when people get into trouble, because most mutual funds, they’re going in and out of stocks all the time, and all of that. And the index, the index does so well, because it’s too dumb to know that it owns Microsoft, and too dumb to sell Microsoft, too dumb to sell Google, too dumb to sell Facebook, and it just ends up in a place where these great businesses stick in the… The only time the S&P throws a company out of the portfolio is when it’s so long in the tooth that it’s obvious, they’ll never throw out a Google until Google’s lost it completely.
不做的重要
Mohnish:
Well, so I think the framework you use when you are a large owner of Apple, or let’s say the founder of Apple, let’s say Steve Jobs’ widow for example, is not to do anything until there is a permanent secular decline. And we realize that we’ll not be able to cash out at the top when there is permanent secular decline. Everything at the end is going to go south, that’s just the nature of capitalism. I don’t see anything on the horizon that is a concern for Apple for the next five or 10 years at least, and maybe beyond. So the simple map that I would do if I was at Berkshire and Warren asked me this question, et cetera, I would just say, “Do nothing.”
And the way I look at it with Berkshire is, they made a $2 billion investment in MidAmerican Energy, which is today approaching 100 billion, it’s a 50 bagger. Their railroad investment is huge, and they’re sitting on 130, 140 billion, and there’s 30 billion a year coming in. I mean, if you look at the entire enterprise, Apple is maybe 1/4 or 1/5 of the pie. We don’t see any issues right now, leave it alone. Focus on the money that’s coming in, and putting that to work. And even if you take a situation where at some point that value declines, there are other engines there, there are other things going on there. So I think that the framework has to be that you give it a very long leash, just like the Walton family and so on.
土耳其投資的經歷-可口可樂裝瓶公司
Well, I mean, I think before Turkey, I had been investing in India, I had been making trips to Korea. I had looked at things in China, looked at things in Japan and so on. But what caught my eye in Turkey in 2018 was their ratio of GDP to market cap. And the GDP to market cap is not something you can always hang your hat on, but there’s a correlation. Basically certain amount of the country’s wealth is in the publicly-traded companies. I mean, if you look at The U.S. GDP and U.S. market caps, U.S. is more than 100% of GDP, the publicly-traded market caps in The U.S. In Turkey, it was a small fraction, a relatively very small fraction.
And the second thing I noticed is that everyone had exited. Everyone and their brother had these foreign funds, et cetera, had left the country. And so I happened to have a very good friend who’s a very diehard Graham investor. He comes to Omaha, and he’s very well-versed in Buffett, and Graham, and Munger, but though he’s too overdosed on Graham, I’m trying to move him over to Munger. I’m making a little bit of progress, but not enough. So I told him in 2018 that, “Listen, I’d like to come to Istanbul, and I know the food’s great, we’re going to have a good time, but I just want to visit companies that you have in your portfolio. Don’t take me to companies that you don’t have an investment in. And I want to visit the businesses that have the largest positions in your fund, and would you be okay with doing that?”
He said, “Oh yeah, it’d be a blast.” Okay, so I still remember the first day we were going to visit the first business, and he tells me, “Mohnish, the PE is 0.1, not a PE of one.” A 0.1 means that the company’s going to earn its entire market cap in one month. I said, “Does it have hair on it?” He said, “Yeah, it has a little bit of hair on it.” I said, “What kind of hair does it have on it?” So it turns out it was one of the largest banks in Turkey, and they had been violating the UN sanctions against Iran, and they were facilitating all these transactions with Iran. They were not supposed to do that. And The U.S. got wind of that, and they were really pissed off.
And the CFO of the bank, who really didn’t have a whole lot to do with all of this, was a chairman driving all this, had come to The U.S. to vacation with his kids, Disney World. And the Feds picked him up in New York while the rest of his family watched, and they put him straight in Rikers prison. And then Erdogan is calling Trump, and telling him, “You’ve got to let this guy go.” And Trump is saying, “It’s the State of New York that’s going after this, it’s not me. I can’t do anything, they don’t listen to me.” And then in the meantime, the company is trading on the market, and The U.S. is thinking of just taking them off the international SWIFT system and everything else.
So I went to that first meeting, it’s a very well-run bank, and I told my friend, “This is too much hair for me. I can’t go there. Can we just take it down a notch? We can’t be doing 0.1 PE, at least take me to PE of one.” But what I found in Turkey is that there was very high inflation that was going to persist and continue, but there were a set of businesses which were not affected at all. In fact, some of them had tailwinds because of inflation, and the baby got thrown out of the bathwater, no one was interested. So then I just looked at those businesses, and I had a lot of cover because my friend knew the families, knew where the skeletons were, I mean, he’d really studied these businesses a lot. And so I had a great unpaid analyst on the ground, and we didn’t do a whole lot. I mean, if I looked today, I made so many trips to Turkey.
We have three investments. That’s it. We have three investments in Turkey after probably having visited about 80 or 90 businesses there over the years. And the three companies don’t really have any correlation with Turkish inflation or anything else. One of them gets a tailwind from it, because their revenues are euros, and all the costs are lira, so they actually get tailwinds from inflation. And they were very strong businesses, so for example, there’s a Coke bottler in Turkey, and not only do they bottle Coke exclusively in Turkey, they do it in about a dozen other countries, and they have a very good relationship with the Coca-Cola Company. Coca-Cola Company owns 20% of the business, sits on the board.
And you can look at Coke bottlers around the world, economics are very similar, they should trade at similar multiples. If the growth rates are different, you can put different multiples on them. This thing was an outlier. And the Coke bottler, only about 1/3 of their volume, maybe 35% or 40% was coming from Turkey. The rest was coming from things that had nothing to do with Turkey. They’re the largest coke bottler in Pakistan. I mean, they’re the only Coke bottler in Pakistan, for example. And so it’s huge volumes. So basically what I found is that there were a sliver of businesses there that no one was interested in, and we invested in a warehouse company, I still couldn’t believe it, but the liquidation value was like six or 700 million, and the market cap was 20 million. I just couldn’t understand that, it was just crazy.
難忘的投資-加拿大鋼鐵、殯葬業
Mohnish:
Well, the thing is that what I have always found interesting is the anomalies. So for example, I remember in about… I think it was 2004 or so, in 2004, there’s a steel company based in Canada called IPSCO. And IPSCO had no debt, it had $15 a share in cash, and it had a given guidance that the next two years’ earnings were going to be $15 a share each for the next two years, so there was $30 of earnings coming in. The stock was at 42. So I’m saying, “Okay…” And the reason they gave the guidance was they used to make these tubular steel pipes where they had contracts with these pipelines where they want to deliver… The pipelines had basically given them purchase orders. And so they were going to deliver these pipes, and the cash flows were guaranteed, it’s not like they were giving guidance based on future sales to be done, these were sales that were already done.
So I said, “Okay, I don’t know what will happen after two years, but I know that after two years, there’ll be $45 of cash on the balance sheet, no debt, and the stock price currently is 42.” I said, “I just want to see what the stock price is two years from now. I want to see what Mr. Market does with this.” And I just bought it based on that notion. And a year later, the company announces that we have one more year of visibility, and we’ll have another 15 a share in earnings for one more year. And now the stock is at about 70 or 80, it’s gone up a bit. And I’m thinking about, “Well, it’s a steel company, it could go to zero. Whatever, it’s a very cyclical business.”
And then it starts drifting close to 90, and I’m thinking of taking it off. Like I said, the double in 15 months is really good, let’s move on. And then I wake up one morning and the stocks at 157, and some Swedish company offered to buy them at 160. About five minutes after that, I unloaded the stock. I said, “We don’t need to wait for the last $3, we’re done.” And recently, the two stocks I found in The U.S., which I got very excited about, are like that. I never thought I’d find that again, where it’s this kind of an anomaly where the guaranteed cash flows are exceeding the market cap and all of that.
And I remember a couple of years before that, in 2001, so I had read a long time ago that the lowest rate of business failure of any kind of business that you can have is funeral homes. So if you really want to have a guaranteed long-term successful business, just buy an existing funeral home that’s doing okay. And nobody goes into the funeral home business, nobody takes a low bid when their favorite uncle dies, you just want it done right. So they have no cost pressures, they have no margin pressures, there’s nothing. And I thought, “Okay, wow.” I read that, I said, “Okay, that’s interesting that the funeral businesses have got these great characteristics.” And then in 2001, I’m reading Value Line, every week I read Value Line, one of the areas I look at is the stocks with the lowest fees, “We can’t, help us out.” We always go to the lowest paying stock. And I see two funeral services companies with a PE of two. Two of them sitting there, lowest in the Value Line list.
So I said, “Okay, maybe there’s some craziness in the numbers or something.” I went back and looked at those companies, they actually have two times earnings. So I said, “Wait a minute, these businesses never fail, and it’s a two times earnings, and I know that it’s a great business.” And it turned out both these companies had done big roll-ups in business, they had a lot of debt, they were a concern about the debt. But I said, “The cash flows are so resilient. We don’t know who’s going to die next week in Peoria, Illinois, but we know how many are going to die.” There’s absolute certainty on that.
And so I bought, I bought Stewart Enterprises, a funeral services company at two times earnings, and it was eventually at 10 times earnings, and got to where it needed to get to. So I think the best ones are the anomalies. I go to Turkey, I go to this meeting, and the whole market cap is 20 million, and the liquidation value is 700 million. And you scratch your head, it just hits you in your head [inaudible] two by four. And so those are the ones that really interest me.
投資不需要知道所有事情-史丹佛大學地主的故事
Mohnish:
Well, like Buffett says, we’re in a business with no call strikes, and you’re not going to be struck out by letting three balls go, you can let 3,000 balls go. So we don’t need to know much about anything. And Charlie brings up his friend John Arrillaga. He just invested all his life in real estate, one mile around the Stanford campus. That’s all he did. Died a billionaire. And then his daughter marries Marc Andreessen, so it’s billionaire to the power of billionaire now. So anyway, what I’m saying is, Arrillaga has such a tiny circle of competence. He didn’t even do Bay Area real estate, he didn’t do California real estate, he only did real estate around Stanford.
And if you walked with him around the Stanford campus, he could point to any building outside the campus, and he’d tell you everything about it, when was built, what the rents are, what you could buy it for, everything. And so I think in investing, and as well as in entrepreneurship inch-wide and a mile deep is the way to go. You don’t want to be an inch-deep and a mile wide. And so I think that you can pick your spots, you don’t need to know everything about everything, you need to know a lot about something a little bit, and then it works out well.