(ET Now, 2017)
Recently, the Economic Times in India was lucky enough to sit down for an interview with Mohnish Pabrai and Guy Spier. This is an amazing opportunity for us, as individual investors, to learn from the pro’s. As you know, (if you’ve read my posts or are part of my newsletter) I’m a huge fan of both value investors. They have learned many lessons over their investment careers, and are both very generous with the insights they share. If you’re an investor in any sense of the word, you’ll likely find much of this information very useful. In fact, you’ll want to bookmark this page, for quick reference in the future. (Ctrl+D).
Here’s the topics we’ll cover
1. A quick intro to Mohnish and Guy.
2. Is the current market overvalued?
3. Active funds Vs Exchange Traded Funds.
4. How to get a 3x or 4x return in the current market.
5. They discuss India
6. And Indian Airlines
7. Commodity Businesses, and which ones are best.
8. Breaking free of mental barriers.
9. Mohnish’s recent talk with Charlie Munger.
10. Main rules for being a great investor
11. Indian Tech companies
12. Should we be looking In India?
13. Conclusion
Bonus: Watch the video!
Note: This post is written with headlines, then each investor's opinions around that specific topic in short format. For some responses, I directly quote the two. For others, I elaborate to make the point clearer, and add my own comments.
To get the most out of this post, read it first, then watch the video interview at the bottom. Let’s begin!
Mohnish Pabrai
One of the best investors I’ve been lucky enough to stumble across. He’s a very generous and thoughtful teacher with a very large intellect (IQ in the 180’s). If you YouTube his name, (and you should) you’ll find a plethora of great advice on investing. I’ll never forget the big lesson Pabrai taught me: Risk and reward are not directly correlated. In other words, you don’t have to take on a large amount of risk, for the possibility of a large reward. This is not the normal way to think about an investment. Most people believe that to get high returns, you have to take on a lot of risk, and that’s just not true. His investment thesis revolves around the idea of Low risk, High uncertainty transactions. He says this is where you are likely to find a price vs value discrepancy. And if You have a large margin of safety when you purchase a company, the downside is automatically limited while the upside should be large.
His motto; Heads I win, Tails I don’t lose much, says it all. But, in case it doesn’t… he means we should always look for investments that have a large asymmetrical risk to reward ratio, or said more plainly, an investment idea that has a large potential upside, with a very low probability of downside. What could be simpler right? He is also an adamant believer in cloning. This means that you look at what the best investors in the world are investing in, and copy them. Simple as that. In fact, Mohnish even put together a cloning algorithm of his 9 favorite investors. You can read more about that here. (and you can read more about the idea of cloning here).
His book The Dhandho Investor is still one of my all time favorites. If you haven’t read it yet, do yourself a favor, and read it today. Your other books can wait. The story of the Patel family alone is worth the buy.
Guy Spier
Here’s an individual who looks at investing differently. His book The Education of a Value Investor, is less about investing in stocks and more about investing in yourself, and how to approach life. It’s an honest, and refreshing book that gets passed all the BS wall street tends to spout. Guy is a extremely personable and appreciative individual. He went from being a regular wall-street money chaser, to becoming a much more down to earth, and isolated investor. In fact, to escape the craziness of Wall Street, and following in the methodology of Warren Buffett, Guy and his family decided to move to Zurich Switzerland. He did this to focus on what’s important; His Family, and finding great businesses at attractive prices. The rest is just noise.
Guy believes that the lessons learned from the Berkshire Hathaway annual letters are less to do with investing, and more to do with how to properly live your life. He talks about why having an inner scorecard is more important than comparing yourself to others (outer scorecard). Only you can be the true judge of yourself, and act in such a way that aligns with your true self. In other words, be your own authentic self. You’ll be happier for it.
He also attributes a lot of his success to writing thank you notes, which I’ll sheepishly admit, I’ve always wanted to implement, but still haven’t.
So, those are the two guys we’re going to learn some lessons from today. Excited? I know I am.
Is the market Over-valued?
Pabrai:
Pabrai doesn’t concern himself with the market price. Investors would be better off ignoring all that noise and focusing on specific businesses that you can understand. It can be a waste of time trying to figure out what the market will do in the next month, let alone the next year.
Yes, the market may be overvalued (according to multiple metrics) but, if we compare it to the year 2000 or 1999 we aren’t much higher than we were back then. (S&P only up 4.8% since 2000)
Looking at where the indices or the market is at any given time is irrelevant. In other words, focus on the task at hand, and ignore all the noise.
Spier:
It’s difficult to figure out near-term moves. For example, look at the presidential election. Very few people would have predicted the outcome. Then the market was down around 1000 points overnight but quickly rallied the next day and continues to do so. No one could have made these predictions.
Ignore it completely, and think of the next 30 years instead. Brain cells are wasted otherwise.
Trump removed TPP. At first this seems terrible, but other countries are taking over instead and free trade could continue without the leadership of the US.
Odds are 100% that over the next 10 years, there will be a crisis in Europe. But we shouldn’t allow that to affect the way we invest.
Active Funds Vs Exchange Traded Funds
Pabrai:
Index funds are a great way to go. Buffett has been saying this for years.
People who are rich, expect that if they pay more, they get more, but that’s just not true with investing. There’s an old saying that goes ‘Wall Street is the only place where people in Rolls Royce’s get advice from people who arrive on the subway’.
The best answer is to Dollar Cost Average the Nifty 50 index. Which he thinks is the best answer for almost everyone.
Save early.
Always spend less than you earn
Keep putting money away, and you’ll be surprised, that in a few decades, you’ll be very rich.
Spier:
It sounds easy to do what Mohnish recommends, but it never feels easy when you’re doing it.
You may not feel good doing it. The important thing is to keep doing it, and to trust the process. It works.
looking for that 3x or 4x.
Spier:
Guy recently sent Mohnish an investment idea from a conference he was at called Value X. Mohnish replied ‘If it’s not a 5x, don’t waste my time. And the conference should be renamed to Value 5X’.
Pabrai:
There is such a thing as a free lunch when it comes to investing.
If you find companies that are trading at likely to go up 3x, 5x or 10x. What’s probably also the case, is that they are deeply on sale, giving them a high margin of safety.
High Margin of Safety comes with high returns. This is not a business where high risk, equals high returns. If you follow value investing, it’s a business that is low risk, High returns.
Your job is to sit on your ass and do nothing for long periods of time. Every so often, there is an anomaly, an event, or some sort of mispricing that others don’t see. This is when you step up and hit the ball.
Example:
When Pabrai bought Fiat Chrysler, based on 2018/2019 earnings the company was selling for a PE of 1. He loves a PE of 1.
India
Pabrai:
There are more publicly traded companies in India, than almost anywhere else in the world.
90% of them, are not followed by analysts and are less than $100 million market cap. This is where value investing can flourish, but it’s also where you can get your head handed to you.
If Mohnish was a small investor in India, he would put all his time into looking at those small (sub $100 million) businesses, and really tearing them apart, and trying to find which ones are the diamond in the rough. That would be the game.
Spier:
For guy to invest confidently in India, he would have to live in India for 10 years, and really get to know the management teams.
We know the accounts are rarely going to reflect the actual liabilities.
Look for the management team that show less than they have, are very modest, and have a margin of safety built into their accounting.
Local Indian investors have a huge advantage over the rest of us because they can actually go and visit these managers, and get to know them well enough to understand their accounting practices.
Indian Airlines
Pabrai is currently investing in one American airline company: Southwest Airlines. Ticker LUV. He was asked if he’s looked to invest in Indian Airlines.
Pabrai:
They have similarities to the American ones, and some important differences.
In India they are more dependent on low-cost fuel prices because of the low fare structure. Mohnish thinks this is a good thing, because he believes oil won’t be above $60 a barrel for a sustained period. He believes this because of the American Frackers. He thinks that they have become the swing producers, causing prices to deflate, once they are inflated for any meaningful amount of time.
The capped cost of oil, is what attracted Pabrai to the airlines in the first place.
Believes the low-cost Carriers (such as Indigo) are extremely well run.
Good to keep some of these companies on your radar, but they are currently not cheap enough.
Commodity businesses
Spier:
If you’re considering purchasing a commodity business, you always want to be looking at the Lowest cost producer. In other words, you want to own the one that has the lowest operating costs. E.g. If you’re a Uranium Miner, you (as the business) want to be able to get the highest-grade uranium out of the ground, for the lowest cost to you, the business.
If you are the lowest cost producer, you will likely survive the price swings that occur in commodities.
Commodity companies are often difficult to value, but if you find the low-cost producer the margin of safety is built into that. This means you can mostly ignore the swings in price. (I would say that if you can find the low-cost producer, in an industry with a historically low commodity price, you’re likely to be paying a cheap price for that company’s stock).
Don’t put yourself in a box
Spier:
We as investors, set the limits for how well we will do. We too often put the limits on our own capabilities. Instead, it’s important for us to ask ourselves ‘what box am I in’ and ‘how can I break out’. This will open you up to all sorts of possibilities.
That sub $100 million-dollar market cap, is a great place to look.
If you believe you can find a 1, 2 or 3 PE stock, you’ll likely have a better chance of finding that.
Sit on your ass (the Munger way)
Recently, Mohnish was talking with Charlie Munger. (Warren Buffett's partner for those who don’t know…). Charlie told him that, for the past 50 years of reading Barron's magazine, he invested only once in a company that was mentioned. That’s 2600 issues, and roughly 10 stocks per issue. This means that Munger only invested in one company, out of a possible 26,000. In other words, over five decades, he turned down 25,999 stock ideas before he found one that he liked. He had found the anomaly he was looking for. He then invested $10 million into this auto-parts company. How did he do you ask?
Well he made roughly 8x on this one in about three years. In other words, he turned that $10 Million into $80 million. But wait, it gets better. He then handed that money to Li Lu who then turned that $80 million into $500 million. This all happened in roughly a 16-year period.
Lesson: Charlie Munger waited patiently, maybe even beyond patiently for an opportunity to put his money to work, and because of this, he made 50 times his money is 16 years. That’s what we want to do… wait patiently until it’s obvious, then make a killing.
How to be a great investor
Pabrai:
‘The single most important skill that an investor can bring to bare, is extreme patience’. You need to be the type of person who loves to watch paint dry.
If you are a person who loves to watch paint dry… this is a business for you.
You need to be ‘a gentleman of leisure, reading all the time, and looking for anomalies.’
There is no time urgency.
Make few, big bets.
You may not find the anomaly for years. You must be patient.
The question is not ‘which insurance company or tech company should I invest in?’ it’s which company is a no brainer.
We want to make Obvious Bets.
If you spend 10 years, reading about businesses in India, then you make 3 or 4 big bets, The chances are very good, that you’re going to end up with more money than you’re going to be able to use.
Spier:
There are 3 bears fishing in a river, two cubs and their mother. The cubs are running around chasing every fish they see, doing there best to keep up with the fish and catch them. The mom, stand and one spot, not moving, waiting for the fish to come to her. Then with one powerful swipe of her paw, she’s caught one. She repeats this until full.
We want to be like the Mother bear. Sitting there patiently waiting for a sure thing, then taking a big swipe at it.
Indian Tech
(The example brought up here was Infosys.)
Pabrai:
They may be viable, but they are not at the point of no-brainer.
If you must scratch your head and ask ‘where is this headed in the next five years?’ it’s not a no brainer.
Genuine headwinds from the Trump administration, especially the outsourcers.
Agrees that they abuse the US H1 Visa program.
Believes that the H1 Visa program should be expanded significantly, but in the right direction. They should want the top talent, for higher salary jobs.
Currently if you are an Indian, looking to settle in the US, it can take 10 to 15 years to get a green card. This is not the way to attract the best talent.
However, technology does allow you to get a lot of work done locally instead of moving to the US. So, this will likely not be a death blow for companies like Infosys.
Canada, specifically Vancouver, is setting up to be a big tech hub (yay Canada!)
Thinks the Trump administration should be changing the H1 program from 65-85,000 to 500,000. But make it so it's the best talent in the world that they are attracting.
On the prowl for Indian companies
Spier:
The US stock market is very ‘picked over’ making it difficult to find great bargains.
There is likely more opportunity in the Indian market, to find those out of the park, no-brainers. This is likely true because less investors are willing to look here.
He is on the prowl.
Largest English speaking country in the world.
The legal and business system that used to run the world was:
1. Britain, then it became the
2. United States, eventually it will be
3. India.
Conclusion
As you can see, these investors have a depth of knowledge that is just incredible. They can address any topic the interviewer asks them, and they stay true to their investment philosophies. If you can take one thing away from this post, I hope it’s that you learned the huge potential value of patience. I personally struggle with this daily, as the market always offers us new, and often tempting, possibilities. I need to just sit on my hands and wait for that obvious home run. Or instead, like the bear, wait for the fish to swim to me, then take a big swipe.
I hope you enjoyed the post! I highly recommend watching the interview right now to have the concepts more deeply ingrained. It’s fun to see Mohnish’s dry sense of Humor and Guy’s openness.
Thanks for reading!
We’ll talk again soon.
~Ryan Chudyk~
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Here’s the great interview:
If you like Mohnish Pabrai, you’ll love this post:
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