Episode #495: Mohnish Pabrai on Cloning & Compounding
Guest: Mohnish Pabrai is the founder and Managing Partner of the Pabrai Investments Funds, which he started in 1999.
Date Recorded: 7/28/2023 | Run-Time: 1:15:01
Summary: In today’s episode, Mohnish talks about his love for bridge, what his friend Warren Buffett’s online bridge name is, his philanthropic endeavors, opportunities he sees in Turkey and India, and what he would do with the Apple position today if he was running Berkshire Hathaway.
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Links from the Episode:
- 0:39 – Sponsor: YCharts
- 1:26 – Intro
- 2:00 – Welcome Mohnish to the show
- 5:57 – Mohnish’s educational background
- 11:37 – Revived love for Bridge despite generational divide
- 18:00 – The magic of compounding
- 21:46 – Increasing savings with ‘opt-out’ system
- 24:57 – Dakshana provides intense prep for competitive exams to underprivileged kids
- 38:54 – Investing long-term in high-conviction bets regardless of error rates
- 42:51 – Think like a founder, hold onto investments long-term despite drawdowns
- 46:32 – If he worked at Berkshire, would he sell or hold Apple today?
- 48:53 – What interested Mohnish in Turkey & India?
- 1:02:45 – Tech industry insights and long-term investment perspectives learned from Bill Gates
- 1:06:51 – Mohnish’s most memorable investment
- 1:11:57 – Narrow expertise depth, no need to know everything about everything
- Learn more about Mohnish: Dakshana Foundation
Transcript:
Welcome Message:
Welcome to the Meb Faber Show, where the focus is on helping you grow and preserve your wealth. Join us as we discuss the craft of investing, and uncover new and profitable ideas, all to help you grow wealthier and wiser. Better investing starts here.
Disclaimer:
Meb Faber is the co-founder and chief investment officer at Cambria Investment Management. Due to industry regulations, he will not discuss any of Cambria’s funds on this podcast. All opinions expressed by podcast participants are solely their own opinions and do not reflect the opinion of Cambria Investment Management or its affiliates. For more information, visit cambriainvestments.com.
Sponsor Message:
This episode is sponsored by our friends at YCharts. If you’re an advisor, you know just how many hats you have to wear, sales, marketing, portfolio management, relationship-building, accounting, a dozen other functions that fall on your plate, often all at the same time. That’s where YCharts steps in. YCharts is a one-stop shop for all your investing research, and client communication needs. With its intuitive interface, prebuilt research templates and custom reporting tools, you’ll save hours of time each week, and be equipped with the tools and data you need to uncover better and newer investing ideas. Visit go.ycharts.com/meb2023, or click the link in the show notes to start your free YCharts trial, and get 20% off your initial subscription. New customers only.
Meb:
Welcome podcast friends. We’ve got a special episode today. Our guest is Mohnish Pabrai, founder and managing partner of the Pabrai Investment Funds, which he started in 1999, and has since built an incredible track record. In today’s episode, Mohnish talks about his love for the card game, bridge, what his friend Warren Buffett’s online bridge name is, his philanthropic efforts, opportunity CCs, and investing in far-flung places like Turkey and also India, and what would he do with an Apple position today if he was running Berkshire Hathaway. Please enjoy this episode with Mohnish Pabrai.
Mohnish, welcome to the show.
Mohnish:
Meb, it’s a pleasure to be here. It’s been too many years, so I’m looking forward to it.
Meb:
Just got back from two weeks on the road, so I’m a little out of sorts.
Mohnish:
Where were you at?
Meb:
So my family, my mom’s side is from North Carolina, so they do an annual… It’s like salmon, an annual trip back to this tiny little beach called Topsail Island, it has one road. So we went there, saw a bunch of family, Winston-Salem. Have you ever been to North Carolina?
Mohnish:
Well, I went to Clemson, so I spent a lot of time in the Carolina.
Meb:
I have some funny Clemson stories, man. Once you get past cousin, I can never tell what the relations are, it’s as my great uncle or something once removed, blah, blah, blah, but he was a Clemson guy. He was kind of a little bit of a deviant. He liked to play tricks on everyone. And he was older at the time, so let’s call him 70 when I was a kid. But he’s the type of guy, we’d be going to church Sunday morning, and he would come up and squirt the kids with disappearing ink. So the kids would crying ’cause they’re getting ready to go to church, this type of guy. But I have a very distinct memory of driving to a Clemson/Carolina football game years ago when I think Clemson was good the first time around, and Carolina was terrible, but he just marched right up to the press parking, and said, “Hey, I’m Clemson Press.” And the young girl said, “Do you have a badge?” And he said, “No.”
But the authority and confidence that only a 70-year old could have, who is absolutely not a journalist, and they let us right in, and I remember saying, “Goodie…” That was his name, Goodie. “Goodie, I’m not sure what lesson to take away from this.” My great uncle. But they did a really funny practical joke on all of our Carolina UNC family, where he got giant Clemson paw prints, and at night in Chapel Hill, went with orange paint, and did them through the streets all through Chapel Hill.
Mohnish:
[inaudible]
Meb:
I mean, this is back probably 50 years ago, I think before I was around, so they was 70… I don’t even know at this point, but they were around for a while, they didn’t just come and pave them and clean them off the next day, these giant paw prints were there for, I think, many years. They tried to be anonymous, but they had the paw prints leading up to my great aunt’s house, or his cousin, whatever it was.
Mohnish:
Well, I always felt when the Clemson/Carolina game took place that everything changed. The sky color changed, and just… The whole atmosphere, there’s no other day like that. I mean, there’s no other football game or anything else you could go there that would give you that. The whole place felt completely different.
Meb:
I remember receiving $2 bills when I was a kid, never seen a $2 bill, but it had two orange paw prints on them. So I just assumed that’s what came on a $2 bill. Probably still have those somewhere. I don’t even know the answer to this, how’d you end up in Clemson?
Mohnish:
Oh, just very random. When my brother and I were coming to The U.S. for studying, we had one distant relative, and my parents asked, “Hey, the boys are coming. What schools?” This guy had done his PhD in Clemson, he said, “Oh, of course they should come to Clemson.”
Meb:
So funny.
Mohnish:
And that’s how I ended up there. I actually never realized, I got parachuted into Clemson from Dubai and India, and I actually never realized a couple of things. One is how pretty that part of the country was until I left, ’cause I just assumed this was The U.S., and all of the U.S. was like this.
Meb:
In a slightly different multiverse timeline, you would end up being agriculture guy. That was a very big ag school, right?
Mohnish:
Sure, yeah.
Meb:
How’d you not end up being a farmer? That could have been a different path for you.
Mohnish:
Yeah, I mean, I actually didn’t even know what to study. People said computers are hard, so I studied computer engineering, and that was that, and I just kind of drifted through. I really didn’t have a good idea what I should be doing, or what I should be studying, so I was just open to suggestion.
Meb:
Yeah, when you’re 18, 20 years old, whatever it is as kids, even then, the idea of what the studying meant, I wanted to be… I started out in aerospace, and then I looked at my schedule, and as an engineer… So I went to Virginia right up the road, and they give you a schedule for an engineer, because you have to take all these years of requirements. And I am not a morning person, I had five 8:00 AM classes. And I looked at the schedule, I said, “What is this? This is all physics and chemistry. I just want to be an astronaut. What does it have to do with aerospace engineering?” So a little do you know what things end up being when you’re that young. But same thing as investing, if you were to ask me probably what an equity was when I was high school age, I’d probably say, “Something on the menu for lunch. I don’t know.”
Mohnish:
Yeah, and one of the things that happened to me at Clemson is, I had a deep interest in economics, accounting, business in general, and my father was an entrepreneur, so I tried to take as many elective courses as I could in the business school. So I used to just look at whatever I could take in the business school, just because I just had an interest. And I remember I was taking an investing class, I was a junior or something, I was taking some investing class, and it was actually… I didn’t realize at the time, this was 1985, and the markets has just started to turn, 82 onwards, they started to rise. And the professor got us all a student subscription to the Wall Street Journal, and then I remember we used to… He was doing these case studies, like Disney for example, some of the parts. I mean, I was just surprised how cheap things were.
And I had 106% average in that class going into the final. And so the professor called me to his office, he says, “I was really surprised I looked you up, that you’re not a business major, and you’re topping my class.” So he says, “I called you here for two reasons.” He says, “First, you don’t need to show up to the final, you have an A. So you’re exempted for the finals.” Okay, that’s great. One less class to worry about. And the second is, he said, “I think you’re in the wrong major.” He says, “I don’t know what kind of engineer you’re going to be, but I know you’d be great at investing.” And my perspective at that time was that these business school students were so stupid, they were so dumb. My perception as a 20-year old was, when I used to go and take my engineering classes, I was really challenged, they were really tough classes.
But the business school, it came so easy to me, it was a cakewalk. So I’d say, “I can’t have a major with these guys, that’d be terrible.” So I just said, “Well, thanks for the input, but I’m just going to stay where it is.” And then after I think eight years after that is when I heard about Buffett for the first time, and then I did a pivot about 13 years after graduating. So it’s funny, I went and caught the year around this, instead of just going straight in that way. So that was kind of funny.
Meb:
I mean, that was another serendipitous… You came to Buffett just through grabbing a book, right? I mean, I feel like I almost remember, you’re on an airplane, and just grabbing a book or something. I mean, I wonder if you end up grabbing some other book, maybe a romantic novel or something, you’d be a romance novelist at this point, I don’t know. But it’s funny that-
Mohnish:
No, I think it was that I was… I think the data points were already there when I was doing my undergrad that I really liked the stuff, and it’s just that I had a mental block, and I didn’t know what to do with going into investing or whatever. I knew that I was on a student visa, I need to get a job, it would be easy as an engineer to get a job. And it’s really after a few years when I realized that, no, this… When I especially read the first Buffett biography, I felt like a lot of it was speaking to who I was, and I found a lot of commonality. About eight or nine years before I heard about Buffett, I had started playing bridge, and I love playing Bridge. And then I find that he’s… Even now, he’s playing bridge three, four nights a week. And bridge really correlates a lot with investing, so I was always drawn to probabilities, math, and I grew up with an entrepreneur father, so I was always around business and all that. So there’s just a mix of all of that, just worked for me.
Meb:
It’s funny about the bridge topic, because I’m 46, and I feel like there’s a line somewhere around here where the generation that’s slightly older to me, all the way through my parents’ generation… My parents met playing bridge. I have never played Bridge in my life. I’ve played every card game, I grew up playing, my grandmother called it 21, but blackjack, and spades, and poker, and on and on, I love playing games. And by the way, Mohnish has a request on Twitter listeners for a solid ringer bridge partner. What was the request? For playing the Swiss team or something? What was the…
Mohnish:
Yeah, yeah. So actually, I just spent a week in Chicago. So the ACBR, the American Contract Bridge League has three national, basically conferences, every year in The U.S., spring, summer and fall. And it’s the first time I went to a bridge tournament in 20 years. I mean, I’d been busy with the family, playing online, et cetera. I hadn’t gone to actually live bridge in a long time. So I said, “I’m going to take a week off and just go play live bridge.” And I didn’t even know whether I would like it, because one of the problems with playing bridge live is it’s a lot slower. It’s slower, you have to do it on their timing, you have to go to a particular place.
And what I found is that it was a blast. I mean, I really had a great time. And I didn’t have a partner, so I had to do a pick-up partner at a partnership desk, and I didn’t want to… There are many different bridge games, but you can play pairs, where you and your partner play a bunch of other people and whatever, or you can play teams, and it’ll take some time to describe, but it’s a four-person team. So I had the partner, this guy was a good guy from New York, and then every day we were finding two others to make up our Swiss team, which is a particular kind of game, which is difficult to play online, you really have to play in-person. And Swiss teams is just a blast, just the format is really good.
I said, “What would really enhance this is if I had a regular partner.” Because Bridge takes a long time to build a compatibility, and understand what your partner means and all of that, it can take years. And so I said, “If I can find a great partner, and then we can have a great team, four people who actually play two, three times a year at these national tournaments, it would just be a blast.” So the funny thing is, what really surprised me, I have 188,000 Twitter followers. I have 50,000 followers on LinkedIn, and I have about 5,000 on Facebook. Not one person. I was shocked. I thought I’d get inundated. And this is a smart investing crowd, the people who follow me on Twitter are interested in investing, and zero. I was just shocked at that. And even when I go to the bridge tournament, you see a young Chinese kids, you see 12 year old Chinese, kids, 15 year old Chinese kids, you’d see a couple of Indian nerd kids, but then the rest of the crowd is an over 70, over 80, oxygen tank, over 90.
Meb:
What is the reason? Because there’s other games that have translated to the younger crowd. I mean, poker certainly has had its moment, I mean, a lot of interest in clearly games in general. What about bridge?
Mohnish:
I don’t really understand it, I think it’s such an amazing game. It’s a game that you can never master in your lifetime. It’s a game that would give you so much joy and pleasure. I think the thing is, for the younger crowd, there are so many options that weren’t there for your parents. The range of options with video games and everything else that they can do with all the distractions, with the phones and all that, the interests level are not there, which is really sad. It’s actually a really good game, it’s a wonderful game, and it’s a game that will give you a lot of pleasure. I was really surprised that it happened to me, I feel like Forrest Gump. But I spent a few years playing bridge with Charlie and his friends, and I had to pinch myself, because that was a blast and a half.
And one time, quite accidentally, I played bridge Warren. Thing with bridge is that when you’re playing with someone, you really have to have an understanding, the conventions. And Warren and I start playing together online, and there’s a chat box chat, you can even chat with your partner and others. So I’m really quickly trying to message him, trying to get his conventions, and he’s saying, “Yeah, I kind of play that. I don’t play this.” And I’m saying, “I’m going to blow this game so badly that he’s never going to want to have anything to do with me.” And the funny thing is, the other two people we were playing with had no idea that it’s Warren Buffett playing, because his handle is T-Bone, and people don’t know T-Bone is Buffet.
Meb:
They do now.
Mohnish:
But we whipped it, we really, really… Amazingly, I didn’t screw up, we did really well. And then three days later, I get a message from Buffett’s assistant. So when you play online, you can go back and review all the hands, you can do everything, there’s a record of it, which you can’t do in live bridge. So I get this long email from his assistant, Debbie, saying, “Hey, Warren really enjoyed the session with you, and he was really impressed with the play, and especially board six, the way you did the bidding, and then the end play with the hands and all that.” And I said, “He’s got a zillion other things to do, he’s going back and reviewing the hands.”
Meb:
Come on, T-Bone was going through those, and he is saying, “Mohnish, board four, I don’t know, we may have to evict you as the partner, your bidding was a little suspect.” That’s funny.
Mohnish:
Yeah, exactly.
Meb:
Well, I’ll try it. I’ve never played, but I love games in general. And by the way, the only tournament I’ve ever played in, I played in a spades tournament when I was in college, and got absolutely destroyed. We made it through to the semi-finals, and got absolutely destroyed by two 90 year old grandmas. I mean, it wasn’t even close. I’m convinced they had some hand signals, whatever it was, but they absolutely killed us.
While we’re kind of on this topic of you being in college, and learning about investing, some in the early days, I want to make sure I leave some time for your initiative, India, I think it’s Dakshana, ’cause I think it’s phenomenal and fascinating. But leading into that, if you were to go back and teach… I mean, I know you do a lot of student Q&A’s and talks, but one of the things, we don’t really teach money in schools in The U.S., it’s starting to, I think it’s up to maybe a third of high schools teach some form of personal finance and investing as sort of a rounding area of that. But what would your kind of idea or advice as you talk to your kids, your friends’ kids, college students today? How do you put them on the right path? Or if you’re an administrator of Clemson, let’s say the president of Clemson’s like, “Mohnish, we’ve really got to lay this out the right way.” How would you think about it? What would you say?
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.
Meb:
But there’s this very obvious challenge, which is 18 year old me wants an iPhone, sick new truck, go out with my friends, I want to go on spring break, new surfboard, whatever it may be, there’s the allure and seduction of the hedonic treadmill. There’s the people that get it, so let’s ignore those, there’s a certain percentage that hear that statement, they hear you talk to their high school class, and they’re like, “I’m in.” The Buffett inoculation, they heard it once, they’re in. But for the vast majority of everyone else, having some sort of a failure nudge behavioral system in place, ’cause a lot of it right now is opt-in, as far as retirement-
Mohnish:
Yeah, so the first thing is, it becomes opted out. It becomes opted out, the 401(k) money gets taken out, you don’t get to see it, it goes automatically to an index if you do nothing, and you cannot take a loan against it unless it’s really important, and there’s some real hardship. And it’s complicated to opt out. I mean, you just put those pieces in place, and the employer match goes in, and that you cannot even pull out, no matter what. It’s too easy to shut off the engine today, or to not even start it.
Meb:
I mean, there’s two ideas in my mind. One is, if Biden’s listening, or his crew, to this podcast is, to move it towards the Australia model, where you have to put in 10% or whatever it is into retirement from wages, and that’s that. And they love it over there, because they’ve been in it long enough, to where they see these massive retirement accounts. But presuming the government’s not going to do it, listeners, I think someone, I would love to see an app or something like the anti-Robinhood annuities in this umbrella, but they have so many historical conflicts of interest and fees, it’s wadding through that. But almost like an app that is like, “Look, you can buy Berkshire, S&P, whatever it is, but you have to hold it for X amount of time, or there’s a penalty.” Or there’s something, but it’s almost like a way to incentivize people to actually do it. And there seems to be ways that the capitalism free market could solve this, presuming the government doesn’t get its act together, but TBD.
Mohnish:
But also what doesn’t happen today is, even when people join 401(k)’s, whatever else, nobody really explains the [inaudible] nature of compounding. They just say, “Oh, you do this, and you get 10% a year.” Or whatever else, and no one really connects the dots. That piece is just left hanging to figure it out on your own. And even for me, I was always great at math and all that, it was surprising when I actually studied it, and I looked at it, and I looked at Buffett, and looked at what he had been doing, it was a revelation for me. And I mean, I was always good at math, and I always [inaudible] I understood all that, but I still never really properly understood it.
Meb:
Yeah. Well, let’s use that as a segue. I want to hear a little bit about this big school initiative that you’ve been doing. How long now? Is it 10 years now?
Mohnish:
It’s now 16 years.
Meb:
Wow. I was actually watching one of your YouTube videos, and it was fun, because the comment sections, which some reason on YouTube are actually very pleasant now, I don’t know if they’ve just gotten a handle on part of the ability to filter the messages, but one of them was a doctor, who said, “I had actually been through this program.” And I was like, “How amazing to read.” Finally, the fruits of doing this for so long. Tell the listeners what I’m talking about, and give us an update and overview of what’s been going on there.
Mohnish:
Yeah, actually, our oldest alums now are 32 years old, and they’re just starting to make their mark, which is really fun to see. But basically, the idea is that we identify very poor kids who are really bright, and we identify them between the age of 16 and 18, and we spend one or two years with them, and we basically prep them for the engineering and medical entrance exams in India. And one of the things about India is that the engineering and medical schools are really good, they are run by the government, and they are pretty much almost free to attend, basically very heavy government subsidy. But getting into those schools is really hard, it’s very competitive. So for example, the IITs, Bill Gates says that if he was only allowed to recruit from one school, he would only recruit from the IIT, so the Indian Institute of Technology.
Meb:
I’ve worked with a couple of ITT guys, and they are definitely smarter, and more capable than I am, I’ll give them that. They negotiate every single possible thing in the world, even when you’re not even supposed to be negotiating, and I love them to death. And we’ll go get a sandwich, and they’re like, “So six bucks, when you say six bucks, maybe five bucks.” I’m like, “Hey, you don’t have to negotiate the sandwich right now, we can just buy this sandwich.” But extremely capable.
Mohnish:
Well, there’s 1.3 million kids, 18 year olds who take that entrance exam for 16,000 seats. So it’s a 1.3% admit rate. And if I look at Princeton, it’s a 5% admit rate. Harvard is a 5% admit rate. And the thing is that they give priority to legacies, and they give priorities to all kinds of donors, and whatever else is going on, which now they’re getting clobbered on the head by. But the IITs are purely a quantitative measure. It doesn’t matter if you are the prime minister’s son or daughter, or the richest person in India, whatever, or how much you willing to donate, it’s based on your test score on that test. That entrance exam test is the hardest test in the world. If you score 34% on that test, you have a seat at IIT, you just need to get a third correct.
Meb:
It kind of makes me want to take it right now, I’m a little curious to see how bad I… It’s going to remind me of my physics three classes in college, when an A was getting a 25 somehow.
Mohnish:
And they have negative marking. So the thing is, if you get a wrong answer, they dinging you, they take away a quarter point for a wrong answer. So 70% of test takers end up below zero. They don’t even-
Meb:
Oh my God, that’s so demoralizing.
Mohnish:
They would’ve been better off just turning in the empty paper, their score would have been higher. But anyway, the thing is that we identify these kids. Most of these kids are illiterate parents, laborers, farmers and so on, the parents don’t even know what we’re doing with the kids. And we bring them into a boarding school system so we can completely control… Because they don’t have electricity, they don’t have a desk, they don’t have a computer, there’s nothing, there’s no infrastructure where they’re at. And so we bring them to our centers, which are fully equipped, we’ve got the best faculty, best everything. And our testing is really good that we identify that they have horsepower. And then we spend two years prepping them for the test. And so the national admit rate is 1.3%, our success rate is north of 60%. And actually, if I include the next level of schools, the NITs, which are right below the IITs, it’s over 90%.
Meb:
What is the lag time on how long they’re in the program? Is it six years? Is it two years?
Mohnish:
They’re with us for two years, and then they go into the IIT for a standard four-year undergraduate degree. So basically, we usually start with them at 16, we’re done at 18. They finish with the IITs at 22, and then they enter the workforce, and then we go from there. And basically, Our kids have been recruited straight from the IIT campuses directly by Google, and Microsoft, and Amazon, and all of these companies all over the world. They end up with Samsung in Korea, and different companies in Singapore, and all over the place and of course, all over India as well.
And these kids are coming from less than $3 a day family income, it’s very, very low income. And so they go from something like $1,000 a year of family income, to 150, 200,000 when they start. It’s a huge reset. And so from my point of view, it’s a real zero to hero. The return on invested capital, social return invested capital is off the charts. And one of the things that makes Dakshana work so well is, it costs us about three grand to take a kid through the two-year program, the boarding, lodging and everything. The subsidies from the government [inaudible] 25:1 match. So our 3,000 unlocks about 75,000 in government subsidy, because that’s the cost of the IIT degree that the government is paying for. So we are able to lift these families from poverty permanently. It looks like a magic bullet, because you spend 3,000 and suddenly, the guy’s making 150,000, but that’s because there’s another 75,000 of spending. So the 25:1 match is really what makes it work so well.
Meb:
And I think I’ve heard you say you guys are starting to be a non-trivial percentage of the IIT intake each year. How many students are going through the program per year now, or aggregate in total?
Mohnish:
Every year, we have about 1,000 graduates. And so we are taking about 4% or so of the IIT seats currently, and similar number of medical seats currently. And when we get to about 12 or 13%, we’ll pretty much max out. It’s very competitive, there are a lot of rich people, with a lot of resources going after these seats, with a lot of brain power as well. So we will not be able to take more than one in eight seats or something.
Meb:
What’s been the response from locally in India? Obviously the communities which you’re involved in it is probably universally positive. Has Modi reached out, and been like, “Hey man, this is amazing. We’ve got to help you out on this path. We see that you’re doing God’s work”? What’s been the response from government, corporations, just people, boots on the ground?
Mohnish:
Well, for the entire 16 years, we’ve had a huge relationship with the government. So we work with the largest magnet school system in India, which is a government school system in rural India. We actually could not do the work if we were not tied into them, because they are really sourcing these kids in sixth grade, from all over the place in India, with the language and vernacular. So the government actually has been very supportive, I mean, it’s been a great partnership. And Dakshana, we don’t really focus on trying to get a lot of pats on the back or whatever else, so we just put our head down and get the work done. And we do get accolades from Modi and others, and that’s fine, but it’s all about the inner scorecard. We just want to basically do our work, and do the best we can, and let the chips fall where they may.
Meb:
Well, you get about another generation, 10 years of these, and you’re going to have a bunch of these graduates starting to percolate through the ranks of corporate, and government in India anyway, so we’ll just have a Pabrai army of well-equipped, and-
Mohnish:
And some of our kids have already dropped out of undergrad, they got funded by Y Combinator, and all these top-end VCs, some are already on their second startup and so on. So I think in 10 or 15 years, we’ll start seeing some amazing stories. We are already seeing people, we have a kid at Google, and when Sundar does his IO presentation, he’s a part of that. Some of those slides are done by him, so they’re already starting to make some waves, which is great.
Meb:
We talk a lot about startup investing here, and having been doing that for a while, there’s a trend maybe about half a decade ago, where I really started to see a lot of companies… ‘Cause the Y Combinator template has spread around the world, and so you’re starting to see… Now that you have this kind of templated documents, and way to go about the funding, it just makes it so much simpler, you’re seeing a lot of startups have very real traction in India, Bangladesh, Pakistan, Africa, Latin America, and it’s to the point now, I think for the past few years, the majority, or near majority, of my startup investments have been ex-U.S., but in a lot of these places, which is really fun to watch.
My idea, I don’t take credit for this, but given all the shenanigans and revelations going on, which I feel like everyone has always known in the university system in The U.S., I said, “I’m waiting for a top 100 college…” It’s not going to be one of the top 10, but to just say, “We’re just going to be honest about this. Here’s what we’re going to do. We’re going to auction off the top 100 spots, so we’re bringing in 10,000 a year. So top 100, you get in no matter what, but it’s going to be a blind auction. So, you don’t have to name a building, we don’t want your name on the building, we’ll do a blind auction, top 100 get in no matter what, but we’ll be honest about it.” And to me, this seems like a much more transparent way to go about these crazy college admissions, besides all the scandals and nonsense that goes on today. But I like the pure merit base too, that makes a lot of sense.
Mohnish:
No, but I think your idea is a good one. I mean, I think bottom line is that college education is a lot more expensive than the tuitions you can charge and should charge. And so it does need, in some ways, to be subsidized by the rich. And so you can give some quid pro quo to the rich, but I think the more straightforward and transparent you make it, the better it is.
Meb:
Yeah. All right, well, listeners, when we were prepping for this interview, “I’m going to send over a couple criteria.” Which I have actually never heard before. He said, “I want to hear some hard questions, and questions I’ve never been asked before.” So I said, “Okay, we’ll take up that challenge.” So we’re going to use some of these. This may not be a linear progression, but they could be jumping off points. And some of these answers may only last for a minute, and some could be a half an hour conversation, so we’ll just see where this leads us. But I have a theory, and I’m pretty sure you’ve never been asked this question, but every portfolio manager of maybe the last 50 years who has opted into this decision, I believe has had their best performance. Which is, if you look back, Bill Gross, Mohamed El-Erian, I’m trying to think who else, Soros ever having a mustache, that male portfolio managers, when they had mustaches were their best performing years than when they were clean-shaven.
And if you’re watching this on YouTube, you see what I’m talking about. If you’re listening this on podcasts, Mohnish has a beautiful duster right now. Do you find any correlation? Have you been putting up better years with than without mustache? ‘Cause you’ve been clean-shaven before, right?
Mohnish:
Yeah, I actually didn’t have a mustache until about eight or nine years ago, maybe 10 years ago, but I have never been asked that question before, Meb. So thank you, congratulations.
Meb:
We’re going to have to go through the annual Christmas cards, and say, “Did he have a mustache?” And then look at the returns for the year, and then we’ll do a regression analysis, and we’ll see what the answer is. But I feel like I have a pretty high hit rate on this.
Mohnish:
I would say, in my case, there’s no direct correlation. So, sorry to disappoint you in that, but maybe we don’t have enough data.
Meb:
We’ll put some IIY interns on this, and we’ll see what they can come up with.
Mohnish:
We don’t have enough data because the mustaches are short relative to the non-mustache years.
Meb:
Well, I was Googling, and you’ll probably know better than I was, I was trying to find some pictures of Warren Buffett or Charlie, if they ever had a mustache. I don’t think they have.
Mohnish:
Yeah, Charlie and Warren, there was only one time, and Warren went through some kind of a surgery, and he was in the hospital for two, three weeks where he actually grew a beard, and that’s the only time when he didn’t shave. And Charlie, I’ve never seen that.
Meb:
That’s probably when Berkshire paid their one and only dividend too. He’s in the hospital, he came back, he’s like, “What’s going on here? I’ve got a beard, you guys are paying dividends.” You, like many, there’s some non-consensus views. One of my favorite Twitter threads that we ask people, and is to say, what is a view that you hold personally about investing that the vast majority of your peers do not hold? So let’s talk about 70%, two thirds, 75% that if you said this today, almost everyone would be like, “I absolutely do not agree with you on this.” Is there anything that comes to mind?
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.
Meb:
This concept of these power law investing, there’s two groups that really understand this. I think my startup VC friends really get it, because by definition, they can’t sell. So they invest in 20 companies, they get that one or two is going to drive the returns of the entire fund. My [inaudible] trend followers get this, because they’ve modeled it out, and they see, “Hey, our batting average is 30%, but that one trade on euro/dollar, or wheat, or short bonds, or whatever it was, makes up for all the losers. A lot of the public market friends… I think there’s a phrase, and maybe it was Jerry Parker, but they’re essentially, I’m going to get it wrong, “Fearful with gains, but hopeful with losses.” And so as if they get a double or a triple, like, “Oh my God, this is amazing. Best thing ever.” But every 10 bagger, 100 bagger at one point was a triple.
And I think the challenge of holding things for very long, and there’s a couple of good books on this, 100 Baggers, and 101 in the Stock Market, I think is hard obviously, because of the drawdowns, but also because you get to a point… And I’d love to hear your perspective on this, ’cause Twitter obviously loves to chime in. Warren and Charlie have a massive concentrated holding now, and this sucker, Apple, historically, I think every decade has had at least a 50% drawdown, I think with the exception of the last one, and one over, I think 80. How do you think about it?
Mohnish:
I think the mental model you have to use is, think of yourself as the founder or the entrepreneur. So if I look at the Walton family, they’re the only ones who’ve held Walmart from 1970 until today. And they held it after Sam Walton was gone, they held it when there were no Waltons running the place, I think there might one Walton on the board or something. And they’ve had no control over this business, and they’ve held it for this entire period. And so why should an investor use a different framework from an entrepreneur?
So we see this all the time. You see entrepreneurs have 99% of their wealth in the business they created, and they go to sleep at night very comfortable with that. And people say, “Well, they’ve got control.” Well, control is overrated, it’s not really the control. So I think that the framework we have to use is to think of ourselves as, if we are not the founder, we are basically an owner or a partner. So think of it as a partnership in a private enterprise. And so I think that once you make that shift where you say that, “This is a family business, and I own 30% of the business. I’m not the founder, but I have a significant stake, and I understand the business.”
Then those two, the investor, the entrepreneur, start blending. I mean, we see this over and over, you see the Ikea guy. I mean, basically he put the entire company into a foundation, but 99.99% of his net worth was Ikea. And we just see that with all these entrepreneurs, all over the place, and they remained comfortable. If you look at the Google guys, they stepped aside, but they kept their stake, and perfectly okay.
Meb:
Let’s say Warren says, “All right, Ted and Todd, they’re awesome. Mohnish, we need your help too. What do you think we should do with Apple? This is a big, big stinking part of our portfolio.” Warren’s like… He wouldn’t say this, but, “I don’t want to have another 1999 Coke, where this thing is probably expensive, the taxes, I don’t want to pay taxes, this is a good business, great franchise.” What do you think you would do in their seat at this point? Would you start to trim this big position, or would you hold on thinking this might be the world’s first 10 trillion company? I think first 5 trillion too, I don’t think we have a 5 trillion yet, do we?
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.
Meb:
Okay, you say, “Okay, I’m not going to tell you to sell Apple. However, Turkey.” Now, we love foreign markets, I spend an inordinate time talking about investing beyond our own shores. Walk us through a little bit how a guy whose first checklist rule is circle of competence. How did this guy get interested in Turkey of all places? What was the inspiration? Were you just vacationing, and you’re like, “Man, the food here is wonderful, beautiful, great country. Let me go, Jim Rogers style, go check in on some businesses.” How’d you come around to the Turkey interest? And how much other foreign investing had you been doing at this point? Was it a large part of the investing strategy, or… Walk us through how it happened?
Mohnish:
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.
Meb:
We hear the same three or four tropes every time we talk about foreign markets, but the two big ones are, people get so caught up in the macro, and so many investors get sidelined by it, because they see what’s going on with the currency, or they see what’s going on with the government, or they see what’s going on… All these list of things that, in our opinion, can be controlled. How do you think about, broadly speaking, the currency side of it? Is it something you hedge at all? You mentioned some have even more complicated and even beneficial parts of the hedging type of thoughts, but how much of the macro picture plays in for you guys on either dissuading you, or… Obviously it didn’t, ’cause you do it, but if someone is asking this question, I’m trying to get to it, but how do you think about the macro in places like this?
Mohnish:
Well, I mean, we’ve never hedged currency anywhere. And in some places, like in Turkey or India, et cetera, it would be quite expensive, and actually, you wouldn’t be able to do it for very long, so it would be somewhat impractical. Well, we had a view that the currency would continue to devalue quite significantly, and that inflation would be high, it wouldn’t go down in any finite period of time. And so I basically looked at businesses where those conditions were irrelevant. So if I am bottling Coke, for example, I will get paid a certain amount for someone’s labor to give them a Coke. That’s basically the deal. That currency is not that relevant. I mean, they’re going to be able to adjust it based on whatever was going on. And in other cases, there were businesses where the revenue just wasn’t… I mean, we don’t have an investment here, but there’s a juice exporter in Turkey, where all their revenues are coming from Europe and euros, and the costs all in lira.
It’s not relevant to them what is happening in the country from an inflation point of view, they actually get tailwinds because the labor costs actually go down, because the standard of living goes down with all this inflation. So I think the macro is important when you have these crazy things going on, and I just try to sidestep, and look at a sliver of things. Because the baby got thrown out of the bathwater, most of those companies deserve to be clobbered, because inflation will clobber everything about them. And so the market is mostly correct about that, but it’s not entirely correct. And what I found is, even very smart, rational people I would talk to didn’t have an interest. And that’s when I could see that, “Okay, this is a very irrational reaction here, because I know these guys are smart, but they’re still not willing to even go look at it. Not invest, but just look at it.”
Meb:
Well, Turkish stock certainly had a monster 2022, which I would also like to point out. Correlates with the mustache year, Mohnish. As you look beyond our borders, are you getting curious about the Omaha crews in Japan? Any other countries? How does India look? Any other places that are interesting right now?
Mohnish:
Yeah, India is also another good place, because it has a lot of secular tailwinds. The whole China being in the penalty box and all of that is a big tailwind for India, and also there’s big demographic dividends, it’s the only large country with a growing population and so on. But I would say, in any other country, other than The U.S., Canada and India, and maybe some western European countries, I need ground cover. So I need someone on the ground who really understands Buffett and Munger, and understands the ground realities. And so usually I can’t, like, “Someone send me some stock in Mexico.” Or something. Unless I have trusted people, et cetera, I really can’t do a whole lot. Because I think that once you step outside The U.S. borders, governance becomes a really big issue. The people become a really big issue.
And what I found in Turkey is, in these businesses we invested in, the people running these businesses, some of the highest quality people I met. Just incredible. Incredible talent, incredible ethics. I mean, one of the families in Turkey, the one that has the Coke bottle, they have all the McDonald’s franchises in Turkey. They have a big joint venture with [inaudible] InBev for beer. And I could see why that’s the case, because they have the most pristine reputation in Turkey. And all these companies, before they would partner with anyone, they do a very extensive due diligence, and they had very deep comfort. So basically, it was really important to make sure that the families, and the promoters we were dealing with were absolutely the top-notch, highest quality. I think we ended up with much higher quality teams and promoters than I would have in The U.S. And those are also an anomaly, they’re few and far between. So I think that when I’m looking at foreign markets, these factors, more than macro, the people become a lot more important.
Meb:
We haven’t even spent much time on U.S. markets, what does the opportunity set look like to you now in the summer of 2023? Did you find a lot of opportunity? Are you finding a lot of landmines? What do things look like to you?
Mohnish:
I was having a very hard time finding stuff in The U.S., and part of the reason is my own fault, is that I’m a cheapskate. And the amazing thing about someone like Warren Buffett is he’s still adding to Apple. We had a discussion about whether he should trim at the current market cap, he’s still adding. And he’s adding at five times the price he first bought. So it’s amazing that he’s not anchored, it’s a great skill to have to be able to do that. I did find a couple of things in The U.S., I was actually surprised, I found them recently, but we will not talk about it. It’ll come out in the next 13F.
Meb:
We’ll watch your 13Fs. It’s funny is that we both have been longtime followers and curious about the concept of cloning. To me, and Charlie talks about it, I think certainly more than just about anyone, I don’t know if Warren talks about it as much, but Charlie talks a lot about that, that concept of 13Fs. And I love looking at yours, ’cause usually there’s not a lot of names on there. I mean, sometimes there’s four. We’ve got Micron? Brookfield?
Mohnish:
Yeah, I think the last one maybe had two or three names, and that was it. I mean, the thing is that we just haven’t been able to find stuff. And actually part of it is my problem, I think that I didn’t fully grasp how strong the tech tailwinds were, and how strong, for example, a business like Amazon is. I was surprised that in Omaha this year, at a dinner, I was seated next to Bill Gates, and I had two and a half hours with Bill Gates, I was like, “Okay, this will be fun.” And I played a game with him, I said, “Look, Bill, I’ll mention a name of a company, and you tell me whether you’d go long, or short, or neutral.” And he was willing to play the game.
I was just surprised at how much insight he had into some of these tech names, and the way he sliced business like Google versus Amazon, versus Apple. He was complaining to me, he said, “I invested in Berkshire as a hedge against everything else I’m doing.” And then I see that they had this huge Apple bullish. And so one of the [inaudible]. When I asked him about Apple, he was in the book, he said, “Look, they don’t do R&D.” He said, “We do R&D. Google does R&D, not as well, they’re loosey-goosey R&D.” But Apple, it’s top-down, it was designed by Steve to be one guy driving everything. And it’s a very different company than something like Amazon is. If I look at, for example, Facebook and Amazon, compare them, they will put a lot of stuff, throw a lot of stuff against the wall in Amazon, and a lot of small bets. And then they watch, and then they nurture the ones that are getting traction.
But when you have things like [inaudible] that Bezos loves, he’ll bury. It doesn’t get traction, he’ll bury it. And you look at some [inaudible] like Facebook, it’s one big bet. It’s one big bet on the Metaverse. And between the two, I just want to do it the Amazon way, I don’t want to do it the Facebook way. That’s just all or none. And Mark has gotten that message now. Now he’s become a hardcore, cut the costs, and show me the money kind of guy, which is great. But it was fascinating to hear it from Bill in terms of these different companies. Even the semiconductor companies, I mean, he gave me a 20-minute lecture on ASML, and the technology of ASML. I mean, he just knows it down to the nitty-gritty, which is really impressive. But I can tell you what he would do. He would go long Amazon, he would definitely go long Microsoft, and he would go long AMD. Those were his picks. And-
Meb:
Elon keeps whining about it, he’s very famously short Tesla, or has been, ’cause Elon’s always like, “When are you going to close out this Tesla short position?” It’s on Twitter all the time.
Mohnish:
Yeah, I think the whole shorting thing is a little bit dumb, and I think shorting someone like Elon is very dumb.
Meb:
On the hundreds, thousands maybe, of investments you’ve done in your career, what’s been the most memorable? Doesn’t have to be the best, doesn’t have to be the worst, but just the one that pops in your head as the most memorable investment for you.
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.
Meb:
Your comments I think are more important and profound than… It sounds very simplistic, but listeners, the concept, you don’t have to have an opinion on every stock that comes your way. And particularly the ones like Tesla, or Bitcoin, it’s not a stock, but everyone feels like they have to have an opinion on every single thing, and they say… It’s very refreshing to simply say, “There’s tens of thousands of stocks out there, I don’t have to have…” Like Jim Cramer, “Have an opinion on every single one. I can just simply sit there and let them pass by, and then on the occasion-”
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.
Meb:
Well, Mohnish, we kept you long enough. Before we let you go, what’s the best place for people to check-in with you, listen to you, what you’re up to? Is Chai with Pabrai the best spot?
Mohnish:
Chai with Pabrai is good. My Twitter handle is good. If you’re a bridge player, direct message me on Twitter, we can play together. And LinkedIn is fine too, any of those is just fine.
Meb:
Awesome. It’s been a blessing to catch up with you, buddy. Hopefully to see you in the real world. Thanks for joining us today.
Mohnish:
Thanks, Meb. It was a pleasure.
Meb:
Podcast listeners, we’ll post show notes to today’s conversation at mebfaber.com/podcast. If you love the show, if you hate it, shoot us feedback at [email protected], we love to read the reviews. Please review us on iTunes, and subscribe to the show anywhere good podcasts are found. Thanks for listening, friends, and good investing.
