Mohnish has been on his grind with his talks lately! As usual, he's dropping knowledge bombs on future generations and sharing his thoughts with the masses. Here are key points from his latest Q&A.
Value has been underperforming growth for several years, has this changed your investment philosophy?
- Value and Growth are two sides of the same coin
- Businesses all have future cash flows, if we pay less than the DCF, we are engaged in value investing, no matter what the growth outlook is
- In 2000 he visited Microsoft to talk to potential investors for his fund. Many of them had a lot of their wealth in Microsoft and at the time they were overvalued. Many of them said Microsoft has gone up for ages and wouldn't stop any time soon. Its value was so far ahead of its future cash flows that it was unlikely to give good returns on the stock.
- It was a rough ride for a while after, because the price had to catch up to its valuation in an environment of volatility (had 70% drawdowns, despite positive growth)
This is something I've come to understand more since I started my deep dive into investing. The point of investing is to buy shares in a company where the business economics will improve many years down the road. The stock price will follow this success. It doesn't matter if you are buying something that is 50% under intrinsic value or 90% under, you can be very successful if you buy something with a good runway that isn't egregiously expensive.
How do you gain conviction to hold onto your investments during big bear markets where your portfolio goes down substantially?
- Mohnish says that during Munger's lifetime he's witnessed Berkshire go down by 50% 3 times and that he considers this par for the course.
- In a 12 month period you'll see a 100% delta. In auction driven markets you'll see large swings in stock price because of auction driven markets
- During large swings down, your stocks will drop below intrinsic value
- Don't be leveraged in large drawdowns (or anytime)
- Wealth loss is temporary, you'll live to fight another day
- Opportunities are everywhere during large drawdowns: get rid of lesser quality businesses for high-quality bets
- During the great recession commodities got crushed, he made a basket of 7-8 commodities that he added 2% to and all of them was at least 2x in a short period of time, with some of them going 7-8x.
- Expect volatility and you should be comfortable with it
The way I rationalize drawdowns (for when I experience one when I have money in the market) is as an opportunity to buy great businesses at great prices. If you are spooked that your business will go below intrinsic value, then you don't understand it well enough to assign it a price. You should happy as a pig in poop if a business you follow drops below intrinsic value because you can now add to your position to reap the rewards of the future.
The other important thing is to have some sort of cash position when the markets get frothy. I don't think there is a specific percentage of your portfolio that you should hold in cash, but if you know that the guys you follow have large cash holdings, it's probably a good indicator to do the same.
How do you structure your portfolio and how do you deal with portfolio management issues that people may face?
- Think of yourself as a partner in a business rather than an investor
- Even If you own .01% of a company, think of yourself as a co-owner
- Business owners like Sam Walton, or numerous small business owners, are incredibly focussed and ignore diversification
- WB: If you understand a few businesses well, it's madness to put money into your 25th best idea
- Charlie Munger: there's no need to have a portfolio with even more than 5 stocks. 3 stock portfolio is more than enough
- He rarely has more than 2-3 in his personal accounts
- In Pabrai Funds, he won't put more than 10% at cost in a single idea
- But he's had ideas that went up so much they made up 60% of the portfolio
- It's hard to outperform the index with a 20 stock portfolio
- Understand a few businesses extremely well
- When there's something you understand very well and it's underpriced, load up
Nothing to add here as he's been drilling this down into my head and I love the idea.
When you build your checklist, what are you looking for?
- Used to try buying a dollar bill for 40-50 cents then sell at 90 cents to a dollar, and hopefully get a 2-3x if the intrinsic value increased
- He now switched from looking from undervalued businesses to great compounders
- He's invested in great compounders in the past, the price went up to where he thought it was too risky to hold on and would allocate capital into other ideas. This is tax-inefficient.
- If you can identify businesses with long runways that you can buy at even a small discount (might not be 50% off) and you're correct on the runway and long-term value creation, those can turn into 10-100 baggers.
- Only a few of these can make a huge difference
- During the nifty 50, you could identify 50 great businesses with great future prospects, but they were expensive. Included things like McDonald's, Coke, Polaroid, Kodak, etc.
- End results of Nifty 50 wasn't great because many of these holdings were training at 50+ PE's
- There were huge drawdowns in the '70s where the market went down 75%
- Unfortunately, even after this drawdown the pain wasn't over because the stocks were still so overvalued.
- If you put Walmart in the portfolio at 2% weighting and run the numbers the nifty 50 beats all indexes by a mile
- If you remove Walmart it performs terribly.
- 1 business at 2% weighting can cause that big of a difference
- Walmart at that time had a ridiculously long runway
- If you have a portfolio of 10 stocks with long runways, that aren't bought at ridiculous runways, you will only need 1 or 2 of those to perform really well. As long as your other holdings don't cause too much of a drag
- When you make 10 bets, at least 4 won't work the way you think they will
- In the case of the Nifty 50, you'd have a 98% error rate, and you still would've crushed it
- Only the Walton family has held its stock from 1990 until now. It's obviously a great business, so when you find one, hold it and let it compound for you
- Extreme patience is the number one skill for investing. If you love watching paint dry, you'll do well.
This is a cool concept. I know Peter Lynch has written extensively about how you should expect the majority of what you pick to fail. As Mohnish discusses, a few big hits can drastically change the outcome of your portfolio provided that you hold on to them and let them compound for you! Excited to see how my portfolio performs for years to come!
What's his current view on the macroeconomic environment.
- He doesn't understand most of what's going on in the macro, he focuses on the micro
- For instance, at the end of the day for Walmart, the only thing that mattered was Sam Walton. Everything else going on around the world mattered not one little bit.
- Focus on the micro. Don't focus on the macro. Try to understand certain businesses that you think are understandable and try to get an understanding of where they are heading.
- When there's a fire in the theatre, he goes into the theatre when everyone is trying to get out faster than Usain Bolt in a 100m dash
- For instance, in his Turkish business they had a bunch of negative things happening in the macro, but when you look at just the business, he was buying it for one year's rent. It's that simple. He didn't care what would happen to the Lira
- The Lira went down 40% within 6 months after he invested. In dollar terms, he was up 7x, in Lira 12x. There is a tonne of variables that can change the price based on inflation and blah, blah, blah. He doesn't care, find great companies and hold on to them.
This is something that I know I can work on. I do enjoy reading about what is going on in the world in terms of economics, but in all honesty, I don't allow it to guide my investments. I will buy something regardless of the economic conditions as long as the company has great prospects, is well priced, and has great management. I do enjoy learning about the macro, but it's more out of curiosity rather than a guiding light for my investment philosophy.
How does he narrow down his screening process when picking new companies in terms of North America and Worldwide?
- Being narrow is good.
- One of Charlie's friends invests in real estate within a two-mile radius of Stanford campus. He doesn't care about things that aren't in his circle of competence.
- When things are euphoric he sells, when there's panic he buys
- You do not need a large circle of competence to well as an investor. The most important thing is to stay within the boundaries of what you understand
- 2018-present, it's been tough to find things that are priced well in North America
- Had friends in Korea and Turkey. Went to both these destination to hang out and see some of the companies they were holding.
- These friends were more of the Graham type, deep value investors and not the Munger compounder focus
- Korea and Turkey were both very cheap markets in 2018
- This helped him expand his circle of competence so he could understand things faster
- You don't need to try and find out the whole world. Try and understand things that are easy and things that you use regularly.
I've heard this story of Charlie's friend before and it's really interesting. I'm trying to read, read, read and learn a lot to try and somewhat expand my circle of competence. I have a lot of interest, and I like to try and get a more in-depth knowledge of those areas. I like how Mohnish learned directly from friends, I feel that gives you a huge edge in knowledge because you can expedite your learning process from people who already have skin in the game.
When looking at new markets do you look at TAM and find investments in that space? For instance, do you look for businesses that have untapped markets?
- Focuses on bottom-up
- There's nothing wrong with that model, but it isn't for him
- Can I understand this? Yes > Whats it worth? No> Move onto other opportunities.
- Netflix can keep increasing rates and there probably won't suffer from disconnects in memberships. That's a moat you want.
What's your highest conviction pick right now?
- PASS. Lol.
- Too much downside, not enough upside to tell.
- It's a bad idea to just buy something that someone else tells you to buy.
- 3 Variables that drive long-term wealth. 1. Amount of capital you have access to. 2. Length of the runway, how much return do you have? 3. Rate of return.
- Starting young is very good because you have long runways
- Life is all about the number of doubles
- Saving and compounding at 15% will end up in mind-boggling rates of wealth in 50 years.
- If you want to do the least amount of work possible, invest in indexes.
- Mr. Money mustache assumed he'd get a generic programming job, with a generic salary and bonuses.
- His goal was to be financially independent at the age of 30, he graduated at 22.
- Don't follow dogma like "spend 1/3 of your earnings on housing"
- He's done all this by saving and living below his means and being frugal
- He was also lucky to meet Mrs. Money Mustache who shares his views
- Important things you can control: savings rate, runway (by staying alive), rate of return (doesn't matter much with a long runway, but get something
Mohnish is the king of compounding so no surprise here that he breaks it down simply. I like the philosophy of controlling what you can control and letting the rest play out as is. Savings rate and runway are two huge things I have in my corner, and I plan on improving my rate of return as I get more and more knowledge.