As usual, a variety of great topics were covered. I really enjoyed his thoughts on opening a Pabrai Fund and how he'd go about it. I also liked his insights on how he made rules on his fund that fit his lifestyle and attract the exact people he wants in his fund.
What made you get into running an investment fund and how has it evolved over time?
- Pabrai Funds started accidentally as a habit
- He'd been applying the methods of Buffett and Munger for 5 years
- He was approached by friends to who he gave free stock tips. But said the disconnect between his tips and knowing when to buy, sell, etc. made the process a little bit too laborious. They wanted to pool some money together for him to manage
- He thought of this as a hobby because 1 million dollars AUM isn't going to pay bills
- 15 months after starting his AUM was up to ~2.5m and he decided to take it more seriously. Bringing in more investors and money
How has the fund changed over time?
- Be a continuous learning machine
- All knowledge is cumulative
- Unlike being an athlete, you should be getting better and better the more you age
- Gaining experience through learning and learning from mistakes, he's seen a massive change in his investing philosophies
- Nick Sleep's letters drove a paradigm shift in his philosophy in 2020. Read them.
- He felt the model that Nick Sleep was doing was vastly better than what he was doing. Be a founder or manager of a business. This changes the time horizons of potential businesses and the types of businesses he wants to own.
- This method is tax-efficient and he says more satisfying
I've been getting through the Nick Sleep letters from beginning to end. I'm definitely moving towards being more a business owner rather than joust a stock picker. I like the idea of not having to constantly find new ideas and holding onto really good ideas as long as the business remains in a great position. Luckily most of my investments I feel are long-term in nature and I plan on holding most of them as long as the business is doing well or if I find something with even better returns (which should be rare, as I'm going for pretty high returns, so knocking something off will only identify mistakes from myself).
Did that change the way you value companies because of the pandemic?
- No it doesn't change you value businesses
- Moved from purely buying businesses that are 50% off to long-term compounders to businesses that can grow and scale over time
- You may have to pay more for growing pies
I will admit, I have bought companies that have pretty high PE ratios >25 and non-existent earnings. So I don't think of myself as being the type who is only looking for PE of 1 and asset value plays. So I feel I'm on the right path here and will continue simply buying businesses that will grow and give me a great price.
Thoughts on investing in multiple countries?
- Over the last few years, he's found it difficult to find good businesses in the US. Things seem to be priced for perfection
- So he wanted to broaden his options where there were entire markets that were cheap: Japan, Korea, Turkey, etc.
- Went to Seoul to visit a friend's businesses multiple times and learned a tonne from doing this
- Because he had a great resource, he was able to clone them and improve his circle of competence.
I'd love the opportunity to go abroad and see companies through the eyes of locals. I feel this would give unique insights that you wouldn't be able to get without having feet on the ground. Hopefully, I'll get the financial freedom to reach that point at some time, but not there yet!
Is there anything that changes when evaluating businesses in one country compared to another?
- You have to be sensitive to culture and how businesses managers and owners think about their businesses
- For the most part, it's not that different, a business is a business, look at future cash flows and discount it back.
Thoughts on past investments? Why you got into or out of them?
- The best lessons come from the losers
- You don't learn much from your winners, as you end up just patting yourself on the back
- Created a checklist 13 years ago, but it's an ongoing process. It was created looking at all the big mistakes great investors have made. There was enough data that should've given them pause, but they went ahead anyway.
- 3 main categories: leverage was probably the biggest, misunderstanding of the moat and competitive advantage, management, and ownership issues
- He's had multiple zeroes from companies with leverage problems, so he's a lot leerier in going into situations with a lot of debt
- 2007: Mortgage company, Delta Financial. They were an underwriter of mortgages, package them, securitize them and get them off their balance sheet
- Was profitable because it didn't need equity
- They went bankrupt during the GFC
I haven't really made a checklist for myself, but I know I need to start one. I think Phil Town has a decent checklist, but it's very simple and I feel removes way too many options. Now that I'm learning more and more I feel I have the tools to begin creating my own. Unfortunately, since I'm also a newer investor, I don't have as much time under my belt for mistakes to learn from. So I'll have to keep diving into the history of other great investors and learn from their mistakes as well as my own.
What are your thoughts on looking for competitive advantage businesses?
- It will show itself in numbers
- Revenue, growth, cash flows will show it's a great business
- Moats make themselves visible most of the time
- It's not hard to sift the great from the not so great
- The issue is that businesses that are great, are well recognized as such and are usually traded fully priced or overpriced. Rarely underpriced
- The key is finding great businesses that are also misunderstood or facing temporary headwinds, which have decimated the share price.
This was excellent. This reinforced who I already evaluate businesses, using metrics like Revenue, Earnings, Free Cash Flow, Cash From Operations, and ROIC/ROE to give you a snapshot of how good a business is. If these numbers are growing well with little to no one-off outliers, you are looking at a great business.
The hard part is finding one that is cheap. It's nearly impossible. But... Like Mohnish says, if you find companies that are not well understood and/or are facing temporary headwinds, these great companies can be underpriced. But you often need to act fast!
What's your opinion to incorporate value given market trends this year?
- I don't worry about trends or forward PE
- PE is an inadequate metric to help much
- The businesses that you own, what are their prospects in the next 5-10 years?
- If they are growing at 30% a year and can do that for 5-10 years, then a PE of 23 is still pretty cheap and I'd ignore whatever noise there is (temporary drawdowns, etc.)
- I don't focus on markets and macro events. I focus on what one particular business will do over time.
- Goes over Walmart, which I've covered extensively listening to Mohnish, so I won't comment here. Check it out here.
- The important thing in investing is to be able to tell what a business will look like 5-10 years from now and what will cash flows look like?
- The best thing to do is nothing if you have businesses that look good going into the future.
What advice would you give to younger investors who wanted to start their own investment vehicles? Is 0/6/25 feasible even at the beginning?
- Yes. Use that structure from the beginning.
- Li Liu invested tuition float that he turned into a million dollars
- Charlie Munger's perspective is if he wanted to give money to someone to manage, the first thing he would look at is, is the manager financially independent?
- If you are a gifted money manager, if you start with small sums and are beating the market by a healthy manager, you should be pretty wealthy in 10-15 years.
- Mohnish would ask potential money managers what their record is with their own money before taking on investors money
- Mohnish's results from 94-99 he turned 1 million into 10 million. So in 5 years, he went 10x.
- Buffett says "if you are a manager who has delivered and in the future is likely to deliver significantly above-market returns, you could be a leper on a rowboat in the middle of the Atlantic and people will swim through shark-infested waters to give you money to manage."
- People will find you if you have good skills.
- His number one piece of advice for people wanting to start a fund is to be able to look back and see what they have done for themselves. That is basic proof that you are a good manager if you have accumulated some wealth
- The second piece of advice is to focus on friends, families, and fools if strangers won't give you money
- Amongst the 3, the fools are the most important
- 0/6/25 gives you a competitive advantage
Really enjoyed all these insights.
How do you get like-minded investors to invest with you?
- If you own a McDonalds and you serve fine french food, you will have confused customers
- How you interact with your investors will "drive who comes to the restaurant"
- If you have certain rules and behaviors, you will attract specific investors
- What's the point of being independently wealthy if you can't do what you want?
- "I don't like a lot of human contacts. Generally, human contact is not that exciting. And I don't like to have a lot of conversations with potential or current investors etc. I just like to be in a room by myself. That's quite exciting to me."
- Due to the rules he made, certain things happened. He knew who would "walk into his McDonalds."
- The people who walked in were mostly the principals, not agents
- Most are first-generation entrepreneurs.
- Because he didn't want to have conversations, his clients did research on their own
- He has investors in NZ that have wired millions of dollars to his fund and he hasn't even had a phone conversation with them.
- He hasn't met a multitude of his investors.
The highlighted quote above is basically me. Probably why I like Mohnish so damn much!
What suggestions do you have for young people to become better stock pickers?
- Don't bother having an opinion on 95% of all stocks out there.
- What do you understand well? Focus on that.
- Don't focus on the big wide world. Invest in things that make sense and intrigue you.
- Don't complicate it more than that.
This was great. I think he does a great job showing that you can ignore a lot of what is happening in the world and still do very well. Just focus on what you know, try to understand what you know about or want to know about better than other people and you'll gain an edge that can be deployed in order to make a tonne of gains. I'm trying to learn as much as I can about building a circle of competence. Since I don't feel I understand enough things well, I'm working on growing it in a few focused areas.
After identifying a company you find interesting how do you decide whether to pull the trigger on an investment?
- You should be able to explain to a 9-year-old in a few sentences why you will be drowning in wealth with said business. And why there is no chance you will lose any money.
What does he see in SRG that other investors don't see given the issues that commercial properties have had due to Covid?
- He'll mostly duck the question but say this: the stock market is like a theatre, and in the theatre, the rule is that every seat has to be occupied. Or in other words, if there is a business and it has 10 million shares outstanding, every one of those shares has to be owned by someone. Now there's a fire in the theatre or someone yells fire. When you hear the word fire you get up from your seat and go to the exit. You don't ask questions such as if the fire is real or not. But there is a rule in this theatre that you can only leave your seat if you find something else to take your seat. The share has to be held by someone.
- Now say you leave the theatre, remember that you have to have your seat filled. You find someone outside and tell him the movie is great, but there is a small fire. I paid 10 bucks for the ticket, but please take it for 50 cents? No... How about a quarter?
- There is a clearing price for these tickets.
- He will answer the question on SRG when he doesn't own it.
- Before Covid SRG was trading at 35 bucks a share and the Covid fire began and instantly the stock went to 6-9 dollars per share.
- Now he owns ~1/8 of the seats in the movie, so he must clearly really like the movie. It might be a little warm under the seat but the movie is good.
I think I have some idea of why he likes it so much. I'm a shareholder, and there is a lot of info out there. But what I would say is that SRG has a few crown jewel developments that won't be ready for a few years. The debt and current book value scare off a lot of people who are on shorter time series. For myself, I can look 5-10 years down the road at the value of what they will own and I think we will do really well on this one.
When do you pare back a position or exit the trade?
- The Walton family hasn't done that in 51 years.
- The question he'd ask is: is the business getting better? I wouldn't focus on the evaluation. I imagine myself as the owner or family member of the owner. If it's worth 100 and trading for 120, I don't care.
- I'm concerned with what is the quality of the business and is it getting better?
- Unless the outlook is egregious like Snowflake trading at 80x Sales, then it's a different conversation.
- But if something is slightly overpriced that doesn't matter if the company is going to keep increasing its intrinsic value.
- We should be comfortable with 95% of your portfolio in one stock. For instance, if you had a few stocks 10 years ago and you had Amazon, Amazon would make up a massive amount of your portfolio. Would you really sell Amazon today? There is no good reason to do that.
- Doing nothing is a good strategy.
I think the idea of paring back position for portfolio re-positioning is a regulatory thing. I don't really care if a position I have becomes a huge part of my portfolio. I have 2 positions above 15% of my portfolio, SRG, and INMD. I don't see any reason why my initial theses have changed on either of these so why would I remove profits?
What's a good number of stocks in a portfolio?
- Charlie would say 4-5, and I like that for your own money.
- Pabrai Funds only goes 10%.
- He thinks 10 is plenty.
I like the idea of focused portfolios. I don't think I'm quite at a point where I'd be comfortable with 4-5, but I'm double that, so it's not like I'm a mutual fund. I plan on making even more focused bets as I become more proficient at analysis.
How much information do you need to understand in a business in order to buy it?
- Some people will start their position small and buy it as it goes up in price.
- Risk factors decrease as you own the business for longer because you begin to understand it better.
- You understand a business only after you own it.
- Nick Sleep started with 30 stocks but would have 7 positions making up 80%.
- MP doesn't do this but it's a fine approach.
How do you evaluate companies where there isn't a lot of info available such as emerging markets?
- If you don't have access to enough data, you should take a pass.
- There is such a large range of investment opportunities to take ones that are hard to understand.
- For instance, if you use a product and the moat of a company, then the disclosure of a company isn't as important.
- I wouldn't invest anything until I have great conviction. You can get great convictions if the business isn't providing a lot of detail.
What's been worrying you in this market?
- If wealth is lost, nothing is lost, if health is lost, something is lost, if character is lost everything is lost.
- I don't concern myself with what happens in the market.
- During the GFC his portfolio went down 2/3's and his wife didn't realize it happened because nothing changed in his behavior.
- He concerns himself with individual businesses. When they are on sale, he's happy.
- Don't worry about the macro.
Looking forward to more great Q&A's! If you enjoy reading them in a few minutes rather than watching a 60-minute video please make sure to come back to The Thinking Investor. I don't plan on stopping these summaries as I get a tonne of knowledge out of them and I hope you do too!
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