Mohnish is just crushing it with his Q&A's. There were a few questions that he gets every Q&A and I didn't hear any new insights, so I didn't add them to this.
Q: How do you ID investment ideas to reduce where you spend your time
A: - You need a system to eliminate large swaths of companies where you can take a few seconds to a minute to remove
- If it's not in your CoC then you don't bother
- For instance, Pabrai doesn't care for US healthcare as it's outside his CoC and he doesn't find it interesting
- A lot of tech names are highflyers that lose him on evaluation
- Snowflake would take him 15 seconds to move on from
- Something needs to draw him in: look at VIC (well-filtered list), a good place to learn, ValueLine is good, SumZero is good, e-mailed investment ideas everyday which can be a hit or miss
- The objective of looking at a business is to say no and move on as quickly as possible. In some cases it might take a few seconds, others maybe a few days.
- You should be good at saying no. It should convince a deep skeptic that it should be in a portfolio
His thoughts on investment philosophy are always refreshing. I especially enjoy how he views his CoC and how important it is to all investors. This is an area that I think most retail and casual investors overlook. They see a hot name, read one analyst report on Motley Fool then throw 10 grand in a stock that produces a product they can't even pronounce.
One thing I've learned from Li Lu is that if you don't have an in-depth knowledge of the industry a potential business is in, you shouldn't invest in it. Li Lu says he likes to be more knowledgeable about the business than the business's own executives. This is insanely in-depth knowledge. And you can see the disconnect in knowledge between knowing more than the companies own executive and reading an article on the internet...
If you don't care to learn, then invest in an index. That simple. As Buffett says "diversification is a protection against ignorance." If you don't want to gather in-depth knowledge about a company, then diversify.
Be a generalist as well as you can, then when an interesting opportunity shows itself, specialize until you have an edge. Or if you don't think there's a point in having an edge, take a pass!
Q: How do you balance the idea of CoC and diversification in your portfolio?
A: - You don't compromise CoC
- Diversification is overrated. Look at Sam Walton. There are plenty of other examples of people who are very focused and they are successful
- So don't feel like you need to get out of your CoC to make a decision
- Uses example of Munger's friend who only invests in property within 2 miles of Stanford campus and is a billionaire
This is along the lines of questions he's always asked by professors who are taught EMH. He always has the same answers.
Q: How do you judge where you have the competence or not? What level of knowledge do you need to get to, to feel confident in your CoC?
A: - To ask a question is to answer it
- If you have to ask if something is in your CoC, then the answer is "no" and you can move on
- If you have to ask "what is this business worth" it's not in your CoC and you can move on
- You should know it very well, know the 2-3 variables that will drive most of the long-term outcome, and the valuation of the business is quite apparent
- If you move out of your CoC the risk factors increase
- Don't be concerned you don't understand many things. Pabrai says he doesn't understand 99% of stocks, just understand a few things well and stick to those few things
This is a topic I've been trying to come to grips with. After specializing in my field for so long, becoming a generalist has made me a novice in many areas, but I'm enjoying the process of learning about new countries, and industries around the world. I feel like I'm starting to understand how the world works a little better, and always looking for mental models I can apply to other areas of my investing.
Munger has said that he doesn't necessarily need to fully understand the company in order to invest in it. But he needs to admit that he has the ability to understand it sometime in the future. I agree with this.
Q: When you are first starting out in investing, when do you recommend digging into being competent in a business vs taking a pass? Uses a shipping company as an example
A: - At the highest level shipping isn't complicated.
- It didn't seem too difficult. He wasn't familiar with crude shipping, but he was curious about it. He wanted to see if he could read on it and understand the industry and business and it didn't seem difficult to figure out.
- Used a mental model from real estate to apply to shipping. In commercial RE (tall office towers in large metro areas) those may take 4-6 years to build from land > permits > build. In RE, when the market is tight and rents are rising a lot, these projects get started because the economics are good.
- So all these towers get constructed at the same time and are complete at the same time. So you go from a tight market to a depressed market because of all the supply.
- You won't see that same nuance in industrial space, or commercial warehouses, because construction is quick 12-18 months. Therefore you don't get these huge supply pumps.
- When looking at ships there were only a few manufactures, mainly in Korea. If you wanted one you put a deposit down and 3 years later you get a ship. If the queue was longer it would take longer.
- Shipping rates had wild fluctuations of 5000-250000 per day. Much wider ranges than CRE.
- So the VLCC business was like CRE on steroids, where the booms and bust would be amplified.
- It came down to understanding how daily rates were determined for shipping crude oil, and how you couldn't instantaneously increase the fleet if demand went up, because the ship supply would take time to increase
- If you're curious, learning about different businesses, industries and nuances is very helpful.
- Whether or not you invest is another question.
- Frontline was the company he was looking at as the largest operator of VLCC's at the time. The fleet was 350-400 ships and they had 80 of them. 100% of their fleet was on the spot market.
- Two ways to run a fleet as a shipowner. 1. Sign long-term lease agreements with Aramco, Exxon, etc. They pay a set amount per day for a fixed time period. 2. I'll rent per voyage. So when a ship needs to go from point A to point B you rent the ship for the given time period on the spot market.
- Frontline was all on spot market. They had debt on their ships, but the debt was tied to individual ships and was non-recourse.
- When he was looking at Frontline, the demand for oil was low, shipping rates were under 10k/day. At these prices, they lose money.
- When shipping rates collapse another nuance comes into play. After Exxon Valdes went to aground, new regulations came out. New ships had to be double-hulled. Single-hulled ships were cheaper than double-hulled ships. When rates collapsed there were too many ships and no one rented the single-hulled ships.
- A lot of single-hulled ships were scrapped.
- RE guys think rents will always stay high. Shipowners think the same way: rents for ships will stay at 250k for example for eternity. So they buy ships thinking that this "fact" will hold true.
- When ship rates are low 8-10k, the shipowners sell their ships because they figure their ships won't be rented.
- So when rates are low, the worldwide fleet decreases due to increased scrappage. But when the oil demand comes up, the demand goes up, and shipping rates will go hyperbolic (10k to 250k in a period of a few weeks for example)
- The liquidation value of the company was 8$/share and selling at $4, so there was no downside.
- In a few months when shipping rates went up, it went to 10-11. He exited and moved on. A year or two later it was over $150 per share. He could've kept a small position but oh well!
Never thought I'd learn this much about crude shipping companies! This was a really cool example. He went into detail on how he used a mental model from RE and applied it to container shipping, which I thought was brilliant. I imagine this was a stock that helped propel him to the "don't sell if it becomes overpriced" model he's interested in now.
Later in the talk, he did say that the destination for these types of businesses was impossible to predict and therefore he wouldn't have invested in this company if he were following his current checklist. But definitely a great learning tidbit.
Q: How do you think about diversification and portfolio construction?
A: - At Pabrai he has never invested more than 10% in a position.
- Doesn't cut positions if they are running. He's had 2 positions that makeup 70% of his assets.
- Don't cut the flower to water the weeds.
- In his personal portfolio he rarely has more than 3 stocks, many times it's one. His foundation is concentrated
- There aren't a lot of opportunities and you can't understand 100 companies at once.
Q: What is your view on efficient markets?
A: - Efficiency isn't directed at specific markets
- There are times when the US market will be inefficient
- Inefficiencies in US markets are where things are overheated
- Undervalued names in the US presently are few and far between
- Different market around the world are at different points in the cycle
- Looking outside the US could be an advantage to an investor
This is simple economics. Invest where you can get the best returns. If you want 4% then invest in the US. If you want to actually make money, look elsewhere. I really liked how he said the inefficiencies in US markets were that equity prices were overheated. Once they're on the opposite end of the spectrum, I'm sure you'll see him owning more US companies. I feel the same. There aren't a lot of interesting opportunities in the market in the US or Canada at these prices.
Q: Have his views on shorting changed?
A: - Look at the top 10-20 wealthiest people on the planet, how many short sellers are there?
- If shorting is so good, why aren't there amazing short sellers in the Forbes 400?
- That list is dominated by people with 2 characteristics: long-only and non-diversified
- On paper, it looks interesting to go long and short, but the issue with shorting is it comes with a need to be really good at risk management
- It's easier to make money on the longs
- You have to use leverage
- You have to constantly monitor share prices
My main takeaway from this was that the Forbes 400 is dominated by individuals who are long-only and who are non-diversified. I think understanding a business so well, that you only need 1-3 holdings is a great theory. I hope I can get to that point in the future.
Q: What sources of info do you find the most impactful in your decision-making?
A: - Depends on the situation.
- A great write-up on another site like VIC can be a good start. Then you need to dig in and find info yourself.
- Look back at their filings and see if what they were saying about the business 5, 10 years ago, did what they say transpire, or did they sweep it under the rug?
- It's a jigsaw puzzle, get some understanding of a business, have a thesis about why it could be interesting, look for evidence that confirms or denies the thesis. Look for a flimsy reason to stop research and be done and move on.
- Good thing about this is that you learn about the company, CEO, and industry that you can apply to your CoC in the future.
The more I research the more streamlined my process is starting to become and I have to say it isn't much different than what Pabrai does but we arrived at the same path independently.
For me it's I get my initial idea from screens (maybe 5-10%), VIC writeups, Twitter, Corner of Berkshire and Fairfax, or Seeking Alpha (although I mainly use this to follow analysis on what I already own). Then I begin reading annual reports and looking into the industry and some of the main competitors. I want to see that the company has a moat that will be hard for competitors to cross. This is the time that I may find things are too difficult or boring for me to understand and I usually end up moving on unless something intrigues me.
Q: How long do you typically hold a stock?
A: - Thomas Phelps 100:1 in Stock Markets author: every sell decision is an investing mistake. Every time you sell, you are acknowledging you made a mistake
- Utopia would be that you made an investment you can hold for multiple decades that compounds at a double-digit rate for the duration
- Businesses like this exist but are VERY hard to find at inception.
- Constantly buying and selling is tax-inefficient and forces you to constantly be on top of things
- Ask what a business will look like in 10-20 years?
- The holy grail is to find compounders that the rest of the world hasn't found are good compounders then sit on your ass watch your stacks pile up
Since I've started investing I've sold 3 holdings. The #1 reason: I didn't understand them well enough. The other reason was that I knew I could make more money by putting the proceeds into other companies. I don't plan on making these mistakes again. I have to be even pickier about what I find going into the future because I'd prefer not to sell.
Because I'm a retail investor, I don't have a pool of funds to allocate. But I do have monthly savings that will accumulate. I have this mental barrier that I don't really like having my cash sitting idly and I sometimes make rash decisions to deploy my capital when I should be waiting for juicier opportunities. 1 idea every 1-3 years is all you really need.
Q: Sounds like the transition Buffett had moving from Net-Nets to great businesses at reasonable prices. How has your process changed? What discounts do you use, 50%?
A: - Just had dinner with Charlie and he will say "XYZ" is a cinch, but "ABC" is not a cinch.
- If you had asked Buffett and Munger about AMEX 20 years ago, they would have said it was a Cinch
- The odds something could destroy the franchise was so low it was a cinch
- They wouldn't say AMEX is a cinch anymore
- If Charlie says something is a cinch, you wait for a cheap price and back up the truck
- You want to get something as close to a cinch as possible
- If he asked Charlie if Costco is a cinch, he'd probably say yes
- Fanatical focus on cinches or near cinches
- Capitalism is brutal, 99% of businesses will die in 10-20 years
- A friend of his visited a company CFO and he went to meet him. The CFO had his feet on the table. His friend asked him if had anything to do? The CFO replied that any company that has towers to sell has their number, if they want to sell they can call us, and we already know what we would pay for them. They call, we give them our terms, and we get them or we don't.
- If the CEO has their feet up on the desk, it's probably a cinch
- Pabrai is going after long run-ways. He looks at his portfolio like a museum: only cinches, and only feet-on-desk businesses.
- He is not in the promised land right now. Only 2 reach these criteria.
- Another question to ask is what is the destination? Costco in China got mobbed. They had to put restrictions on it. Costco doesn't have a presence in 160 countries. Could they have one in 10 of them?
The three main points here are things that any long-term investor should strongly consider adding to their checklist:
Is it a cinch or near cinch?
Is it a feet-on-desk type business?
Does their destination look excellent?
I feel these go hand in hand with being able to estimate a companies value in 10 years with a high degree of certainty. They certainly are moat protecting attributes, which is an are you should always be looking for when analyzing potential investments.
Q: What items or questions would be on your checklist?
A: - It's a living, breathing document
- The three above: can I see the destination, is it a cinch or near cinch, is it a feet-on-the-desk business?
- The remaining 160+ items he'll pass on discussions
Q: How do you study intrinsic values? Do you use DCF? Do you use scenario analysis like in your book? How many scenarios do you use?
A: - Depends on the business
- For Costco, you'd need a range of future stores, future memberships, future profitability per store, some numbers along those lines in your head
- Then backtrack from that into a reasonable price to pay
- Each business is different
- Analysis varies by the nature of business
- Not a fan of DCF. I don't like excel.
- I know if I can get Costco at at PE of 9, I don't need Excel to tell me that I'll make money
I tend to use a similar system. I don't like discounting free cash flow to present values. Instead I like to estimate what earnings will be like over a 10 year period, then I apply a terminal PE multiple. Then I discount them back to a present value at whatever return I'm looking to achieve. Then I half that. If the price is below that number it passes on that metric.
I won't lie, I do use excel. But I've also been practicing the math in my head enough that I can look at a companies financial info for the last 10 years and tell if the growth on certain metrics I like meet my minimum qualifications. I just like to have things neat and orderly, and typing it out is better than my chicken scratch writing.
Q: Do you use a hurdle rate?
A: - The hurdle rate has changed quite a bit on with the buy and hold forever view
- If I bought Costco at PE 9, held it for a few years and then it went to a PE 40, I wouldn't sell it.
- I do know that returns at 40 PE won't be as good as a 9 PE, and the risk goes up, but I still would not sell.
- If the family of Costco isn't selling, think like them. THey wouldn't sell
- Is the business getting better, is the moat getting deeper, and is the company becoming more valuable?
- If those answers are yes, you leave it alone and don't worry about what kind of return it will generate in the future.
This term isn't even in my vocabulary. Maybe I'm just dumb, but it seems like it's a term used by EMH fan boys to justify "paring" positions. And making decisions based on interest rates. I couldn't care what interest rates are now and 10 years in the future as it doesn't effect my investing decision making.
Q: Do you apply investment tenets to the social work you do in philanthropy?
A: - He was disappointed in a lot of charities. They either had way too many initiatives, or the charities don't deploy their capital.
- Or they deploy their capital very poorly.
- Most businesses that don't deliver to their customers die. This isn't the case in philanthropy.
- The principle that Rockefeller applied to create wealth is different than what his foundation does. The people running the fund, just want to collect fees, they don't care about the impact.
- When Mohnish started Dakshana he wanted to have a real impact. He wanted it to be measurable.
- So he lent himself to programs with easy measurement. He wanted the feedback from measurement.
- Independent 3rd parties give his foundation a report card that he pays close attention to.
I knew he'd have an interesting contrarian view of philanthropy and he didn't disappoint. Everything he says is completely rational and makes sense to me. I don't follow charities very closely, but if the funds act like a private fund, then you would expect them to be inefficient.
Q: Do you have any large setbacks in your history, and how did you overcome them?
A: - Goes over his favorite quote (which I love) "if wealth is lost, nothing is lost, if health is lost, something is lost, and if character is lost, everything is lost"
- In investing if you make 10 investments 5-6 won't work like expected.
- Projecting the future isn't easy and accurate. Who could have predicted the pandemic? Who would have thought the stock market would be where it is today given the pandemic?
- Having investments not work out or go south is par for the course. You would love to not lose any money, but it happens.
- At Pabrai Funds, they've had several zeros.
- Countless investments that went flat or declined somewhat
- Have discipline and process. Ride them out and learn.
- Setbacks don't rattle him much, he's not wired that way.
This fact has been hammered into my brain so much during my reading that I don't think I'll have much of an issue dealing with it when I have my inevitable screwups. But as long as I can pick a few winners, which i think I have, then I have nothing to worry about! I've always been an optimistic person who finds learnings experiences in most failures.
Q: What is the most important trait for an investor? And what is the most valuable skill to develop?
A: - Extreme patience.
- The time frames business goes through change is different from which your brain processes information. Business change takes years or decades. The processing time of your brain takes seconds or minutes.
- If you love watching paint dry or thrives in inactivity, you'll do well.
From doing my research on psychological aspects of markets I have to say this is spot on. Also in talking with friends who seem to be interested in market, they all seem to be short-term driven. THere is a reason the media doesn't stop talking about Gamestop... Seeing "Gamestop goes up 1000% in 4 hours" is a lot sexier than saying "Berkshire Hathaway grows 15% this year" even tho one business is worth 500b+ and has been compounding at high rates of return for decades and the other one probably won't even exist in 1 decade.
Q: Was your lunch with Buffett worth it? What was your biggest takeaway?
A: - My only expectation for the lunch was to thank him. I used his intellectual property and used it to make my living.
- The lunch lead to a relationship with Buffett and Charlie and many other wonderful relationships
- They recalled 55 different questions
- Wanted to make them feel like they got a bargain
- The single most important decision you make in your life is who you decide to marry
The rest of the Q&A was a mixture of questions he's asked regularly. If you want to be a fund manager, you should be independently wealthy and have a long track record of success. The best way to learn is to have a brokerage account containing a high percent of your net worth, and invest in high conviction ideas. The biggest mistake he made was in 2014, where he had a holding company and acquire insurance businesses, so he'd have a float. He then learned a few things that made it a mistake for him, then he decided to unwind and get back the capital. Luckily there was no loss in capital, but it was a mistake for sure.
Hope you enjoyed the Q&A and keep on thinking!