Other[Music][Music][Music][Music][Music][Music] combines the old value tenets of Grahamcombines the old value tenets of Grahamcombines the old value tenets of Graham and Buffett with a modern holisticand Buffett with a modern holisticand Buffett with a modern holistic approach to investing in June 2007 heapproach to investing in June 2007 heapproach to investing in June 2007 he made Headlines by winning a bid of overmade Headlines by winning a bid of overmade Headlines by winning a bid of over 650 000 US Dollars along with a friend650 000 US Dollars along with a friend650 000 US Dollars along with a friend for a charity lunch with Warren Buffettfor a charity lunch with Warren Buffettfor a charity lunch with Warren Buffett he is an author of the dhando investor ahe is an author of the dhando investor ahe is an author of the dhando investor a book on his investment style and Mosaicbook on his investment style and Mosaicbook on his investment style and Mosaic perspective on investing in which heperspective on investing in which heperspective on investing in which he distilled the Warren Buffett method ofdistilled the Warren Buffett method ofdistilled the Warren Buffett method of investing his approach to life isinvesting his approach to life isinvesting his approach to life is covered extensively in guys Piers bookcovered extensively in guys Piers bookcovered extensively in guys Piers book the education of a value investor he isthe education of a value investor he isthe education of a value investor he is an investor with nerves of Steel andan investor with nerves of Steel andan investor with nerves of Steel and West with unshakable conviction ladiesWest with unshakable conviction ladiesWest with unshakable conviction ladies and Gentlemen please put your handsand Gentlemen please put your handsand Gentlemen please put your hands together for monish babaroy managingtogether for monish babaroy managingtogether for monish babaroy managing partner popular investment funds as hepartner popular investment funds as hepartner popular investment funds as he shares his Insight with usshares his Insight with usshares his Insight with us
Otherthank you very much pleasure to be herethank you very much pleasure to be herethank you very much pleasure to be here and pleasure to be at a Morning Starand pleasure to be at a Morning Starand pleasure to be at a Morning Star conference actually I used to I used to
Questionerconference actually I used to I used to live in Chicago in the 80s and 90s and actually new morning stuff and it was very embryonic and it's always done really good work and in fact it's just a coincidence but their focus on the First dovetails with with what I've always always thought are important and fundamental aspects of investing anyway the subject at hand today which I'm going to talk about is the Ten Commandments of investment management and these these Commandments basically evolved over the years and actually I came up with the framework in the last few months but they've been very fundamental and I don't think they're really subject to debate if you will it's almost like the laws of physics so given that we're on a somewhat tight schedule I'll get get going with them the first the first commandment which is thou shall not skim off the top
Questionerthou shall not skim off the top and so just in case that's nebulous when Warren Buffett and Charlie Munger ran there investment Partnerships in the 1950s and 60s the fee structure that Buffett followed was do not charge any management fees there was Zero management fees and then there was a six percent hurdle and then he got paid one-fourth of the returns above six percent and it was subject to high water marks for example if the the fund was up 10 in a year he would get paid one percent if it was up five percent he wouldn't get paid anything and if he was up 15 he would get about two and a quarter percent so it was a complete align with the investors and the fee structure has a number of effects on how fund managers think so one of the first effects it has is that they stop becoming asset Gathering machines because you don't get
QuestionerGathering machines because you don't get paid for assets you get paid forpaid for assets you get paid forpaid for assets you get paid for performance and and that's generally aperformance and and that's generally aperformance and and that's generally a good thinggood thinggood thing and and the second is that they getand and the second is that they getand and the second is that they get focused on trying to do the bestfocused on trying to do the bestfocused on trying to do the best investing they can and it would lead toinvesting they can and it would lead toinvesting they can and it would lead to a lot of other things for example beinga lot of other things for example beinga lot of other things for example being relatively concentrated the lack of feesrelatively concentrated the lack of feesrelatively concentrated the lack of fees also means the lack of a team which Ialso means the lack of a team which Ialso means the lack of a team which I will get to in the second commandmentwill get to in the second commandmentwill get to in the second commandment but basically there's intense Focus thatbut basically there's intense Focus thatbut basically there's intense Focus that comes out of that on not havingcomes out of that on not havingcomes out of that on not having frivolous expenses so the question thatfrivolous expenses so the question thatfrivolous expenses so the question that a lot of investment managers would havea lot of investment managers would havea lot of investment managers would have is wellis wellis well how do I take care of the expenses of anhow do I take care of the expenses of anhow do I take care of the expenses of an investment operation if I'm notinvestment operation if I'm notinvestment operation if I'm not guaranteed a certain amount of fees myguaranteed a certain amount of fees myguaranteed a certain amount of fees my answer to that is that if you set up aanswer to that is that if you set up aanswer to that is that if you set up a steel millsteel millsteel mill or you start an airline or almost anyor you start an airline or almost anyor you start an airline or almost any other business venture set up a Refineryother business venture set up a Refineryother business venture set up a Refinery there is nothing ordained in capitalismthere is nothing ordained in capitalismthere is nothing ordained in capitalism that assures you that those Ventures
Otherthat assures you that those Ventures would make money it's a risk and so Investment Management also if you set up an operation and you now this is relatively low capex but if you set up an operation you have some expenses that's fine if you do well the operation will end up being successful if you don't do well then it doesn't deserve to skim off the top and cover some of the losses it works out now the second the second commandment which actually dovetails in the first one is thou shall not have an investing team and and this is something that always puzzles and surprises me is when I look at Warren Buffett and Charlie Munger again so today Buffett is managing I think something north of 400 billion in in assets I think the stock portfolio cash Investments is about north of 200 billion and there is no team he doesn't have an analyst he doesn't have any
Otherhave an analyst he doesn't have any associate he manages that by himself and besides managing the 200 billion of Investments on the side he until recently also managed about 80 CEOs and businesses that are producing 10 20 billion a year in cash flows so not only is he a leader of a large conglomerate with lots of direct reports he has a very significant portfolio and on the other hand I routinely run into funds that will have maybe under 100 crores or 200 crores of assets with several people hovering around and I actually don't understand what they do because basically you need to find about three or four stocks in a year and I don't know why you need even more than half a human to do that but the industry Works a certain way and it doesn't weigh it doesn't work the way the high priest of the industry and the gods of investing
Otherand the gods of investing have said that it should work andhave said that it should work andhave said that it should work and actually when you follow the firstactually when you follow the firstactually when you follow the first commandment which is not skimming offcommandment which is not skimming offcommandment which is not skimming off the top it actually automatically leadsthe top it actually automatically leadsthe top it actually automatically leads to following the second commandmentto following the second commandmentto following the second commandment because if you're not going to bebecause if you're not going to bebecause if you're not going to be collectingcollectingcollecting fees on a certain amount of assetsfees on a certain amount of assetsfees on a certain amount of assets you'll be really careful about how theyou'll be really careful about how theyou'll be really careful about how the money is being spent so I routinely seemoney is being spent so I routinely seemoney is being spent so I routinely see investment operations with a lot of fatinvestment operations with a lot of fatinvestment operations with a lot of fat and a lot of misuse of the managementand a lot of misuse of the managementand a lot of misuse of the management fees they go to areas which really havefees they go to areas which really havefees they go to areas which really have nothing to do with deliveringnothing to do with deliveringnothing to do with delivering performanceperformanceperformance and going on to commandment three I'mand going on to commandment three I'mand going on to commandment three I'm going to move around on these in agoing to move around on these in agoing to move around on these in a little fast pace because we've got tolittle fast pace because we've got tolittle fast pace because we've got to get throughget throughget through all all 10 of these and then have someall all 10 of these and then have someall all 10 of these and then have some time for Q a but the third one is attime for Q a but the third one is attime for Q a but the third one is at least one third of the time and so thisleast one third of the time and so thisleast one third of the time and so this comes from John Templeton if we arecomes from John Templeton if we arecomes from John Templeton if we are going to try to figure outgoing to try to figure outgoing to try to figure out the future of a business what a business
Otherthe future of a business what a business looks like five years from now or ten years from now by definition that type of an Endeavor is going to have a very high error because there are lots of uncertainties that come in when we look at long-term futures of businesses and even the best investment manager John Temple introduces even the best invest in analyst will be wrong at least one out of three times now when they're wrong it doesn't mean that they lose money it could be that you thought oh this talk is going to triple and it flatlines or maybe it goes down 10 percent or it maybe goes up 50 but it doesn't do what you expected it to do and the good news with the investment business is that even with a very healthy other error rate even if you're wrong four out of ten times you are going to hit the ball out of the park so you know if you're a brain surgeon
Otheryou know if you're a brain surgeon you cannot have a 40 error rate or a you cannot have a 40 error rate or a you cannot have a 40 error rate or a four percent error rate or even a point four percent error rate or even a point four percent error rate or even a point four percent error it doesn't work but four percent error it doesn't work but four percent error it doesn't work but the investing business is a very the investing business is a very the investing business is a very forgiving business and it tolerates a forgiving business and it tolerates a forgiving business and it tolerates a high error rate which is great the next high error rate which is great the next high error rate which is great the next one now should look for one now should look for one now should look for hidden hidden hidden PE of one stocks PE of one stocks PE of one stocks and just so there's no confusion po1 and just so there's no confusion po1 and just so there's no confusion po1 means that the company in the next one means that the company in the next one means that the company in the next one year earns what the market cap is year earns what the market cap is year earns what the market cap is which is generally good for your which is generally good for your which is generally good for your Financial Health there's let's say Financial Health there's let's say Financial Health there's let's say around 50 000 around 50 000 around 50 000 publicly traded stocks on the planet publicly traded stocks on the planet publicly traded stocks on the planet and let's say I run a screen which says and let's say I run a screen which says and let's say I run a screen which says I only want to look at stocks that have I only want to look at stocks that have I only want to look at stocks that have a multiple of 40 or less probably tens a multiple of 40 or less probably tens a multiple of 40 or less probably tens of thousands of companies will fit that of thousands of companies will fit that of thousands of companies will fit that and then if you keep tightening the news and then if you keep tightening the news and then if you keep tightening the news to saying I won't be your 30 or less or to saying I won't be your 30 or less or to saying I won't be your 30 or less or 20 or less 20 or less 20 or less that number is going to keep going down that number is going to keep going down that number is going to keep going down but
Questionerbut in an auction driven Market which most all stock markets auction Road Market we it is the norm that we get wide Miss pricing and every so often we get mispricing which is very much in our favor as buyers sometimes it's in our favor as sellers where things get very euphoric so generally when things get very pessimistic we want to be buying and when things get very euphoric we want to be selling and taking advantage of Mr Market and when I look back I think I've been managing money professionally for a little over 19 years and when I look back over the last 19 years there's been at least six or seven of these hidden po1s that have shown up in the portfolio and so they're not very common I think my own history is they show up probably every two or three years but generally speaking one can do really well if one is attuned to looking
Otherreally well if one is attuned to looking at these types of types of businesses and just to give some examples one one in India which I invested in about three years ago a company called rain Industries and Rain Industries basically does about two billion dollars a year in Revenue and in 2015 the market cap was about 200 million dollars a little less than that about 180 million so they were trading at one tenth of Revenue PS of 0.1 which is also nice but rain Industries one if one can of peel the onion I mean it had a normal multiple I think it was trading at 10 or 15 times earnings at the time but if one kind of feel the onion and dug a little bit one would see that the business had some cyclicality they were sitting on a kind of multi-year low in terms of the physicality and that there were a number of Market forces that were likely
Ted Weschlerlikely to get them to a very different sort of earnings in a few years so my best guess was that the odds were high when I was buying in 2015 that in 2018 or 2019 the company's earnings per share would exceed the company's stock price always a nice thing and and actually now we're at 2018 and it's I think approximately true I think they now make something around 10 10 Rupees a quarter about 40 maybe 35 to 50 rupees a year and we were buying between 30 and 45 rupees the 2015 stock is 2018 2019 at a pe1 and and when you do that generally good things happen to you one is they stopped trading at a po1 and and then life is even better commandment five is thou shall never use Excel and so you know when you don't have people on your team spending all day and all week on Excel so investing investing is a game where if you find yourself reaching for excel
Questionerif you find yourself reaching for excel to do investment analysis it should be an automatic path and just to go back to the Rain Industries example I didn't even need a calculator much less Excel I in fact I didn't even need both hands I just needed the fingers on one hand to to figure it out and and basically the the math is pretty straightforward that if I buy a company for 200 million dollars market cap and at some point their earnings are 200 billion in the next 200 million the next few years generally speaking the market won't price at a 200 mL it'll come to its census and no Excel needed commandment six I think commandment six this is very timely to talk about commandment six so thou shall always have a rope to climb out of the deepest I think many people today are in deep wealth and they have a need of Need for some rope to come out this is actually a quote for
Otherto come out this is actually a quote forto come out this is actually a quote for my dadmy dadmy dad and so my dad used to be an entrepreneurand so my dad used to be an entrepreneurand so my dad used to be an entrepreneur actually we used to live in bandra notactually we used to live in bandra notactually we used to live in bandra not too far from here he was todaytoo far from here he was todaytoo far from here he was today quintessential serial entrepreneur andquintessential serial entrepreneur andquintessential serial entrepreneur and started a number of different businessesstarted a number of different businessesstarted a number of different businesses and different Industries and the commonand different Industries and the commonand different Industries and the common theme was that at some point almost alltheme was that at some point almost alltheme was that at some point almost all of them blew up and some cases theyof them blew up and some cases theyof them blew up and some cases they scaled up a decent amount got to 100 orscaled up a decent amount got to 100 orscaled up a decent amount got to 100 or 200 employees but my dad was always very200 employees but my dad was always very200 employees but my dad was always very optimistic and he was always veryoptimistic and he was always veryoptimistic and he was always very levered and it was a kind of a toxiclevered and it was a kind of a toxiclevered and it was a kind of a toxic combo and so one time I think I was 9 orcombo and so one time I think I was 9 orcombo and so one time I think I was 9 or 10 years old and my parents were just10 years old and my parents were just10 years old and my parents were just not very good in terms of financialnot very good in terms of financialnot very good in terms of financial management or saving so when themanagement or saving so when themanagement or saving so when the business was not doing well then we werebusiness was not doing well then we werebusiness was not doing well then we were personally in the household not doingpersonally in the household not doingpersonally in the household not doing very well financially because there'd bevery well financially because there'd bevery well financially because there'd be no money for rent and groceries and allno money for rent and groceries and allno money for rent and groceries and all that so wethat so wethat so we be asking friends and family to help us
Otherbe asking friends and family to help us and so on so it was not a good situation but after one of these blow-ups I think I was 9 or 10 years old I noticed that they they used to be this astrologer who was invited by my dad to come home on Sunday and tell him about what would happen in the future and this guy orange robes a lot of marks on his forehead with a hairdo like mine and he would give my dad all kinds of my perspective mumbo jumbo about what is going to happen in the future and my dad would pay him and then he'd come back again the following Sunday and my dad was an engineer a very rational guy so I I told him listen you have got to know that this guy whatever he's saying is utter nonsense and so my dad said to me that I am at the bottom of a very deep well and I need a rope to climb out of it and when I pay this guy to tell me about the future
Otherto tell me about the futureto tell me about the future he makes sure that he tells me about ahe makes sure that he tells me about ahe makes sure that he tells me about a very Rosy futurevery Rosy futurevery Rosy future because he wants to come back the nextbecause he wants to come back the nextbecause he wants to come back the next weekweekweek to collect some money as well and heto collect some money as well and heto collect some money as well and he wants to keep that gravy train growingwants to keep that gravy train growingwants to keep that gravy train growing so he's not going to tell me the Futuresso he's not going to tell me the Futuresso he's not going to tell me the Futures groom and doom so when he tells me thatgroom and doom so when he tells me thatgroom and doom so when he tells me that the future is greatthe future is greatthe future is great I just suspend rationality and choose toI just suspend rationality and choose toI just suspend rationality and choose to believe him and I think Steve Jobsbelieve him and I think Steve Jobsbelieve him and I think Steve Jobs talked about his distorted reality fieldtalked about his distorted reality fieldtalked about his distorted reality field so sometimes distorted reality fieldsso sometimes distorted reality fieldsso sometimes distorted reality fields are very usefulare very usefulare very useful they're useful in producing iPhones andthey're useful in producing iPhones andthey're useful in producing iPhones and they're useful in getting out of deepthey're useful in getting out of deepthey're useful in getting out of deep Wells and so when we find ourselves inWells and so when we find ourselves inWells and so when we find ourselves in market conditions like we are in todaymarket conditions like we are in todaymarket conditions like we are in today this is I think we've got somethis is I think we've got somethis is I think we've got some turbulence it's not significantturbulence it's not significantturbulence it's not significant terminals I think it's significantterminals I think it's significantterminals I think it's significant turbulenceturbulenceturbulence if you're levered which we'll get toif you're levered which we'll get toif you're levered which we'll get to soon I think that's coming up in in asoon I think that's coming up in in asoon I think that's coming up in in a couple of Commandments but if you just
Questionercouple of Commandments but if you just basically invested money and you don't have leverage you don't owe anyone anything and it went down a bit you just hang out and the things will work out just fine and so in the during the financial crisis in 2008 my my portfolio from the peak of 2007 to the bottom of March 2009 went down about 70 I think I was running about 600 million at the time and we were down to 200 million dollars less than 200 million and and I already told you you don't get paid for assets so for me to get paid a fee after 2007 at 600 million I needed to be at least 636 million in 2008 and probably somewhere around 675 million in 2009 with no money being added and while time 2000 name and 2009 came around instead of 675 million after which I collect fees the assets are at under 200 million I found myself at the bottom of a very
QuestionerI found myself at the bottom of a very deep welldeep welldeep well and I didn't have the email address ofand I didn't have the email address ofand I didn't have the email address of the orange robe guythe orange robe guythe orange robe guy and I don't know I had a need for himand I don't know I had a need for himand I don't know I had a need for him but I couldn't find him he's probablybut I couldn't find him he's probablybut I couldn't find him he's probably passed away may he Rest In Peace So whatpassed away may he Rest In Peace So whatpassed away may he Rest In Peace So what I did is I decided to violateI did is I decided to violateI did is I decided to violate commandment number five and I fired upcommandment number five and I fired upcommandment number five and I fired up Excel and then I put up put my portfolioExcel and then I put up put my portfolioExcel and then I put up put my portfolio andandand what I did is instead of putting thewhat I did is instead of putting thewhat I did is instead of putting the current stock prices in there with thecurrent stock prices in there with thecurrent stock prices in there with the quantities of shares I put in what Iquantities of shares I put in what Iquantities of shares I put in what I thought those stocks might trade for atthought those stocks might trade for atthought those stocks might trade for at the end of 2010the end of 2010the end of 2010 and at the end of 2011.and at the end of 2011.and at the end of 2011. and of course it was a great timeand of course it was a great timeand of course it was a great time because everything had collapsed inbecause everything had collapsed inbecause everything had collapsed in price and we were picking up dollarprice and we were picking up dollarprice and we were picking up dollar bills for 20 cents and such at the timebills for 20 cents and such at the timebills for 20 cents and such at the time sososo I was seeing numbers where this 200I was seeing numbers where this 200I was seeing numbers where this 200 million dollar portfolio looked like itmillion dollar portfolio looked like itmillion dollar portfolio looked like it was worth a billion or more and thosewas worth a billion or more and thosewas worth a billion or more and those numbers look great to me and so Inumbers look great to me and so Inumbers look great to me and so I decided let's suspend reality and justdecided let's suspend reality and just
Otherdecided let's suspend reality and just focus on those nice looking numbers andfocus on those nice looking numbers andfocus on those nice looking numbers and the nice looking fee I would collect ifthe nice looking fee I would collect ifthe nice looking fee I would collect if the portfolio actually got to a billionthe portfolio actually got to a billionthe portfolio actually got to a billion and then life was fine I got out of theand then life was fine I got out of theand then life was fine I got out of the well Long Live Excel so use it once in awell Long Live Excel so use it once in awell Long Live Excel so use it once in a while not very oftenwhile not very oftenwhile not very often and then we get to commandment numberand then we get to commandment numberand then we get to commandment number sevensevenseven thou shall be singularly focused likethou shall be singularly focused likethou shall be singularly focused like Arjuna you turn on all the financialArjuna you turn on all the financialArjuna you turn on all the financial news channelsnews channelsnews channels and there's a lot of noise and there's aand there's a lot of noise and there's aand there's a lot of noise and there's a lot of things like suddenly we thoughtlot of things like suddenly we thoughtlot of things like suddenly we thought that with khashoggi Brent will go tothat with khashoggi Brent will go tothat with khashoggi Brent will go to 200.200.200. and then suddenly with khashoggi Brentand then suddenly with khashoggi Brentand then suddenly with khashoggi Brent is down to 76. and those strange thingsis down to 76. and those strange thingsis down to 76. and those strange things happen and but the thing is we reallyhappen and but the thing is we reallyhappen and but the thing is we really don't care about Brent and we reallydon't care about Brent and we reallydon't care about Brent and we really don't care about anythingdon't care about anythingdon't care about anything what we care about is that rainwhat we care about is that rainwhat we care about is that rain industries that 200 million market capindustries that 200 million market capindustries that 200 million market cap and they might in a few years be makingand they might in a few years be makingand they might in a few years be making 200 million and everything else is200 million and everything else is200 million and everything else is irrelevant and so
Otherirrelevant and so
OtherI think all of you know the story from the Mahabharata with Arjuna and dronacharya and he's going to test all his princes on their archery scales and he puts up this pole with a fish on it and then he puts the pole in a kind of a pool of water disaster students look at the pool of the water and shoot out the center of the eye of the fish and one by one the princess stepped forward and he asked them what they see they say oh I see the pole I see the water I see the fish and he tells them sit down one after the other and finally Arjuna stands up our hero and dronacharya asked him what do you see he says I can only see the center of the eye of the fish and of course dronacharya tells him fire at well and and he takes the eye out and that's what we want to do in investing we do not want I really don't care what the
Otherwant I really don't care what the Reserve Bank does was great so the FED does it rate or what happens to crude or what happens to the currency or what's happening with ilfs or what's happening with nbfcs none of that is relevant to what we are trying to get done what we are trying to get done is identify businesses that are within our circle of competence figure out what they're worth and then if they're available ideally in this environment for one-fourth or less then what they're worth let's do something and if not you know come to the Morning Star conference and give a talk and commandment eight thou shall never short and so I think the thing is that the shorting is an exercise that never ever made much sense to me your maximum upside is a double if the company goes to zero and your maximum downside is bankruptcy and I don't know why anyone would want
Warrenand I don't know why anyone would want to play with those sorts of odds if we go long when we buy a stock we don't have to put up more Capital when it goes down when we short a stock and it goes up we have to keep putting up capital and those Capital calls have no limit and that's a very unpleasant place too so I haven't ever shorted a stock in my life and I think I will go to my grave without ever having shorted the stock and I think it's a very simple exercise
QuestionerBuffett and manga always say that they've over their careers identified hundreds of great short candidates they've been right almost 100 of the time and they've been wrong on the timing almost 100 of the time so the problem with shorting is that you can't get the timing right and markets don't follow any kind of rationality they can price things at one time's earnings and
Warrenprice things at one time's earnings and such they can do all kinds of strange things to stock prices so we don't want anything which requires us to look at quotes every five minutes and commandment nine this comes from Hamlet Shakespeare had a character in Hamlet called Polonius and Polonius is giving advice to his son who's going to go off on a long journey and you can go to God Google and just ask God Google felonious advice to his son Hamlet and you'll get the entire the entire one page of advice he gives I actually think it's great advice for all of you to give your kids as they're heading off into their lives but one of those lines that he tells his son is neither a lender nor a borrower B and in fact Buffett rephrased Polonius and he said neither a short-term borrower nor a long-term lender B and if you look at the testosterone fueled nbfc
Otherfueled nbfcfueled nbfc they forgot to read Hamletthey forgot to read Hamletthey forgot to read Hamlet and they forgot to read Buffett becauseand they forgot to read Buffett becauseand they forgot to read Buffett because what they did is they basically lovedwhat they did is they basically lovedwhat they did is they basically loved the fact that if you borrow short andthe fact that if you borrow short andthe fact that if you borrow short and lend long you get really fat juicylend long you get really fat juicylend long you get really fat juicy spreads the problem with borrowing shortspreads the problem with borrowing shortspreads the problem with borrowing short which we saw in the financial crisis iswhich we saw in the financial crisis iswhich we saw in the financial crisis is you've got to turn that paper overyou've got to turn that paper overyou've got to turn that paper over and if you are a level financialand if you are a level financialand if you are a level financial institution most level financialinstitution most level financialinstitution most level financial institutions go bust without running outinstitutions go bust without running outinstitutions go bust without running out of moneyof moneyof money they usually go bust because they runthey usually go bust because they runthey usually go bust because they run out of confidence and way before theyout of confidence and way before theyout of confidence and way before they run out of money so I think it'srun out of money so I think it'srun out of money so I think it's interesting we see it right now in Indiainteresting we see it right now in Indiainteresting we see it right now in India where the assets of these entities arewhere the assets of these entities arewhere the assets of these entities are good I think the assets but they've gotgood I think the assets but they've gotgood I think the assets but they've got a liquidity mismatch and there was noa liquidity mismatch and there was noa liquidity mismatch and there was no reasonreasonreason to have a liquidity mismatch if you'reto have a liquidity mismatch if you'reto have a liquidity mismatch if you're Lending to someone for five yearsLending to someone for five yearsLending to someone for five years borrow for five years as well and yes ifborrow for five years as well and yes ifborrow for five years as well and yes if you borrow for three months or one year
Otheryou borrow for three months or one year you'll get a bigger spread but to finish first you have to first finish and you don't get to finish the game if you do that and finally my favorite commandment 10. thou shall be a Shameless cloner and I forgot to put my email address on the slides but MPMPMP atifunds.com I am low on peo ones so please feel free thank you
Questionerfor your insights uh we have lots of questions uh for you so the first one from the audience uh is umumum you know you had uh you want that uh lunch with Warren Buffett and the question is what was the key investment Insight that you uh got from that lunch with with Borg
Ted Weschlerum a number of years ago well um you know when I was first betting for the lunch my wife thought I'd gone nuts and now when we talk about it she says it's the best investment I ever made other than marrying her which I think is
Ted Weschlerother than marrying her which I think is true so I think the lunch with Warren I had no expectations at that lunch other than wanting to thank him I just felt that this person was alive when I was alive he was willing to take a bribe and sit down for a meal and and he was willing to hang out and so I said she lived in the time of Einstein or Gandhi or Newton and or Swami Vivekananda someone and you had a chance to hang out with them would you take them would you take the chance and I think many of you would say yes and so I said let's and my main motivation for doing the lunch was that I wanted to thank him because I had made all this money using his intellectual property not paying any IP fees and and I want to just truly thank him directly to his face that I was eternally grateful for that and Warren's perspective is somewhat different at these lunches so
Ted Weschlersomewhat different at these lunches so his perspective which I didn't realize when I went in is that he wants to make sure that whoever wins this lunch comes away at the end of the lunch thinking they got a bargain so he's very focused on making sure that he delivers more value than whatever is being paid I didn't realize so when he came for the lunch here he said look I got nothing going on all afternoon my my daughter's here she was uh 12 years old at the time and my other daughter was 10 they sat on both sides of him and he don't pay much attention to what I say but Warren told them the most important decision you'll make is who you decide to marry I think they should remember that which is good because if I said it wouldn't have any impact and so I think I made some notes after the lunch I think there were like 54 different questions he pretty much said
Questionerdifferent questions he pretty much said I'm here all afternoon when you get tired of me I leave and there are lots and lots of takeaways some of the things that really stood out were we had a discussion about inner scorecard versus Elder Scroll card so he said look you can live your life two ways and he says look would you rather be the greatest lover in the world but known as the worst or the worst lover in the world but known as the greatest and he says if you know how to answer that question then rest of the thing falls into place so the inner scorecard which is you do not care about the impact of what you do from a societal perspective you care about it being the right thing to do from your inner inner conscious is a huge huge advantage to in life so I would say to me that was one of the big takeaways but also I would also say
Questionertakeaways but also I would also say about Buffett and Monger is almost everything about them is the public domain so if you want to gain from them you do not need to have a meal with them for example this scorecard discussion is there in the book snowball but what has helped me do it helped me calibrate what was really important to him that was something that was really important um in one of your books you talk about mutual funds uh not being a great sort of vehicle for wealth creation I think you talk about uh you know potentially the holding percentages of many mutual funds um so is that maybe you can talk a little bit about your um yeah your approach to sizing positions in your portfolios
QuestionerI think a lot of mutual funds I think are like the one night stands in the sense that they may have something approaching 100 positions 50 100 150 positions I don't know how you
Questioner100 150 positions I don't know how you would know that many businesses that well and they're turning over 70 80 percent of the portfolio every take a few years to get to fair value they don't really doesn't really happen overnight so I think for most investors the best approach is just a broad index and we can invest in Broad indices at relatively low frictional costs I think that's a great way to go in my case I'm managing money for a relatively small number of high net worth individuals and my natural tendencies go towards concentration so typically if I want to make a bet I don't want to make a bet less than 10 ideally and so I think in my portfolio by the time you get to the fifth or sixth talk we're already getting to 70 of the or more of the pie so I think for stock takers uh it makes no sense to be to hold 25 star I just don't think that makes any sense
QuestionerI just don't think that makes any sense in terms of investing in uh in India where a lot of stocks are sort of more in the in the growth CF theme or have sort of high growth companies and uh Ben Graham um I think he's read his books he's always been sort of skeptical about growth I think you know he has his net Nets where he just looks at the assets um how do you apply your your value philosophy in an Indian in an Indian market context where uh you know maybe payouts are further in the future than sort of a new more mature markets like the United States
Questioneryeah so I think growth and value are two sides of the same coin so I don't I did pretty much joined at the hip you can't be a growth investor or a value investor you're really both if you will and the ideal investment is one which has significant growth ahead that's an ideal business if you are investing in a set
Questionerbusiness if you are investing in a set of assets where the value of those assets does not grow meaningfully over time and you buy those assets at a huge discount to what they're worth you will do well but you will do far better if you are able to buy a growing pie and of course I think the big caveat is that ideally you want that growing pie without paying up for it so it is relatively easy to identify great assets I think great assets around us all the time I I recently met the MD CEO of motherson Sumi I think last couple of years I probably met close to 200 Indian listed company CEOs I would say chant that motherson I probably date him was the best just amazing manager running an amazing business at a not so amazing price and I told chant I love you but I can't get in bed with you not yet anyway and he said that I'm gonna make you
Questionerand he said that I'm gonna make you regret that and such is life but butregret that and such is life but butregret that and such is life but but yeah so what we want to do is we want toyeah so what we want to do is we want toyeah so what we want to do is we want to find great assetsfind great assetsfind great assets and ideally at bargain pricesand ideally at bargain pricesand ideally at bargain prices in terms of your um investing with ain terms of your um investing with ain terms of your um investing with a margin of safety do you have any sort ofmargin of safety do you have any sort ofmargin of safety do you have any sort of guidelines or rules around thatguidelines or rules around thatguidelines or rules around that umumum Seth clarman you know he has sort ofSeth clarman you know he has sort ofSeth clarman you know he has sort of explicit views about that can you uhexplicit views about that can you uhexplicit views about that can you uh just give us some perspective on buyingjust give us some perspective on buyingjust give us some perspective on buying an asset with a margin of safety yeah Ian asset with a margin of safety yeah Ian asset with a margin of safety yeah I
Warrenthink what happens is that you get athink what happens is that you get athink what happens is that you get a free lunchfree lunchfree lunch sososo if you buy a dollar bill forif you buy a dollar bill forif you buy a dollar bill for 40 cents40 cents40 cents or 30 cents or maybe nowadays 20 centsor 30 cents or maybe nowadays 20 centsor 30 cents or maybe nowadays 20 cents there's two things that happen to youthere's two things that happen to youthere's two things that happen to you one is that the odds that you lose moneyone is that the odds that you lose moneyone is that the odds that you lose money go way down and the second is yourgo way down and the second is yourgo way down and the second is your upside goes way up like they say in theupside goes way up like they say in theupside goes way up like they say in the Miller commercial it tastes great and isMiller commercial it tastes great and isMiller commercial it tastes great and is less filling and so I think basically weless filling and so I think basically weless filling and so I think basically we don't get very many free lunches indon't get very many free lunches indon't get very many free lunches in investing but if you can reduce your
Questionerinvesting but if you can reduce your downside while at the same time increasing the upside that's what you get to the margin safety and um have you seen sort of the the margins maybe looking at the past uh you know five to ten years
Questionerum you know I mentioned that the net Nets that Ben Graham looked at where you basically uh you know looked at he was able to buy net ass uh an ass stock that traded at below its net asset value uh and arguably today there's very few of these opportunities uh have you seen that sort of asymmetry change in in sort of this
Warrenyeah so Ben Graham you know Ben Graham came out of I would say Ben was shell shock after the Great Depression and security analysis got written uh 34 of the first edition 1940 second edition at that time U.S markets were drowning in netnet they were all over the place in netnet they were all over the place because the stock markets have been
Questionerbecause the stock markets have been decimated and so you could do really well buying these businesses where quick liquidation of just the current assets would give you a massive return I think the irony with Ben Graham is that he focused on that naturally he focus on netness because the error it came out and they went down dramatically over the subsequent decades but he made all his money on a great business so he owned Geico which was the incredible business even today it's a great business from Berkshire Hathaway so most of Ben Graham's net worth came out of owning a great business not out of dancing in and out of net Nets and so I think if Ben Graham were young and alive today he would not have written the security analysis that he wrote in 34. in 2018 he would written a different book and and so I think that between buying
Questionerbetween buying assets that are undervalued but not going to grow much and buying assets that you have to pay up for a little bit but have significant growth ahead you always almost always will be better off the latter so growing pies is really where the focus ought to be and ideally you want to be I didn't get to the 11th commandment which is be unreasonable so the ideal situation is we want growth that'll be your first commandment is about uh fees and um so your the way you structure your fees uh your sort of aligning yourself with at the investor uh but uh there's a question whether that could lead to sort of excessive risk taking uh where you sort of you know shoot for the stars um do you have any sort of do you have any thoughts on that
Questionerwell I mean I think that there's a couple of things even which I didn't talk about but I think also it's
Ted Weschlertalk about but I think also it's important to be co-invested with your investors so I'm the largest investor in February funds and I would face the impact of dumb investing in two ways I would face it with my net worth going down with my own money and I would face it with lack of fees in the future so at least I haven't I don't think I've ever taken an approach we don't short we don't lever we don't we don't go into options or derivatives and we've been wrong many times and we'll continue to be wrong in the future as well but overall it works out I think every dollar by investors gave me in 99 is now like 14 or 15 dollars after my outrageous fees and and it's always been about trying to make sure that we protect the downside there's a question what should somebody do to have lunch with you actually thank you for the Segway into
Questioneractually thank you for the Segway into an advertisement I run a foundation wean advertisement I run a foundation wean advertisement I run a foundation we have a family Foundation reduction ofhave a family Foundation reduction ofhave a family Foundation reduction of foundation which is a lot of fun and asfoundation which is a lot of fun and asfoundation which is a lot of fun and as you saw in commandment 10 be a Shamelessyou saw in commandment 10 be a Shamelessyou saw in commandment 10 be a Shameless cloner so a few years back I startedcloner so a few years back I startedcloner so a few years back I started auctioning off lunchauctioning off lunchauctioning off lunch with myself and I wonder why I got thatwith myself and I wonder why I got thatwith myself and I wonder why I got that idea and so the proceeds go to theidea and so the proceeds go to theidea and so the proceeds go to the foundationfoundationfoundation and we've been doing these lunches I'veand we've been doing these lunches I'veand we've been doing these lunches I've been doing these lunches for seven orbeen doing these lunches for seven orbeen doing these lunches for seven or eight years met some just incredibleeight years met some just incredibleeight years met some just incredible people over the years people I didn'tpeople over the years people I didn'tpeople over the years people I didn't know they came out of the Woodworks andknow they came out of the Woodworks andknow they came out of the Woodworks and so weso weso we we will run that auction we run it Iwe will run that auction we run it Iwe will run that auction we run it I think usually in November next year ifthink usually in November next year ifthink usually in November next year if you if you go on our website dakshna.orgyou if you go on our website dakshna.orgyou if you go on our website dakshna.org we'll put up something when we run thatwe'll put up something when we run thatwe'll put up something when we run that auction we'll run that in on eBay andauction we'll run that in on eBay andauction we'll run that in on eBay and the lunch can bethe lunch can bethe lunch can be in any of the Metro cities in India orin any of the Metro cities in India orin any of the Metro cities in India or it can be in like California or New Yorkit can be in like California or New Yorkit can be in like California or New York in the U.S and the bidding starts at one
Questionerin the U.S and the bidding starts at one cent and there's no reserve and there's no minimum price you can win it at one cent if no one decides to bid um I want to talk a little bit about your uh current portfolio um where do you see a value today in the market so uh maybe from a initially from a regional standpoint where do you see uh the greatest opportunities
QuestionerI find personally a lot of opportunity in India most parts of the Indian markets I think are still overheated and still over in spite of whatever Corrections have happened but the thing is there are so many companies that the management teams in India in general don't do a good job of explaining their businesses and they in fact I think they do a poor job of that and that leads to an Arbitrage on the degree of understanding of the business and so if you're willing to dig in and
Questionerand so if you're willing to dig in and truly understand the future of many of these companies you'd be in the minority and in some cases there's a very significant Delta between the future of the business and what is baked into the stock price and rain rain is a good example of that the thing is why should it have traded at the price it was trading at in 2015. it didn't make rational sense but that's where it was you think there's a question on uh rain specific do you think um that right now um rain is a good investment given some of the the price drops so
Questionerwe're not into stock tips okay rain was a tremendous investment in 2015.
Questionerum the question about uh cash what is your approach to cash um in your portfolio maybe you can share what that number looks like today and um you know cash for the first time in a decade now has a positive real return um so just maybe start off yeah I think
Questionerum so just maybe start off yeah I think currently we are approximately you know I managed about eight eight hundred million approximately about 10 cash I think the last the last 10 percent becomes what I would call very expensive capital from my perspective I don't want to put the money to get a double I think we would like to get something more the 40 a year on the last 10 percent and that's kind of like a five or six x the next five years and so when we find that we put that so Warren Buffett was one of our your key Inspirations early on
Questionerum if you think about the last maybe five to ten years uh what are some of the books you've read or some of your sort of key influences into your investment thinking of late yeah I think the books would be the The Usual Suspects I think one book that I try to reread every year is for Charlie's Almanac which was the
QuestionerCharlie's Almanac which was the biography on monger and every year when I reread it I would swear to you that I'm reading stuff that I've never read before and so I say I never saw that before and so there's these revelations the other thing that I think is a tremendous resource that got added online recently is that Berkshire Hathaway never used to release the videos of the annual meetings and they've put the entire archive on the web so if you go to buffett.cnbc.com buffet.cnbc.com you will see all the videos of the Berkshire annual meetings from 1994 to just a few months ago 2018 and those those videos they are about five or six hours each I think it's about a north of 150 hours and so I set up a waterproof Bluetooth speaker in my shower so when I'm getting ready every day I go through about 30 minutes and sometimes it's probably the
Questionerminutes and sometimes it's probably the most productive 30 minutes of the day somost productive 30 minutes of the day somost productive 30 minutes of the day so to have Warren and Charlie so I'm now Ito have Warren and Charlie so I'm now Ito have Warren and Charlie so I'm now I think I started with 94 I'm now up tothink I started with 94 I'm now up tothink I started with 94 I'm now up to the year 2003the year 2003the year 2003 and I just keep plowing through that andand I just keep plowing through that andand I just keep plowing through that and I think those those videos they've gotI think those those videos they've gotI think those those videos they've got transcripts as well if you prefer totranscripts as well if you prefer totranscripts as well if you prefer to read them but I think just hearing themread them but I think just hearing themread them but I think just hearing them on a multitude of subjects just lend soon a multitude of subjects just lend soon a multitude of subjects just lend so much Clarity on a variety of subjectsmuch Clarity on a variety of subjectsmuch Clarity on a variety of subjects and so I think that's really goodand so I think that's really goodand so I think that's really good coach is really good and I think ifcoach is really good and I think ifcoach is really good and I think if you're if you're looking for greatyou're if you're looking for greatyou're if you're looking for great entertainment bad blood is a great bookentertainment bad blood is a great bookentertainment bad blood is a great book to read that's the terrano story andto read that's the terrano story andto read that's the terrano story and that's going to become a motion picturethat's going to become a motion picturethat's going to become a motion picture soon which would be good and so thosesoon which would be good and so thosesoon which would be good and so those are some of the things I think worthare some of the things I think worthare some of the things I think worth delving intoright so last questionright so last questionright so last question um so you have Ten Commandments and umum so you have Ten Commandments and umum so you have Ten Commandments and um it'sit'sit's um you know as a Christian myself uhum you know as a Christian myself uhum you know as a Christian myself uh it's tough to follow all uh commitmentsit's tough to follow all uh commitmentsit's tough to follow all uh commitments if you were to pick one which one is the
Questionerif you were to pick one which one is the most important one you can't do one
Questionercommandment the Commandments thou shall not covet thy neighbor's wife
Questionerthe thou shall not covet thy neighbor's sheep they are very good reason why they have ten so I think they're not 10 you can manage ten it's not that many right I think you can deal with ten
Questionerdo you think you can deal with 10 say yes if you can yeah 10 is the manageable number we got 10 fingers we can we don't need Excel
Questionerexcellent well thank you so much Manish uh Round of Applause for uh Manish Ryan thank you
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