Other[Music][Music][Music]
Warrenokay so uh you know uh very very good to be with all of you and uh I think uh arind is this our fourth year doing this
Questionerit is and we're very grateful to have had you for four years in a row right so
Warrenuh anyway I think uh I'd like to start by uh all of us giving a round of applause to Arvin because this is very much a labor of love for him and uh very much a selfless act uh trying to help the next generation of value investors come up so can we give him a round of
Other[Applause][Applause][Applause]
Warrenapplause thank you thank you for doing this Arin so and uh how long are we going to be uh going for today
QuestionerArin the class is scheduled for about two hours but we'll take as much time as you're willing to grant that okay so we can go all night right
Warrenthat's right we're raging okay all right so uh what I'll do is I have a I have a brief PowerPoint I'll go through uh just some
Todd CombsPowerPoint I'll go through uh just some thoughts I wanted to share and uh and then we can open up for Q&A and the Q&A can pretty much uh uh doesn't need to go into the PowerPoint it can go into any subject that you uh want to talk about other than things that I currently own in my portfolio because I prefer not to talk about them till we've exited uh but we can talk about past Holdings or anything else Under the Sun quite quite frankly so uh um and in fact uh if if I get uh questions uh that are new for me or curveball type questions then uh that's what I prefer because I'll uh help me from uh from getting getting too bored so um so let me get started
Todd Combshere you know bubbles um uh bubbles actually are very common um they're far more common than we think they are and they occur in all kinds of different asset classes they occur in all kinds of different geographies in all kinds of um
Questionerdifferent geographies in all kinds of um uh different markets and such at different times they're kind of staggered all over the place and U and um you know there was a there was a book written by a former U former news anchor for CNBC Ron insana and normally news anchors don't write good books but Ron insan insana wrote a book called Trend watching uh which um which listed uh a number of different Bubbles and if you just go through the book you'll see that almost all the time somewhere around the world there's some bubble in in very much in the works or in progress or or getting burst and so on and so they're very common phenomena uh partially because humans vacillate between fear and greed and as long as as long as we have humans involved within markets uh we're going to have Bubbles and uh so I want to just highlight uh a few
Otherfewfew bubbles uh in the past and also a littlebubbles uh in the past and also a littlebubbles uh in the past and also a little bit about the present so in uh in thebit about the present so in uh in thebit about the present so in uh in the early 1920s really likeearly 1920s really likeearly 1920s really like 1990 uh 199 to1990 uh 199 to1990 uh 199 to 1922 uh we had a very major uh1922 uh we had a very major uh1922 uh we had a very major uh automobile bubble and uh and it uh itautomobile bubble and uh and it uh itautomobile bubble and uh and it uh it burst in a pretty significant way inburst in a pretty significant way inburst in a pretty significant way in 1922 but then the remnants were all1922 but then the remnants were all1922 but then the remnants were all taken out in the next uh 9 or 10 yearstaken out in the next uh 9 or 10 yearstaken out in the next uh 9 or 10 years and um so uh so if you uh if you lookedand um so uh so if you uh if you lookedand um so uh so if you uh if you looked at the US kind of from a you knowat the US kind of from a you knowat the US kind of from a you know investor or entrepreneur point of viewinvestor or entrepreneur point of viewinvestor or entrepreneur point of view and you were in the year let's say 1920and you were in the year let's say 1920and you were in the year let's say 1920 or 1921 you know so World War I has hasor 1921 you know so World War I has hasor 1921 you know so World War I has has ended a lot of the world infrastructureended a lot of the world infrastructureended a lot of the world infrastructure especially in the developed world isespecially in the developed world isespecially in the developed world is destroyed except uh North America isdestroyed except uh North America isdestroyed except uh North America is untouched Europe is pretty much inuntouched Europe is pretty much inuntouched Europe is pretty much in flames and uh the the US isflames and uh the the US isflames and uh the the US is industrializing uh it is it is theindustrializing uh it is it is theindustrializing uh it is it is the emerging market and you can clearly seeemerging market and you can clearly seeemerging market and you can clearly see that the all the trends are in the rightthat the all the trends are in the rightthat the all the trends are in the right direction the population isdirection the population isdirection the population is growing uh highways and roads are
Othergrowing uh highways and roads are getting built at a very prolific rate and automobile sales are forecasted to grow quite significantly I mean if you look at what actually happened let's say between 1921 and 1922 you know Auto Sales went up by 50% and uh that is you know rivaling what was happening a few years ago in China on auto sales so so the US was truly uh an emerging market and these were the go- go 20s uh everything looked like you know it would go nothing but go straight up and um and investors basically uh you know had had certain perspectives you know one is they expected that US the US population would rise in 1921 the US population was 109 million and they were absolutely correct that the population Rose nonstop for the next 94 years and even now when we're at you know 300 odd million it's going to continue growing
Questionermillion it's going to continue growing uh for as far as we can see uh just theuh for as far as we can see uh just theuh for as far as we can see uh just the way the demographics of the country areway the demographics of the country areway the demographics of the country are so they they were absolutely right thatso they they were absolutely right thatso they they were absolutely right that you had a very longyou had a very longyou had a very long uh Tailwind of population growth uhuh Tailwind of population growth uhuh Tailwind of population growth uh investors also expected that the countryinvestors also expected that the countryinvestors also expected that the country wouldwouldwould industrialize uh you know when when whenindustrialize uh you know when when whenindustrialize uh you know when when when the United States was formed somethingthe United States was formed somethingthe United States was formed something like 97 98% of the population waslike 97 98% of the population waslike 97 98% of the population was focused on Farming and that number hadfocused on Farming and that number hadfocused on Farming and that number had been continuously coming down and untilbeen continuously coming down and untilbeen continuously coming down and until uh the Industrial Revolution and then ituh the Industrial Revolution and then ituh the Industrial Revolution and then it was coming down quite radically sowas coming down quite radically sowas coming down quite radically so people could see that uh that the thepeople could see that uh that the thepeople could see that uh that the the countrycountrycountry industrialized uh Autos would grow bigindustrialized uh Autos would grow bigindustrialized uh Autos would grow big time and they were absolutely right youtime and they were absolutely right youtime and they were absolutely right you know the the one and a half to two and aknow the the one and a half to two and aknow the the one and a half to two and a half million uh number uh you know nowhalf million uh number uh you know nowhalf million uh number uh you know now this year we're forecasted to have morethis year we're forecasted to have morethis year we're forecasted to have more than 18 million cars sold in the US sothan 18 million cars sold in the US sothan 18 million cars sold in the US so all these things were correct but nearlyall these things were correct but nearly
Otherall these things were correct but nearly all the 1921 investors in Autos or Motor companies lost their entire investment and this was a very major uh bubble at the time and uh if you uh if you go through you know some of the next few slides that coming up this is a list of all these different car companies and next to their names is their year of birth and year of death so like you know you have like the Stanley Steamer 19 1897 to 1927 or you have this Lafayette from 1991927 or you have this Lafayette from 199 to 1924 so that like that that car company lasted 5 years and so we have had hundreds of auto manufacturers uh come up with uh a variety of wide range of cars and lots of money went into these uh these Ventures and in the end uh by the end the dust settled in 1932 we were left with uh PR major US manufacturers for cars and almost everyone else uh was wiped out and um so this was a very
Otherwiped out and um so this was a very significant uhsignificant uhsignificant uh uh bubble that took place and basicallyuh bubble that took place and basicallyuh bubble that took place and basically it wasn't just investors I mean a lot ofit wasn't just investors I mean a lot ofit wasn't just investors I mean a lot of entrepreneurs bought into this and theyentrepreneurs bought into this and theyentrepreneurs bought into this and they a lot of uh a lot of these companiesa lot of uh a lot of these companiesa lot of uh a lot of these companies went public and uh and then they wentwent public and uh and then they wentwent public and uh and then they went bust after going public so so we had abust after going public so so we had abust after going public so so we had a very significant uh uh bubble nearlyvery significant uh uh bubble nearlyvery significant uh uh bubble nearly about a century ago about 90 93 or 94about a century ago about 90 93 or 94about a century ago about 90 93 or 94 years ago and then um then you know ifyears ago and then um then you know ifyears ago and then um then you know if you look at the 1959 to 6 2 period weyou look at the 1959 to 6 2 period weyou look at the 1959 to 6 2 period we had another very significant bubble andhad another very significant bubble andhad another very significant bubble and this is called the Tronics bubble and uhthis is called the Tronics bubble and uhthis is called the Tronics bubble and uh what was happening at this time was thatwhat was happening at this time was thatwhat was happening at this time was that you know you had um you had theyou know you had um you had theyou know you had um you had the semiconductor uh that had been uh thesemiconductor uh that had been uh thesemiconductor uh that had been uh the transistor had been inventedtransistor had been inventedtransistor had been invented semiconductors have been discovered uhsemiconductors have been discovered uhsemiconductors have been discovered uh Mo's law was coming into play and peopleMo's law was coming into play and peopleMo's law was coming into play and people expected that Electronics would be aexpected that Electronics would be aexpected that Electronics would be a major major game Cher uh it would wouldmajor major game Cher uh it would wouldmajor major game Cher uh it would would reconfigure uh a wide range ofreconfigure uh a wide range ofreconfigure uh a wide range of Industries and they absolutely right
QuestionerIndustries and they absolutely right because you know Mo's law has uh you know basically where you're uh doubling the amount of transistors in the same amount of area every couple of years or every 18 months has has pretty much been uh the case almost non-stop from then till now I think now M's law is down to every two or three years but we're still seeing that uh Trend play out and and so as a result of that we've had the huge growth in computers you know going for main frames to minis to servers to PCS to laptops then we had all the cell phones and iPhones and iPads and uh pretty much uh you know you look at it basically UH 60 uh 65 years 66 years Electronics has grown Non-Stop and so so investors were correct in 1959 that Electronics was a sunrise industry and it would change lives big time but in spite of being correct just like the people in the
Warrencorrect just like the people in the motors were correct about the trends uh they lost their entire investment and in fact what happened in uh in the early 60s is all these companies came public with the name ending in Tron like as as on dutron volatron transitron or they had Onyx like circuitronics superponics videotronics and the ultimate was one with both powertron Ultrasonics and you know they wanted to make sure that when they had an IPO they had Sizzle in that name and that was a very sizzling name and I'm sure people bought into into the powertron Ultrasonics and uh it all it all went to uh it all went to zero uh so uh so that also did not uh go very well uh for investors even though they were absolutely right about uh the major Trends and and absolutely right about the huge transformational impact that the semiconductor and transistor would
Questionerthe semiconductor and transistor would have and continues to have and um and have and continues to have and um and have and continues to have and um and then you know uh if you look at uh you know some of you are probably too young uh and uh you know but I I certainly lived through this and uh I think arind uh arind also was uh Arin how old were you in the year
Other2000 you're putting me on the spot man
Questioneryeah how old were you in the year
Other2000 I was uh I was in
Questionercollege all right in college so we like got like a eighty year range or something six year range okay so uh so Arin very much remembers uh the dot bubble and uh I think many of you in the re in the room if you are if you in your like you know mid uh mid 20s or so on you know so this would have been what about when you were about 10 years old or something uh maybe some of you were teenagers then um uh but anyway so I was actually an investor then and uh live through this as well so
Questionerthen and uh live through this as well so um so we had the we have the dot bubble um so we had the we have the dot bubble and uh you know again the investor expectations were that the internet was a game Cher it was a massive disruptor and uh they were right it has improved Our Lives big time and the economy would get reconfigured and they were absolutely right we are still going through that reconfiguration and it's very significant reconfiguration but nearly all 1999 investors in Dooms lost their entire investment didn't it didn't go so well and and and uh and if you uh if you look at uh if you look at some of the names you know like boo.com uh they spent 188 million in the first six months Cosmo uh which is no no relation to Kramer uh was trying to do one hour deliveries and so on we had a you know long list of companies that basically went under and uh here's a list of some of these companies which were bought and
Questionerof these companies which were bought and so you know if you look at for example uh something like broadcast.com which is uh which was sold by Mark Cuban to Yahoo for 5.7 billion and uh Cuban was pretty smart what he did is uh when Yahoo gave him uh Chinese money also known as Yahoo stock uh for broadcast.com uh he he negotiated and hedged the entire position and so after that when Yahoo stock crashed and burned uh Cuban was mostly unaffected and uh hence we see him on Shark Tank now and um and and actually if you look at Mark Cuban's present net worth I was just looking at it in the fors 400 recently it's actually less uh less than 5.7 billion if I remember it's like two or three billion uh now so from from that time till now uh you know he's done all these different things uh bought the NBA team made a bunch of other Investments and so
Questionermade a bunch of other Investments and so on but his net worth uh really hasn't done much I think the single best decision he made was to hedge that Yahoo stock and uh everything else is is wonderful and then you know you even see IAC interactive buying ass.com for 1.9 billion and you look at some of these other deals that Yahoo has done uh you know Geo cities for 3.6 billion and you look at the state of Yahoo today and all the uh you know talk about now selling the company and so you know this uh uh there was a lot of euphoria um at the time and uh in fact you know in the in the year 2000 um in January I was on the HBS campus and you know I used to come to Harvard Business School every year for a week uh as part of this executive Ed program where we do kind of like a week of MBA School uh through YPO and they were about 160 of US every year for a week and the average person ran a
Questionerfor a week and the average person ran a $400 million company and I did this 13 years from 1999 till last year and one uh one evening we would uh hang out uh with the MBA students so there would be eight YPO and eight uh Harvard MBA students and we'd go out for dinner and uh and basically we'd sit you know why your MBA why so on both sides of me for example were uh were two MBA students and um I remember in that year the in January 2000 uh you know um the the bubble was fully on I mean it was just full on at that time it it popped it popped in March and all these kids basically um were had mostly already formed company some were dropping out of HBS they didn't want to wait to complete their degrees they were getting Venture funding uh some of these companies coming out of the HBS campus had uh you know uh I would say pre-money or post
Questionerknow uh I would say pre-money or post money valuations which were in themoney valuations which were in themoney valuations which were in the hundreds ofhundreds ofhundreds of millions um and so thesemillions um and so thesemillions um and so these uh these uh these guys were um on top ofuh these uh these guys were um on top ofuh these uh these guys were um on top of the world if you will and and that yearthe world if you will and and that yearthe world if you will and and that year when they uh went to dinner with us youwhen they uh went to dinner with us youwhen they uh went to dinner with us you know the the body language was that theyknow the the body language was that theyknow the the body language was that they really felt like they were wasting theirreally felt like they were wasting theirreally felt like they were wasting their time with a bunch of these old guys whotime with a bunch of these old guys whotime with a bunch of these old guys who just didn't get it about the internetjust didn't get it about the internetjust didn't get it about the internet didn't get it about the way the worlddidn't get it about the way the worlddidn't get it about the way the world was being reconfigured and and all ofwas being reconfigured and and all ofwas being reconfigured and and all of this and they were all talking aboutthis and they were all talking aboutthis and they were all talking about that you know in two years they were allthat you know in two years they were allthat you know in two years they were all going to be billionaires and and um andgoing to be billionaires and and um andgoing to be billionaires and and um and then you know uh a couple of yearsthen you know uh a couple of yearsthen you know uh a couple of years later again on the HBS campus againlater again on the HBS campus againlater again on the HBS campus again going to dinner with the mbas and yougoing to dinner with the mbas and yougoing to dinner with the mbas and you know the economy is in kind of recessionknow the economy is in kind of recessionknow the economy is in kind of recession and so on and the the I would say theand so on and the the I would say theand so on and the the I would say the body language very different uh theybody language very different uh theybody language very different uh they were giving business cards they werewere giving business cards they werewere giving business cards they were asking if they could get internships and
Questionerasking if they could get internships and so on so so uh so uh The Life and Times uh changed pretty fast and and what you had going on was that you know like there was a chemical um uh you know Chemex was formed them which was like a supposed to be like this U Marketplace for industrial chemicals and so there were all these other dexes being formed on HB on the Harvard campus with like uh looking at uh you know other aspects of uh industrial materials uh there was the metals exchange there was all kinds of stuff going on you know paper exchange uh and so on so forth so there was uh and if you just think about the um you know and then all the squatters trying to which still goes on today you know trying to get the name and sell it for a zillion dollars and so on so um fun times um anyway so um so if you look at these three bubbles um you you know the the three
Questionerbubbles um you you know the the three bubbles are very similar to each other uh the motors bubble the Tronics bubble and the.com bubble each of them is about 38 to 40 years apart and the 38 to 40 years apart is not a coincidence the reason they're that far apart is because the set of investors that saw this bubble have to have exited the scene before the next bubble can takes place because then there's nobody to tell them that hey guys you guys are smoking dope you know this we've already we've seen this movie before and I remember that when the when the internet bubble was going on you know buff Buffett would talk a little bit at that time about the motors and the Tronics bubble but he was just drowned out in fact most of the talk at that time was you know kind of like what's wrong with you Warren you're not in these stocks and B stock has dropped
Questionerin these stocks and B stock has dropped a lot and so on so forth so uh so so it I I would not be surprised if the next one is in kind of the 203 um 2036 to 2042 range and um and you know who knows what the uh what the theme is going to be then it could be uh transport companies taking people to Mars um we don't know we don't know what the uh and you know if it is something like that you know transport to the moon or transport to Mars then all the investors at the time are going to look at these previous tree Bubbles and not see any similarity between these three and that one because they're G to say oh this time it's different you know the the last one is different but we we getting a whole new planet you know so uh we got a different set of U things to worry about so uh most of you will very much be uh you know I guess 40 something
Questionermuch be uh you know I guess 40 something when the when the next one comes around and uh you will know and uh you will know how to Sid step it or like Mark Cuban you know hedge the hell out of it so uh and and you know just uh just to continue this discussion a little bit more um like I said bubbles are very common they don't just happen every 40 years they're happening all the time so in the early' 70s there was this notion uh called nifty50 uh where these uh Banks and Trust companies had come up with the idea that you know you just buy great businesses uh at any price and then you hold them forever and if you do that you end up doing really well and there were these 50 uh uh Blue Chip companies like Disney McDonald's Coca-Cola Kmart Xerox uh digital Avon and so on and since everyone wanted to buy these stocks and hold them forever they went
Questionerstocks and hold them forever they went up to uh ridiculous multiples you knowup to uh ridiculous multiples you knowup to uh ridiculous multiples you know so if you looked at the pees in 1972so if you looked at the pees in 1972so if you looked at the pees in 1972 like you know McDonald's was at 86 timeslike you know McDonald's was at 86 timeslike you know McDonald's was at 86 times earnings and Disney was at 82 timesearnings and Disney was at 82 timesearnings and Disney was at 82 times earnings and you know Polaroid was at 91earnings and you know Polaroid was at 91earnings and you know Polaroid was at 91 times earnings and and so on so forth sotimes earnings and and so on so forth sotimes earnings and and so on so forth so uh these things really uh became veryuh these things really uh became veryuh these things really uh became very popular and so the market basically uhpopular and so the market basically uhpopular and so the market basically uh was a bipolar Market you had very highwas a bipolar Market you had very highwas a bipolar Market you had very high valuations on these top 50 and then youvaluations on these top 50 and then youvaluations on these top 50 and then you had kind of the rest of the market kindhad kind of the rest of the market kindhad kind of the rest of the market kind of getting ignored and um and then uhof getting ignored and um and then uhof getting ignored and um and then uh then you know we had the crash of 1973then you know we had the crash of 1973then you know we had the crash of 1973 74 and uh of course uh in 7374 what74 and uh of course uh in 7374 what74 and uh of course uh in 7374 what happened is that we had the uh Arab oilhappened is that we had the uh Arab oilhappened is that we had the uh Arab oil embargo uh we had for the first time inembargo uh we had for the first time inembargo uh we had for the first time in the United States uh uh rationing of uhthe United States uh uh rationing of uhthe United States uh uh rationing of uh of gasoline and long lines at the pumpof gasoline and long lines at the pumpof gasoline and long lines at the pump and uh people not able to get gas and uhand uh people not able to get gas and uhand uh people not able to get gas and uh and and we had uh a president who hadand and we had uh a president who hadand and we had uh a president who had impros priceimpros priceimpros price controls and uh and we had the
Questionercontrols and uh and we had the impeachment of a US president for the very first time and so you had a whole bunch of different factors uh coming in uh and um and in fact what happened to the nifty50 and in fact the the crash of 7374 was actually worse than the 1929 crash uh because the 1929 crash took place over a short period of time this was uh a very slow motion crash it took place over two years but if you look at the end to endend drop from top of uh 73 to bottom of 74 before it was uh a huge I would say something more than I think aaa 60% uh drop in stock prices over that period and so the the nifty50 initially people followed the advice which is you hold these stocks forever so all these Earth shaking events were taking place and the market started dropping but the nifty50 stayed intact because people kept with it and then as the bad news
Questionerkept with it and then as the bad news just kept coming in theft 5050 was taken out back and shot one by one in the words in the words of a Forbes colonist and so you saw you know 90% 80% drop in prices of these Blue Chips like Disney and Coke and so on and uh so that was pretty brutal so the nifty50 didn't work out uh so well and um and you know if you um if you look at things today so in my opinion we have another nifty50 going on today and it's more amongst uh sliver of the of the tech space uh where you have you know I think Amazon's more than it's more than 576 times earnings now it might be more than 600 or 700 times earnings and then you have Netflix uh I think also north of 200 times earnings Twitter Facebook uh Tesla doesn't make money if they made money they' be at over 100 times Solar City would be at 250 times and Uber you know with the
Questioner250 times and Uber you know with the whatever 50 billion last round or so uh in fact interesting thing about Uber is its uh valuation is one sixth of Amazon and um and so if you if you thought Amazon is a fair value then one would question whether 16 is uh the correct number for Uber but basically investors aren't focused right now on the valuations uh what they're focused on is they they believe that these businesses will be transformational long term in terms of how we conduct our lives and they'll be very much uh very Central to our lives and uh and therefore they're interested in going into these spaces and and of course one of the things one of the ways that bubbles get going is that when people start seeing prices go up they they feel like they left out and up they they feel like they left out and up they they feel like they left out and um and they want to join that party um and they want to join that party um and they want to join that party before uh kind of the train leaves the
Questionerbefore uh kind of the train leaves the station and um you know I I remember I was um in the in in 2000 I was living in Chicago and uh I think it was late 99 early 2000 I was um I was in downtown Chicago and I got into a cab and um a lot of the cab drivers were uh in Indian and Pakistani in Chicago at the time so uh this Pakistani cab driver you know he noticed that I probably was from India or Pakistan and he says to me in uh in Udu uh you know CIS and for the sliver of you that didn't understand that uh what he was saying is that uh what are your thoughts on Cisco as a star and um so you know when the cab driver is focused on high-speed data networking stocks uh in the year 2000 H you know that uh it's like the Sho showing boy in 1929 giving you stock tips and uh and of course Cisco never saw saw that market cap again they were at 600 billion at
Questionercap again they were at 600 billion at the time and they never seen that again the time and they never seen that again the time and they never seen that again so so these these companies uh and you know we have a polar ization going on just like nifty50 right now where you have these uh sliver of these uh Tech uh stocks that are um that are valued very richly and uh and then even the older techs once you get to things like Oracle or Microsoft or any of these other companies uh they have very even even Apple and Google Google Etc have very uh sedate value valuations um and then when you get to kind of old economy stocks today like if you look at um you know the banks or you look at uh you know uh normal Manufacturing Company Etc again uh you might even say they're undervalued because what happens when you have these bubbles is the money is being flushed into one particular area and of course right now one of the issues that investors face is on the
Questionerissues that investors face is on the fixed income side there are there's no money to be made so investors would normally be in fixed income are very frustrated and then they see these kind of High Flyers so you know I I suspect some of that fixed income money is heading this with this way which is a huge amount and I also suspect that money that would normally go in the rest of the stock market is being kind of disproportionately uh funnel this way and um so so basically if you um if you look at something like you know just look at Tesla for example so you know they have uh I don't know like a 30 I think the market cast Over 30 billion now uh they have a 4 billion Revenue run rate they're losing about 400 million a year and you know you can argue that a business like Airbnb or Uber is a capital light business it's a tech business Tesla is a manufacturing
Otherbusiness Tesla is a manufacturing operation uh with its Manufacturing in one of the you know relatively higher um uh labor labor cost uh areas of the planet and uh and if they want to grow they have some very very significant capex and uh so one one should argue that one could argue that an Airbnb or something uh which is uh capex light uh deserves a richer valuation than a Tesla which would you know if they try to increase from 50,000 car cars a year to 200,000 cars a year for example uh it would be a massive massive I mean tens of billions in uh in capex to get there uh so uh so even if they made a 8% profit the PE would be over 100 and you know the best car companies make about 7% just to give you a sense and then you know just to see how the money is moving from old economy to new economy you know we have General Motors uh which has a
Questionerwe have General Motors uh which has a actually a market cap if you take outactually a market cap if you take outactually a market cap if you take out that cash at at a little less than uhthat cash at at a little less than uhthat cash at at a little less than uh less than Tesla and you know Tesla makesless than Tesla and you know Tesla makesless than Tesla and you know Tesla makes like I said about 50,000 actually lesslike I said about 50,000 actually lesslike I said about 50,000 actually less than 50,000 cars a year uh GM has uh youthan 50,000 cars a year uh GM has uh youthan 50,000 cars a year uh GM has uh you know nearly 10% of the global autoknow nearly 10% of the global autoknow nearly 10% of the global auto market you know making what nine or 10market you know making what nine or 10market you know making what nine or 10 million cars a year so it's a roundingmillion cars a year so it's a roundingmillion cars a year so it's a rounding error for GM in terms of what Teslaerror for GM in terms of what Teslaerror for GM in terms of what Tesla makes and they are the number one carmakes and they are the number one carmakes and they are the number one car company in the US and China I mean youcompany in the US and China I mean youcompany in the US and China I mean you know one in uh five and a half cars soldknow one in uh five and a half cars soldknow one in uh five and a half cars sold in the US is a is a GM car and similarlyin the US is a is a GM car and similarlyin the US is a is a GM car and similarly in China they're they're number one andin China they're they're number one andin China they're they're number one and uh they make over 10 billion in cashuh they make over 10 billion in cashuh they make over 10 billion in cash flow that's heading to 12 or 13 billionflow that's heading to 12 or 13 billionflow that's heading to 12 or 13 billion uh aggressively buying back stock um nouh aggressively buying back stock um nouh aggressively buying back stock um no shielding most income and you knowshielding most income and you knowshielding most income and you know people get excited about Tesla for thepeople get excited about Tesla for thepeople get excited about Tesla for the electric car you know GM's got the Chevyelectric car you know GM's got the Chevyelectric car you know GM's got the Chevy bolt coming out next year uh it had abolt coming out next year uh it had a
Questionerbolt coming out next year uh it had a 200 mile range pure electric $30,000 and200 mile range pure electric $30,000 and200 mile range pure electric $30,000 and Tesla would not have a car equivalent toTesla would not have a car equivalent toTesla would not have a car equivalent to this till at least 2018 so GM's actuallythis till at least 2018 so GM's actuallythis till at least 2018 so GM's actually you know two years ahead uh on this butyou know two years ahead uh on this butyou know two years ahead uh on this but because it has the name General Motorsbecause it has the name General Motorsbecause it has the name General Motors uh nobody cares and so you just see thisuh nobody cares and so you just see thisuh nobody cares and so you just see this kind of huge Divergence in uh in thesekind of huge Divergence in uh in thesekind of huge Divergence in uh in these in thesein thesein these valuations uh between kind of you knowvaluations uh between kind of you knowvaluations uh between kind of you know old and new economy and you you can alsoold and new economy and you you can alsoold and new economy and you you can also see it when you look at something likesee it when you look at something likesee it when you look at something like Netflix and uh Micron Technology so thisNetflix and uh Micron Technology so thisNetflix and uh Micron Technology so this is a quote I took from David einin hornsis a quote I took from David einin hornsis a quote I took from David einin horns uh second quarter letter to Partnersuh second quarter letter to Partnersuh second quarter letter to Partners without talking to David so I I hope hewithout talking to David so I I hope hewithout talking to David so I I hope he doesn't object uh but but uh you know hedoesn't object uh but but uh you know hedoesn't object uh but but uh you know he say our long-term Outlook is thatsay our long-term Outlook is thatsay our long-term Outlook is that sometime in the next few years Micronsometime in the next few years Micronsometime in the next few years Micron Technology currently valed valued at 20Technology currently valed valued at 20Technology currently valed valued at 20 billion with you know 3.7 billion inbillion with you know 3.7 billion inbillion with you know 3.7 billion in trailing net income will be worth moretrailing net income will be worth moretrailing net income will be worth more than Netflix currently where at 40
Questionerthan Netflix currently where at 40 billion with 240 million of trailing net income and of course Netflix now is at 44 billion and Micron is at like 15 billion and you know if you ask Reed Hastings uh the CEO of Netflix about the stock price his answer is to me he does not understand why Netflix stock is trading while it's trading and the second thing to understand about Netflix is while they have a little bit of their own content more than 99% of what they're pumping through is other people's content and other people's content is subject to inflation and subject to all sorts of other factors because content is king So Netflix uh has even if you grant them that they have the pipe what goes through the pipe has to be paid for by them to these content owners who aren't exactly I mean you've seen that even in the in the Cable business the content
Todd Combsin the Cable business the content owners was is the pipe owners you constantly have this struggle and so when when Netflix is charging eight bucks to me to come into my living room with unlimited content and uh they have to on the backend pay for that content um you know it's not a business model where you can say out of the $8 $7 is profit that's just not the economics and uh and and then of course you've got all the uh all the technology costs and all the bandwidth costs where uh you know some of the internet service providers are complaining about the the the bandwidth and so on and the the usage so um so again Netflix is a fantastic business extremely well-run business all of us love it we we we get a lot of value out of it but uh none of that means that the stock is going to uh be a winner and um and you know another way
Questionerwinner and um and you know another way to uh think about this is to is toto uh think about this is to is toto uh think about this is to is to invert um is to use uh Charlie manga'sinvert um is to use uh Charlie manga'sinvert um is to use uh Charlie manga's inversion logic Charlie Charlie M saysinversion logic Charlie Charlie M saysinversion logic Charlie Charlie M says you can say solve many problems byyou can say solve many problems byyou can say solve many problems by inversion so if you invert so let's takeinversion so if you invert so let's takeinversion so if you invert so let's take something like uhsomething like uhsomething like uh Amazon uh which I love you know probablyAmazon uh which I love you know probablyAmazon uh which I love you know probably spend too much money every month on thespend too much money every month on thespend too much money every month on the Amazon but you know Amazon has a marketAmazon but you know Amazon has a marketAmazon but you know Amazon has a market cap of I think 320 or 330 billion orcap of I think 320 or 330 billion orcap of I think 320 or 330 billion or somethingsomethingsomething uh today so if you were an investoruh today so if you were an investoruh today so if you were an investor today intoday intoday in Amazon uh it would mean that you'reAmazon uh it would mean that you'reAmazon uh it would mean that you're expecting that market cap to go up fromexpecting that market cap to go up fromexpecting that market cap to go up from today because otherwi why else would youtoday because otherwi why else would youtoday because otherwi why else would you put money into Amazon if unless you wereput money into Amazon if unless you wereput money into Amazon if unless you were expecting you know robust uh growth fromexpecting you know robust uh growth fromexpecting you know robust uh growth from your out and let's say you were a anyour out and let's say you were a anyour out and let's say you were a an investor with uh somewhat modest uhinvestor with uh somewhat modest uhinvestor with uh somewhat modest uh expectations of let's say maybe 15% orexpectations of let's say maybe 15% orexpectations of let's say maybe 15% or 20% a year uh if you owned Amazon well20% a year uh if you owned Amazon well20% a year uh if you owned Amazon well if you had a 15% expectation then whatif you had a 15% expectation then whatif you had a 15% expectation then what your expectation would be that every
Questioneryour expectation would be that every five years the stock would double and so over the next uh you know 20 years or something uh Amazon would need to be 600 to about uh you know 2.4 trillion uh 600 million after 5 years no actually more than that uh 1.2 trillion after 10 years 2.4 trillion after 20 years yeah so it' be about 5 trillion in 20 years and if you think about the entire wealth of the planet uh so first of all the entire US Stock Market Cap all stocks including Amazon today is about 20 trillion and so you're expecting that the wrestle P would not grow so much and the one company would be you know I don't know 10 or 20% of the US economy and global global wealth currently is close to about 100 trillion and uh and again you know look at the percentage versus uh Global wealth and Global wealth is not going to grow from 100 trillion at at 15 or 20% it might
Other100 trillion at at 15 or 20% it might grow at you know one or two% a year or something so uh so when you do the math the law of large numbers uh kicks in and so U count me as a skeptic on the 5 trillion valuation of Amazon 20 years um so inversion is a good way to solve some of these uh some of these issues and then uh you know we have um this chart which shows the number of public companies the p over 100 and in 2000 we we had over 100 of them and now we have about 80 of them this is that whole nifty50 of 2015 where most of those 80 companies are these you know Amazon type High Flyers and uh anytime you've gotten an high up there you've seen that you've kind of come back down and uh that maybe another data point to uh to uh to look at and so you know on March 10th 2000 which is the day the NASDAQ peaked Burkshire hathway hit a
OtherNASDAQ peaked Burkshire hathway hit a multi-year low of 41,000 its price wasmulti-year low of 41,000 its price wasmulti-year low of 41,000 its price was cut in half from 1998 and in fact whatcut in half from 1998 and in fact whatcut in half from 1998 and in fact what was happening is that exactly that youwas happening is that exactly that youwas happening is that exactly that you know the money was going from peopleknow the money was going from peopleknow the money was going from people selling Burkshire to buying all these uhselling Burkshire to buying all these uhselling Burkshire to buying all these uh different uh new economy stocks and ofdifferent uh new economy stocks and ofdifferent uh new economy stocks and of course in I I started P funds incourse in I I started P funds incourse in I I started P funds in 99 and uh we didn't have any of the High99 and uh we didn't have any of the High99 and uh we didn't have any of the High Flyers in our name uh and we did veryFlyers in our name uh and we did veryFlyers in our name uh and we did very well actually in the first uh year ofwell actually in the first uh year ofwell actually in the first uh year of the funds including past the bubble beamthe funds including past the bubble beamthe funds including past the bubble beam burst we were up 70% because we wereburst we were up 70% because we wereburst we were up 70% because we were buying these companies that were verybuying these companies that were verybuying these companies that were very cheap because no one wascheap because no one wascheap because no one was interested and uh and and such and wheninterested and uh and and such and wheninterested and uh and and such and when the bubble burst we really had no impactthe bubble burst we really had no impactthe bubble burst we really had no impact on uh what P funds was doing and so ifon uh what P funds was doing and so ifon uh what P funds was doing and so if you look at the the NASDAQ Composite youyou look at the the NASDAQ Composite youyou look at the the NASDAQ Composite you know this is a index which has made upknow this is a index which has made upknow this is a index which has made up of 2200 stocks the total value of theof 2200 stocks the total value of theof 2200 stocks the total value of the index is 7index is 7index is 7 trillion um and you know the totaltrillion um and you know the totaltrillion um and you know the total value total value in 200
Questionervalue total value in 200value total value in 200 2009 was about 22009 was about 22009 was about 2 trillion andtrillion andtrillion and uh you knowuh uh if you uh if you mute I think Arinuh uh if you uh if you mute I think Arinuh uh if you uh if you mute I think Arin if you mute we'll get a better audio soif you mute we'll get a better audio soif you mute we'll get a better audio so I mutedI mutedI muted you um so um I'll I'll unmute you lateryou um so um I'll I'll unmute you lateryou um so um I'll I'll unmute you later so anyway we've got uh We've Got 2so anyway we've got uh We've Got 2so anyway we've got uh We've Got 2 trillion in valuation in 2002 andtrillion in valuation in 2002 andtrillion in valuation in 2002 and 2009 currently the top 10 businesses in2009 currently the top 10 businesses in2009 currently the top 10 businesses in the NASDAQ compositethe NASDAQ compositethe NASDAQ composite make up 2 trillion so the top 10 make upmake up 2 trillion so the top 10 make upmake up 2 trillion so the top 10 make up 31% and the top31% and the top31% and the top 100 uh the top 100 make up five trillion100 uh the top 100 make up five trillion100 uh the top 100 make up five trillion uh and you know amongst the top 100 youuh and you know amongst the top 100 youuh and you know amongst the top 100 you have the Facebooks and the Amazon andhave the Facebooks and the Amazon andhave the Facebooks and the Amazon and all of that and so you know you haveall of that and so you know you haveall of that and so you know you have 210021002100 stocks that are worth about 2 trillionstocks that are worth about 2 trillionstocks that are worth about 2 trillion and you have 100 names that are worthand you have 100 names that are worthand you have 100 names that are worth 100 uh that are worth 5 trillion and one100 uh that are worth 5 trillion and one100 uh that are worth 5 trillion and one more thing I'd like to just point out uhmore thing I'd like to just point out uhmore thing I'd like to just point out uh you know the nifty50 inyou know the nifty50 inyou know the nifty50 in 7374 had some tech names you know they7374 had some tech names you know they7374 had some tech names you know they had Xerox Polaroid Kodak digital uh IBMhad Xerox Polaroid Kodak digital uh IBMhad Xerox Polaroid Kodak digital uh IBM and so on and with the sole exception ofand so on and with the sole exception ofand so on and with the sole exception of IBM all the tech component of the
QuestionerIBM all the tech component of the IBM all the tech component of the nifty50 uh pretty much disappeared I nifty50 uh pretty much disappeared I nifty50 uh pretty much disappeared I mean almost all the value was lost uh mean almost all the value was lost uh mean almost all the value was lost uh and that is because you know like and that is because you know like and that is because you know like Buffett says uh rapidly changing Buffett says uh rapidly changing Buffett says uh rapidly changing business uh Industries are the enemy of business uh Industries are the enemy of business uh Industries are the enemy of the investor and so the ones that have the investor and so the ones that have the investor and so the ones that have stayed even though they didn't deliver stayed even though they didn't deliver stayed even though they didn't deliver good return have been the non-chs you good return have been the non-chs you good return have been the non-chs you know the kind of the coca-colas and know the kind of the coca-colas and know the kind of the coca-colas and Disneys and and such of the world they Disneys and and such of the world they Disneys and and such of the world they have they have endured and today when have they have endured and today when have they have endured and today when you look at the nft 350 it is All Tech you look at the nft 350 it is All Tech you look at the nft 350 it is All Tech and it is all and it is all and it is all in in in areas of Rapid change and areas of Rapid change and areas of Rapid change and so it is questionable whether so so it is questionable whether so so it is questionable whether so the the 1970 to nifty50 you know it's uh the the 1970 to nifty50 you know it's uh the the 1970 to nifty50 you know it's uh uh 43 years since that uh that peak of uh 43 years since that uh that peak of uh 43 years since that uh that peak of the the the nifty50 and Koch is still with us and nifty50 and Koch is still with us and nifty50 and Koch is still with us and Disney is still with us and uh and and Disney is still with us and uh and and Disney is still with us and uh and and so on many of them have made it through so on many of them have made it through so on many of them have made it through but if you look 43 years from but if you look 43 years from but if you look 43 years from now uh which is you know would be two now uh which is you know would be two now uh which is you know would be two 200000 uh what would be 43 years so uh
Other200000 uh what would be 43 years so uh 268 I think yeah so so 20068 if I were a betting man I wouldn't bet that in 2068 uh we have we have Netflix around you know I mean that's that'd be a pretty tall order to make that bet um just because of the the reconfigurations and such that take place so that's the second piece of the difference between you know the other thing about these two so you know the first set of bubbles we saw were 40 years apart approximately 38 to 40 years apart the nifty 50 uh the last nifty 50 in the current one is 43 years apart so you're seeing about this you know let's say 37 to 43 year between these Mega Bubbles and it's again the same thing which is none of the investors who are coming into Amazon and Uber and all that today have any memory of the 1973 74 nifty50 never lived through it don't even see the
Questionerlived through it don't even see the parallels and uh you know my lone voice in this will just get drowned out so no one's going to care about what I'm trying to say here and that's just the nature of things um and uh and uh so then then you know we get to um uh the NASDAQ Composite of course went from 5,000 to 1200 the current situation is not as Extreme as 2,000 that was a very extreme situation and it's hard to predict what happens it could Flatline for a long time or it could correct uh in a short period or anything in between but the best advice I could give is just to stay away from the High Flyers uh you know look at look at other places and um you know we are seeing a little bit of different situation play out so in what happened to the nifty50 in 73 in 7374 we had these kind of huge macro events take place you know like uh the oil embargo
Questionerplace you know like uh the oil embargo those the big lines outside gas stations those the big lines outside gas stations those the big lines outside gas stations the price controls huge inflation the price controls huge inflation the price controls huge inflation impeachment of a president uh the impeachment of a president uh the impeachment of a president uh the Vietnam War a lot of things were going Vietnam War a lot of things were going Vietnam War a lot of things were going on what is happening right now is it's on what is happening right now is it's on what is happening right now is it's happening kind of quietly kind of and I happening kind of quietly kind of and I happening kind of quietly kind of and I I think they have been taken out back I think they have been taken out back I think they have been taken out back and shot but they're taking out taken and shot but they're taking out taken and shot but they're taking out taken out back and shot one by one so you know out back and shot one by one so you know out back and shot one by one so you know I don't have a slide on I don't have a slide on I don't have a slide on GoPro uh you know which I love as a GoPro uh you know which I love as a GoPro uh you know which I love as a camera I'm sure many of you have a GoPro camera I'm sure many of you have a GoPro camera I'm sure many of you have a GoPro camera uh you know look at the stock camera uh you know look at the stock camera uh you know look at the stock chart on that and and and you know when chart on that and and and you know when chart on that and and and you know when you look at that Peak valuation on GoPro you look at that Peak valuation on GoPro you look at that Peak valuation on GoPro you know what are people thinking you you know what are people thinking you you know what are people thinking you know yeah it's it's a Nifty camera but know yeah it's it's a Nifty camera but know yeah it's it's a Nifty camera but you know what would it take to one up you know what would it take to one up you know what would it take to one up GoPro and what is the situation with GoPro and what is the situation with GoPro and what is the situation with GoPro in GoPro in GoPro in 2068 you know it's not going to be 2068 you know it's not going to be 2068 you know it's not going to be around I mean there's no chance so what around I mean there's no chance so what around I mean there's no chance so what what we seeing is like you know the you
Questionerwhat we seeing is like you know the you know we we seeing the shakeouts happen one at a time you know like the mys spaces of the world are gone Twitter's now at 40% less than Peak valuation Living Social which was like group on uh had a $4 and a half billion dollar valuation at the last round they were going to go public they never went public uh they've gone from 4500 to 800 employees and the burning cash uh Square IPO Le less than 50% of the value of the last Venture round which is very unusual and you know these unicorns that people talk about which is private companies with over a billion dollar valuation there have 141 unicorns currently with a combined value of 500 billion uh many are going to be real businesses for a long time but uh I wouldn't expect them to for most of them to deliver the goods for investors and uh and I think with that
Otherinvestors and uh and I think with that we are at the end and uh we can now unmute Arn for Q&A wonderful Min thank you that was uh that was really great so I'll just turn to the student and uh see who wants to ask the first question maybe I'll I'll start with a with a quick one and then while the students are are warming up here but you know many value investors right now you know as you spent a lot of time talking about perhaps wearing another nifty 50 situation and it's hard to hard to disagree with that assessment at all um but you know many value investors right now are are clearly suffering uh within that context um and so I'd be curious to hear how you cultivate the right temperament during these you know potentially multi-year periods um where the market is is telling you you're wrong um and how you how you build that sort of patience and
Questionerhow you build that sort of patience and how you build that sort of patience and and level set mind during those those and level set mind during those those and level set mind during those those periods um yeah that's a that's a good periods um yeah that's a that's a good periods um yeah that's a that's a good question
Otherlet me uh let me just mute you um yeah so I think that's a great um yeah so I think that's a great um yeah so I think that's a great question and I think that uh uh you know question and I think that uh uh you know question and I think that uh uh you know we've seen this before like for example we've seen this before like for example we've seen this before like for example uh the seoa fund when they first started uh the seoa fund when they first started uh the seoa fund when they first started uh you know I think for the first five uh you know I think for the first five uh you know I think for the first five years uh they they lagged the indices years uh they they lagged the indices years uh they they lagged the indices and and of course then they did they did and and of course then they did they did and and of course then they did they did quite well after that and um and in fact quite well after that and um and in fact quite well after that and um and in fact uh even in uh the the situation we have uh even in uh the the situation we have uh even in uh the the situation we have at uh at pabra funds uh we have we have at uh at pabra funds uh we have we have at uh at pabra funds uh we have we have something similar because we also are something similar because we also are something similar because we also are lagging uh our benchmarks over the last lagging uh our benchmarks over the last lagging uh our benchmarks over the last five years and uh and I've always told five years and uh and I've always told five years and uh and I've always told investors that that's the period over investors that that's the period over investors that that's the period over which they should judge me and uh you which they should judge me and uh you which they should judge me and uh you know I kind of feel strange when I when know I kind of feel strange when I when know I kind of feel strange when I when I go to them and say to them now that uh I go to them and say to them now that uh I go to them and say to them now that uh yeah you should judge over five years
Otheryeah you should judge over five years
Otheryeah you should judge over five years but you know and add a butt to it
Otherbut you know and add a butt to it because then that's kind of moving the goal post and uh
Otherso um it just um it just becomes um uh
Otherso um it just um it just becomes um uh somewhat difficult so what I what I actually did this year when we had an annual meeting I presented a kind of a summarized version of this to investors just to give a context about one of the reasons why uh we may not exactly be you know hitting it out of the park right now and uh just requested them to be patient and of course we've I think we've got an exceptional investor group at forri fun so uh I haven't seen uh you know that many of them wanting to leave their seats or anything like that so it's worked out but I think yeah uh I think for me personally if I ignore the investors it's a non-event in the sense that I'm really not concerned with What markets are doing it's all
Otherwith What markets are doing it's all about inner scorecard as as Charlie manger talks about and uh it's uh not worth focusing on the uh on the outer score score card uh if you will and uh and so there it is I had to stop sharing so now I can see uh all of you quite well so that's very nice uh and and we actually have a few more humans that have shown up which is great uh so um hopefully they're not crashing your class Arn because you know this is only for your class uh but uh but anyway I think it's it's more about Charlie manger and more inner scorecard uh where you where you basically focus on uh focus on what uh what we think are the most important thing and not focus so much on how the world looks at you uh focus on how uh the reality of what you think the world is all about and so uh I I have always had uh you know a natural temperament and tendency
Otherknow a natural temperament and tendency to do that in fact you know um like uh when we had the financial crisis and at that time PAB funds was down close to 70% in 2008 and of course the markets were down you know less than 40% like 37 or 38% so we did much worse in the Market at that time and part of it was you know dumb errors on my part and part of it was just some of our stuff got beaten up more than it should have and uh you know my my wife never realized that there was such a big change in our net worth or in in PAB funds or you know 70% being down is a lot but quite frankly you know uh the way I look at life is very simply which is that if wealth is lost nothing is lost and if health is lost something is lost and if character is lost and everything is lost so right now this entire presentation is very sophomoric because we're only talking about the
Questionerbecause we're only talking about the first variable uh when are we going to arind have uh a talk which will focus on health and character in instead of just well I'm hoping that's the that's the reason we're going to rage man okay that's our okay and and manise you know you know we've known each other for a long time and I've always been a huge admirer uh of your ability to be levelheaded um and uh for what it's worth uh you know we were very fortunate to talk to David Einhorn um uh before Thanksgiving um and he had the exact same philosophy um and it's so wonderful to see that that just the strong character of these Great Value investors um so other other questions please yeah Mr P thanks for joining us tonight uh just one quick question uh some of the other investors that have come in have mentioned that in order to avoid bias during idea generation they
Questioneravoid bias during idea generation they kind of they want to almost be in a silo so that they're not affected by a mob mentality or or some bias could you just speak to the dynamic of your idea generation at the firm and what what's the I guess the protocol that you go through
Questionerokay yeah so maybe I can translate that question to be uh why didn't we invest in Valiant with all the other hedge funds is that what you're asking and uh how come we march marching to our own drummer um uh well yeah I mean I think that uh independence of thought is is one of the most fundamental things in in investing I think that um you know I I call myself the Shameless cloner and uh cloning is a very good thing it's good to borrow ideas from Ein horn and Company especially since they're free uh but but I think that you know that's the starting point and after that you have
Todd Combsstarting point and after that you have to basically run it through a set of uh very independent filters uh in terms of you know things like is it within your circle of competence do you understand the business what is it worth uh what are the risk factors you know run the checklist and so on uh I I have found it useful to have conversations with gu spear so uh we do that uh uh as well and uh and so yeah I think I think you have to have uh strong conviction uh you have to have independence of thought and uh that's just you know I think just a most basic requirement for uh for being a being a decent investor did I uh did I ask question uh yes and I was actually I was more hitting on the internal um idea of generation so you mentioned with guys feere so just how how you bounce ideas around or if you come to ideas alone and then we'll then
Questionercome to ideas alone and then we'll then we'll go into a room and talkwe'll go into a room and talkwe'll go into a room and talk about you know uh by the time we getabout you know uh by the time we getabout you know uh by the time we get done with with this talk uh you're goingdone with with this talk uh you're goingdone with with this talk uh you're going to have a relatively low um umto have a relatively low um umto have a relatively low um um impression of me I have no internalimpression of me I have no internalimpression of me I have no internal ideas uhideas uhideas uh I am only focused on ideas generated byI am only focused on ideas generated byI am only focused on ideas generated by Einhorn and Company uh please make sureEinhorn and Company uh please make sureEinhorn and Company uh please make sure you mention that to David next time andyou mention that to David next time andyou mention that to David next time and thank him for me uh so I haven't had anthank him for me uh so I haven't had anthank him for me uh so I haven't had an original idea for a very longoriginal idea for a very longoriginal idea for a very long time and I did have an original idea uhtime and I did have an original idea uhtime and I did have an original idea uh a few years back uh which is calleda few years back uh which is calleda few years back uh which is called Horsehead Holdings uh but we'll discussHorsehead Holdings uh but we'll discussHorsehead Holdings uh but we'll discuss that at another time otherthat at another time otherthat at another time other question um can you talk about how umquestion um can you talk about how umquestion um can you talk about how um you said you generate a lot of ideasyou said you generate a lot of ideasyou said you generate a lot of ideas from Einhorn and um you were looking atfrom Einhorn and um you were looking atfrom Einhorn and um you were looking at their te as from bir share and othertheir te as from bir share and othertheir te as from bir share and other investors can you talk about how um youinvestors can you talk about how um youinvestors can you talk about how um you balance different people's strategiesbalance different people's strategiesbalance different people's strategies because um each person is likebecause um each person is likebecause um each person is like fundamentalfundamentalfundamental a little bit different in how you sort
Questionera little bit different in how you sorta little bit different in how you sort of generated your own strategy fromof generated your own strategy fromof generated your own strategy from those investors I mean Ithose investors I mean Ithose investors I mean I think important thing is one is to whenthink important thing is one is to whenthink important thing is one is to when you're going to when you're going toyou're going to when you're going toyou're going to when you're going to clonecloneclone someone uh what you want to do is yousomeone uh what you want to do is yousomeone uh what you want to do is you want to focus on their biggestwant to focus on their biggestwant to focus on their biggest bets uh so so ideally you want to clonebets uh so so ideally you want to clonebets uh so so ideally you want to clone people who are not making you know don'tpeople who are not making you know don'tpeople who are not making you know don't have 60 positions in their portfolio orhave 60 positions in their portfolio orhave 60 positions in their portfolio or if they have 60 positions then the uhif they have 60 positions then the uhif they have 60 positions then the uh the top 10 maybe make up half orthe top 10 maybe make up half orthe top 10 maybe make up half or something and and ideally focus on thesomething and and ideally focus on thesomething and and ideally focus on the largest position so the first rule oflargest position so the first rule oflargest position so the first rule of cloning is uh look at where they havecloning is uh look at where they havecloning is uh look at where they have really put their money um and and usereally put their money um and and usereally put their money um and and use that as a starting point to getting athat as a starting point to getting athat as a starting point to getting a name on your radar and then the you knowname on your radar and then the you knowname on your radar and then the you know then it's a very simple exercise thethen it's a very simple exercise thethen it's a very simple exercise the first question you ask yourself is isfirst question you ask yourself is isfirst question you ask yourself is is this within my circle of competencethis within my circle of competencethis within my circle of competence and uh most of the time the answer is noand uh most of the time the answer is noand uh most of the time the answer is no and so then you're done and if it is
Questionerand so then you're done and if it is within your circle of competence then you ask yourself the second question is uh if you if you think something is within your circle competence then you know what it's worth and so then the second question is if you take what it's worth and divide it by two is that above or below the current stock price and uh in most cases the current stock price is not 50% below what we think it may be worth so then you're done as well and so then that idea also is rejected so then you get to the small sliver where you believe it's in your circle of competence and you believe it's at a very significant discount to intrinsic value where it's more than half off and then then you know it's time to start reading and uh educating yourself further on the business and um sending an email uh to gu spear giving him a
Todd Combsan email uh to gu spear giving him a heads up that he can start reading asheads up that he can start reading asheads up that he can start reading as well uh because he's strling on hiswell uh because he's strling on hiswell uh because he's strling on his thumbs waiting for me to send an emailthumbs waiting for me to send an emailthumbs waiting for me to send an email and then he goes into action reading andand then he goes into action reading andand then he goes into action reading and uh and then uh then you know we figureuh and then uh then you know we figureuh and then uh then you know we figure out uh with our independent readingout uh with our independent readingout uh with our independent reading whether uh you know what I think andwhether uh you know what I think andwhether uh you know what I think and what he thinks and uh what the checklistwhat he thinks and uh what the checklistwhat he thinks and uh what the checklist thinks and so on so forth both and umthinks and so on so forth both and umthinks and so on so forth both and um and then you know figure out positionand then you know figure out positionand then you know figure out position size and so on so that's basically howsize and so on so that's basically howsize and so on so that's basically how we go about it and uh you know you'rewe go about it and uh you know you'rewe go about it and uh you know you're you're lookingyou're lookingyou're looking for you're looking for factors whichfor you're looking for factors whichfor you're looking for factors which will eliminate things from your desk sowill eliminate things from your desk sowill eliminate things from your desk so we're not looking for a reason towe're not looking for a reason towe're not looking for a reason to invest we're looking for ainvest we're looking for ainvest we're looking for a reason and as soon as we find the reasonreason and as soon as we find the reasonreason and as soon as we find the reason not to invest we can take that off the r
QuestionerMr thank you for joining us today um canMr thank you for joining us today um canMr thank you for joining us today um can you speak a little bit about youryou speak a little bit about youryou speak a little bit about your portfolio construction so uh how manyportfolio construction so uh how manyportfolio construction so uh how many positions what's the largest positionpositions what's the largest position
Questionerpositions what's the largest position what's the shortest position um how muchwhat's the shortest position um how muchwhat's the shortest position um how much cash youhold oh yeah
Todd Combssure yeah so typically you know uh thissure yeah so typically you know uh thissure yeah so typically you know uh this has gone through a little bit of changehas gone through a little bit of changehas gone through a little bit of change over time for me but when I firstover time for me but when I firstover time for me but when I first started used to uh run what I would callstarted used to uh run what I would callstarted used to uh run what I would call a 10x10 portfolio where if I made a beta 10x10 portfolio where if I made a beta 10x10 portfolio where if I made a bet it would be at 10% of assets and I wasit would be at 10% of assets and I wasit would be at 10% of assets and I was looking to have kind of like a 10 stocklooking to have kind of like a 10 stocklooking to have kind of like a 10 stock portfolio if I got fully invested and uhportfolio if I got fully invested and uhportfolio if I got fully invested and uh and then in my uh shell shock stateand then in my uh shell shock stateand then in my uh shell shock state after the financial crisis I uh uh Iafter the financial crisis I uh uh Iafter the financial crisis I uh uh I changed that uh to uh uh you know wechanged that uh to uh uh you know wechanged that uh to uh uh you know we have seen so many ideas such a largehave seen so many ideas such a largehave seen so many ideas such a large number of ideas uh come through that uhnumber of ideas uh come through that uhnumber of ideas uh come through that uh that I went to investing in baskets likethat I went to investing in baskets likethat I went to investing in baskets like there was a Commodities basket that madethere was a Commodities basket that madethere was a Commodities basket that made sense because we had just such a widesense because we had just such a widesense because we had just such a wide range of companies that were sorange of companies that were sorange of companies that were so mispriced and so at that point I changedmispriced and so at that point I changedmispriced and so at that point I changed to having 2% 5% and 10% positions uhto having 2% 5% and 10% positions uhto having 2% 5% and 10% positions uh where 2% would be either uh you know anwhere 2% would be either uh you know an
Todd Combswhere 2% would be either uh you know an aetric bet where there was a huge upside but also a somewhat elevated downside um kind of like the Freddy Fanny preferred if you will um 5% uh would be more uh you know where where there was a good amount of conviction and 10% would be where you know absolutely you know felt like this was a serious idea and had it had to put the maximum amount so the maximum we invest at any given time is 10% 10% of assets um so far we have not trimmed a position because it has grown size because I don't want to cut the flowers and water the weeds uh I'd rather water the flowers and cut the weeds and uh so we have some positions that have become a much larger portion of the portfolio because they have appreciated and such and that's perfectly fine and uh so my preference is always like the 10% but we'll do uh 5% and sometimes we'll do 2%
Todd Combswe'll do uh 5% and sometimes we'll do 2% and cash basically is that uh you know the idea is that the first 75% of the portfolio gets invested in doubles you know where we see at least a 2X possibility then the next 10% uh focus on triples um then maybe the next 10% on 4 x's and the last 5% as 5 X's so that's typically how basically the idea is that as you get more uh compelling ideas you're willing to go uh deeper into so for example you know during the financial crisis at the absolute depths of the financial crisis it would make no sense to hold cash you know you really want to get to fully invested at that point because you've just got pretty much the best possible playing field to put money to work and and subsequently uh as those positions get sold off or get full price then your cash will build up again and so on so that's uh basically how we try to run
Otherthat's uh basically how we try to run
Questionerthat in your book you talk lot about risk and unty talk about how risk Arvin can you repeat that I didn't fully get sh the question was how do you disentangle risk from uncertainty
Otheruh risk risk and uncertainty are uh are two different things and one of the things that works to the advantage of investors is that markets hate uncertainty so markets will really punish companies uh which have uncertain uh outcomes and uh you know it's uh it's always fun to play these uh uncertainty games so let's let me give you a a real example uh which is in my portfolio right now so uh there's a there's a company called uh WL Ross and compy the ticker is wlrh and uh it was it was set up by Wilbur Ross and it's a blank check uh uh uh spack company basically where they raise about 500 million and pretty much all the cash is sitting there and um and
Questionerall the cash is sitting there and um and all the cash is sitting there and um and all the cash is sitting there and um and they have to do a deal in a couple of they have to do a deal in a couple of they have to do a deal in a couple of years and if they don't do a deal in a years and if they don't do a deal in a years and if they don't do a deal in a couple of years then the cash comes back couple of years then the cash comes back couple of years then the cash comes back to investors and uh so in fact the to investors and uh so in fact the to investors and uh so in fact the unusual thing about the Wilbur Ross unusual thing about the Wilbur Ross unusual thing about the Wilbur Ross company is that even the investment company is that even the investment company is that even the investment banker underwriting fees get refunded in banker underwriting fees get refunded in banker underwriting fees get refunded in the event the money is sent back so you the event the money is sent back so you the event the money is sent back so you know the the guys who did the all the know the the guys who did the all the know the the guys who did the all the work for the IPO and such most of that work for the IPO and such most of that work for the IPO and such most of that would come back too so basically you would come back too so basically you would come back too so basically you know the company know the company know the company has pretty much has pretty much has pretty much $10 a share in cash and uh the stock is $10 a share in cash and uh the stock is $10 a share in cash and uh the stock is at at at $10 and in fact when we bought it uh we $10 and in fact when we bought it uh we $10 and in fact when we bought it uh we bought it anytime it went below bought it anytime it went below bought it anytime it went below $10 um in fact we usually bought it $10 um in fact we usually bought it $10 um in fact we usually bought it below below below 9.97 so that even with commissions we 9.97 so that even with commissions we 9.97 so that even with commissions we were below $10 and uh so we were buying were below $10 and uh so we were buying were below $10 and uh so we were buying a dollar bill for slightly less than a a dollar bill for slightly less than a a dollar bill for slightly less than a dollar bill uh in that case and Wilber dollar bill uh in that case and Wilber dollar bill uh in that case and Wilber Ross is a tremendous value Ross is a tremendous value Ross is a tremendous value investor uh he's uh you know I would say
Questionerinvestor uh he's uh you know I would say deep distressed value and so the uncertainty in that in that stock is we have no idea what business uh Wilbur Ross will invest in or what industry he will invest in or what the economics of the investment will be we also don't know whether he's going to fail to make the investment in which case the money comes back to us and so there's a a lot of uncertainty in that stock but when you look at risk uh the risk is for the most part non-existent today there isn't much risk because you've got cash against what you paid and how would you lose money well you would lose money if Wilbur made an investment that ended up being a bonehead investment where it turned out to be terrible and the batting average of ilber Ross is so good that I would say that the odds that you have a significant permanent loss of capital in
Questionersignificant permanent loss of capital insignificant permanent loss of capital in an investment that he would make is veryan investment that he would make is veryan investment that he would make is very low and there's another ticker with thelow and there's another ticker with thelow and there's another ticker with the same stock which issame stock which issame stock which is wlru which is gives you a share of thewlru which is gives you a share of thewlru which is gives you a share of the stock and also gives you the option tostock and also gives you the option tostock and also gives you the option to buy another half share I think at atbuy another half share I think at atbuy another half share I think at at like the equivalent of $11 a share orlike the equivalent of $11 a share orlike the equivalent of $11 a share or something so that has a a kicker in itsomething so that has a a kicker in itsomething so that has a a kicker in it as wellas wellas well so this is an example ofso this is an example ofso this is an example of uh risk being low uncertainty being highuh risk being low uncertainty being highuh risk being low uncertainty being high and markets not liking that right uhand markets not liking that right uhand markets not liking that right uh there was another company I had investedthere was another company I had investedthere was another company I had invested in uh a long time back in fact this wasin uh a long time back in fact this wasin uh a long time back in fact this was the first investment I made uh when wethe first investment I made uh when wethe first investment I made uh when we first started PAB funds in Julyfirst started PAB funds in Julyfirst started PAB funds in July 99 and uh it was called Silicon Valley99 and uh it was called Silicon Valley99 and uh it was called Silicon Valley Bank and uh Silicon Valley Bank uh wasBank and uh Silicon Valley Bank uh wasBank and uh Silicon Valley Bank uh was uh it still is a bank in the in Siliconuh it still is a bank in the in Siliconuh it still is a bank in the in Silicon Valley very well-run Bank um that mainlyValley very well-run Bank um that mainlyValley very well-run Bank um that mainly makes uh kind of asset back loans tomakes uh kind of asset back loans tomakes uh kind of asset back loans to venture back companies but what theventure back companies but what theventure back companies but what the unusual thing about them is that usually
Questionerunusual thing about them is that usually when they make those loans uh they also get warrants attached uh to those loans so you know in um in Silicon value if you're if you're a masseuse at Google you're going to get stock options and uh so nobody nobody raises any eyebrows on your Banker says hey I made alone can you give me some stock options when even the waer at IL foro thinks he should get his tip in stock options and um so so they they had in July of 99 hundreds of St options and hundreds of these Dooms and they had no disclosure around those now the bank was profitable and doing well assuming those warrants were worth zero and in the valuation that was being given to the bank there was really no value being ascribed to those warrants people didn't know which companies they had they didn't know how much they had uh and they
Questionerknow how much they had uh and they didn't know what the strike prices weredidn't know what the strike prices weredidn't know what the strike prices were there was no disclosure but the idea isthere was no disclosure but the idea isthere was no disclosure but the idea is that it was all above zero you know thethat it was all above zero you know thethat it was all above zero you know the lowest price it could be is zero and thelowest price it could be is zero and thelowest price it could be is zero and the odds were pretty high with this hugeodds were pretty high with this hugeodds were pretty high with this huge bubble that was being fueled I wasbubble that was being fueled I wasbubble that was being fueled I was looking for a way at that time in 99 tolooking for a way at that time in 99 tolooking for a way at that time in 99 to get the upside with the with the bubbleget the upside with the with the bubbleget the upside with the with the bubble without the downside and what awithout the downside and what awithout the downside and what a beautiful way to play that bubble withbeautiful way to play that bubble withbeautiful way to play that bubble with Silicon Valley Bank where you get theSilicon Valley Bank where you get theSilicon Valley Bank where you get the base bank which is solid and then youbase bank which is solid and then youbase bank which is solid and then you have this you know uh un unknown Moonhave this you know uh un unknown Moonhave this you know uh un unknown Moon shot applied to it and uh I think we hadshot applied to it and uh I think we hadshot applied to it and uh I think we had a 30 or 4X in Silicon Valley Bank in thea 30 or 4X in Silicon Valley Bank in thea 30 or 4X in Silicon Valley Bank in the in a year that we held it and whatin a year that we held it and whatin a year that we held it and what happened is a few months after I boughthappened is a few months after I boughthappened is a few months after I bought the bank started to realize they had youthe bank started to realize they had youthe bank started to realize they had you know
Other[Music]
Questionerso manyso manyso many mistakes uh because uh you know the bestmistakes uh because uh you know the bestmistakes uh because uh you know the best investors are going to be right two outinvestors are going to be right two outinvestors are going to be right two out of three times uh and you know we have
Ted Weschlerof three times uh and you know we have I'm far from the best so we have a a a long list of uh a long list of mistakes so let me think of a a a juicy one to uh to talk about there's many mistakes like for example uh I used to have an investment in in Sears um and uh you know of course the the thesis was and in fact even the people who invested in C us today the thesis is that their real estate holdings alone are worth multiples of the stock and and so you have a huge underlying uh set of assets which is significantly above the current market cap and um you know I remember I had um I think this was in 2009 and it was in June of 2009 uh I had lunch uh I had lunch with Charlie Munger uh and it was the first time I had lunch with him and um you know this was a lunch that Warren Buffett had set up uh and um and so I went with my wife and uh you know I just thought it' be
Questionerand uh you know I just thought it' be like you know one of these you know to social lunches and uh you know I could tell Charlie how much I admire him and so on so forth Charlie had uh Charlie came with a print out he doesn't use a computer but he came with a print out of Guru Focus which listed my portfolio uh which his assistant must have uh printed out for me and he uh opened it up and he pointed to Sears and then he uh he said to me you know monish I noticed uh that you own Sears and U I said and then he said he did this he did okay um anytime you're talking to Charlie mber and he does this what you do is as soon as that meeting is over you dump the entire position okay because you don't need any more indicators that uh you are out there without a paddle and uh so Charlie said to me after he finished shaking his head he said that you know Warren and I
Questionerhead he said that you know Warren and I were in the retail business with Diversified retailing in the early 70s they bought these uh department stores in Baltimore and he said they were very lucky to be able to sell it sell those stores for almost approximately what they bought them for in fact one of the only times when Burkshire has sold a wholly owned subsidiary you know they've had subsidiaries go to zero get closed down like bursh haway Mills but typically when businesses are in decline or whatever else they just you know run them down they the sales are few and far between um so they sold that and uh and of course he pointed out to me that uh Sears uh between the between the real estate being liquidated and uh the that cash coming to investors there were more than 100,000 employees in all the store course and if any of you have run a
Questionercourse and if any of you have run a course and if any of you have run a business before uh you know anytime you business before uh you know anytime you business before uh you know anytime you have to let a person go uh it is a have to let a person go uh it is a have to let a person go uh it is a gut-wrenching thing to do and now if you gut-wrenching thing to do and now if you gut-wrenching thing to do and now if you have to let a person go who's have to let a person go who's have to let a person go who's incompetent uh I have no problem with incompetent uh I have no problem with incompetent uh I have no problem with that you know sometimes that's good for that you know sometimes that's good for that you know sometimes that's good for you and the person they can find a you and the person they can find a you and the person they can find a better calling in life uh but if the better calling in life uh but if the better calling in life uh but if the person is being let go for no reason person is being let go for no reason person is being let go for no reason other than that the business is doing other than that the business is doing other than that the business is doing poorly uh that is terrible because you poorly uh that is terrible because you poorly uh that is terrible because you know they didn't do anything wrong know they didn't do anything wrong know they didn't do anything wrong they're doing their jobs well well Sears they're doing their jobs well well Sears they're doing their jobs well well Sears has you know a 100,000 of those people has you know a 100,000 of those people has you know a 100,000 of those people and so if you were to go in and want to and so if you were to go in and want to and so if you were to go in and want to monetize that real estate you'd have to monetize that real estate you'd have to monetize that real estate you'd have to get rid of the people and and no matter get rid of the people and and no matter get rid of the people and and no matter how stoneheart you are that is an how stoneheart you are that is an how stoneheart you are that is an extremely difficult gut-wrenching thing extremely difficult gut-wrenching thing extremely difficult gut-wrenching thing to do and so what we have going on and to do and so what we have going on and to do and so what we have going on and of course you know this has been th of course you know this has been th of course you know this has been th since Charlie got me out of seers and
Warrensince Charlie got me out of seers and the good news at that time was in June 2009 everything else was still depressed so even though I took a loss on Sears I forget what we bought but I'm sure we made multiples of whatever we bought at that time so thank you Charlie we're most appreciative and um and um and so you know this is the situation where uh I had ignored this very basic fact that liquidation value uh can be illusion uh because because especially when businesses have people and and all these sorts of things and I think even Eddie Lampert realizes that he could monetize the real estate but I think he realizes how difficult a gut-wrenching job it is to just turn all the switches off and so what we have going on at sear is a Liquidation in slow motion and so they keep shutting a few stores and of course what is happening at the same
Othercourse what is happening at the same time is the economy is reconfiguring you know stuff is going to Amazon more and more stuff is going online so they are not in a steady state model uh in fact even the value of the real estate one would one can argue maybe going down because what is the value of a shopping mall in an Amazon world you know so so you have you have issues uh along those lines so that's uh that's one m mistake uh if you would like to talk about more I can I have an endless stream of mistakes to talk about
Questionerwe have out the Y other questions yeah thanks for speaking to us so my question is how has your investment selection process changed over time like you have been investing from 1999 so how has it changed from 99 uh let me just make sure I got the um got the question correctly I guess the question was that how has uh the way I invest change between 1999 and now is
Questionerinvest change between 1999 and now is that correct Arvin okay all right um
Otheryeah so uh you know one of the things about good things about investing is uh we are in a different place than Kobe Bryant and you know our beloved Kobe has hung up his boots now and you know did you like his PO po I liked his poem and uh and you know Kobe said my heart wants to play My Soul wants to play and my body is just not there and uh the good news at investing is you know we only need this portion of the body to work in fact one can argue we probably only need this portion maybe even just this portion to work uh and that's all we need we just need like this much we don't need any hands or legs or anything else uh and uh so so you know I'm sorry to say but Kobe may have picked the wrong vocation uh you know because he needed the whole body to function and uh we
Warrenthe whole body to function and uh we don't need the whole body we just need a tiny tiny uh I'd say I probably need like about uh maybe uh I'd say 2% of my body weight if I had about 2% of my body weight I think we could function uh just fine and uh so so the good news is that uh uh until that 2% is functioning well we can keep doing what we're doing and the other good thing is that unlike Kobe uh who may have peaked a few years back uh the good news is that uh I haven't peaked yet you know and uh my my best investing days I think are ahead of me what a wonderful concept and and um and uh and so you know the the beautiful thing about investing is all knowledge is cumulative you know so you sit down for lunch with Charlie and he beats you with the head with a 2x4 about buying Sears and yeah it hurts at the time but then you get a little bit better about
Questionerthen you get a little bit better about the next time you see one of those and uh you're that much faster at saying no to that and so uh you know you start seeing more things so I would say that uh um one of the best things about investing is that you know we all start out with this brain which has horsepower but doesn't have any content we start off with horsepower with no content right and uh what Warren and Charlie have been doing is they've they been dumping content into that brain at a very intense rate and even if you don't do it at the rate they have done it with uh as long as you keep pumping content in and synthesizing that content and you know Lis worko mental models you're going to keep getting better and better over time with uh with how uh how you look at the world so the best thing you can do is uh never stop
Othercan do is uh never stop learning always start always keeplearning always start always keeplearning always start always keep reading turn off thereading turn off thereading turn off the iPhones and uh and focus on just dumpingiPhones and uh and focus on just dumpingiPhones and uh and focus on just dumping as much stuffas much stuffas much stuff into your brain and and ideally dump itinto your brain and and ideally dump itinto your brain and and ideally dump it into your brain frominto your brain frominto your brain from either um you know Monger says that youeither um you know Monger says that youeither um you know Monger says that you know publication like Forbes Fortuneknow publication like Forbes Fortuneknow publication like Forbes Fortune Business Week economists have uhBusiness Week economists have uhBusiness Week economists have uh encapsulated a lot of stuff in a fewencapsulated a lot of stuff in a fewencapsulated a lot of stuff in a few pages so that is concentrated input intopages so that is concentrated input intopages so that is concentrated input into your brain so you know read all of thoseyour brain so you know read all of thoseyour brain so you know read all of those read the New York Times read The Wallread the New York Times read The Wallread the New York Times read The Wall Street Journal the financial times putStreet Journal the financial times putStreet Journal the financial times put all those in and then look for greatall those in and then look for greatall those in and then look for great authors because they spend you knowauthors because they spend you knowauthors because they spend you know three years or two years writing a bookthree years or two years writing a bookthree years or two years writing a book and that's fine you can put all thatand that's fine you can put all thatand that's fine you can put all that content in your brain in a week you knowcontent in your brain in a week you knowcontent in your brain in a week you know so the idea is to keep pumping contentso the idea is to keep pumping contentso the idea is to keep pumping content in the idea is to keep learning fromin the idea is to keep learning fromin the idea is to keep learning from other people's mistakes that's evenother people's mistakes that's evenother people's mistakes that's even cheaper than your own uh but of coursecheaper than your own uh but of coursecheaper than your own uh but of course even if you make your own mistakes then
Questionereven if you make your own mistakes then those get seared in more so over time what is going to happen is uh you are going to keep getting better uh because you you know more and you've seen more and you've understood more and you know manger says about Buffett that he is still learning and he's still getting better and uh so uh uh so I would say that the difference between the 99 monish and the 2015 monish is the one is the 99 Mish had more hair uh and you know we have a little less hair now but that's okay it's uh hasn't taken away from the critical 2% body weight so that's important and uh the U the 2015 Mish has taken several arrows in the back which have taught him a few lessons which is great and uh also learned a lot from other people's mistakes you know um like uh I learned a lot I learned a lot from Valiant for example right so I never made an
Questionerexample right so I never made an investment in Valiant but when manger made those comments about Valiant and he compared them to it I I actually bought because I didn't know much about that guy Janine and in fact I I have a book here yeah so I bought uh this uh I bought this biography on uh on uh Janine and it's called the sovereign state of it I mean this book was uh I think written in the 60s or something it's out of print but I think it was cost me like 99 cents on Amazon so the price was right and thank you Mr Bezos and um and uh so uh we uh we you know I really enjoyed reading that because I read the it biography on Janine and then I could understand kind of what is going on with the Valiant and all of that and uh and you know that was like free entertainment from the cheap seats so it was great thank you so much Mr P for
Questionerwas great thank you so much Mr P for speaking to us tonight um you were speaking to us tonight um you were speaking to us tonight um you were talking a little bit about your circle talking a little bit about your circle talking a little bit about your circle of competence as newer investors what of competence as newer investors what of competence as newer investors what are um some tips on improving our circle are um some tips on improving our circle are um some tips on improving our circle of competence or expanding it that's a of competence or expanding it that's a of competence or expanding it that's a great question and uh you know what uh great question and uh you know what uh great question and uh you know what uh what Buffett says is that the size of what Buffett says is that the size of what Buffett says is that the size of the circle is not relevant knowing its the circle is not relevant knowing its the circle is not relevant knowing its boundaries is absolutely critical so boundaries is absolutely critical so boundaries is absolutely critical so what he means by that is that let's say what he means by that is that let's say what he means by that is that let's say you know this was your circle of you know this was your circle of you know this was your circle of competence you just kind of understand a competence you just kind of understand a competence you just kind of understand a very tiny sliver of businesses right um very tiny sliver of businesses right um very tiny sliver of businesses right um You are not at a disadvantage if that is You are not at a disadvantage if that is You are not at a disadvantage if that is the case uh I know that may seem counter the case uh I know that may seem counter the case uh I know that may seem counter intuitive where having like such a big intuitive where having like such a big intuitive where having like such a big circle of competence versus this small circle of competence versus this small circle of competence versus this small how can they be but you know uh Charlie how can they be but you know uh Charlie how can they be but you know uh Charlie manga gives the example of his friend uh manga gives the example of his friend uh manga gives the example of his friend uh this guy John ARA and John ARA is on the this guy John ARA and John ARA is on the this guy John ARA and John ARA is on the forbs 400 I think he's worth the two forbs 400 I think he's worth the two
Otherforbs 400 I think he's worth the two three billion after having given away three billion after having given away three billion after having given away 700 million to Stanford and uh 700 million to Stanford and uh 700 million to Stanford and uh all all he has done is he has invested all all he has done is he has invested all all he has done is he has invested and developed real estate and developed real estate and developed real estate within one or two miles of the Stanford within one or two miles of the Stanford within one or two miles of the Stanford campus so what is John ARA circle of campus so what is John ARA circle of campus so what is John ARA circle of competence John ARA circle of competence competence John ARA circle of competence competence John ARA circle of competence is not even real estate it's not even is not even real estate it's not even is not even real estate it's not even real estate in California it's not even real estate in California it's not even real estate in California it's not even real estate in California in Northern real estate in California in Northern real estate in California in Northern California or in the Bay Area his circle California or in the Bay Area his circle California or in the Bay Area his circle of competence is limited to a few square of competence is limited to a few square of competence is limited to a few square miles of real estate and that's it and miles of real estate and that's it and miles of real estate and that's it and what he has done is he's what he has done is he's what he has done is he's understood uh the the Dynamics of uh understood uh the the Dynamics of uh understood uh the the Dynamics of uh that area and he's only uh put all his that area and he's only uh put all his that area and he's only uh put all his energies into that area and you know energies into that area and you know energies into that area and you know he's uh he's made a fortune doing that he's uh he's made a fortune doing that he's uh he's made a fortune doing that so uh you know and and manger goes on to so uh you know and and manger goes on to so uh you know and and manger goes on to say that if you lived in a small town say that if you lived in a small town say that if you lived in a small town okay and you'd never left that small okay and you'd never left that small okay and you'd never left that small town you know let's say you were in town you know let's say you were in
Warrentown you know let's say you were in Poria Illinois and uh you know you grew up in Poria Illinois and uh you know you grew up in Poria Illinois and uh you know you grew up in Poria Illinois and you just were there all your life and so on and uh you there all your life and so on and uh you there all your life and so on and uh you know you feel like the whole world is know you feel like the whole world is know you feel like the whole world is all around you and uh you don't know all around you and uh you don't know all around you and uh you don't know anything he says that if you invested in anything he says that if you invested in anything he says that if you invested in uh the Ford dealership in puia Illinois uh the Ford dealership in puia Illinois uh the Ford dealership in puia Illinois and you invested in the McDonald's and you invested in the McDonald's and you invested in the McDonald's franchise franchise franchise in puia Illinois and you invested in the in puia Illinois and you invested in the in puia Illinois and you invested in the best apartment building in puia Illinois best apartment building in puia Illinois best apartment building in puia Illinois and you invested in the best office and you invested in the best office and you invested in the best office building in Puro Illinois and you did building in Puro Illinois and you did building in Puro Illinois and you did nothing for the rest of your life you nothing for the rest of your life you nothing for the rest of your life you had those four Investments and you don't had those four Investments and you don't had those four Investments and you don't even need to own the whole thing part of even need to own the whole thing part of even need to own the whole thing part of a McDonald's part of a Ford dealership a McDonald's part of a Ford dealership a McDonald's part of a Ford dealership part of the best uh apartment complex part of the best uh apartment complex part of the best uh apartment complex and part of the best class A office and part of the best class A office and part of the best class A office building and the key is you bought those building and the key is you bought those building and the key is you bought those four four four at the right time at the right prices at the right time at the right prices at the right time at the right prices right and then you just sit on your ass
Otherright and then you just sit on your ass and do nothing for 60 years or 80 years and you're done there's no need to even enroll in irin's class because you know he's sadistic let me just tell you he wants to make you work hard for no reason all you need to do is move to peia Illinois make those four Investments and you can say goodbye Arvin I don't need you so circle of competence can be very tiny and that's perfectly fine I'm sorry irin that they won't be coming to class anymore well there a there's not much class left so that's I got I got a lot of value out of them while we had it but um just on that on that topic Manish you know you've been investing for 15 plus years at this point what what do you feel is firmly in your circle of confidence
Otheryeah that's a that's a that's a good question I would say that uh I'm I'm not I'm not very good at uh
Todd CombsI'm not I'm not very good at uhI'm not I'm not very good at uh Industries with rapid change so I thinkIndustries with rapid change so I think ininin general I would uh I would stay awaygeneral I would uh I would stay awaygeneral I would uh I would stay away from those uh because I just don't thinkfrom those uh because I just don't thinkfrom those uh because I just don't think I'm really good at kind of figuring outI'm really good at kind of figuring outI'm really good at kind of figuring out where those are headed and so on sowhere those are headed and so on sowhere those are headed and so on so forth I did I did make an investment inforth I did I did make an investment inforth I did I did make an investment in Google but I think that that's a littleGoogle but I think that that's a littleGoogle but I think that that's a little bit different different in the sensebit different different in the sensebit different different in the sense that uh just the way that companiesthat uh just the way that companiesthat uh just the way that companies configured and the pricing was prettyconfigured and the pricing was prettyconfigured and the pricing was pretty good and such so and it was a smallgood and such so and it was a smallgood and such so and it was a small investment so that's hopefully will workinvestment so that's hopefully will workinvestment so that's hopefully will work out uh but I would say that it's it's uhout uh but I would say that it's it's uhout uh but I would say that it's it's uh the main thing the main thing I look forthe main thing the main thing I look forthe main thing the main thing I look for are no-brainers I I I feel that the bestare no-brainers I I I feel that the bestare no-brainers I I I feel that the best investments uh the ones that are youinvestments uh the ones that are youinvestments uh the ones that are you know squarely in circle of competenceknow squarely in circle of competenceknow squarely in circle of competence are ones that are really really simplehope for me one time I was having dinnerhope for me one time I was having dinnerhope for me one time I was having dinner at Charlie monger's place and the goodat Charlie monger's place and the goodat Charlie monger's place and the good news after the lunch was that he saw fitnews after the lunch was that he saw fitnews after the lunch was that he saw fit to invite me to dinner and uh we weren't
Questionerto invite me to dinner and uh we weren't even at a at at his club we were at his house uh so I felt like i' died and gone to heaven and um and so I'm sitting with Charlie in his study uh with the with a big portrait of Samuel Johnson on uh on the wall and uh as we were about to go to the dining room to start dinner uh he just makes a casual comment and he says that you know a good investment operation uh needs to focus on just three things uh the cannibals uh the cloners and the spin-offs and then he just walks off taking his seat so I said wait wait wait Charlie wa what did you just say so I said what do you mean by the Cannibals he said oh the companies that are eating eating themselves the ones that are buying back stock and uh and of course the cloners uh I'm all about the cloners he said you know buy ideas that other people have invested in so I was very
Questionerpeople have invested in so I was very happy that the Shameless cloner got an endorsement from Moses himself uh on his cloning techniques so that was great and of course the spin-offs you know we've got green blad's book uh you can be a stock market genius too which is all about spin-offs and so that gives you all the reasons why spin-offs Mak sense and you know if you if you look at berkshire's permanent Holdings uh all the permanent Holdings are cannibals um you know American Express Coca-Cola IBM I don't know if IBM is permanent but it's large Wells Far um they all aggressively buying back stock and they've been aggressively buying back stock for decades and um and I didn't appreciate uh how powerful uh cannibals are so you know just like Brands uh I'm I I I think that uh and you know we are one of the things I have is I have this thing which uh I started
Questioneris I have this thing which uh I started a holding company uh last year called dando Holdings and one of the things we're working on is we're working on uh launching an ETF uh hopefully next year and uh and that ETF uh focuses on these three areas it is an ETF which will do uh cannibals cloning and spin-offs and you know I spent about uh six months uh uh doing all kinds of back tests with a very talented crew uh on this and I've spent more time than I would like to admit on cannibals and it's incredible what kind of performance and what kind of outperformance you get versus the indices uh with the cannibals so you know the the the learning continues I would say that uh I'm always looking for no-brainers I'm looking for undervalued businesses I'm looking for simple businesses I'm looking for things that are uh easy I mean like you know we made
Questionerare uh easy I mean like you know we made an investment we still own thean investment we still own thean investment we still own the investment about three and a half yearsinvestment about three and a half yearsinvestment about three and a half years ago in Fiat Fiatago in Fiat Fiatago in Fiat Fiat Chrysler and uh and at the time we madeChrysler and uh and at the time we madeChrysler and uh and at the time we made thethethe investment uh Fiat Chrysler had a marketinvestment uh Fiat Chrysler had a marketinvestment uh Fiat Chrysler had a market cap under five billion and I just foundcap under five billion and I just foundcap under five billion and I just found it incredible that a company doing overit incredible that a company doing overit incredible that a company doing over 100 billion in Revenue had a market cap100 billion in Revenue had a market cap100 billion in Revenue had a market cap of under five billion and they just punof under five billion and they just punof under five billion and they just pun outoutout Ferrari and Ferrari has a market cap ofFerrari and Ferrari has a market cap ofFerrari and Ferrari has a market cap of 10 billion and you know Fiat sells 510 billion and you know Fiat sells 510 billion and you know Fiat sells 5 million cars and Ferrari sells 7,000million cars and Ferrari sells 7,000million cars and Ferrari sells 7,000 cars so they took a very small sliver ofcars so they took a very small sliver ofcars so they took a very small sliver of the business and spun it out and thethe business and spun it out and thethe business and spun it out and the small s of the business being spun outsmall s of the business being spun outsmall s of the business being spun out is at 2x the valuation that we had thatis at 2x the valuation that we had thatis at 2x the valuation that we had that the market had priced the business hadthe market had priced the business hadthe market had priced the business had three and a half years ago and the restthree and a half years ago and the restthree and a half years ago and the rest of the business is still there so uh youof the business is still there so uh youof the business is still there so uh you know if you had asked me if Autos areknow if you had asked me if Autos areknow if you had asked me if Autos are within my competence I would have toldwithin my competence I would have toldwithin my competence I would have told you before 2012 that yeah maybe I
Warrenyou before 2012 that yeah maybe I understand them but it's such an ugly business I'll never invest in it and here I am deeply pregnant with the auto business um so I think stay flexible uh keep it simple go for Nob brainers keep reading don't Focus too much on expanding the circle it'll expand on its own by osmosis and uh and that's it how uh just go returning that comment from Charlie
QuestionerMonger can you can you touch upon how uh Buffett and Monger clone was that part of their repertoire you know it's well known the cannibals and spin-offs and the like you know Philip 66 for example but um what did they you know are they sort of cloners too were they in their younger years you know that is a that is a really excellent question you know um Warren doesn't talk much uh you know he's kind of like a poker player so you know um I remember one
Questionerplayer so you know um I remember one time I was in his office uh with guytime I was in his office uh with guytime I was in his office uh with guy Spear and um we saw we saw a book on hisSpear and um we saw we saw a book on hisSpear and um we saw we saw a book on his desk uh which is the Japanese companydesk uh which is the Japanese companydesk uh which is the Japanese company handbook it's basically like a valuehandbook it's basically like a valuehandbook it's basically like a value line but it lists every single Japaneseline but it lists every single Japaneseline but it lists every single Japanese stock and a half page per stock instock and a half page per stock instock and a half page per stock in Engish English right and uh and you knowEngish English right and uh and you knowEngish English right and uh and you know it was folded over like he was readingit was folded over like he was readingit was folded over like he was reading it and guy and I had been looking atit and guy and I had been looking atit and guy and I had been looking at Japanese net net Nets and I looked atJapanese net net Nets and I looked atJapanese net net Nets and I looked at that book and uh uh subsequently foundthat book and uh uh subsequently foundthat book and uh uh subsequently found that I could do the same thing inthat I could do the same thing inthat I could do the same thing in capital IQ a lot faster and um so we hadcapital IQ a lot faster and um so we hadcapital IQ a lot faster and um so we had found a bunch of uh companies thatfound a bunch of uh companies thatfound a bunch of uh companies that looked like pretty good company so whenlooked like pretty good company so whenlooked like pretty good company so when when we were in the office with war wewhen we were in the office with war wewhen we were in the office with war we said hey he War you know there are thesesaid hey he War you know there are thesesaid hey he War you know there are these companies that we found uh uh throughcompanies that we found uh uh throughcompanies that we found uh uh through Capital IQ and you know these are theCapital IQ and you know these are theCapital IQ and you know these are the names and then Guy picked up the booknames and then Guy picked up the booknames and then Guy picked up the book and you know he started leafing throughand you know he started leafing throughand you know he started leafing through to find those names to tell you know
Questionerto find those names to tell you know kind of dog ear and Mark for Warren that these are the names to uh to look at so Warren is just kind of observing guy you know randomly go and Doge ear his book without asking any permission or anything and um and you know while we're going through the whole process um uh you know some of the some of the good com were at the back you know towards the end of the book and Warren said yeah you know it's always that the good stuff is in the end you know we got to keep leafing through to get to the end but he would he was a poker face he didn't let us into any data on whether he was going to look at those companies or not look at those companies or any of that and then one time I had sent him uh a stock tip I was very excited about this company and I wrote him a note that this is something he might want to take a
Questioneris something he might want to take a look at because of a large cap for berkshire's portfolio and uh I never heard back you know which is fine anytime I send Warren notes I never hear back that's kind of part for the course but later when I was uh talking to Charlie Munger Charlie merer says hey you know that uh that company you sent to Warren you know uh he spent an incredible amount of time on it uh I said he did I said yeah he spent he said yeah he said he did so then when I saw Warren the next time I said let me ask him directly so I said hey Warren you know I sent you that company what did you do with that and you know he just gave a one sentence answer on why he rejected it right and he gave no data to me that he had spent you know a zillion hours looking at it or any of that uh that was just kind of you know under the radar
Questioneryou know under the radar so I think that Warren uh Warren is not so I think that Warren uh Warren is not so I think that Warren uh Warren is not Warren has some cloning like I think Tesco was bought by Alou Simpson then he Tesco was bought by Alou Simpson then he Tesco was bought by Alou Simpson then he bought it for himself I think Precision bought it for himself I think Precision bought it for himself I think Precision C Parts was bought by Todd kums and now C Parts was bought by Todd kums and now C Parts was bought by Todd kums and now he's bought it for Burkshire the whole he's bought it for Burkshire the whole he's bought it for Burkshire the whole company and so he's he he will look at company and so he's he he will look at company and so he's he he will look at stuff I saw I saw that that one stock stuff I saw I saw that that one stock stuff I saw I saw that that one stock had sent him he spent some time on and had sent him he spent some time on and had sent him he spent some time on and so on uh so on uh so on uh and I think Charlie is probably more and I think Charlie is probably more and I think Charlie is probably more open on that front I think Warren open on that front I think Warren open on that front I think Warren probably is more more of you know I want probably is more more of you know I want probably is more more of you know I want to do the work so he may take it as an to do the work so he may take it as an to do the work so he may take it as an input but he's very independent on his input but he's very independent on his input but he's very independent on his thoughts so he's it's not going to have thoughts so he's it's not going to have thoughts so he's it's not going to have a huge uh bearing on him but but I I a huge uh bearing on him but but I I a huge uh bearing on him but but I I actually think that uh cloning is uh is actually think that uh cloning is uh is actually think that uh cloning is uh is a very a very a very powerful uh tool because you know powerful uh tool because you know powerful uh tool because you know someone else who's pretty smart it's someone else who's pretty smart it's someone else who's pretty smart it's gone through all their filters and so uh gone through all their filters and so uh gone through all their filters and so uh you know we've we've talked about this you know we've we've talked about this
Questioneryou know we've we've talked about this uh before Arvin but you know you can gouh before Arvin but you know you can gouh before Arvin but you know you can go bowling two ways you can go to a bowlingbowling two ways you can go to a bowlingbowling two ways you can go to a bowling alley and bowl withalley and bowl withalley and bowl with bumpers and or you can bowl withoutbumpers and or you can bowl withoutbumpers and or you can bowl without bumpers and the last time I asked Arinbumpers and the last time I asked Arinbumpers and the last time I asked Arin the question Arin uh if you go to athe question Arin uh if you go to athe question Arin uh if you go to a bowling alley and all that mattered wasbowling alley and all that mattered wasbowling alley and all that mattered was the score would you bowl with bumpers orthe score would you bowl with bumpers orthe score would you bowl with bumpers or without bumpers and I think last timewithout bumpers and I think last timewithout bumpers and I think last time Arin may have given the wrong answer soArin may have given the wrong answer soArin may have given the wrong answer so let me ask him again so Arin if youinglet me ask him again so Arin if youinglet me ask him again so Arin if youing alleyalleyalley and we are bowling for the how should weand we are bowling for the how should weand we are bowling for the how should we B
Otherso Manish I very grateful that weso Manish I very grateful that weB so Manish I very grateful that we record all ourrecord all ourrecord all our conversations uh because if you red theconversations uh because if you red theconversations uh because if you red the last conversation you would observe thatlast conversation you would observe thatlast conversation you would observe that I said I bow withI said I bow withI said I bow with buers so nowbuers so nowbuers so now and I I don't like you know the same wayand I I don't like you know the same wayand I I don't like you know the same way you don't like businesses with rapidyou don't like businesses with rapidyou don't like businesses with rapid change my answers don't have rapidchange my answers don't have rapidchange my answers don't have rapid change either so it's it's the sameanswer and and Arin when you go when youanswer and and Arin when you go when youanswer and and Arin when you go when you go to a a real bowlinggo to a a real bowlinggo to a a real bowling alley do you bowl with bumpers or
Questioneralley do you bowl with bumpers or without
Questionerwithout
Otherbumpers yeah you know I'm not a Big Bowler actually it's do you uh are you a Big Bowler Manish I am a Midwestern blue collared American of course
Questioner[Laughter] wonderful I'm I'm from Poria Illinois I I bowl on my way to picking up the McDonald's dividend wonderful other questions yeah
Otherso one of the things that we've talked about to other investors is what their take on the impact of management of a company so what what do you look into do you talk to management extensively or does it matter from case to case when you when you go to the stock yeah
Otheractually I think that's a that's another great question so there's there is no point talking to management uh because uh so first of all management matters a lot I mean I mean of course just like Brands and cannibals I have learned uh the hard way to appreciate
Warrenlearned uh the hard way to appreciate high quality management ultra high highhigh quality management ultra high highhigh quality management ultra high high quality management so uh so I I put aquality management so uh so I I put aquality management so uh so I I put a lot of weight on it now much more than Ilot of weight on it now much more than Ilot of weight on it now much more than I did in 99 for example uh but I thinkdid in 99 for example uh but I thinkdid in 99 for example uh but I think that uh you're not going to get too manythat uh you're not going to get too manythat uh you're not going to get too many insights about management by hanging outinsights about management by hanging outinsights about management by hanging out with them um you know so the averagewith them um you know so the averagewith them um you know so the average public companypublic companypublic company CEOCEOCEO uh is likely a greatuh is likely a greatuh is likely a great salesmen if they weren't great salesmensalesmen if they weren't great salesmensalesmen if they weren't great salesmen they wouldn't have gotten that job andthey wouldn't have gotten that job andthey wouldn't have gotten that job and so if you go meet a greatso if you go meet a greatso if you go meet a great salesman and he's talking about asalesman and he's talking about asalesman and he's talking about a subject that he knows everything aboutsubject that he knows everything aboutsubject that he knows everything about and you know nothing about you cannot beand you know nothing about you cannot beand you know nothing about you cannot be anything butanything butanything but impressed uh so there's not much that'simpressed uh so there's not much that'simpressed uh so there's not much that's going to come out of that meeting that'sgoing to come out of that meeting that'sgoing to come out of that meeting that's going to be helpful to your long-termgoing to be helpful to your long-termgoing to be helpful to your long-term investmentinvestmentinvestment success um so you know the averagesuccess um so you know the averagesuccess um so you know the average public company CEO is a very honorablepublic company CEO is a very honorablepublic company CEO is a very honorable guy a person you would be happy to haveguy a person you would be happy to haveguy a person you would be happy to have your daughter marry but not a person you
Questioneryour daughter marry but not a person you should be hanging out with to understand whether you should buy the stock or not
Questionerso I I never uh try to meet managements uh I've never tried to reach out to them uh in some cases uh they have reached out to me and I've actually told them not to waste their time uh because you know there's not much to come out of that uh very of focusing on running the business and um and so knowing the nature of management is very important uh and you can know that by looking at the long history ideally of what they've been up to and what they said and what they've delivered versus what they are saying they will deliver in the future so you're better off looking at the past and extrapolating on your own independently what you think they'll do in the future versus uh trying to go by what they are saying they'll do in the future while they
Questionerthey'll do in the future while they ignore their past uh so so as I as I look at my portfolio today I find that it is very rich in high quality managements uh versus even five years ago or 10 years ago that's one change I notice uh and I'm very happy about that so I think that if if we can find uh you know going back to the WL Ross Wilber Ross company you know Wilber Ross is a exceptional value investor so you're getting a very high quality person at no premium uh upside without downside it's a very nice Confluence of factors you know so uh so I think that uh yes I think that if you put in your checklist that you want to have high quality management in addition to everything else that criteria will not hurt you the ability to profit companies in different econom most other steady deining well can you repeat that sure the the question
Questionerrepeat that sure the the question broadly speaking were was and correct me broadly speaking were was and correct me broadly speaking were was and correct me this isn't a fair representation you this isn't a fair representation you this isn't a fair representation you know what are sort of the attributes of know what are sort of the attributes of know what are sort of the attributes of economic modes um that that you value uh and and there was a a second part to and and there was a a second part to and and there was a a second part to that which is do you think about those that which is do you think about those that which is do you think about those notes differently in a growing business versus a declining versus a declining business and a and a and a a business business and a and a and a a business business and a and a and a a business that is sort of flattish okay yeah that is sort of flattish okay yeah that is sort of flattish okay yeah that's that's that's a
Todd Combsthat's a good question you know the uh a good question you know the uh a good question you know the uh I think the evaluational mor is uh probably one of the most difficult probably one of the most difficult probably one of the most difficult things uh things uh things uh you know when I um when I talk to uh you know when I um when I talk to uh you know when I um when I talk to uh when I talk to Guy and um I remember when I talk to Guy and um I remember when I talk to Guy and um I remember recently we were talking about some recently we were talking about some recently we were talking about some company and uh you know it looked very company and uh you know it looked very company and uh you know it looked very compelling to me you know I told them compelling to me you know I told them compelling to me you know I told them you know how would you compare this to you know how would you compare this to you know how would you compare this to Nestle for Nestle for Nestle for example and his perspective was there's example and his perspective was there's example and his perspective was there's no comparison because no comparison because no comparison because Nestle's guy think Nestle is bulletproof
OtherNestle's guy think Nestle is bulletproof you know it's going to be there forever uh and they're going to keep taking more and more share and emerging markets and so on and or then I asked him you know how does this compare to vabx which was a small UK company um made serial and such and of course he's very high on vabx and um so Moes modes are extremely important I so Moes modes are extremely important I so Moes modes are extremely important I think the evaluation of think the evaluation of think the evaluation of modes uh is not the easiest thing um modes uh is not the easiest thing um modes uh is not the easiest thing um it's uh it takes uh it takes it's uh it takes uh it takes it's uh it takes uh it takes time uh time uh time uh and uh and some you know I would say Lis and uh and some you know I would say Lis and uh and some you know I would say Lis work type thinking uh thinking about in work type thinking uh thinking about in work type thinking uh thinking about in many different ways to try to get to a many different ways to try to get to a many different ways to try to get to a sense of kind of what uh what those mes sense of kind of what uh what those mes sense of kind of what uh what those mes are and uh and how enduring they are and are and uh and how enduring they are and are and uh and how enduring they are and and and and so on you know um and and and so on you know um and and and so on you know um so it's uh yeah I mean I I I think that so it's uh yeah I mean I I I think that so it's uh yeah I mean I I I think that the uh you know the expanding the uh you know the expanding the uh you know the expanding businesses or the shrinking businesses businesses or the shrinking businesses businesses or the shrinking businesses or the flat businesses well you know you
Warrenor the flat businesses well you know you have to look at it in the context of the of the actual business I would say this that other things being equal uh you're better off investing in in businesses with huge runways ahead of them I think you're better off investing where you've got so again this is a sh shift I'm going through and I've been going through for many years between buying assets cheap versus buying assets that are going to appreciate a lot in the future you're always better off buying assets that are going to appreciate a lot in the future and in monger's words paying up for them uh you'll end up better and uh you know to give you one uh uh one example uh and I think Tom Gainer used this example recently he's from Marquel and you know we talked about the nifty 50 in 1972 and we talked about how it got decimated so if you bought the
Questionerdecimated so if you bought the nifty50 uh no I'm sorry if you invested nifty50 uh no I'm sorry if you invested nifty50 uh no I'm sorry if you invested $50 in the S&P $50 in the S&P $50 in the S&P 500 on the day the nifty50 peaked in 500 on the day the nifty50 peaked in 500 on the day the nifty50 peaked in 1972 that $50 today is worth $2,800 1972 that $50 today is worth $2,800 1972 that $50 today is worth $2,800 okay it's gone up a lot it's it's gone okay it's gone up a lot it's it's gone okay it's gone up a lot it's it's gone up uh up uh up uh uh how much is it like almost like what uh how much is it like almost like what uh how much is it like almost like what 5,000 6,000 per a huge amount of gain in 5,000 6,000 per a huge amount of gain in 5,000 6,000 per a huge amount of gain in that in that period of time uh doing that in that period of time uh doing that in that period of time uh doing nothing just sitting on the S&P right nothing just sitting on the S&P right nothing just sitting on the S&P right now Tom Gainer says that if you invested now Tom Gainer says that if you invested now Tom Gainer says that if you invested $3 in three of the nifty50 you know a $3 in three of the nifty50 you know a $3 in three of the nifty50 you know a dollar dollar dollar he said let's say you put a dollar in he said let's say you put a dollar in he said let's say you put a dollar in each of the each of the each of the nifty50 and now you had you took just nifty50 and now you had you took just nifty50 and now you had you took just three out of those dollars which means three out of those dollars which means three out of those dollars which means three of the companies out of the three of the companies out of the three of the companies out of the 50 the three companies in the $3 you 50 the three companies in the $3 you 50 the three companies in the $3 you invested assume 47 went to invested assume 47 went to invested assume 47 went to zero the three companies that were part zero the three companies that were part zero the three companies that were part of the of the of the nifty50 today are worth more than $2,800 okay and this is worth more than $2,800 okay and this is worth more than $2,800 okay and this is worth more than $2,800 $2,800 $2,800 by buying it at the peak so you went by buying it at the peak so you went by buying it at the peak so you went through all the valleys you went through
Questionerthrough all the valleys you went through the 90% declines you went through all ofthe 90% declines you went through all ofthe 90% declines you went through all of that and but because you had a stomachthat and but because you had a stomachthat and but because you had a stomach of Steel like AR who eats his oats dailyof Steel like AR who eats his oats dailyof Steel like AR who eats his oats daily uh you just with strong fortitude helduh you just with strong fortitude helduh you just with strong fortitude held on to those stockson to those stockson to those stocks 287 273 through 74 through all the287 273 through 74 through all the287 273 through 74 through all the crashes through the Dooms through thecrashes through the Dooms through thecrashes through the Dooms through the 2008 you head it all with your steel2008 you head it all with your steel2008 you head it all with your steel stomach you had like $3,000 from the $3stomach you had like $3,000 from the $3stomach you had like $3,000 from the $3 became 3,000 now I take a little I takebecame 3,000 now I take a little I takebecame 3,000 now I take a little I take a little uma little uma little um um um you know I like Tom Gainer but Ium um you know I like Tom Gainer but Ium um you know I like Tom Gainer but I take a little uh question with histake a little uh question with histake a little uh question with his analysis and the little question I haveanalysis and the little question I haveanalysis and the little question I have is that there's a controversy whetheris that there's a controversy whetheris that there's a controversy whether Walmart was part of the nifty50 or notWalmart was part of the nifty50 or notWalmart was part of the nifty50 or not and one of the three that he includes isand one of the three that he includes isand one of the three that he includes is Walmart right and according to meWalmart right and according to meWalmart right and according to me Walmart should not be in the nifty50Walmart should not be in the nifty50Walmart should not be in the nifty50 because in 1972 it was not a blue chipbecause in 1972 it was not a blue chipbecause in 1972 it was not a blue chip it was a very small company but Tom G'sit was a very small company but Tom G'sit was a very small company but Tom G's point was that if one of those 50point was that if one of those 50point was that if one of those 50 companies was Walmart and you put a
Questionercompanies was Walmart and you put a dollar into Walmart uh you could had a dollar into Walmart uh you could had a dollar into Walmart uh you could had a 96% or 94% error rate means 94% of 96% or 94% error rate means 94% of 96% or 94% error rate means 94% of portfolio going to zero and still beat portfolio going to zero and still beat portfolio going to zero and still beat the the the S&P okay and and he makes another point S&P okay and and he makes another point S&P okay and and he makes another point you know we all know about the salad oil you know we all know about the salad oil you know we all know about the salad oil crisis in the crisis in the crisis in the 1960s where AMX got hit a lot and then 1960s where AMX got hit a lot and then 1960s where AMX got hit a lot and then Buffett bought AMX when it dropped a lot Buffett bought AMX when it dropped a lot Buffett bought AMX when it dropped a lot because of salad oil crisis and he put because of salad oil crisis and he put because of salad oil crisis and he put 40% of his fund and he made made a 40% of his fund and he made made a 40% of his fund and he made made a killing so Tom Gainer says let's say you killing so Tom Gainer says let's say you killing so Tom Gainer says let's say you were the schmuck who bought MX one day were the schmuck who bought MX one day were the schmuck who bought MX one day before the salad oil crisis hit okay and before the salad oil crisis hit okay and before the salad oil crisis hit okay and you put money into AMX in 1962 or 63 you put money into AMX in 1962 or 63 you put money into AMX in 1962 or 63 whenever that crisis hit but one day whenever that crisis hit but one day whenever that crisis hit but one day before Peak price and next day it drops before Peak price and next day it drops before Peak price and next day it drops very heavily and you held from that time very heavily and you held from that time very heavily and you held from that time in in in 1962 till today you did not touch AMX 1962 till today you did not touch AMX 1962 till today you did not touch AMX and of course AMX you know now is at $70 and of course AMX you know now is at $70 and of course AMX you know now is at $70 a share it went down to $10 a share in a share it went down to $10 a share in a share it went down to $10 a share in 2008 you know it's it lost a lot of its 2008 you know it's it lost a lot of its 2008 you know it's it lost a lot of its value in 2008 as well but he says that
Questionervalue in 2008 as well but he says that if you held on and you compare compared if you held on and you compare compared if you held on and you compare compared it to Buffett buying at the 40% discount it to Buffett buying at the 40% discount it to Buffett buying at the 40% discount and assuming Buffett held till today and and assuming Buffett held till today and and assuming Buffett held till today and you compared the annualized return that you compared the annualized return that you compared the annualized return that you had versus the annualized return you had versus the annualized return you had versus the annualized return Buffett had the two are going to look Buffett had the two are going to look Buffett had the two are going to look very similar in fact the more time that very similar in fact the more time that very similar in fact the more time that goes on those returns are going to goes on those returns are going to goes on those returns are going to converge even though there was a big converge even though there was a big converge even though there was a big difference in the Buy price so the difference in the Buy price so the difference in the Buy price so the lesson in all of these is that if you lesson in all of these is that if you lesson in all of these is that if you bought bought bought great businesses and you know this is great businesses and you know this is great businesses and you know this is why the Nifty 50s and these bubbles get why the Nifty 50s and these bubbles get why the Nifty 50s and these bubbles get going because some pundit like me says going because some pundit like me says going because some pundit like me says you buy a great business and doesn't you buy a great business and doesn't you buy a great business and doesn't matter right but that's not what I'm matter right but that's not what I'm matter right but that's not what I'm saying so all I'm trying to say is that saying so all I'm trying to say is that saying so all I'm trying to say is that between buying a cheap business you know between buying a cheap business you know between buying a cheap business you know buying between buying a fair business at buying between buying a fair business at buying between buying a fair business at a good price or a good business at a a good price or a good business at a a good price or a good business at a fair price you should always prefer the
Questionerfair price you should always prefer the good business at a fair price and so this is another lesson that I've been learning over the years where in 1999 Mish was a cheap skate investor and in 2015 I'm much more uh tuned to Value managements can add value that gold modes can add value that enduring Moes can add and I think that the subject of figuring out Moes is a really tough subject I mean we saw with the nifty50 in 72 that the Polaroids and Xerox and Kodak didn't make it I mean Kodak was just there was nothing visible at that time that would tell you that there was any in their armor they had patents out the ying-yang they controlled film they had a monopoly in film I mean pretty much they they own the whole Market you know so same with Xerox you know literally they they owned that market and and look where we are today so so Moes the nature
Otherwhere we are today so so Moes the nature of capitalism is uh creative destruction of capitalism is uh creative destruction of capitalism is uh creative destruction and that is the best part of our and that is the best part of our and that is the best part of our capitalism is creative destruction so capitalism is creative destruction so capitalism is creative destruction so Moes of it is very difficult to find Moes of it is very difficult to find Moes of it is very difficult to find Moes that will not get destroyed over Moes that will not get destroyed over Moes that will not get destroyed over time it's it's an exception to find a mo time it's it's an exception to find a mo time it's it's an exception to find a mo that will not get destroyed and so the that will not get destroyed and so the that will not get destroyed and so the quest is on for enduring Moes at great quest is on for enduring Moes at great quest is on for enduring Moes at great prices where the rest of humanity prices where the rest of humanity prices where the rest of humanity doesn't understand that there's a mo uh doesn't understand that there's a mo uh doesn't understand that there's a mo uh I think I think I think I think I think I think we're we are moving towards that we're we are moving towards that we're we are moving towards that direction you know direction you know direction you know
Questionerper perhaps uh you know I could pause and and ask a quick question which is and and ask a quick question which is and and ask a quick question which is you know you spent a lot of time you know you spent a lot of time you know you spent a lot of time studying mistakes um and a lot of time studying mistakes um and a lot of time studying mistakes um and a lot of time studying you know buffets great studying you know buffets great studying you know buffets great successes have you spent uh time successes have you spent uh time successes have you spent uh time studying other successes do you think studying other successes do you think studying other successes do you think that's an important part of your process that's an important part of your process that's an important part of your process uh or is it really because of the uh or is it really because of the uh or is it really because of the asymmetric nature of investing where if
Questionerasymmetric nature of investing where if you go down 50% you have to double to get up back to your original investment uh that you really spent your time focusing on the mistakes and and you view the study of successes as less important um yeah that's a that's a good question I mean I think that uh I think mistakes are part of the investment landscape um you know Warren Warren and Charlie both try to spend a lot of time reducing mistakes and that's a good good place to spend your time uh but they also spend a lot of time on uh you know great modes and things that they don't have to touch for a long time so the best thing you can do the single greatest um I would say skill set you can bring to bear as an investor is patience you know extreme patience if you are a guy or girl who loves to watch paint dry you will be a great investor and uh Arin does your class
Questionerinvestor and uh Arin does your class love to watch paint dry how many people love to watch paint dry how many people love to watch paint dry please raise your hand we got one paint dryers out there man and uh I also want to let you know Arvin that I did not get the memo about the coat and tie next time please send the memo I don't think your class got that memo either
Otheryeah I I was saying the next nevermind Kelly formula yeah glad I'm glad you brought up the Kelly formula the Kelly formula was a mistake on my part I should have never put into my book I should have never talked about it it it works if you are doing you know 5,000 coin tosses you know where you're repeatedly making Bets with no nods uh I mean if you had uh heads was 51% Tails was 49% and someone allowed you to do 5,000 coin tosses and you got to pick heads that would be great to use a Kelly formula to set your beted size and all of that
Otherof thatof that but in investing at least the way webut in investing at least the way webut in investing at least the way we practice investing you're making oneoffpractice investing you're making oneoffpractice investing you're making oneoff bets it's not like 5,000 coin tosses sobets it's not like 5,000 coin tosses sobets it's not like 5,000 coin tosses so it doesn't apply and so in hindsight Iit doesn't apply and so in hindsight Iit doesn't apply and so in hindsight I realized that if I were to ever dorealized that if I were to ever dorealized that if I were to ever do another version of my book or anotheranother version of my book or anotheranother version of my book or another addition where the odds are low uh Iaddition where the odds are low uh Iaddition where the odds are low uh I would acknowledge that and take that outwould acknowledge that and take that outwould acknowledge that and take that out so don't don't worry about the Kellyso don't don't worry about the Kellyso don't don't worry about the Kelly formula unless you are in some kind offormula unless you are in some kind offormula unless you are in some kind of situation with the ability to make a lotsituation with the ability to make a lotsituation with the ability to make a lot of Bets with or in your favorof Bets with or in your favorof Bets with or in your favor frequently maybe we can close with anyfrequently maybe we can close with anyfrequently maybe we can close with any parting thoughts that you might uh mayparting thoughts that you might uh mayparting thoughts that you might uh may maybe we can close with any partingmaybe we can close with any partingmaybe we can close with any parting thoughts that you might have in in thethoughts that you might have in in thethoughts that you might have in in the room we have a you know a broad array ofroom we have a you know a broad array ofroom we have a you know a broad array of students uh from MBA Finance Majors uhstudents uh from MBA Finance Majors uhstudents uh from MBA Finance Majors uh any advice that you would have for themany advice that you would have for themany advice that you would have for them as they think about theiras they think about theiras they think about their career yeah I mean uhcareer yeah I mean uhcareer yeah I mean uh uh I think I think the uh the advice Iuh I think I think the uh the advice Iuh I think I think the uh the advice I have because I'm a cloner is I would
Otherhave because I'm a cloner is I would just clone the advice Warren would give you or Charlie would give you which is uh to focus on going to work for people you like admire and trust and one of the things if you unpack what Warren says about like admire and trust is when he says goes to work for people that you like admire trust notice that it doesn't talk about what the comp is it doesn't talk about what the company is uh whether it's a blue chip or not or startup or not it's about the people and so you have to go work for people and with people that you would truly enjoy working with if you were not getting paid uh so I think that that should be the criteria uh the second thing again what Warren says is that uh don't put things off you know in in his words he's saying that's like saving sex for old age not a good idea um you know so so
Questionerage not a good idea um you know so so basic basically don't say I'm going to uh work three years at Goldman Sachs then I'm going to get my MBA then I'm going to go do X for three four years and then I'm going to start a fund and then this and then that you know um since we have all night arind I wanted to tell you the story of this uh very stressed out investment banker so there's this guy in New York who's an investment banker working like 100 120 hours a week totally burnt out you know just flaming out you know just with this intense and he's of course making a lot of money but he is uh just stressed out beyond belief so he uh does some research and he finds this little tiny Mexican fishing Village uh which is in a very remote part of Mexico where there is a small like you know one room Resort uh and and no humans just it would be just he'd be the only guest and
Warrenwould be just he'd be the only guest and there's no one around for Miles he said there's no one around for Miles he said that's the place for me so he goes over and he books himself for a week at that place to recuperate from New York and in the morning he gets up and he notices that there's a Hut uh just off the beach and this guy this Mexican guy in this Hut have you heard the story before
Questionerno
Warrenyeah I know all my story is original so uh so he sees his Mexican guy in this Hut and this Mexican guy pulls out a small boat uh small little canoe and he takes it out in the ocean and then he's gone for like an hour hour and a half and he comes back with two fish and then he makes a little fire and you know Cooks one fish and then has that's his lunch then he goes and takes a nap he wakes up in the evening Cooks the second fish and that's his dinner and then you know he's just hanging out
Questionerand then you know he's just hanging out in his Hut and goes to sleep and thenin his Hut and goes to sleep and thenin his Hut and goes to sleep and then the next morning the banker noticesthe next morning the banker noticesthe next morning the banker notices again in the morning the guy wakes upagain in the morning the guy wakes upagain in the morning the guy wakes up takes his boat goes out in the ocean youtakes his boat goes out in the ocean youtakes his boat goes out in the ocean you know gets the two fish comes back againknow gets the two fish comes back againknow gets the two fish comes back again Cooks one fish takes the nap second fishCooks one fish takes the nap second fishCooks one fish takes the nap second fish and after three days the banker can'tand after three days the banker can'tand after three days the banker can't take it anymore okay so he goes and talktake it anymore okay so he goes and talktake it anymore okay so he goes and talk talks to the only human he can which istalks to the only human he can which istalks to the only human he can which is the Mexican fisherman and so he saysthe Mexican fisherman and so he saysthe Mexican fisherman and so he says that you know uh when you go out in thethat you know uh when you go out in thethat you know uh when you go out in the ocean could you catch more than two fishocean could you catch more than two fishocean could you catch more than two fish and uh the Mexican fisherman says yeahand uh the Mexican fisherman says yeahand uh the Mexican fisherman says yeah the ocean is full of fish I can catch athe ocean is full of fish I can catch athe ocean is full of fish I can catch a lot more fish so he says uh why don'tlot more fish so he says uh why don'tlot more fish so he says uh why don't you cash catch more than two fish heyou cash catch more than two fish heyou cash catch more than two fish he says I only need two fish why would Isays I only need two fish why would Isays I only need two fish why would I need to catch more than two fish he saysneed to catch more than two fish he saysneed to catch more than two fish he says so the banker says look if you C catchso the banker says look if you C catchso the banker says look if you C catch more than two fish then you would havemore than two fish then you would havemore than two fish then you would have some extra fish you would only eat thesome extra fish you would only eat the
Othersome extra fish you would only eat the two fish but you could sell it in thetwo fish but you could sell it in thetwo fish but you could sell it in the market you know so the fisherman says uhmarket you know so the fisherman says uhmarket you know so the fisherman says uh and then what he says well you know thenand then what he says well you know thenand then what he says well you know then you'd have some money and you know asyou'd have some money and you know asyou'd have some money and you know as you keep getting these more fish and youyou keep getting these more fish and youyou keep getting these more fish and you get more money uh what you can do is youget more money uh what you can do is youget more money uh what you can do is you can get a second boat and hire a guy andcan get a second boat and hire a guy andcan get a second boat and hire a guy and he's going to go out in the boat andhe's going to go out in the boat andhe's going to go out in the boat and fish as well and he's going to catch afish as well and he's going to catch afish as well and he's going to catch a bunch of fish too and now you'll havebunch of fish too and now you'll havebunch of fish too and now you'll have more fish because you'll pay the guy butmore fish because you'll pay the guy butmore fish because you'll pay the guy but you'll have some left over and uh you'llyou'll have some left over and uh you'llyou'll have some left over and uh you'll have more to sell in the market so thehave more to sell in the market so thehave more to sell in the market so the fisherman says and then what he saysfisherman says and then what he saysfisherman says and then what he says then you know we're going to keep doingthen you know we're going to keep doingthen you know we're going to keep doing this and of course we're going to have athis and of course we're going to have athis and of course we're going to have a fleet which is going to be bringing infleet which is going to be bringing infleet which is going to be bringing in this fish but then we're going tothis fish but then we're going tothis fish but then we're going to vertically integrate so instead ofvertically integrate so instead ofvertically integrate so instead of selling the fish into the market we'reselling the fish into the market we'reselling the fish into the market we're going to set up a canning operation andgoing to set up a canning operation and
Questionergoing to set up a canning operation and we're not going to let those comebacks take all the margin by doing the canning themselves we're going to do the canning and you know we in this great part of the country we're going to create a great brand and we're going to have this you know organic you know uh fish and all this stuff and we're going to can it and uh we're going to then you know send it out all over the world so the fisherman says uh and then what he said and then you know I'm going to take you public you know I'm I'm I'm I'm your man you know I can take you public I we can do an IPO and then you know you're going to have uh lots of money and uh you know great life and such and he says and then what he said then you know when you when you want to take a vacation you can come here and hang out and the fisherman just looks at him that he's already there
Questionerlooks at him that he's already there story man I actually do think you've told me this story but it's it's such a great story Manish I actually do think you've told me this story but you know I never there's so many layers so the the the qu the one of the things I wanted to sh say with the class is is don't be like thelike thelike the banker be like the fisherman you know so think of life in terms of the essence of life and and the essence of life is there are there are some basic fundamentals the first essence of life is the banker forgotten is life is finite okay it's not infinite the second essence of life is that like my dad used to say we come to this world naked and we leave this world naked no one's taken even a pin with them so basically uh whatever we get in this world is going to get recycled back in one way or another so we don't know how long we are
Otheranother so we don't know how long we are on earth uh we don't know how we'll leave and so the best thing you can do is not defer things into the future but take it into the present like the fisherman has and so always keep the basics in mind which is you know we live in a country where no one's going to starve and certainly none of you are going to starve none of you going to be homeless none of you are ever going to have uh difficulty making ends meet so once your Basics are covered it doesn't make sense to pursue careers or go to work at companies or go to work for people where you are questioning uh the quality of stuff right so if you're not high quality all the way then you should make a change and hit the reset button and go from there and I think that's about it
QuestionerManish that was so wonderful thank you thank you so much for all the effort you
Questionerthank you so much for all the effort you put in each year uh into teaching the class we're just incredibly grateful thank you thank you so
Other[Applause]
Questionermuch you know I would uh I would just say Arin that uh this was a great way to spend the last couple of hours so thank
Other[Music]
Questioneryou