Otherforeign[Music]thank you so much for being here as
Questionerthank you so much for being here as always we're ecstatic to have you and I can't wait to Jump Right In okay great
Warrento be here I don't recall what year this is for us arvind you know how many years it's been I think it's 13 or 14 in that range all right time is flying and good to see you and good to be with your class and the good news is that since you don't have any repeaters I can use the same jokes or don't have to keep coming up with with new jokes all right so I'm I'm actually always excited every year to speak to arvin's class because it's such a hard-working dedicated group and I think you guys have some you guys have a treat in life having him as an instructor and all the amazing speakers he brings in and somehow he still finds room for me which I'm surprised about every year but I'll take what I can get so anyway what
OtherI'll take what I can get so anyway what I'll do this time is I'm going to go through some slides which you can see is the Uber cannibal framework and and we'll get through these maybe I don't know I haven't timed this before it's a new presentation maybe 30 to 45 minutes something like that and and then we can we can get into q a what you have in mind what arvind has in mind and it can be related to what I have presented or it can be whatever else you want to talk about and I'll get from there that I'll get going and so I think Charlie may be speaking to you soon which is awesome and he has this quote play pay close attention to the cannibals the businesses that are eating themselves by buying back their stock and basically what we're going to do in this presentation is what Charlie says in one sentence you know have about like 45
Questionersentence you know have about like 45 slides to explain what he means by thatslides to explain what he means by thatslides to explain what he means by that one sentenceone sentenceone sentence and then take it from there so I'm gonnaand then take it from there so I'm gonnaand then take it from there so I'm gonna go through some some different companiesgo through some some different companiesgo through some some different companies and what they've been doing in terms ofand what they've been doing in terms ofand what they've been doing in terms of buying back their shares and what that'sbuying back their shares and what that'sbuying back their shares and what that's led to and there's there are a range ofled to and there's there are a range ofled to and there's there are a range of different businesses and some of thesedifferent businesses and some of thesedifferent businesses and some of these you might be familiar with and othersyou might be familiar with and othersyou might be familiar with and others you may not but that's okay the oneyou may not but that's okay the oneyou may not but that's okay the one that's the poster child or the two thatthat's the poster child or the two thatthat's the poster child or the two that are actually post the children of theseare actually post the children of theseare actually post the children of these cannibals which are in our time in thecannibals which are in our time in thecannibals which are in our time in the sense that they still continue to gobblesense that they still continue to gobblesense that they still continue to gobble up as much talk as they can the firstup as much talk as they can the firstup as much talk as they can the first one is NVR which is a Mid-Atlantic homeone is NVR which is a Mid-Atlantic homeone is NVR which is a Mid-Atlantic home builder and NVR made made some changesbuilder and NVR made made some changesbuilder and NVR made made some changes they went through bankruptcy or nearthey went through bankruptcy or nearthey went through bankruptcy or near bankruptcy experience in the early 90sbankruptcy experience in the early 90sbankruptcy experience in the early 90s and the CEO at the time he did a bunchand the CEO at the time he did a bunchand the CEO at the time he did a bunch of soul searching and he basicallyof soul searching and he basicallyof soul searching and he basically changed their complete business model in
Questionerchanged their complete business model in how they operate and in fact now the home building industry most of the other major players have shifted to his business models what he started doing is two or three things number one no dividends number two no stock splits and number three the place where most home builders put their cash and capital is in purchasing land he also went to a capital light model where instead of having large land Banks he basically went to a model where they only had land for the next year or two of of homes to be built and beyond that they had options on purchasing landform on land owners and what you notice over the last 28 years is the share price which was 5.50 in 94 is now approximately four thousand dollars and in fact one thing to keep in mind about all these stock prices is that in general we are not at
Questionerprices is that in general we are not at Peak valuations right now we've seen significant declines in equity so in fact if you look at NVR they were close to 6 000 at the end of last year so the stock went from 5.50 to about 4 000 it's not a.com and it's not a tech business it's a home builder and it doesn't have a fancy PE it's trading at less than 10 times earning so it's not like it's on some euphoric PE or anything so if you look at NVR the business in 93 they had almost 18 million shares outstanding they have 3.3 million shares now they've bought back 82 percent of their shares in the last 28 and a half years no dividends like I said no stock splits and the Stock's gone from five dollars and fifty cents to more than four thousand it's a 727 bagger now earnings went up 150x which is massive uh we're going to look at a bunch of other companies soon and you will notice
Otherother companies soon and you will notice that none of them took their earnings up anything near that rate and this is a 27 percent annualized rate of return over almost 30 years and so it's it's quite remarkable what they were able to do there is a Formula I came up with and actually I came up with this formula as I was pulling putting these slides together so the best way to learn is to teach which is why I love doing this class with Arwen because it forces me to learn so the way to calculate I think the way to calculate the cannibal return formula is to look at the growth in earnings and multiply it with the so you take 100 as a numeral numerator and then 18 as the denominator in this case which is the percentage of shares left so it's about 5.5 which is the multiple pop you get because of share reduction and then the multiple expansion and again like I
Questionerthe multiple expansion and again like I said because right now no one is buying any homes with seven percent mortgage rates and all of that their multiple is pretty low and this predicts a like a 783x and it's pretty close to that it's 700 odd X in both cases the second one which is the poster child is AutoZone and again the interesting thing to remember about NVR and AutoZone is that these are very basic businesses these are not businesses that you would think of as being high flyers or high return Equity or any of them even though they've become that way NVR is a very high return equity because basically they took away anything that takes up a lot of equity so if we look at if we look at AutoZone they had over 150 million shares outstanding about 24 years ago and and now they have billion shares outstanding share the outstanding have
Questioneroutstanding share the outstanding have gone down a lot it trades at the scenesgone down a lot it trades at the scenesgone down a lot it trades at the scenes mid to high teens multiple and again ifmid to high teens multiple and again ifmid to high teens multiple and again if we look at the story herewe look at the story herewe look at the story here 87 percent of the shares have been87 percent of the shares have been87 percent of the shares have been bought back in 24 years no dividendsbought back in 24 years no dividendsbought back in 24 years no dividends they did they didn't get the memo aboutthey did they didn't get the memo aboutthey did they didn't get the memo about not doing stock splits and so they'venot doing stock splits and so they'venot doing stock splits and so they've come into the stocks but if you adjustcome into the stocks but if you adjustcome into the stocks but if you adjust their stock it's basically gone from 27their stock it's basically gone from 27their stock it's basically gone from 27 to 2160. it's a 80 80 bagger over thisto 2160. it's a 80 80 bagger over thisto 2160. it's a 80 80 bagger over this 24-year period earnings went up 11x24-year period earnings went up 11x24-year period earnings went up 11x and it's a 20 analyzed rate return soand it's a 20 analyzed rate return soand it's a 20 analyzed rate return so again we look at our formula you getagain we look at our formula you getagain we look at our formula you get about a 85xthenthenthen we get to the other one which iswe get to the other one which iswe get to the other one which is AutoNation both AutoZone and AutoNationAutoNation both AutoZone and AutoNationAutoNation both AutoZone and AutoNation are ones that Eddie Lampert had aare ones that Eddie Lampert had aare ones that Eddie Lampert had a significant position and actually hadsignificant position and actually hadsignificant position and actually had influence on the board and basically Iinfluence on the board and basically Iinfluence on the board and basically I think that's one of the reasons theythink that's one of the reasons theythink that's one of the reasons they went down this path of of buying backwent down this path of of buying backwent down this path of of buying back their shares AutoNation is basically atheir shares AutoNation is basically atheir shares AutoNation is basically a car dealer with dealerships all over the
Questionercar dealer with dealerships all over the country they've got all kinds of brands that they have dealerships for again 450 million odd shares outstanding and now it's about 56 million and actually in their case it's a little bit distorted because their multiple is really low right now they're trading at four times earnings so maybe this might be a something interesting to look at but anyways it's 80 88 of shares gone in the last 24 years no dividends and the stock is a eight bagger so the earnings have gone up just three times this is a 3X in earnings over this 24-year period about a nine and a half percent rate of return but one thing to Just Adjust is that if their PE is of three or four times the current PE then you wouldn't have a eight pack or you would really have a 20 odd bagger and those return analyze returns would change so I haven't looked at AutoZone
Questionerchange so I haven't looked at AutoZone in a lot of detail and I haven't looked at specifically why it's at such a low multiple because generally speaking the auto manufacturing business is not a great business but the the dealerships are a tremendous business and especially if in in decades so they've got a lot of Porsche and Mercedes and BMWs and so on type dealerships basically the back of the house which is doing all the parts and service that's a license to print money it's very high high return in the front of the house does really well on the the used cars and the financing the place where they don't do well is the new cars because the people can comparison shop and all of that but they tend to make it on the on the financing and other aspects so overall car dealerships are a very good build then we look at H R Block and this one
Todd Combswe look at H R Block and this one actually was a little surprising to me to look at so 24 years they had 400 odd million shares outstanding which is now about 160 million trades 10 times and historically straight A Little Higher and again in that case they bought back 63 percent of shares they haven't been as rigorous on their BuyBacks and as consistent and we've had dividends and all that stocks only you want to be X and earnings have only gone up 1.4 so I would have expected this business to actually have done better because it's actually a very stable franchise business where the tax code keeps getting more complicated and most of us either need TurboTax or some preparer and H R Block is a low-cost producer amongst tax preparers but anyway it's a eight percent annual return with reinvested dividends then we look at Jack In The Box they used to
Questionerlook at Jack In The Box they used to have 72 million shares outstanding andhave 72 million shares outstanding andhave 72 million shares outstanding and Jack in the Box basically has been overJack in the Box basically has been overJack in the Box basically has been over the years slimming down they've beenthe years slimming down they've beenthe years slimming down they've been converting their company-owned on storesconverting their company-owned on storesconverting their company-owned on stores into franchise stores and and andinto franchise stores and and andinto franchise stores and and and getting a little more Capital light overgetting a little more Capital light overgetting a little more Capital light over the years but again this is one I wouldthe years but again this is one I wouldthe years but again this is one I would expect it would have done better thanexpect it would have done better thanexpect it would have done better than it's actually done but anyway the sharedit's actually done but anyway the sharedit's actually done but anyway the shared outstanding have gone from 70 oddoutstanding have gone from 70 oddoutstanding have gone from 70 odd million to 20 million so they've boughtmillion to 20 million so they've boughtmillion to 20 million so they've bought back 71 of their shares in 16 yearsback 71 of their shares in 16 yearsback 71 of their shares in 16 years earnings have been flat which isearnings have been flat which isearnings have been flat which is surprising and just the 6.3 analystsurprising and just the 6.3 analystsurprising and just the 6.3 analyst return over that period and recentlyreturn over that period and recentlyreturn over that period and recently they bought they bought Del Taco whichthey bought they bought Del Taco whichthey bought they bought Del Taco which is interesting so the it's like Tacois interesting so the it's like Tacois interesting so the it's like Taco Bell and so we'll see what they'll whatBell and so we'll see what they'll whatBell and so we'll see what they'll what they'll do with that usually thesethey'll do with that usually thesethey'll do with that usually these businesses if you can run at the way butbusinesses if you can run at the way butbusinesses if you can run at the way but the thing is running which is mostlythe thing is running which is mostlythe thing is running which is mostly franchised over other way Dairy Queen
Questionerfranchised over other way Dairy Queen
Questionerruns then they're really good businesses
Questionerthen we have apple which is basically
Questionergotten buyback religion in the last 10 years
Questionerand and if you look at Apple they used to have
Questioner26 billion shares outstanding
Questionerand it's about 16 billion now
Questionerand they just reported earnings and they
Questioneractually are very good anyway about 40
Questionerof share has been bought back in the
Questionerlast 10 years and again split adjusted
Questionerit's a six bagger in the last 10 years
Questionerthe earnings have gone up two and a half
QuestionerXXX so Apple's delivered about a 21.5 annual
Questionerrate of return
Questionerwith the reinvestor dividends and and we
Questionerknow that Warren has the stock and I
Questionerthink Warren is very happy with them
Questionerdoing these BuyBacks and increasing
Questionerhis ownership every quarter or
Questionerberkshire's ownership then we have IBM
Questionerwhich also Berkshire used to own and IBM
Questionerin the last 28 years they had about 2.3
Questionerin the last 28 years they had about 2.3 billion shares out and now it's about 900 million and you can see that they basically stopped their Buybacks in 2018 and in fact the Share account has been going up after 2018 and so if you look at the entire period it looks like a six bagger and earnings went up 3x but IBM is actually a business that you actually have to ask a little more carefully if you look at the business from 2001 to 2022 which is 21 years it's zero returns and the reason it's zero returns is it's actually a business in Decline and Buffett bought the stock in 2011. and he sold the stock in 2017 and for him it was actually lost it was a negative returns over that period and so one of the things that's really important about cannibals it might be in the next slide we will actually get to that in a second and then you look at
Questionerthat in a second and then you look at Sears so we have a number of stocks here where Eddie Lampard has his fingerprints AutoZone AutoNation and Sears the BuyBacks have worked for AutoZone and Auto Nation they have not worked for Sears and the reason they didn't work for he was buying back shares from 2006 to 2011 and took out about a third of the shares over that period and basically eventually Sears declared bankruptcy and and so if you look at this this particular one that returns a zero basically they end up being multiplied by zero is a zero so when we do BuyBacks one thing to keep in mind that's really important is that we need to have a business it's okay for the business to be cyclical for example NVR is a cyclical their business apps and Floors but we cannot have a business that goes into secular decline and the nature of capitalism is that
Warrenand the nature of capitalism is that almost everything is going to go into aalmost everything is going to go into aalmost everything is going to go into a secular decline after a few decades orsecular decline after a few decades orsecular decline after a few decades or less and so one needs to really have aless and so one needs to really have aless and so one needs to really have a viewpointviewpointviewpoint on what the business looks like 10 yearson what the business looks like 10 yearson what the business looks like 10 years from now or 20 years from nowfrom now or 20 years from nowfrom now or 20 years from now and I remember I remember recentlyand I remember I remember recentlyand I remember I remember recently I I was talking to Charlie and he wasI I was talking to Charlie and he wasI I was talking to Charlie and he was musing about Applemusing about Applemusing about Apple and he said you don't really have muchand he said you don't really have muchand he said you don't really have much in terms of Book value and he was sayingin terms of Book value and he was sayingin terms of Book value and he was saying look if you own like a car dealershiplook if you own like a car dealershiplook if you own like a car dealership and the business kind of goes sidewaysand the business kind of goes sidewaysand the business kind of goes sideways or goes down we've got the real estateor goes down we've got the real estateor goes down we've got the real estate and we've got a few hard assets and weand we've got a few hard assets and weand we've got a few hard assets and we can salvage something from all of thatcan salvage something from all of thatcan salvage something from all of that business like apple is trading on abusiness like apple is trading on abusiness like apple is trading on a multiplemultiplemultiple of future earnings it's not trading onof future earnings it's not trading onof future earnings it's not trading on one-time Book value or something andone-time Book value or something andone-time Book value or something and apple is an interesting business becauseapple is an interesting business becauseapple is an interesting business because at least when I look at it I don't seeat least when I look at it I don't seeat least when I look at it I don't see anything affecting their franchise foranything affecting their franchise foranything affecting their franchise for 10 years but I can't make that statement
Warren10 years but I can't make that statement for 20 years so what does apple look like in 2042 and I don't know it could be a much stronger company than it is today or it could be a much weaker company than it is today and I think 10 years from now I would say that the odds are pretty high that apple is still cranking best I can tell so anyway I also want to parse NVR a little bit more than we did in the first go around and this slide has a little bit more granular data on the amount of shares that are added to compensate manage management versus the shares bought back so if you look at the towards the bottom there's a there's a row which says shares added through incentive plan and you can see in 94 it was two percent two percent then 96 is 11 and there's been a consistent amount of shares that's been added now they bought back so much that the net
Questionerso much that the net effect is still a reduction in share count and we looked at the net reduction in Checker but the thing is that if you if you look at it it's consistently through that period approximately five percent of the business has been given away to the knights who manage the castle so the CEO and the senior team is in effect extracting approximately five percent of the equity value every year as their as their compensation for running the ship and of course we have to pay the knights to run the castle but how much we pay them does matter and so if we look at NVR over the entire period entire 28-year period they bought back approximately six percent a year but if you look at this period from 94 to 2005. during that period they bought back nine more than nine percent a year and if you look at the returns over that period 94
Questionerlook at the returns over that period 94 2005 the NVR stock went up 128 x2005 the NVR stock went up 128 x2005 the NVR stock went up 128 x over that 11-year period which is 55over that 11-year period which is 55over that 11-year period which is 55 annualized and if we look at the periodannualized and if we look at the periodannualized and if we look at the period after that which is 2000after that which is 2000after that which is 2000 six to 2012 they only bought back lesssix to 2012 they only bought back lesssix to 2012 they only bought back less than two percent a year and then againthan two percent a year and then againthan two percent a year and then again 2013 to 2022 was about four percent and2013 to 2022 was about four percent and2013 to 2022 was about four percent and 17 to 22 is about two percent this is17 to 22 is about two percent this is17 to 22 is about two percent this is much lower than the six percent overallmuch lower than the six percent overallmuch lower than the six percent overall or the nine percent over the over thator the nine percent over the over thator the nine percent over the over that periodperiodperiod and so if we look at the annualizedand so if we look at the annualizedand so if we look at the annualized returns from 2006 onwardsreturns from 2006 onwardsreturns from 2006 onwards it's a 6X 12 and a half percent not tooit's a 6X 12 and a half percent not tooit's a 6X 12 and a half percent not too badbadbad and then in the last five yearsand then in the last five yearsand then in the last five years it's about three percent annualized nowit's about three percent annualized nowit's about three percent annualized now that's not a long enough period theirthat's not a long enough period theirthat's not a long enough period their stock has also gone down about a thirdstock has also gone down about a thirdstock has also gone down about a third over that period but we can also seeover that period but we can also seeover that period but we can also see that their buyback rate has gone down athat their buyback rate has gone down athat their buyback rate has gone down a lot so when we look at that formula welot so when we look at that formula welot so when we look at that formula we had which is thehad which is thehad which is the multiple the growth in earnings with themultiple the growth in earnings with themultiple the growth in earnings with the amount of shares that are reduced and
Questioneramount of shares that are reduced and then the any kind of multiple expansion you get a two percent analyzed share contraduction is unlikely to get you to the promised land and we'll see a little bit more about this in a second and now if we compare it to Apple for example in this case the Knight or the knights who are running the castle are on average taking about one percent of the business every year so the incentives the shares added the incentive plan is approximately one percent now of course the difference in those two companies is a massive amount of size diff so Apple has 400 billion or something in revenue and 2 trillion or something in market cap and if they take away 20 billion a year and give it to their worker bees and their their Senior Management and so on it's more palatable just because the size is so big so one
Questionerjust because the size is so big so one percent is okay it doesn't affect things that much five percent is there NVR has delivered over the years now the other thing that's happened with apple over the years is their multiple has gone up and so they bought back an average of five percent a year and really from 2013 to 19 it was five and a half percent close to six percent more recently because the multiple has gone up it's about three and a half percent and so it's unlikely that Apple unless they were to level up is going to be able to buy back more than two to four percent a year so the buyback rate is an interesting one to look at just because it tells you something so why did BuyBacks not work for IBM and C so we cannot have businesses just it's just common sense I own 10 of a business I keep buying back the shares over time I own 20 of the
Questionerthe shares over time I own 20 of the businessbusinessbusiness that's all fine if the value of thethat's all fine if the value of thethat's all fine if the value of the business has gone up over that periodbusiness has gone up over that periodbusiness has gone up over that period earnings have gone up everything's goneearnings have gone up everything's goneearnings have gone up everything's gone up and then I get the kicker of moreup and then I get the kicker of moreup and then I get the kicker of more share zone or more bigger fraction ofshare zone or more bigger fraction ofshare zone or more bigger fraction of the businesses but if the business is inthe businesses but if the business is inthe businesses but if the business is in Decline it's actually going to hurt youDecline it's actually going to hurt youDecline it's actually going to hurt you a lot because you never got thea lot because you never got thea lot because you never got the dividends you never got to put itdividends you never got to put itdividends you never got to put it somewhere else so what can be a reallysomewhere else so what can be a reallysomewhere else so what can be a really great boost can end up being a terriblegreat boost can end up being a terriblegreat boost can end up being a terrible outcome because the businessman will beoutcome because the businessman will beoutcome because the businessman will be decline sodecline sodecline so it's really important that when we lookit's really important that when we lookit's really important that when we look at these cannabis you have to lookat these cannabis you have to lookat these cannabis you have to look pretty deep into the future so let's saypretty deep into the future so let's saypretty deep into the future so let's say if you look at a business like AutoZoneif you look at a business like AutoZoneif you look at a business like AutoZone in the absence of electric cars if wein the absence of electric cars if wein the absence of electric cars if we continued with internal combustioncontinued with internal combustioncontinued with internal combustion engine cars AutoZone is a great businessengine cars AutoZone is a great businessengine cars AutoZone is a great business basically their demographic that usesbasically their demographic that usesbasically their demographic that uses AutoZone really leverages AutoZone a lotAutoZone really leverages AutoZone a lot
QuestionerAutoZone really leverages AutoZone a lot after the cars are out of warranty orafter the cars are out of warranty orafter the cars are out of warranty or extended warranty kind of cars that areextended warranty kind of cars that areextended warranty kind of cars that are more than seven eight ten year 12 yearsmore than seven eight ten year 12 yearsmore than seven eight ten year 12 years old type of type of cars and they reallyold type of type of cars and they reallyold type of type of cars and they really are uh because they've got so muchare uh because they've got so muchare uh because they've got so much expertise in the store and ability toexpertise in the store and ability toexpertise in the store and ability to Quick quickly stock stock up orQuick quickly stock stock up orQuick quickly stock stock up or replenish the stores and so on andreplenish the stores and so on andreplenish the stores and so on and they've got such high margins on on onthey've got such high margins on on onthey've got such high margins on on on their stuff it works now trick cars aretheir stuff it works now trick cars aretheir stuff it works now trick cars are very small today but they're going tovery small today but they're going tovery small today but they're going to become a larger and larger portion sobecome a larger and larger portion sobecome a larger and larger portion so California has a mandate that after 2035California has a mandate that after 2035California has a mandate that after 2035 you cannot sell internal combustionyou cannot sell internal combustionyou cannot sell internal combustion martial engine new cars the used carsmartial engine new cars the used carsmartial engine new cars the used cars are still there but if by 2035 or 2040are still there but if by 2035 or 2040are still there but if by 2035 or 2040 or 2045 all cars sold correct then theyor 2045 all cars sold correct then theyor 2045 all cars sold correct then they would start feeling that they'll alreadywould start feeling that they'll alreadywould start feeling that they'll already start feeling it even now becausestart feeling it even now becausestart feeling it even now because there's a small decline taking placethere's a small decline taking placethere's a small decline taking place every year which is going to become aevery year which is going to become aevery year which is going to become a large decline
Questionerlarge decline and of course their demographic and the cars they're servicing so what I'm saying is that I I don't I couldn't make a statement I don't think AutoZone is going to go into a decline in 10 years and they may not even go into a decline in 20 years just because the Gap the lag from the time these cars but 30 years becomes questionable Nation because the franchise laws and the US and all of that being so tight I think the business will be around but again the back of the house what is being spent on service today with combustion engine cars versus what will get spent on service with battery powered cars is quite different so not quite sure whether the back of the house is going to be as good a business as it is today it may be because the cars are more complex so only the dealer can deal with them and so on but
Questionerwith them and so on but so what I'm saying is that when we look at these businesses it requires us to really go deep into the future and look at them really because if they're going to do these Furious BuyBacks then you need to look at that so some things about the framework and then we'll dive in a little bit deeper is that again we've talked about stable or growing earnings one needs to have a view from 2022 to 2042. cyclicality is okay and we are a cyclical but they typically don't lose much during downturns because they don't really build spec homes every home they build is already sold and they just have a few models that people walk through and so on and the only thing they lose when their sales go down what it costs to run the businesses they may not be able to stream bugs but if you look at this period from 2007 to 2009 which was pretty much the most
Questioner2009 which was pretty much the most extreme stress test you can put any home builder through NVR was profitable through that area their profits dropped a lot but they didn't lose money because of these characteristics and so there's an interplay between the earnings growth double expansion and the amount of she has brought back and if a business is growing it's earnings 15 a year which means the earnings are doubling every five years 72 and 84 of the shares are taken out over a 20-year period That's a hundred bagger so you didn't need to have a really high rate of being presented healthy rate of growth the apple is growing about 10 a year or something if earnings grow ten percent a year or eighty percent of your Shares are taken out will expands by 50 percent it'll be a 50 bagger in 20 years so you can get some spectacular returns
Questionerso you can get some spectacular returns even with 10 15 percenteven with 10 15 percenteven with 10 15 percent consistent Growersconsistent Growersconsistent Growers so in the end what matters after 20so in the end what matters after 20so in the end what matters after 20 years is what percent of the shares areyears is what percent of the shares areyears is what percent of the shares are gone what are the typical earnings andgone what are the typical earnings andgone what are the typical earnings and growth is the business still stable andgrowth is the business still stable andgrowth is the business still stable and growing what multiple is the marketgrowing what multiple is the marketgrowing what multiple is the market awarding the businessawarding the businessawarding the business and the important thing in all theseand the important thing in all theseand the important thing in all these cannibal oriented businesses is theycannibal oriented businesses is theycannibal oriented businesses is they shouldn't hold backshouldn't hold backshouldn't hold back from investing or reinvesting in theirfrom investing or reinvesting in theirfrom investing or reinvesting in their business if they've got greatbusiness if they've got greatbusiness if they've got great opportunities so AutoZone is stillopportunities so AutoZone is stillopportunities so AutoZone is still opening new stores it's just thatopening new stores it's just thatopening new stores it's just that they're taking some of them excessthey're taking some of them excessthey're taking some of them excess capitalcapitalcapital and and using that for BuyBacks theand and using that for BuyBacks theand and using that for BuyBacks the interesting thing to keep in mind aboutinteresting thing to keep in mind aboutinteresting thing to keep in mind about cannibals is we had two very finecannibals is we had two very finecannibals is we had two very fine investing Mindsinvesting Mindsinvesting Minds make large mistakes for accountable wemake large mistakes for accountable wemake large mistakes for accountable we had Buffett with IBM and we had Eddiehad Buffett with IBM and we had Eddiehad Buffett with IBM and we had Eddie Lampard with C or seals are the mistakeLampard with C or seals are the mistakeLampard with C or seals are the mistake but Eddie's been a great investor beyondbut Eddie's been a great investor beyondbut Eddie's been a great investor beyond that and did really well
Questionerthat and did really well a bunch of other things and I think the Sears and Kmart buys were really good it was just him trying to run those businesses for a long time which was rather mistakenly he had just bought he actually got his money back pretty quickly by getting rid of some assets and some stores and then I think he needed to just package and settle the whole thing and move on which is by the mistake lies if you look at some businesses which I think look like great cannibal candidates so ADP for example being gonna happen because the disruption comes from all over the place but I can't see their business really going into decline in 20 years it hasn't gone to decline in 60 years tool works just because it's like a mini Berkshire Berkshire Hathaway Microsoft I think looks very solid for a very long time alphabet Amazon
Questioneralphabet Amazon
Alphabet Amazon 10 cent maybe not 10 cent after what's
10 cent maybe not 10 cent after what's
10 cent maybe not 10 cent after what's happening in China but at least 10 cent
happening in China but at least 10 cent
happening in China but at least 10 cent two weeks ago or something but it still
two weeks ago or something but it still
two weeks ago or something but it still might be okay but anyway so these are
might be okay but anyway so these are
might be okay but anyway so these are really good cannibal candidates they
really good cannibal candidates they
really good cannibal candidates they need to prioritize internal growth at
need to prioritize internal growth at
need to prioritize internal growth at high Roe or BuyBacks only buy back when
high Roe or BuyBacks only buy back when
high Roe or BuyBacks only buy back when they don't have other stuff going on if
they don't have other stuff going on if
they don't have other stuff going on if we end up with a gifted Capital
we end up with a gifted Capital
we end up with a gifted Capital allocator which is really hard to end up
allocator which is really hard to end up
allocator which is really hard to end up with who knows when to throttle
with who knows when to throttle
with who knows when to throttle the buyback when to increase and when to
the buyback when to increase and when to
the buyback when to increase and when to decrease
decrease
decrease then you really get magical returns
then you really get magical returns
then you really get magical returns that's really hard to get because most
that's really hard to get because most
that's really hard to get because most management teams aren't really good at
management teams aren't really good at
management teams aren't really good at understanding when to do them but we had
understanding when to do them but we had
understanding when to do them but we had one manager besides Buffett and that was
one manager besides Buffett and that was
one manager besides Buffett and that was Henry Singleton who ran and Henry
Henry Singleton who ran and Henry
Henry Singleton who ran and Henry Singleton so Charlie knew Henry and
Singleton so Charlie knew Henry and
Singleton so Charlie knew Henry and Henry could play chess blindfolded with
Henry could play chess blindfolded with
Henry could play chess blindfolded with eight people at the same time and beat
eight people at the same time and beat
eight people at the same time and beat them all
Questionerthem all and he he was just an amazing manager and he he was just an amazing manager and he he was just an amazing manager amazing business person amazing business person amazing business person great capital allocator great capital allocator great capital allocator so so he formed he founded Teledyne in 1960 he formed he founded Teledyne in 1960 he formed he founded Teledyne in 1960 and when he was 40 odd years old and and when he was 40 odd years old and and when he was 40 odd years old and from 65 to 70. he acquired 130 company from 65 to 70. he acquired 130 company from 65 to 70. he acquired 130 company issuing stock to acquire these come and issuing stock to acquire these come and issuing stock to acquire these come and typically he was buying these companies typically he was buying these companies typically he was buying these companies for like like around 10 times earnings for like like around 10 times earnings for like like around 10 times earnings and he was issuing Canada in stock to and he was issuing Canada in stock to and he was issuing Canada in stock to sellers sellers sellers and the teledyne's talk was and the teledyne's talk was and the teledyne's talk was trading between 40 and 70 times trading between 40 and 70 times trading between 40 and 70 times so basically it was you could think of so basically it was you could think of so basically it was you could think of it as a roll-up it wasn't really also he it as a roll-up it wasn't really also he it as a roll-up it wasn't really also he was very heavily in Aerospace then he was very heavily in Aerospace then he was very heavily in Aerospace then he branched out into a few other places but branched out into a few other places but branched out into a few other places but he did a bunch of things which is very he did a bunch of things which is very he did a bunch of things which is very similar to the way similar to the way similar to the way constellation software runs or maybe constellation software runs or maybe constellation software runs or maybe even some similarity similarities to the even some similarity similarities to the even some similarity similarities to the way Berkshire runs so when he bought a way Berkshire runs so when he bought a way Berkshire runs so when he bought a company company company even if he owned very similar related even if he owned very similar related even if he owned very similar related businesses he left those companies alone
Questionerbusinesses he left those companies alone and he left inefficiency in terms of they didn't try to consolidate the back office put all the HR under one company put all the payroll and accounting under headquarters or any of that he kept the business unit independent with the inefficiencies of running everything as a separate business and the reason he did that the same reason a constellation does it is he wanted to hold the manager's accountable so the managers had incentives typically they were the owners or maybe someone the owner had nominated and so they paid very close attention to how these businesses were performing and because they never integrated them with their Acquisitions they could easily do apples to apples comparisons and that and take care of that then in 70 and 72 when the bear Market set in and Teledyne stock nosedive
Questionerstock nosedive it's PE fell below 10. and he could not it's PE fell below 10. and he could not it's PE fell below 10. and he could no longer use stock to buy things longer use stock to buy things longer use stock to buy things and what he did is from 72 to 84 12 years Henry brought back more than 90 of years Henry brought back more than 90 of years Henry brought back more than 90 of talodyne's shares outstanding and his talodyne's shares outstanding and his talodyne's shares outstanding and his earnings in this 12-year period tripled earnings in this 12-year period tripled earnings in this 12-year period tripled so he was at approximately so he was at approximately so he was at approximately 1.64 a share in earnings 1.64 a share in earnings 1.64 a share in earnings and by 1985 he was 45 a share in and by 1985 he was 45 a share in and by 1985 he was 45 a share in earnings the stock went up 40x period earnings the stock went up 40x period earnings the stock went up 40x period and in fact what Teledyne did is most of and in fact what Teledyne did is most of and in fact what Teledyne did is most of the BuyBacks were not done in the open the BuyBacks were not done in the open the BuyBacks were not done in the open market market market he issued tender offers to buy back he issued tender offers to buy back he issued tender offers to buy back shares and the first tender offer you shares and the first tender offer you shares and the first tender offer you issued in 74th he offered to buy a issued in 74th he offered to buy a issued in 74th he offered to buy a million shares I think for twenty million shares I think for twenty million shares I think for twenty dollars a share and 9 million shares got dollars a share and 9 million shares got dollars a share and 9 million shares got offered offered offered so he was really shocked at the number so he was really shocked at the number so he was really shocked at the number that was offered and he took the entire that was offered and he took the entire that was offered and he took the entire 9 million and then later he did six or 9 million and then later he did six or 9 million and then later he did six or seven of these tender offers and he seven of these tender offers and he seven of these tender offers and he didn't have the cash because the amount didn't have the cash because the amount
Otherdidn't have the cash because the amount he was buying back outstripped the earnings so what he did is he did exchanges and so he told the shareholders that they could give Teledyne the stock they had and in exchange they got 10 percent debentures and amazingly all these people were really excited about taking the 10 debentures and giving him the stock nobody in the 70s wanted to own stocks it was a terrible period in terms of return but it was a great period for Henry so you look at Henry in the 60s he's issuing shares furiously and the 70s is buying back shares like crazy if we do a comparison between Tim Cook and Henry Singleton I know this is not a fair comparison because Tim didn't have the 1970s to work with but Apple tripled its earnings in the last 10 years and Teledyne tripled its earnings in 12 years it took a little longer than
Questionerlonger than Apple so we have one for Tim and zero for Henry in terms of the earnings growth Apple bought back 39 of shares in 10 years and Teledyne brought back 90 of shares in 12 years Henry trounces Tim Cook and apples of 6X in 10 years until that ends up 40x and so here you see earnings going up very similarly or the buyback period is also very similar in terms of 10 or 12 years but you see a huge difference because the valuation Deltas allowed Henry to buy back and Henry was Furious about the Buybacks in the sense that he bought back well beyond the earnings of Teledyne he took on debt to buy back the shares and then later he retired all the debt and so you see this 40x in 1985 and Henry knew Charlie and he approached Charlie and Warren I don't know exactly when but my guess is somewhere in the mid 80s he approached them
Questionermid 80s he approached them and he wanted to after this 40x sell the entire thing to Berkshire and Berkshire was interested in buying telegram with a bunch of very high quality businesses they he even had bought a bunch of insurance companies and whatever but what Henry wanted I told you he pays just blindfolded with eight people and wins again all eight he told Warren and that he wanted only Berkshire stock he didn't want cash so his final I would say brushes on the painting was to take the 40x then at that time Berkshire shares were about 2 000 or 2500 a share and so it would have been about a 200x from then till now to his estate and of course Warren and Charlie balked issuing Berkshire stock and and so that deal never took place and but Henry still did fine and the interesting thing about Henry Singleton is the people he had on his board he had
Questioneris the people he had on his board he had his seraphim in Dallas the Egyptianhis seraphim in Dallas the Egyptianhis seraphim in Dallas the Egyptian Finks you can look him up on Google ifFinks you can look him up on Google ifFinks you can look him up on Google if you've not heard of him he passed awayyou've not heard of him he passed awayyou've not heard of him he passed away recently he had Arthur Rock was one ofrecently he had Arthur Rock was one ofrecently he had Arthur Rock was one of the first Venture capitalists ever inthe first Venture capitalists ever inthe first Venture capitalists ever in Silicon Valley funded Intel and whateverSilicon Valley funded Intel and whateverSilicon Valley funded Intel and whatever else and he had Claude Shannon andelse and he had Claude Shannon andelse and he had Claude Shannon and Claude Shannon was a MIT professorClaude Shannon was a MIT professorClaude Shannon was a MIT professor and he was a mentor to Ed Thorpe so heand he was a mentor to Ed Thorpe so heand he was a mentor to Ed Thorpe so he really had these are just amazingreally had these are just amazingreally had these are just amazing individuals so Henry himself was amazingindividuals so Henry himself was amazingindividuals so Henry himself was amazing but he's some really good advisorsbut he's some really good advisorsbut he's some really good advisors around him so it was a interestingaround him so it was a interestingaround him so it was a interesting person to study and there's a book thatperson to study and there's a book thatperson to study and there's a book that came out several years ago calledcame out several years ago calledcame out several years ago called Distant Force which was written byDistant Force which was written byDistant Force which was written by Henry's number two guy I think GeorgeHenry's number two guy I think GeorgeHenry's number two guy I think George Roberts it's a great book to read ifRoberts it's a great book to read ifRoberts it's a great book to read if you're looking to learn more about Henryyou're looking to learn more about Henryyou're looking to learn more about Henry and so again Furious space of BuyBacksand so again Furious space of BuyBacksand so again Furious space of BuyBacks was key Henry took on lots of debt thatwas key Henry took on lots of debt thatwas key Henry took on lots of debt that he paid back laterhe paid back laterhe paid back later
Questionerhe paid back later and Henry bought back well above the andand Henry bought back well above the andand Henry bought back well above the and he really recognized when he had anhe really recognized when he had anhe really recognized when he had an opportunity and he went for it soopportunity and he went for it soopportunity and he went for it so the key factors how fast the share hasthe key factors how fast the share hasthe key factors how fast the share has been retiredbeen retiredbeen retired how quickly can we get to 80 gonehow quickly can we get to 80 gonehow quickly can we get to 80 gone 80 shares gone means the earnings are80 shares gone means the earnings are80 shares gone means the earnings are stablestablestable you have a 5x if there's no earningsyou have a 5x if there's no earningsyou have a 5x if there's no earnings growth and no multiple expansiongrowth and no multiple expansiongrowth and no multiple expansion so you just get a five extras based onso you just get a five extras based onso you just get a five extras based on shares being taken and then you have toshares being taken and then you have toshares being taken and then you have to ask yourself how much can earnings growask yourself how much can earnings growask yourself how much can earnings grow in this periodin this periodin this period earnings growth is free to multiplyingearnings growth is free to multiplyingearnings growth is free to multiplying that 5x and then like Henry can we buythat 5x and then like Henry can we buythat 5x and then like Henry can we buy back a lot of shares at low multiplesback a lot of shares at low multiplesback a lot of shares at low multiples and end up with high multiples and muchand end up with high multiples and muchand end up with high multiples and much higher earnings and then we get to thehigher earnings and then we get to thehigher earnings and then we get to the promised land and so when you look atpromised land and so when you look atpromised land and so when you look at people like Henry Singleton and Warrenpeople like Henry Singleton and Warrenpeople like Henry Singleton and Warren Buffett Buffett actually did not want toBuffett Buffett actually did not want toBuffett Buffett actually did not want to ever buy back shares so he had a littleever buy back shares so he had a littleever buy back shares so he had a little different ethos from Henry he did not in
Otherdifferent ethos from Henry he did not in his words want to pay Jin and Rami with his shareholders so while Henry saw thought of his shareholders as faceless people Buffett thinks of his shareholders as partners and so he doesn't want to really make money off his partners he wants to make money with his partners and that's why for the longest time Berkshire resisted buying back shares and I think only more recently he's given a lot of I would say disclosures and and is willing to buy back but he wants to make sure other side has all the information or nearly all the information that he does so anyway a little bit different ethos between every Singleton Warren Buffett rare to have CEOs who know when to do BuyBacks so this is a very rare skill when to pause and when to issue shares if you actually end up with a CEO who's a great operator
Questionerend up with a CEO who's a great operator great capital allocator and exceptionalgreat capital allocator and exceptionalgreat capital allocator and exceptional at knowing when to do the BuyBacks andat knowing when to do the BuyBacks andat knowing when to do the BuyBacks and when to issue shares you're you're likewhen to issue shares you're you're likewhen to issue shares you're you're like living in a utopian world it's greatliving in a utopian world it's greatliving in a utopian world it's great it's not great to be buying back sharesit's not great to be buying back sharesit's not great to be buying back shares at huge multiples that just doesn't workat huge multiples that just doesn't workat huge multiples that just doesn't work very well there is Magic in BuyBacks andvery well there is Magic in BuyBacks andvery well there is Magic in BuyBacks and the magic really starts happening whenthe magic really starts happening whenthe magic really starts happening when you start taking out more than 80 ofyou start taking out more than 80 ofyou start taking out more than 80 of sharessharesshares so you buy back half the shares you getso you buy back half the shares you getso you buy back half the shares you get a 2X if there's no change in anythinga 2X if there's no change in anythinga 2X if there's no change in anything elseelseelse you buy back two-thirds you get a threeyou buy back two-thirds you get a threeyou buy back two-thirds you get a three eggs buy back 80 you get a five x 90 iseggs buy back 80 you get a five x 90 iseggs buy back 80 you get a five x 90 is 10x and just keeps going 99 to 100x10x and just keeps going 99 to 100x10x and just keeps going 99 to 100x so the interesting thing is it reallyso the interesting thing is it reallyso the interesting thing is it really starts getting interesting after eightystarts getting interesting after eightystarts getting interesting after eighty percentpercentpercent but what you also saw is to buy back 80but what you also saw is to buy back 80but what you also saw is to buy back 80 for most businessesfor most businessesfor most businesses can take two or three decades and so youcan take two or three decades and so youcan take two or three decades and so you need a lot of stabilityneed a lot of stabilityneed a lot of stability in the business or a very long period ofin the business or a very long period ofin the business or a very long period of time and you need to have a view
Questionertime and you need to have a viewtime and you need to have a view that the business is going to be stablethat the business is going to be stablethat the business is going to be stable over that period of time and then Iover that period of time and then Iover that period of time and then I didn't want to leave you hanging withoutdidn't want to leave you hanging withoutdidn't want to leave you hanging without any value addition with all this mumboany value addition with all this mumboany value addition with all this mumbo jumbo so I got you a list that you canjumbo so I got you a list that you canjumbo so I got you a list that you can look atlook atlook at and you can go shopping based on thisand you can go shopping based on thisand you can go shopping based on this list these are all the companieslist these are all the companieslist these are all the companies that have the highest 10-year BuyBacksthat have the highest 10-year BuyBacksthat have the highest 10-year BuyBacks ordered by how much they bought back inordered by how much they bought back inordered by how much they bought back in the last 10 years and we've got 167the last 10 years and we've got 167the last 10 years and we've got 167 companiescompaniescompanies that I bought back more than 30 ofthat I bought back more than 30 ofthat I bought back more than 30 of shares in the last 10 yearsshares in the last 10 yearsshares in the last 10 years and you have all kinds of companies overand you have all kinds of companies overand you have all kinds of companies over here you can look at that have done thathere you can look at that have done thathere you can look at that have done that then we also have another list ofthen we also have another list ofthen we also have another list of companies that have done a lot ofcompanies that have done a lot ofcompanies that have done a lot of Buybacks in the last five yearsBuybacks in the last five yearsBuybacks in the last five years and again it's another list you can lookand again it's another list you can lookand again it's another list you can look at and see which ones of these what Iat and see which ones of these what Iat and see which ones of these what I would do if I were looking at this listwould do if I were looking at this listwould do if I were looking at this list is I would look at the ones that I haveis I would look at the ones that I haveis I would look at the ones that I have some way of knowing that the business is
Othersome way of knowing that the business is going to be stable 20 years from now and probably the business is going to be bigger 20 years from now so Union Pacific is in there and there's a good chance that railroad is cranking 20 years from now as well His cranking 20 years from now as well His cranking 20 years from now as well H R Block is probably going to be cranking 20 years from now and and so on so it's another list you can you can take a look at and that's pretty much it we will basically go to going over what you have on your mind
Questionerthank you that was great Monash thank you so with that I'll invite the students to ask any questions that they'd like so please don't be shy just use the raise hand tool and I'll call upon you Josh hi monish thank you so much for speaking with us this evening so my question for you is you seem to favor stocks that pay a dividend so is there any is there ever any instances where it makes sense to buy a
Questionerinstances where it makes sense to buy a stock that does not have a dividend but has the but has a greater chance for a higher return
Todd CombsI actually don't favor stocks that issue dividends I'm not sure where you reach that conclusion I've never paid much attention to the dividend when I'm looking at making an investment a dividend actually first of all is a little bit sub-optimal in the sense that you've got two layers of Taxation going on so one of the things which we didn't talk about in the BuyBacks is that they are returning Capital to shareholders without Uncle Sam taking his piece and so there is some a little bit of efficiency that you get in those BuyBacks but yeah I don't I think that if a company is not able to invest in its own business at high Returns on at a high rate of return and they don't understand that they not don't have appreciation for BuyBacks
Questionerdon't have appreciation for BuyBacks
Otherthen yeah then they should dividend it
Otherout of course that's the only choice left rather than letting it sit on the balance sheet and on on nothing and so on but yeah I would prefer that companies that have really stable and good businesses and that they're going to be stable and good for a very long period of time that after they're done investing in their business that they look at the BuyBacks I would prefer that over the difference Monash talk can you talk a little bit more about that it's interesting because a business there's inherently that tension between continued growth for a good business and then buying back the stock so it may not be an intelligent thing to do for a business that's particularly early in its Runway but maybe more of a mature business it may be of some intelligence depending on the price of the stock and
Questionerdepending on the price of the stock and the moment in time it the businesses the moment in time it the businesses the moment in time it the businesses that you're pointing to tend to be more mature when they're buying back stock mature when they're buying back stock mature when they're buying back stock and generating good returns how do you and generating good returns how do you and generating good returns how do you think about I think a business should think about I think a business should think about I think a business should
Warrenalways give priority to its internal always give priority to its internal always give priority to its internal needs and its internal growth needs and needs and its internal growth needs and needs and its internal growth needs and the important thing is which a lot of the important thing is which a lot of the important thing is which a lot of managers and CEOs don't think a lot managers and CEOs don't think a lot managers and CEOs don't think a lot about is about is about is what is a return they're likely to what is a return they're likely to what is a return they're likely to generate from that additional capital generate from that additional capital generate from that additional capital if they've got a great mousetrap if they've got a great mousetrap if they've got a great mousetrap and that great mouse trap delivers very and that great mouse trap delivers very and that great mouse trap delivers very high returns it's a no-brainer high returns it's a no-brainer high returns it's a no-brainer you put your money there but if your you put your money there but if your you put your money there but if your reinvestment opportunity is going to reinvestment opportunity is going to reinvestment opportunity is going to give you eight percent return or give you eight percent return or give you eight percent return or something then you need to evaluate something then you need to evaluate something then you need to evaluate whether a dividend makes if the stock is whether a dividend makes if the stock is whether a dividend makes if the stock is at a very high multiple then maybe a at a very high multiple then maybe a at a very high multiple then maybe a dividend is a better way to go than a dividend is a better way to go than a dividend is a better way to go than a buyback so I think if you're looking at
Questionerbuyback so I think if you're looking at those three options dividend buyback or internal investment and this is where most CEOs are useless because they usually get promoted the number one reason they get promoted they're exceptional sales people or exceptional marketing people they're able to build a lot of relationships and so on and they don't Capital allocation aspect of their skill set is never really tested until they're in the top job so if someone ran r d at Intel they never allocated Capital just did r d of their end marketing against people so then when they actually get the top job that added piece and I think that with Tim Cook has been a really good CEO because he felt like he didn't understand these things well and then he asked himself who are the best people who can help me learn these things and he reached out to Buffett and
Todd Combsthings and he reached out to Buffett and he reached out to Buffett tohe reached out to Buffett tohe reached out to Buffett to specifically understandspecifically understandspecifically understand how he should think about allocatinghow he should think about allocatinghow he should think about allocating capital and BuyBacks and dividends and Icapital and BuyBacks and dividends and Icapital and BuyBacks and dividends and I think Buffett gave him some goodthink Buffett gave him some goodthink Buffett gave him some good pointerspointerspointers and then he's followed that Playbook andand then he's followed that Playbook andand then he's followed that Playbook and I'm sure they talk probably a few timesI'm sure they talk probably a few timesI'm sure they talk probably a few times a year and I'm sure Tim just tries toa year and I'm sure Tim just tries toa year and I'm sure Tim just tries to keep improving his skill set on thatkeep improving his skill set on thatkeep improving his skill set on that front in terms of how he thinks about itfront in terms of how he thinks about itfront in terms of how he thinks about it so Apple's a good example in the senseso Apple's a good example in the senseso Apple's a good example in the sense that they do need to invest in theirthat they do need to invest in theirthat they do need to invest in their business and they should and they arebusiness and they should and they arebusiness and they should and they are but they also generate a lot of cash andbut they also generate a lot of cash andbut they also generate a lot of cash and they could do the BuyBacks they could dothey could do the BuyBacks they could dothey could do the BuyBacks they could do the dividendsthe dividendsthe dividends through acquisitions and how youthrough acquisitions and how youthrough acquisitions and how you sift through all that is important yeahsift through all that is important yeahsift through all that is important yeah other questions Caleb yeah Joe pleaseother questions Caleb yeah Joe pleaseother questions Caleb yeah Joe please thank you for seeing us with us tonightthank you for seeing us with us tonightthank you for seeing us with us tonight now moving forward do you think thatnow moving forward do you think thatnow moving forward do you think that your investment strategy is going toyour investment strategy is going toyour investment strategy is going to change
Questionerchangechange higher interest rates hard geopoliticalhigher interest rates hard geopoliticalhigher interest rates hard geopolitical situations are you aiming towards to tosituations are you aiming towards to tosituations are you aiming towards to to a different industry or are you thinkinga different industry or are you thinkinga different industry or are you thinking about that
Ted Weschleryeah when I first startedabout that yeah when I first startedabout that yeah when I first started investinginvestinginvesting in the mid 90s interest rates werein the mid 90s interest rates werein the mid 90s interest rates were higher and of course until they justhigher and of course until they justhigher and of course until they just kept falling until very recently Ikept falling until very recently Ikept falling until very recently I internally always assumed that the myinternally always assumed that the myinternally always assumed that the my the long-termthe long-termthe long-term interest rate I always assumed isinterest rate I always assumed isinterest rate I always assumed is somewhere between seven to nine percentsomewhere between seven to nine percentsomewhere between seven to nine percent I just used to assume that but actuallyI just used to assume that but actuallyI just used to assume that but actually the way I invest is because I'm lookingthe way I invest is because I'm lookingthe way I invest is because I'm looking for so much dislocation those are Mickeyfor so much dislocation those are Mickeyfor so much dislocation those are Mickey Mouse factors so if I I think that IMouse factors so if I I think that IMouse factors so if I I think that I thinkthinkthink the investment casethe investment casethe investment case for me he doesn't rest on whether thefor me he doesn't rest on whether thefor me he doesn't rest on whether the interest rate is four percent or seveninterest rate is four percent or seveninterest rate is four percent or seven percent I think that type of a Deltapercent I think that type of a Deltapercent I think that type of a Delta should have no impact or even betweenshould have no impact or even betweenshould have no impact or even between two percent and seven percent ittwo percent and seven percent ittwo percent and seven percent it wouldn't have much impact on the way Iwouldn't have much impact on the way Iwouldn't have much impact on the way I think about things for example we and I
Ted Weschlerthink about things for example we and I was not able to convince this company to do BuyBacks if they ever went down that bad would be quite incredible but I I found this company in Turkey race us which basically runs they're the number one owner of warehouses in Turkey which they rent out to Blue Chip companies like Mercedes and Ikea and car4 and Amazon and so on 12 million square feet 99 least inflation indexed very stable very stable recurring revenues in 2019 when we made the investment the market cap was 20 million and the liquidation value was like 800 million it was trading at two and a half times two and a half percent of liquidation crazy I thought it was a fraud when I first heard those numbers now I think the market cap is north of 150 million so it's moved up even though the Lira has collapsed and such and it used to collapse the interest rates in
Otherused to collapse the interest rates in that particular case are completely meaning are they borrowing it at two percent or seven percent or whatever you just have such a huge gap so I think it just I think that I also own a airport operator that's based in Turkey but they operate 15 airports in eight different countries and in that case the market cap was under a billion probably their earnings in a few years will be two or three hundred million and airports are really good businesses and they usually traded very high multiples because they're such amazing businesses and so again in that case thing is that if I'm correct about their trajectory of earnings the interest rates really become irrelevant so what we are looking for we're looking for some very wide wide gaps between price and intrinsic value and when you have a wide enough gap
Questionerand when you have a wide enough gap between price and intrinsic value you can have a wide range of interest rates that would all lead to a great result some may lead to a better result but they'll all lead to as long as you're thinking about the business is correct so that's how I think about it Caleb hi is my mark working this time
Questioneryes all right sorry I couldn't figure out why I wasn't working last time but first thank you for speaking as others have said your dog Shauna Foundation it aims to give back to society through alleviating poverty through promoting education so what do you find is the biggest challenge in mobilizing that Capital into getting it to help with education from there the what do you think the biggest challenge for Translating that education into actual economic growth Mobility is yeah that's a good question the rules the rules for charity and
Questionerthe rules the rules for charity and the rules the rules for charity and philanthropy are a little bit different philanthropy are a little bit different philanthropy are a little bit different from the rules we use when we're making from the rules we use when we're making from the rules we use when we're making Investments one of the differences is Investments one of the differences is Investments one of the differences is that you go high risk High return that you go high risk High return that you go high risk High return and when we invest we are trying to go and when we invest we are trying to go and when we invest we are trying to go low risk High return we are trying to low risk High return we are trying to low risk High return we are trying to minimize the downside while retaining minimize the downside while retaining minimize the downside while retaining substantial upside substantial upside substantial upside but when we are looking at charitable but when we are looking at charitable but when we are looking at charitable Endeavors and it was really Buffett who Endeavors and it was really Buffett who Endeavors and it was really Buffett who helped me understand this he he said you helped me understand this he he said you helped me understand this he he said you really need to swing for the fences really need to swing for the fences really need to swing for the fences and it's perfectly fine if you sing for and it's perfectly fine if you sing for and it's perfectly fine if you sing for the fences and you completely Miss the fences and you completely Miss the fences and you completely Miss so if you think about for example The so if you think about for example The so if you think about for example The Gates Foundation Gates Foundation Gates Foundation and their drive to find a malaria and their drive to find a malaria and their drive to find a malaria vaccine now that is high risk High vaccine now that is high risk High vaccine now that is high risk High return return return right no one's found a malaria vaccine right no one's found a malaria vaccine right no one's found a malaria vaccine so far they've put a good amount of so far they've put a good amount of so far they've put a good amount of money behind it it may or may not ever money behind it it may or may not ever money behind it it may or may not ever give a return we don't know but I think give a return we don't know but I think give a return we don't know but I think if you ask Warren about that particular
Questionerif you ask Warren about that particular one he would say it's the right thing to do because the thing is that if they succeed they have a huge trajectory change in improving human lives across the world and so the issue we face in philanthropy which is very different from the issues we face as capitalists is when I'm a capitalist running a business I get to choose what area I want to focus on and I get to choose what areas I want to put Capital into and I will typically choose areas which have the greatest promise so for example someone might think about coming up with an app right some kind of app which has the possibility to go viral doesn't cost much gets millions of downloads and then some kind of freemium model and they end up building a business that's worth a lot that type of way Endeavor is very low risk and has the potential of high returns
Questionerand has the potential of high returns and when you're trying to build an app or something you want to try to pick areas that have great promise and if you build an app it doesn't work you go build another app it doesn't work in the third app and you keep going at some point something might work when we go to philanthropy here's your choices climate change education power B homelessness or drug abuse Health Care poverty all these are each single one of these is a very difficult nut to crack okay if you just look at the homeless situation in Los Angeles not an easy problem to crack okay and in a capitalist Society no one would deal with that problem because they'd say hey if you look at if you apply a capitalist lens you would say I'm going to fail what do I do the odds of failures were I but Buffett would say try to come up with the best
Questionerwould say try to come up with the best approach you can and go all in on it if you fail it's okay but the upside is so much if you get some success that we should try so when I when I said abduction I knew I had to go high risk High return the second thing that you do in philanthropy which is different from running an investment fund or allocating capital is you concentrate to an extreme so in my fund I might have 10 positions typically when I make a bet it's 10. in charity what you really ought to do is you should try to have only one that and the one that should be should absorb all your resources go all in the one thing that would deliver the biggest bang for the buck and is likely to move the needle is what you want to focus on so what I did in dakshana is I knew that we had to go all in on a single cause the single cause is relatively easy if
Otherthe single cause is relatively easy if you can measure between different Endeavors so the second thing that we did is most charitable endeavors do not lend themselves to measurement so for example if you were to say is it higher Roe or social return Equity to cap to to humanity to take care of the homeless population in LA or is it better to reduce the effects of climate change these are very hard questions to answer it's really hard to get the the data which would point you in the right direction so what I did is I inverted the problem which is like Monger says inward always inward I only looked at causes where measurement was easy so if you have a homeless population and you give out needles to everyone that's a really good thing to do what is the impact of that versus taking some people off the street into temporary housing which is better
Otherinto temporary housing which is better I have no idea which is better I don'tI have no idea which is better I don'tI have no idea which is better I don't know how to measure between those twoknow how to measure between those twoknow how to measure between those two those two Endeavors it becomes reallythose two Endeavors it becomes reallythose two Endeavors it becomes really hard so I'm not interested in going downhard so I'm not interested in going downhard so I'm not interested in going down paths where I can't measure outcomespaths where I can't measure outcomespaths where I can't measure outcomes so I wanted to measure outcomes I had aso I wanted to measure outcomes I had aso I wanted to measure outcomes I had a bias towards education educationbias towards education educationbias towards education education generally gives you more measurablegenerally gives you more measurablegenerally gives you more measurable outcomes and we ended up with aoutcomes and we ended up with aoutcomes and we ended up with a situation where we are able to identifysituation where we are able to identifysituation where we are able to identify really poor kids in India who are reallyreally poor kids in India who are reallyreally poor kids in India who are really bright and we're able to spending two orbright and we're able to spending two orbright and we're able to spending two or three thousand dollars per kidthree thousand dollars per kidthree thousand dollars per kid do some prettydo some prettydo some pretty extreme changes to theirextreme changes to theirextreme changes to their them and their familiesthem and their familiesthem and their families future well-being and so these are kidsfuture well-being and so these are kidsfuture well-being and so these are kids who are coming from families that arewho are coming from families that arewho are coming from families that are making thirty two hundred dollars amaking thirty two hundred dollars amaking thirty two hundred dollars a month well below the poverty line and somonth well below the poverty line and somonth well below the poverty line and so on and we have some of these alums aton and we have some of these alums aton and we have some of these alums at Google making over half a million a yearGoogle making over half a million a yearGoogle making over half a million a year now and sometimes they used to go hungrynow and sometimes they used to go hungry
Othernow and sometimes they used to go hungry at night didn't have even boiled rice to eat so you go from not having boiled rice to eat to making 50 000 a month at Google that's great trajectory change and so that's how I thought about it and unfortunately most charities don't think like this they think about what feels good they think about what pictures will look good they think about how they can raise a lot of money and they don't even care about how efficient or inefficient their fundraising is so in some cases 90 of the money they raise goes into the process of raising the money and they still feel that's great because they end up at 10 thank you so much Manish for sharing so my question is about your time allocation I'm curious about how much percent of your time you spend on people and how much percent of your time you spend on business learning industry knowledge and
Questionerbusiness learning industry knowledge andbusiness learning industry knowledge and try to analyze and I also learned thattry to analyze and I also learned thattry to analyze and I also learned that you have on two companies previouslyyou have on two companies previouslyyou have on two companies previously used to be an entrepreneur in I inused to be an entrepreneur in I inused to be an entrepreneur in I in technology so how this allocation oftechnology so how this allocation oftechnology so how this allocation of time evolve along your journey yeah
Questionerthat's a great question I went throughthat's a great question I went throughthat's a great question I went through in 1999 this is like what 23 years agoin 1999 this is like what 23 years agoin 1999 this is like what 23 years ago I had these two in industrialI had these two in industrialI had these two in industrial psychologists who did a complete likepsychologists who did a complete likepsychologists who did a complete like 360 on me they had me take a bunch of360 on me they had me take a bunch of360 on me they had me take a bunch of tests and they talked to people close totests and they talked to people close totests and they talked to people close to me like my wife and family and friendsme like my wife and family and friendsme like my wife and family and friends and employees and at the end of all ofand employees and at the end of all ofand employees and at the end of all of that they gave me what I think of as mythat they gave me what I think of as mythat they gave me what I think of as my owners man they basically told me who Iowners man they basically told me who Iowners man they basically told me who I waswaswas and each one of us is different and atand each one of us is different and atand each one of us is different and at that time I was running a business withthat time I was running a business withthat time I was running a business with 170 people170 people170 people and I actually hated to go to work Iand I actually hated to go to work Iand I actually hated to go to work I loved that business when it was just meloved that business when it was just meloved that business when it was just me alone in my bedroom trying to build italone in my bedroom trying to build italone in my bedroom trying to build it and it was really a lot of fun it got
Questionerand it was really a lot of fun it got past 20 or 30 people and then it just kept growing and my job turned into herding cats and HR and whatever so they told me actually they couldn't even understand how I'm even able to function because that's so far away from who I am and they actually explained to me who I am and so between our genetics and what happens in the first five or six years of Our Lives who we are is hard coding it's not going to change after the age of six so if you look at someone at the age of six and you see them at 96. they're going to look the same traits their behaviors might be different or the traits of the same so the traits are not going to change so what they told me is that I'm a guy who likes to play games but I don't like to play any kind of games I like to play very specific kind of game I like to play single player
Otherof game I like to play single player games so for example they said I'm not the kind of guy who likes to be on a Socrates where the outcome depends on the whole team and the other team so they said I like to play games which are more it would be more like singles tennis than soccer okay but they also said there were two more Works in my personality I like to play games where I think I can win so I've got something which is telling me my wiring hey I think this would be an easy game for me to play and win so single player games that I can win and games that need no people and in 99 when I went through this testing I was thinking of I was just about to start probably funds and I was explaining to them that look I'm starting this new fund and it's only going to be me and so on and so forth and they so they encouraged me to leave my business as soon as possible
Ted Weschlerto leave my business as soon as possible I actually started a CEO search and six months later I left that company which was great I felt really good and then a few months after that someone offered to buy it and we moved on when they looked at what Brian funds was going to be they said this is perfect this will work really well for you and one of them then says to me they weren't wealthy people these two psychologists or psychiatrists they said I want to invest in your fund so I said look man I'm giving you like a thousand dollars to do all of this and then you're gonna give me a thousand dollars to go into the fund I really don't want to lose money for you and all that he's gonna crack your head up and I'm not going to lose any money and so he actually was one of the First Investors in public funds and he did quite well so he knew what he was doing and and so now
Otherhe knew what he was doing and and so now it's been 23 years and I still love it because there's no humans So when you say spending time with people I want to spend no time with no people except Arvin once in a while I like to talk to our men is the students kovid actually gave me some experience working from home where there are very few humans and so I actually switched recently to 100 working from home because it becomes completely single player and I don't I have a so the dakshana foundation has a lot of people but it's in India most of the operations are in India I don't really run it I've got a team that runs it and I try to their biggest complaint to me is that they hardly hear from them and I said it runs better because you don't hear from me and I actually don't I know that I will be unhappy if I am deeply involved in the
Otherif I am deeply involved in the operations of dakshana because that is not a single player game and I was I actually didn't even want to have a foundation I actually wanted to write someone checks but then I couldn't find people who understood what to do with those checks properly so I was forced to do the foundation but I tried to set it up in a manner where there's it's a ring fenced and that so whenever I go to India for example and um I basically spend all the time with the scholars and their families the students we have I spend no time with the management team and all the people and all that and they complain you didn't come into the office I said exactly I don't want to come into the office and have meetings and so on and so that's that's how I proceed and if there are less people around I like to play bridge single player game it's a player with
Othersingle player game it's a player with game with a partner so two players it's okay it works and investing works that's not a team sport and and so these types of things work really well and I think everyone should get their owner's manual so they know how to go through life thank you so much Manish for spending your time with us it's a lot of fun once a year man when looking at a new CEO what is the appropriate time frame to judge if they're good at allocating Capital yeah that's a hard question I think that in an ideal situation we would have a long history to look at sometimes you can get that long history and sometimes you can so if you can get that you can look at someone and look at a long history of what they've done it's one of the dilemmas I actually am looking at right now I'm looking at this business where the CEO looks good but it's his first job as CEO
Questionerlooks good but it's his first job as CEO and so he's been like kind of CEO for three years and before that he's been CEO and you know VP and so on so I don't have enough treadmills I'm trying to figure out who this person is I don't know I mean there's an unknown there and I can't tell so it's a problem and it's not easy to get there but if you can look at long histories I made an investment in 2012 in Fiat Chrysler and Sergio marchioni was the leader at the time there were some Harvard case studies on him he had run some previous businesses there were a lot of trademarks even though it was a book written about me and so on so I had a lot of history then which gave me a lot of comfort but yeah that's a great question try to extract whatever you can about their past and sometimes we can get that and sometimes
OtherTrevor yeah thanks Manish I was
QuestionerTrevor yeah thanks Manish I was wondering the notion of intrinsic value and where that factors in to your decision-making process if you could contextualize that for me really in the class within the context of an emerging technology or a startup it seems like from a long time Horizon View this becomes a more significant challenge I'm just interested like really to understand that definition of intrinsic or what are you really looking at there when you factor that in
Questioneryeah that's a great question so the definition of intrinsic value is really simple it's the sum of cash that can be pulled out of a given business would be now in judgment bounded by some reasonable interest rate okay now calculating that is almost impossible for almost any business you can think of there's a very small several businesses where you could actually
Otheractuallyactually get some kind of handle around what thatget some kind of handle around what thatget some kind of handle around what that cash generation is going to be over thatcash generation is going to be over thatcash generation is going to be over that period of time I was actually misled andperiod of time I was actually misled andperiod of time I was actually misled and I think I think Ben Graham because heI think I think Ben Graham because heI think I think Ben Graham because he came out of this shell shock of the thecame out of this shell shock of the thecame out of this shell shock of the the Great Depression and the huge collapseGreat Depression and the huge collapseGreat Depression and the huge collapse in pricesin pricesin prices in the 1930s hein the 1930s hein the 1930s he anchored very heavily on intrinsic valueanchored very heavily on intrinsic valueanchored very heavily on intrinsic value and he didn't even anchor on intrinsicand he didn't even anchor on intrinsicand he didn't even anchor on intrinsic value he anchored on a subset of Bookvalue he anchored on a subset of Bookvalue he anchored on a subset of Book value and so basically he wasvalue and so basically he wasvalue and so basically he was his perspective was that a businesshis perspective was that a businesshis perspective was that a business should not be beyond what you might getshould not be beyond what you might getshould not be beyond what you might get in the liquidationin the liquidationin the liquidation and that's actually in my opinion theand that's actually in my opinion theand that's actually in my opinion the wrong way to think about it so the idealwrong way to think about it so the idealwrong way to think about it so the ideal situation so if you look at let's say wesituation so if you look at let's say wesituation so if you look at let's say we look at this it's like Amazonlook at this it's like Amazonlook at this it's like Amazon so Amazon through its history hardlyso Amazon through its history hardlyso Amazon through its history hardly generated any cash look at their annualgenerated any cash look at their annualgenerated any cash look at their annual earnings for a long period they won'tearnings for a long period they won'tearnings for a long period they won't almost non-existent and the reason theyalmost non-existent and the reason theyalmost non-existent and the reason they were non-existent is because they were
Questionerwere non-existent is because they were investing so heavily into the future of the business and they never really clearly disclosed even from I think that they've never ever disclosed what that reinvestment rule is so we cannot look at the financials of Amazon and come up with a number saying x amount has been spent on growth or expound has been spent which could have been distributed or have other uses so they don't break that out and even if Amazon broke that number up so even if Amazon told us no the business had 100 billion in sales and seven billion in net income and we allowed five of it or six of it back into the business even if they gave us that that still wouldn't help us because what matters is not the number that they're reinvesting but what is the outcome of that means and so with Amazon we've got two problems we don't know the number that
Questionerproblems we don't know the number that they're reinvesting and we don't know the trajectory of that reinvestment the correct way to think about a business like Amazon is to not even think about intrinsic value is to basically say okay I know that they keep throwing things against the wall I know that's a lot of things they throw against the wall don't work but the way Jeff Bezos used to do that is that the bed sizes were small when they threw stuff against the wall so if things didn't work they could write it off and move on but there was so much asymmetry when things worked that when things did work they got a massive exponential return versus what they put in and then they could keep investing more and more so that's it an example put a little bit in they saw it's working they put a little bit more in so we really cannot look at AWS in the
Todd Combswe really cannot look at AWS in the point of view of how much Capital went into it to build AWS that's really has nothing to do with the value the value of AWS is what happened to you know about the multiply effect that they got so when we look at a business like Amazon and if I were an investor in Amazon the only question I would ask myself is the business getting better is the business better today than it was a year ago two years ago or five years ago and is the valuation within some reasonable range of possibly giving me a good outcome long term so when I look at a business like Amazon today and I look at their market cap and whatever I don't consider it egregious I don't consider the valuation egregious based on the different pieces that are there and so the way I would look at Amazon is it's Buy and Hold for okay and the time to rethink Amazon is
Todd Combsokay and the time to rethink Amazon is not based on valuation unless it goes really crazy Amazon value goes to 10 trillion or 20 trillion or something and all that so off tomorrow if you go there over time that might be okay but the question is one is if the valuation goes extreme or the second is the business is in Decline so you reach a conclusion that the business is worse than it was yesterday or the day or the five years ago so if the business is in decline or the valuation is very extreme those will be the two conditions under which under which if I was an owner of Amazon I would look to sell it but I would not try to waste a lot of brain cells trying to figure out what the intrinsic value of Amazon Michael so going back to quinlan's question so obviously prior to running prepared funds you found it and ran a successful business I'm just
Questionerran a successful business I'm just curious on how much of that experience do you think has contributed to your success in investing and if so like what do you think were the most important like traits or performance attributes that you gain from that experience that was vital to running your firm
Questioneryeah so Buffett has a quote he says I'm a better businessman because I'm an investor and I'm a better investor because I'm a businessman there's a lot of cross-pollination that takes place between running a business and running a portfolio and he also says that you can talk to a fish for a thousand years about what it is like walk on land but half an hour of actually walking on land would teach the fish a lot more than the Thousand Years of talking about it if the fish could survive on that so what I'm saying is that I to some in some way
OtherI'm saying is that I to some in some way they can't really answer your question they can't really answer your question they can't really answer your question because I ran a business and that because I ran a business and that because I ran a business and that payroll did all these things then I payroll did all these things then I payroll did all these things then I became an investor I actually don't even became an investor I actually don't even became an investor I actually don't even know how people can be investors know how people can be investors know how people can be investors without ever having run a business without ever having run a business without ever having run a business I find that really difficult to fathom I find that really difficult to fathom I find that really difficult to fathom because to some extent it's not real for because to some extent it's not real for because to some extent it's not real for them looking at things through them looking at things through them looking at things through spreadsheets spreadsheets spreadsheets and things and so when we look at a and things and so when we look at a and things and so when we look at a business and we just talked about Amazon business and we just talked about Amazon business and we just talked about Amazon so let's continue to Amazon jassy who's so let's continue to Amazon jassy who's so let's continue to Amazon jassy who's running it or Bezos who was running it running it or Bezos who was running it running it or Bezos who was running it probably had three or four variables in probably had three or four variables in probably had three or four variables in their head that drove 80 of the outcome their head that drove 80 of the outcome their head that drove 80 of the outcome and they don't didn't and don't run the and they don't didn't and don't run the and they don't didn't and don't run the business through spreadsheets I think at business through spreadsheets I think at business through spreadsheets I think at Amazon he doesn't want to see want to Amazon he doesn't want to see want to Amazon he doesn't want to see want to see PowerPoint right he makes people see PowerPoint right he makes people see PowerPoint right he makes people right right right these essays on what they want to get these essays on what they want to get these essays on what they want to get funded and so on so the thing is that funded and so on so the thing is that
Questionerfunded and so on so the thing is that the three or four variables that they are looking at is if you look at if they think you're entering some new business or making some experiment they look at the economics of that if it works and they'll see what the bed size should be so if it doesn't work it doesn't sink the company and they look at what kind of people and team they can put behind it so it gives it the highest chance of success and then they nurture it and see if they can make it work they are continuously doing that in a wide range of Endeavors and they're going even outside their industry classification this has nothing to do with selling books so that their landscape that they're willing to look at is pretty wide so I think that as an investor you would need to have the same variables you're looking at that Bezos and his successor are looking
Questionerthat Bezos and his successor are looking and if you can get to the same variables and if you can get to the same variables and if you can get to the same variables that the CEO and his team are looking at that the CEO and his team are looking at that the CEO and his team are looking at when they're running the business then when they're running the business then when they're running the business then you've nailed it then you've got the you've nailed it then you've got the you've nailed it then you've got the right framework and getting to those right framework and getting to those right framework and getting to those same variables same variables same variables may not be that easy if you haven't run may not be that easy if you haven't run may not be that easy if you haven't run a business it's still hard even if a business it's still hard even if a business it's still hard even if because the business will be very because the business will be very because the business will be very different than the one you ran different than the one you ran different than the one you ran but you at least need to get into the but you at least need to get into the but you at least need to get into the mindset mindset mindset that is aligned with the way they think that is aligned with the way they think that is aligned with the way they think and then you can go from there Gavin hi and then you can go from there Gavin hi and then you can go from there Gavin hi monish I just want to go back to the monish I just want to go back to the monish I just want to go back to the topic of effective Sherry purchasing topic of effective Sherry purchasing topic of effective Sherry purchasing strategy and smart Capital allocation strategy and smart Capital allocation strategy and smart Capital allocation I'm curious about what in your opinion I'm curious about what in your opinion I'm curious about what in your opinion is typically the biggest factors that is typically the biggest factors that is typically the biggest factors that contribute to a CEO or capital allocator contribute to a CEO or capital allocator contribute to a CEO or capital allocator having ineffective or value destructive having ineffective or value destructive having ineffective or value destructive sharing purchasing over the long term sharing purchasing over the long term sharing purchasing over the long term because something I'm struggling to
Questionerbecause something I'm struggling to reconcile is that conceptually the idea of buying shares when you believe that there are no organic investment opportunities that offer a higher return and or the shares or are way too undervalued conceptually it's not rocket science it's intuitive and it makes sense and yet we see as you mentioned that many very smart people very educated professionals have not a very great track record of employing it and I think a popular characterization or factor that people like to label to explain this is discipline it's a popular gym undisciplined repurchases or undisciplined Capital allocation because they come into a lot of money and they want to boost EPS in the short term or something of that sort but I'm not exactly sure that encapsulates everything and I'm saying this with several particular examples in mind
Questionerseveral particular examples in mind which is Q rate and Liberty Global which is Q rate and Liberty Global which is Q rate and Liberty Global according to their background one would according to their background one would according to their background one would think think think given John Malone's legendary status as given John Malone's legendary status as given John Malone's legendary status as capital allocator that these would have capital allocator that these would have capital allocator that these would have been candidates that have be among the been candidates that have be among the been candidates that have be among the best being at buying back shares and yet best being at buying back shares and yet best being at buying back shares and yet we've seen arguably that both companies we've seen arguably that both companies we've seen arguably that both companies have engaged in value destructive share have engaged in value destructive share have engaged in value destructive share Buybacks in the recent years so what are Buybacks in the recent years so what are Buybacks in the recent years so what are the biggest factors that makes what the biggest factors that makes what the biggest factors that makes what seems like a rather simple concept seems like a rather simple concept seems like a rather simple concept actually so incredibly difficult to actually so incredibly difficult to actually so incredibly difficult to execute well over long term
Otheryeah that's that's a great question so every single yeah that's that's a great question so every single yeah that's that's a great question so every single business on the planet eventually will business on the planet eventually will business on the planet eventually will cease to exist okay so it is in the cease to exist okay so it is in the cease to exist okay so it is in the nature of capitalism that we will see nature of capitalism that we will see nature of capitalism that we will see creative destruction creative destruction creative destruction and we've seen that in the past so how and we've seen that in the past so how and we've seen that in the past so how many companies are 200 years old how many companies are 200 years old how many companies are 200 years old many companies are 500 years old many companies are 500 years old many companies are 500 years old how many of the companies around today
Questionerhow many of the companies around today will be around 100 years or 200 years from now or 50 years from now 20 years so
Warrenthe basic tenant of capitalism is that almost everything is going to be completed once in a while in a unpredictable manner for the most part we end up with some modes like we end up with a moat around Coca-Cola or we end up with a mode around Visa Mastercard or we end up with some books around Louis Vuitton and so on the people who founded these businesses could not see these moves okay they did not start these businesses saying I'm going to build the biggest soft drinks company in the world I'm going to control payments in the world go and study the history of these businesses they're all access accidental set of circumstances that leads if you look at something like Amex today and the trajectory it's been through it'd be
Otherthe trajectory it's been through it'd be very unpredictable but this is where it would be and so basically I think the reason all of this is difficult so on one hand we have this situation where almost everything in capitalism is going to disappear most businesses will disappear on the other hand you have CEOs and managers who have to have a trait if they're going to lead the common trait they have is their optimists if they weren't optimists they couldn't be leaders so they have to be seeing a half full glass as overflow if they didn't see the half full glass of oil flowing how they're going to lead their troops and people and so I think this I think it is par for the course that a CEO typical CEO may not have a good view on what his business is or her business looks like 10 or 20 years from because you know they're optimists they think all their
Otherthey're optimists they think all their Endeavors are going to work they don't see the disruptive Innovations coming from Left Field all these different things going on they don't see that there's a parking lot near LAX which I used to like a lot when I used to travel in our LAX called Wally Park and every time I parked at Wally Park I really liked everything about it so Wally Park had these kind of leather these hanging leather separators for each parking spot so your car could never get dinged by another car there was a separate and they put that in the whole parking lot so I said wow this is really nice I come to Wally Park and then they ran their shuttles very frequently and all of these things okay and I used to always think why should go tell the owner of Wally Park that if he ever decides to sell the business or something give me a call Berkshire style
Questionersomething give me a call Berkshire style something give me a call Berkshire style write him a letter or something but I write him a letter or something but I write him a letter or something but I just love the business and it was very just love the business and it was very just love the business and it was very popular relative to the other parking popular relative to the other parking popular relative to the other parking spaces and other parking operators spaces and other parking operators spaces and other parking operators and no one else had copied that leather and no one else had copied that leather and no one else had copied that leather thing even though they could all see it thing even though they could all see it thing even though they could all see it then suddenly Uber comes up okay and I'm then suddenly Uber comes up okay and I'm then suddenly Uber comes up okay and I'm not driving to the airport okay and not driving to the airport okay and not driving to the airport okay and suddenly I look at Wally Park and they suddenly I look at Wally Park and they suddenly I look at Wally Park and they got too many spaces that business got too many spaces that business got too many spaces that business suddenly changed so suddenly changed so suddenly changed so the the thing is that I was looking at the the thing is that I was looking at the the thing is that I was looking at that business I love that business I that business I love that business I that business I love that business I couldn't see anything that would take couldn't see anything that would take couldn't see anything that would take away parking from being a great business away parking from being a great business away parking from being a great business for 50 years around L.A but it even that for 50 years around L.A but it even that for 50 years around L.A but it even that business got disrupted so I think that business got disrupted so I think that business got disrupted so I think that this creative destruction of capitalism this creative destruction of capitalism this creative destruction of capitalism is really a powerful force it's not is really a powerful force it's not is really a powerful force it's not linear linear linear it comes from Left Field it comes it comes from Left Field it comes it comes from Left Field it comes suddenly you see something coming up and suddenly you see something coming up and suddenly you see something coming up and Clay Christensen wrote about it
QuestionerClay Christensen wrote about it innovators dilemma and all of that so I don't blame the managers always so much I think the managers maybe they have too much on their plate they're trying to run the ship they're trying to motivate their troops return of meet payroll all these things and for them to have a view of what happens 20 years from now that's really hard and even when in Berkshire Hathaway so many of the businesses they bought have disappeared so many of the businesses they bought were mistakes to buy probably half the businesses they bought are either mistakes or have disappeared and so the forces are very powerful and when we look at I haven't followed Liberty and Malone in a long time he's a smart guy he always takes care of himself I always found some of the ways things happened not quite buffet-esque in the sense that Buffett doesn't want
Questionerin the sense that Buffett doesn't want to play gin and Rummy with his shareholders but Malone doesn't seem to have too many issues with that and so anyway I don't have much of a view on what's been going on there but I would just say that when I look at this whole area of the cannibals and all of that I can't rely on the manager what I have to really look at is I have to look at businesses which look like a Union Pacific Railroad I think 20 years from now Union Pacific is around now we'll see if it becomes like Wally par and something comes along who knows but I think there's a good chance those rights of ways and all of that stuff that it's around but there's very few businesses like that and especially when you go long enough time Horizon and especially if you're looking at cannibals we need to go really long time Horizon to get 100x 300X the good
Questionertime Horizon to get 100x 300X the good
Othernews is that if you had a portfolio of 10 you could have seven that don't work and still owe will still be a great return so some of this can be taken care of with bed sizing and so on thank you
Questionerthat was very insightful so I believe you once said if you were spending a lot of time analyzing a business and Excel then something is seriously wrong so with that in mind could you walk us through what mental models you find most useful today and how those have perhaps changed over the course of your career
Charlieyeah actually what I said is that if you open Excel there's a problem spend time on it just even open Excel if you're looking at a business and you can't do the math in your head then I think there's a problem the mental models I think the first thing that goes through is you've got to really be honest about
Questionerreally be honest about circular competence got a business and you say okay this is something I understand or I don't I don't understand anything about biotech I don't want to deal with the defense sector because it deals with one customer or few customers I don't like that I don't like the healthcare industry in the US because it has non-market forces working on so there's entire areas that I just don't understand and anytime I encounter and if I encounter anything with blockchain that's way above my pay group so it's gone it's a lot of things just go away and I think the important thing is like Buffett says the size of the circle is not important staying in the center is very important so the first question is circular competence then we feel that something is within your circular competence then you know by definition we should be able
Questioneryou know by definition we should be able to figure out what it's likely trajectory is going to be and then you look at the we would also be able to figure out what kind of low return on Equity hard-earned Equity needs a lot of capital doesn't need a lot of capital what kind of person is running it what kind of capital allocator do we have there's all these different things are going on to figure out whether you want to spend time today thank you Cam thank you for speaking with us today that Excel comment you know that's one of your Commandments a few others that I find interesting are thou shall not short and now shall not introduce leverage and I find those too interesting because those are two techniques or two strategies investors you'll see it more on the institutional side instead of retail individual retail but those are two strategies that people
Questionerbut those are two strategies that people can use to hedge positions or reduce risk and earlier in this discussion you talked about how the lira in turkey has plummeted over the past year so with all that in mind how can and an individual retail investor reduce risk with their Investments is that something we should be thinking about or should we really just be focusing on finding that intrinsic value with these companies
Questioneryeah I think that I would stick by those Commandments shorting it for dumb exercise in my opinion basically you make a double if you're right and you go bankrupt if you're wrong and my friend Bill Ackman recently said he's done with shorting so it's nice to see he finally grew up which is great and yeah I think and even leverage I think like I said to finish first you have to first finish and Equity prices in the auction driven
Questionerand Equity prices in the auction driven Market can do anything and so if you're levered then you will not get to play you're out of the game so we don't really want to go down those paths I think that investors should think of themselves similar terms to the way I would say that the Walton family thinks about Sam Walton had distributed this talk to his gene pool and then he passed away and then they were Waltons who were no longer running the place and all of them for the most part have kept their shares for several decades after that and he made up over 90 percent plus of their assets unhedged I'm pretty sure none of them had any puts on Walmart Sam Walton would be turning in his grave with someone his son or daughter about puts on Walmart or something and yeah I mean I think that the thing is you carefully selected a dozen businesses or so or 10
Othera dozen businesses or so or 10 businesses or something and you've gone long and you have no Leverage and even half of them may not work because of the nature of capitalism the result can still be very good
QuestionerDan hey monish thanks so much for taking the time to talk with our class you're a complete Legend to me later on in life when I have to make important decisions you're one of the very few people that I'm going to refer back to help me make that decision and when I'm going to be making these decisions thinking back to your advice I'm going to be trying not to make a mistake and that leads me to think about two things how ninety percent of active managers can't beat the market and also how Buffett says he knows within one two three whatever five minutes looking at a company whether he wants to spend another 20 minutes looking at it so why
Questioneranother 20 minutes looking at it so why is it that you think 90 what's the biggest mistake or the most common mistake that 90 of active managers are making that's preventing them from being able to beat the market and also what are the most important filters that you use whether they're industry filters or like valuation Financial filters when you're looking at a company where you say nope not I'm not looking at this anymore
QuestionerI think the reason most managers cannot beat the indexes really for two reasons one is the index doesn't have frictional costs and the manager does so the manager might have one two three percent of frictional costs every year including all the trading costs and all that and so they have to overcome that hurdle which is a significant hurdle to overcome and the second is that when we look at the stock market something like four
Questionerthe stock market something like fourthe stock market something like four percent of stocks deliver almost all ofpercent of stocks deliver almost all ofpercent of stocks deliver almost all of the returns so there's some studiesthe returns so there's some studiesthe returns so there's some studies about how when s p is done like nineabout how when s p is done like nineabout how when s p is done like nine percent a year for 100 years but if youpercent a year for 100 years but if youpercent a year for 100 years but if you took away the top four percenttook away the top four percenttook away the top four percent performers you'll be left with nothingperformers you'll be left with nothingperformers you'll be left with nothing and like more than half the stocksand like more than half the stocksand like more than half the stocks deliver negative returns long termdeliver negative returns long termdeliver negative returns long term so basically here again that goes backso basically here again that goes backso basically here again that goes back to the creative destruction and all ofto the creative destruction and all ofto the creative destruction and all of that so the thing is the index is toothat so the thing is the index is toothat so the thing is the index is too dumb to know that it owns Amazon and itdumb to know that it owns Amazon and itdumb to know that it owns Amazon and it owns Apple it owns alphabetowns Apple it owns alphabetowns Apple it owns alphabet owns Microsoft and owns all theseowns Microsoft and owns all theseowns Microsoft and owns all these companiescompaniescompanies and it's also too dumb to ever selland it's also too dumb to ever selland it's also too dumb to ever sell these companies and so it owns thesethese companies and so it owns thesethese companies and so it owns these companies it never sells these companiescompanies it never sells these companiescompanies it never sells these companies these companies keep becoming a largerthese companies keep becoming a largerthese companies keep becoming a larger and larger portion of the indexand larger portion of the indexand larger portion of the index it doesn't really rebalance and such itit doesn't really rebalance and such itit doesn't really rebalance and such it just sits therejust sits therejust sits there whereas the active managerwhereas the active managerwhereas the active manager even when they're smart enough to buy
Questionereven when they're smart enough to buy Amazon they are trying to figure out Amazon they are trying to figure out Amazon they are trying to figure out every day should they sell it or keep every day should they sell it or keep every day should they sell it or keep they get in their own way they get in their own way they get in their own way so how many people so how many people so how many people figured out Amazon and then kept it for figured out Amazon and then kept it for figured out Amazon and then kept it for 10. so there's a fund manager in 10. so there's a fund manager in 10. so there's a fund manager in Scotland Bali Gifford Scotland Bali Gifford Scotland Bali Gifford and I like the Bali gift for people a and I like the Bali gift for people a and I like the Bali gift for people a lot even though I think they're lot even though I think they're lot even though I think they're overdosed on carvana right now but but overdosed on carvana right now but but overdosed on carvana right now but but Bali Gifford when they go in they'll Bali Gifford when they go in they'll Bali Gifford when they go in they'll just be there right they try to find just be there right they try to find just be there right they try to find these great businesses and they try to these great businesses and they try to these great businesses and they try to they'll hang on for a long time they'll hang on for a long time they'll hang on for a long time Berkshire does that and so on so I think Berkshire does that and so on so I think Berkshire does that and so on so I think the the the active manager the deck is stacked active manager the deck is stacked active manager the deck is stacked against them right you've got the against them right you've got the against them right you've got the frictional call and you basically are frictional call and you basically are frictional call and you basically are going to be picking one out of 25 out of going to be picking one out of 25 out of going to be picking one out of 25 out of every 25 stocks one is the winner 24 and every 25 stocks one is the winner 24 and every 25 stocks one is the winner 24 and so great so great so great which is why you get even a 50 error which is why you get even a 50 error which is why you get even a 50 error rate and so figuring out what these rate and so figuring out what these rate and so figuring out what these companies will do long term in the light
Questionercompanies will do long term in the light of the creative destruction that capitalism imposes on you it's a difficult thing to do Troy hey monish thanks for taking the time again this year to speak with the class I had a question around your thoughts or your evolving thoughts on investing in China and companies in China obviously when we spoke last year as a class we had some glowing thoughts on tencent and Alibaba and you've made Investments there in the past and I think earlier he made a note of how things have changed over the past couple weeks obviously not it's been an evolving change so I just want to get your perspective on investing in China and how that's evolved over time yeah I
Otherthink probably for me China would always be difficult I think in the past like one time I invested in Mal which was a stock lilu told me about Alibaba and
Questionerstock lilu told me about Alibaba and tencent very well-run companies Greattencent very well-run companies Greattencent very well-run companies Great governance and all of that but we've gotgovernance and all of that but we've gotgovernance and all of that but we've got the unknown of the government and allthe unknown of the government and allthe unknown of the government and all their policies and all of thattheir policies and all of thattheir policies and all of that and maybe they can transcend and maybeand maybe they can transcend and maybeand maybe they can transcend and maybe they cannot I don't knowthey cannot I don't knowthey cannot I don't know so I think given the leadership in Chinaso I think given the leadership in Chinaso I think given the leadership in China and given how they think about thingsand given how they think about thingsand given how they think about things I would just not put a lot of energyI would just not put a lot of energyI would just not put a lot of energy behind China at this time I still likebehind China at this time I still likebehind China at this time I still like him sent a lot as a business I thinkhim sent a lot as a business I thinkhim sent a lot as a business I think onima is a once in a generation manageronima is a once in a generation manageronima is a once in a generation manager and he may find a way to transcend alland he may find a way to transcend alland he may find a way to transcend all the headwinds and curveballs that keepthe headwinds and curveballs that keepthe headwinds and curveballs that keep throwing at him we'd love to see justthrowing at him we'd love to see justthrowing at him we'd love to see just one quick follow-up on that are thereone quick follow-up on that are thereone quick follow-up on that are there any lessons outside of China and how youany lessons outside of China and how youany lessons outside of China and how you think about geopolitical risks obviouslythink about geopolitical risks obviouslythink about geopolitical risks obviously you have Investments you mentionedyou have Investments you mentionedyou have Investments you mentioned turkey obviously of investments in Indiaturkey obviously of investments in Indiaturkey obviously of investments in India are there is it really just in theare there is it really just in theare there is it really just in the context of China or are there other
Questionercontext of China or are there other things other areas that you've evolved or thinking on
OtherI think I should put all my energy behind a place like turkey I think I should spend a lot more time the in the investors that I would be buying stock from in Turkey so the Turkish talking Market is mostly held either by insiders or foreigners 80 is held that way and that doesn't trade the other 20 which is held by the locals Etc turns over every nine days and for most locals nine days is too much they want to invest at 10 and be done at two four hour holding period and Buffett says that stock market is a mechanism to transfer wealth from the active to the inactive and couldn't be and these gamblers they're not investors speculators or gamblers told me race us at two and a half percent of liquidation lab because they couldn't be bothered what
Otherbecause they couldn't be bothered what the company said that's not part of the equation at all when you're buying at 10 o'clock and selling it at two o'clock you are not running any intrinsic value calculations you're just trying to have some kind of psychology that somebody will pay you something more than what you paid or whatever and so I think that because of the the nature of the investors and also that the geopolitical and all of that everyone's exited I still think like 95 or 97 of turkey is not investable but there's a three to five percent where their revenues are in Euros or dollars inflation is a Tailwind rather than a headwind and people aren't interested because the baby got thrown out of the bathroom so like we have a cork bottler in Turkey we've got a company that Imports all the VW Brands and controls most of those dealerships in Turkey these are really
Questionerdealerships in Turkey these are really good businesses and the gamblers will give it to you at great prices so that's why I think I should put more time and energy minus the foreign ownership you just mentioned why doesn't that trade I'm just think institutional investors are not going in and out every year they did go out I think in 2018 2019 2017 there was a mass Exodus right so there were Templeton funds sold me races at two and a half percent of liquidation I don't know what John Templeton thinks of that in his grave okay but they're supposed to have the framework but some guy in New York says Exit and then they exit turkey so that sort of thing happens and so yeah I think that the institutions in a place like turkey I think they have a somewhat longer Horizon but I think they get they also get spooked out I think at this point
Questionerget spooked out I think at this point everyone and their brother has left soeveryone and their brother has left soeveryone and their brother has left so the but the thing is that the stockthe but the thing is that the stockthe but the thing is that the stock market's kind of like a theater everymarket's kind of like a theater everymarket's kind of like a theater every seat has to be occupiedseat has to be occupiedseat has to be occupied and so every share has to be held byand so every share has to be held byand so every share has to be held by someonesomeonesomeone so if you are exiting it's like aso if you are exiting it's like aso if you are exiting it's like a burning theater you have to findburning theater you have to findburning theater you have to find somebody who will take your ticket andsomebody who will take your ticket andsomebody who will take your ticket and go back in and sit in the theater and ifgo back in and sit in the theater and ifgo back in and sit in the theater and if the theater is on fire that ticket isthe theater is on fire that ticket isthe theater is on fire that ticket is not going for a hundred dollars you paynot going for a hundred dollars you paynot going for a hundred dollars you pay to get that see you'll take 10 cents andto get that see you'll take 10 cents andto get that see you'll take 10 cents and you're enjoying the movie so that's goodyou're enjoying the movie so that's goodyou're enjoying the movie so that's good I think that I got to make sure I'm inI think that I got to make sure I'm inI think that I got to make sure I'm in the part of the theater which is notthe part of the theater which is notthe part of the theater which is not going to get affected the Theta is ongoing to get affected the Theta is ongoing to get affected the Theta is on fire but there's like there's a balconyfire but there's like there's a balconyfire but there's like there's a balcony where it's not going to get there orwhere it's not going to get there orwhere it's not going to get there or something okay yeah thanks for beingsomething okay yeah thanks for beingsomething okay yeah thanks for being here monish your presentation and alsohere monish your presentation and alsohere monish your presentation and also the mention of Bailey Gifford seemedthe mention of Bailey Gifford seemedthe mention of Bailey Gifford seemed like an offshoot of your search you
Questionerlike an offshoot of your search you mentioned I think last year opening yourself is or position your fund for much longer hold periods I would just love to hear how that transition is going like any update there and that I remember you said that you were like pretty pregnant with positions Etc yeah
Ted Weschlerwhen I first started in 94 or 95 I was buy and hold forever that's how I thought about it and then I did really well I had 200 Baggers in that period from 90 till 99 2000 and then I probably saw the internet bubble Maybe 12 weeks before anyone else I was about 10 12 weeks out of the crowd not a huge lead but some lead so I got really concerned that this thing would blow up because those valuations were really crazy there was a lot of crazy behavior at that time so I switched I started for bright funds and I basically switched do a very heavy
Questionerand I basically switched do a very heavy Ben Graham approach in 99 and 2000 basically where you know the day the NASDAQ I think March 9th 2000 5000 or something was the day Berkshire hit a multi-year low so people were selling Berkshire and buying pets.com that's what was happening and so at that time there were a lot of basic businesses steel companies funeral homes and things of that nature that was single digit multiples available really cheap and very stable business so I switched to those businesses and and I did really well basically completely sidestepped the NASDAQ crash and everything else and basically what I should have done is probably in 2012 or thereabouts I should have switched back I should switch back to the great growing businesses and what happened is that I became so comfortable with these cigar birds and I did so well with them eight
Questionerbirds and I did so well with them eight or nine years or like 36 a year beforeor nine years or like 36 a year beforeor nine years or like 36 a year before that and even in 2009 when the marketthat and even in 2009 when the marketthat and even in 2009 when the market crashed and I put the entire fund almostcrashed and I put the entire fund almostcrashed and I put the entire fund almost completely in Commodities that crashedcompletely in Commodities that crashedcompletely in Commodities that crashed like you wouldn't believe we were uplike you wouldn't believe we were uplike you wouldn't believe we were up like 130 in one year and so on so thoselike 130 in one year and so on so thoselike 130 in one year and so on so those things came back really fast so it butthings came back really fast so it butthings came back really fast so it but what I should have done is in aroundwhat I should have done is in aroundwhat I should have done is in around 2012 or so I should have switched back2012 or so I should have switched back2012 or so I should have switched back again to the great businesses paid upagain to the great businesses paid upagain to the great businesses paid up for the businesses like I used to and itfor the businesses like I used to and itfor the businesses like I used to and it was really I think in 2020 when I readwas really I think in 2020 when I readwas really I think in 2020 when I read uh nickens act chapter in anotheruh nickens act chapter in anotheruh nickens act chapter in another manuscript at William green but sent offmanuscript at William green but sent offmanuscript at William green but sent off whichever is a happier that I realizedwhichever is a happier that I realizedwhichever is a happier that I realized that I'd screwed up that I had to gothat I'd screwed up that I had to gothat I'd screwed up that I had to go backbackback that the Holy Grail in investingthat the Holy Grail in investingthat the Holy Grail in investingthat the Holy Grail in investing is a small ownershipis a small ownershipis a small ownership of a great growing business over a veryof a great growing business over a veryof a great growing business over a very long period of time I think that'slong period of time I think that'slong period of time I think that's really where you get to Utopia you don'treally where you get to Utopia you don'treally where you get to Utopia you don't I have this friend in turkey and he's
QuestionerI have this friend in turkey and he's basically everything I bought in Turkey I only visited businesses in Turkey where he already owned it in his fund so I told him I only want to visit businesses that you've already invested in okay because I needed cover first layer is someone already put money in and he's a very smart investor and he's deeply overdosed on Ben Graham and I'm trying to get him to those more or at least dose up a little bit on Charlie Munger so I actually sent him a cost of Charlie Munger told him to worship it every morning but so the thing with him is he takes me to race us he owns it in his portfolio he tells me it's at two and a half percent of liquidation value and resource goes from a 20 million market cap to a 40 million market cap and he completely exits so I asked him I said you told me it's worth 800 million he said monish I have
Questionerworth 800 million he said monish I have a simple rule everything at 100 is sold once I make 100 I sell so I told him to Triple his mother worship time every day and you take the incense sticks the Indians have and put it on monger and he's doing that he actually told me he goes to the Charlie Munger bus where he says it'll take a long time to reprogram so anyway what I'm saying is that I think that the Holy Grail is the great growing business that's where we want to be and so I was Snow White and then I drifted and then I'm trying to get back to Snow White again Michael I'm just wondering how do you distinguish between whether or not a stock has diminished in price due to risk or just uncertainty we're not going to always get it right I think the thing is that like John Templeton said you're going to be wrong at least one out of three times and probably more
Otherone out of three times and probably more like half the time so we use all the tools at our disposal to try to make sure that something is not in secular Decline and something is a temporary Hiccup and we may not always get it right it's a difficult thing to get right on Gavin while we're still close to the topic about Chinese stocks I had a question regarding tencent I've listened to one of your talks in which you said that you thought it was maybe more attractive to get tense and exposure through process than directly holding tension and then in that conversation the topic sort of just went on and you didn't really get a chance to elaborate that so I was curious as exactly why you thought it was better it's a big there's a big gap between the look through value of tencent through process and the process market cap so you're seeing uh times that the
Questionercap so you're seeing uh times that the app was more than 40 percent so it's hard to ignore that and also process is aware of that Gap and willing to take action to try to close that yeah suppose the danger there is that what they've said is they're going to sell down some tense and buy back process and they're also selling down some tencent or taking some dividends and making other Investments so the question is that how does process how well does process do on its non-intense and impression and is that kind of sell-off of tencent to buy back process
QuestionerI think that can work if you don't take the tencent position down too much so they used to have 29 if they go to 20s or low 20s probably still okay if you're buying back at that huge discount but yeah I think the a lot of investors prefer just owning content directly and that can be valid but I think in my
Questionerand that can be valid but I think in my way of thinking it's difficult to ignore that big gap and they're people who want to take action to close I have a quick follow-up to that sure so a lot of why investors might be as you said preferring to directly hold tension versus investing and holding company thesis that has underlying exposure is that there's some degree of frictional or managerial cost that you're going to have to be paying up in order to get that optionality of those managers and their decisions how do you think about quantifying or weighing those sort of frictional costs and managerial costs in some cases which may be unseen because of during times where quick decision making is rewarded there is generally a sort of lag between you directly controlling your assets versus having another manager in this case own the company that you like yeah I would
Questionerthe company that you like yeah I would say that let's look at it this way if a person invested in tencent directly the reason they're investing is they believe that tencent will be a lot more valuable in the future right that's the only reason they would buy 10 cents office because you had a Viewpoint that it's a business that's undervalued or likely to create a lot of value in the future so let's say for example that over a five-year holding period or a 10-year holding period 10 cent triples or quadruples in price for example and now we have this ownership and process there's a discount there's a holding company discount there's some frictional costs and they may or may not invest their own other money as well as tencent does and so on so forth but also that Gap May close it may be half the Gap it was in 10 years that's possible
Otherthat's possible so it's not apparent to me that in these two scenarios that holding tencent directly would have the superior outcome that's not apparent to me I think the important thing that matters in both cases the more important thing that happens is that tencent value has to be and if the tension value goes up and the stock directly with 10 cent is a 4X and me holding it through process is a 3X for example okay so then in that case that was not a that was not an optimal decision but I still got to get some of the upside front ends wasn't completely lost so the important thing I think in this equation is that do you believe or not believe that 10 cent will be a lot more valuable in the future or not if it is a rising tide it's going to lift tall boats so if it is more valuable they'll both the both the stocks will do fine I think
Questionerboth the stocks will do fine I think it's possible process could do better possible but it's also possible it does the same or does worse Josh so I also wanted to ask you so what are signals so when so when do you decide it's time to sell a stock in other words what are some signals that you take in when to know that it's time
QuestionerBill Fisher says that if the job is done right every cell decision is a mistake right so when I grow up that's where I want to be I haven't grown up yet but so ideally if you find yourself in the happy position of owning a great business and it's continuing to increase in value and it's not extreme in its valuation you would just keep holding it it wouldn't matter if you perceived as being above intrinsic value or anything like that you just hold it the second reason you would sell something or the reason you would sell something is you
Warrenreason you would sell something is you realize you made a mistake you realize that there are future prospects of a business are vastly inferior to what you'd originally thought and the third reason could be opportunity costs and that's actually a difficult one because the mistress always looks better than the one and in actuality the wife might be prettier
QuestionerSusan yeah I'm basically an individual investor and I'm a big fan of BRK of course but I just learned in all the readings from this class about Markle Corporation and I was wondering what your views are if any of Markle
Warrenyeah Markel is a wonderful business I think they've got some excellent Insurance businesses because they're they used to be excess Surplus lines and insurance which is not the odds and ends that most people didn't want to deal with generally if you're good in those lines the profit
Questioneryou're good in those lines the profit margins can be better but I I if I were to choose between Markel and Berkshire I would choose Berkshire I think that the Capital allocation province of Berkshire buffet and such is is very proven or a very long period of time Markel has started to make private investments in buying whole companies I just don't have enough data there I think that's a much more difficult area even Buffett's had a lot of difficulty in the whole Acquisitions I would say probably a good one-third of the companies they bought have ended up being mistakes but I don't know what that error rate is to me between the two I would go even though it's larger and size is a anchor thank you but did you attend the Berkshire annual meeting I haven't and I'm thinking of it this year especially given their ages but yeah and every Sunday morning there's a Markel
Questionerevery Sunday morning there's a Markel brunch in Omaha yes and so you could attend that brunch the food is good and Tom Gainer who's a good friend he's on stage so you get buy one get one free sounds good thank you Mona you've been so generous with your time I thought we'd go I thought we'd go for another two hours arvind I think you're getting sleepy or something no I'm not and I don't have the time advantage that you do in Austin but but it's better it's not as strong as you once had in Orange County so that's good it's weakening but you've been so generous at your time time I'd asked to love to ask you one final question which I ask you every year in this room there are students that are graduating college to those graduating business school is any is there any advice that you would leave them with either personally or professionally as they launch into their
Questionerprofessionally as they launch into their Journeys ahead I yeah there's a couple of things one is I would encourage all of you to get your owner's manual and I'll give Arvin the name of the guy who did it for me with his contact if you want to pursue that or you can contact someone else I have no Kickback coming to me if you do that just FYI but I think it's important to know who you are I think that's I think I wish we came with our owner's manual so I didn't really know who I was till I was 35 and it would have been of some benefit to know at 20 or something so that's one thing I would say is try to understand who you are and and then the other thing that Buffett says which is you go to work for people you like admire and trust and so it's not about the name brands I think a lot of times when you're getting out of business schools people focus on the
Otherbusiness schools people focus on the brands and it's really about the people you work with or the person you work under and and all of that so I think it's not about which Place pays you the most or which sounds the most when you're at a dinner table at Thanksgiving with your family or something I think it's really more along where the values align or profit says you get better if you hang out with people better than you so you want to always make sure that you're in the company of very high quality people and and so that should be the criteria is go to work or places where you are moving up in the world from a quality point of view what
Questionera wonderful note to end on Monash thank you so much and we'll talk soon
Otherall right thank you arvind always a pleasure bye