Other[Music][Music]thank you so much for taking the time to uh to speak with us today uh to speak with us today uh to speak with us today steak it's always a pleasure at this time of the year just before the Woodstock for capitalist it gets underway so uh it's like our tradition right this is the kind of a pre-game tailgate party so my first question to you is sort of life with that as a backdrop is how do you make sure to stay objective whenever you process information from people that you you really like perhaps you even admire them and you have this lot of Palooza Cascade of different biases that can make you susceptible to not seeing the world the way it really is is is
Otheryeah that's a that's a great question yeah that's a that's a great question yeah that's a that's a great question stick and it's really difficult to do stick and it's really difficult to do stick and it's really difficult to do and I think and I think and I think most of us definitely myself we fail at most of us definitely myself we fail at most of us definitely myself we fail at it so yeah I mean our our brains you it so yeah I mean our our brains you it so yeah I mean our our brains you know they've evolved over the Millennia know they've evolved over the Millennia know they've evolved over the Millennia and they are not optimized
Questionerand they are not optimized for being great investors they were really brain with optimized to help us survive and surviving on the African Savannah needed a certain type of wiring and we need a different kind of wiring to be great investors so our brains have a lot of quirks and a lot of biases and I would say reading monger's essay and reading cialdini's book is going to be helpful in at least being aware of the pitfalls but but we are susceptible to it you know the commitment and consistency biases a number of the the biases that come in and that are very much part and parcel of who we are it's just part of who we are the best the best that we can do is try to be aware of it and try to sidestep as many of the pitfalls as you can but I don't think anyone has succeeded in sidestepping all the pitfalls so yeah I mean I think that's a
Questionerpitfalls so yeah I mean I think that's a great essay and it is helpful it's helpful to reread it and it's helpful to be aware that we we are quirky living creatures with quirky brains which don't necessarily follow a you know rational path all the time you also talked about how whenever you translate the the Turkish word it's into you you don't invest it's like play the stock market yeah and um so that sort of like makes me think about what that Dynamic due to the efficiency of a market um you know Graham said uh you know decades ago it took like 18 months to revert back to uh intrinsic value how do you think about the whole inverting to intrinsic value how is that different than than say the data series we have about the states uh if at all
Questionerwell I mean I think I think Graham's Bedrock that we all believe in is that in the long run the stock market is a uh
Questionerin the long run the stock market is a uh weighing machine and in the short run it's a voting machine so I think that applies universally I think in the end all companies get correctly valued and if they're undervalued they're going to go up they overvalue they're going to come down and so I think that is part of the Bedrock that applies globally but I I think that in a place like turkey and actually when I mentioned to local Turks about the nine days they're actually surprised they expected it to be a lot shorter because they're all the people they know basically you know invest at 10 o'clock and want to wrap it up by two o'clock and so they actually expected that the holding period would be like you know two or three days on average so they were actually surprised that it's long as long as nine days because they just said like like I said that their the way
Questionersaid like like I said that their the way they look at the stock market is they're playing the market and not not really investing and that's really the only explanation one can come up with you know for the wide mispricing we've seen in businesses like Racers for example is that no one is weighing the weighing the companies they're just you know dancing in and out of them and you know Buffett has a great quote he says that the stock market is a mechanism to transfer wealth from the active to the inactive and it could not be more true than a place like turkey so yeah actually I enjoy it's kind of like I would say it's almost a little bit of a Time Warp it's like going back to the 60s and 70s in the US I think that's all it feels like the early 90s in India where you had a lot of very high quality businesses at single digit multiples so that
Questionerat single digit multiples so that existed in in Western markets in existedexisted in in Western markets in existedexisted in in Western markets in existed in Indiain Indiain India and it doesn't exist anymore you know soand it doesn't exist anymore you know soand it doesn't exist anymore you know so these places have we will always havethese places have we will always havethese places have we will always have fear and greedfear and greedfear and greed and we'll always have mispricing but theand we'll always have mispricing but theand we'll always have mispricing but the degree of mispricingdegree of mispricingdegree of mispricing that I can find in a place like the USthat I can find in a place like the USthat I can find in a place like the US is is much much lessis is much much lessis is much much less than many other placesthan many other placesthan many other places with all of that said I also heard youwith all of that said I also heard youwith all of that said I also heard you say in another video thatsay in another video thatsay in another video that here in 2023 you wanted to study 50here in 2023 you wanted to study 50here in 2023 you wanted to study 50 businessesbusinessesbusinesses um if it passed those first few hours ofum if it passed those first few hours ofum if it passed those first few hours of tests sotests sotests so I'm I'm curious what you learned andI'm I'm curious what you learned andI'm I'm curious what you learned and again not to put you on spot of any kindagain not to put you on spot of any kindagain not to put you on spot of any kind of specific stocks but whether you foundof specific stocks but whether you foundof specific stocks but whether you found I don't know perhaps a new mental modelI don't know perhaps a new mental modelI don't know perhaps a new mental model you want to share or or A Newyou want to share or or A Newyou want to share or or A New Perspective on on thingsPerspective on on thingsPerspective on on things
Otheryeah and I've made some good progress onyeah and I've made some good progress onyeah and I've made some good progress on the 50 businesses I think it's up tothe 50 businesses I think it's up tothe 50 businesses I think it's up to close to 20 so farclose to 20 so farclose to 20 so far and I have to pull it up maybe like 17and I have to pull it up maybe like 17and I have to pull it up maybe like 17 or 18 or something like that which is
Questioneror 18 or something like that which is or 18 or something like that which is I'm on track because basically I'm I'm I'm on track because basically I'm I'm I'm on track because basically I'm I'm behind if I'm not at least one per week behind if I'm not at least one per week behind if I'm not at least one per week so I'm I'm very pleased with that and of so I'm I'm very pleased with that and of so I'm I'm very pleased with that and of course you know when I make a trip like course you know when I make a trip like course you know when I make a trip like I made a trip to Turkey I see all these I made a trip to Turkey I see all these I made a trip to Turkey I see all these new companies so I get a lot done during new companies so I get a lot done during new companies so I get a lot done during a week like that but yeah I mean I think a week like that but yeah I mean I think a week like that but yeah I mean I think that one of the things I am that one of the things I am that one of the things I am I am excited about it's kind of a new I am excited about it's kind of a new I am excited about it's kind of a new way of of me way of of me way of of me looking at things is what I call the looking at things is what I call the looking at things is what I call the circle the wagons the circle the wagons circle the wagons the circle the wagons circle the wagons the circle the wagons approach uh to investing approach uh to investing approach uh to investing and you know this year for example and you know this year for example and you know this year for example Buffett in his letter mentioned Buffett in his letter mentioned Buffett in his letter mentioned that you know Berkshire has a few truly that you know Berkshire has a few truly that you know Berkshire has a few truly extraordinary businesses extraordinary businesses extraordinary businesses many pretty good businesses and a very many pretty good businesses and a very many pretty good businesses and a very large number of mediocre or below large number of mediocre or below large number of mediocre or below average businesses and he also mentioned average businesses and he also mentioned average businesses and he also mentioned that that that in 58 years it's really been 12 in 58 years it's really been 12 in 58 years it's really been 12 decisions that have decisions that have decisions that have created most of the great outcome for
Questionercreated most of the great outcome for BerkshireBerkshireBerkshire and most of the other decisions haveand most of the other decisions haveand most of the other decisions have just been at best so sojust been at best so sojust been at best so so if you look at something like Berkshireif you look at something like Berkshireif you look at something like Berkshire Hathaway over 58 yearsHathaway over 58 yearsHathaway over 58 years Warren has bought more than 80 companiesWarren has bought more than 80 companiesWarren has bought more than 80 companies in that periodin that periodin that period he's probably made at least 10 key hireshe's probably made at least 10 key hireshe's probably made at least 10 key hires and probably boughtand probably boughtand probably bought at least 210 stocksat least 210 stocksat least 210 stocks over that period so collectively wellover that period so collectively wellover that period so collectively well over 300 decisionsover 300 decisionsover 300 decisions and when he says that 12 stand outand when he says that 12 stand outand when he says that 12 stand out it's like 1 in 25.it's like 1 in 25.it's like 1 in 25. it's like a four percent hit rate forit's like a four percent hit rate forit's like a four percent hit rate for someone as great as Warren Buffett andsomeone as great as Warren Buffett andsomeone as great as Warren Buffett and and you know Charlie manga said manyand you know Charlie manga said manyand you know Charlie manga said many times if you took a top 15 decisions andtimes if you took a top 15 decisions andtimes if you took a top 15 decisions and took them out our record would betook them out our record would betook them out our record would be uselessuselessuseless and we we actually see this particularand we we actually see this particularand we we actually see this particular phenomena of you know this four percentphenomena of you know this four percentphenomena of you know this four percent play out over and over so for example ifplay out over and over so for example ifplay out over and over so for example if you look at theyou look at theyou look at the uh nifty 50 you know in the early 70suh nifty 50 you know in the early 70suh nifty 50 you know in the early 70s which was very popular by the you knowwhich was very popular by the you knowwhich was very popular by the you know 50 blue strip stocks and don't worry50 blue strip stocks and don't worry
Questioner50 blue strip stocks and don't worry about the valuation
Othercan I set it and forget it there is some controversy whether Walmart was part of the nifty 50 or not if you assume that Walmart is part of the nifty 50 we'll take two cases here but let's say you assume Walmart is part of the Nifty 50. and you assume that it has a two percent weight in the nifty 50 because there are 50 stocks each one has a two percent weight and you assume that the other 49 stocks go to zero they they just get wiped out and you assume that you bought Walmart at the IPO in 1970. and you held it till today the nifty 50 with 49 out of 50 gone to zero would have ended up with something like a 13.3 percent annualized return and the s p is 10 and change you know 10.3 percent or something so with just two percent of the portfolio surviving and being there for the entire 52-year period
Questioner52-year period you still significantly outperform the s p and of course 49 of the other names didn't go to zero they were like McDonald's and Coke and Procter Gamble they were a lot of good company there were some bad companies like you know Polaroid and Xerox and Kodak and Burrows and a lot of these companies basically went to zero but you can just see that the one decision whether Walmart is part of the group and whether you keep it or not has such a outsized impact now if you take the other case which is that let's assume that Walmart is not part of the Nifty 50. and you assume that you invest in the nifty 50 at the all-time high in 1972. just before the big crash of 7374. and you run it till today what you find is that the annualized return is 10.2 percent annualized and the s p is 10.3 percent so even with buying at ridiculous
Questionereven with buying at ridiculous valuations and but just holding them of course what happened in 7374 is the nifty 50 went down 50 percent nobody was in the nifty 50 by 1975 you know that everyone exited but if they had held on and if they held on till today they would pretty much be Toe to Toe with the s p it's not that much of a difference so and and you know this lesson again plays out where we had this great investor in India who passed away last year Rakesh junjunwara and Rakesh ninja never managed money professionally he was an individual investor and maybe close to the end of his life he was starting a business basically it was all passive investing and he started with 400 when he was 25 years old and at 62 when he passed away it was 5.8 billion and in night in 2003 Rakesh put four percent of his portfolio into a company in India called Titan
Questionerinto a company in India called Titan Industries and it was a 3.4 Million Dollar Bet On Titan he had about 85 million dollars in total assets at that time so he invested 3.4 million if you again like the Nifty take everything to zero that he had in 2003. except for Titan and he owned like you know a little over five percent of Titan you run it till when he passed away now his widow has kept Titan so it still compounding it became 1.4 billion excluding dividends if you reinvest the dividends it's even higher so 3.4 million was a 400x return and so even if you took everything else to zero each still have 1.4 billion so again we see this Phenom and these are not Venture Investments right I mean when Buffett buys Coke or Sees Candy these aren't like you know we're not early stage like Sequoia making a bet on Amazon when it's early stage business
QuestionerAmazon when it's early stage business these are mature you know businesses with a lot of history and we see the same thing with Nick sleep with Amazon I mean if you pull Amazon out of the equation Nick sleeps record isn't that great and when you put it in it's an exceptional record so the important thing and then of course the most extreme case of all of this is naspers in South Africa so you know naspers in 2001 it's a you know it's almost 100 year old newspaper company that's how it started about 100 100 years ago in 2001 they have a market cap of about 500 million dollars they put 32 million dollars into 10 cent and they get a 46 percent stake in tencent and the most surprising thing about the naspers 10 cent Adventure is they basically never sell they sold little bit of the IPO but they still own 36 percent of the company in 2018
Questioner36 percent of the company in 2018 and in 2018 their stake was worth 170 billion and in 2021 at the peak of tencent their stake was worth 270 billion so here's a you know sleepy old you know Media Company in South Africa they suddenly start seeing some Chinese company become 99 percent or even more than 99 percent of their total assets and they don't trim it and they don't hedge it they just keep it and they end up with and you know astronomical analyze return over the last 20 years and so in if you look at the 10 cent bet it was six percent approximately six percent of the value of naspers at that time and it and Nas was made you know hundreds of bets everything else really didn't matter there were only two things that mattered buying 10 cents and more importantly not selling tencent so the circle the wagons concept comes from
Questionerconcept comes from the 19th century on the American frontier so when the pioneers and the settlers were moving West to you know stake out and take over land and start farming it and so on these wagons used to get attacked by the American Indians and the defensive posture they took to defend against the Indians was to circle the wagons which means you know you put everything your crown jewels in the center of the circle and then you fight and you try to protect the center and it's a similar Concept in investing with the nifty 50 with Walmart you really need to not touch it it only works if you don't touch it similarly with See's candy and American Express and Coke for for Berkshire you know all of these you know hiring Ajit Jain and so on you need the long Runway and lastpers needs the very long Runway with 10 cent and so the key in investing
Warren10 cent and so the key in investing is to recognize two things one we're going to make a lot of mistakes two this is a very forgiving business you can be wrong even 98 of the time still come out smelling really nice and three that is only going to happen if you are able to buy businesses with great economics at reasonable valuations and then hang on to them forever so when they get fully priced they don't get sold when they get overpriced they don't get sold it's only possibly when they get completely ridiculously egregiously overpriced that you can consider selling and so this framework of circle the wagons is very fundamental I think it's very hard to beat the market if you don't have this framework because you're going to be cutting the flowers and watering the weeds and what we need to do is make sure we don't cut the flowers
Questionerdon't cut the flowers and it really doesn't matter whether you water the weeds or not but the important thing is you just don't cut the flowers it's okay if you want to water the weeds
Questioneryeah it's uh it's so well said Madison and I think you you brought up this stat um of the index is like five percent that generates all their turns because the index is too dumb to sell Amazon and and alphabet so so they're not cutting the flowers and and then you had this joke where you're like yeah and you don't want to pay up for it good luck you know good luck finding them and of course there are exceptions where you can get a wonderful wonderful company for for small multiple but you know it is that's why we hang out in Istanbul that's yeah you know so you have to see how the jigsaw puzzle fits so we have to find the great businesses and we have to go fishing where the fish
Questionerand we have to go fishing where the fish are perhaps we can talk about one of your previous uh Holdings shinoken uh which I know there are also some cultural differences in in terms of Japan and how they do Capital location but could you paint some color around why are founders who are clearly very good at Capital allocation not necessarily good at buying back their own stock whenever it's clearly below their their liquidation value which you know they would know better than anyone but they were liquidation value is of their assets so why is that the case
Todd Combsyeah so just to give you an update on shinoken there was a take under and they did a tender offer offering a small premium and they took the company private and so the founder with some investors basically in effect did what you're suggesting they should do and it took them some time to understand
Todd Combsit took them some time to understand we had a number of conversations I had a number of conversations with Chino kin including I actually sent them a PowerPoint in Japanese on the benefits of BuyBacks explaining because I realized that a builder may not understand that you know entrepreneurial Builder and what ended up happening actually they took my advice in very large doses so instead of instead of nibbling at a buyback like I was suggesting I mean we had already sold the stock because we were a little bit frustrated that they were not really acting the way they should because they had significant amounts of cash flow and they could retire significant number of shares but they were nibbling it was a very small amount that they were buying back and and then we exited and I think a year or two later they basically took one big gap
Todd Combsone big gap and bought it all at a actually a spectacular discount to what the business was worth shineken is was a exceptional business because it has very strong recurring revenues from all the properties they're managing it's I mean the visibility into cash flows go out you know many many years it's actually a exceptional business and one of the things that attracted me to shineken in the first place was that it was founder run and that he did not fit the template of most Japanese managements Most Japanese managements and Boards run the business for the benefits of the employees they do not run the business for the benefit of the shareholders so their number one concern is to make sure that the business is very stable and can survive downturns without layoffs and the shareholders pay a very big price for a business that takes that approach
Questionerfor a business that takes that approach and so I generally find Japan difficult to invest in for two reasons that's one reason and the second is the demographics of the declining population so last year 1.6 million Japanese citizens died and 800 000 new ones were born so we're looking at almost a net 1 million reduction in the population in a single year and South Korea is even more extreme than that so we did see founder act very rationally eventually for his own self-interest in the case of race as I think that again they were very focused on building and they have very much woken up to the fact that they blew it I think that if they look back they would they wish they had you know given a 50 premium and bought the whole company taking the whole company private for example and they've been trying to fix that mistake by increasing their Holdings they've been
Questionerincreasing their Holdings they've been buying back shares in the last last couple of years or so so they did wake up to the fact that um or we should have approached this differently but it's it's not easy for CEOs even founder-led CEOs to look at things like BuyBacks basically what ends up happening is you see cash leave your Treasury and you don't immediately see a pop in the stock price so you see something go away and you don't see anything on the other side so it's really you have to have a kind of faith the way Henry Singleton had faith that when you retire a very large number of shares and of course you're going to see the stock react to that
Questionerwell thank you for uh for elaborate on that um and thank you for opinions and color running so if we look at the the stock market or if you look at the game of investing well as a game
Questionerinvesting well as a game umumum has that changed since since you startedhas that changed since since you startedhas that changed since since you started in 1999 and if it hasin 1999 and if it hasin 1999 and if it has how have you adapted to the new rules ofhow have you adapted to the new rules ofhow have you adapted to the new rules of the gamethe gamethe game
Ted Weschlerwell I very much enjoy the gamewell I very much enjoy the gamewell I very much enjoy the game and one of the things with thisand one of the things with thisand one of the things with this particular game it's actually veryparticular game it's actually veryparticular game it's actually very similar to bridgesimilar to bridgesimilar to bridge is that you know Bridge is a game thatis that you know Bridge is a game thatis that you know Bridge is a game that would take you 15 minutes to learnwould take you 15 minutes to learnwould take you 15 minutes to learn and you cannot Master it in a lifetimeand you cannot Master it in a lifetimeand you cannot Master it in a lifetime so you can keep learning forever there'sso you can keep learning forever there'sso you can keep learning forever there's really no Plateau that shows up inreally no Plateau that shows up inreally no Plateau that shows up in Bridge even if you're playing 30 40Bridge even if you're playing 30 40Bridge even if you're playing 30 40 hours a week for your whole life youhours a week for your whole life youhours a week for your whole life you would still be learningwould still be learningwould still be learning and I think investing is very similar inand I think investing is very similar inand I think investing is very similar in the sense that this is a a game with athe sense that this is a a game with athe sense that this is a a game with a lot of twists and turns and anytime youlot of twists and turns and anytime youlot of twists and turns and anytime you look at a businesslook at a businesslook at a business the my rate of factors that affect wherethe my rate of factors that affect wherethe my rate of factors that affect where it might be in the long runit might be in the long runit might be in the long run are so diverse and some of them you mayare so diverse and some of them you mayare so diverse and some of them you may be able to understand some of them maybe able to understand some of them maybe able to understand some of them may be within your circular competence a lot
Questionerbe within your circular competence a lot of them may not be so you know lifelong learning is going to serve you very well so I think I am as excited about the investing game as I was nearly 30 years ago when I was just getting started with this but I think what has happened in the previous almost three decades is that more competence has been built up more mental models have been refined and Incorporated and so the pattern recognition is probably faster now than it used to be and it's broader now than it used to be
Questionerinteresting I want to talk a bit about uh shares and and dilution and buying back shares it's just just it's just such a such a fascinating thing and you I heard you talk about uh in the r uh over the past few years and how they have been done be doing a a wonderful job buying back shares uh they've also been um the Lumi sum this
Questionerthey've also been um the Lumi sum this year's uh giving toyear's uh giving toyear's uh giving to she has to management and and whatnotshe has to management and and whatnotshe has to management and and whatnot and do you have a threshold for how muchand do you have a threshold for how muchand do you have a threshold for how much shareholder dilution you will tolerateshareholder dilution you will tolerateshareholder dilution you will tolerate in companies you invest inin companies you invest inin companies you invest in
Warrenwell you knowwell you knowwell you know we would we would ideally likewe would we would ideally likewe would we would ideally like compensation I think you can you can setcompensation I think you can you can setcompensation I think you can you can set a compensation and incentives quite wella compensation and incentives quite wella compensation and incentives quite well without giving out equitywithout giving out equitywithout giving out equity and you could encourage managementsand you could encourage managementsand you could encourage managements to buy equityto buy equityto buy equity and I think for example constellationand I think for example constellationand I think for example constellation software does that and they do ansoftware does that and they do ansoftware does that and they do an excellent job Berkshire does that in theexcellent job Berkshire does that in theexcellent job Berkshire does that in the sense that does a lot of the Berkshiresense that does a lot of the Berkshiresense that does a lot of the Berkshire managers havemanagers havemanagers have significant ownership of Berkshire butsignificant ownership of Berkshire butsignificant ownership of Berkshire but they basically taken after tax earningsthey basically taken after tax earningsthey basically taken after tax earnings and bought it with those earningsand bought it with those earningsand bought it with those earnings so and that's worked out well for themso and that's worked out well for themso and that's worked out well for them and everyoneand everyoneand everyone sososo I think Silicon ValleyI think Silicon ValleyI think Silicon Valley and the tech world is overdosed on aand the tech world is overdosed on aand the tech world is overdosed on a certain modelcertain modelcertain model you know which is that you know you giveyou know which is that you know you giveyou know which is that you know you give away equity
Questioneraway equity to everyone uh and their brother and you know boards don't understand the value of this equity and many times CEOs don't understand it and because it is non-cash it becomes attractive because you're not really using the company's cash so one good thing that happened in accounting is that Gap accounting rules changed a while back to force them to you know treat stock based compensation as an expense and to show it as as an expense on the income statement and so the companies have gone to you know metrics like adjusted ebitda or adjusted net income and adjusted whatever you know yeah so it's it's an unfortunate State of Affairs it is sub-optimal we can still do well in in some businesses even with that drag you can still work out okay but it's far from ideal yeah I'm happy to say that because it it sounds like such a
Questionersounds like such a it sounds like such a plausible thing that you give out options everyone's now an owner so now everyone's going to work a lot harder and what you basically made me see is just that existing shareholders are being deluded it's heads they win and Tails they don't lose you know and so there's no real skin in the game there and I I really like the plan that Mark Leonard put in place at constellation I think that if if you're if you don't believe that you know just cash comp alone is gonna do it for you you could go with a plan like that and the results at constellations speak for themselves
Questioneryeah I'm happy that you mentioned constellation I want to say it's between 25 and 75 of the compensation or bonuses I should say that has to be have to be uh bought back in the open market and Market lender is just amazing you know
QuestionerMarket lender is just amazing you know he now he's he's traveling a bit more he now he's he's traveling a bit more he now he's he's traveling a bit more comfortable than he used to but he's also paying it out of pocket uh which is you know it's an example yeah and he you know it's an example yeah and he you know it's an example yeah and he takes no salary takes no salary takes no salary he has no salary and no bonus he has no salary and no bonus he has no salary and no bonus because his owner and he's thinking like because his owner and he's thinking like because his owner and he's thinking like an owner yeah an owner yeah an owner yeah but you can contrast that for example but you can contrast that for example but you can contrast that for example with someone like Larry Ellison with someone like Larry Ellison with someone like Larry Ellison at Oracle so one can argue Larry is a at Oracle so one can argue Larry is a at Oracle so one can argue Larry is a Founder he has a significant ownership Founder he has a significant ownership Founder he has a significant ownership stake stake stake why would he need a stock based why would he need a stock based why would he need a stock based Compensation Plan Compensation Plan Compensation Plan to be aligned with other shareholders to be aligned with other shareholders to be aligned with other shareholders but if you study Oracle and you look at but if you study Oracle and you look at but if you study Oracle and you look at the Historical amount of the Historical amount of the Historical amount of compensation that's gone to Ellison compensation that's gone to Ellison compensation that's gone to Ellison it's been quite Spectacular Now it's been quite Spectacular Now it's been quite Spectacular Now he would argue that he's worth it and I he would argue that he's worth it and I he would argue that he's worth it and I would say probably would say probably would say probably absolutely he's probably worth it but he absolutely he's probably worth it but he absolutely he's probably worth it but he would have worked just as hard would have worked just as hard would have worked just as hard because he had the incentive with the because he had the incentive with the because he had the incentive with the ownership ownership ownership and so it was a add-on
Questionerand so it was a add-onand so it was a add-on that was a tax to thethat was a tax to thethat was a tax to the shareholders that never happened withshareholders that never happened withshareholders that never happened with Bill Gates at MicrosoftBill Gates at MicrosoftBill Gates at Microsoft so Gates basically always had a veryso Gates basically always had a veryso Gates basically always had a very modest salarymodest salarymodest salary and never granted himself any options orand never granted himself any options orand never granted himself any options or anything like thatanything like thatanything like that you know consolation software is it's soyou know consolation software is it's soyou know consolation software is it's so interesting so many reasons and you sortinteresting so many reasons and you sortinteresting so many reasons and you sort of like like with like with so manyof like like with like with so manyof like like with like with so many things you're like it's almost likethings you're like it's almost likethings you're like it's almost like whenever you look at an as a managerwhenever you look at an as a managerwhenever you look at an as a manager you're like you want a long Runway butyou're like you want a long Runway butyou're like you want a long Runway but you also want the long track record soyou also want the long track record soyou also want the long track record so you're like yeah consolation softwareyou're like yeah consolation softwareyou're like yeah consolation software that makes a lot of sense to have trackthat makes a lot of sense to have trackthat makes a lot of sense to have track record but now they're like 50 billionrecord but now they're like 50 billionrecord but now they're like 50 billion plus what mod cap so it's probably goingplus what mod cap so it's probably goingplus what mod cap so it's probably going to be hard to do for the next twoto be hard to do for the next twoto be hard to do for the next two decades well but I would also but Idecades well but I would also but Idecades well but I would also but I would also not bet against markwould also not bet against markwould also not bet against mark Mark has an uncanny abilityMark has an uncanny abilityMark has an uncanny ability to put wrap pull rabbits out of the hatto put wrap pull rabbits out of the hatto put wrap pull rabbits out of the hat so I don't have an investment in
Todd Combsso I don't have an investment in constellation and many times I think it's a mistake even at the size and the multiple that they're at because the the quality of the manager is so exceptional and the business model is so exceptional in many ways constellation is embryonic so I would not be surprised at all if constellation continues to do very well in the years ahead I would also not be surprised at all if Leonard takes the company in some different direction where he might allocate you know he's not really a software guy he's a capital allocator and he found a mousetrap that worked really well and he that mousetrap had a deep vein and they continue to mind that that vein of great opportunities but I know that they're looking at other you know sectors and areas that could hold promise to deploy capital
Questionerum pristine so so I get I guess on on that node I've heard you say it and again I'm probably
Questionerheard you say it and again I'm probably paraphrasing but like don't look too much about what the management is saying like look at the track record like that that's what what's important if you look at a Serial acquire what what is there to look out for other than than the track record assume that the management do not change would you have anything when you're like this is interesting
Questionerwell usually I don't I'm not a big fan of roll-ups and I'm not a big fan of Serial acquirers I think that companies like constellation and Berkshire are Cut From a Different Cloth so if you look at constellation they have a internal list of about 40 000 vertical Market software companies small companies you know 40 000 of them and they nudge them probably two or three times a year and basically and they have a whole Biz Dev team m a team so basically they'll kind of
Otherm a team so basically they'll kind of like what Buffett would do with his letters to different companies like Ikea he'd say Hey you know if you ever decide to do something please think of us you know that that sort of thing and amongst these 40 000 companies you know there are founders who are getting old who may want to retire they could be divorces there could be other reasons why somebody wants to sell and move on and for most of them concentration might be the only buyer they these are usually not rapidly growing companies they may have stable revenues and cash flows or might have just very very slow growth and so private Equity is not interested venture capital is not interested and even even to venture capitalists actually constellations a great exit so they make you know 20 bets in a portfolio and one outlier is going to generate
Questionerand one outlier is going to generate most of the returns they hope and you know 15 or 17 end up being either they're going to disappear or just be on you know Flatline you know just kind of limping along and the partners of these Venture funds do not don't want to sit on those boards anymore and waste their time so they want those companies off their off their their ownership and so a place that consolation is perfect for them you know they can stop doing the babysitting they get rid of these things that they thought might have a great moonshot now they know there's no moon chart and they can focus on their one or two outliers and take it from there so though in effect constellation is in the funeral business and the funeral business like I wrote about in my first book Mosaic is a really good business so somebody has to take care of these businesses at some
Othertake care of these businesses at some point and constellations the caretaker and they're really good at it so when they acquire a business they have a lot of ways in which they can help the business not by being overbearing but by telling them listen we've got seven others like this and these are what we've learned could be helpful and and so on so yeah I think I think that mousetrap is exceptional and they're the only ones with that mousetrap and we also talked about Alibaba in previous episode and text harvesting and all that stuff and so do we as investors whenever we make a mistake wait for the stock to revert back to the intrinsic value again knowing that it can take a long time before that happens and perhaps you're even wrong in a new assessment of the intrinsic value as as much as we cut it or do we start do we do we caught our losses do we challenge
Questionerdo we caught our losses do we challenge the premises of the question uh please
Questionerthe premises of the question uh please do if if you want
Questionerdo if if you want um and how do you think about this
Questionerum and how do you think about this realizing you made a mistake and the opportunity cost yeah so you know we
Otherrealizing you made a mistake and the opportunity cost yeah so you know we have to separate the signal from the noise
Otherhave to separate the signal from the noise and as we saw with these examples of the nifty 50 and naspers and Buffett and so on is this is a business with a high error rate
Otherand as we saw with these examples of the nifty 50 and naspers and Buffett and so on is this is a business with a high error rate even the best investors will be wrong at least half the time and and so one of the backdrops we have to keep in mind is that if you have a portfolio of 10 stocks
Othereven the best investors will be wrong at least half the time and and so one of the backdrops we have to keep in mind is that if you have a portfolio of 10 stocks more than likely half are mistakes now you may not lose money or them they may not just compound at a high rate they may you know be four percent compounding instead of 15 that you're expecting for example so you don't lose money but you don't make the money you were thinking you'll make so knowing that there's a high error
Todd Combsso knowing that there's a high error rate and separating the signal from the noise when you have a good amount of data telling you that the signal is saying that you were probably wrong then yeah you cut your losses then you move on and I think in the case of Alibaba we saw we saw actions by the Chinese government that quite frankly become very hard to handicap in the future so we've seen a bunch of actions in the past which we didn't see when the investment was made and those actions destroyed value for the investor and we don't know what the end game is we don't so I I would say that you know what the Chinese government does and the impact it has on Alibaba goes into the two hard pile we just don't know and and the second is you know which is one of the things that I've always I've tried to avoid the mega caps
Todd Combsthe mega caps and you know and you know and you know I made an exception for Alibaba which I made an exception for Alibaba which I made an exception for Alibaba which didn't help me and I moved that didn't help me and I moved that didn't help me and I moved that investment to process which I think investment to process which I think investment to process which I think tencent is a tencent is a tencent is a is a better bet is a better bet is a better bet but I think the fact remains that if but I think the fact remains that if but I think the fact remains that if you're buying you're buying you're buying a business with 100 or 200 or 300 a business with 100 or 200 or 300 a business with 100 or 200 or 300 billion dollars billion dollars billion dollars market value market value market value what is the runway what is the runway what is the runway you know that remains a question now you you know that remains a question now you you know that remains a question now you could buy Apple at 200 billion and it could buy Apple at 200 billion and it could buy Apple at 200 billion and it could go to 2 trillion or two and a half could go to 2 trillion or two and a half could go to 2 trillion or two and a half trillion trillion trillion and that's fine but those are few and and that's fine but those are few and and that's fine but those are few and far between far between far between so so so my bias has been to my bias has been to my bias has been to try to look for businesses try to look for businesses try to look for businesses that were much smaller where the the that were much smaller where the the that were much smaller where the the runway was not in question runway was not in question runway was not in question that you know there was room for them to that you know there was room for them to that you know there was room for them to to grow to grow to grow it doesn't mean that you know they're it doesn't mean that you know they're it doesn't mean that you know they're always going to work out but that's always going to work out but that's always going to work out but that's that's the goal is that they have that's the goal is that they have that's the goal is that they have they're not sitting at these they're not sitting at these they're not sitting at these massive Mega cap numbers where you're massive Mega cap numbers where you're massive Mega cap numbers where you're saying okay saying okay saying okay even a double from here may not be that
Questionereven a double from here may not be that easy very interesting thank you for sharing that uh Manish I wanted to talk to you about uh Power versus Force which is uh this uh book by David Hawkins and one of the lessons you took away from the book is um that we subconsciously can know if a person is lying a big pattern recognition what not there's just something there we don't really like to be around them at least it does for us so so perhaps if you could share your your journey in how you started cutting out the smaller than the big lies and what that has meant for you and the way you live your life today
Otheryeah well I think that's a great question it it is going to feel uncomfortable I think that it is the small white lies are just very comfortable you know you don't you don't hurt anyone and why would anyone care and just move on you know like oh you your dress looks
Otheryou know like oh you your dress looks great you know you know how is anyone ever gonna know that you really thought it didn't look great you know and so you move on but it's not authentic and I think that many times when we meet people we don't know why but we sometimes just don't want to be around certain people we can't put our finger on it and it may be that there's too much implicit and explicit lies around what that person is saying or doing and so I think that the inversion of that is that if you want to build trust you have to make a commitment to the truth and the truth is going to not be easy many times but I think that once you kind of cross that Rubicon and you know are on the other side what you're going to find is that trust goes up a lot and basically this world functions on trust it doesn't function on contracts you know people do business of people
Questioneryou know people do business of people because they trust them because they trust them because they trust them and the best contracts are ones that you and the best contracts are ones that you and the best contracts are ones that you never look at after you sign them never look at after you sign them never look at after you sign them and so I think that if you if you want and so I think that if you if you want and so I think that if you if you want to have to have to have a lot of success in business a lot of success in business a lot of success in business you have to have a very high standard you have to have a very high standard you have to have a very high standard for Candor and integrity for Candor and integrity for Candor and integrity and if you want to have you know great and if you want to have you know great and if you want to have you know great deep relationships great friendships deep relationships great friendships deep relationships great friendships then again that that same thing is then again that that same thing is then again that that same thing is really important I think your really important I think your really important I think your your friends need to know you've got their back and that you've got their back and that you've got their back and that when they come to you they're not when they come to you they're not when they come to you they're not they're going to get very authentic they're going to get very authentic they're going to get very authentic answers you know even if though the answers you know even if though the answers you know even if though the answers are not what they want to hear answers are not what they want to hear answers are not what they want to hear and so those are I think these are these and so those are I think these are these and so those are I think these are these are very powerful principles where are very powerful principles where are very powerful principles where once you gonna get comfortable with it once you gonna get comfortable with it once you gonna get comfortable with it and start to apply it in your life and start to apply it in your life and start to apply it in your life the paybacks are so enormous that it the paybacks are so enormous that it the paybacks are so enormous that it just becomes a no-brainer I think any just becomes a no-brainer I think any just becomes a no-brainer I think any other way of living is kind of dumb and
Otherother way of living is kind of dumb and it's going to make your life a lot more pleasant you know it's very easy when you don't lie because you don't have to remember your lies you know this makes it really simple anytime you're saying something or talking about something you don't have to remember oh I said this and I said that and I got to keep consistent with that or any of that just say the truth you know and and that's the end it's um like they say it's uh it's simple but not easy but it's a it's a great journey to go on and it's a journey which is going to lead to a lot of growth so it will feel unnatural and uncomfortable at times but you'll yourself start noticing very quickly that you feel so much better that that that's so true and just as a personal anecdote I in my early 20s I told all my my friends and families I didn't want to go to their birthdays or
Otherdidn't want to go to their birthdays or go to weddings or anything like that because it just I feel uncomfortable and and it's hard and and this is you next Tuesday it's not because I don't like you it's because I don't want to sit next to your uncle and six hours whenever I could be reading a book or doing something else I really want and I can say that's been one of the best decisions that I've made but it's hard
Otheryeah I think Candor in that situation you'll be surprised and you probably already seen that that your friends and relatives really appreciate you for the candor and and they'll understand you know you know weddings you know my my take on weddings are painfully boring you know and you know they just they just I mean the only I would say the only Redeeming Grace of weddings is if you get to meet a bunch of long lost you
Questioneryou get to meet a bunch of long lost you know friends and relatives that you've been longing to hang out with that can be a great upside but you are also going to meet a lot of dysfunctional relatives and and hang out with them as well and that may not be so much fun
Otheryeah so I think the the Candor is is will be welcomed by everyone
Questionerso so on that note uh so I wanted to ask the the last question I have here for today my wife and I have a we have a hard time talking about money in some settings with with other people how has your journey into becoming Financial independent and the success you have today uh how has that changed your relationships with the people you knew before and after you got Financial independent
Otheryeah so actually what what I have found is that you know your remarks about people don't like to talk about money I think that is universal across
QuestionerI think that is universal across cultures so it's not just I don't have a bunch of friends who love to talk about money okay there's no such thing and and you know guy always gets a chuckle because many times he and I will be in a conversation with someone who's having has some important issues folk in the road trying to figure out what to do you know I'll be asking a bunch of questions to try to get the data to try to help the person and one of the first questions will go to really understand in detail the financial situation you know what's the network what's the income what's the expense and all that and guy always kind of goes into a cubbyhole said oh there we go again monish asking all these uncomfortable questions you know and but he's he's now learned that monish is going to ask those questions okay and and what I find surprising is
Otherokay and and what I find surprising is the people who hear those questions who have never answered those questions to anyone openly give the answer and then they say I want to let you know I have never discussed this with anyone no one knows this please don't I said it's all confidential I'm not we're not going to talk about it to anybody but people actually get relieved to be able to share the data recently I had a call with a friend who wanted advice career advice you know and he was he's at an age where he could retire or he could take job a or Joby or whatever and one of the first things I asked him is I I needed to know his financial situation before I could tell him what made sense for him you know and so he shared he shared his information that he's never shared with anyone you know other than his wife has never talked about it I don't think his kids are
Questionerabout it I don't think his kids are aware of it and so but but that gave me the information to be able to be most helpful to him and and also I think he felt relieved that he was not having a conversation around eggshells you know where I'm in a vacuum you know trying to uh say well if this is your situation then do this I actually knew exactly what his situation was and I could tell him what I would do in that situation so yeah I mean I think I think people don't like to talk about money but many times when they're confronting different issues those conversations can be very can lighten the Lord for them and I think it's important that in a safe and confidential environment with the people near you when you're trying to you know help them with some things where that information would be relevant that you go there you go to the the land
Questioneryou go there you go to the the land you're not supposed to go to that's okay wonderful wonderful wonderful wonderful to set my news and and perhaps you should end on on that note thank you
Questionerso much for your your time it's uh it's always a pleasure having this annual call here in in April just before before Berkshire so I just want to say say thank you on behalf of uh of all our listeners steak I always enjoy hanging out with you and it was a a wonderful pleasure for me to have you join as an investor so that added another dimension to our relationship
Otherthat's wonderful and though I still feel you've kept the the objectivity which is great uh yes I do I do enjoy hanging out with you and I also want to say that you and Preston are doing God's work I enjoy your podcast a lot I listen to many of your guests and I think you've done a tremendous service to the community with the podcast so thank you for that
Questionerwow I don't think we can end on any better notes so so I just want to humbly say thank you it means a lot