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Questionerso first of all uh Arin it's a pleasure and an honor to uh uh address your class one more time I think is this the sixth time you said
Otheryes I think uh I think it is and we're incredibly grateful uh to you for spending so much time with us over the years okay no it it helps pass the time so that's great um um anyway so uh our uh our our our topic for today uh at least During the period when uh when I have a monologue going with you guys is uh the Quest for 10 to 100 Baggers so that's the uh that's the uh subject of the talk and um and I'll um I have a lot of lot of material to cover and uh so I'll move this along at a at a pretty good clip I think uh I think it'll go for at least an hour it may go a little bit longer um and um and um and so maybe you can uh you can mute on your end I think we might get a little bit better uh better audio
Otherlittle bit better uh better audio without the feedback without the feedback without the feedback um and um and and so um so for me you um and um and and so um so for me you um and um and and so um so for me you know the the the saying that the best know the the the saying that the best know the the the saying that the best way to learn is to way to learn is to way to learn is to teach uh certainly has held true and um and uh one of the one of the big drivers and uh one of the one of the big drivers and uh one of the one of the big drivers for me uh in doing this talk with this for me uh in doing this talk with this for me uh in doing this talk with this particular uh subject is to really to particular uh subject is to really to particular uh subject is to really to learn and in fact I I learned quite a learn and in fact I I learned quite a learn and in fact I I learned quite a bit in um in putting uh uh putting the bit in um in putting uh uh putting the bit in um in putting uh uh putting the talk together and uh and I'm hoping it talk together and uh and I'm hoping it talk together and uh and I'm hoping it will be helpful uh certainly to all of will be helpful uh certainly to all of will be helpful uh certainly to all of you but I'm also hoping it's helpful to you but I'm also hoping it's helpful to you but I'm also hoping it's helpful to me in the future and um and and the theme me in the future and um and and the theme me in the future and um and and the the reason I I chose this reason I I chose this reason I I chose this topic um was uh because uh when I first topic um was uh because uh when I first topic um was uh because uh when I first started started started investing uh uh right right at the investing uh uh right right at the investing uh uh right right at the beginning and uh I heard about Warren beginning and uh I heard about Warren beginning and uh I heard about Warren Buffett for the first time in Buffett for the first time in Buffett for the first time in 1994 uh it's about 22 years ago and uh I 1994 uh it's about 22 years ago and uh I 1994 uh it's about 22 years ago and uh I I happened to have about a million I happened to have about a million I happened to have about a million dollars with me at the time uh which was dollars with me at the time uh which was dollars with me at the time uh which was just extra money first time I had uh any
Otherjust extra money first time I had uh anyjust extra money first time I had uh any kind of money of that type in my life Ikind of money of that type in my life Ikind of money of that type in my life I had sold some Assets in my in myhad sold some Assets in my in myhad sold some Assets in my in my business and so the million was sittingbusiness and so the million was sittingbusiness and so the million was sitting there and uh I had studied about buffetthere and uh I had studied about buffetthere and uh I had studied about buffet and compounding and and all of that andand compounding and and all of that andand compounding and and all of that and I said well you know um why don't we umI said well you know um why don't we umI said well you know um why don't we um try to figure out whether I can actuallytry to figure out whether I can actuallytry to figure out whether I can actually do this and uh invest a million using uhdo this and uh invest a million using uhdo this and uh invest a million using uh the principles uh that I had learnedthe principles uh that I had learnedthe principles uh that I had learned from from Buffett and of course at thatfrom from Buffett and of course at thatfrom from Buffett and of course at that time I only had about part-time about 12time I only had about part-time about 12time I only had about part-time about 12 months of Buffett learning under me ifmonths of Buffett learning under me ifmonths of Buffett learning under me if you will and um so very quickly Iyou will and um so very quickly Iyou will and um so very quickly I decided that uh I would basically putdecided that uh I would basically putdecided that uh I would basically put the million into 10 stocks uh kind ofthe million into 10 stocks uh kind ofthe million into 10 stocks uh kind of 10% bets which was very similar to the10% bets which was very similar to the10% bets which was very similar to the way P funds operated later and um but asway P funds operated later and um but asway P funds operated later and um but as uh as part of that uh you know uh groupuh as part of that uh you know uh groupuh as part of that uh you know uh group of stocks I wanted to invest in I wasof stocks I wanted to invest in I wasof stocks I wanted to invest in I was interested at the time in investing in ainterested at the time in investing in ainterested at the time in investing in a few stocks in India uh because a few of
Questionerfew stocks in India uh because a few of them had caught my attention and they looked quite compelling uh but at that time in 1994 um it was somewhat it was quite cumbersome actually to uh to invest in India especially as a a US citizen and a foreign investor coming into India and um it took a few months to do the paperwork and then I had to physically go to Mumbai and um and execute these trades and then the U the Indian government at the time had uh set up a deal where they said that if a if a foreign uh uh person non-resident Indian came in to invest uh in the equity markets they could repatriate create everything back in dollars and if they uh if the gains were long-term there were no long-term gain taxes uh so I would only be taxed in the US which was great and uh so I like that um but I was very skeptical whether a
Otherum but I was very skeptical whether a country with all these exchange controls would ever actually allow that or actually execute that in a seamless manner so I had some skepticism about whether uh investments in India would really be kind of easy to get back to the US and such so because of those concerns I limited uh my investments in India to just $30,000 so out of the million I only allocated about 3% to India and uh the $30,000 half of that uh went into one company uh uh which is uh Saum computers and uh which I'll talk about in in a second um but uh I made four I made four in investments in India at the time uh saam was the largest it was approximately half of the pie and uh and then the uh the other three uh two of them were corer companies kind of like FedEx and UPS uh they were blue dot and Sky pack Courier and basically the idea there was
QuestionerCourier and basically the idea there was that India just has had terrible uhthat India just has had terrible uhthat India just has had terrible uh Postal Service and if you really neededPostal Service and if you really neededPostal Service and if you really needed kind of any kind of U uh reliability inkind of any kind of U uh reliability inkind of any kind of U uh reliability in getting packages to destination yougetting packages to destination yougetting packages to destination you really didn't or couldn't use uh thereally didn't or couldn't use uh thereally didn't or couldn't use uh the postal system you had to rely on kind ofpostal system you had to rely on kind ofpostal system you had to rely on kind of private companies so I thought theyprivate companies so I thought theyprivate companies so I thought they would do really well as the economy grewwould do really well as the economy grewwould do really well as the economy grew and uh and the fourth company wasand uh and the fourth company wasand uh and the fourth company was actually the uh the broker I was usingactually the uh the broker I was usingactually the uh the broker I was using to do all of this I'd been veryto do all of this I'd been veryto do all of this I'd been very impressed with them in dealing with themimpressed with them in dealing with themimpressed with them in dealing with them uh Goldman Sachs had taken a 20% stakeuh Goldman Sachs had taken a 20% stakeuh Goldman Sachs had taken a 20% stake in them uh they were just extremely highin them uh they were just extremely highin them uh they were just extremely high quality so I felt again that theirquality so I felt again that theirquality so I felt again that their business had some uh good Tailwinds sobusiness had some uh good Tailwinds sobusiness had some uh good Tailwinds so so I made these four Investments but theso I made these four Investments but theso I made these four Investments but the uh the broker was kind of a last minuteuh the broker was kind of a last minuteuh the broker was kind of a last minute thing so I think I only invested aboutthing so I think I only invested aboutthing so I think I only invested about $1,500 in the broker and uh about uh$1,500 in the broker and uh about uh$1,500 in the broker and uh about uh 13,000 odd dollars went into the two13,000 odd dollars went into the two13,000 odd dollars went into the two corer companies and um one of the corer
Othercorer companies and um one of the corercorer companies and um one of the corer companies uh was a company called Bluecompanies uh was a company called Bluecompanies uh was a company called Blue Dot and um soDot and um soDot and um so uh when I when I made the uh and all ofuh when I when I made the uh and all ofuh when I when I made the uh and all of these all of these companies when I madethese all of these companies when I madethese all of these companies when I made this these Investments at that timethis these Investments at that timethis these Investments at that time India did not have dmat so after I madeIndia did not have dmat so after I madeIndia did not have dmat so after I made bought these shares I got physicalbought these shares I got physicalbought these shares I got physical certificates sent to me in Californiacertificates sent to me in Californiacertificates sent to me in California and these physical C certificates lookedand these physical C certificates lookedand these physical C certificates looked really really beat up and they lookedreally really beat up and they lookedreally really beat up and they looked really dilapidated and uh they lookedreally dilapidated and uh they lookedreally dilapidated and uh they looked just terrible they were like fallingjust terrible they were like fallingjust terrible they were like falling apart and so I was very skeptical aboutapart and so I was very skeptical aboutapart and so I was very skeptical about my ability to ever get my money backmy ability to ever get my money backmy ability to ever get my money back when I looked at these things uh butwhen I looked at these things uh butwhen I looked at these things uh but anyway in in 95 I just decided okay thisanyway in in 95 I just decided okay thisanyway in in 95 I just decided okay this is like you know buy and hold forever Iis like you know buy and hold forever Iis like you know buy and hold forever I stuck it at the bottom drawer of my deskstuck it at the bottom drawer of my deskstuck it at the bottom drawer of my desk and I said uh we're not going to touchand I said uh we're not going to touchand I said uh we're not going to touch these for for a decade or two just letthese for for a decade or two just letthese for for a decade or two just let them ride and then um uh what happenedthem ride and then um uh what happenedthem ride and then um uh what happened is that if you can put up the chart for
Otheris that if you can put up the chart for uh satam computers I think that's one of the first ones uh let me see what uh what number that is give me a second so I can get the same thing going here yeah I think satam is the first chart and uh these uh these uh hang on yeah so uh these uh these charts on yeah so uh these uh these charts basically uh reflect total return so they include all stock splits and they also include all dividends uh so they don't fully require uh uh basically reflect exactly what I paid uh because satam for example had a 10 to 1 stock split uh twice once did a 5 to 1 once it did a 2 to 1 uh but basically in 95 early 95 I bought the stock for about 40 OD rupees of between 40 and 45 rupees a share and I noticed that uh it had gone up a huge amount because uh if you can see that in the late 99 and early 2000 per period uh especially in 2000 it really took off it was about it was
Otherreally took off it was about it wasreally took off it was about it was around 2,000 Rupees from 45 in um by thearound 2,000 Rupees from 45 in um by thearound 2,000 Rupees from 45 in um by the end of 99 about uh uh about five yearsend of 99 about uh uh about five yearsend of 99 about uh uh about five years and then in 2000 it really took off andand then in 2000 it really took off andand then in 2000 it really took off and I said you know I know I want to holdI said you know I know I want to holdI said you know I know I want to hold these things forever satam was a companythese things forever satam was a companythese things forever satam was a company that I was very familiar with because Ithat I was very familiar with because Ithat I was very familiar with because I uh at the time was running an ITuh at the time was running an ITuh at the time was running an IT services company so I I knew theservices company so I I knew theservices company so I I knew the business as well and I obviously wasbusiness as well and I obviously wasbusiness as well and I obviously was dead centered in my circle of competencedead centered in my circle of competencedead centered in my circle of competence but uh I decided to take another look atbut uh I decided to take another look atbut uh I decided to take another look at detail about in with its financials todetail about in with its financials todetail about in with its financials to really understand what was going on whenreally understand what was going on whenreally understand what was going on when I bought the stock it was actuallyI bought the stock it was actuallyI bought the stock it was actually trading uh below the co the value of thetrading uh below the co the value of thetrading uh below the co the value of the real estate they had in India and theyreal estate they had in India and theyreal estate they had in India and they were growing very rapidly so thewere growing very rapidly so thewere growing very rapidly so the business actually was coming for free itbusiness actually was coming for free itbusiness actually was coming for free it was very cheap and uh great team andwas very cheap and uh great team andwas very cheap and uh great team and such and um you know when I studied itsuch and um you know when I studied itsuch and um you know when I studied it uh it was Trading had more than 100uh it was Trading had more than 100
Questioneruh it was Trading had more than 100 times earnings uh the whole dot boom was on at that time the bubble was on in full bloom and uh satam had spun out do uh and uh and uh and when they had spun out that do no they didn't spin it out to shareholders they had listed a a company which they still held a big share in uh that company got a huge valuation and in return uh satam's stock price reflected that valuation so anyway the stock that I had bought for about 45 rupees was trading at about 7,000 rupees and of course the exchange rates had moved against me but it was still more than 100x I mean the the 15,000 was sitting at over 1.5 million it was sitting uh at a huge number and and again I opened my desk drawer and I saw those dilapidated certificates which are now theoretically worth a 100 times what I had paid for them and I looked at them with a jaist eye because I said you
Otherthem with a jaist eye because I said you know who knows what these are worth who knows if they'll ever give me my money or if I can sell them or if the money gets stuck in India if it gets taxed uh I had a lot of variables that I didn't know about um and but when I studied satam's financials in early 2000 I said uh we're getting out of here we're not we're not interested here because this is uh you know definitely either fully priced or more likely overpriced and um so I contacted a broker and said I'm ready to sell all my satam shares and so I sent the shares back to them they sold them all in fact I sold within 5% or 10% of the absolute Peak price I I was amazed at uh how close I got to the absolute Peak and um and then they put the money uh in my Indian bank account which was linked to the brokerage account and then I asked the bank to
Questioneraccount and then I asked the bank to wire the money to the US and the next day the money was in my US bank account and it went went through completely seamlessly exactly as the Indian government has promised and I had um 1.5 million from the 15,000 which was great you know very well done moish I felt great you know the buffet thing was uh was working quite well and and of course I only told you about 15,000 out of the million I haven't told you about the 985 th000 yet which we'll get to uh in a second uh and then you know these other three stocks that I had bought in India uh they hadn't done much because none of the other three were what you would call what you would call new economy stocks I mean one was a uh broker and two two were CER companies very much kind of brick-and motor uh type businesses and uh at that time uh many of you U uh maybe maybe were in
Questionermany of you U uh maybe maybe were inmany of you U uh maybe maybe were in kindergarten or something or maybe inkindergarten or something or maybe inkindergarten or something or maybe in first grade perhaps uh but at that timefirst grade perhaps uh but at that timefirst grade perhaps uh but at that time even uh you know the day the NASDAQ preeven uh you know the day the NASDAQ preeven uh you know the day the NASDAQ pre peaked in March 2000 was the same daypeaked in March 2000 was the same daypeaked in March 2000 was the same day that Burkshire hit a multi-year low uhthat Burkshire hit a multi-year low uhthat Burkshire hit a multi-year low uh literally people were pulling theirliterally people were pulling theirliterally people were pulling their money out of uh kind of traditionalmoney out of uh kind of traditionalmoney out of uh kind of traditional stocks which they thought were losersstocks which they thought were losersstocks which they thought were losers and they were dumping it into pets.comand they were dumping it into pets.comand they were dumping it into pets.com and they were they were buying all itand they were they were buying all itand they were they were buying all it was a just a it was a frenzy um and itwas a just a it was a frenzy um and itwas a just a it was a frenzy um and it was a quite an intense frenzy in fact inwas a quite an intense frenzy in fact inwas a quite an intense frenzy in fact in in 22 years of investing I have neverin 22 years of investing I have neverin 22 years of investing I have never seen a bubble like the uh like the dotseen a bubble like the uh like the dotseen a bubble like the uh like the dot bubble um of um of 98 to 2000 if yoububble um of um of 98 to 2000 if yoububble um of um of 98 to 2000 if you will and um in fact I remember uh at thewill and um in fact I remember uh at thewill and um in fact I remember uh at the time I was living in Chicago and uh I umtime I was living in Chicago and uh I umtime I was living in Chicago and uh I um was taking a cab ride in the city and uhwas taking a cab ride in the city and uhwas taking a cab ride in the city and uh some Pakistani cab driver uh says to mesome Pakistani cab driver uh says to mesome Pakistani cab driver uh says to me in Uduumis and just for the small minority ofumis and just for the small minority ofumis and just for the small minority of people who didn't understand that uh
Questionerpeople who didn't understand that uhpeople who didn't understand that uh what he was saying is uh what's yourwhat he was saying is uh what's yourwhat he was saying is uh what's your perspective on Cisco and uh and when theperspective on Cisco and uh and when theperspective on Cisco and uh and when the Pakistani cab driver uh who doesn't knowPakistani cab driver uh who doesn't knowPakistani cab driver uh who doesn't know you you know starts talking to youyou you know starts talking to youyou you know starts talking to you before even saying hello uh like youbefore even saying hello uh like youbefore even saying hello uh like you know what do you think about Cisco youknow what do you think about Cisco youknow what do you think about Cisco you know that you are in the ultimate bubbleknow that you are in the ultimate bubbleknow that you are in the ultimate bubble of bubbles uh and uh and it's it's timeof bubbles uh and uh and it's it's timeof bubbles uh and uh and it's it's time to get out it's kind of like the Shoto get out it's kind of like the Shoto get out it's kind of like the Sho shine boy in 1929 outside the New Yorkshine boy in 1929 outside the New Yorkshine boy in 1929 outside the New York Stock Exchange giving you stock tips umStock Exchange giving you stock tips umStock Exchange giving you stock tips um so um so anyway the other three stocksso um so anyway the other three stocksso um so anyway the other three stocks hadn't done much and uh I held them forhadn't done much and uh I held them forhadn't done much and uh I held them for like another year it been like six orlike another year it been like six orlike another year it been like six or seven years and then I I sent them allseven years and then I I sent them allseven years and then I I sent them all to India and I told the broker sell themto India and I told the broker sell themto India and I told the broker sell them all because I said that you know we weall because I said that you know we weall because I said that you know we we had we had our adventure of investing inhad we had our adventure of investing inhad we had our adventure of investing in IND Indian stocks um they had theIND Indian stocks um they had theIND Indian stocks um they had the remainingremainingremaining 15,000 uh was worth somewhere there in15,000 uh was worth somewhere there in15,000 uh was worth somewhere there in the 20 25,000 range it hadn't gone up
Questionerthe 20 25,000 range it hadn't gone up much but hadn't gone down and one of the stocks uh uh which was uh Sky pack Courier uh which is uh slide number four uh if you just put on uh yeah slide number four Arin you can see that sky sky pack Courier actually didn't do much it just basically fizzled out and uh so I lost about half the money I invested in sky sky pack but um so if you go to the previous slide which is Blue Dot um so I sent these stocks to India to sell and the broker sold them all and he said there were just 100 shares of blue doart which they claimed were fake uh these were fake shares they said so I said well if they're fake shares I bought them from you so you have you know reps and warranties uh on these fake shares they said no Indian law doesn't give us any reps warranties to you this is entirely your your fault that you didn't check
Otheryour your fault that you didn't checkyour your fault that you didn't check these shares so they sent those 100these shares so they sent those 100these shares so they sent those 100 shares back to me and uh but I didn'tshares back to me and uh but I didn'tshares back to me and uh but I didn't really care much it it was it was a kindreally care much it it was it was a kindreally care much it it was it was a kind of wor like you know I think the uh theof wor like you know I think the uh theof wor like you know I think the uh the it was worth like $200 or something andit was worth like $200 or something andit was worth like $200 or something and you know I had cashed out more than 1.5you know I had cashed out more than 1.5you know I had cashed out more than 1.5 million and and such so I really didn'tmillion and and such so I really didn'tmillion and and such so I really didn't care much I just kept those shares andcare much I just kept those shares andcare much I just kept those shares and then you know uh just very recently Ithen you know uh just very recently Ithen you know uh just very recently I looked at uh that starts stocklooked at uh that starts stocklooked at uh that starts stock certificate again about a year back andcertificate again about a year back andcertificate again about a year back and I looked at it I said you know thisI looked at it I said you know thisI looked at it I said you know this doesn't look fake to me it looks justdoesn't look fake to me it looks justdoesn't look fake to me it looks just like all the other stocks looked so Ilike all the other stocks looked so Ilike all the other stocks looked so I contacted uh the broker again and by nowcontacted uh the broker again and by nowcontacted uh the broker again and by now I had no account or anything with themI had no account or anything with themI had no account or anything with them while I closed all of that and a newwhile I closed all of that and a newwhile I closed all of that and a new cast of characters had come in becausecast of characters had come in becausecast of characters had come in because it had been so long I and I I didn'tit had been so long I and I I didn'tit had been so long I and I I didn't tell them they were fake I just said Itell them they were fake I just said Itell them they were fake I just said I have these 100 shares and I like to sellhave these 100 shares and I like to sell
Questionerhave these 100 shares and I like to sell them they said yeah send them to us they said yeah send them to us they said yeah send them to us we'll demat them we'll basically make we'll demat them we'll basically make we'll demat them we'll basically make them electronic and we'll sell them so I them electronic and we'll sell them so I them electronic and we'll sell them so I sent it to them and they said are they sent it to them and they said are they sent it to them and they said are they are the shares genuine they said yeah are the shares genuine they said yeah are the shares genuine they said yeah they're genuine there's no issues we they're genuine there's no issues we they're genuine there's no issues we sell them so I said okay uh please go sell them so I said okay uh please go sell them so I said okay uh please go ahead and sell them and um when I sold ahead and sell them and um when I sold ahead and sell them and um when I sold those those those shares uh I think uh I got uh you know shares uh I think uh I got uh you know shares uh I think uh I got uh you know there was a stock split uh and they gave there was a stock split uh and they gave there was a stock split uh and they gave me me me $111,000 for those shares it was like uh $111,000 for those shares it was like uh $111,000 for those shares it was like uh you know the original value was I think you know the original value was I think you know the original value was I think about $100 sorry not it was about $100 about $100 sorry not it was about $100 about $100 sorry not it was about $100 and um it was up 100 100 and um it was up 100 100 and um it was up 100 100 times and times and times and accidentally I had held those blue dot accidentally I had held those blue dot accidentally I had held those blue dot Blue Dot shares even though I didn't Blue Dot shares even though I didn't Blue Dot shares even though I didn't intend to for uh 21 years and uh and uh intend to for uh 21 years and uh and uh intend to for uh 21 years and uh and uh I've never held any stock for 21 years I've never held any stock for 21 years I've never held any stock for 21 years so uh so 21 years was truly spectacular so uh so 21 years was truly spectacular so uh so 21 years was truly spectacular and so I I decided to look at well what and so I I decided to look at well what and so I I decided to look at well what would have happened if I had done and would have happened if I had done and
Questionerwould have happened if I had done and you know satam was clearly a bubble butyou know satam was clearly a bubble butyou know satam was clearly a bubble but there was nearly there was really nothere was nearly there was really nothere was nearly there was really no good reason to sell the other threegood reason to sell the other threegood reason to sell the other three stocks uh you know I I I could havestocks uh you know I I I could havestocks uh you know I I I could have followed the game plan I had originallyfollowed the game plan I had originallyfollowed the game plan I had originally which is just leave them alone and if Iwhich is just leave them alone and if Iwhich is just leave them alone and if I had done that with uh with these stockshad done that with uh with these stockshad done that with uh with these stocks you know Blue Dot eventually was uh ayou know Blue Dot eventually was uh ayou know Blue Dot eventually was uh a 60x uh I think it was $200 the 200 went60x uh I think it was $200 the 200 went60x uh I think it was $200 the 200 went to 10,000 sorry so Blue Dart if I hadto 10,000 sorry so Blue Dart if I hadto 10,000 sorry so Blue Dart if I had held it all the way through was 6 TX uhheld it all the way through was 6 TX uhheld it all the way through was 6 TX uh kotak Mahindra Bank uh which is I thinkkotak Mahindra Bank uh which is I thinkkotak Mahindra Bank uh which is I think the the next slide uh yeah slide numberthe the next slide uh yeah slide numberthe the next slide uh yeah slide number uh five kotak Mahindra Bank ended upuh five kotak Mahindra Bank ended upuh five kotak Mahindra Bank ended up being uh abeing uh abeing uh a 50x and of course Sky pack we lost about50x and of course Sky pack we lost about50x and of course Sky pack we lost about half our money uh so you know I washalf our money uh so you know I washalf our money uh so you know I was thinking about this I said well you knowthinking about this I said well you knowthinking about this I said well you know uh the otheruh the otheruh the other 15,000 uh there were some real winners15,000 uh there were some real winners15,000 uh there were some real winners in them I mean I mean I had I had aboutin them I mean I mean I had I had aboutin them I mean I mean I had I had about uh I think in Blue Dot we had I haduh I think in Blue Dot we had I haduh I think in Blue Dot we had I had invested um $7,700 in Blue Dot and today
Questionerinvested um $7,700 in Blue Dot and today that would have been worth $465,000 uh which is not exactly chump change and um and and uh the kotak investment which was the smallest that was 1500 uh that would be 75,000 today and and so uh you know while I I certainly benefited from a bubble and I um I uh was able to uh you know it had a good positive impact on my netw worth to capture that um you know it got me thinking because then the second part of it is the other 985 th000 uh in the other 985 th000 if you go to um I'm not sure where I put this slide let me just see if I can find it uh yeah I think this is slide number eight so Arvin if you can go to slide number eight so the other 9 185,000 one of the stocks I invested in uh was cmgi uh which was basically um that was uh a deliberate uh bet uh I made uh where um you know I was in the in the tech
Questioneryou know I was in the in the tech industry and uh clearly the internet you looked like it would be transformational but you know almost everything was trading at ridiculous multiples but when I found cmgi it was a kind of a incubator actually was based in um uh based in the suburbs of Boston um it was an incubator and it was kind of spawning out or investing in in a bunch of Dooms by the Dozen if you will and uh the stock at that time was still very much um benign just you know little premium to book and so I put 10% of the million into cmgi and uh I eventually cashed out uh at about a 100 times uh what I put into it so the 100,000 that went into cmgi uh turned into 10 million and um and of course we saw that the 30,000 uh in India turned into you know north of one and a half million and the rest of the portfolio the remaining 900
Questionerrest of the portfolio the remaining 900 or uh 870,000 if you will uh at that time the stock market has gone up in the kind of the 20 25% a year range uh for that 95 to 2,000 period and uh so the rest of it had you know doubled or tripled uh so the overall result of the portfolio was more than acceptable I mean it had gone up uh to something uh you know 13 million or something 13 14 million somewhere around that that number and um and so you know uh I I said you know good job Mish that was fantastic um uh this is this is uh amazing but uh you know the the experience at Blue doart um had me got me thinking that you know I've always been the kind of investor who buys buys things hopefully for 50 cents or less on the dollar and attempts to sell them when they get valued at 90% or more what they're worth so if something's worth a dollar and it's worth and it's available
Questionerdollar and it's worth and it's available for 50 cents very happy to buy it and for 50 cents very happy to buy it and for 50 cents very happy to buy it and then when it gets to 90 cents or better then when it gets to 90 cents or better then when it gets to 90 cents or better I'm I'm happy to sell it and I'm I'm I'm happy to sell it and I'm I'm I'm happy to sell it and I'm assuming that most of the time that assuming that most of the time that assuming that most of the time that convergence from 50 cents to 990 cents convergence from 50 cents to 990 cents convergence from 50 cents to 990 cents happens within 2 or 3 years and if it happens within 2 or 3 years and if it happens within 2 or 3 years and if it happens within two years uh you end up happens within two years uh you end up happens within two years uh you end up with a 30 plus perc return return and with a 30 plus perc return return and with a 30 plus perc return return and even in three years you'll end up with a even in three years you'll end up with a even in three years you'll end up with a kind of low to mid 20s type return which kind of low to mid 20s type return which kind of low to mid 20s type return which is very acceptable um and so that is the is very acceptable um and so that is the is very acceptable um and so that is the motos oft motos oft motos oft Randy I followed for more than two Randy I followed for more than two Randy I followed for more than two decades and uh so one of the reasons for decades and uh so one of the reasons for decades and uh so one of the reasons for this talk is that I realize that this talk is that I realize that this talk is that I realize that um my um my um my Approach uh is Approach uh is Approach uh is flawed uh because because while the uh flawed uh because because while the uh flawed uh because because while the uh the doubles and all of that certainly the doubles and all of that certainly the doubles and all of that certainly work um you work um you work um you know I think like Charlie Munger one know I think like Charlie Munger one know I think like Charlie Munger one time told me that for each of us there time told me that for each of us there time told me that for each of us there is a limited quota of truly great is a limited quota of truly great businesses which I have the ability to
Warrenbusinesses which I have the ability to generate spectacular returns for us you know 10 Baggers 50 Baggers 100 Baggers uh while holding it for a long time and the important thing for us to do uh is to do nothing uh is is is to recognize when we have something like like some something like that in our portfolios and um and not be in a hurry to act and so so I thought about the the experience at Blue do and these I said well how many times has it happened in my portfolio that some huge multibagger showed up I was smart enough to buy it uh but perhaps not smart enough to keep it uh and I realized it happened a lot uh because when I went back and looked I I found uh this happened several times where I made a double or a triple or a 4X and I sold and the stock went up you know 10 times after that for example and um and so I said well what can I do uh in terms of a
Questionercan I do uh in terms of acan I do uh in terms of a framework uh to be better uh better atframework uh to be better uh better atframework uh to be better uh better at uh identifying because you know the theuh identifying because you know the theuh identifying because you know the the advantages that you get uh you know Iadvantages that you get uh you know Iadvantages that you get uh you know I don't I don't need to uh uh you knowdon't I don't need to uh uh you knowdon't I don't need to uh uh you know really spend too much time explaining toreally spend too much time explaining toreally spend too much time explaining to you guys that 100 Baggers are reallyyou guys that 100 Baggers are reallyyou guys that 100 Baggers are really good for your health you know and andgood for your health you know and andgood for your health you know and and not not only are they really good fornot not only are they really good fornot not only are they really good for your health um you have no taxes for ayour health um you have no taxes for ayour health um you have no taxes for a long time uh so uh you have deferredlong time uh so uh you have deferredlong time uh so uh you have deferred taxes free loan from Uncle Sam for thetaxes free loan from Uncle Sam for thetaxes free loan from Uncle Sam for the entire period you own the stock it itentire period you own the stock it itentire period you own the stock it it kind of almost becomes like investing inkind of almost becomes like investing inkind of almost becomes like investing in a retirement account because uh if ifa retirement account because uh if ifa retirement account because uh if if you can hold something for 10 or 20you can hold something for 10 or 20you can hold something for 10 or 20 years or 30 years and then pay a taxyears or 30 years and then pay a taxyears or 30 years and then pay a tax bill one time well that's very highlybill one time well that's very highlybill one time well that's very highly efficient so not only are theefficient so not only are theefficient so not only are the multi-baggers great from a just a puremulti-baggers great from a just a puremulti-baggers great from a just a pure numbers perspective they have uh anumbers perspective they have uh anumbers perspective they have uh a significant upside in terms of taxes andsignificant upside in terms of taxes andsignificant upside in terms of taxes and and you know uh I live in perhaps one of
Questionerand you know uh I live in perhaps one of the highest tax states uh in the country where why the federal government gives me uh you know a break on long-term gains the state of California doesn't so the the marginal tax rate for someone like me in the state of California is north of 12% and so while the federal long gains maybe 20 or 22% uh California is more than half of that and so uh so it's really good for your health if you're in California um to uh to get the free loan for a long time and um so so I thought about you know is there a framework um and is there a pattern to these uh these different stocks and uh what I realized as I went through it is that yes there is a frame framework I've never seen the framework before uh presented anywhere and so I said well since nobody wants to do it might as well be moish and it might as well be
Otherwell be moish and it might as well be the the the good students at BC who umthe the the good students at BC who umthe the the good students at BC who um get to um get to hear and uh learn aboutget to um get to hear and uh learn aboutget to um get to hear and uh learn about the framework so umthe framework so umthe framework so um so by the time it was time for this talkso by the time it was time for this talkso by the time it was time for this talk because Arin didn't give me too muchbecause Arin didn't give me too muchbecause Arin didn't give me too much time I came up with fivetime I came up with fivetime I came up with five uh differentuh differentuh different attributes uh in terms of uh kind ofattributes uh in terms of uh kind ofattributes uh in terms of uh kind of five different kinds offive different kinds offive different kinds of businesses that can be hugebusinesses that can be hugebusinesses that can be huge multi-baggers you know they they fallmulti-baggers you know they they fallmulti-baggers you know they they fall into kind of five different categoriesinto kind of five different categoriesinto kind of five different categories and there will maybe more than fiveand there will maybe more than fiveand there will maybe more than five categories and if Arin invites me backcategories and if Arin invites me backcategories and if Arin invites me back next year and if I've come up with somenext year and if I've come up with somenext year and if I've come up with some more then um uh your successors I'llmore then um uh your successors I'llmore then um uh your successors I'll have them watch this video and I canhave them watch this video and I canhave them watch this video and I can give them uh any more that I come upgive them uh any more that I come upgive them uh any more that I come up with but this these five feel like awith but this these five feel like awith but this these five feel like a good uh framework and I wish I wish Igood uh framework and I wish I wish Igood uh framework and I wish I wish I had thishad thishad this framework uh 21 or 22 years ago becauseframework uh 21 or 22 years ago becauseframework uh 21 or 22 years ago because if I had this framework I would haveif I had this framework I would haveif I had this framework I would have taken different decisions and while thetaken different decisions and while thetaken different decisions and while the journey has been very very good for the
Otherjourney has been very very good for the for the last two decades it would probably have been better uh significantly better and um so uh let me uh let me uh let me go through the uh let me uh let me go through the uh let me uh let me go through the framework so there are five different kind of categories of businesses that kind of categories of businesses that kind of categories of businesses that what we should kind of pay attention to what we should kind of pay attention to what we should kind of pay attention to uh because they have the uh because they have the uh because they have the potential uh to have huge uh multibagger potential uh to have huge uh multibagger potential uh to have huge uh multibagger gains in the long run so the first kind gains in the long run so the first kind gains in the long run so the first kind of business is a business which has uh of business is a business which has uh of business is a business which has uh extremely wide and deep extremely wide and deep extremely wide and deep modes and these businesses are so good modes and these businesses are so good modes and these businesses are so good that idiots can run them so uh they're that idiots can run them so uh they're that idiots can run them so uh they're their core economics are so fantastic their core economics are so fantastic their core economics are so fantastic that they're almost indestructible and that they're almost indestructible and that they're almost indestructible and in fact if you see some of the examples in fact if you see some of the examples in fact if you see some of the examples of some of these businesses um they have of some of these businesses um they have of some of these businesses um they have been run by been run by been run by idiots uh in some cases they've been run idiots uh in some cases they've been run idiots uh in some cases they've been run by idiots for decades and they couldn't by idiots for decades and they couldn't by idiots for decades and they couldn't destroy the business it was so good and destroy the business it was so good and destroy the business it was so good and so I have hardly ever had the uh Good
Questionerso I have hardly ever had the uh Good Fortune of having these types of businesses in my portfolio and one of the reasons they don't end up in my portfolio is because I'm a cheap skate uh usually I'm going for the Bargain Bin uh and uh you know trying to find things that are 50 cents off and there's some anomaly and something and and these types of businesses usually uh they'll sometimes get to The Bargain Bin uh but they usually don't get that cheap and so what are some examples of these of these businesses
Questionerwell some examples of these wide M uh businesses runable by idiots are businesses like Coca-Cola uh Seas candy Moody Visa Mastercard American Express and so on and so um if you um you know clearly many of us are familiar with Coca-Cola for example uh and of course uh you know we we studied coke uh with uh arin's other class and maybe you can share some
Warrenother class and maybe you can share some of those results with you uh but but Coke is a business that uh has basically been growing non-stop for uh something like uh one and a quarter Century it's been a long time and it continues on a Non-Stop growth path which will which will go on for a while and uh and there's a there's a talk I gave uh to the students at UC Irvine and some of you may have seen that talk but it's on YouTube so if you get a chance uh to see that sometime and you can't go to sleep at night or something you can take a look at that talk and it explains uh the incredible business model that is Coca-Cola and that will give you a sense so sometimes uh and you know Coke was a b business that was for decades uh run by very poor managers and even though they were run by uh managers that were not so good um the business
Charliethat were not so good um the business kept going they really couldn't do uhkept going they really couldn't do uhkept going they really couldn't do uh much to destroy it because the economicsmuch to destroy it because the economicsmuch to destroy it because the economics was so good and uh Moody is anotherwas so good and uh Moody is anotherwas so good and uh Moody is another example of a business that isexample of a business that isexample of a business that is exceptional because um you know let'sexceptional because um you know let'sexceptional because um you know let's say some company is issuing some bondssay some company is issuing some bondssay some company is issuing some bonds and they need a uh a credit rating onand they need a uh a credit rating onand they need a uh a credit rating on their debt in order to you know givetheir debt in order to you know givetheir debt in order to you know give investors Comfort uh well there onlyinvestors Comfort uh well there onlyinvestors Comfort uh well there only couple of places two or three placescouple of places two or three placescouple of places two or three places they can go to usually they have to gothey can go to usually they have to gothey can go to usually they have to go to Moody or S&P in the US to get thatto Moody or S&P in the US to get thatto Moody or S&P in the US to get that rating and moody in S&P usually chargesrating and moody in S&P usually chargesrating and moody in S&P usually charges them uh you know an arm and leg it's athem uh you know an arm and leg it's athem uh you know an arm and leg it's a usually uh you know uh probably 10 or 20usually uh you know uh probably 10 or 20usually uh you know uh probably 10 or 20 times or 30 times what it costs moodiestimes or 30 times what it costs moodiestimes or 30 times what it costs moodies to do the analysis and give the ratingto do the analysis and give the ratingto do the analysis and give the rating so Moody's may have an analyst whoso Moody's may have an analyst whoso Moody's may have an analyst who they're paying uh very well maybe2they're paying uh very well maybe2they're paying uh very well maybe2 200,000 or something like that uh that200,000 or something like that uh that200,000 or something like that uh that analyst is probably going to bring inanalyst is probably going to bring inanalyst is probably going to bring in several million dollars in Revenue
Otherseveral million dollars in Revenue because he'll be rating several companies which will be issuing debt over time so uh you know it is a great business if you pay someone 200,000 and he brings in 5 million of Revenue every year and it's a great business when the companies have to keep coming back to you because uh the number of debt instruments dwars the number of equity instruments I mean if we have 5,000 stocks in the US we probably have more than 50,000 uh different types of uh rated debt instruments it maybe even well beyond that it may be sever hundred, so uh so each one of those instruments is separately rated and each one of those generates fees for companies like Moody and Moody is is a company and same with S&P which we saw in the financial crisis um delivered outright Incorrect and blatantly uh wrong ratings on all these mortgages and
Warrenwrong ratings on all these mortgages and everything else uh where they rated them triaa and they probably were uh just horrible you know they were prone to have high defaults and they did have high defaults even after doing that which is that's the only competency they need to have which is rate the quality of debt um even when they couldn't do that in the financial crisis uh you still could destroy the company and actually if we go back and look at uh the Moody's stock chart in uh slide number six uh you can see that in the 2008 09 and 10 period the stock came down a lot and in fact if if I hadn't been staring at my belly button I should have bought some um and and uh at that time basically um basically you you saw that um you know there was a a very strong effort made by various regulators and Congress and such to punish Moody and
QuestionerCongress and such to punish Moody and S&P so it it caused an overhang on theirS&P so it it caused an overhang on theirS&P so it it caused an overhang on their stock prices and they made them pay somestock prices and they made them pay somestock prices and they made them pay some fine but you can also see that none offine but you can also see that none offine but you can also see that none of them none of that affected the businessthem none of that affected the businessthem none of that affected the business I mean the all-time high for moody inI mean the all-time high for moody inI mean the all-time high for moody in 2007 was around $60 a share and now it's2007 was around $60 a share and now it's2007 was around $60 a share and now it's approaching twice that uh so whateverapproaching twice that uh so whateverapproaching twice that uh so whatever they did uh in the financial crisisthey did uh in the financial crisisthey did uh in the financial crisis which call which they were a verywhich call which they were a verywhich call which they were a very critical piece uh they were not the onlycritical piece uh they were not the onlycritical piece uh they were not the only piece but they were very critical piecepiece but they were very critical piecepiece but they were very critical piece of fueling the fire if you will withoutof fueling the fire if you will withoutof fueling the fire if you will without the Moody and S&P ratings you would notthe Moody and S&P ratings you would notthe Moody and S&P ratings you would not have uh the pervasiveness andhave uh the pervasiveness andhave uh the pervasiveness and extensiveness of damage that happened toextensiveness of damage that happened toextensiveness of damage that happened to the uh to the global economy uh and inthe uh to the global economy uh and inthe uh to the global economy uh and in spite of being such aspite of being such aspite of being such a critical uh you know contributor to suchcritical uh you know contributor to suchcritical uh you know contributor to such a major crisis uh here we are with uh ana major crisis uh here we are with uh ana major crisis uh here we are with uh an idiot run Company still doing great andidiot run Company still doing great andidiot run Company still doing great and um so the next time it has a problem Ium so the next time it has a problem Ium so the next time it has a problem I will not be Naval grazing I will be uh
Questionerwill not be Naval grazing I will be uh will not be Naval grazing I will be uh calling my broker and you know I have a calling my broker and you know I have a calling my broker and you know I have a friend of mine uh guy spear uh some of you might might have heard of him and you might might have heard of him and you might might have heard of him and sometimes in my conversations with guy I sometimes in my conversations with guy I sometimes in my conversations with guy I like to put salt on Old like to put salt on Old like to put salt on Old Wounds uh just to see how he reacts and Wounds uh just to see how he reacts and Wounds uh just to see how he reacts and uh so guy guy has a mental model where uh so guy guy has a mental model where uh so guy guy has a mental model where he says look if if you can identify a he says look if if you can identify a he says look if if you can identify a great business in the United States like great business in the United States like great business in the United States like let's say if you say say Coca-Cola is a let's say if you say say Coca-Cola is a let's say if you say say Coca-Cola is a great business or Coca-Cola bottlers are great business or Coca-Cola bottlers are great business or Coca-Cola bottlers are a great business then you know you ought a great business then you know you ought a great business then you know you ought to go look for bottlers in other parts to go look for bottlers in other parts to go look for bottlers in other parts of the world which are also bottling of the world which are also bottling of the world which are also bottling Coca-Cola because they probably have Coca-Cola because they probably have Coca-Cola because they probably have very similar economics and Coke is a very similar economics and Coke is a very similar economics and Coke is a great great great business uh being a Cocola bottler is business uh being a Cocola bottler is business uh being a Cocola bottler is not as great as being a CO in being not as great as being a CO in being not as great as being a CO in being Coca-Cola but it's it's still a really Coca-Cola but it's it's still a really Coca-Cola but it's it's still a really good business um if if if you good business um if if if you good business um if if if you inherited a a Coca-Cola Bottling inherited a a Coca-Cola Bottling inherited a a Coca-Cola Bottling operation or a Pepsi Bottling operation
Warrenoperation or a Pepsi Bottling operation you will never have any Financial issues in your life trust me everything's going to go great uh because those are those are great businesses so he said well uh we should go look for Coke bottlers in Turkey we should look for them in Africa we should look for them in Brazil in China in India and we should basically see gu's model was see what the valuations are in all those different markets because in other markets they may or may not have realized that this is a great business and sometimes what can happen is that let's say for example the Brazil Brazilian economy is doing poorly the stock market goes down well everything goes down including the Coke bottler and so sometimes you might be able to pick up a Coke bottler in Brazil for a lot lower price uh than the Coke bottler in Tennessee for example and uh
Questionerbottler in Tennessee for example and uhbottler in Tennessee for example and uh so he he's done this quite successfullyso he he's done this quite successfullyso he he's done this quite successfully so he loved Moody's he did not like theso he loved Moody's he did not like theso he loved Moody's he did not like the stock price and so he said well whatstock price and so he said well whatstock price and so he said well what what other credit R credit ratingwhat other credit R credit ratingwhat other credit R credit rating agencies are there in the rest of theagencies are there in the rest of theagencies are there in the rest of the world which are providing this criticalworld which are providing this criticalworld which are providing this critical function in different countries and theyfunction in different countries and theyfunction in different countries and they all must have similar economics toall must have similar economics toall must have similar economics to Moody's so uh which ones are out thereMoody's so uh which ones are out thereMoody's so uh which ones are out there and he did a global search and if you goand he did a global search and if you goand he did a global search and if you go to slide numberto slide numberto slide number seven um he identified a company inseven um he identified a company inseven um he identified a company in India calledIndia calledIndia called Crystle and uh guy invested in CrystleCrystle and uh guy invested in CrystleCrystle and uh guy invested in Crystle so in 2001 or 2002 he uh he bought someso in 2001 or 2002 he uh he bought someso in 2001 or 2002 he uh he bought some Crystal at that time I think he wasCrystal at that time I think he wasCrystal at that time I think he was running 30 or 40 million and it wasrunning 30 or 40 million and it wasrunning 30 or 40 million and it was small investment and then it went up itsmall investment and then it went up itsmall investment and then it went up it doubled or something and then he addeddoubled or something and then he addeddoubled or something and then he added some more in 2004 or 2005 and then yousome more in 2004 or 2005 and then yousome more in 2004 or 2005 and then you know he got two or three times his moneyknow he got two or three times his moneyknow he got two or three times his money in a couple of years and then he EX itin a couple of years and then he EX itin a couple of years and then he EX it um and uh all I got to do when I want to
Questionerum and uh all I got to do when I want to sprinkle salt on guy's wounds say guy you know that Crystal position that you had uh that you were so smart to buy in 2002 and 2005 uh do you know what that's worth today he said why do you have to bring that up Mish and uh I said no no have you looked at what it's worth today and I said maybe you haven't so I have the exact number for you and and basically Crystal uh Crystle basically uh on the 2001 purchase that guy did it's gone up 200 times since then and on the 2005 purchase that he did it's gone up 43 times and um and uh and you know he manages around 160 million uh the crystal position alone in his portfolio if he had not touched it would be probably close to 150 160 million uh so it would it would be 50% of the pi instead of being 0% of the pi and and um what was so difficult especially after I
Questionerwhat was so difficult especially after I give you this framework about knowing that it's a great business now if you had any doubts about crystal in in 1997 uh no
Other1998 mcgrawhill which was the owner of SNP um paid $8.5 million to Crystle for a test 10% stake so they just like kotak Mahindra Bank uh Goldman Sach had taken a stake so if you were looking for a strategic investor from the US who had blessed kotak I mean blasted Crystal as being a high quality operation you couldn't get higher quality than S&P taking a stake and what S&P kept doing is every few years they would buy an additional stake they would convince the crystal people to sell them uh a little more and I think now S&P owns 75% of Crystal so they've taken that stake and they've paid a lot more over the years so the $8.5 million stake in 9 in u 9798 the market cap of Chris was 85 million
Questionerthe market cap of Chris was 85 million the market cap of Chris was 85 million the market cap of Crystal now is 25 the market cap of Crystal now is 25 the market cap of Crystal now is 25 billion and um billion and um billion and um and and I believe when you look at the and and I believe when you look at the and and I believe when you look at the stock chart of stock chart of stock chart of Crystal uh and I'm talking to you here Crystal uh and I'm talking to you here Crystal uh and I'm talking to you here and I'm sure I'm going to regret this uh and I'm sure I'm going to regret this uh and I'm sure I'm going to regret this uh when I watched this video 10 years from when I watched this video 10 years from when I watched this video 10 years from now it's probably a mistake if I owned now it's probably a mistake if I owned now it's probably a mistake if I owned it to sell it today because as far as it to sell it today because as far as it to sell it today because as far as Emerging Markets go and as far as the Emerging Markets go and as far as the Emerging Markets go and as far as the debt instruments the size of the debt instruments the size of the debt instruments the size of the instruments and number of instruments 10 instruments and number of instruments 10 instruments and number of instruments 10 years from now 20 years from now 50 years from now 20 years from now 50 years from now 20 years from now 50 years from now in India will dwarf the years from now in India will dwarf the years from now in India will dwarf the number today today um now if you look at number today today um now if you look at number today today um now if you look at the Crystal nose bleed price earnings the Crystal nose bleed price earnings the Crystal nose bleed price earnings ratio today uh you're going to take a ratio today uh you're going to take a ratio today uh you're going to take a pause um but uh it may well be because pause um but uh it may well be because pause um but uh it may well be because the quality of the business that that the quality of the business that that the quality of the business that that nose bleed valuation uh may not look so nose bleed valuation uh may not look so nose bleed valuation uh may not look so nose bleed five or 10 years or 15 years nose bleed five or 10 years or 15 years nose bleed five or 10 years or 15 years from now so these are these are the from now so these are these are the from now so these are these are the ultimates you know these are the
Questionerultimates you know these are the businesses that if they ever show up in our portfolio what what I've learned from this is if they have this characteristic of incredible Moes I mean if you look at Moody's if the 2008 financial crisis could not destroy the moat nothing is going to destroy the moat that is the biggest seismic event they could ever face in a 100 years I don't believe in the next 100 years they will face anything like uh the event they fac in 2008 because that was really uh getting at the core I mean that's almost the equivalent of coke selling poison product uh they were they were selling poison ratings and they still survived uh so these are these are the ones to watch for because they've got incredible economics and these businesses incredible economics will just blow your mind in terms of what they can deliver the second kind of
Otherthey can deliver the second kind of business so we crossed off the first one uh the second kind of business is exactly like the first one except that they cannot be run by idiots uh they actually need competent humans to run them so these are again great businesses and great franchises but they need to be run by great uh managers and so which are what are the businesses that fall in this category well they are Amazon Costco Geico kotak Mahindra Bank Blue Dot satum restaurant Brands International you know the guys who use who own Burger King and Tim Hortons Yum brands Domino's Pizza and so on so these These are businesses that have incredible economics uh I mean if if you if you own Marriott International you know which is which owns all these different hotel brand names uh the number of hotels Marriott actually owns uh is less than 1% of probably we
Questionerowns uh is less than 1% of probably weowns uh is less than 1% of probably we less than 1% of the number of hotelsless than 1% of the number of hotelsless than 1% of the number of hotels that they have their brand on so theythat they have their brand on so theythat they have their brand on so they don't have the investment in the realdon't have the investment in the realdon't have the investment in the real estate or any of the capex associatedestate or any of the capex associatedestate or any of the capex associated with that hotel but each time someonewith that hotel but each time someonewith that hotel but each time someone checks in a portion of that of that uhchecks in a portion of that of that uhchecks in a portion of that of that uh of that night stay and the revenueof that night stay and the revenueof that night stay and the revenue generated comes to Marriot um so marotgenerated comes to Marriot um so marotgenerated comes to Marriot um so marot International also a great business butInternational also a great business butInternational also a great business but it does need competent management so soit does need competent management so soit does need competent management so so thesethesethese businesses um are uh more uh morebusinesses um are uh more uh morebusinesses um are uh more uh more prevalent uh in the marketplace than theprevalent uh in the marketplace than theprevalent uh in the marketplace than the first category the first category is afirst category the first category is afirst category the first category is a very unusual category I mean you wouldvery unusual category I mean you wouldvery unusual category I mean you would be looking at beer companies uh You' bebe looking at beer companies uh You' bebe looking at beer companies uh You' be looking at tobacco companies in thelooking at tobacco companies in thelooking at tobacco companies in the first category uh I mean the human viesfirst category uh I mean the human viesfirst category uh I mean the human vies would show up in the first categorywould show up in the first categorywould show up in the first category because uh humans get addicted to thesebecause uh humans get addicted to thesebecause uh humans get addicted to these things and then you be looking at youthings and then you be looking at youthings and then you be looking at you know the the the cost the the coola theknow the the the cost the the coola the
Otherknow the the the cost the the coola the Moody the second category is a littleMoody the second category is a littleMoody the second category is a little broader uh because you do do need um umbroader uh because you do do need um umbroader uh because you do do need um um you do need U you know uh management toyou do need U you know uh management toyou do need U you know uh management to be competent and the Moes are not quitebe competent and the Moes are not quitebe competent and the Moes are not quite as as robust but they're still prettyas as robust but they're still prettyas as robust but they're still pretty solid um and I haven't had much in termssolid um and I haven't had much in termssolid um and I haven't had much in terms of the second category I mean I mean ifof the second category I mean I mean ifof the second category I mean I mean if I look at myI look at myI look at my portfolio uh I did have three of them uhportfolio uh I did have three of them uhportfolio uh I did have three of them uh kotak Mahendra blueart and and and Saumkotak Mahendra blueart and and and Saumkotak Mahendra blueart and and and Saum that were part of mythat were part of mythat were part of my portfolio um and uh I I was not smartportfolio um and uh I I was not smartportfolio um and uh I I was not smart enough in two or the three of them uh toenough in two or the three of them uh toenough in two or the three of them uh to keep them around so um one of thekeep them around so um one of thekeep them around so um one of the reasons to do the St uh do this talk isreasons to do the St uh do this talk isreasons to do the St uh do this talk is to just pound that into my head um youto just pound that into my head um youto just pound that into my head um you know the the best thing to do is take anknow the the best thing to do is take anknow the the best thing to do is take an afternoon nap not put a sell order inafternoon nap not put a sell order inafternoon nap not put a sell order in and um and I know arind has disappearedand um and I know arind has disappearedand um and I know arind has disappeared to the towards the side but arind I hadto the towards the side but arind I hadto the towards the side but arind I had a great nap before this class started soa great nap before this class started soa great nap before this class started so I'm in great shape um anyway the going
QuestionerI'm in great shape um anyway the going on to the next category and thison to the next category and thison to the next category and this category has shown up the mostcategory has shown up the mostcategory has shown up the most frequently in my uh in my portfolio andfrequently in my uh in my portfolio andfrequently in my uh in my portfolio and this is the one where I've had uh thethis is the one where I've had uh thethis is the one where I've had uh the most difficulty where I have not beenmost difficulty where I have not beenmost difficulty where I have not been able to capture in many cases theable to capture in many cases theable to capture in many cases the significant upside so this thirdsignificant upside so this thirdsignificant upside so this third category is a category where I callcategory is a category where I callcategory is a category where I call markets getting confused between riskmarkets getting confused between riskmarkets getting confused between risk and uncertaintyand uncertaintyand uncertainty and um so I'll give you uh I'll give youand um so I'll give you uh I'll give youand um so I'll give you uh I'll give you a fewa fewa few examples and uh the first example is aexamples and uh the first example is aexamples and uh the first example is a company called ipsco and so ipsco is acompany called ipsco and so ipsco is acompany called ipsco and so ipsco is a steel maker and uh we can go to uh thesteel maker and uh we can go to uh thesteel maker and uh we can go to uh the slide on ifso let me see if I can uhslide on ifso let me see if I can uhslide on ifso let me see if I can uh yeah so slide number nine and uh soyeah so slide number nine and uh soyeah so slide number nine and uh so ipsco uh sits in the center of the Northipsco uh sits in the center of the Northipsco uh sits in the center of the North American continent in Canada just aboveAmerican continent in Canada just aboveAmerican continent in Canada just above the Great Lakes and uh they make uhthe Great Lakes and uh they make uhthe Great Lakes and uh they make uh basically uh plate steel and tubularbasically uh plate steel and tubularbasically uh plate steel and tubular steel the company doesn't exist anymoresteel the company doesn't exist anymoresteel the company doesn't exist anymore they were bought by a uh by a Swedish uhthey were bought by a uh by a Swedish uhthey were bought by a uh by a Swedish uh uh
Questioneruhuh company um I think incompany um I think incompany um I think in 2007 uh and that's when uh they stopped2007 uh and that's when uh they stopped2007 uh and that's when uh they stopped trading but when I uh when I found thetrading but when I uh when I found thetrading but when I uh when I found the company in um incompany in um incompany in um in 2005 they were trading uh for you know2005 they were trading uh for you know2005 they were trading uh for you know the economics were like this uh IFCO hadthe economics were like this uh IFCO hadthe economics were like this uh IFCO had a market cap of 2 and a half billion uma market cap of 2 and a half billion uma market cap of 2 and a half billion um they had 900 million in cash on theirthey had 900 million in cash on theirthey had 900 million in cash on their balance sheet uh theybalance sheet uh theybalance sheet uh they had uh givenhad uh givenhad uh given guidance uh that the next couple ofguidance uh that the next couple ofguidance uh that the next couple of years with their backlogs and such uhyears with their backlogs and such uhyears with their backlogs and such uh that they had uhthat they had uhthat they had uh approximately 650 million in cash flowsapproximately 650 million in cash flowsapproximately 650 million in cash flows coming in in terms of net income in thecoming in in terms of net income in thecoming in in terms of net income in the next couple of years um and then therenext couple of years um and then therenext couple of years um and then there was no no visibility beyond the next twowas no no visibility beyond the next twowas no no visibility beyond the next two years and so the markets uh kind ofyears and so the markets uh kind ofyears and so the markets uh kind of don't like uncertainty so but my my mydon't like uncertainty so but my my mydon't like uncertainty so but my my my perspective was that who cares whatperspective was that who cares whatperspective was that who cares what happens after two years if you take thehappens after two years if you take thehappens after two years if you take the 900 million plus the 1.3 billion in the900 million plus the 1.3 billion in the900 million plus the 1.3 billion in the next two years you've got 2.2 billionnext two years you've got 2.2 billionnext two years you've got 2.2 billion and the market cap is 2.5 billion so Iand the market cap is 2.5 billion so I
Questionerand the market cap is 2.5 billion so I said okay you know what I'm going to do is I'm just going to own this stock for two years let this cash balance get to 2.2 billion and then I want to see what the company's trading at and I didn't think it was possible they would trade at 2 and a half billion at the time because um you know you got all the plant and equipment and everything else that they got and of course the steel business is very cyclical so um but I felt that the upside downside ratios were out of whack and um so a year went by and uh so you can see in in the beginning of 2005 it's in the $40 odd dollar range and then uh by the time uh uh 2006 arrived uh they had visibility into another year of around 650 million and so so by by now the the the stock had climbed you know it had get gotten up to close to um close to $100 a share and was bouncing around between kind of 80
Questionerwas bouncing around between kind of 80 and 100 and so I said well now we are at a point where we've got close to 2 billion in cash flows plus the 900 million we're above our cost basis in terms of cash coming in and uh so I said let's uh continue holding the company because we don't know what happens in uh after 2007 and then uh in uh in early 2007 they got a buyout offer from uh this Swedish company for $160 a share their abouts uh maybe around 165 or so and so the stock went up to like 157 or something and I decided that was enough and I unloaded so in this particular case actually we captured almost all of the uh the upside that was Associated um and you know the funny thing about the way the world works is this Swedish company came in the you know early part of 2007 to buy the business business they could have shown
Questionerbusiness business they could have shown up two or three years before that andup two or three years before that andup two or three years before that and they could have bought it for 1/4 ofthey could have bought it for 1/4 ofthey could have bought it for 1/4 of that right and clearly they they werethat right and clearly they they werethat right and clearly they they were people who I hope or understood uhpeople who I hope or understood uhpeople who I hope or understood uh valuations of steel companies and um butvaluations of steel companies and um butvaluations of steel companies and um but they didn't and and that's one of thethey didn't and and that's one of thethey didn't and and that's one of the kind of crazy things about the way thekind of crazy things about the way thekind of crazy things about the way the world works is um is neither did theyworld works is um is neither did theyworld works is um is neither did they show up nor did the market uh have muchshow up nor did the market uh have muchshow up nor did the market uh have much respect for company with volatilerespect for company with volatilerespect for company with volatile earnings so the risk with ipsco that Iearnings so the risk with ipsco that Iearnings so the risk with ipsco that I saw was very low uh but the uncertaintysaw was very low uh but the uncertaintysaw was very low uh but the uncertainty with IPO was relatively high it was itwith IPO was relatively high it was itwith IPO was relatively high it was it was extremely uncertain after two yearswas extremely uncertain after two yearswas extremely uncertain after two years and and one of the things I thinkand and one of the things I thinkand and one of the things I think probably the markets were concernedprobably the markets were concernedprobably the markets were concerned about is could the company actually loseabout is could the company actually loseabout is could the company actually lose money for example you know I mean whatmoney for example you know I mean whatmoney for example you know I mean what would happen if they had a severewould happen if they had a severewould happen if they had a severe downturn and so on so uh but but I feltdownturn and so on so uh but but I feltdownturn and so on so uh but but I felt that the uh the asymmetry of the riskthat the uh the asymmetry of the riskthat the uh the asymmetry of the risk rewardreward
Questionerreward was very lopsided and um and so looking for these types of U opportunities is uh is kind of interesting and can be profitable and there's a company in my portfolio right now which is um um Fiat chrys automobiles uh another hated industry High capex um you know subject to Consumer taste unionized all kinds of good stuff um so um fear Chrysler is a company that has a market cap uh of um less than um less than 10 billion about 9 billion or so n and a half billion and um they they have said that u in um in 2018 uh they expect earnings per share uh to be you know north of uh $5.50 a share so which is uh which is about you know 7 billion or something so you have a market cap of less than 10 billion or let let me put it in stock price the stock price is at under $7 and uh the 2018 earnings are you know suggested by the company to be
Questioner$5.50 so if they actually deliver $5.50 in earnings in 2018 um this would be trading at uh like I don't know 1.3 times the P 1.3 so uh I'm missing my friend arind who's disappeared to the slide uh arid you can you can um um you can come back into the scene for a second so I can see you and ask you a question but how many stocks are there um in the US that trade for less than 1.5 times earnings you know since since you have all these that fidelity
OtherI I don't imagine that there are many I'd be curious to to hear how much debt the company has though yeah so I'll get to that get that in a second uh maybe you can mute the microphone uh sorry about that um but yeah so so the the company has guided it's it's also guided that it will be uh debt free in uh in 2018 actually have a so they will have debt but their cash balance will exceed uh the debt and in
Questionerbalance will exceed uh the debt and in fact this year for example at the end of this year and end of 2016 they've guided that uh the net debt of the business will be like five billion um less than five billion so so here's the situation um if I pull up value line which is tracking 1,700 companies uh and I look at the lowest PE companies in value line usually they will be one business or maybe two businesses that are less than a p of two uh I think recently when I looked I think there was only one business um uh so businesses less than a one or two PE is uh well under one tenth or 1% uh and and value line is not not tracking the average stocks in the US uh it's it's tracking the better 1700 stocks if you will um in the US so so if I look at Fiat for example um and I pull up any brokerage report on Fiat and you know the street research if you will and I look at their 2018
Questioneryou will and I look at their 2018 numbers so the Fiat management says ebet earnings before interest in taxes will exceed 9 billion euros in 2018 and in The Brokerage reports they have 2018 ebit at three billion okay and so there is like a 3 to1 difference between what the street seems to believe and what the company is saying and my uh my analysis suggests that the company is not exactly high on various substances uh when they're making such a claim and um and so just like ipco my my take is set it and forget it which is uh okay we don't need to kind of scratch our heads about this too much we own the stock uh we're not going to do anything with it we're going to wait till uh probably the first quarter of 2019 when the 2018 numbers are published and and uh and if arind invites me back in 2019 I'll share with you what happened and um and uh and uh and see what's
Otherand um and uh and uh and see what's going on so I realized when I Was preparing that this this talk that I never correlated the similarity between ipso and Fiat crysler and when I Was preparing this I said oh my God this is kind of why I like this because it brings me back to the very nice memories of the wonderful people at ipso and
Questioneruh Manish just a question on that with ipco it sounds like you had a backlog that gave you comfort with the cash flow what's the parallel
Otherhere so the parallel here is number one I have a man crush on the CEO Sergio Maron if if my wife allowed me I would take him on a date um I don't think she's quite ready for that yet and I don't know whether whether Sergio would go on a date with me but it would be a fun date um so uh so first of all uh I love Sergio and um and the second is I've actually uh looked at how they've
QuestionerI've actually uh looked at how they've come up with the numbers and they they come up with the numbers and they they come up with the numbers and they they they didn't just come up with a number they didn't just come up with a number they didn't just come up with a number they actually gave a lot of Det detail they actually gave a lot of Det detail they actually gave a lot of Det detail so if you go on the feat Chrysler so if you go on the feat Chrysler so if you go on the feat Chrysler website so first of all I don't want this to be a stock tip right this I'm this to be a stock tip right this I'm this to be a stock tip right this I'm not the class is not about a stock tip not the class is not about a stock tip not the class is not about a stock tip um and clearly please please if you take um and clearly please please if you take um and clearly please please if you take any actions you are 100% responsible for any actions you are 100% responsible for any actions you are 100% responsible for those actions um uh just uh don't come those actions um uh just uh don't come those actions um uh just uh don't come to me because there's no reps and to me because there's no reps and to me because there's no reps and warranties here because you know I warranties here because you know I warranties here because you know I already told you I have the man crush already told you I have the man crush already told you I have the man crush which is clouding my vision and um so uh which is clouding my vision and um so uh which is clouding my vision and um so uh so anyway the if you go on the company's so anyway the if you go on the company's so anyway the if you go on the company's website they have a Five-Year Plan uh website they have a Five-Year Plan uh website they have a Five-Year Plan uh which they gave out they had an investor which they gave out they had an investor which they gave out they had an investor Day in 2014 where they laid out uh their Day in 2014 where they laid out uh their Day in 2014 where they laid out uh their plan from 2014 to 2018 and they've plan from 2014 to 2018 and they've plan from 2014 to 2018 and they've updated the plan a couple of times since updated the plan a couple of times since updated the plan a couple of times since then so uh they did an update in then so uh they did an update in
Questionerthen so uh they did an update in September of this year uh they didSeptember of this year uh they didSeptember of this year uh they did another update about a year ago and uhanother update about a year ago and uhanother update about a year ago and uh so they actually give you the pieces ofso they actually give you the pieces ofso they actually give you the pieces of how they get to that number and thosehow they get to that number and thosehow they get to that number and those pieces are uh so far I mean they they'vepieces are uh so far I mean they they'vepieces are uh so far I mean they they've they've got two years left basically uhthey've got two years left basically uhthey've got two years left basically uh they've delivered they've delivered onthey've delivered they've delivered onthey've delivered they've delivered on the first three years of the plan inthe first three years of the plan inthe first three years of the plan in Spades uh they are pretty much exactlySpades uh they are pretty much exactlySpades uh they are pretty much exactly where they uh thought they wanted to bewhere they uh thought they wanted to bewhere they uh thought they wanted to be and the one of the things that Sergioand the one of the things that Sergioand the one of the things that Sergio does he's a great manager is he set hedoes he's a great manager is he set hedoes he's a great manager is he set he sets these stretch targets to push hissets these stretch targets to push hissets these stretch targets to push his teamteamteam and it it clearly was a stretch Targetand it it clearly was a stretch Targetand it it clearly was a stretch Target but it was a public public stretchbut it was a public public stretchbut it was a public public stretch Target and he intended to deliver on theTarget and he intended to deliver on theTarget and he intended to deliver on the public stretch Target and he thoughtpublic stretch Target and he thoughtpublic stretch Target and he thought about it and they made some uh they madeabout it and they made some uh they madeabout it and they made some uh they made some um tweaks to the plan as they'vesome um tweaks to the plan as they'vesome um tweaks to the plan as they've progressed so for example one of theprogressed so for example one of theprogressed so for example one of the things they've realized sincethings they've realized sincethings they've realized since 2014 is that the world loves Jeeps a lot
Questioner2014 is that the world loves Jeeps a lot more than they thought they did in 2014 and so they have uh you know so just to give you an example of what one of the things that's happening is in um in 2009 uh when Fiat bought Chrysler Chrysler produced about a quarter million Jeeps a year and um this year uh they I think they're going to produce close to 1.4 million Jeeps so the Jeep production at at Fiat Chrysler used to be it was only produced in the US it is now produced in the U in US Mexico Brazil Italy and China um so they they're producing on every continent now and um and they are uh the just the Chinese uh Jeeps are over 100,000 uh run rate now and uh they just started making the Jeeps in China and China's projected to be in 2018 half a million jeeps and uh I believe they'll get there because the Chinese love their Jeeps um
QuestionerJeeps umJeeps um so so the U I actually think that theso so the U I actually think that theso so the U I actually think that the thethethe $5.50 from the way things are going$5.50 from the way things are going$5.50 from the way things are going right now is a low ball Target I thinkright now is a low ball Target I thinkright now is a low ball Target I think they'll they'll blow through that umthey'll they'll blow through that umthey'll they'll blow through that um they might be at $6.50 so it's actuallythey might be at $6.50 so it's actuallythey might be at $6.50 so it's actually truly be uh a PO one um and so anyway sotruly be uh a PO one um and so anyway sotruly be uh a PO one um and so anyway so thanks Manish I we don't want you tothanks Manish I we don't want you tothanks Manish I we don't want you to have any commitment or consistencyhave any commitment or consistencyhave any commitment or consistency biases so don't yes yeah so let's movebiases so don't yes yeah so let's movebiases so don't yes yeah so let's move ononon okay so the the next one we want to talkokay so the the next one we want to talkokay so the the next one we want to talk about is um is uh Toroabout is um is uh Toroabout is um is uh Toro petroleum and uh Torro uh this is slidepetroleum and uh Torro uh this is slidepetroleum and uh Torro uh this is slide number 10 and uh so I uh I made the uh Inumber 10 and uh so I uh I made the uh Inumber 10 and uh so I uh I made the uh I made the investment in Torro in themade the investment in Torro in themade the investment in Torro in the middle ofmiddle ofmiddle of 2002 and um and2002 and um and2002 and um and uh and and basically uh the the reason Iuh and and basically uh the the reason Iuh and and basically uh the the reason I I bought toI bought toI bought to Soro um was that uh the stock price hadSoro um was that uh the stock price hadSoro um was that uh the stock price had been cut by 75% it was at $30 a sharebeen cut by 75% it was at $30 a sharebeen cut by 75% it was at $30 a share and gone down to 750 and one of theand gone down to 750 and one of theand gone down to 750 and one of the reasons it went down to 750 is that thereasons it went down to 750 is that thereasons it went down to 750 is that the company had uh purchased a oil refinerycompany had uh purchased a oil refinerycompany had uh purchased a oil refinery and they had loaded a lot of debt on
Greg Abeland they had loaded a lot of debt on their balance sheet to make that purchase and after they had completed that purchase um the crack spread which is you know the spread between the price of gasoline and the price of crude oil if you will the crack spread had narrowed a lot and so uh their uh cash flows were stressed and uh and the markets were very concerned with all the debt and so on and so just to step back a little bit on the oil refining business in 30 years uh the United States uh has not built a new oil refinery and the reason we haven't built a new oil Refinery is because of nimi not in my backyard uh nobody wants nuclear plants in the backyards and nobody wants oil refineries in the backyard so getting permitted to open an oil refinery in the US uh is almost impossible and uh so what happens is that the existing refineries they keep
Otherthat the existing refineries they keep tweaking those refineries to get more output out of them and so oil refining because of this attribute uh is actually not exactly a commodity business um of course oil can oil refined oil can come in from outside the US but also what happens in the US is that the formulations that are required for each of the states is usually different from the other states and so you cannot Just Produce gasoline the US and sell it across the US California has a set of very stringent requirements uh Illinois has ethanol requirements and so on so all the states require or you know they require different BL lends and so refineries uh are kind of optimized creatures some can produce some Blends they can't produce others some can deal with sour crude oil from like Saudi Arabia others uh can't and so on so the inputs and the outputs make each
Questionerinputs and the outputs make each Refinery kind of a creature of its own if you will so suddenly for example if you had a high crack spread on uh the kind of oil uh refined gasoline need in Hawaii uh you may or may not be able to supply that from other refineries in the US because they cannot adjust that quickly uh to that uh and so uh my take on Toro was that they had a bunch of refineries and I felt that if the debt was an issue and if there was a real concern there they could unload assets and and they could unload refineries refineries are kind of Standalone entities and they just like the refiner there Bo now they may be selling at distress prices but also when I looked carefully at their financials and their covenants and then when their debt was coming due I think the the market I think was overreacting to their debt situation and
Questioneroverreacting to their debt situation and such so after I bought uh tsoro at 750 it um it proceeded to go down to a 133 in price so you know PAB funds put 10% of assets into torao at 750 thinking this is extremely good Mish you've done your homework it's great and then we were down 80% after that and um and of course when we're down 80% one of the things that uh that I'm very used to is everything I buy goes down you know so that's just normal uh but that only happens to me it never happens to Arvin and it never happens to anyone else only happens to me and um and uh so when it's at a 133 uh you know I'm looking at everything looks fine and such I say okay we got to kind of hang in there we just don't have much uh Choice here we're not going to sell this thing because we're going to let this thing play out and um then it got back to 750 which felt really good and then it got
Otherwhich felt really good and then it got to $15 uh which felt even better and I said we're out of here we got our double uh this is a cyclical business uh we are out of here and so I sold to S we made a 100% return and um you know when I when I bought the Soro they had a 480 $480 million market cap and I estimated the value of the business was over a billion um that 480 market cap 480 million market cap went down to 85 million uh a few months after I bought bought it uh the current market cap is 10 billion um plus they did a $6 billion spin-off which is Torro Logistics the next slide so they spun off this brand new company tsoro Logistics uh that has a six billion market cap and they issued another 700 million in dividends between 2002 and now so actually the dividends that they've issued in the last 13 years exceeded the market cap when I bought
Questionerexceeded the market cap when I bought the business so um from the absolute bottom tick that Toro hit the 1.33 it's a 200x and even even at the the $500 million price I bought um it's more than a 30X and um and again you know the thing with what I did not appreciate about tsoro is tsoro is again a business just like ipsco it's a very cyclical business but what I did not appreciate is there was a very gifted manager Bruce Smith and I could tell every conference call I listened to Bruce I wasn't quite in love as much in love with him as Sergio but I love Bruce and Bruce was an exceptional manager and uh did a great job and and he uh during the financial crisis for example he bought up all these pipeline assets and built up the business and so on and he was really really good about the way he managed the business managed the cash flows and managed uh all the different
Questionerflows and managed uh all the different operations and uh he was very heavily responsible for that huge home run so again uh a low risk High uncertainty uh tsoro would have been good to hold for a while uh then going to the next one which is a front line and so Frontline is a is a shipping company and uh this is uh slide number 12 and um so here the here the the mistake I made uh with Frontline now we made money on Frontline so what I did is uh let me just give you um a little bit of a of an Insight on on Frontline um basically um they they are um they are at least at the time I invested in them I think this was in um in 2002 um they they were a a um a leaser of a very large crude carriers so the vccs at that time these are the kind of these large ships that you know transport crw from Saudi Arabia uh to the US Etc and the global Fleet at that
Questionerthe US Etc and the global Fleet at that time of very large crude carriers was 400 and Frontline had about 70 of them so they had 70 out of the 400 uh Global Fleet and these vlccs get leased out in two different ways they either go on time Charters where some oil company or uh company will lease them for you know several years at a time or they go out on like kind of daily Charters uh where they on the spot price it just depends on whatever the price is and if they go on daily Charters the range the price range on the The Daily rental rates on these vlccs is extremely volatile on the low end it has gone down as low as five or $6,000 a day which is when they're losing money they're just just covering marginal costs if you will and there it's gone all the way up to 300,000 plus per day so the range of the uh what you would get in terms of the
Questioneruh what you would get in terms of the spot price onspot price onspot price on vlccs is 100 to one uh almost no novlccs is 100 to one uh almost no novlccs is 100 to one uh almost no no let's say 60 to one you know from 5,000let's say 60 to one you know from 5,000let's say 60 to one you know from 5,000 tototo 300,000 and um once the rate is more300,000 and um once the rate is more300,000 and um once the rate is more than 30,000 a day for example thethan 30,000 a day for example thethan 30,000 a day for example the company is making a lot of money once itcompany is making a lot of money once itcompany is making a lot of money once it goes to 40 or 50,000 a day it is ingoes to 40 or 50,000 a day it is ingoes to 40 or 50,000 a day it is in super normal profit territory and oncesuper normal profit territory and oncesuper normal profit territory and once it's making over 100,000 a day they areit's making over 100,000 a day they areit's making over 100,000 a day they are just you know uh they are just drowningjust you know uh they are just drowningjust you know uh they are just drowning in dollars if you will it's just hugein dollars if you will it's just hugein dollars if you will it's just huge and um so uh one way to value a companyand um so uh one way to value a companyand um so uh one way to value a company like Frontline is to try to estimate thelike Frontline is to try to estimate thelike Frontline is to try to estimate the cash flows which are very hard to do thecash flows which are very hard to do thecash flows which are very hard to do the second way to Value Frontline is to looksecond way to Value Frontline is to looksecond way to Value Frontline is to look at liquidation value of the company soat liquidation value of the company soat liquidation value of the company so these vccs get bought and sold all thethese vccs get bought and sold all thethese vccs get bought and sold all the time time and so you can track what thetime time and so you can track what thetime time and so you can track what the pricing is on a vlcc based on age andpricing is on a vlcc based on age andpricing is on a vlcc based on age and all these different things and so frontall these different things and so frontall these different things and so front lines's uh liquidation value uh waslines's uh liquidation value uh waslines's uh liquidation value uh was around $9 a share and it was $9 a
Questioneraround $9 a share and it was $9 aaround $9 a share and it was $9 a share with the drop that uh vlcc pricesshare with the drop that uh vlcc pricesshare with the drop that uh vlcc prices had undergone when these rates had gonehad undergone when these rates had gonehad undergone when these rates had gone to 10 or 12,000 a day so the stock wasto 10 or 12,000 a day so the stock wasto 10 or 12,000 a day so the stock was at about $6 the liquidation value isat about $6 the liquidation value isat about $6 the liquidation value is about $9 I thought I'd capture thatabout $9 I thought I'd capture thatabout $9 I thought I'd capture that spread between $6 and $9 and um andspread between $6 and $9 and um andspread between $6 and $9 and um and there their debt on thesethere their debt on thesethere their debt on these vccs was at the ship level so eachvccs was at the ship level so eachvccs was at the ship level so each individual ship had um leverage on thatindividual ship had um leverage on thatindividual ship had um leverage on that ship kind of like a mortgage on aship kind of like a mortgage on aship kind of like a mortgage on a particular house so if there are anyparticular house so if there are anyparticular house so if there are any problems all that the lender could doproblems all that the lender could doproblems all that the lender could do they could repossess the ship there wasthey could repossess the ship there wasthey could repossess the ship there was nothing else they could do um so thenothing else they could do um so thenothing else they could do um so the most of the debt was at the ship levelmost of the debt was at the ship levelmost of the debt was at the ship level and so I said well you know if there'sand so I said well you know if there'sand so I said well you know if there's an issue with the company they can justan issue with the company they can justan issue with the company they can just liquidate the fleet and even if theyliquidate the fleet and even if theyliquidate the fleet and even if they liquidate at a discount it would stillliquidate at a discount it would stillliquidate at a discount it would still be over $6 a share so the the marketbe over $6 a share so the the marketbe over $6 a share so the the market didn't like the uncertainty so thatdidn't like the uncertainty so thatdidn't like the uncertainty so that really collapsed the stock price so uh
Questionerreally collapsed the stock price so uh one of the things about the the vlc market is uh that when these rates collapse like let's say they go down to 5 or $10,000 a day well what happens at that time is ship owners especially of the very old vlccs that are let's say 15 or 20 years old 25 years old the rust buckets they prefer to scrap them because when they scrap the ship they'll get 10 to 20% of the original purchase price of the ship immediately and so they're losing money on the ships with having the cruise and all that so they'd rather just get rid of the ships so one of the things about the shipping business uh because it's dominated by these flamboyant Greek guys um is is they project present circumstances to Infinity in fact most investors project present circumstances to Infinity so when VCC prices are $100,000 per day they believe it'll always be $100,000 a
Otherthey believe it'll always be $100,000 a day when it's $5,000 a day they are crying in in their bars into their beers and they think it'll always be $5,000 a day and um so they project present circumstances to Infinity the other thing that happens with the vlcc business is that it takes three or four years to build one so when the shipping rates are at 100,000 per day all the Greek ship owners go to the Korean shipyards and place a huge number of orders for ships because they believe what's what could go wrong you you take these ships it costs you 20,000 a day to run them Joe idiot Joe is paying you 100,000 a day you're just going to make you know found money it's going to be and and the 20,000 per day you're getting cheap Bank financing and all that so they they put up small deposits so these each of these ships cost like 70 million 80 million or so they'll put up
Othermillion 80 million or so they'll put up a $2 million deposit and um and the a $2 million deposit and um and the a $2 million deposit and um and the Korean Shipyard will put them in a kind of queue to build the ship of queue to build the ship of queue to build the ship and then when they're ready to construct and then when they're ready to construct and then when they're ready to construct the ship they'll say okay now you know the ship they'll say okay now you know the ship they'll say okay now you know send another 5 million and you know send another 5 million and you know send another 5 million and you know start making the the payments uh and of start making the the payments uh and of start making the the payments uh and of course by that course by that course by that time um those 100,000 per day prices may time um those 100,000 per day prices may time um those 100,000 per day prices may not exist and so then they'll just they not exist and so then they'll just they not exist and so then they'll just they they won't even return the shipyard's they won't even return the shipyard's they won't even return the shipyard's call they'll say let the deposit go we call they'll say let the deposit go we call they'll say let the deposit go we don't want the ships don't want the ships don't want the ships so so they pay they place a lot of so so they pay they place a lot of so so they pay they place a lot of orders when the rates are high and they orders when the rates are high and they orders when the rates are high and they place no orders when the rates are low place no orders when the rates are low place no orders when the rates are low so you have these boom and bus Cycles so you have these boom and bus Cycles so you have these boom and bus Cycles because it takes four years to build because it takes four years to build because it takes four years to build these ship so all the extra ships show these ship so all the extra ships show these ship so all the extra ships show up at the same time and when those extra up at the same time and when those extra up at the same time and when those extra ships show up rates collapse then nobody ships show up rates collapse then nobody ships show up rates collapse then nobody orders ships for a long time they scrap
Questionerorders ships for a long time they scrap the old ships as the old ships get scrapped it sets up the conditions for another boom and then they again place order so this continuous boom and bus Cycles uh in the shipping business is a norm it's just like the Class A Office Buildings in Prime US cities if you will because of that three or four year lag and because humans are involved in the decision- making and because humans vasate between fear and greed so anyway the bottom line is when shipping rates go to 10,000 a day or 5,000 a day that those rates set up the conditions to spike to 100,000 a day because what happens is a lot of ships get taken out and get scrapped and then when the oil demand comes back up the ships aren't there they can't manufacture ships that quickly and so the only thing that can move is the price and um so this was an attribute I did not appreciate about
Questionerattribute I did not appreciate about Frontline I just took the in and out now Frontline I just took the in and out now Frontline I just took the in and out now if I had kept if I had kept if I had kept Frontline um all the way through and I Frontline um all the way through and I Frontline um all the way through and I had sold including the drop and PES had sold including the drop and PES had sold including the drop and PES because they are all the dividends uh because they are all the dividends uh because they are all the dividends uh you know I bought the shares for $6 they you know I bought the shares for $6 they you know I bought the shares for $6 they issued $56 in dividends then they spun issued $56 in dividends then they spun issued $56 in dividends then they spun out a company called ship finance and out a company called ship finance and out a company called ship finance and that issued $24 in dividends then ship that issued $24 in dividends then ship that issued $24 in dividends then ship fine stock price is fine stock price is fine stock price is $14 the the end to end end is my five or $14 the the end to end end is my five or $14 the the end to end end is my five or $6 purchase price I would have ended up $6 purchase price I would have ended up $6 purchase price I would have ended up with $130 almost almost 25 times if I with $130 almost almost 25 times if I with $130 almost almost 25 times if I just and that's including the current just and that's including the current just and that's including the current collapse in the shipping industry and in collapse in the shipping industry and in collapse in the shipping industry and in fact one of the things that happened fact one of the things that happened fact one of the things that happened when I Was preparing the stock is I when I Was preparing the stock is I when I Was preparing the stock is I realized realized realized that today the shipping industry that today the shipping industry that today the shipping industry is in the do drums just like it was just is in the do drums just like it was just is in the do drums just like it was just like the vccs were in 2002 and and so I like the vccs were in 2002 and and so I like the vccs were in 2002 and and so I said well you know it means said well you know it means said well you know it means that again with the risk and uncertainty that again with the risk and uncertainty
Questionerthat again with the risk and uncertainty there must be some slivers of that market that may be interesting and I actually recently just found one I'm still studying it but it has exactly these attributes and this time when I make the investment if I make the investment I won't be stupid like last time um you know we going to we're going to Rite it Beyond liquidation value if you will so uh Manish wasn't there also the move uh from uh single Hull to double Hull when you invested which added uh a regulatory Tailwind yeah after yeah Exxon vald's yeah so just yeah just to um go back to before any of you were born uh you know this drunk captain on the Exon wdes uh of the close of Alaska um you know kind of runs the ground and then spills several million um gallons of crude on prudo prudo Bay U and destroyed quite a bit of habitat it and destroyed quite a bit of habitat it was terrible one of the worst natural
Questionerwas terrible one of the worst natural disasters and of course Exxon is still paying out for that and um so there were a lot of changes that took place after that and that was a vlcc that uh that leaked those uh those uh huge number of barrels I mean this is this is way worse the the Exon disaster was far worse uh than the the gulf disaster with the uh with the broken oil well with the what the name of that um um the uh the the the rig on the uh Off Louisiana I forget the name uh but anyway this is saying Horizon yeah yeah that's right it was much worse than deep hor deep Horizon so anyway um what they did one of the rules they came up with at the time they mandated that all these vccs have to be double hul so after the Exon disaster in 92 uh they mandated that everything has to be double HED and um so over time the singled H Fleet has been scrapped but
Questionersingled H Fleet has been scrapped but what what started happening a few years after the Exxon disaster is um us oil companies did not want the liability risk of uh bringing in single Hull crude carriers to the US so what happened after a few of the double held ships started coming out is the single heal ships mostly got used to transport crude to third world countries uh Africa India uh Asia and so on and most of the crew transported to Europe and the US was Double H so you got kind of got a kind of a cast system in the uh in the crew transport system but when the shipping rates collapse uh when they go so single house ships will always rent for 5,000 a day less or 7,000 a day less than the double HS but when the rate is down to 7,000 then the single hulls stop getting rented at all uh because there's no there's no reason to rent because you
Otherthere's no reason to rent because you can get the Double H for 7,000 and so the single HS go through very aggressive scrapping uh so that actually accelerates the scrapping and so one of the things about the uh attribute of the business was that at that time because of the collapse and rates the amount of scrapping of ships was on a turbo path and and that set up the conditions for the subsequent massive pop in price if you will and um so anyway going on to the next one which is uh Tech Kinko uh so we'll go to U which is called teex resources slide 15 uh at the time it was called Tech Kinko and and this was one I missed because the same thing happened uh earlier this year actually but uh during the financial crisis or just before the financial crisis in like in a mid 2008 uh Tech Kinko had completed a large acquisition of a metallurgical
Questionerlarge acquisition of a metallurgical call umcall umcall um uh mining operation and they had takenuh mining operation and they had takenuh mining operation and they had taken on a huge amount of debt to completeon a huge amount of debt to completeon a huge amount of debt to complete that acquisition and they took it tookthat acquisition and they took it tookthat acquisition and they took it took the debt on as a bridge loan to get thethe debt on as a bridge loan to get thethe debt on as a bridge loan to get the deal done and then they were planning indeal done and then they were planning indeal done and then they were planning in one year to kind of refinance everythingone year to kind of refinance everythingone year to kind of refinance everything and get the balance sheet kind of backand get the balance sheet kind of backand get the balance sheet kind of back on track and of course what happened ison track and of course what happened ison track and of course what happened is that right after they closed the deal uhthat right after they closed the deal uhthat right after they closed the deal uh the world went to hell and Lemanthe world went to hell and Lemanthe world went to hell and Leman Brothers happened and all of that and soBrothers happened and all of that and soBrothers happened and all of that and so Tech Kinko is like kind of like the IBMTech Kinko is like kind of like the IBMTech Kinko is like kind of like the IBM of um of mining companies uh it's reallyof um of mining companies uh it's reallyof um of mining companies uh it's really a blue chip company really well-run anda blue chip company really well-run anda blue chip company really well-run and they've got some of the lowest costthey've got some of the lowest costthey've got some of the lowest cost mines around the world um and they'vemines around the world um and they'vemines around the world um and they've got a lot of iron or metallurgical coalgot a lot of iron or metallurgical coalgot a lot of iron or metallurgical coal zinc mines and so on and um so the stockzinc mines and so on and um so the stockzinc mines and so on and um so the stock price for uh for Tech resources uh wentprice for uh for Tech resources uh wentprice for uh for Tech resources uh went from uh you know $45 a share to $4 afrom uh you know $45 a share to $4 afrom uh you know $45 a share to $4 a share in a very short period like 12
Questionershare in a very short period like 12 weeks 10 or 12 weeks it collapsed uh because this was a stock that was you know usually uh a safe kind of widows kind of stock if you will and um so it didn't really have a natural constituency of people wanted to own it because of this huge overhang and when I looked at Tech it was very similar to Torro where I said that no uh they do have stress on their balance sheet and they do have uh cash flow issues but they also had these Ultra low c cost mines and they had some Hedges and so my my thinking was that the banks who had all this bridg loan debt would not want to run a mining company and would not want to liquidate this company what they would probably do is they would do extend and pretend which is they would extract a pound of Flesh and push out their loans and uh my sense was uh Tech could sell some assets and they could
Todd Combscould sell some assets and they could get out of the kind of the fix they were in and that's actually what they did so I invested at about U you know less than $5 a share um and this was at that time there was a lot of commodity stocks available this was part of a basket uh so I made a 2% bet on Tech Kinko and I've made 2% bets on several of these commodity playes because they all collapsed in price and in fact we had we had no losers amongst all of them all of them actually did very well and um a few months I think just two months after we bought uh uh a strategic Chinese investor came in bought a stake in Tech Kinko gave them cash which uh took away some of the risk and then uh they renegotiate with the banks they sold some assets and then commodity prices started to come back up and eventually it it went to around $35 a share we had
Questionerit it went to around $35 a share we had a 7x in in a year um and we sold and anda 7x in in a year um and we sold and anda 7x in in a year um and we sold and and then it went to $55 a share so at leastthen it went to $55 a share so at leastthen it went to $55 a share so at least in this case we captured most of it butin this case we captured most of it butin this case we captured most of it but very recentlyvery recentlyvery recently it went down at the beginning of thisit went down at the beginning of thisit went down at the beginning of this year because commodity prices had againyear because commodity prices had againyear because commodity prices had again collapsed so much to less than $5 sharecollapsed so much to less than $5 sharecollapsed so much to less than $5 share and I I wasn't paying attention and Iand I I wasn't paying attention and Iand I I wasn't paying attention and I real I saw it taking place but I wasreal I saw it taking place but I wasreal I saw it taking place but I was looking at other things at the time andlooking at other things at the time andlooking at other things at the time and uh so that was a a a glaring mistake ofuh so that was a a a glaring mistake ofuh so that was a a a glaring mistake of omission uh because I'm sure that if Iomission uh because I'm sure that if Iomission uh because I'm sure that if I had studied uh the business and thehad studied uh the business and thehad studied uh the business and the balance sheet and all of that I couldbalance sheet and all of that I couldbalance sheet and all of that I could have gotten a better handle of uh whathave gotten a better handle of uh whathave gotten a better handle of uh what was the Dynam dyamics at this point andwas the Dynam dyamics at this point andwas the Dynam dyamics at this point and and again it's again driven by fear andand again it's again driven by fear andand again it's again driven by fear and greed where humans just don't like thegreed where humans just don't like thegreed where humans just don't like the uncertainty but when you get these umuncertainty but when you get these umuncertainty but when you get these um kind of um risk and uncertainty thingskind of um risk and uncertainty thingskind of um risk and uncertainty things going on at the same time you can getgoing on at the same time you can getgoing on at the same time you can get kind of wide distortions and um so
Otherkind of wide distortions and um sokind of wide distortions and um so that's the fourth uh so that's the Thirdthat's the fourth uh so that's the Thirdthat's the fourth uh so that's the Third Kind which is this high risk lowKind which is this high risk lowKind which is this high risk low uncertainty uh the next one is what Iuncertainty uh the next one is what Iuncertainty uh the next one is what I call these bankruptcies reorganizationscall these bankruptcies reorganizationscall these bankruptcies reorganizations lb's special situations kind of alb's special situations kind of alb's special situations kind of a catchall and um many of you may becatchall and um many of you may becatchall and um many of you may be familiar with Z Sam zel um can you raisefamiliar with Z Sam zel um can you raisefamiliar with Z Sam zel um can you raise your hand if you heard of Samzel okay so a few of you heard of samelzel okay so a few of you heard of samelzel okay so a few of you heard of samel maybe you can Google him after um aftermaybe you can Google him after um aftermaybe you can Google him after um after the class and and uh Arin the you knowthe class and and uh Arin the you knowthe class and and uh Arin the you know there's no downside to sending Sam anthere's no downside to sending Sam anthere's no downside to sending Sam an email asking him to speak to your classemail asking him to speak to your classemail asking him to speak to your class uh because all that can happen is he canuh because all that can happen is he canuh because all that can happen is he can say no uh but Sam is also known as thesay no uh but Sam is also known as thesay no uh but Sam is also known as the gravegravegrave dancer uh because he loves to dance ondancer uh because he loves to dance ondancer uh because he loves to dance on the grave of uh companies left for deadthe grave of uh companies left for deadthe grave of uh companies left for dead and he's done really well I mean he setand he's done really well I mean he setand he's done really well I mean he set up uh Equity office properties Equityup uh Equity office properties Equityup uh Equity office properties Equity Residential Properties he sold a lot ofResidential Properties he sold a lot ofResidential Properties he sold a lot of these assets pretty much at 1155 p.m.these assets pretty much at 1155 p.m.these assets pretty much at 1155 p.m. before the music stopped and uh and has
Questionerbefore the music stopped and uh and has done really well but anyway you know there are some in investors in the US who are who have been truly exceptional at the US tax code uh so for example Warren Buffett in my opinion uh knows the US tax code almost better than anyone else uh the pritzkers Jay pritsker who's passed away uh knew the US tax code really well and I would say sam zel and the lucadia guys uh you know the lucadia guys I don't think they ever sent a check to the IRS uh um um the L ladia guys know knew the US tax code really well and Sam zel uh is a master of the US tax code really really uh smart about uh about the taxes and you'll notice uh that there's a conspicuous person I left out of the list of people people who know the tax code uh so well and I don't put the Donald in the category of knowing the tax code so well he may know a lot of
Othertax code so well he may know a lot of other things so well but I don't think he's uh that great on the tax code I think he's okay uh but but anyway Sam Sam is an expert on the tax code so in uh 1990 there was a insurance company that went bankrupt Mission insurance and um when the bank went bankrupt the shell company was left and the shell company had 6 650 million in NS which are quite valuable if you could marry those NOS with a profitable business uh you could Shield the profits of the business for a while and Sam was able to buy the no's for 30 million so he he went in and bought the bankrupt Mell Insurance uh renamed it Danielson Holdings and then um Marty Whitman bought a stake in that too so Danielson Holdings was an interesting business because it had uh Marty Whitman was the chairman for a while and Sam was a shareholder and then
Questionerwhile and Sam was a shareholder and then they went hunting to find a a profitablethey went hunting to find a a profitablethey went hunting to find a a profitable business that they could marry to thisbusiness that they could marry to thisbusiness that they could marry to this nool rich company and they found a bargenool rich company and they found a bargenool rich company and they found a barge a barge company ina barge company ina barge company in Mississippi and um this barge companyMississippi and um this barge companyMississippi and um this barge company was a profitable company you know kindwas a profitable company you know kindwas a profitable company you know kind of transporting goods up and down theof transporting goods up and down theof transporting goods up and down the Mississippi so they bought the the bargeMississippi so they bought the the bargeMississippi so they bought the the barge company with the idea that the thecompany with the idea that the thecompany with the idea that the the earnings from the barge company wouldearnings from the barge company wouldearnings from the barge company would now be taxfree for a while and rightnow be taxfree for a while and rightnow be taxfree for a while and right after they bought the barge company theafter they bought the barge company theafter they bought the barge company the barge shipping rates collapsed and thebarge shipping rates collapsed and thebarge shipping rates collapsed and the barge company wentbarge company wentbarge company went bankrupt um and so now theybankrupt um and so now theybankrupt um and so now they had bankruptcy to the power ofhad bankruptcy to the power ofhad bankruptcy to the power of bankruptcy and you will learn manybankruptcy and you will learn manybankruptcy and you will learn many things from Arvin but he'll neverthings from Arvin but he'll neverthings from Arvin but he'll never explain to you how to calculateexplain to you how to calculateexplain to you how to calculate bankruptcy to the power bankruptcy all Ibankruptcy to the power bankruptcy all Ibankruptcy to the power bankruptcy all I can tell you it's bad okay so the 650can tell you it's bad okay so the 650can tell you it's bad okay so the 650 million NOS were now at 850 millions ofmillion NOS were now at 850 millions ofmillion NOS were now at 850 millions of NOS so they were in a deeper hole thanNOS so they were in a deeper hole than
QuestionerNOS so they were in a deeper hole than when they had started so now they were went hunting for another business uh which would be profitable and they could again do this so they kind of were uh hunting around and this time they found a um an unusual business it was a waste to energy business so this was a company that had um assets worth 2 billion they had debt worth 2 billion and what they did was they had a bunch of plants where you put garbage in on one end and you got electricity in on the other end it was a German process where they ran furnaces at very high temperature and because your garbage has all kinds of things that have energy value uh when you burn it you create energy and uh they converted that energy to electricity and then they sold that electricity and in some cases they had long long-term contracts to sell the electricity so they had some stability
Questionerelectricity so they had some stability of cash flows and and uh they had variance on tipping fees which is what they had to pay to get the garbage uh or what they got paid to take the garbage in some cases and um so they um they bought this company and this time they hit it correctly um and so by the time uh you know the stock was at a Dollar by the time I found out about uh and I think kanta they named Danielson holding Kant so you can see that in 2002 in 2003 this thing is trading at like a dollar a share and um by the time I got to know that there was Marty vitman samel and all that doing this and they were planning to do a couple of Rights issues and so on the stock was at about $9 a share and uh it was still it was still cheap because of all the The Leverage and the the NS and all that and um and uh they did two rights offerings which I
Questioneruh they did two rights offerings which I participated in and eventually I sold inparticipated in and eventually I sold inparticipated in and eventually I sold in about 18 months for about 90% gain andabout 18 months for about 90% gain andabout 18 months for about 90% gain and uh if I had kept it throughout I think Iuh if I had kept it throughout I think Iuh if I had kept it throughout I think I would have had a uh a 4ex gain if youwould have had a uh a 4ex gain if youwould have had a uh a 4ex gain if you will so that's another one of these umwill so that's another one of these umwill so that's another one of these um um kind of um you know these bankruptcyum kind of um you know these bankruptcyum kind of um you know these bankruptcy reorgs can have some unusual Dynamicsreorgs can have some unusual Dynamicsreorgs can have some unusual Dynamics wor worth paying attention to and thenwor worth paying attention to and thenwor worth paying attention to and then the the finalthe the finalthe the final category uh which is the upside withoutcategory uh which is the upside withoutcategory uh which is the upside without downside uh type business business sodownside uh type business business sodownside uh type business business so these are ones where uh I mean a reallythese are ones where uh I mean a reallythese are ones where uh I mean a really good example of this is Silicon Valleygood example of this is Silicon Valleygood example of this is Silicon Valley Bank and uh that is uh slide 17 the lastBank and uh that is uh slide 17 the lastBank and uh that is uh slide 17 the last slide and um so when when I was startingslide and um so when when I was startingslide and um so when when I was starting for Bri funds infor Bri funds infor Bri funds in 99 you know the internet bubble was on99 you know the internet bubble was on99 you know the internet bubble was on and all these stocks were climbingand all these stocks were climbingand all these stocks were climbing pets.com and all of that and um I waspets.com and all of that and um I waspets.com and all of that and um I was trying to find atrying to find atrying to find a way I could play the bubble without anyway I could play the bubble without anyway I could play the bubble without any risk because I knew some of therisk because I knew some of therisk because I knew some of the companies might do really well uh but acompanies might do really well uh but a
Questionercompanies might do really well uh but a lot of them may not do well so I was trying to figure out a way to play it and and I had figured out my personal portfolio a while back with cmgi um which was the 100x but by the time P fund started cmgi had already climbed to some ridiculous number so uh that wasn't really an option but I found uh this Bank in Silicon Valley Silicon Valley Bank and what silic Valley Bank did was they primarily had banking relationships with Venture back startups and so they knew all these venture capitalist and the venture capitalist when they you know funded companies they would tell the founders you know set up the account at Silicon Valley bank and they used to make you know kind of uh asset back loans and different things to these Banks and anytime they did any kind of credit facilities or anything for them they would um uh take warrants
Questionerfor them they would um uh take warrantsfor them they would um uh take warrants so you know Silicon Valley is a placeso you know Silicon Valley is a placeso you know Silicon Valley is a place where uh if you're landscaper for Googlewhere uh if you're landscaper for Googlewhere uh if you're landscaper for Google you get warrants if you're a chef foryou get warrants if you're a chef foryou get warrants if you're a chef for Google you get warrants if you're a mGoogle you get warrants if you're a mGoogle you get warrants if you're a m you know a waiter at a restaurant uhyou know a waiter at a restaurant uhyou know a waiter at a restaurant uh just in Palo Alto you'll get warrantsjust in Palo Alto you'll get warrantsjust in Palo Alto you'll get warrants for serving some Venture Capal warrantsfor serving some Venture Capal warrantsfor serving some Venture Capal warrants and stock options in Silicon Valley isand stock options in Silicon Valley isand stock options in Silicon Valley is like breathing um so uh they hand themlike breathing um so uh they hand themlike breathing um so uh they hand them out to anyone who has a pulse and um soout to anyone who has a pulse and um soout to anyone who has a pulse and um so the bank when they said okay when we dothe bank when they said okay when we dothe bank when they said okay when we do our loans we want warrants uh theour loans we want warrants uh theour loans we want warrants uh the companies really didn't care you knowcompanies really didn't care you knowcompanies really didn't care you know they said fine we'll give you besidesthey said fine we'll give you besidesthey said fine we'll give you besides the loan ter they give you some warrantsthe loan ter they give you some warrantsthe loan ter they give you some warrants so each time they did a deal they wouldso each time they did a deal they wouldso each time they did a deal they would have these warrants and they had nohave these warrants and they had nohave these warrants and they had no disclosure on the warrant so they uhdisclosure on the warrant so they uhdisclosure on the warrant so they uh they just disclosed that they had thethey just disclosed that they had thethey just disclosed that they had the practice of taking warrants so I had apractice of taking warrants so I had apractice of taking warrants so I had a sense of the companies that they had insense of the companies that they had in
Questionersense of the companies that they had in their portfolio uh because you could seetheir portfolio uh because you could seetheir portfolio uh because you could see some disclosure of you know some of thesome disclosure of you know some of thesome disclosure of you know some of the businesses they were doing business withbusinesses they were doing business withbusinesses they were doing business with and all of that and it talked about someand all of that and it talked about someand all of that and it talked about some of these businesses and so I said okayof these businesses and so I said okayof these businesses and so I said okay the bank is trading at a modest premiumthe bank is trading at a modest premiumthe bank is trading at a modest premium to book value it's a well-run bank it'sto book value it's a well-run bank it'sto book value it's a well-run bank it's actually been a well-run bank throughoutactually been a well-run bank throughoutactually been a well-run bank throughout and we've got this unknown moonshot uhand we've got this unknown moonshot uhand we've got this unknown moonshot uh possible moonshot in the in the warrantspossible moonshot in the in the warrantspossible moonshot in the in the warrants so I said this is something where I'veso I said this is something where I'veso I said this is something where I've got a floor because I'm not paying forgot a floor because I'm not paying forgot a floor because I'm not paying for those warrants but the warrants could bethose warrants but the warrants could bethose warrants but the warrants could be valuable and um and so as the bubblevaluable and um and so as the bubblevaluable and um and so as the bubble took off uh and these companies startedtook off uh and these companies startedtook off uh and these companies started going public the bank realized they weregoing public the bank realized they weregoing public the bank realized they were sitting on huge number in terms of uhsitting on huge number in terms of uhsitting on huge number in terms of uh values of these warrants and theyvalues of these warrants and theyvalues of these warrants and they started selling the warrants becausestarted selling the warrants becausestarted selling the warrants because they wanted to monetize them and sothey wanted to monetize them and sothey wanted to monetize them and so those now started showing up on thethose now started showing up on the
Questionerthose now started showing up on the income statement and then they were theyincome statement and then they were theyincome statement and then they were they were talking a bit about them and uh thewere talking a bit about them and uh thewere talking a bit about them and uh the market finally understood and eventuallymarket finally understood and eventuallymarket finally understood and eventually it became a 4X from where I had where Iit became a 4X from where I had where Iit became a 4X from where I had where I was buying I was buying in the you knowwas buying I was buying in the you knowwas buying I was buying in the you know $112 range uh I captured about a 2 and$112 range uh I captured about a 2 and$112 range uh I captured about a 2 and a2x and uh moved on uh in about not nota2x and uh moved on uh in about not nota2x and uh moved on uh in about not not that long a period uh I think aboutthat long a period uh I think aboutthat long a period uh I think about about um about 2 and a half years uh butabout um about 2 and a half years uh butabout um about 2 and a half years uh but I could have held on for longer and doneI could have held on for longer and doneI could have held on for longer and done done even better and so that's the fifthdone even better and so that's the fifthdone even better and so that's the fifth one and and cmgi which we talked aboutone and and cmgi which we talked aboutone and and cmgi which we talked about at the beginning uh was similar in theat the beginning uh was similar in theat the beginning uh was similar in the sense that um those those businesses hadsense that um those those businesses hadsense that um those those businesses had that attribute and of course I thinkthat attribute and of course I thinkthat attribute and of course I think it's not the most elegant way to makeit's not the most elegant way to makeit's not the most elegant way to make money and probably in hindsight Imoney and probably in hindsight Imoney and probably in hindsight I probably should have sold uh cmgi soonerprobably should have sold uh cmgi soonerprobably should have sold uh cmgi sooner and probably should have sold even saamand probably should have sold even saamand probably should have sold even saam computers sooner um but I should havecomputers sooner um but I should havecomputers sooner um but I should have sold many of these other ones much later
Warrensold many of these other ones much later um and so uh so we uh we win some and lose some and so that's pretty much the framework and uh we've taken up I think uh Arin uh we've taken up what uh about uh we've got about 45 50 minutes or so right we have a about an hour yeah uh slightly under an hour left about 50 minutes for Q&A that fantastic Manish so thank you yeah and and uh I should thank you because like I said um I found the one Shipping Company because I was doing this and who knows what else I'll find yes I'm I'm excited so uh I don't know who wants to ask the first question but please uh please feel free maybe maybe I'll start in the interim Manish which is you know you you you talk a lot about cloning uh in terms of 13 fs and the like how do you go about cloning um uh International Investments given that there are no uh
QuestionerInvestments given that there are no uh 13fs for some of the areas that you traffic in yeah the international Investments you can get a little bit of that through Bloomberg uh so it's not for Joe public because Joe public will have a little harder time but actually not even Bloomberg the thing is that if you um you know if you go to a website in India like money control which is uh you know like Google Finance if you will and um India India requires the Brokers to uh disclose uh anyone who owns more than 1% of a public company so the companies don't have to make a disclosure till they own 5% or something something but the Brokers do and so if you look at a specific company you can see who the shareholders are and there are some um there are some service providers and you know kind of data scrapers who uh like I think I subscribe to one I think it's called Alpha ideas
Questionerto one I think it's called Alpha ideas in India which basically uh figures out uh who owns more than 1% of these different companies and they update that once a water so I can see some of that uh Bloomberg uh uh Bloomberg also like for example uh if I look at a Korean company in Bloomberg it will show me the shareholders and again um it's not as easy as a 13f uh in the US uh but I think uh some of it you can get that way uh but it's not the easiest thing in the world
QuestionerI have found Investments uh in places like Korea uh which are owned by some investors I really admire a lot and in China and such uh through that process
Questionerso it doeswork yeah thank you very much for for sharing time with us today this is fantastic opportunity really appreciate it um wanted to touch on uh Toro you were talking about and uh you mentioned how they have kind of a moat on their
Questionerhow they have kind of a moat on their supply in terms of refineries and uh also though how you want to hold them for a long period of time so I'm somewhat familiar with the industry and people are saying that in the long run uh there's going to be declining demand for crude oil so when thinking about the the moat on the demand side if you will how do you incorporate that into your analysis
Todd Combsyeah that's a that's a good question you know uh the the investment uh at the time I had made it I mean this was a long time ago I think that uh uh this was a investment in 2002 and um uh Elon was still busy with other things at the time and uh we didn't have any uh uh concerns on decline in uh in uh crude consumption if you will as we do today so clearly if I were looking at the business today as opposed to 2002 uh you'd have to weigh that factor
Questioner2002 uh you'd have to weigh that factor and um you know the funny thing is thatand um you know the funny thing is thatand um you know the funny thing is that U this is something that I actually I'veU this is something that I actually I'veU this is something that I actually I've I've questioned is that U uh whenever II've questioned is that U uh whenever II've questioned is that U uh whenever I I listen to kind of oil analysts and uhI listen to kind of oil analysts and uhI listen to kind of oil analysts and uh different people in the oildifferent people in the oildifferent people in the oil industry they don't seem to reallyindustry they don't seem to reallyindustry they don't seem to really see uh the the supposedly huge declinesee uh the the supposedly huge declinesee uh the the supposedly huge decline that may come include consumption fromthat may come include consumption fromthat may come include consumption from the switch to electrified cars if youthe switch to electrified cars if youthe switch to electrified cars if you will um and uh and I think the thewill um and uh and I think the thewill um and uh and I think the the movement uh towards electrified cars ismovement uh towards electrified cars ismovement uh towards electrified cars is a real movement uh I mean it's you knowa real movement uh I mean it's you knowa real movement uh I mean it's you know it's going to go it's going to be a mixit's going to go it's going to be a mixit's going to go it's going to be a mix of hybrids and pure electrics andof hybrids and pure electrics andof hybrids and pure electrics and everything in between uh but clearlyeverything in between uh but clearlyeverything in between uh but clearly that that trend is is uh is happening uhthat that trend is is uh is happening uhthat that trend is is uh is happening uh it's also going to take some timeit's also going to take some timeit's also going to take some time because the economics are still notbecause the economics are still notbecause the economics are still not completely there and you know we havecompletely there and you know we havecompletely there and you know we have some economics in the US on electricsome economics in the US on electricsome economics in the US on electric cars but in other parts of the worldcars but in other parts of the worldcars but in other parts of the world especially when you don't have garages
Otherespecially when you don't have garages and don't have your own uh private parking spot and all those sorts of things uh charging becomes a real issue and uh so in many parts of the world including in dense urban areas in the US uh that's a that's a real issue uh so so it I haven't had any Investments where I've had to figure out uh you know what exactly is a trajectory of uh oil consumption uh but but I would say that yes uh you would have to factor that in um but if you got to uh if you got to extreme distress I mean in in if you take a period from 2016 to 2025 let's say you take that 9 year or 10 year period um it is not obvious to me that in 2025 human crude oil consumption is less than 2016 uh that is not an obvious uh statement to make it's also not obvious to me that that will grow over that period but whether it will shrink over
Greg Abelperiod but whether it will shrink over that period is questionable and one of the reasons it's questionable is because large parts of the world uh humans just don't have good transport options and those are improving and actually if you if you think about the kind of the Ubers and lifts of the world if you will and all the different uh ways you get into mobility and shared economy and all of that uh miles traveled in uh motorized transport per human is on a significant upward trajectory so whether people own their cars or they lease their cars or they rent them by the day or the hour or by the ride or whatever else to do a shared rides uh the miles traveled is going up and so uh it is obvious to me there are some plays that are obvious um for example it is obvious to me that tire consumption is going to increase so if you ask me about total volume of tires
Otheryou ask me about total volume of tires produced in 2016 and total volumes of produced in 2016 and total volumes of produced in 2016 and total volumes of tires produced in 2025 there is no tires produced in 2025 there is no tires produced in 2025 there is no question in my mind that in 2025 that question in my mind that in 2025 that question in my mind that in 2025 that number may be um 20 30 40% higher than number may be um 20 30 40% higher than number may be um 20 30 40% higher than it is today um I cannot make the same it is today um I cannot make the same it is today um I cannot make the same statement about crude oil uh it may statement about crude oil uh it may statement about crude oil uh it may Flatline it may go down a little bit it Flatline it may go down a little bit it Flatline it may go down a little bit it may even go up a little bit we don't may even go up a little bit we don't may even go up a little bit we don't know but the good good news about this know but the good good news about this know but the good good news about this business is that we don't need to know business is that we don't need to know business is that we don't need to know everything about everything uh and we we everything about everything uh and we we everything about everything uh and we we can say no to a lot of things and so can say no to a lot of things and so can say no to a lot of things and so anytime you encounter something which is anytime you encounter something which is anytime you encounter something which is uh um giving you uh um giving you uh um giving you trouble um you know Warren Buffett has a trouble um you know Warren Buffett has a trouble um you know Warren Buffett has a real uh you know people have an inbox real uh you know people have an inbox real uh you know people have an inbox and outbox on their desk on his desk and outbox on their desk on his desk and outbox on their desk on his desk he's got a real two hard pile box and uh he's got a real two hard pile box and uh he's got a real two hard pile box and uh it's actually a box which says to hard it's actually a box which says to hard it's actually a box which says to hard and uh one time I was visiting his and uh one time I was visiting his and uh one time I was visiting his office and he was giving me a tour of office and he was giving me a tour of office and he was giving me a tour of his private office and I saw that that
Questionerhis private office and I saw that that there's a real two hard box there and it was empty and uh so I told Warren I said Warren you know you always said that like 98% of the stuff that shows up on your desk is in the two heart pile but the two heart pile is empty so what's going on so he said oh let me fix that right now monish and he immediately took a whole bunch of paper and he dumped it into a two heart pile he said does it look like most of it is rejected now I said yeah I said it looks great now he said okay good um and then we took a picture with the the filled up two hard pile box so um so bottom line is that we don't need need to have a uh an opinion or a position about anything what we want to do is we want to have opinions on high probability events what we perceive as high probability events where we think that we've got the odds
Todd Combswhere we think that we've got the odds in our favor so like like for me when some analyst says fear chist is going to produce three billion uh Bill three billion in ebet and my man crushed Sergio says we're going to produce 9 billion I go with the man crush you know and uh so we just go with high probability bets
Questioneryeah um so to go to one of the specific examples you mentioned your thesis with Frontline was that you thought there was a liquidation value of like around $9 a share and that you sold when you got to around there um in adding that you should have waited longer right was your process wrong because you you sold that what you thought was intrinsic value to a certain degree so you mentioned humans sort of vasate between fear and greed how do you avoid that in your own decision making
Todd Combsyeah I think I think that's that's a really good question because
Questionerthat's a really good question because this is a you know uh oh good arand has muted a you know uh oh good arand has muted a you know uh oh good arand has muted which is great uh you know because this which is great uh you know because this which is great uh you know because this is actually happening right now in real is actually happening right now in real is actually happening right now in real time so there is Frontline 2.0 another time so there is Frontline 2.0 another time so there is Frontline 2.0 another company just showed up on the radar company just showed up on the radar company just showed up on the radar which shall go unnamed so you guys don't which shall go unnamed so you guys don't which shall go unnamed so you guys don't drive up the price um uh but but drive up the price um uh but but drive up the price um uh but but Frontline 2.0 is uh basically a Frontline 2.0 is uh basically a Frontline 2.0 is uh basically a situation where it's trading currently situation where it's trading currently situation where it's trading currently and I'm I'm still doing the research I'm and I'm I'm still doing the research I'm and I'm I'm still doing the research I'm hoping this weekend to really get my hoping this weekend to really get my hoping this weekend to really get my teeth into it uh it seems to be trading teeth into it uh it seems to be trading teeth into it uh it seems to be trading at half of liquidation value very at half of liquidation value very at half of liquidation value very similar to front line all the debt is at similar to front line all the debt is at similar to front line all the debt is at the individual ship level and uh and the individual ship level and uh and the individual ship level and uh and such so it's trading at less than half such so it's trading at less than half such so it's trading at less than half uh the rates and the utilizations have uh the rates and the utilizations have uh the rates and the utilizations have kind of gone down which is what the kind of gone down which is what the kind of gone down which is what the Market's concerned with Market's concerned with Market's concerned with and the price has gone down like 70% in and the price has gone down like 70% in and the price has gone down like 70% in uh 70 80% in the last year or two and uh uh 70 80% in the last year or two and uh uh 70 80% in the last year or two and uh so um so clearly it's a if if if after I
Questionerso um so clearly it's a if if if after I do my analysis I get comfort that something that's let's say for argument sake is trading at $20 a share and let's say it's worth 40 uh the liquidation value is 40 uh so clearly I don't need to make a decision today about when I would sell I know that I'm going to sell at 40 or above right so I don't need to make that decision today I've got time I I might have a year or two uh to figure that out and do more work to figure that out which is good um but what I will not do which I did with Frontline is I will not sell at 90% of 40 uh with Frontline I was very clear 90% of liquidation value was out of there I didn't want that anything more to do with it because I think I had a juvenile understanding of the huge swings in human nature and all of that and um so now that uh the benevolent gods of investing are giving me another
Warrengods of investing are giving me another crack at the Apple I'll try not to disappoint them this time and so I'll figure out a few things I could do something like cut my position in half you know take half the money off the table for example I could do that which is I would have gotten all my principle out if you will if I invested you know 20 million and it's gone to 40 million I could pull 20 million out and then say okay now now let's uh let Humanity do whatever it wants and uh when we can't lose money because we've that's one way I could skin it or another way I could skin it is to let it go a little further uh which is uh look at what's going on with the business at the time and try to understand some more about the Dynamics and see whether it's a high probability that uh this can uh you know that this can go to uh one and a half times
Questionercan go to uh one and a half timescan go to uh one and a half times liquidation value or something or not umliquidation value or something or not umliquidation value or something or not um so we don't need to make that decisionso we don't need to make that decisionso we don't need to make that decision today uh I think if you put a gun to mytoday uh I think if you put a gun to mytoday uh I think if you put a gun to my head and said make the decision today Ihead and said make the decision today Ihead and said make the decision today I would probably take the approach ofwould probably take the approach ofwould probably take the approach of something along what I said just takesomething along what I said just takesomething along what I said just take take the principle out leave the resttake the principle out leave the resttake the principle out leave the rest but leave the rest again with a taper inbut leave the rest again with a taper inbut leave the rest again with a taper in the sense that the next Double Takethe sense that the next Double Takethe sense that the next Double Take Another half off and the next becauseAnother half off and the next becauseAnother half off and the next because you know this is not Coke we know thisyou know this is not Coke we know thisyou know this is not Coke we know this is not Coke we know this is not moody weis not Coke we know this is not moody weis not Coke we know this is not moody we know it's going to crash and burn oneknow it's going to crash and burn oneknow it's going to crash and burn one day we know that and um it may take fiveday we know that and um it may take fiveday we know that and um it may take five years before it crashing and burns butyears before it crashing and burns butyears before it crashing and burns but we don't want to be there for four and awe don't want to be there for four and awe don't want to be there for four and a half years thinking it'll go for fivehalf years thinking it'll go for fivehalf years thinking it'll go for five years so if we if we get our double weyears so if we if we get our double weyears so if we if we get our double we might do it thatway yeah yeah soway yeah yeah soway yeah yeah so let's say you do have a stock that youlet's say you do have a stock that youlet's say you do have a stock that you believe is like a Coke orbelieve is like a Coke orbelieve is like a Coke or booties um at what point is that worth
Questionerbooties um at what point is that worth selling you know if it's 100x 150x like when do you feel comfortable and
Questionerhow you know uh that is a really good question and the reason it's a good question is because um uh I I think in the in the past I've not been good about that and I think the thing is that there is an asymmetry um there is an asymmetry that I've had a hard time understanding and uh you know someone like uh Tom Russo uh understands this really well someone like uh Tom Gainer understands it really well even someone like Charlie Munger uh uh and Warren buff Buffett understand this really well and uh but I think I think like for example with with with Tom you know Tom is always buying companies that are either number one or number two on our list either they can be run by idiots or they have great mes that need non- idiots uh they I've never seen
Questionernon- idiots uh they I've never seen things in his portfolio which go to number three four or five they're always number one or number two right so he's always playing in the number one number two uh space which is a great place to play the only critique I would have if I would critique something about Tom is uh is that there hasn't been in my opinion the level of price discipline in buying as perhaps might be better to have so you know uh there's um there's this um story about the difference between Ben Graham and Charlie Monger so Ben Graham will go into a grocery store and he'll look for what item is discounted the most and he'll buy that item and come out and Charlie Munger will go into a grocery store and look at look for items that he truly loves and then he'll keep going back every day till it goes on sale and then when it's on sale he'll buy that
Todd Combsthen when it's on sale he'll buy that and come out and clearly the Charlie Monger approach uh in in in my opinion is is a better approach Sometimes some some people have taken the approach of just going in the grocery store and buying what they love regardless of price or without too much attention being paid to price where even a nearly fully price is okay and that can work out fine I mean you could have bought Crystal at a full price 20 years ago and still done well uh so clearly with some of these incredible modes you can do really well even at full price uh I have a hard time with that I think that that that um is something I'm probably never been that's a bridge I'll probably never be able to cross but what I what I what I believe I can cross Ross is I can buy I can identify these assets I mean I have a company in my portfolio today uh
Warrenhave a company in my portfolio today uh which is like Coke I never thought that would happen but I have a company like like Coke this is a company that can be run by idiots I never thought it would happen I actually have a business can be run by idiots awesome uh and it's number one it's like one of those absolute number one companies almost impossible to destroy the business almost impossible to destroy the moat I believe that moat will be around a 100 years from now now it may be around 300 years from now it is super super powerful in terms of the quality of the moat I have decided that for that one business I'm just never selling that okay uh because I've never had the Good Fortune of such things happening so I'll leave that one alone and I'll play my Mickey Mouse games with the shipping companies and all the other stuff and uh and deal with
Questionerall the other stuff and uh and deal with it that way and leave that that oneit that way and leave that that oneit that way and leave that that one alone so to answer your question I wouldalone so to answer your question I wouldalone so to answer your question I would just say this that that if you're ablejust say this that that if you're ablejust say this that that if you're able to get a Coketo get a Coketo get a Coke for 14 timesfor 14 timesfor 14 times earnings uh my two cents to you is uhearnings uh my two cents to you is uhearnings uh my two cents to you is uh you know Warren says that he made ayou know Warren says that he made ayou know Warren says that he made a mistake in hindsight of not selling Cokemistake in hindsight of not selling Cokemistake in hindsight of not selling Coke in 99 or 2000 so if if Burkshire youin 99 or 2000 so if if Burkshire youin 99 or 2000 so if if Burkshire you know 99 2000 Coke was selling at 40know 99 2000 Coke was selling at 40know 99 2000 Coke was selling at 40 times earnings and then the thattimes earnings and then the thattimes earnings and then the that multiple dropped very significantly tomultiple dropped very significantly tomultiple dropped very significantly to less than half of that and um they neverless than half of that and um they neverless than half of that and um they never sold um and and he said it was probablysold um and and he said it was probablysold um and and he said it was probably a mistake not to sell anda mistake not to sell anda mistake not to sell and um but but the reality is the actionum but but the reality is the actionum but but the reality is the action that he took was not to sell I don'tthat he took was not to sell I don'tthat he took was not to sell I don't believe Coke is going to be sold bybelieve Coke is going to be sold bybelieve Coke is going to be sold by Burkshire in either of theirBurkshire in either of theirBurkshire in either of their lifetimes uh and I don't believe Cokelifetimes uh and I don't believe Cokelifetimes uh and I don't believe Coke will be sold by theirwill be sold by theirwill be sold by their successors forsuccessors forsuccessors for maybe a decade or more after they'vemaybe a decade or more after they'vemaybe a decade or more after they've gone so Burk show may be holding Cokegone so Burk show may be holding Cokegone so Burk show may be holding Coke for at least let's say two or three more
Questionerfor at least let's say two or three more decades or or even beyond that and um and and quite frankly that may be a wise decision because how many businesses can you identify uh that are like that uh I mean Coke is not even about sugared water if you look at their portfolio of the 100 plus Brands they have and how how many of those brands have anything to do with sugar I mean that num is going down so so actually when people think of coke they think of the the sugared water product they have a zillion other products and they have the distribution engine and all the different economics that make it such a great business so so my two cents to you is that if you are able to buy these type one businesses at a modest multiple um probably really good things will happen to you um I mean let me put it this way I think the business that I bought I would say that
Questionerbought I would say that uh if I got to a 50x on it which may or may not happen in my lifetime um I might sell um I don't think I'm selling at 10x other questions yeah um been watching your previous video you talked a lot about um your circle of uh confidence and I realized that I didn't know what my circle of confidence was so how would you recommend we either discover that or develop that um you know I'll just give you Charlie munger's question uh I'm Charlie M's answer to that question which is to ask the question is to answer it if you are wondering if something is in your circle of competence uh it is not in your circle of competence so it's as simple as that other questions say kind of P you backing off with that um one of the companies or two of the companies that you mentioned you missed on Apple and Amazon uh you mentioned were out of your circle of competence as well and I was wondering what exactly about those
Questionerwondering what exactly about those companies kind of made you uncertain about your understanding of them because it seems you it seems that you're pretty well knowledged and you know TP in
Todd Combsgeneral yeah I mean I think uh apple apple is a uh you know uh I have a I have a very good friend of mine uh who's a venture capitalist in Silicon Valley and uh right after uh the the first iPhone came out uh uh he called me and and we had a long conversation and uh he's an investor in my in my fund and he told me that I needed to buy Apple in in PAB funds this was I think in 2007 um and and he told me and tried to explain to me the App Store and what that meant and kind of where this was going with the App Store and the e ecosystem and he also tried to explain to me actually it was uh it was one of the most eloquent uh discussions I had with anyone about uh why to invest in Apple
Questioneranyone about uh why to invest in Apple
Questionerand uh you know he highlighted the the mo but he also highlighted the fact that um you know one of the things put a pretty powerful computer in each of our palms and he thought that that was a very significant game Cher and and you know this was in 2007 it was well before Uber came out it was well before a lot of other companies came out and a lot of these companies could not exist if the iPhone did not exist I mean you you just wouldn't have Uber if you didn't have an iPhone um it's just not possible to do it without a smartphone and so uh it basically became the infrastructure on which everything uh got built but you know um I'm I'm one of these uh stupid people uh that when people hit me with a 2x4 on my head with a great idea I'm still not able to see it um and um and and somehow we still limp along and do
Questionerand somehow we still limp along and do okay and Arin still wants me to talk to you you guys um so I looked at Apple at the time it wasn't at a single digit PE uh the moment something's not a single-digit PE I'm I'm gone you know you already lost me the moment you get to something at 11 times earnings or something uh you know I'm La so clearly um I I did not appreciate I mean I understood what he was saying but I didn't want to pay up you know I wanted um a lot cheaper price uh to get a business like that but even then I've always been skeptical and even even today if you look at Apple today uh forget 2007 look let's look at 2016 so Apple trades are a pretty modest multiple you know if you look at their earning stream uh versus the market cap it's very different from Amazon and Facebook I mean it actually produces massive earnings and it's trading at
Todd Combsmassive earnings and it's trading at less than you know after you take out the cash I don't know I think less than 12 or 13 times earnings I think Arin may have the exact number and that's not a high multiple for a business like that but you know I also playback in my head the graveyard of companies in technology like blackberry and Nokia and all these other ones that have had huge runs and disappeared and Apple has something more than those companies have because they they have the app store and they have habits the important thing this is what my friend in 2007 was saying Mish human habits are changing with the iPhone and you have to understand when the habits change uh that is is very enduring it was a great talk I wish IID recorded that talk because if I could play it for you it' be better than me babbling here and uh so he was telling me about it's
Questionerand uh so he was telling me about it's the Habit economy and all these habits were very important and um and I didn't appreciate that and so today we have a situation where Apple's I think unit sales are dropping uh but their earnings are still rising and because the ecosystem just gets larger you know there's over a billion devices which have apps on them and every quarter the number of devices that have apps on them increases even if they're quarter or quarter sales Decline and um and and of course they got a you know a free Tailwind from the Woos of Samsung if you will uh but you know my take is that this is one of those things where you want absolute no-brainers and anytime in your in the investing world you have doubts in your head uh then you're better off just not going there so for example for me drilling into the shipping company half
Warrenshipping company half off is a lot more tangible uh to get Comfort than I could get with Apple at 12 times earnings today it's just and and that may be a mistake but it's just the way I'm wired and uh so someone else can hopefully figure that out and U uh do better with it
Questionerother questions and of course since since that time my sprinkle salt on wounds and reminds me what his Apple position is worth versus uh what his pund position is
Questionerquestion you have you explain how you evolve and how you really side and you also sh you shared us that there are some sucks that you actually experience the hols and in coming of your the 22 years what contribute most in developing your general insight and your character in bearing those wordss so the question Manish was how did you uh over the past 22 years how did you uh develop your insights and the character to survive the valleys of the whole is that
Questionerright okay so it's about um overcoming adversity is that what the question's about as well as how you uh develop the insights to build your circle of competence and and uh to make those big bats uh that led to your success
Questioneryeah I mean I think the thing is that uh the the first the first question to ask yourself is uh what are you passionate about you know and if if you're willing to work at something where the amount you get paid is irrelevant and you truly enjoy that work uh then you're getting close to answering the question correctly and so so if you are pursuing uh a career as a investment manager an investment analyst and and you would do this job if it paid the same as a school teacher for example example um then then you are picking the right calling because you should not be picking this calling because it pays
Otherpicking this calling because it pays well uh you should be picking thiswell uh you should be picking thiswell uh you should be picking this calling because it is what you believecalling because it is what you believecalling because it is what you believe you're wired for and what you love doingyou're wired for and what you love doingyou're wired for and what you love doing so the first question to ask yourself isso the first question to ask yourself isso the first question to ask yourself is what do you love doing and uh in in mywhat do you love doing and uh in in mywhat do you love doing and uh in in my case you know uh I think this is uh I'vecase you know uh I think this is uh I'vecase you know uh I think this is uh I've asked myself the question repeatedly inasked myself the question repeatedly inasked myself the question repeatedly in fact umfact umfact um one of the things that uh uh that uh Ione of the things that uh uh that uh Ione of the things that uh uh that uh I had I had I had uh gone through um in uhhad I had I had uh gone through um in uhhad I had I had uh gone through um in uh in actually the 99 time frame was uh I'min actually the 99 time frame was uh I'min actually the 99 time frame was uh I'm part of this group called YPO and we hadpart of this group called YPO and we hadpart of this group called YPO and we had done uh kind of a an exercise where wedone uh kind of a an exercise where wedone uh kind of a an exercise where we had a couple of industrialhad a couple of industrialhad a couple of industrialhad a couple of industrial psychologists uh who spent uh some timepsychologists uh who spent uh some timepsychologists uh who spent uh some time uh doing a 360 analysis of us so theyuh doing a 360 analysis of us so theyuh doing a 360 analysis of us so they they called and interviewed our spousesthey called and interviewed our spousesthey called and interviewed our spouses our friends uh in my case people whoour friends uh in my case people whoour friends uh in my case people who work for me if if the kids were oldwork for me if if the kids were oldwork for me if if the kids were old enough to talk to the kids then theyenough to talk to the kids then theyenough to talk to the kids then they conducted a bunch of tests on us thenconducted a bunch of tests on us thenconducted a bunch of tests on us then they interviewed us and then what theythey interviewed us and then what they
Otherthey interviewed us and then what they gave us at the end of all that was agave us at the end of all that was agave us at the end of all that was a blueprint of who we were and uh whatblueprint of who we were and uh whatblueprint of who we were and uh what happens with most humans is that uh wehappens with most humans is that uh wehappens with most humans is that uh we have a map kind of this is what we arehave a map kind of this is what we arehave a map kind of this is what we are on the inside and then we kind of acton the inside and then we kind of acton the inside and then we kind of act this way on the outside side because wethis way on the outside side because wethis way on the outside side because we believe the world expects us to act thisbelieve the world expects us to act thisbelieve the world expects us to act this way but our internal wiring is that thisway but our internal wiring is that thisway but our internal wiring is that this is who we are and we act this way so ifis who we are and we act this way so ifis who we are and we act this way so if you get an Inon in congruence betweenyou get an Inon in congruence betweenyou get an Inon in congruence between who you are internally and who youwho you are internally and who youwho you are internally and who you are acting like externally you will notare acting like externally you will notare acting like externally you will not go far in life what you have to do isgo far in life what you have to do isgo far in life what you have to do is you have to get things in perfectyou have to get things in perfectyou have to get things in perfect alignment like this where your internalalignment like this where your internalalignment like this where your internal wiring is exactly the way you arewiring is exactly the way you arewiring is exactly the way you are externallyexternallyexternally and um so uh at the time I had goneand um so uh at the time I had goneand um so uh at the time I had gone through this testing I was just about tothrough this testing I was just about tothrough this testing I was just about to start P Bri funds and I was running astart P Bri funds and I was running astart P Bri funds and I was running a company which had about 170 people uh ITcompany which had about 170 people uh ITcompany which had about 170 people uh IT company that I had founded and the uhcompany that I had founded and the uh
Othercompany that I had founded and the uh the psychologists basically said that they couldn't even understand how I was able to run that company because was so far away from what my preferences and competence and uh wiring was if you will and then they looked at PAB fanss and they looked at kind of the way it would be and the size where there would be no people and all that and they said this is perfect for what uh your internal wiring is so their belief system was that between our genetics and the experiences we have in the first five years of life who we are as people is hardcoded and that is not going to change for the rest of your life so whatever why Ing and and uh kind of inside map you have is fixed the problem is that most humans don't know what that map is because we don't come with the owner's manual but at the age of 34 I received an owner's manual a 20page
Questionerreceived an owner's manual a 20page document for the first time someone gave me an owner's manual uh it was invaluable I thought was one of the best things I ever did uh the best $2,000 I ever spent and um and um that so one of these two psychologists um when pund was starting he wasn't a very wealthy man uh but he invested he was one of the original investors who invested and I asked him you know why do you want to invest in this he say he said Mish I cracked your brain open I know exactly what's in there this is the right place to put the money you know uh I I know this bet won't fail and and of course we did quite well uh with that so uh so the first question is uh if if investing puts you in an alignment like this which is not an easy thing to figure out um you know you can understand what some of these kind of things are in your owner's manual with
Otherthings are in your owner's manual with how you feel after doing certain tasks if you feel energized and excited about doing something uh then you're in the right place like you know the shipping company this weekend uh if if my wife told me we have to go to some party I would prefer looking at the sipping company to go into the party you know it would just be more fun and U and son so so so you you can answer that question with kind of your likes and dislikes so that's the first thing you have to make sure that you are playing in Center Court uh of what you are wired to do and figuring out what you're wired to do is not the easiest thing in the world uh but it can be done and you can uh Myers Briggs might help you that's a poor man's version uh but I think going to Industrial psychologist like like the one I went to and they have tools to
Questionerone I went to and they have tools to figure this out for you and I think it figure this out for you and I think it figure this out for you and I think it should be required for every human I should be required for every human I should be required for every human I think every human should have an owner's think every human should have an owner's think every human should have an owner's manual it would help a lot uh the second part about the adversity in The Valleys part about the adversity in The Valleys part about the adversity in The Valleys uh there have been a few valleys and um uh there have been a few valleys and um uh there have been a few valleys and um um you know the the thing is that um um you know the the thing is that um um you know the the thing is that um there's a movie that came out a while um there's a movie that came out a while um there's a movie that came out a while back I think it was the best picture of back I think it was the best picture of back I think it was the best picture of the Year Life is the Year Life is the Year Life is Beautiful um did you guys see that Beautiful um did you guys see that Beautiful um did you guys see that movie raise your hand if you've seen the movie raise your hand if you've seen the movie raise your hand if you've seen the that that that movie a couple of souls have seen the movie a couple of souls have seen the movie a couple of souls have seen the movie and a couple of souls think they movie and a couple of souls think they movie and a couple of souls think they may have seen it uh well it might be uh may have seen it uh well it might be uh may have seen it uh well it might be uh useful to see it it's a it's a it's uh useful to see it it's a it's a it's uh useful to see it it's a it's a it's uh it's in some parts funny but I think it's in some parts funny but I think it's in some parts funny but I think it's it's got some great life lessons um it's it's got some great life lessons um it's it's got some great life lessons um so there are uh there are two movies you so there are uh there are two movies you so there are uh there are two movies you know books are so boring but movies are know books are so boring but movies are know books are so boring but movies are more fun to see so I'd like to recommend more fun to see so I'd like to recommend more fun to see so I'd like to recommend a couple of movies to you uh the first
Questionera couple of movies to you uh the first one is uh Jiro Dreams of Sushi uh how many of you have seen that movie Jiro Dreams of Sushi oh we've got a few people who seen that that's great so uh that's that's you know Jiro uh who is my hero is exactly like this he's doing he's he didn't go to Industrial psychologist but he's dead on doing what he loves to do and uh it's a great movie in fact I I have my first trip to Japan coming up uh next march and it's a restaurant where they serve sushi and uh I think you got to make a reservation of month in Van so I'm looking forward to uh meeting Jiro and eating his Sushi u in a few months it'll be great and um so that's a great movie the second one is Life is Beautiful uh which is also a good movie to see um but you know the thing is that uh when I was uh which will the Life is Beautiful Will kind of
Questionerwill the Life is Beautiful Will kind of anytime you feel that you're in a Valanytime you feel that you're in a Valanytime you feel that you're in a Val your life is useless um put on thatyour life is useless um put on thatyour life is useless um put on that movie it'll give you some perspective ummovie it'll give you some perspective ummovie it'll give you some perspective um and uh and such and um um I I saw myand uh and such and um um I I saw myand uh and such and um um I I saw my parents U go through uh multipleparents U go through uh multipleparents U go through uh multiple bankruptcies in my childhood and uh mybankruptcies in my childhood and uh mybankruptcies in my childhood and uh my parents were very poor financialparents were very poor financialparents were very poor financial planners so when things they were kindplanners so when things they were kindplanners so when things they were kind of like these Greek ship owners um whenof like these Greek ship owners um whenof like these Greek ship owners um when uh when times were going well uh weuh when times were going well uh weuh when times were going well uh we lived really well and when times werelived really well and when times werelived really well and when times were rough uh we didn't have money forrough uh we didn't have money forrough uh we didn't have money for groceries uh we didn't have money forgroceries uh we didn't have money forgroceries uh we didn't have money for rent they was absolutely it was absoluterent they was absolutely it was absoluterent they was absolutely it was absolute rock bottom and so when the business myrock bottom and so when the business myrock bottom and so when the business my my dad was a kind of Serial entrepreneurmy dad was a kind of Serial entrepreneurmy dad was a kind of Serial entrepreneur so when the businesses uh went bankruptso when the businesses uh went bankruptso when the businesses uh went bankrupt and every few years with some regularityand every few years with some regularityand every few years with some regularity they would go bankrupt um it would havethey would go bankrupt um it would havethey would go bankrupt um it would have a direct personal impact uh because justa direct personal impact uh because justa direct personal impact uh because just you know the basics were goneyou know the basics were goneyou know the basics were gone and um but through each of those
Questionerand um but through each of those bankruptcies I never saw my parents uh ever get depressed uh in fact for my mother I never ever saw that in fact in fact she what I learned uh one of the greatest things I learned from my mom was just uh uh the way she looked at life just how resilient she was and how resilient she still is which is great uh my dad would sometimes get uh down because there was just so much he was dealing with and uh but one time just to give you a quick story I know Arin thinks I'm taking up so much time my stories but just a quick story um you know uh one time my my dad was bankrupt there was nothing nothing going on it was almost there was hardly any money and every Sunday he had this priest this Hindu priest uh show up at our house and this Hindu priest claimed to be an astrologer who could predict the future
Otherastrologer who could predict the future and he would you know look at all theseand he would you know look at all theseand he would you know look at all these signs of when my father was born andsigns of when my father was born andsigns of when my father was born and Mars was in this position and all thisMars was in this position and all thisMars was in this position and all this sort of stuff and say what was going tosort of stuff and say what was going tosort of stuff and say what was going to happen and and then my dad would pay himhappen and and then my dad would pay himhappen and and then my dad would pay him and then you know he'd come back theand then you know he'd come back theand then you know he'd come back the next week again and you know he'd getnext week again and you know he'd getnext week again and you know he'd get he's got all these markings on his headhe's got all these markings on his headhe's got all these markings on his head he's got the saffron ropes and my dadhe's got the saffron ropes and my dadhe's got the saffron ropes and my dad was an engineer and you know he wasn't awas an engineer and you know he wasn't awas an engineer and you know he wasn't a religious guy so after I was like aboutreligious guy so after I was like aboutreligious guy so after I was like about 11 years old and got some courage I I11 years old and got some courage I I11 years old and got some courage I I told him you know you got to know thattold him you know you got to know thattold him you know you got to know that this guy is full of not in quitethis guy is full of not in quitethis guy is full of not in quite these many words but in more diplomaticthese many words but in more diplomaticthese many words but in more diplomatic language so I wouldn't get slapped orlanguage so I wouldn't get slapped orlanguage so I wouldn't get slapped or something and um I said why do you havesomething and um I said why do you havesomething and um I said why do you have this guy and you know he's taking moneythis guy and you know he's taking moneythis guy and you know he's taking money when money is very scarce we don't havewhen money is very scarce we don't havewhen money is very scarce we don't have any money so he my dad says toany money so he my dad says toany money so he my dad says to me I know he's full of but I tryme I know he's full of but I tryme I know he's full of but I try not to think about that so I see he says
Othernot to think about that so I see he says that um I'm at the bottom of a well and I need a rope to climb out of the well and he is my rope because when I pay him and he gives me the future he knows if he if he presents a bleak future he won't be called back the next week and and so because he's going to give me a somewhat positive forecast about the future I get some energy to kind of start climbing up that rope and try to get up and get out of the well so my dad said I'm I'm paying him because he's my rope so my dad figured out a way uh to find a rope right so so one of the things uh you know there are different I would say there are different ways and different uh kinds of rope that you can use so it is a given that part of the human condition is that we're going to have great times and we're going to have lousy times and we're going to be uh you know down and
Otherwe're going to be uh you know down and we're going to be uh you know down and out at times and we'll be riding various out at times and we'll be riding various out at times and we'll be riding various waves at times and that's just going to waves at times and that's just going to waves at times and that's just going to happen to all of us and the key is to happen to all of us and the key is to happen to all of us and the key is to understand that when you're down and out understand that when you're down and out understand that when you're down and out just like the shipping rates that have just like the shipping rates that have just like the shipping rates that have collapsed that it's a temporary collapsed that it's a temporary collapsed that it's a temporary condition and uh the second thing uh to condition and uh the second thing uh to condition and uh the second thing uh to realize is and this is uh you know I'm realize is and this is uh you know I'm realize is and this is uh you know I'm not religious but there's a there's a not religious but there's a there's a not religious but there's a there's a Hindu philosophy that there is no Hindu philosophy that there is no Hindu philosophy that there is no suffering in this world it's a Buddhist suffering in this world it's a Buddhist suffering in this world it's a Buddhist philosophy actually um there's no philosophy actually um there's no philosophy actually um there's no suffering in this world uh there is a suffering in this world uh there is a suffering in this world uh there is a reaction to events that humans have reaction to events that humans have reaction to events that humans have which causes suffering so even if a which causes suffering so even if a which causes suffering so even if a person has person has person has cancer and even if they are terminal and cancer and even if they are terminal and cancer and even if they are terminal and let's say go they're going to die in a let's say go they're going to die in a let's say go they're going to die in a month at the particular moment month at the particular moment month at the particular moment that you ask them so let's say they get that you ask them so let's say they get that you ask them so let's say they get a shot of morphine they feel pretty good a shot of morphine they feel pretty good a shot of morphine they feel pretty good uh so are they suffering at that moment uh so are they suffering at that moment
Otheruh so are they suffering at that moment no they're not suffering five minutesno they're not suffering five minutesno they're not suffering five minutes later are they suffering no they're notlater are they suffering no they're notlater are they suffering no they're not suffering now if they think about thesuffering now if they think about thesuffering now if they think about the end terminalend terminalend terminal result they will start suffering so weresult they will start suffering so weresult they will start suffering so we we have control over whether we sufferwe have control over whether we sufferwe have control over whether we suffer or not the event does not cause theor not the event does not cause theor not the event does not cause the suffering it is our reaction to thesuffering it is our reaction to thesuffering it is our reaction to the event that's going to lead to sufferingevent that's going to lead to sufferingevent that's going to lead to suffering so if you can control theso if you can control theso if you can control the reaction uh and that's why like if youreaction uh and that's why like if youreaction uh and that's why like if you see the movie like life is beautifulsee the movie like life is beautifulsee the movie like life is beautiful he's controlling the reaction so we wehe's controlling the reaction so we wehe's controlling the reaction so we we have the power within us to control thehave the power within us to control thehave the power within us to control the reaction and uh once you can understandreaction and uh once you can understandreaction and uh once you can understand how to control the reaction uh then uhhow to control the reaction uh then uhhow to control the reaction uh then uh sufferingsufferingsuffering becomes uh quite irrelevant and uh andbecomes uh quite irrelevant and uh andbecomes uh quite irrelevant and uh and so you know uh the the highs and lowsso you know uh the the highs and lowsso you know uh the the highs and lows yes we've had a few lows while I've beenyes we've had a few lows while I've beenyes we've had a few lows while I've been running PAB funds uh but you know thenrunning PAB funds uh but you know thenrunning PAB funds uh but you know then there's another saying uh you know ifthere's another saying uh you know ifthere's another saying uh you know if um if wealth is lost nothing is lost ifum if wealth is lost nothing is lost if
Questionerum if wealth is lost nothing is lost if health is lost something is lost and ifhealth is lost something is lost and ifhealth is lost something is lost and if character is lost everything is lost socharacter is lost everything is lost socharacter is lost everything is lost so the anything happening with PAB funds isthe anything happening with PAB funds isthe anything happening with PAB funds is only related to wealthonly related to wealthonly related to wealth and uh so basically that isand uh so basically that isand uh so basically that is irrelevant so uh it doesn't mean muchirrelevant so uh it doesn't mean muchirrelevant so uh it doesn't mean much and so far in life uh I thankfully haveand so far in life uh I thankfully haveand so far in life uh I thankfully have not had any health or character issuesnot had any health or character issuesnot had any health or character issues that are meaningful so so that's goodthat are meaningful so so that's goodthat are meaningful so so that's good and I hope thatand I hope thatand I hope that continues sorry for the long discoursecontinues sorry for the long discoursecontinues sorry for the long discourse and getting away from value investingand getting away from value investingand getting away from value investing
OtherArvin but you made me do it Manish thatArvin but you made me do it Manish thatArvin but you made me do it Manish that was uh no that was that was great otherwas uh no that was that was great otherwas uh no that was that was great other questions
Questioneryeah they've had record profits but theyeah they've had record profits but theyeah they've had record profits but the multiple keeps Contracting so do youmultiple keeps Contracting so do youmultiple keeps Contracting so do you have a catalyst in mind or is this morehave a catalyst in mind or is this morehave a catalyst in mind or is this more of one of those bets where it's allof one of those bets where it's allof one of those bets where it's all upside and downside you're really notupside and downside you're really notupside and downside you're really not going to losegoing to losegoing to lose anything um you know uh I I missed theanything um you know uh I I missed theanything um you know uh I I missed the first part of the question can you justfirst part of the question can you justfirst part of the question can you just repeat it so the the question was uhrepeat it so the the question was uh
Questionerrepeat it so the the question was uh looking at at businesses like GM and Ford uh earnings have increased but the multiple has compressed and the question was do you have a catalyst in mind when investing in those types of businesses is that a fair or is it just like just or is it upside downside uh focused where you feel you can't lose any money and you can double or triple your money and you don't have a clear Catalyst
Warrenyeah well so uh I didn't want to make this talk about stock tips and portfolio positions and such but I'll try to answer your question um in um um in the context of just trying to be helpful um but uh so uh the stock market is not there to instruct us uh it is there for to serve us where we can buy at times when it's offering a bargain and we can sell at times when it's euphoric so that's the purpose of the stock market so I never look at the
Todd Combsthe stock market so I never look at the GM or any other company stock price to instruct me on what the business is worth what the business is worth is independent of that stock price and um Catalyst uh I have never done Catalyst investing uh so value is its own catalyst so with GM it's uh it's really quite simple so uh recently I looked at the I you know if you go on the John Deere website uh they have a investor presentation and I think slide 49 if my memory serves me right is a slide that shows 25 years history of their uh earnings over the last 25 years 25 or 27 years and they have the earnings in two pieces uh one piece of the earnings is the earnings from their Finance business and the other piece of the earnings is the rest of the business so some a company like John Deere basically makes tractors and farm equipment and uh they offer
Ted Weschlerand farm equipment and uh they offer financing and leasing to their customersfinancing and leasing to their customersfinancing and leasing to their customers of that farm equipment and the theof that farm equipment and the theof that farm equipment and the the captive uh you know so one of the mentalcaptive uh you know so one of the mentalcaptive uh you know so one of the mental models that uh I actually came to quitemodels that uh I actually came to quitemodels that uh I actually came to quite by accident and I came to this mentalby accident and I came to this mentalby accident and I came to this mental model in 92model in 92model in 92 uh so it's been uh 24 years ago evenuh so it's been uh 24 years ago evenuh so it's been uh 24 years ago even before PAB funds um and I I won't gobefore PAB funds um and I I won't gobefore PAB funds um and I I won't go into the reasons why I came to thatinto the reasons why I came to thatinto the reasons why I came to that because we want to keep uh on some kindbecause we want to keep uh on some kindbecause we want to keep uh on some kind of some type of schedule but um theof some type of schedule but um theof some type of schedule but um the captive Finance businesses of companiescaptive Finance businesses of companiescaptive Finance businesses of companies like joh John Deer so in 25 years thatlike joh John Deer so in 25 years thatlike joh John Deer so in 25 years that business had seen a lot of cyclicalitybusiness had seen a lot of cyclicalitybusiness had seen a lot of cyclicality going up and down and the profits hadgoing up and down and the profits hadgoing up and down and the profits had gone up and down but their Financegone up and down but their Financegone up and down but their Finance business had had nobusiness had had nobusiness had had no cyclicality uh it the finance businesscyclicality uh it the finance businesscyclicality uh it the finance business of John Deere has made money everyof John Deere has made money everyof John Deere has made money every single year since 92 including thesingle year since 92 including thesingle year since 92 including the financial crisis 2007 2008 2009 2010 andfinancial crisis 2007 2008 2009 2010 andfinancial crisis 2007 2008 2009 2010 and even recently when uh demand for farmeven recently when uh demand for farmeven recently when uh demand for farm equipment has collapsed and not only has
Otherequipment has collapsed and not only has it stayed profitable it's almost stayed profitable in a straight line up which means that uh almost always this year's earnings from Finance are greater than last year's earning from finance and this is the case with almost all the captives so if you look at Ford Credit and uh GM's uh captive Finance arm Etc uh these are very stable businesses and they are more stable so for example Banks during the financial crisis saw their earnings get whacked and lot of losses and all of that even during the financial crisis the captive Finance arms had no issues and why is that why so I'll get to the why is that later if Arin permits me uh let's just take it to be the gospel truth that the finance arms of these captives go one way so GM has a captive Finance arm so first of all GM used to have a captive Finance
Questionerof all GM used to have a captive Finance arm called GMAC and what GAC did is bearm called GMAC and what GAC did is bearm called GMAC and what GAC did is be before the financial crisis instead ofbefore the financial crisis instead ofbefore the financial crisis instead of just financing cars they startedjust financing cars they startedjust financing cars they started financing homes and they startedfinancing homes and they startedfinancing homes and they started financing all kinds of things unrelatedfinancing all kinds of things unrelatedfinancing all kinds of things unrelated to cars or General Motors um after theto cars or General Motors um after theto cars or General Motors um after the company came out of bankruptcy theycompany came out of bankruptcy theycompany came out of bankruptcy they started a new Finance arm they actuallystarted a new Finance arm they actuallystarted a new Finance arm they actually bought a uh subprime lender and nowbought a uh subprime lender and nowbought a uh subprime lender and now about onethird of the North Americanabout onethird of the North Americanabout onethird of the North American Business when they sell a new car uhBusiness when they sell a new car uhBusiness when they sell a new car uh about onethird of the time if it'sabout onethird of the time if it'sabout onethird of the time if it's financed uh maybe it's close to 40% it'sfinanced uh maybe it's close to 40% it'sfinanced uh maybe it's close to 40% it's fin financed by uh general motor finfin financed by uh general motor finfin financed by uh general motor fin General Motors Financial uh GM financeGeneral Motors Financial uh GM financeGeneral Motors Financial uh GM finance and and as they grow the uh the theand and as they grow the uh the theand and as they grow the uh the the sales the earnings from that Finance armsales the earnings from that Finance armsales the earnings from that Finance arm was going to keep going up and just towas going to keep going up and just towas going to keep going up and just to give you a sense Ford Motor Company uhgive you a sense Ford Motor Company uhgive you a sense Ford Motor Company uh used to make something like five billionused to make something like five billionused to make something like five billion a year on their Finance arm uh GM todaya year on their Finance arm uh GM todaya year on their Finance arm uh GM today makes about a billion a year on their
Othermakes about a billion a year on their Finance arm they have uh guided that in a few years it'll be at 2 billion and if you understand the long history of of how these Finance arms go if you take a very uh distant view of maybe 10 years it may be 3 four five billion because they are still building out in other parts of the world Etc so uh so the so that Finance arm is uh is incredibly valuable but let's let's say we just go with a 2 billion number which the company expects to get to in their Finance business in uh 2 or 3 years so if you have a business which the cash flows are not like the shipping business if the 2017 or 2018 cash flows in the finance business are 2 billion and in 22 or 23 they are two and a half or three billion and they keep going what is that business worth today uh well that business in the low interest rate
Questionerbusiness in the low interest rate environment we're in today is on a badenvironment we're in today is on a badenvironment we're in today is on a bad day worth at least 15 times today'sday worth at least 15 times today'sday worth at least 15 times today's earnings if if if uh you know it's it'searnings if if if uh you know it's it'searnings if if if uh you know it's it's a very very good business um so if if ifa very very good business um so if if ifa very very good business um so if if if if we think that in two or three yearsif we think that in two or three yearsif we think that in two or three years GM's Finance business which is at aGM's Finance business which is at aGM's Finance business which is at a billion today is at two billion thatbillion today is at two billion thatbillion today is at two billion that business is worth 30 billion in threebusiness is worth 30 billion in threebusiness is worth 30 billion in three years uh GM also has a business in Chinayears uh GM also has a business in Chinayears uh GM also has a business in China they are the largest company that sellsthey are the largest company that sellsthey are the largest company that sells cars in China in China and they sell itcars in China in China and they sell itcars in China in China and they sell it through a joint venture so they sellthrough a joint venture so they sellthrough a joint venture so they sell more cars in China than they sell in themore cars in China than they sell in themore cars in China than they sell in the US uh and they own half of thoseUS uh and they own half of thoseUS uh and they own half of those operations and the Chinese operationsoperations and the Chinese operationsoperations and the Chinese operations like clockwork produce about two billionlike clockwork produce about two billionlike clockwork produce about two billion a year they produce two billion a year aa year they produce two billion a year aa year they produce two billion a year a while for a while and they continue towhile for a while and they continue towhile for a while and they continue to produce and if anything that number isproduce and if anything that number isproduce and if anything that number is going to go up it probably goes up togoing to go up it probably goes up togoing to go up it probably goes up to two and a half or three billion at sometwo and a half or three billion at sometwo and a half or three billion at some point but let's keep it at two billion
Questionerpoint but let's keep it at two billion
Questionerso what is that business worth it's in an Emerging Market uh the Chinese are going to buy cars for a long time there's uh there's a there's a long uh Runway ahead of the billion 4 or whatever the population is with um cars being bought it's four times the US population even with the lower GDP it's still going to have a a huge runway in terms of cars being sold um so we have these two businesses they collectively let's say in three years are producing 4 billion 4 billion in these two businesses in my opinion is worth at least 60 billion it should be worth at least 15 times cash flows uh and now the truck business in the US and Cadillac and they've they've sell 10 Bill 10 million cars I'm ignoring seven out of those 10 million cars because I'm only accounted for Chinese car sales and the finance
Todd CombsChinese car sales and the finance business I'm ignoring Park sales uhbusiness I'm ignoring Park sales uhbusiness I'm ignoring Park sales uh which is also very high margin um andwhich is also very high margin um andwhich is also very high margin um and such so I don't seesuch so I don't seesuch so I don't see how GM as a companyhow GM as a companyhow GM as a company is fairlyis fairlyis fairly valued at uh less than 50valued at uh less than 50valued at uh less than 50 billion uh with 20 billion of cash onbillion uh with 20 billion of cash onbillion uh with 20 billion of cash on the balance sheet when they have thesethe balance sheet when they have thesethe balance sheet when they have these twotwotwo businesses and and I actually believebusinesses and and I actually believebusinesses and and I actually believe the truck business is worth somethingthe truck business is worth somethingthe truck business is worth something and I believe Cadillac is worthand I believe Cadillac is worthand I believe Cadillac is worth something and I believe at some pointsomething and I believe at some pointsomething and I believe at some point they will make money in Europe and atthey will make money in Europe and atthey will make money in Europe and at some point they'll make money in Latinsome point they'll make money in Latinsome point they'll make money in Latin America and so on so um that's why weAmerica and so on so um that's why weAmerica and so on so um that's why we invested in GM
Questionermanise you you've been so generous withmanise you you've been so generous withmanise you you've been so generous with your time today uh I'm curious if youyour time today uh I'm curious if youyour time today uh I'm curious if you have any parting thoughts for the classhave any parting thoughts for the classhave any parting thoughts for the class as we kind of reached the the last fewas we kind of reached the the last fewas we kind of reached the the last few minutes
Todd Combswell uh this was a lot of fun itactually went by a lot faster uh than Iactually went by a lot faster uh than Iactually went by a lot faster uh than I thought uh I was uh I think my my mythought uh I was uh I think my my mythought uh I was uh I think my my my analysis of the Five Points took aanalysis of the Five Points took aanalysis of the Five Points took a little longer so I'm sorry about that
Otherlittle longer so I'm sorry about that but it was always Arin is always a pleasure uh you always have great students I love Boston College and um and uh wish you all the best and um and uh I hope you got something out of it
Questionerthank you we did this was great Manish thank you so much