Other[Music][Music][Music] welcome back everybody can you hear me
Otherwelcome back everybody can you hear me
Otherwelcome back everybody can you hear me yes wonderful all right so we've got a
Otheryes wonderful all right so we've got a
Otheryes wonderful all right so we've got a real treat in store for you tonight and I hope that as you made your way through the reading both Dondo investor and the stone trust yellow books you started to get a sense of how Mr Mohnish Pabrai approaches capital allocation and approaches value investing and you'll see common themes with what we've talked about so far this semester and you may see how he approaches it in slightly different ways than we have up to this point so tonight he's going to join us as is Mr Francis Chiu who was part of this stone trust acquisition and we'll go through the kind of an orientation for tonight in just a moment but they'll walk us through from start to finish what they saw in stone trust what they were looking at before the acquisition how it how it took place and then how it
Otherhow it how it took place and then how ithow it how it took place and then how it has done since then okay so with thathas done since then okay so with thathas done since then okay so with that I'm going to give you briefI'm going to give you briefI'm going to give you brief introductions to mr. Bob Ryan mr. Chiuintroductions to mr. Bob Ryan mr. Chiuintroductions to mr. Bob Ryan mr. Chiu both of them are preceded by theirboth of them are preceded by theirboth of them are preceded by their reputations mr. Parr I was born in inreputations mr. Parr I was born in inreputations mr. Parr I was born in in India and came to the u.s. in 1983 heIndia and came to the u.s. in 1983 heIndia and came to the u.s. in 1983 he worked at Tellabs from 86 to 91 in theirworked at Tellabs from 86 to 91 in theirworked at Tellabs from 86 to 91 in their high-speed data networking group andhigh-speed data networking group andhigh-speed data networking group and then international marketing and salesthen international marketing and salesthen international marketing and sales he started Transtech an IT consultinghe started Transtech an IT consultinghe started Transtech an IT consulting and systems integration company withand systems integration company withand systems integration company with 30,000 from his retirement savings and30,000 from his retirement savings and30,000 from his retirement savings and 70,000 in credit card debt70,000 in credit card debt70,000 in credit card debt he sold it in 2000 for 20 million hehe sold it in 2000 for 20 million hehe sold it in 2000 for 20 million he then started Habra investment fundsthen started Habra investment fundsthen started Habra investment funds which he continues to run today mr. Chiuwhich he continues to run today mr. Chiuwhich he continues to run today mr. Chiu raised in India began his career as araised in India began his career as araised in India began his career as a Bell Telephone technician he startedBell Telephone technician he startedBell Telephone technician he started investing with six colleagues and has ainvesting with six colleagues and has ainvesting with six colleagues and has a kegger across his careerkegger across his careerkegger across his career over 13% with a high school diploma heover 13% with a high school diploma heover 13% with a high school diploma he took the CFA exams and passed in 1985took the CFA exams and passed in 1985
Othertook the CFA exams and passed in 1985 earning his CFA designation Behrens hasearning his CFA designation Behrens hasearning his CFA designation Behrens has called him one of the world's bestcalled him one of the world's bestcalled him one of the world's best investors and there's actually ainvestors and there's actually ainvestors and there's actually a wonderful collection of articles aboutwonderful collection of articles aboutwonderful collection of articles about him on his website and so I provided thehim on his website and so I provided thehim on his website and so I provided the link there because you'll have access tolink there because you'll have access tolink there because you'll have access to the slides after this class and it wouldthe slides after this class and it wouldthe slides after this class and it would be worthwhile for all of you if yoube worthwhile for all of you if yoube worthwhile for all of you if you haven't seen the articles yet to go andhaven't seen the articles yet to go andhaven't seen the articles yet to go and explore those so with that I'm gonnaexplore those so with that I'm gonnaexplore those so with that I'm gonna turn it over to mr. Pomeroy and mr. Chiuturn it over to mr. Pomeroy and mr. Chiuturn it over to mr. Pomeroy and mr. Chiu let me stop sharing the screen and iflet me stop sharing the screen and iflet me stop sharing the screen and if you could take us through stone trustyou could take us through stone trustyou could take us through stone trust and what led you to it why it was aand what led you to it why it was aand what led you to it why it was a meritorious idea at the time formeritorious idea at the time formeritorious idea at the time for acquisition how the acquisition went andacquisition how the acquisition went andacquisition how the acquisition went and how it's done subsequently and then thathow it's done subsequently and then thathow it's done subsequently and then that we can go from there into the Q&A I'llwe can go from there into the Q&A I'llwe can go from there into the Q&A I'll turn it over to you sure well let meturn it over to you sure well let meturn it over to you sure well let me I'll get started first if that's okayI'll get started first if that's okayI'll get started first if that's okay Francis so professor sander thank youFrancis so professor sander thank youFrancis so professor sander thank you very much for having Francis and me join
Othervery much for having Francis and me join your class when we had set this up many moons ago it wasn't set up to happen with such an interesting backdrop we thought it'd be a more sedate environment but here we are and it's kind of I think it's kind of interesting and fun to to do this with with all the the events and things taking place around us we truly live in unprecedented times I definitely hope I don't really live these times ever before I leave planet Earth and probably that's likely and probably likely for all of you as well anyway so it's great to be here and you know I accidentally heard about Warren Buffett you know I think reading a book by Peter Lynch this was maybe 26 years ago and I'm an engineer by training and I was just very intrigued once I heard about Warren Buffett and his approach to investing and that eventually led me to
Questionerinvesting and that eventually led me to abandon tech and engineering and move into investing and compounding and so on and it's been a really fun quarter century over you know trying to practice that and I I cloned many aspects of what Buffett did I like to say that I'm the shameless cloner and cloning is one of the best mental models you can adapt it's very powerful a lot of people have figured out a lot of smart stuff and you can just lift and take that you don't need to invent everything yourself so so cloning is definitely good for your financial health and probably for your for your well-being in many other ways and I had always been intrigued with the Berkshire Hathaway model and always been intrigued with Buffett's use of float and and so on and so in in the 2014 timeframe I got to know that there was a insurance
Otherto know that there was a insurance company privately held insurance companycompany privately held insurance companycompany privately held insurance company in Baton Rouge Louisiana which focusedin Baton Rouge Louisiana which focusedin Baton Rouge Louisiana which focused on workers comp that possibly might beon workers comp that possibly might beon workers comp that possibly might be available for sale and and I thoughtavailable for sale and and I thoughtavailable for sale and and I thought well you know it would be interesting towell you know it would be interesting towell you know it would be interesting to actually have vehicle and insuranceactually have vehicle and insuranceactually have vehicle and insurance vehicle with float etc and and to to tryvehicle with float etc and and to to tryvehicle with float etc and and to to try to clone that aspect of what Warrento clone that aspect of what Warrento clone that aspect of what Warren Buffett did and so I set up anotherBuffett did and so I set up anotherBuffett did and so I set up another entity called tondo Holdings separateentity called tondo Holdings separateentity called tondo Holdings separate from Popeye funds I raised about a 150from Popeye funds I raised about a 150from Popeye funds I raised about a 150 million from a number of investors andmillion from a number of investors andmillion from a number of investors and the idea was to acquire stone trust andthe idea was to acquire stone trust andthe idea was to acquire stone trust and also to maybe possibly acquire otheralso to maybe possibly acquire otheralso to maybe possibly acquire other private businessesprivate businessesprivate businesses the the the funds I run Barbrathe the the funds I run Barbrathe the the funds I run Barbra investment funds are focused on publicinvestment funds are focused on publicinvestment funds are focused on public equity markets they are not set up to doequity markets they are not set up to doequity markets they are not set up to do these kind of private acquisitions andthese kind of private acquisitions andthese kind of private acquisitions and so on so I was setting up a secondso on so I was setting up a secondso on so I was setting up a second vehicle which basically would give mevehicle which basically would give mevehicle which basically would give me the wherewithal to in effect be able tothe wherewithal to in effect be able to
Questionerthe wherewithal to in effect be able to invest in a broader range of assets andinvest in a broader range of assets andinvest in a broader range of assets and so we raised the money and we boughtso we raised the money and we boughtso we raised the money and we bought stone trust for 65 million and I thinkstone trust for 65 million and I thinkstone trust for 65 million and I think before the ink was dry I was beginningbefore the ink was dry I was beginningbefore the ink was dry I was beginning to understand that maybe I made ato understand that maybe I made ato understand that maybe I made a mistake and you know one of the thingsmistake and you know one of the thingsmistake and you know one of the things about investing is that you reallyabout investing is that you reallyabout investing is that you really understand a business only after you ownunderstand a business only after you ownunderstand a business only after you own it so if you run some paper portfolioit so if you run some paper portfolioit so if you run some paper portfolio and buy and sell stocks on a spreadsheetand buy and sell stocks on a spreadsheetand buy and sell stocks on a spreadsheet without real money involved the learningwithout real money involved the learningwithout real money involved the learning is not really going to sink in as wellis not really going to sink in as wellis not really going to sink in as well as when you make real investments withas when you make real investments withas when you make real investments with real money and you end up losing some ofreal money and you end up losing some ofreal money and you end up losing some of it that's really when the learning kicksit that's really when the learning kicksit that's really when the learning kicks in so there's really no way to avoidin so there's really no way to avoidin so there's really no way to avoid that tuition bill in terms of learningthat tuition bill in terms of learningthat tuition bill in terms of learning so once I was realizing that maybe itso once I was realizing that maybe itso once I was realizing that maybe it wasn't the brightest idea I ever came upwasn't the brightest idea I ever came upwasn't the brightest idea I ever came up with to buy an insurance company I waswith to buy an insurance company I waswith to buy an insurance company I was then confronted with either you knowthen confronted with either you know
Questionerthen confronted with either you know live with the decision or be honest with live with the decision or be honest with live with the decision or be honest with myself and be honest my investors and myself and be honest my investors and myself and be honest my investors and try to try to reverse the rescission so try to try to reverse the rescission so try to try to reverse the rescission so we we will all make mistakes mistakes we we will all make mistakes mistakes we we will all make mistakes mistakes are par for the course but we also need are par for the course but we also need are par for the course but we also need to consider what we do once we know to consider what we do once we know to consider what we do once we know those mistakes have been made and so I those mistakes have been made and so I those mistakes have been made and so I realized that stone trust had many realized that stone trust had many realized that stone trust had many aspects to the business that were really aspects to the business that were really aspects to the business that were really good but I also realized it had some good but I also realized it had some good but I also realized it had some aspects of the business that were not so aspects of the business that were not so aspects of the business that were not so good and good and good and I came to the conclusion did not want to I came to the conclusion did not want to I came to the conclusion did not want to be owning and running from a board level be owning and running from a board level be owning and running from a board level that insurance company because the that insurance company because the that insurance company because the opportunity cost or what else I could do opportunity cost or what else I could do opportunity cost or what else I could do and what else my investors could do with and what else my investors could do with and what else my investors could do with those assets I considered pretty high so those assets I considered pretty high so those assets I considered pretty high so you know the if you have studied John you know the if you have studied John you know the if you have studied John Shackleton you know when he embarked on Shackleton you know when he embarked on Shackleton you know when he embarked on getting to the South Pole you know that getting to the South Pole you know that getting to the South Pole you know that was his primary objective for that
Otherwas his primary objective for that mission get to the South Pole but once his ship got trapped in ice and and it started breaking a heart and you know he knew there was no way in hell he was gonna get to the South Pole he changed his mission and his mission was now to get his men back to safety and so once I realized that stone trust was a mistake not where I wanted to be my primary objective was to get my investors capital back to them and ideally hit them get them back a hundred cents on the dollar so even if they didn't make a return if you have a mistake in investing and you get back all your money that's that's a pretty good good place to be so the insurance business and of course Francis is on the other side he's an owner of the business I I know he loves stone trust and and I know they're doing extremely well actually under his leadership which is
Warrenactually under his leadership which is wonderful the insurance business has a number of great attributes one of the biggest attributes is that it is a business where your customers give you money today and they may never ever come back to take that money from you they may never have a claim and and such as life and you get to get the time value of that money over time
Warrenthe second is that there is a recurrence to that revenue so if I am a business you know if I'm running a barber shop I need to have business insurance I need to have workers comp insurance I need to have a variety of different insurance coverages required by law workers comp for example is required by law in all states and and so it's a mandatory requirement like auto insurance and generally speaking if you've written a policy for that barber shop the odds are pretty high that when a time when the
Questionerpretty high that when a time when the time comes to renew a good portion of that business to be sticky it'll come back year after year so the recurring revenue is one of the most beautiful aspects of any business you can own getting into businesses where you don't have recurring revenue can be quite uphill there are a variety of business models that work well but in general recurring revenue is really good so insurance has some really good aspects it has a recurrence to it it has other people giving you money today now if I just compare that to lending in in my opinion lending is one of the worst business to be in because when you make a sale the money leaves your kitty and you hope and pray it comes back and in the time of corona who knows how much is coming back so so you know I think lending is the opposite of insurance in the sense that when you make a sale it's
Ajit Jainthe sense that when you make a sale it's terrible and you make a sale and money leaves the door you know at least is insurance you make a sale money comes in but you have to make sure the policy the price correctly many times you know one of the things I learned after buying insurance or a bind stone trust was one of the things I really did not like about the business was you make a sale but you don't know your cost of goods for that sale many times for several years in the future so I've sold an item where I don't know what my cost of goods really is I may have models that will help me estimated but those models may or may or may not work it just depends on the way things unfold and and such and Francis went probably tell you about you know the nature their claims that they're seeing today in the business in the time of Corona versus what they were
Questionerthe time of Corona versus what they were seeing maybe six months ago it's change quite a bit so once I once I decided to sell the business the stone trust was doing reasonably well it was a business of pretty good shape which is I said okay maybe this is a good time to sell it and I decided let's let's try to unwind the transaction and if we can get around sixty five million which we paid for it maybe even a little bit less a little bit more that's fine we will go ahead and so we we hired bankers and we started the sale process and then I think maybe Francis and correct me if my recollection is wrong but he called me after we had started the process and he was almost offended he said Mohnish I I heard you're selling your insurance company and you did not call me to offer it to me and I said I didn't call it call you to offer it to you because
Othercall you to offer it to you because you're a friend of mine you know I'm selling a business that I'm not very happy with I really like Francis a lot I value a friendship a lot I don't want to do a transaction when I am trying to exit with someone like you because you're too near and dear to me he says no I would I would love to buy the business so I tried really hard to convince Francis not to buy the business and I tried really hard just like I'm telling you all the negatives of the business and it fell on deaf ears and I told Francis please please don't buy the business and Francis will say to me mounish please please only sell the business to me and and so here we are and now I think it's been I think more than more than a couple of years since we closed the deal it was very important to me no matter who the buyer was that anytime I'm doing
Questionerwho the buyer was that anytime I'm doing any kind of transaction or you know deal with anyone they should get a good result not just I should get a good result I always think that one has to think about the greater good and not just think about transaction hey I did well and that sucker got left holding the bag that's not that's a very bad way to live your life and if you lived your life that way life is not going to turn out so well for you so it's always been very important to me that whoever is the people in my in my orbit you know why investors or my vendors or when I'm a customer to somebody else etcetera all of those relationships be win-win relationships as far as possible and Francis had been a very close friend he's a very high-quality human being and I did not want our friendship or our relationship being negatively affected
Questionerrelationship being negatively affected which is why I tried really hard not to sell the business to him but he insisted and here we are and so with that maybe Francis I'll pass the floor to you and let's hear your perspective on this
QuestionerThank You Barbara no I heard about app Mohnish was selling the business on one of the chat boats so iPhone Mohnish and asking about dates for sale and and and I was surprised how quickly big we came to the price we had some know a bit of a concern about reserves and so on and so forth but Mohnish was really quick and proposing of the term and I think we Excel and I accepted it within 48 hours it was really quick and Morris told me you know was give me like how to buy a business you know how you should buy a business and he said you know first thing is you know she'd really consider is the person selling the business to you and he said you know it's it's me selling to you and
Questioneryou know it's it's me selling to you and you know it's it's me selling to you and therefore you should do know do you therefore you should do know do you therefore you should do know do you diligence so you should trust the person diligence so you should trust the person diligence so you should trust the person and so and so if you know the story I and so and so if you know the story I and so and so if you know the story I hardly didn't need any due diligence hardly didn't need any due diligence hardly didn't need any due diligence based on what mohnish was telling me and based on what mohnish was telling me and based on what mohnish was telling me and and and and that is how it happened so and and and that is how it happened so and and and that is how it happened so there were few things that are important there were few things that are important there were few things that are important is when you buy an insurance yeah in is when you buy an insurance yeah in is when you buy an insurance yeah in fact if I may just interrupt Francis for fact if I may just interrupt Francis for fact if I may just interrupt Francis for a second it was four months after he a second it was four months after he a second it was four months after he bought the business that he showed up to bought the business that he showed up to bought the business that he showed up to see it for the first time and it was see it for the first time and it was see it for the first time and it was kind of nice he said he felt that to see kind of nice he said he felt that to see kind of nice he said he felt that to see them actually existed yep what boenish them actually existed yep what boenish them actually existed yep what boenish is saying is quite true I did not even is saying is quite true I did not even is saying is quite true I did not even visit the office and I and I had a visit the office and I and I had a visit the office and I and I had a chance to meet the executives not not in chance to meet the executives not not in chance to meet the executives not not in Baton Rouge where it was based but in Baton Rouge where it was based but in Baton Rouge where it was based but in New York by accident so we had a nice New York by accident so we had a nice New York by accident so we had a nice dinner and I had a chance to talk to dinner and I had a chance to talk to dinner and I had a chance to talk to executives to 3x I guess like the executives to 3x I guess like the
Ajit Jainexecutives to 3x I guess like the president and and the CFO and actuary and then I I kind of had a good understanding that you know a lot of things that boenish had done previously was was was something that I would have done and therefore I don't have to do it so let's look at a few things that Mohnish that first he moved first he moved to Nebraska you know way it should be like we report to me to put to the Nebraska commissioner instead of Louisiana now Nebraska is really important because because of what we call it the investment rules so it's much more relaxed some some states have have investment rules where you can only put 5% of your capital into equities whereas a Nebraska had far more liberal liberal rules you can put almost close to one to one and that is important in an insurance company because if you cannot invest in equities insurance as as a
Questionerinvest in equities insurance as as a rule just lousy businesses and you don't make an adequate return and and so so so when I was looking at them at the business so it reserves have comes first thing in mind you know you can really play with reserves and and so how do you reserves so I was fortunate enough that I've been that I have been involved with Fairfax since 1985 so I've been in the insurance lost fear for a long time and and and the first thing I looked at was like when you look at workers comp one of the biggest danger in workers comp is is how many claims you have now if more than 90 percent of the claims are not resolved within two years it can really spiral and that's that is the biggest danger and workers comp if you don't settle it in two years what happens is that two years can become ten years they're still paying the plane
Otheryears they're still paying the plane over ten years so in in stone trust case over ten years so in in stone trust case over ten years so in in stone trust case yeah yeah yeah ninety percent of their claims were ninety percent of their claims were ninety percent of their claims were resolved in two years I think it was resolved in two years I think it was resolved in two years I think it was around ninety one percent but that gave around ninety one percent but that gave around ninety one percent but that gave me a great comfort factor a second one me a great comfort factor a second one me a great comfort factor a second one was the number of clear claims count it was the number of clear claims count it was the number of clear claims count it was less than three hundred and I was less than three hundred and I was less than three hundred and I thought if it goes over five hundred it thought if it goes over five hundred it thought if it goes over five hundred it would be you know they were not doing would be you know they were not doing would be you know they were not doing their job so three hundred meant they their job so three hundred meant they their job so three hundred meant they were really doing a fabulous job and were really doing a fabulous job and were really doing a fabulous job and looking after claims and second one was looking after claims and second one was looking after claims and second one was as you know claims are extremely as you know claims are extremely as you know claims are extremely dangerous when you go into insurance you dangerous when you go into insurance you dangerous when you go into insurance you don't know your cause as bonnet I said don't know your cause as bonnet I said don't know your cause as bonnet I said it earlier and and sometimes you know it earlier and and sometimes you know it earlier and and sometimes you know your pricing something that you don't your pricing something that you don't your pricing something that you don't know like twenty years later what the know like twenty years later what the know like twenty years later what the price should be but in contrast case the price should be but in contrast case the price should be but in contrast case the duration of an average reserve was only duration of an average reserve was only duration of an average reserve was only three years so if I am off I mean by three years so if I am off I mean by
Questionerthree years so if I am off I mean by pricing I'm only off by by it by three years so these were factors that came into it in terms of understanding whether I should do you know total total due diligence so they they all it came in really like they were lined up and knowing more - I knew it was a really well-run company so so the next part that come becomes really difficult is how do you make a deal and as you know when you make a deal it becomes can become really acrimonious but in our case no one nation IV we struck a deal in less than 48 hours after I saw the numbers and we know there were a few things I was a little bit concerned about and one is that why don't we do it like this and I greed right away and so so over the six-month period before closing the deal there were minor issues here and there and and we have we hardly ever went to
Otherand and we have we hardly ever went to any type of long negotiation we justany type of long negotiation we justany type of long negotiation we just picked up the phone and and we justpicked up the phone and and we justpicked up the phone and and we just resolved it over the for me it didn'tresolved it over the for me it didn'tresolved it over the for me it didn't have lawyers battling each other his lawhave lawyers battling each other his lawhave lawyers battling each other his law and then my lawyer is battling we justand then my lawyer is battling we justand then my lawyer is battling we just talked on the phone and and we justtalked on the phone and and we justtalked on the phone and and we just resolved it ourselves so that's how itresolved it ourselves so that's how itresolved it ourselves so that's how it went from my side and and in the end itwent from my side and and in the end itwent from my side and and in the end it turned out really well so I go into intoturned out really well so I go into intoturned out really well so I go into into you know into a personal address fouryou know into a personal address fouryou know into a personal address four months later and I thought I'll bemonths later and I thought I'll bemonths later and I thought I'll be seeing lot of cockroaches a lot of stuffseeing lot of cockroaches a lot of stuffseeing lot of cockroaches a lot of stuff mohnish did not tell me nope it could bemohnish did not tell me nope it could bemohnish did not tell me nope it could be hiding in one cupboard maybe in severalhiding in one cupboard maybe in severalhiding in one cupboard maybe in several cupboards but I went there it was trulycupboards but I went there it was trulycupboards but I went there it was truly really clean everything that Mauricereally clean everything that Mauricereally clean everything that Maurice told me you know was true so so you cantold me you know was true so so you cantold me you know was true so so you can see you know like Bonnie said insee you know like Bonnie said insee you know like Bonnie said in businesses and knowing the person isbusinesses and knowing the person isbusinesses and knowing the person is important and knowing that guysimportant and knowing that guysimportant and knowing that guys honorable is important and that's a plushonorable is important and that's a plushonorable is important and that's a plus I think most most likely in a small deal
QuestionerI think most most likely in a small deal like stone tress about seventy million dollars it must be two three two two five million dollars in legal fees their professional fees yeah and one of the things one of the things that I've always felt which is a very good saying to keep in mind is you cannot write a good contract with a bad person so you can never expect a contract to protect you if the ethics of the person who's signing the contract your counterparty is in question so the most important thing you've got to figure out and I think this is the most important in life in general is all the people in your orbit all the people you do business with the people you work with they all need to be high quality individuals it is not worth it to to try to go through life without without without that basic edict and when we close the stone trust
Ajit Jainedict and when we close the stone trust transaction you know on closing Dondo transaction you know on closing Dondo transaction you know on closing Dondo received forty five received forty five received forty five and we had notes receivable from and we had notes receivable from and we had notes receivable from France's for 26 million and I would have been unwilling to have even a small been unwilling to have even a small been unwilling to have even a small fraction of that receivable with anyone fraction of that receivable with anyone fraction of that receivable with anyone if it was in Francis because these a lot if it was in Francis because these a lot if it was in Francis because these a lot of that receivable was subject to of that receivable was subject to of that receivable was subject to adjustment based on what happened with adjustment based on what happened with adjustment based on what happened with reserves and so we we gave we gave reserves and so we we gave we gave reserves and so we we gave we gave Francis a warranty and I knew that so Francis a warranty and I knew that so Francis a warranty and I knew that so what we said is okay look if the what we said is okay look if the what we said is okay look if the reserves actually proved to be reserves actually proved to be reserves actually proved to be inadequate then you can take some inadequate then you can take some inadequate then you can take some portion all of 16 million out of the 26 portion all of 16 million out of the 26 portion all of 16 million out of the 26 million and adjust the purchase price in million and adjust the purchase price in million and adjust the purchase price in the future and if we offer that to any the future and if we offer that to any the future and if we offer that to any buyer in insurance they can fudge the buyer in insurance they can fudge the buyer in insurance they can fudge the future reserve numbers and say hey we future reserve numbers and say hey we future reserve numbers and say hey we are three million short over five are three million short over five are three million short over five million short or whatever and then the million short or whatever and then the million short or whatever and then the mechanisms will resolve that aren't the mechanisms will resolve that aren't the mechanisms will resolve that aren't the easiest so because I had complete trust
Othereasiest so because I had complete trust in Francis in fact what happened is we in Francis in fact what happened is we in Francis in fact what happened is we were supposed to every year each be an were supposed to every year each be an were supposed to every year each be an actuary to do a analysis on the reserves actuary to do a analysis on the reserves actuary to do a analysis on the reserves and then take a middle of those two so and then take a middle of those two so and then take a middle of those two so my actually was it's every year we have my actually was it's every year we have my actually was it's every year we have both waived the actuary coming in to do both waived the actuary coming in to do both waived the actuary coming in to do that that that which means he bought save a hundred which means he bought save a hundred which means he bought save a hundred thousand or something in cost because thousand or something in cost because thousand or something in cost because we've you know like he said he found we've you know like he said he found we've you know like he said he found it's a clean company and there were no it's a clean company and there were no it's a clean company and there were no misrepresentations I made to him and on misrepresentations I made to him and on misrepresentations I made to him and on the flip side they've been a very very the flip side they've been a very very the flip side they've been a very very francis has been an extremely honorable francis has been an extremely honorable francis has been an extremely honorable buyer where we've gone I think more than buyer where we've gone I think more than buyer where we've gone I think more than more than two years now there has been more than two years now there has been more than two years now there has been no purchase price adjustments the no purchase price adjustments the no purchase price adjustments the purchase price is where it's been purchase price is where it's been purchase price is where it's been because the reserves have proven to be because the reserves have proven to be because the reserves have proven to be accurate and such so so I think these accurate and such so so I think these accurate and such so so I think these lessons are know much lessons are know much lessons are know much related to insurance they're not even related to insurance they're not even related to insurance they're not even related to M&A transactions I think the
Questionerrelated to M&A transactions I think the lessons relate to how you should live your life you know in terms of you know who you go for work go to work for who your business partners are just every facet of your life you want the highest quality human beings all around you and once you have that everything else goes really simply after that to the reserve adjustments we had two years one was last year and then this one was this year a night and I would phone a monisha sometime in September I knocked oh my I said forget getting your actuary you know to do what Reserve analysis so it's been two years now there's two more years to go when you can see you know companies clean and there's nope nope no doesn't make sense playing with playing with numbers so maybe maybe what we will do is we will open up to questions if you want to ask questions on stone trust
Otheryou want to ask questions on stone trust that's perfectly fine if you want to ask on other subjects that's also fine anything other than what we are buying right now I think is fair game so please feel free you had a question didn't you
Questioneryes can you hear me awesome well thank you mr. Brian mr. Chu for taking us on to you come talk to us I have a couple of questions the first one would be about insurance the second one would be about foundation so I guess I'll start with the insurance one how do you value an insurance company do you is it based on the amount of reserve reserve is it based on the amount of reserve they have or you balance or you buy based on you always start with the
Otherbook value but the adequacy of reserve once you establish that you know the adequacy is fine then you go to Book value and so that's where you start and and if
Questionerthat's where you start and and if they're higher rated companies then youthey're higher rated companies then youthey're higher rated companies then you pay a premium to book but for mostpay a premium to book but for mostpay a premium to book but for most companies you know just it's somewherecompanies you know just it's somewherecompanies you know just it's somewhere around book book plus 20% or book plusaround book book plus 20% or book plusaround book book plus 20% or book plus 10% and then during good times it can go10% and then during good times it can go10% and then during good times it can go to like a book plus 30% but that isto like a book plus 30% but that isto like a book plus 30% but that is where you are most of the time you landwhere you are most of the time you landwhere you are most of the time you land and my second question is about mr.and my second question is about mr.and my second question is about mr. choose fund you've had a lot of goodchoose fund you've had a lot of goodchoose fund you've had a lot of good years and a couple of down years how doyears and a couple of down years how doyears and a couple of down years how do you kind stake that they do they stayyou kind stake that they do they stayyou kind stake that they do they stay with you treated to the good and the badwith you treated to the good and the badwith you treated to the good and the bad
Otheror on your investors so as you know Ior on your investors so as you know Ior on your investors so as you know I have not marketed my funds and and Ihave not marketed my funds and and Ihave not marketed my funds and and I just have one employee with me and sojust have one employee with me and sojust have one employee with me and so most of them have come in true you knowmost of them have come in true you knowmost of them have come in true you know what about and by knowing about how Iwhat about and by knowing about how Iwhat about and by knowing about how I invest and so what I don't have isinvest and so what I don't have isinvest and so what I don't have is something called hot money and and wesomething called hot money and and wesomething called hot money and and we have not done well last for four or fivehave not done well last for four or fivehave not done well last for four or five years and some of them could be becauseyears and some of them could be becauseyears and some of them could be because value has not done well and the other
Questionervalue has not done well and the other side is also you know before some of the stocks we've picked or not but not the greatest we made a few mistakes a few assumptions that are wrong we did not like we did not like we did not properly estimate how low the let's say the price of oil and gas would be and how long they would be at such a low price the same thing with commodity businesses and we also made a lot of mistakes on the other side good companies that we thought were overvalued but when you look back on it now let's say after 10 years most probably they were undervalued because we did not like accurately calculate how fast they were growing part of intrinsic value is the growth of the company and beyond as value investors we tend to underestimate that so so value investing is you know you make mistakes and best thing is face
Questioneryou make mistakes and best thing is face up to it and acknowledge and because we don't have face up to it and acknowledge you will keep repeating it other question regarding like the trust it's amazing how you know you were able to do big transactions with such you know good friendships and and stuff but what if it's not really available like for other or in these days you know it could be hard to trust another investor or another potential partner and again how do you trust the employees as well I would love to hear your feedback on that
Othermaybe I'll go first maybe Franciscan chiming I think that's a really really good question you know when I had when I had lunch with Warren Buffett 2008 it was a slightly expensive lunch but now in hindsight looks pretty cheap but anyway one of the questions actually made a comment to him I said you know Warren how come you are such a good
QuestionerWarren how come you are such a good judge of human nature how are you able to figure out people so well and so he
Warrensaid actually Mohnish I'm not good at judging people he said if you put me in a cocktail party hundred people in a room and I got a chance to spend a few minutes with each person he said I could probably tell you that four people are exceptionally good and I could probably tell you that four people are exceptionally bad and the other 92 I would not be able to make any judgment on so he says that the way he lives his life is by being a harsh grader and so what he means by that he said that I only let in the four people into my life who are exceptionally good and I don't give benefit of doubt to the 92 who we don't know whether they're good or not and we definitely have no interest in the ones who are you know the the bottom
Questionerthe ones who are you know the the bottom 4% if you will so so the thing that as we as we go through life and as we encounter people there will be data points that will make it clear relatively quickly in some cases that some individuals are exceptional and and they'll also there will also be some data points we tell us that some individuals are just not worth bothering with you know it might be the way they treat the you know the server and a restaurant or you know their perspective on different different things in life there could be subtle clues of that and so the the key that he is that which I have taken from taken to heart from Buffett is be a harsh grader so when you pick up some signals even though they will be relatively weak about some people you know Charlie Munger says there are enough nice people in this world that you don't really need to you
Otherworld that you don't really need to you know make make exceptions orknow make make exceptions orknow make make exceptions or accommodation so it is it is not naturalaccommodation so it is it is not naturalaccommodation so it is it is not natural in human nature to be a harsh graderin human nature to be a harsh graderin human nature to be a harsh grader with various humans you know that's awith various humans you know that's awith various humans you know that's a that's a very yeah almost inhumane thingthat's a very yeah almost inhumane thingthat's a very yeah almost inhumane thing to say but it is it is extremely good toto say but it is it is extremely good toto say but it is it is extremely good to have an exceptional life because one ofhave an exceptional life because one ofhave an exceptional life because one of the things about humans is that there isthe things about humans is that there isthe things about humans is that there is a gravitational effect if we hang outa gravitational effect if we hang outa gravitational effect if we hang out with people who are better than us we'rewith people who are better than us we'rewith people who are better than us we're gonna get better and if we hang out withgonna get better and if we hang out withgonna get better and if we hang out with people who are worse than us we're gonnapeople who are worse than us we're gonnapeople who are worse than us we're gonna get worse so our quest should always beget worse so our quest should always beget worse so our quest should always be to hang out with people that we liketo hang out with people that we liketo hang out with people that we like admire and trust and to minimize or getadmire and trust and to minimize or getadmire and trust and to minimize or get rid of the relationships where we haverid of the relationships where we haverid of the relationships where we have question marks and you know one of thequestion marks and you know one of thequestion marks and you know one of the one of the I would say things thatone of the I would say things thatone of the I would say things that Buffett says to students he says let'sBuffett says to students he says let'sBuffett says to students he says let's say you're in a class with 40 othersay you're in a class with 40 othersay you're in a class with 40 other students you know and you know thesestudents you know and you know thesestudents you know and you know these forty people quite well
Otherforty people quite well and he says let's say you could offer a deal to any student in the class where you would give that person half of your lifetime income and in return you would get half of their lifetime income you know a swap the question he asked is who would you do that deal with right and the answer that's gonna come out usually is it's not going to be the brightest person and it may not even be the hardest-working person but it's going to be a combination of integrity intelligence and energy you know someone who's got very high ethics someone who's pretty smart and works hard you know that that kind of combination so generally speaking when you stride to identified those types of trades so it's it's not that hard to be able to figure out the lazy ones and take them out it's also not that hard to start figuring out
Otheralso not that hard to start figuring out people who are cutting corners in different ways take them out so just be a harsh grader look at the way things are and you can start getting better over time and the advantage I can just tell you that you know I when I look at the the friends I have and I look at the people I spend time with it's a very blessed life because I've deliberately been doing for decades culling you know it's harsh but culling is very important so that you have the time for the highest quality humans in your life I know when I was really young coming out of Bell Canada as a technician and I was looking to get into the investment field I was just looking for a question I could work with for a long time I was fortunate enough you know that in 1984 1985 I met Prem Watsa as you know Prem Watsa is is famous for you know for having guided Fairfax
Questioneryou know for having guided Fairfax Financial to what it is today and so it's important to go with good people good integrity and and and long term but it will make a big difference if I could just thank you for having a momentary lapse and spending some time with the 92% you're not sure about we certainly appreciate it this evening but I wanted to ask how you go about defining your circle of competence and when we have these this is such a unique environment for me as an investor where markets moved so quickly that that the other the speed of the reaction and the opportunity that presented itself was really on a scale I hadn't I hadn't seen before and and I think it's it's really important to have to understand what your circle of competence is but also when these opportunities are presented in front of you how you go about
Questionerin front of you how you go about evaluating well maybe this is an opportunity or it's close enough to to this area that maybe it's an adjacency I could I could venture into so how do you how do you deal with you know setting hard boundaries and then when do you relax them well maybe for instance I'll go first and then so first of all you know we don't have the 92% we have the hundred percent in the class there's always the quest for the 4% so so the it's not an entirely lost cause to hang out in the in the mix and I I hope we we have the smarts to figure that out so I think circle of competence you know Charlie Munger says to ask the question is to answer it so if you have to ask yourself if a particular company is in your circle of competence you have already answered it then the answer is it is not in your circle of competence so it's it's a pretty simple test the
Otherso it's it's a pretty simple test the second thing I think which is useful in this environment just to keep in mind is I think when when Bill Gates and Warren Buffett was the the single most important trait that has been most important to their success in life they both say its focus and and so the thing is that as I look at what's happening with us you know obviously the human tragedy is terrible and of course we have all our lives disrupted but but when we look at the markets quite frankly we were at relatively elevated levels before all of this and it's I I don't find that many things that are obviously cheap based on what's happened in the last few weeks so I have found one business so far that I am quite excited about it I've been buying and they possibly may be another one but when I look back at 2008 oh nine I mean
Todd Combswhen I look back at 2008 oh nine I mean at that point it was an avalanche of incredible deals I mean literally you could throw darts and it was so hard to keep up with the amount of stuff coming at me so I was doing basket bets because there were so many companies that look so good so I said okay instead of making a 10% bet I'm gonna make five two percent bets and all of them because they all look so cheap and I don't know which one does the best and all of them went up five six times or ten times whatever so in fact at that time in oh eight or nine I don't think there was any business I invested in which was not a winner so we are nowhere near those levels today and I hope we don't get to those levels because that would mean that you know there's a lot of other things going on which are quite ugly so I think in in this environment also even though we were not medically ready for
Charliethough we were not medically ready for co-ed the the fiscal and monetary response especially in the United States has been remarkably fast and remarkably furious I think part of it because the lessons that these guys learn to the financial crisis and so I think that that end of it is actually working better this is a much more deeper dive than we went through me already past 10% unemployment we the it took us you know 15 months to get to ten percent unemployment in oh it oh nine so so yeah i think i think the circle of competence is very fundamental you should it should be obvious to you that you understand how the business works and and many businesses are relatively straightforward to figure out you know if you look at MasterCard it's not that hard to figure out that business American Express not that hard to figure out Carnival Cruise Lines not that hard
Questionerout Carnival Cruise Lines not that hard to figure out so but they could be many businesses which are pretty hard to figure out so you have to take a pass very quickly on the ones where you're scratching your head and hone in on the ones that you think you can get your arms around Francis so when you're looking at up in the market you should like this 30,000 stocks or maybe more and you only need a like ten or fifteen of them so if you miss something you can always go to the next one so if you look at my career going back like almost forty years ago I was just coming from Bell Canada as a technician and so I concentrated on something called financial bargain I was much closer to what Benjamin Graham was doing there buying that nets and so on and you know when you find that Nets they are really cheap on an asset side but in 1981 1982
Questionercheap on an asset side but in 1981 1982 you have another big benefit not only these companies that were net nets but they were also good companies and so you had the best of both worlds so so that is what I was doing up when I started my career so as my knowledge grew then I went into a high quality company that was willing to pay yeah so you can see even in stotras I did not be off my line I went into something that I was familiar with I dealt with the workers coming over there Fairfax into them one into them too and so I knew what I was getting into so the key thing is know what you're getting into and into the fields that you're in so just don't go adjacent to it like even if you play a racquet sport and if you're really good in racquet sport and if you're really good at tennis stick to tennis but don't go to squash badminton so so that is
Questionergo to squash badminton so so that is what I mean you know a circle of confidence and so that is what I do like like lately let's say because of the co-ed crisis like I don't have confidence in terms of understanding how the stock will work out but lot of the bonds have been beaten up like by 50% like something a bond that is worth 100 cents on a dollar a lot of them you can buy them at 50 cents on a dollar and that is very very cheap er way more safer than buying equities so so you can see that you have options and you get options and you can look at it another way is to buy fixed income instruments which is an easier way to play and safer way to play and you're getting almost the same kind of returns that starts again thank you guys for being here mr. prover I know that you had you know had the ability to have lunch with Warren Buffett so any other
Questionerlunch with Warren Buffett so any other key insights into that would be great but I guess thinking to your acquisition of stone trust as Warren Buffett's history in insurance do you think that swayed you to think that that would be a great route for you to do and your investments and were you thinking about buying any Furniture Mart's in Nebraska
Questioneryeah well thank you for the for the question well I mean I think I think on the on the insurance side yeah I was a sous vide by Buffett but one of the things that I think most people don't understand about Berkshire Hathaway and even I didn't understand this until recently is at the highest level when you look at a property can the insurance company what the regulator's and rating agencies want you to do is they generally speaking want you to take the money that has been set aside to pay future claims the reserves
Questioneraside to pay future claims the reserves and invest that in a very low-risk manner and they like if you're gonna do it and bond there I really want those bonds with maturities which are matching your liabilities and then your surplus or Book value generally speaking that with some restrictions they allow you to go into equities all the different states and countries have different regulations like Francis mentioned Nebraska is more favorable you know no surprise because Buffett is there and probably part of his a part of his influence but but this the one advantage Berkshire Hathaway has which almost no other insurance company has his Berkshire has almost no restriction that their float needs to be in fixed income there because of their triple-a rating and they they're such heavily over capitalized insurance companies you know they put a railroad inside the insurance
Otherthey put a railroad inside the insurance companies and those regulators love that railroad being inside that insurance company and they treat that railroad like it's a bond instrument okay but it's got I mean the railroad just to give you an example Buffett spent thirty thirty billion on that railroad it's worth over a hundred billion now and the regulator's are treating that like a bond you know no bond has done that since he bought the railroad in fact with Corona actually were held born you would have actually had not such a great great ride on many of them but of course I think from now on that that ride is pretty good so so I think that I came to a conclusion that insurance in the business that's good from far but far from good and and I mean I think Francis and his team I think at stone trust they will do okay because it's an exceptional team there's an
Questionerit's an exceptional team there's an exceptional investment manager on that team and there's an exceptional set of executives on the underwriting side so it does take some incredible prowess to make their engine work whereas if you owned a coke bottle er your idiot nephew could run it and it would make money you know you cannot have your idiot refu nephew run stone trust it would get into trouble in no time when we had the when we had lunch with Buffett or Warren Buffett you know that lunch went for like more than three hours in fact I think one of the first things Buffett said is that I got nothing going on all afternoon when you get sick and tired of me let me know and I'll leave so I'm here till you kicked me out and and he actually stuck to that he actually just was totally laid-back and I think me between us he probably had more than 50
Ted Weschlerbetween us he probably had more than 50 questions for him and many many of the questions for him and many many of the questions by themselves were worth the price of the lunch and then some but but for example you know I asked him a question about Rick Warren who was one of their one of the three musketeers with Warren and Charlie in the 60s and I hadn't heard of it going in a long time so I said you know are you in touch with Drake because he kind of fell off the face of the earth and of course now rick is a good friend of mine I've reconnected with him but at that time at the time the lunch was over 20 years ago I didn't know that so Warren said yeah I'm very much in touch with him in fact he plays bridge with Rick regularly and and you know when the 73-74 crisis hit that was a very intense drop in stock prices you know Rick was levered and he got margin calls and he ended up selling a large portion of
Questionerhe ended up selling a large portion of his berkshire hathaway says shares to warren buffett at $40 a share you know the things that were recently priced at 300 thousand was sold at that time 440 and and of course Ric has done very well since then he's not suffering but what Warren said that you know if you're even a slightly above average investor over a lifetime if you spend less than you earn you cannot help but get let get rich so all of you in professor Santos class with with your past education and the degree you're getting now you you are definitely significantly above average in annual income versus the rest of the population if not now definitely in the near future and you can just run the math yourself you know if you're maxing your 401k maxing your IRA and and spending less than you earn even if you have a single-digit return on the money
Questionerhave a single-digit return on the moneyhave a single-digit return on the money you know maybe five to ten percent overyou know maybe five to ten percent overyou know maybe five to ten percent over time that's gonna build up especiallytime that's gonna build up especiallytime that's gonna build up especially with employer matches and everything sowith employer matches and everything sowith employer matches and everything so I'm strange to say compounding is theI'm strange to say compounding is theI'm strange to say compounding is the eighth wonder of the world and there areeighth wonder of the world and there areeighth wonder of the world and there are three variables you need to get fluencythree variables you need to get fluencythree variables you need to get fluency and compounding and you know we're notand compounding and you know we're notand compounding and you know we're not going to go there too much in this classgoing to go there too much in this classgoing to go there too much in this class but there are three variables thatbut there are three variables thatbut there are three variables that control compounding you know yourcontrol compounding you know yourcontrol compounding you know your starting capital or the capital you'restarting capital or the capital you'restarting capital or the capital you're contributing every every every year thecontributing every every every year thecontributing every every every year the length of the runway and your averagelength of the runway and your averagelength of the runway and your average annualized rate of return and so if youannualized rate of return and so if youannualized rate of return and so if you think of those three variables I havethink of those three variables I havethink of those three variables I have some videos you can you can look at Isome videos you can you can look at Isome videos you can you can look at I think I gave a talk one time you knowthink I gave a talk one time you knowthink I gave a talk one time you know CEO Rico which goes into it I recommendCEO Rico which goes into it I recommendCEO Rico which goes into it I recommend you maybe hear that talk but basicallyyou maybe hear that talk but basicallyyou maybe hear that talk but basically the bottom line is that if the runway isthe bottom line is that if the runway isthe bottom line is that if the runway is really long even with very small amounts
Questionerreally long even with very small amounts of capital and even with not such a high rate of return you will end up with really long even with very small amounts of capital and even with not such a high rate of return you will end up with really long even with very small amounts of capital and even with not such a high rate of return you will end up with Spector Spector Spector Hasan's and/or if your runway is short Hasan's and/or if your runway is short Hasan's and/or if your runway is short you need a higher higher return to end you need a higher higher return to end you need a higher higher return to end up with the same result so they're up with the same result so they're up with the same result so they're interchangeable so if you look at interchangeable so if you look at interchangeable so if you look at someone like Warren Buffett so far his someone like Warren Buffett so far his someone like Warren Buffett so far his runway is 70 years old he started in at runway is 70 years old he started in at runway is 70 years old he started in at the age of 20 with 10,000 and now he's the age of 20 with 10,000 and now he's the age of 20 with 10,000 and now he's 90 and he had been compounding for 70 90 and he had been compounding for 70 90 and he had been compounding for 70 years and he's continuing to go and look years and he's continuing to go and look years and he's continuing to go and look at the opportunity mr. market has served at the opportunity mr. market has served at the opportunity mr. market has served after him now and so the most important after him now and so the most important after him now and so the most important thing for all of you is start early you thing for all of you is start early you thing for all of you is start early you know one of the problems is that I asked know one of the problems is that I asked know one of the problems is that I asked professor Sando before we did this is professor Sando before we did this is professor Sando before we did this is you know what's the average age of you know what's the average age of you know what's the average age of students and as I was so disappointed students and as I was so disappointed students and as I was so disappointed when he said you guys are in your 30s when he said you guys are in your 30s when he said you guys are in your 30s because I wish I was talking to you when because I wish I was talking to you when because I wish I was talking to you when you were 17 and actually even 17 is a
Charlieyou were 17 and actually even 17 is a little late because if you had part-time jobs when we were 14 the IRA IRA laws allow you to open an IRA even when you're three years old there's no minimum age to open an IRA and you can put 100 percent of your earnings in the IRA as long as it's less than five or six thousand so those only starts are extremely important but all is not lost even though you and your thirties all is not lost because you will live a lot longer than Francis and me so your runway end date will be a lot further out than our runway end date so you still have probably I would guess maybe six decades or something of compounding ahead of you and get on with the task
Otherpotin of what Mohnish is saying about standing starting as early as possible it's not just that runway but as you know we are human beings and earlier you
Questionerknow we are human beings and earlier you start what you'll have is that you're going to make mistakes and when you make mistakes when you're young it's much easier to bounce back and said okay what I'm thinking I think I was thinking this way and I thought I would make a lot of money but it proved I was wrong and therefore you can start early so it's if you start at 25 versus 50 and 50 if you make that same mistake consider yourself an idiot but at 20 25 but now just start again so you have that benefit when you're younger so you can make mistakes then you can bounce back I was fortunate I started investing at a really young age and I've made a lot of mistakes and I was able to bounce back without really hurting myself so you have to give allowing something for mistakes even me as portfolio managers we only write most probably only 60% of the time
Otherwrite most probably only 60% of the time 40% of time we are just you know either making mistakes or or they're not right decisions so do that the bearing ratio to give you a rough idea do you wanna go ahead and ask
Questioneryes mr. Perrine mr. Cheney thanks for joining us I'm interested in hearing when you first started your career both of you have pretty incredible stories and you took a different path than most people who will continue to work for him company I'd like to hear you know what was it that gave you the initiative to do that or to say it another way if you have a son or a daughter what what type of advice are you giving them
Othermaybe I'll go I'll go first so I think I think one of the one of the negatives you run into when you have these advanced degrees from elite institutions is that the opportunity cost for you to do something else is really high so what I mean by
Otherelse is really high so what I mean by that is that if you are an MBA from Harvard the marketplace recognizes that and is willing to pay good on good sums for that and so if you were to say okay I'll ignore that and I'll go on my own what you're giving up in terms of lost income for a flyer is quite high right because you know the opportunity costs are so high and so generally speaking we we don't end up with a lot of Harvard MBAs doing non venture-backed startups because just it's the risk factors for them and the risk reward doesn't appear palatable but but there's a way around it and so what I what I've always told young people and my kids is that and it's the same same with my experience is when I was when I was leaving my first job to start my first business what I first what I did was I actually ran my business while working for nine months because let somebody else pay the rent
Otherbecause let somebody else pay the rent because let somebody else pay the rent let somebody else pay for the groceries let somebody else pay for the groceries let somebody else pay for the groceries don't start any burn because my employer don't start any burn because my employer don't start any burn because my employer needs 40 hours a week and I used to put needs 40 hours a week and I used to put needs 40 hours a week and I used to put in a lot more hours but once I started in a lot more hours but once I started in a lot more hours but once I started my own business I went down to exactly my own business I went down to exactly my own business I went down to exactly 40 hours I was no longer concerned with 40 hours I was no longer concerned with 40 hours I was no longer concerned with great reviews I was only concerned about great reviews I was only concerned about great reviews I was only concerned about slightly about firing them so you know slightly about firing them so you know slightly about firing them so you know like the New York governor wants to keep like the New York governor wants to keep like the New York governor wants to keep the shut down so he just slightly under the shut down so he just slightly under the shut down so he just slightly under the number of ventilators and ICU beds the number of ventilators and ICU beds the number of ventilators and ICU beds he just doesn't want to blow past that he just doesn't want to blow past that he just doesn't want to blow past that number and every day he gives us all the number and every day he gives us all the number and every day he gives us all the data on the how he's just under the data on the how he's just under the data on the how he's just under the thing my my cake was just do enough so thing my my cake was just do enough so thing my my cake was just do enough so you don't get fired okay and focus all you don't get fired okay and focus all you don't get fired okay and focus all the energies on the business and so I the energies on the business and so I the energies on the business and so I was trying to get my business part-time was trying to get my business part-time was trying to get my business part-time off the ground and I should go to work off the ground and I should go to work off the ground and I should go to work in evenings weekends I would work on the in evenings weekends I would work on the in evenings weekends I would work on the business and after nine months of doing
Questionerbusiness and after nine months of doing that I had a few clients I had revenue and cash flows and I was dying to go full-time because I was you know putting in probably hundred hours a week and I went in to resign to my to my boss and his boss and they they both talked to me this is you know now it all makes make sense because I told them I was I started this company was not competitive with what they were doing so they were very supportive but they said you know we had many discussions over the year that your performance had dropped off but it hadn't dropped off so much that we wanted to fire you but we were just concerned it had dropped on us exactly that was my point is to make sure you never get to a point where you're terminating me because then the plan doesn't work you know and so when I was leaving my employer told me you can
Otherwas leaving my employer told me you can come back any time you'll get a raisecome back any time you'll get a raisecome back any time you'll get a raise you get a higher position so I thoughtyou get a higher position so I thoughtyou get a higher position so I thought wow there's no risk because one is I'vewow there's no risk because one is I'vewow there's no risk because one is I've got a business that's already got somegot a business that's already got somegot a business that's already got some revenue it's got some traction I wasrevenue it's got some traction I wasrevenue it's got some traction I was single at the time I said and I'd yousingle at the time I said and I'd yousingle at the time I said and I'd you know I took 70,000 in credit cards andknow I took 70,000 in credit cards andknow I took 70,000 in credit cards and emptied my 401k out my perspective wasemptied my 401k out my perspective wasemptied my 401k out my perspective was at 25 I had a clean shot I didn't have aat 25 I had a clean shot I didn't have aat 25 I had a clean shot I didn't have a wife and kids and if I failed I could gowife and kids and if I failed I could gowife and kids and if I failed I could go back to work and I would have given itback to work and I would have given itback to work and I would have given it one solid shot the opportunity cost wasone solid shot the opportunity cost wasone solid shot the opportunity cost was low right and and so it worked so thelow right and and so it worked so thelow right and and so it worked so the earlier you do it the easier it is andearlier you do it the easier it is andearlier you do it the easier it is and if in this environment with you know theif in this environment with you know theif in this environment with you know the way technology is a lot of ideas thatway technology is a lot of ideas thatway technology is a lot of ideas that you can come up with for businessesyou can come up with for businessesyou can come up with for businesses don't require capital they requiredon't require capital they requiredon't require capital they require what's between your ears so there's awhat's between your ears so there's awhat's between your ears so there's a lot of intellectual capital requiredlot of intellectual capital requiredlot of intellectual capital required there's not a lot of capital requiredthere's not a lot of capital requiredthere's not a lot of capital required which is great and so so what that means
Otherwhich is great and so so what that means is you don't need a lot of money to get these businesses off the ground you can still have somebody be paying your rent and everything else and then when the business has some traction and you can actually see some runway at that point you can you know make the switch and the cost is pretty low Frances you have a really good question so I could let you know what I was thinking in 1976 when I first came into Canada so I was working for Bell Canada is like a technician like a repairman or an installer that you see and so you know I was getting restless I was wondering what I should do with my life and I said okay if I go into engineer most likely I would just be kind of maybe average to above-average and if I go and become a doctor most like there'll be an average doctor maybe above average and the reason for going
Otherabove average and the reason for going into engineering and let's say being a doctor is because of peer pressure you know your parents expect you to do to go into those lines it has some prestige and so for oriental no that's a perfect job but but I was not comfortable with that so I was hunting around looking around what field should I go you know what feel that I have a comparative advantage here just based on my lifestyle and the way my DNA is so all my life as you know where as when you live in India you're basically shopping you boil like here you're going to a bazaar it's not like you go to a Walmart here where all the prices are mark so you go and you haggle you know you have to check you know the prices you know if any goods you buy any vegetable you buy and then you haggle and then I read about when Ibraham and 1979 and then you
Questionerabout when Ibraham and 1979 and then you know I figure out that what he was know I figure out that what he was know I figure out that what he was saying is that if you can estimate the saying is that if you can estimate the saying is that if you can estimate the value of company if it is hundred if you value of company if it is hundred if you value of company if it is hundred if you can buy for 60 cents assembly's 70 can buy for 60 cents assembly's 70 can buy for 60 cents assembly's 70 percent out of that hundred then you got percent out of that hundred then you got percent out of that hundred then you got a bargain and then then I realize this a bargain and then then I realize this a bargain and then then I realize this is my field this is what I've been doing is my field this is what I've been doing is my field this is what I've been doing all right on my life and were notorious all right on my life and were notorious all right on my life and were notorious cheapskate born like that cheapskate born like that cheapskate born like that so that is the field Wyatt why I picked so that is the field Wyatt why I picked so that is the field Wyatt why I picked said that is and so when I go to the said that is and so when I go to the said that is and so when I go to the stock market I'm just looking for stock market I'm just looking for stock market I'm just looking for something that's you know marked down something that's you know marked down something that's you know marked down and and has worked for me for 40 years and and has worked for me for 40 years and and has worked for me for 40 years so the key thing is realize we're you so the key thing is realize we're you so the key thing is realize we're you know just the way you are your DNA the know just the way you are your DNA the know just the way you are your DNA the way you are as a person the way you way you are as a person the way you way you are as a person the way you train yourself and and figure out you train yourself and and figure out you train yourself and and figure out you know you have a comparative advantage know you have a comparative advantage know you have a comparative advantage and then go to that field but the second and then go to that field but the second and then go to that field but the second question is that work if you decide to question is that work if you decide to question is that work if you decide to go to a certain field you should have
Othergo to a certain field you should have conviction a lot of people say you cannot do it you don't have a degree and so on that is very confident in yourself confidence that if you work hard you can break through so that was the second thing I did that know that was really important at that time and you know you guys haven't picked up Francis is not really Chinese he's like a fake Chinese he he grew up in India and actually when he talks to me in Hindi there are more cuss words in the sentence then I can utter over here not allowed to utter them but I'm just saying that his he's got an extensive vocabulary of salty Hindi and he's a fake Chinese grew up in a llama in India so I could speak the Indian language I can read it right once upon a time maybe not now now he only remembers the bad words tell you if you shop a lot day in India it's a perfect round perfect training ground
Questionerperfect round perfect training ground for you to be a good value investor for you to be a good value investor for you to be a good value investor go ahead yeah thank you for both of your go ahead yeah thank you for both of your go ahead yeah thank you for both of your time I was wondering about your time I was wondering about your time I was wondering about your investment process when you are investment process when you are investment process when you are analyzing and making investment decision analyzing and making investment decision analyzing and making investment decision do you rely on the opinion and the do you rely on the opinion and the do you rely on the opinion and the analysis of all the analysis or do you analysis of all the analysis or do you analysis of all the analysis or do you only and solely rely on your own opinion only and solely rely on your own opinion only and solely rely on your own opinion to make your investment decisions but to make your investment decisions but to make your investment decisions but basically you have to rely on yourself basically you have to rely on yourself basically you have to rely on yourself
Ted Weschlerso early on in my career because I was so early on in my career because I was so early on in my career because I was working in Bell Canada and I didn't have working in Bell Canada and I didn't have working in Bell Canada and I didn't have too much experience with companies I too much experience with companies I too much experience with companies I kind of had a security blanket kind of kind of had a security blanket kind of kind of had a security blanket kind of looking for financial bargains things looking for financial bargains things looking for financial bargains things are really really cheap but as you know are really really cheap but as you know are really really cheap but as you know once you get into business you once you get into business you once you get into business you understand the quality of business understand the quality of business understand the quality of business really matters so so now there's a really matters so so now there's a really matters so so now there's a purpose more emphasis on what the purpose more emphasis on what the purpose more emphasis on what the company could be worth five years down company could be worth five years down company could be worth five years down the road what the company could be worth
Questionerthe road what the company could be worth ten years down the road so so so the analysis that you see on Wall Street is basically like short term the earnings next quarter and Excel know six months down the road and though that kind of meaningless so so on our case is more valuation of company what they're worth based on evaluation and you go with that
CharlieI have nothing to add sounds like your buyer your buddy Munger thank you
Questionerhi this is Deb Deana thanks sir thank you again the voted for coming and addressing our city I've been following your website the chai with publix.com and the free lunch portfolio that you have very carefully put together there you also show us the Hooper cannibals and the shroomless cloning companies and I know you have been speaking about Lowell learning these well known portfolios like cures now for us amateur investors to even think about learning
Questionerinvestors to even think about learning such high profile portfolios what key factors do you think we should keep in mind
Todd Combswell I think the the Chive it provides freelance portfolios those are those are designed to be kind of like set it and forget it kind of like index investing and and so they're really I mean I think that stock picking you know with all the with all the discount brokers and now you know zero commissions and all of that appears to be very easy and very simple but in reality you know figuring out what a business is worth and what its value is a few years into the future is extremely complicated and for most humans they are not going to have the time or the inclination to be able to figure that out so I think the best thing for most investors to do is to index you can index with the S&P 500 does a perfectly good way to go
Questionergood way to go you can also index with the free-lunch portfolio which is a mix of cannibals spin-offs and cloned ideas and and so we we you know run our back test and we update that portfolio annually and yeah so I mean that's a good way to go but it's kind of like watching paint dry you know if you are a kind of person who gets entertained watching paint dry then the freelance portfolio or indexing will work well for you and if you need more action then it's not going to work well for you
Questionerwell firstly I wanted to thank mr. Cobra and mr. Chu for the presentation tonight it's it's very enlightening to me because my background is in engineering - and halfway through my career I decided to move to the finance sector and that's part of the reason why I'm pursuing this graduate degree so I can start investing on my own so I guess my
Questionerstart investing on my own so I guess my question is how when you're starting off how did you increase your circle of competence and investing in financial instruments
Questionerwell I did it as you know I was kind of fortunate to start my investing career in that period of 1978 to 1981 so as you know the Dow had not gone gone anywhere from 1962 to 1981 it was 1,000 in 1962 in 1981 it was at 1,000 but during the recession of 1981 82 went down to 600 so so the Dow was selling you know below Book value it was at six times the earnings on average and six and a lot of them were at 6% dividend yield so I came in at a really good time and so I started with financial bargain but slowly slowly you cannot do it in been six months or a year or two years and and so you start with something really comfortable like financial bargains and then you go into specializing into certain industries but
Questionerspecializing into certain industries but you have to give yourself time you cannot rush it you are going to make some mistakes kind of dead end at decisions then you know it's a mistake and you start again and and so so so go initially with something you are really secure with and then increase your circle of confidence but you have to test yourself where you're most comfortable with like if you what is it what is the engineering line if it is in like say a lines or engines then you can start from there because you already have a background in that you know in what you're studying yeah
Questionerand I think what I would add is that it should not be an objective to broaden your circle of competence I think what should be your objective is to make sure that so you know I always give the example of one of Charlie Munger's friends John Arriaga and John area has a
Questionerfriends John Arriaga and John area has afriends John Arriaga and John area has a billionaire he lives in Palo Alto andbillionaire he lives in Palo Alto andbillionaire he lives in Palo Alto and throughout his life he's only investedthroughout his life he's only investedthroughout his life he's only invested in real estate within one mile of thein real estate within one mile of thein real estate within one mile of the Stanford campus and so you know hisStanford campus and so you know hisStanford campus and so you know his circle of competence is not real estatecircle of competence is not real estatecircle of competence is not real estate it's not even California registered it'sit's not even California registered it'sit's not even California registered it's not to be Northern California realnot to be Northern California realnot to be Northern California real estate it's in a very very smallestate it's in a very very smallestate it's in a very very small geography but in that geography I'm suregeography but in that geography I'm suregeography but in that geography I'm sure if I'm just walking with him on Paloif I'm just walking with him on Paloif I'm just walking with him on Palo Alto and I look at a random building heAlto and I look at a random building heAlto and I look at a random building he could probably tell me everything aboutcould probably tell me everything aboutcould probably tell me everything about that building he could probably tell methat building he could probably tell methat building he could probably tell me what the rents are whatever sell forwhat the rents are whatever sell forwhat the rents are whatever sell for everything about it so he is operatingeverything about it so he is operatingeverything about it so he is operating in the epicenter of his circle ofin the epicenter of his circle ofin the epicenter of his circle of competence and with him having such acompetence and with him having such acompetence and with him having such a narrow circle of competence it did notnarrow circle of competence it did notnarrow circle of competence it did not prohibit him from becoming extremelyprohibit him from becoming extremelyprohibit him from becoming extremely wealthy so one does not need to knowwealthy so one does not need to knowwealthy so one does not need to know everything about everything to do welleverything about everything to do welleverything about everything to do well so in this business being an inch wide
Todd Combsso in this business being an inch wide and a mile deep is much better than being a mile wide and an inch deep and so the key is so first of all there are areas and businesses today that you understand well focus on those and the second is to have a curious mind and to read a lot you know Buffett needs a lot of business biographies and business biographies are just a really good way to learn different businesses and just how how those you know founders or owners or managers thought about their business right and I mean like recently a few months ago I read a book called plain talk and plain talk is written by Kenan Ken Iverson who was the CEO of new core and and new core did really well in many Mills and ran circles around all the integrated steel companies and all of that in a tough business and that that book is a easy read and teaches you a lot about the
Questionerread and teaches you a lot about the mini-mill business and it also teaches you a lot about you know great management and you know business principles so I think that being curious about businesses and just being wanting to understand why things work a certain way you know like for example I think Professor Sandor brought up Carnival Cruise Lines right and I have never looked at Carnival Cruise Lines but there are a few things that bother me about the business and one of the things that bothers me about the business is it probably not an insignificant portion of the revenue comes from gambling you know they've got captive in show of casinos in all their boats and once you get past 12 miles you know the the tables open and the second is that the all the cruise ship companies from my vantage point skirt the labor laws so because they are not subject to the labor laws
Questionerthey are not subject to the labor laws of any country when you look at the of any country when you look at the of any country when you look at the cruise on the cruise ships and what they cruise on the cruise ships and what they cruise on the cruise ships and what they are paid on a monthly basis and the are paid on a monthly basis and the are paid on a monthly basis and the hours they have to work that would not hours they have to work that would not hours they have to work that would not pass muster with the US Department of pass muster with the US Department of pass muster with the US Department of Labor it would not pass muster in most Labor it would not pass muster in most Labor it would not pass muster in most countries and those those individuals countries and those those individuals countries and those those individuals have to provide that service because have to provide that service because have to provide that service because if they went back to the home country if they went back to the home country if they went back to the home country they wouldn't have even those they wouldn't have even those they wouldn't have even those opportunities so the thing is that you opportunities so the thing is that you opportunities so the thing is that you know to me some of these aspects of this know to me some of these aspects of this know to me some of these aspects of this business bother me now it may be business bother me now it may be business bother me now it may be rational or irrational to be bothered by rational or irrational to be bothered by rational or irrational to be bothered by these by these factors but the way I these by these factors but the way I these by these factors but the way I look at it is that I don't need to spend look at it is that I don't need to spend look at it is that I don't need to spend any more time on the cruise ship any more time on the cruise ship any more time on the cruise ship business because I see a couple of business because I see a couple of business because I see a couple of things that bother me I could be I could things that bother me I could be I could things that bother me I could be I could be completely off it could be a straight be completely off it could be a straight be completely off it could be a straight 10 bagger very easily my reservations 10 bagger very easily my reservations 10 bagger very easily my reservations may have no strong basis for but the
Warrenmay have no strong basis for but the thing is that this is a business where there's no call strikes so if Carnival ends up being a great investment and I don't make that investment I have no tears and we're gonna share in the future about it because I'm not interested in in going there but if if a business is well understood by me I look at it and I study it and I see that can do well and then I just graze in my navel and never pull the trigger on a trade I absolutely would regret that later because I should have pulled the trigger and I didn't so so I think that being a student of business over time the circle will expand but one doesn't need a large circle to do well there's a lot of to what Ramona is saying I know that Davies family you know they're worth a billion dollars and they just made it in insurance there was another person I was talking to and only invest
Charlieperson I was talking to and only invest in small banks and maybe he made a fortune out of it so you don't need to call it in many different fields you can see it also in stores if your outstanding let's say in baseball you don't need to be outstanding at tennis or volleyball or basketball and that's where you can make a fortune and the same it's the same with entrepreneurs the entrepreneurs we like admire and respect so much they have such narrow circle of competence right I mean they just know everything about this much and and it's the only way they can succeed they cannot succeed that be jack-of-all-trades so the key to success like buffington and gates a focus is narrow your scope not broaden your scope just hone in very narrowly and a few things that you understand well and that's more than enough so I've been I've been writing a list I won't give
QuestionerI've been writing a list I won't give you guys a full list but I'll start with this one so of the mistakes that you've made in investing which one have you learned the most from over your careers
Otherwell Robert you know I liked my library bless all your library so thank you for making me feel great
Otherwell I'll go first I think I think the eye I had a couple of companies well one went to zero during the financial crisis Delta financial and another one was almost to zero and you know because I run a concentrated portfolio zeroes hit you and and and they're they're not that easy to recover from the but the thing is that those mistakes get seared in and so after that I developed the checklist and I studied why and what were the kinds of mistakes that most investors made the number one reason why most many investments don't work out is leverage it's number one
Questionerwork out is leverage it's number one reason why businesses fail and and it became obvious when I looked at you know the failures of other investors and my own so it gave me a lot of pause on making investment in elaborate institutions so I seriously cut back my interest in going into levered institutions because I came to the conclusion that if you're a really good business you know Google or Amazon or Microsoft you don't need leverage to make money you would have very high returns on capital and you don't need to increase we didn't even get a good look at him man but here the joys of covert 19 so anyway so I think that that for me the number one thing that I learned was leverage and to avoid it and to minimize it and to look at businesses which have the ability to make great returns without the use of leverage Frances bonus you
Questionerthe use of leverage Frances bonus you make a really good point leverage is make a really good point leverage is make a really good point leverage is something that will really hurt you something that will really hurt you something that will really hurt you especially you know you can see just as a prime example like last one months how a prime example like last one months how a prime example like last one months how the market is gone but the second half the market is gone but the second half the market is gone but the second half think that I think I can cause investors think that I think I can cause investors think that I think I can cause investors and definitely me a lot of grief is and definitely me a lot of grief is and definitely me a lot of grief is let's say I go into a stock and I think let's say I go into a stock and I think let's say I go into a stock and I think it's worth hundred but it was a mistake it's worth hundred but it was a mistake it's worth hundred but it was a mistake in my valuation so so the stock goes in my valuation so so the stock goes in my valuation so so the stock goes down to fifty but instead of just down to fifty but instead of just down to fifty but instead of just admitting that I made a mistake in my admitting that I made a mistake in my admitting that I made a mistake in my valuation I doubled up it's just you valuation I doubled up it's just you valuation I doubled up it's just you know if you know the emotions get in the know if you know the emotions get in the know if you know the emotions get in the way your pride gets in the way so so the way your pride gets in the way so so the way your pride gets in the way so so the proper thing to do is to just admit it proper thing to do is to just admit it proper thing to do is to just admit it and you know either sell it or just stay and you know either sell it or just stay and you know either sell it or just stay put or try to get out as soon as put or try to get out as soon as put or try to get out as soon as possible but the worst thing to do is possible but the worst thing to do is possible but the worst thing to do is just to go and double your bet hoping to just to go and double your bet hoping to just to go and double your bet hoping to make back the money on that particular make back the money on that particular make back the money on that particular stock you can always make their back
Otherstock you can always make their back your money on something else but does not have to be on that particular stock if I'm gonna have to follow up because so you have a checklist
Questionermohnish can you can you share substantially what it is like roughly
Otheryeah this is proprietary I haven't shared it but I'll just tell you kind of how I went about building it it isn't rocket science so what I the premise was that if if some great investor had an investment that ended up with a negative return which is relatively easy to figure out from 13f filings so I could for example take you know someone like Bill Ackman or David Einhorn or Warren Buffett and Charlie Munger and I can go back and look at all the investments they made and then I can also look at you know which ones made money in which one didn't write so I look at the ones where they lost money
Questionerlook at the ones where they lost money and I ask myself the question that would it have been obvious before the investment was made by these extremely good investors not to make the investment was there some some data point available that would have told you that this is probably not gonna work out like let's say for example Buffett investing in u.s. air right I mean you know they they were not the low-cost provider Southwest Airlines came in clobbered them etc and then you know it went south so you know then you can say okay you know are you the low-cost provider you know like that becomes a checklist item right because it was it was the lack of them being a low-cost operator and so I went through probably and I had a couple of really good in terms helping me when I was doing this I went through probably you know hundreds of businesses you know maybe a dozen or
Questionerof businesses you know maybe a dozen or 15 20 investors and all the failures and the surprising thing was in most cases it was obvious before the investment was made that there was there was a relatively easy weak link to figure out in my case I used to look at these levered institutions and yeah it looks great on the upside but then on the downside you know your equities levered twenty to one and you're just gone you know you can't even take a gentle breeze forget a storm so so the thing is that the checklist basically got built from post-mortems on a number of good investors and then I what I did is I sorted the checklist by category the biggest area was leverage was the one that caused the most issue most hard one that now the number-two area was related to moats either misunderstanding or not figuring out the nuances the moat
Questioneror not figuring out the nuances the moat right there were other things too likeright there were other things too likeright there were other things too like you knows let's say some come he failedyou knows let's say some come he failedyou knows let's say some come he failed because of Labor Relations you know thatbecause of Labor Relations you know thatbecause of Labor Relations you know that was pretty small or environmentalwas pretty small or environmentalwas pretty small or environmental factors pretty small but these were thefactors pretty small but these were thefactors pretty small but these were the big ones you know the leverage qualitybig ones you know the leverage qualitybig ones you know the leverage quality of management and moat probably theof management and moat probably theof management and moat probably the three biggest ones right and you knowthree biggest ones right and you knowthree biggest ones right and you know why do you need a checklist to tell youwhy do you need a checklist to tell youwhy do you need a checklist to tell you that it should be obvious to us beforethat it should be obvious to us beforethat it should be obvious to us before we even run out to look at a checklistwe even run out to look at a checklistwe even run out to look at a checklist seven yahoo and so one of the thingsseven yahoo and so one of the thingsseven yahoo and so one of the things that you know we it's never too late tothat you know we it's never too late tothat you know we it's never too late to grow up when the financial crisis wasgrow up when the financial crisis wasgrow up when the financial crisis was going on in Oh 8 or 9 I was finding allgoing on in Oh 8 or 9 I was finding allgoing on in Oh 8 or 9 I was finding all these bargains and I was just interestedthese bargains and I was just interestedthese bargains and I was just interested I said a threshold that I want at leastI said a threshold that I want at leastI said a threshold that I want at least the five acts if I'm gonna make anthe five acts if I'm gonna make anthe five acts if I'm gonna make an investment has to be a 5x I wasn'tinvestment has to be a 5x I wasn'tinvestment has to be a 5x I wasn't concerned whether they were greatconcerned whether they were greatconcerned whether they were great business or not all I wanted was the PIbusiness or not all I wanted was the PIbusiness or not all I wanted was the PI is discounted enough that I can get a
Otheris discounted enough that I can get a five bagger and that did happen in the sense that the investments I made eventually most of them became five X's or more this time around I said I'm not interested in discounted pies I'm interested in growing parties okay so I so mounish has grown up a little bit eleven years okay so I said number one I want growing pies I don't want cheap discounted pies that are not gonna grow and number two five x is for losers okay I'm going for 10x okay so I said I want growing pies and I want that pie to be a 10x in five years and once you set that benchmark you know life becomes really simple because most things don't make that cut and then you can you can plan accordingly and and you know in two 20:19 I made three investments and even in the age of Corona I'm really happy I'm really happy with two of them the
OtherI'm really happy with two of them the third one I think we still do okay on even with Corona and all that in 2020 I made one investment I'm really happy with nice straight 10x and five years nice moat and and the thing is you know so investments fall to me and this is my learning in 11 years once you finally figured out that investments fall into three categories okay one discounted pies I'm talking about value investments right we're not talking about you know these moonshot things trading at hundred times earnings but one is the PI is heavily discounted it's not gonna grow much or it may not grow at all but you're getting a discounted PI okay the second is obviously great businesses right growing pies but the whole planet knows they're glowing Google Amazon Microsoft Salesforce Excel the problem with the growing pies which Francis is I you know I am Mohnish Pabrai and I'm an
Questioneryou know I am Mohnish Pabrai and I'm an alcoholic and I'll say it for Francis I'm Francis Chu and I'm an alcoholic the problem Francis and I have is we are so cheap that we can never invest in those businesses we know that those businesses are really good and we know 10 years to normally look at them we will say you dummy we of course it was a great business why didn't you buy it well we cannot buy those okay we cannot buy I mean the day I see Microsoft on in Francis's portfolio you know I'll jump out of my chair okay so I'm not gonna see sales force in this portfolio I'm not gonna see Microsoft in this portfolio and I'm definitely not gonna see Amazon its portfolio you can just take that to the bank in happening even though they are phenomenal businesses so then they're the third category the third category is where we can actually make some a
Otheractually make some a and those are the hidden modes so we cannot go after the obvious modes because the whole planet knows about them the cats out of the bag we're hosts it's the hidden modes where the action is and 11 years ago I didn't understand this I just focused on discounted pies now I said I don't want any discounted toys I've had enough pie to last me a lifetime which is discounted pies I want growing pies and I want deep moats but I want those modes where no human can understand there's a moat or very few humans can understand it and so we can go play there and maybe some sometimes if we do another session if professor Santo has us back we'll go deep into the hidden modes Frances you know we're investing in companies that has no growth was this company that has growth so you can just take a simple number let's say a company growing
Questionernumber let's say a company growing that's a 15% a year but 50% a year that that's a 15% a year but 50% a year that that's a 15% a year but 50% a year that company is doubling every five years so company is doubling every five years so company is doubling every five years so in ten years it has gone up four times in ten years it has gone up four times in ten years it has gone up four times so think about it like this you buy a so think about it like this you buy a so think about it like this you buy a company let's say both hundred in your company let's say both hundred in your company let's say both hundred in your estimation you pay 50 cents 50 50 estimation you pay 50 cents 50 50 estimation you pay 50 cents 50 50 percent of that so you're buying in at percent of that so you're buying in at percent of that so you're buying in at 50 cents and at all and you buy another 50 cents and at all and you buy another 50 cents and at all and you buy another company right that is growing at 15% a company right that is growing at 15% a company right that is growing at 15% a year so your hundred or even if you pay year so your hundred or even if you pay year so your hundred or even if you pay and let's say hundred cents on a dollar and let's say hundred cents on a dollar and let's say hundred cents on a dollar let's say you play hundred but in ten let's say you play hundred but in ten let's say you play hundred but in ten years that is worth four hundred but if years that is worth four hundred but if years that is worth four hundred but if you go into a company that is not you go into a company that is not you go into a company that is not growing in ten years it is still stuck growing in ten years it is still stuck growing in ten years it is still stuck at $100 so which is it a better buyer at $100 so which is it a better buyer at $100 so which is it a better buyer 100 cents on a dollar or 50 cents on a 100 cents on a dollar or 50 cents on a 100 cents on a dollar or 50 cents on a dollar that has no grow so this is kind dollar that has no grow so this is kind dollar that has no grow so this is kind of a thing that you know be as value of a thing that you know be as value of a thing that you know be as value investors will always face you always investors will always face you always investors will always face you always want something cheap today but we don't want something cheap today but we don't
Otherwant something cheap today but we don't put enough emphasis on what it is whatput enough emphasis on what it is whatput enough emphasis on what it is what it'll be worth that said 10 years downit'll be worth that said 10 years downit'll be worth that said 10 years down the roadthe roadthe road and we learned from experience just likeand we learned from experience just likeand we learned from experience just like Buffett had therefore make Spears thatBuffett had therefore make Spears thatBuffett had therefore make Spears that it makes more sense to go with companiesit makes more sense to go with companiesit makes more sense to go with companies that are growing rounded with companiesthat are growing rounded with companiesthat are growing rounded with companies that are not growing even if you get athat are not growing even if you get athat are not growing even if you get a big bargain if Francis have you boughtbig bargain if Francis have you boughtbig bargain if Francis have you bought Salesforce yet no I bought Apple youSalesforce yet no I bought Apple youSalesforce yet no I bought Apple you bought Apple oh my god oh he paid abought Apple oh my god oh he paid abought Apple oh my god oh he paid a double-digit PE yeah I bought it atdouble-digit PE yeah I bought it atdouble-digit PE yeah I bought it at hundred sixty bucks oh that's greathundred sixty bucks oh that's greathundred sixty bucks oh that's great Francis why didn't you ask me up when itFrancis why didn't you ask me up when itFrancis why didn't you ask me up when it went down next time next time Franciswent down next time next time Franciswent down next time next time Francis call me collect okay okay yeah call mecall me collect okay okay yeah call mecall me collect okay okay yeah call me collect okay I know that from Torontocollect okay I know that from Torontocollect okay I know that from Toronto it's an expensive call so call collectit's an expensive call so call collectit's an expensive call so call collect okay we do have that in the portfoliookay we do have that in the portfoliookay we do have that in the portfolio and the stuff you bought for no firstand the stuff you bought for no firstand the stuff you bought for no first one tells you about Google at fiveone tells you about Google at fiveone tells you about Google at five hundred I still kept it that's what thathundred I still kept it that's what thathundred I still kept it that's what that
Otherhundred I still kept it that's what that I left him Google it's good that he keptI left him Google it's good that he keptI left him Google it's good that he kept it it was growing rapidly so it madeit it was growing rapidly so it madeit it was growing rapidly so it made sense to you to do it most probably Isense to you to do it most probably Isense to you to do it most probably I would have sold it 20 years ago but youwould have sold it 20 years ago but youwould have sold it 20 years ago but you know as you know a bit experience youknow as you know a bit experience youknow as you know a bit experience you learn a little bit so see there's evenlearn a little bit so see there's evenlearn a little bit so see there's even there's even some hope for Francis andthere's even some hope for Francis andthere's even some hope for Francis and me we're still learning you have to haveme we're still learning you have to haveme we're still learning you have to have done successful and and a lot of timesdone successful and and a lot of timesdone successful and and a lot of times your failures it's not the mistakesyour failures it's not the mistakesyour failures it's not the mistakesyou've made let's say by buying theyou've made let's say by buying theyou've made let's say by buying the wrong stock a lot of mistakes are madewrong stock a lot of mistakes are madewrong stock a lot of mistakes are made by not buying the stock that you shouldby not buying the stock that you shouldby not buying the stock that you should have bought which is much harder tohave bought which is much harder tohave bought which is much harder to analyze so second area that I would beanalyze so second area that I would beanalyze so second area that I would be for that I would want you know tofor that I would want you know tofor that I would want you know to students to be careful always sometimesstudents to be careful always sometimesstudents to be careful always sometimes you know you go into crappy companiesyou know you go into crappy companiesyou know you go into crappy companies but you can get seduced by a financialbut you can get seduced by a financialbut you can get seduced by a financial bargain let's have a financial deal forbargain let's have a financial deal forbargain let's have a financial deal for example like like Buffett Dube a linesexample like like Buffett Dube a linesexample like like Buffett Dube a lines were really bad he bought us air but he
Questionerwere really bad he bought us air but he costs to be used by a big fat dividend that he caught so he knew no based on his experience is a lousy industry lousy company I shouldn't be in it so he just got a little bit you know three points more in dividends and he got any card seduced fire so so so in essence what I'm trying to say is that look at the company itself not the deal that gets you into it the Hat I had my fair share of that by the way
Otherso much okay Alex why don't you go ahead
Questionerokay thank you guys both for being here mr. Chu and for bride mr. Brian I have my whole afternoon out so nothing to do is going on those hidden votes I'll be here as long as you need me to be yeah I'm asking an honest about the Kelly formula in terms of how much to allocate of your portfolio I mean it's tough to like if you're a hundred percent sure to bet you know
Questionerhundred percent sure to bet you know that much like how much do you tell me - that much like how much do you tell me - that much like how much do you tell me - Kelly formula nd a real life experience Kelly formula nd a real life experience Kelly formula nd a real life experience and you're do it all or just kind of and you're do it all or just kind of and you're do it all or just kind of interesting thing to think about or for interesting thing to think about or for interesting thing to think about or for both you guys it is that something I both you guys it is that something I both you guys it is that something I have you had you take it and practically have you had you take it and practically have you had you take it and practically use it yeah so the Kennedy formula use it yeah so the Kennedy formula use it yeah so the Kennedy formula
Warrenactually the mistake in my book and if I actually the mistake in my book and if I actually the mistake in my book and if I were to do a second edition I would were to do a second edition I would were to do a second edition I would basically say that I would take it out basically say that I would take it out basically say that I would take it out completely so the Kenney formula really completely so the Kenney formula really completely so the Kenney formula really does not apply to investing as we do it does not apply to investing as we do it does not apply to investing as we do it and the reason is that it works well if and the reason is that it works well if and the reason is that it works well if you get to place a zillion sequential you get to place a zillion sequential you get to place a zillion sequential bets bets bets so for example if the odds of heads was so for example if the odds of heads was so for example if the odds of heads was 51% and the odds of tails was 49 percent 51% and the odds of tails was 49 percent 51% and the odds of tails was 49 percent and you got to do this two thousand and you got to do this two thousand and you got to do this two thousand times then you can come up with a times then you can come up with a times then you can come up with a formula for what is the optimal sizing formula for what is the optimal sizing formula for what is the optimal sizing based on your bankroll and those odds based on your bankroll and those odds based on your bankroll and those odds okay but in investing what happens is we
Questionerokay but in investing what happens is we get a one-off opportunity right we'll get one bet we're heads is 70% tails as 30% or heads as 90% tails as 10% but we don't get to do that repeatedly so the formula actually doesn't apply to the format that we find ourselves ourselves and so I would just I would just ignore Kelly completely thank you okay how would how would you go about allocating and if you look bet do you think is a hundred percent you know you like all you I can't wait to invest in this and you know ten thousand I think I think an error rate is guaranteed for every one of us anything you bike and go to zero so probably not a good idea to be single stock you know no matter what your conviction levels are but I also feel that having 20 stocks is also not bright it's very hard to really understand 20 businesses in 20 different industries really well very
Ted Weschlerdifferent industries really well very few of us can do that and to find all of them being heavily mispriced so in my portfolio they have always targeted kind of a 10 percent upper limit that's in the funds I managed personally I've been willing like I mean I like you know I I I had set up UGMA accounts my daughter's when they were very young you know we we put in fifteen thousand a year of my wife and I into those accounts and there was such a long runway on on those you know some three year old I'm putting 30,000 in it's a very long runway right and so those those accounts I was willing to go down to two or three investments you know the highest conviction ideas because even if it even if it didn't work I mean there was a lot of leeway to come back and do things but I wanted to make sure that and actually it ended up being a significant sum of
Otherit ended up being a significant sum of money for them at this point it's worked out very well and so I I'd say that probably not worth looking at more than a 1/10 allocation unless you just you know bouncing off the walls the conviction can't see a downside etc Frances I know from experience at the California it's extremely dangerous and part of it is something called a self-assessment so you may go into a situation I say I on this particular stock I have and it's a 90% confident it will do well but assessment but think about it like this if that same stock a same company that you have 90 percent confident and I gave it to someone who is also equally confident it's a someone who knows that equally well that same puffer he may say on that stock I only have a 10 percent confidence so there's a reality check between someone who who's been in the
Questionerbetween someone who who's been in the field for a long time and know the field for a long time and know the field for a long time and know the company and based on this analysis you company and based on this analysis you company and based on this analysis you know the success may be just 10 or 20 percent but based on your analysis could percent but based on your analysis could percent but based on your analysis could be hundred percent or ninety percent so be hundred percent or ninety percent so be hundred percent or ninety percent so just have to be careful with that where just have to be careful with that where just have to be careful with that where your level of competence and so when I your level of competence and so when I your level of competence and so when I was younger sometimes I you know I would was younger sometimes I you know I would was younger sometimes I you know I would go into certain situations and I think I go into certain situations and I think I go into certain situations and I think I would know Danny percent confident I'm would know Danny percent confident I'm would know Danny percent confident I'm so confident I would put so much money so confident I would put so much money so confident I would put so much money into it but when you look when I look into it but when you look when I look into it but when you look when I look back on it now that 90 percent back on it now that 90 percent back on it now that 90 percent confidence was not justified by my confidence was not justified by my confidence was not justified by my experience and the knowledge of that experience and the knowledge of that experience and the knowledge of that company and that industry but at the company and that industry but at the company and that industry but at the moment of making ideas you feel like moment of making ideas you feel like moment of making ideas you feel like super confident so you have to grab super confident so you have to grab super confident so you have to grab sometimes that be aware of that human sometimes that be aware of that human sometimes that be aware of that human element there the mother can say it element there the mother can say it element there the mother can say it Buffett can say it but they see with so Buffett can say it but they see with so Buffett can say it but they see with so much more no not so much more experience
Questionermuch more no not so much more experience and knowledge in that given feel and therefore they can go into three or four stars that may not be enough may not make sense for a lot of us so also your confident should be you know should be equal to how knowledge will how solid how good you are in that given feel very much thank you
Otherwhy don't you go ahead thank you thank you gentlemen
Questionermr. Prabhu I mr. Chu thank you so much for coming great presentation I have a two-part question
Questioneronce upon a time they existed a company called Enron a great organization by all accounts looking at the financial statements a company a great investment community everybody was saying was a great company or the seven greatest companies in America and we all know what happened so what would you have invested in the company first of all and if not why before they went down before
Questionerif not why before they went down before everybody knew what really transpired and the second part of my question was how long did it take for your portfolio stick to bounce back after the 2007-2008 financial debacle
Todd Combsyeah regarding Enron I I never invested in the business and I never even I think you can seriously look at it I think a lot of stuff in energy is outside my circle of competence and you know I'll give you an example so I like to understand how a business makes money I think that's way so I'll give you an example of Amazon one of the things that I've never understood about Amazon I mean I think it's a phenomenal business understand so well is you know they've got Amazon Prime and we all are Amazon Prime members and I know for a fact with all the gazillion things I order from Amazon that they lose money on shipping there's no way they can ship me all the
Questionerthere's no way they can ship me all the stuff I'm buying for 100 bucks a year orstuff I'm buying for 100 bucks a year orstuff I'm buying for 100 bucks a year or whatever they're charging right now andwhatever they're charging right now andwhatever they're charging right now and so when I look at Amazon's retailso when I look at Amazon's retailso when I look at Amazon's retail operations in my head I cannot figureoperations in my head I cannot figureoperations in my head I cannot figure out how it makes money right I mean Iout how it makes money right I mean Iout how it makes money right I mean I can understand that when they have thecan understand that when they have thecan understand that when they have the marketplace third-party sellers and theymarketplace third-party sellers and theymarketplace third-party sellers and they provide all the services and allprovide all the services and allprovide all the services and all whatever they do charging fees for I canwhatever they do charging fees for I canwhatever they do charging fees for I can understand that part but when Amazonunderstand that part but when Amazonunderstand that part but when Amazon selling stuff themselves they have theselling stuff themselves they have theselling stuff themselves they have the warehouses they're bringing stuff to thewarehouses they're bringing stuff to thewarehouses they're bringing stuff to the warehouses they're shipping it to me inwarehouses they're shipping it to me inwarehouses they're shipping it to me in two daystwo daystwo days all this stuff I mean I send a FedExall this stuff I mean I send a FedExall this stuff I mean I send a FedEx package from a FedEx letter from Irvinepackage from a FedEx letter from Irvinepackage from a FedEx letter from Irvine to San Francisco it's 25 30 bucks youto San Francisco it's 25 30 bucks youto San Francisco it's 25 30 bucks you know just this is little letter that Iknow just this is little letter that Iknow just this is little letter that I sent so so the way I look at it is thatsent so so the way I look at it is thatsent so so the way I look at it is that it somehow works for them it must workit somehow works for them it must workit somehow works for them it must work for them because clearly now Amazon Webfor them because clearly now Amazon Webfor them because clearly now Amazon Web Services I understand it clearlyServices I understand it clearly
WarrenServices I understand it clearly right Google's different businesses Iright Google's different businesses Iright Google's different businesses I can understand those Apple I cancan understand those Apple I cancan understand those Apple I can understand so it doesn't I'm not in anyunderstand so it doesn't I'm not in anyunderstand so it doesn't I'm not in any way of implying there's any issues withway of implying there's any issues withway of implying there's any issues with Amazon's financials or anything likeAmazon's financials or anything likeAmazon's financials or anything like that but what I am saying is I don'tthat but what I am saying is I don'tthat but what I am saying is I don't understand itunderstand itunderstand it I don't need to go there I don't need toI don't need to go there I don't need toI don't need to go there I don't need to understand it you know there'sunderstand it you know there'sunderstand it you know there's thirty thousand of those dog should lookthirty thousand of those dog should lookthirty thousand of those dog should look at Francis you have a good answer thereat Francis you have a good answer thereat Francis you have a good answer there that you don't need to go into Enron butthat you don't need to go into Enron butthat you don't need to go into Enron but one of the big problems with Enron was aone of the big problems with Enron was aone of the big problems with Enron was a lot of their revenues were booked on youlot of their revenues were booked on youlot of their revenues were booked on you know derivative accounting which isknow derivative accounting which isknow derivative accounting which is extremely dangerous and so so you comeextremely dangerous and so so you comeextremely dangerous and so so you come to a point where you know revenues wereto a point where you know revenues wereto a point where you know revenues were not like real but then they were kind ofnot like real but then they were kind ofnot like real but then they were kind of derived and estimated and when you havederived and estimated and when you havederived and estimated and when you have something that is estimated or derivedsomething that is estimated or derivedsomething that is estimated or derived by out true derivatives you just have toby out true derivatives you just have toby out true derivatives you just have to be extremely careful so they were not
Otherbe extremely careful so they were not like real revenues and either real earnings you can always play with numbers GE got into some kind of trouble - like my last two or three years they were making deals going into sixty years and they're trying to get revenues into it because they wanted to show some growth and it so be very careful with accounting when you are looking at companies thank you what was the second question I missed it
Otheroh the second part of the question was thanks for asking by the way was how long did you take your portfolio to bounce back after the 2007-2008 financial debacle the nominee should bounce back within two years roughly then the big balls in 2009 and to the 9 2010 and it comes back super fast in almost every downturn like said 1973 said before anyone any to the bounce back is fairly quick yeah and I think Moe in my case you know I I have a
Questionerthink Moe in my case you know I I have a deal with my investors where you know I deal with my investors where you know I deal with my investors where you know I don't charge management fees I just get don't charge management fees I just get don't charge management fees I just get paid one-fourth about 6% but I have to paid one-fourth about 6% but I have to paid one-fourth about 6% but I have to hit high-water marks so we were down 65 hit high-water marks so we were down 65 hit high-water marks so we were down 65 to 70 percent in the financial crisis a to 70 percent in the financial crisis a to 70 percent in the financial crisis a lot more than the indices so for me to lot more than the indices so for me to lot more than the indices so for me to earn a fee first I had to get back to a earn a fee first I had to get back to a earn a fee first I had to get back to a hundred cents and like they from 35 hundred cents and like they from 35 hundred cents and like they from 35 cents to 100 cents and then I had to cents to 100 cents and then I had to cents to 100 cents and then I had to make up the 6% a year from the middle of make up the 6% a year from the middle of make up the 6% a year from the middle of 2007 when the previous high-water mark 2007 when the previous high-water mark 2007 when the previous high-water mark was and so I came back to the was and so I came back to the was and so I came back to the since relatively quickly because I think since relatively quickly because I think since relatively quickly because I think in the first year in 2009 we were up in the first year in 2009 we were up in the first year in 2009 we were up like 110% like 110% like 110% for example 2010 also we were up a lot for example 2010 also we were up a lot for example 2010 also we were up a lot so to Frances the point yeah in two or so to Frances the point yeah in two or so to Frances the point yeah in two or three years you're we're back but it three years you're we're back but it three years you're we're back but it took me from two thousand seven to two took me from two thousand seven to two took me from two thousand seven to two thousand seventeen before I earned a fee thousand seventeen before I earned a fee thousand seventeen before I earned a fee on one of my funds it took ten years but on one of my funds it took ten years but on one of my funds it took ten years but you know I was able to live very
Questioneryou know I was able to live veryyou know I was able to live very comfortably on fresh air and water forcomfortably on fresh air and water forcomfortably on fresh air and water for ten years as you can see it had noten years as you can see it had noten years as you can see it had no impact on my health and and and theimpact on my health and and and theimpact on my health and and and the thing is that the the the fees are youthing is that the the the fees are youthing is that the the the fees are you know in this business the leverage is soknow in this business the leverage is soknow in this business the leverage is so extreme I mean I think in 2007 my feesextreme I mean I think in 2007 my feesextreme I mean I think in 2007 my fees were like thirty million or somethingwere like thirty million or somethingwere like thirty million or something and in 2017 they were like more thanand in 2017 they were like more thanand in 2017 they were like more than fifty or sixty million and so life isfifty or sixty million and so life isfifty or sixty million and so life is great if every ten years I get fiftygreat if every ten years I get fiftygreat if every ten years I get fifty millionmillionmillion I can hit I can manage I can make itI can hit I can manage I can make itI can hit I can manage I can make it work thank you very much all right Iwork thank you very much all right Iwork thank you very much all right I
Otherwant to be respectful of your timewant to be respectful of your timewant to be respectful of your time gentlemen we have we have threegentlemen we have we have threegentlemen we have we have three questions that remain but I want to bequestions that remain but I want to bequestions that remain but I want to be respectful and so if either of you haverespectful and so if either of you haverespectful and so if either of you have to drop off or want to drop off yeah soto drop off or want to drop off yeah soto drop off or want to drop off yeah so actually Francis and I have no issuesactually Francis and I have no issuesactually Francis and I have no issues Francis is here til midnight no problemyeah he doesn't go to bed he's his boardyeah he doesn't go to bed he's his boardyeah he doesn't go to bed he's his board so he's happy to be here so whenever youso he's happy to be here so whenever youso he's happy to be here so whenever you whenever you get bored of us will leave
Questionerwhenever you get bored of us will leave
OtherI take it away any of the three of you
Questionercan hear me yes thank you yeah first of all I'd like to thank both Francis M Mohnish for sharing your knowledge and experience it's really an inspiration to me and because those of you are we're like you immigrant ended up with a very successful investment career and and I also particularly like to thank melis for your book the dando investors I read it completely I think it's a book that's worth repeating and and also it resonates with me that book because you have some experiences that really kind of match my experience and you mentioned that you work for tell apps I also prefer talipes and I wish I had met you there so that you know as you said right you better start early and so if I started earlier there with you then you think about it the company in knowledge
Questionerthink about it the company in knowledge right so that's that's that's really great I think this is really a service-oriented pitous and so I think one question I really have is about the colleague for me luck is the essence seems to be a repeating theme in that book but of course as you guys just mentioned earlier it seemed that this is this is the same that is out of date I think the Frances said that probably you know the reason it is not so good is because the estimate of the confidence for the outcomes and actually when I was reading the the scenario zu wrote I had similar question too because I think you know how do you estimate and so I I just water in given that we know that's a limitation and is there any way for us to kind of get a more accurate estimate of the probability of the different outcomes so that's kind of a question
Questioneroutcomes so that's kind of a question francis between 8220 and you say okay onfrancis between 8220 and you say okay onfrancis between 8220 and you say okay on average is hundred so this is not aaverage is hundred so this is not aaverage is hundred so this is not a precise number and you a lot of safeprecise number and you a lot of safeprecise number and you a lot of safe francis he's asking for the probabilityfrancis he's asking for the probabilityfrancis he's asking for the probability like let's his talks at fifty what's thelike let's his talks at fifty what's thelike let's his talks at fifty what's the probability it's worth a hundred yeahprobability it's worth a hundred yeahprobability it's worth a hundred yeah upside or downside the probabilityupside or downside the probabilityupside or downside the probability upside or multiple outcomes rightupside or multiple outcomes rightupside or multiple outcomes right something like that
Questionerso basically per you know theso basically per you know theso basically per you know the old-fashioned way is if we just tookold-fashioned way is if we just tookold-fashioned way is if we just took retain earnings and how much it'sretain earnings and how much it'sretain earnings and how much it's growing something like thatgrowing something like thatgrowing something like that retain earning and how much is growingretain earning and how much is growingretain earning and how much is growing whatever they make its retaining intowhatever they make its retaining intowhatever they make its retaining into the business right so indirectly you getthe business right so indirectly you getthe business right so indirectly you get an idea of the growth rate well i we arean idea of the growth rate well i we arean idea of the growth rate well i we are always twenty percent and if the and thealways twenty percent and if the and thealways twenty percent and if the and the companies has done as well as it hascompanies has done as well as it hascompanies has done as well as it has done in the past most probably it willdone in the past most probably it willdone in the past most probably it will be growing at twenty percent a year asbe growing at twenty percent a year asbe growing at twenty percent a year as long as they can deploy that that twentylong as they can deploy that that twentylong as they can deploy that that twenty percent earnings it was the same kind of
Questionerpercent earnings it was the same kind of growth growth as they have in the growth growth as they have in the growth growth as they have in the original business so way of doing it original business so way of doing it original business so way of doing it this way is much more harder you can say this way is much more harder you can say this way is much more harder you can say I'm going into technology I'm going to I'm going into technology I'm going to I'm going into technology I'm going to something new like internet and it's something new like internet and it's something new like internet and it's exploding at thirty percent a year but exploding at thirty percent a year but exploding at thirty percent a year but that is far more harder to do like I've that is far more harder to do like I've that is far more harder to do like I've missed out on a lot of great buys our missed out on a lot of great buys our missed out on a lot of great buys our last ten years I never expected for last ten years I never expected for last ten years I never expected for example that say Google to grow enter example that say Google to grow enter example that say Google to grow enter like twenty five percent a year in spite like twenty five percent a year in spite like twenty five percent a year in spite of being you know ten years ago was of being you know ten years ago was of being you know ten years ago was still a really big company a same thing still a really big company a same thing still a really big company a same thing like Amazon has been growing at a very like Amazon has been growing at a very like Amazon has been growing at a very fast rate in terms of revenues not in fast rate in terms of revenues not in fast rate in terms of revenues not in terms of profits and same thing with terms of profits and same thing with terms of profits and same thing with Netflix and fewer companies 30% a year Netflix and fewer companies 30% a year Netflix and fewer companies 30% a year means revenues are doubling every two means revenues are doubling every two means revenues are doubling every two years two and a half years and in in ten years two and a half years and in in ten years two and a half years and in in ten years means it's gone up you know like years means it's gone up you know like years means it's gone up you know like seven eight times it's really hard to
Questionerseven eight times it's really hard to imagine there is something that could grow that rapidly for a long time you can think about it like for a small company but not for some giants at some point that numbers but will come into play like there will be dimensioning a diminishing returns so how I would say that it depends on the nature of the business so for example let's say I'm looking at a funeral services operator okay I know I don't know who will die in Cedar Rapids Iowa next year but I know how many will die in Cedar Rapids Iowa next year okay and so a business like the funeral services business the number of people dying in a given year is somewhat predictable okay if I look at a casino in Vegas for example let's say the Wynn Las Vegas or the Wynn Boston for example encore Boston right what are their revenues in 2021 well the certainty on
Otherrevenues in 2021 well the certainty on that is much different than the certainty on the funeral services business or you know carnivals business in the future you know so each business has a different certainty of likelihood of those revenues and profits coming in and it varies a lot and the other thing to keep in mind is capitalism is very brutal everyone's out to take everyone out you know doggy dog it's a very competitive landscape creative disruption it's what makes our economy work and so the only defense we have against all of these factors is to have a number of bets so we cannot have like Frances said a high degree of conviction on our own even I mean I could have never no one could have said that Vegas would go to zero customers for several weeks in a row okay who would have ever imagined that right who would ever imagine that you know
Questionerwho would ever imagine that you know that the other day there's an airplane the fluid one passenger okay I mean the things we are seeing happening in the world would not have shown up in any projection you would have made and so the only defense you have against that because you know my friend guys Peter I was talking to earlier today he says he's come to the conclusion that hundred-year events happen every 10 years and 50 years events happen every 7 years so his perspective is there's no such thing as a hundred year event happening every 100 years and he thought once he rode out the financial crisis Oh 809 he could safely go to his grave and he never see another blimp again ok and now he's resigned to the fact that every 5 or 10 years he's gonna see some earth-shattering event come true which you can't imagine so I think the best thing that we can do
Questionerso I think the best thing that we can do is make sure we make investments when knowingly we know the odds of us making money are really high and the odds of us losing money are really really low that's even more important than the making money part and make a few diversified bets don't buy three reads and say you're diversified don't buy three casinos and say you're diversified right so make a few diversified bets within your circle of competence hopefully a no ten bets don't sweat is it 90% of 80% or 70% because we don't know we just aren't that good as humans to see in the future
Questionerthat's great great and another quick question what will be your maximum on pads like optimal number of bats you would like to make
QuestionerI don't put more than 10% of the fund into anything I mean how many bats how many likes ideally ideally it'll be ten Birds okay gotcha
Questionerit'll be ten Birds okay gotcha okay look sense like ten times ten 100%okay look sense like ten times ten 100%okay look sense like ten times ten 100% that's great and Francis and sometimesthat's great and Francis and sometimesthat's great and Francis and sometimes are going to make mistakes in that 10are going to make mistakes in that 10are going to make mistakes in that 10 and 15 stocks but sometimes you can getand 15 stocks but sometimes you can getand 15 stocks but sometimes you can get whackedwhackedwhacked you know from left field I know recentlyyou know from left field I know recentlyyou know from left field I know recently you know Airlines and you can see whatyou know Airlines and you can see whatyou know Airlines and you can see what happened to Airlines and most probablyhappened to Airlines and most probablyhappened to Airlines and most probably the intrinsic value what has happenedthe intrinsic value what has happenedthe intrinsic value what has happened recently most probably you can take 20recently most probably you can take 20recently most probably you can take 20 to 30% of its intrinsic value so ifto 30% of its intrinsic value so ifto 30% of its intrinsic value so if these Airlines right now I think it'sthese Airlines right now I think it'sthese Airlines right now I think it's 780 it has not destroyed that industry780 it has not destroyed that industry780 it has not destroyed that industry but definitely has impacted thebut definitely has impacted thebut definitely has impacted the intrinsic value other things you have tointrinsic value other things you have tointrinsic value other things you have to take into consideration it can come fromtake into consideration it can come fromtake into consideration it can come from left field yeah and that costs yourleft field yeah and that costs yourleft field yeah and that costs your mistakes the government doesn't caremistakes the government doesn't caremistakes the government doesn't care about the situation with the equityabout the situation with the equityabout the situation with the equity holder of Airlines they just care aboutholder of Airlines they just care aboutholder of Airlines they just care about airlines flying you know so they're oneairlines flying you know so they're oneairlines flying you know so they're one of the airlines will be around whatof the airlines will be around whatof the airlines will be around what happens the equity investor is a
Questionerhappens the equity investor is ahappens the equity investor is a different question yeah you can see thedifferent question yeah you can see thedifferent question yeah you can see the same thing happening with small bankssame thing happening with small bankssame thing happening with small banks you know zero interest rate and theyyou know zero interest rate and theyyou know zero interest rate and they cannotcannotcannot any money on it they don't have anyany money on it they don't have anyany money on it they don't have any other Avenue so smaller banks and ruralother Avenue so smaller banks and ruralother Avenue so smaller banks and rural studies are really suffering so thatstudies are really suffering so thatstudies are really suffering so that there are not but the the measures thatthere are not but the the measures thatthere are not but the the measures that the government have taken is is you knowthe government have taken is is you knowthe government have taken is is you know there are a lot of pain there and a lotthere are a lot of pain there and a lotthere are a lot of pain there and a lot of people don't see it business peopleof people don't see it business peopleof people don't see it business people and you know investors are taking a bigand you know investors are taking a bigand you know investors are taking a big hit especially those who are borrowedhit especially those who are borrowedhit especially those who are borrowed money and I've been on margin greatmoney and I've been on margin greatmoney and I've been on margin great great thank yougreat thank yougreat thank you
Otheryeah Thank You Buster perfectly answersyeah Thank You Buster perfectly answersyeah Thank You Buster perfectly answers thank you so much hi miss Sherman thankthank you so much hi miss Sherman thankthank you so much hi miss Sherman thank you so much both of you for joining usyou so much both of you for joining usyou so much both of you for joining us and thank you so much for sharing yourand thank you so much for sharing yourand thank you so much for sharing your knowledge with us really appreciate itknowledge with us really appreciate itknowledge with us really appreciate it and really appreciate reading your bookand really appreciate reading your bookand really appreciate reading your book as well that Tonto investor I know thatas well that Tonto investor I know thatas well that Tonto investor I know that Warren Buffett invest in businesses
QuestionerWarren Buffett invest in businesses where he can go and see what how the where he can go and see what how the where he can go and see what how the business is doing aside from the trusted business is doing aside from the trusted business is doing aside from the trusted business partners that you are um how important is it for each of you to see important is it for each of you to see important is it for each of you to see what you're investing in to go and see what you're investing in to go and see what you're investing in to go and see how business is doing go touch feel etc how business is doing go touch feel etc how business is doing go touch feel etc
WarrenI'll go false trances you know I used to I'll go false trances you know I used to I'll go false trances you know I used to have a perspective probably from coming have a perspective probably from coming have a perspective probably from coming from Ben Graham that if you went and met from Ben Graham that if you went and met from Ben Graham that if you went and met the the CEOs of the business etcetera the the CEOs of the business etcetera the the CEOs of the business etcetera their number one skills they all have in their number one skills they all have in their number one skills they all have in common are they great sales guys that's common are they great sales guys that's common are they great sales guys that's how they got that job so generally how they got that job so generally how they got that job so generally speaking your judgment would get swayed speaking your judgment would get swayed speaking your judgment would get swayed quite a bit negatively if you met those quite a bit negatively if you met those quite a bit negatively if you met those super salesman but on the other hand if super salesman but on the other hand if super salesman but on the other hand if you read Phil Fisher's book common you read Phil Fisher's book common you read Phil Fisher's book common stocks and uncommon profits which is a stocks and uncommon profits which is a stocks and uncommon profits which is a terrific read scuttlebutt is really good terrific read scuttlebutt is really good terrific read scuttlebutt is really good which is you know poke around in which is you know poke around in which is you know poke around in different areas of the business to try
Questionerdifferent areas of the business to try to understand is that's really good I am probably guilty of doing very little scuttlebutt or things in terms of kicking the tires for most of my career as an investor you know I should just be an armchair investor if you will and when I started investing internationally I had to eliminate fraud risk so I had to you know get on an airplane and go kick the tires and so on and that actually I found to be very invigorating it was really good and I think my perspective was flawed so I think that the more you can do Phil Fisher type scuttlebutt and the better you can understand the business and you can get like you know finishes like doing a 360 talk to x-x-x employees talk to customers talk to vendors just get a full view on what's going on in the business is going to help you or not
Questionerhelp you or not Francis mohnish what you're saying makes
QuestionerFrancis mohnish what you're saying makes
QuestionerFrancis mohnish what you're saying makes a lot of sense like I don't mean I don't
Questionera lot of sense like I don't mean I don't
Questionera lot of sense like I don't mean I don't mind I'm meeting the CEOs but what I try
Questionermind I'm meeting the CEOs but what I try
Questionermind I'm meeting the CEOs but what I try to do is to know the company first so I
Questionerto do is to know the company first so I
Questionerto do is to know the company first so I would go through let's say last ten
Questionerwould go through let's say last ten
Questionerwould go through let's say last ten years of their numbers look at the
Questioneryears of their numbers look at the
Questioneryears of their numbers look at the capital allocation capital allocation
Questionercapital allocation capital allocation
Questionercapital allocation capital allocation decisions how it has gone and how they
Questionerdecisions how it has gone and how they
Questionerdecisions how it has gone and how they have made money and where they are
Questionerhave made money and where they are
Questionerhave made money and where they are allocating all those retain earnings so
Questionerallocating all those retain earnings so
Questionerallocating all those retain earnings so after I know all that after I have a
Questionerafter I know all that after I have a
Questionerafter I know all that after I have a good idea I have a form made some kind
Questionergood idea I have a form made some kind
Questionergood idea I have a form made some kind of sense to myself you know how good the
Questionerof sense to myself you know how good the
Questionerof sense to myself you know how good the company is how good the management is
Questionercompany is how good the management is
Questionercompany is how good the management is then I'm quite willing to meet them but
Questionerthen I'm quite willing to meet them but
Questionerthen I'm quite willing to meet them but you know sometimes as you know talking
Questioneryou know sometimes as you know talking
Questioneryou know sometimes as you know talking about earlier sometimes I just take it
Questionerabout earlier sometimes I just take it
Questionerabout earlier sometimes I just take it literally
Questionerliterally
Questionerliterally mounish you know as you know told me
Questionermounish you know as you know told me
Questionermounish you know as you know told me when I was buying store trust listen to
Questionerwhen I was buying store trust listen to
Questionerwhen I was buying store trust listen to me you know when you buy a company you
Questionerme you know when you buy a company you
Questionerme you know when you buy a company you need to know the man so I'm honest
Questionerneed to know the man so I'm honest
Questionerneed to know the man so I'm honest Barbara you don't need to do any due
OtherBarbara you don't need to do any due diligence and I took his word for the company it looks like it worked out well in this case yes well thank you very much of you for staying late with us tonight and I know your time is valuable so I'll keep my answer short from your practice experience even though with you already find a company within your competence circle and when you do the evaluation for the company what are the signals that can trigger you to sense the dangerous the risks there were you know you make you to be more cautious besides the legal issues besides the towns of that be says the longer you know a country CIPA that you cannot collect
Questionerthat's a great question ran you know so one of the I think one of the best pieces of advice I got from Charlie Munger is he he told me that it's very important to have somebody to talk to
Questionerimportant to have somebody to talk to about your investments so he told me youabout your investments so he told me youabout your investments so he told me you know I've always had somebody to talk toknow I've always had somebody to talk toknow I've always had somebody to talk to about my investment so I said oh youabout my investment so I said oh youabout my investment so I said oh you mean like Warren Buffett so he said wellmean like Warren Buffett so he said wellmean like Warren Buffett so he said well it wasn't always Buffett but it's veryit wasn't always Buffett but it's veryit wasn't always Buffett but it's very important to have somebody you canimportant to have somebody you canimportant to have somebody you can bounce things off of because the thingbounce things off of because the thingbounce things off of because the thing is that when we look at a business weis that when we look at a business weis that when we look at a business we are biased based on all our pastare biased based on all our pastare biased based on all our past learning and experience and we may notlearning and experience and we may notlearning and experience and we may not see something that is obvious to someonesee something that is obvious to someonesee something that is obvious to someone else so if you if you can get differentelse so if you if you can get differentelse so if you if you can get different perspectives on the business fromperspectives on the business fromperspectives on the business from different people it's gonna help youdifferent people it's gonna help youdifferent people it's gonna help you understand the business better so manyunderstand the business better so manyunderstand the business better so many times we are not going to really be abletimes we are not going to really be abletimes we are not going to really be able to get to the promised land just byto get to the promised land just byto get to the promised land just by looking at the data I think the thing islooking at the data I think the thing islooking at the data I think the thing is that you know it's what Munger calls thethat you know it's what Munger calls thethat you know it's what Munger calls the latticework of mental models the numberlatticework of mental models the numberlatticework of mental models the number of things that affect the future of aof things that affect the future of aof things that affect the future of a business is so many things it could be
Questionerbusiness is so many things it could be the CEO could be the team could be the environment could be you know competitive sources there's a zillion things going on that affect the future of the business and so the better you can get at understanding that the better you're going to be as an investor and I think bouncing things off others can be really really powerful and and Buffett and Munger complain the actions said it many times that the two of them think so similarly that they are very concerned that if it gets guest pass one filter it'll go through the second filter too so to the extent that you can have someone who is a person you and trust and has different life experiences than you and looks at things differently that's a very big advantage Frances I have a really good point I know when I was working in Fairfax and so we would come up let's say you really
Otherso we would come up let's say you really like this stock blah blah blah and all that stuff and so so we would appoint someone really senior among ourselves to look at all the negatives and tell us what's wrong with the investments so so we didn't take a junior guy because the junior guy will always you know as you know sometimes an organization will always differ to someone that is senior and I may not want to make a noise but we would always get someone really senior to go and check you know if there's any fallacy the baby are thinking and the baby executing it or something that we missed when you're younger and a Buffett relationship relationship is also special because the mug is not afraid to tell Buffett that you're an idiot so that worked really well do so so you need someone like monger who is a frank open and just their profit that you are making a
Questionertheir profit that you are making a mistake a lot of people in the position of Munger was probably will differ - what - what the Buffett is doing like in my case when my run my mutual funds you need sometimes like checks and balances because I run it by myself so in my case I just punished myself like last into the 19 I did badly for my bond fund so I came back 1.5 million dollars in fees as I repaid it for years of fees as a punishment so that you know that sharpens you're pretty quick but generally speaking that relationship shouldn't be a master/slave relationship it should be a peer relationship so generally speaking I think in a investment shop it shouldn't be someone reporting to you like I mean I've had a lot of great conversations with guys peer I've had a number of great conversations with other people who don't work for me but you know that that
Questionerdon't work for me but you know that that gives them the freedom to be very objective that's a great address thank you so much um gentlemen thank you very very much for spending the time you have with us these are have been wonderful insights I am NOT going to ask about anything you're buying now but I am curious about what your view of the world is at this point in terms of where earnings could go the macro picture in general which I know is is different than how you've allocated investments but that would be very helpful just to get your your view of what's going on and and how unique it is and what your expectations are
Questionermy view is that a little bit philosophical a little birthday no political we live like in a free enterprise country right it's extremely resilient and it's a type of a system where most likely you know you can have events like the Great
Questioneryou can have events like the Great Depression the Great Recession of 2008 you can have you know second world war the first world war in time you know every pub every generation or every 10 years things will be better than what what has been in the past so if you ask me I would say you know even five years from now ten years from now we will have you know a higher GDP has the highest standard of living and the stock market should be much much much higher just because of the type of systems we have that was government we have here yeah you know what I would say is that you know man is a very clever animal and even as we observe like you know look at the u.s. you know you can say fumbled stumble response to Cove it actually you know this is a super athlete and the super athlete got on its knees and he's standing up frequently so as I see
Warrenstanding up frequently so as I see things you know like the other day I was listening to I think a PBS podcast where they had the the CEO of ntek you know making the ventilator and when tech makes a hundred and fifty ventilators a month and you know obviously they've got all kinds of calls and they said you know we can max it to a thousand a month with all our infrastructure that's the max we can do so GM got paired up with them and about four days later the guy is saying we will produce twenty thousand a month so they went from 150 to twenty thousand because the guy said that GM is not an auto parts company it's this incredible global supply chain manager GM through 800 of its people its supply chain engine onto when tech went after the entire supplier base which makes auto parts and those guys are taking pistons there we're into cars and miniaturizing
Otherthere we're into cars and miniaturizing them and making christian that don't do ventilators I mean I think the the the human response is a superhuman response and we are seeing that response on vaccines we are seeing that response on antivirals on every single facet of what's going on so I would I would be very surprised if we are not in a very different situation in maybe four to eight weeks I think it'd be a very different ballgame almost every day we are hearing what breakthroughs breakthroughs in testing breakthroughs in different aspects so it would really surprise me if eight weeks from now this athlete is not sprinting and the second thing is that it's a very intense shock to the system businesses Biden very nature extremely fragile most businesses cannot survive if you take away their revenue for two or three months that's I mean a lot of
Questioneror three months that's I mean a lot of small businesses smaller restaurants out of business a lot of small businesses with all the help the government is giving will not make it a lot of large businesses will have equities impaired in you know like Airlines for example I think they'll make it but you know what what those equity returns end up being either different question but I would say this that I would say that when you fast-forward few years we would not even be able to look back and say oh you know we can see the scars or what happened we cannot see the scars or what happened in the financial crisis very easily today and those were some pretty deep scars and we learned a lot of lessons in fact the banks are in such good shape because of all the lessons we learnt and so I wouldn't ever count America out I wouldn't count the world out I won't
Otherwouldn't count the world out I won't count humans out and I think we will prevail and I think we will not be having sessions like this too far into the future so thank you this is this is great and thank you for being willing to stick around and answer questions enthusiastically respond and also responding from your training but also responding from your your personality and your philosophy I think this is exceeded expectations
Otherall right great it was it was a fun afternoon okay thank you so much and take care all right
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