OtherOkay, all right, so tonight we are fortunate to have Monish Pabrai as a guest lecturerhere at UC Irvine's Merage School of Business.
And to introduce him, I want to touch on three things he's the founder of.
So first, he's the managing partner of Pabrai Investment Funds,which today manages over $500 million.
A $100,000 investment in Pabrai Funds at its inception in 1999would be worth $889,000 at the end of 2015.
And by comparison, the same amount invested in the Dow Joneswith dividends reinvested would be $234,000.
Second, in 2014, he founded and raised $150 million for Dondo Holdings.
Dondo Holdings is a insurance-focused holding company.
Its primary strategy is to acquire private companies.
And last but not least, he's the founder of the Dakshana Foundation.
It takes a metrics-driven approach to providing world-class educationalopportunities to gifted but impoverished children worldwide.
So please join me in welcoming Monish Pabrai.
Thank you.
OtherWell, it's a pleasure to be here and actually quite an honor.
So my family and I, we moved to Irvine in 2003.
And I have a couple of lectures a year at a couple of business schools.
One is in New York and the other is in Delhi.
It's very nice to have a shorter commute.
It did take 13 years to get here.
But thank you, thank you, Professor Yang, for making that happen.
And I'd also like to say that there's very few enlightened businessschools that have anything in terms of either coursework orprofessors who focus on value investing.
So from that vantage point,I think it's wonderful to see that UC Irvine is in that genre.
It's a very small group.
And I think Professor Yang may have something to do with that.
So let's give him a round of applause.
So thank you.
Thank you for making that happen.
So I haven't given this talk before.
So to some extent, you're guinea pigs.
So thank you for being the guinea pigs.
And it's somewhat different from a lot of other talks I've given.
And I've always felt that the best way to learn is to teach.
And so quite frankly, one of the big reasons I wanted to put this together wasto actually educate myself.
And actually, I got quite an education in putting the talk together.
And I think I'll get a little bit more of an education in the interaction today.
So that'll be great.
So the focus of the talk is really to,it would appeal to, I would say, a few different audiences.
So one is, if you were considering a career as an investment manager or
Questioneran investment analyst, I think the talk would be helpful in helping you figure out whether that is the path you want to go down. And even if you are a person who has some assets and some savings and trying to figure out kind of how to invest those. I think the talk will add some value on that front as well. So most of the material I'm going to present is plagiarized because I have no original ideas. You'll soon learn that. And so I'm actually going to be channeling a guy named Peter Kaufman and another guy named Charlie Munger and a little bit of Warren Buffett thrown in. So Peter is the author of Poor Charlie's Almanac. Some of you might be familiar with that. And it's a wonderful book. I think it's one of my favorite books. And he's very close friends with Charlie Munger. And I think one time he told Charlie Munger that, you know, Charlie, you and Warren have been successful for three reasons. And do you know what those three reasons are? And Charlie told him, no, Peter, why don't you enlighten me? And so Peter said, well, the three reasons you guys have been so successful is that first, you're willing to be extremely patient. You guys are not in a hurry to do anything. You're willing to be very patient. The second is that you're willing to be very decisive. So when opportunity presents itself, you don't hesitate to act. And Munger has referred to this kind of like a man with a spear standing there waiting for a salmon to go by. And so he's got the spear ready and he's perfectly happy waiting there for hours. And then a big juicy salmon goes by and he spears it. And so extreme patience coupled with extreme decisiveness. And the third trait is having no concerns about being different from the crowd. So doing whatever they feel makes sense, regardless of how the world looks at it. So they don't really care about what people might say if they do something. And what Peter said is that you really have to kind of unpack that a little bit. So when he says being patient, it's not about being in agony while being patient. It's being in bliss while being patient. So it should be a very natural trait for you to be very happy to watch paint dry. So if you're the kind of person who loves to watch paint dry, then the investing business is a very good one for you. The decisiveness, again, it shouldn't make you break out in sweats. But when you see every so often, Charlie says that for each of us, the opportunities that would truly make us wealthy
Questionerare not going to come around every week.They'll come around every so often, and they come around at unpredictable times.But when they do come around, and when you do recognize it,you need to act very significantly and very quickly.And that, again, is a second thing that a lot of people have issues with,where they'll recognize something, and then they'll make a 2% bet.So that also is a second trait.And then the third one about being different,this is probably the hardest one for humans.Humans are averse to stepping away from the crowd.And so having no concerns about how people think about you based on whatactions you take is a very important trait, and having no stress about it.So each of you can kind of evaluate that for yourself in terms of whether thoseare, does the glove fit, if you will, does the glove fit with those traits?To some extent, I think they must be, at least most of it needs to be inborn.I think it'd be a little bit difficult to take a high speed trader andconvert him into a model like that.So you need to have kind of a natural bias towards that in your personality.And then the other piece is, how do you make investments?How do you know if something's a great idea or not?And I thought what I'd do is I'd take the example of one investmentthat Warren Buffett and Charlie Munger made, which was the investment in Coca-Cola.And I wanted to go through the models they usedwhen they made this investment.So there was no spreadsheet ever created when they did the Coke investment.From then till today, it's been about almost 30 years since they made the investment.They have no analysts or associates or anyone who helps them.I don't even believe they made much in terms of noteswhen they made the investment, but they thought very deeply about it.And for most investments, if you can't do the math in your head,then it should be an automatic pass.So there was no DCF model run for Coke.There was no numbers-based models.I mean, they had some numbers in their mind, butI don't think they ever reduced them to paper.But they did have, I think, and I may be missing some of them, butI think there were dozens upon dozens of models that they used in making the investment.And what happens is that when you have an overlay between models,that's when you get what Charlie Munger calls Lula Bluza effects, 1 plus 1 becomes 11.And so it's really kind of the interplay between the models
Questionerthat lead to kind of the aha moment and such.So Charlie Munger had given a speech to a group that basically elected to be secret.They told him not to disclose the name of the group that he gave that speech to.And after he gave the speech,where part of the speech covered the Coke investment,they told him it was a useless speech.That, and so they didn't appreciate it.And I actually think it's one of his more brilliant speeches andactually gives you a window into how they think.So I think it's useful.So anyway, the Coke investment that Berkshire Hathaway made was made between1988 and 1990, about a three year period when they bought the stock.And at the time, they invested about 1.3 billion into Coke.And 1.3 billion at that time was approximately one-fourthof the book value of Berkshire Hathaway.So they made a very significant bet.I mean, you think of an insurance company taking one-fourth of their equityinto a single stock, and that's what they did at the time.And so, and the last bit of Coke that Warren bought in 1990was bought at about 25 times trailing earnings.So it wasn't cheap by traditional metrics that you might use.But on many fronts, they considered it a no-brainer.And obviously, they've now not touched that position foralmost approaching 30 years.And I don't think they're gonna touch that positioneven well after Warren and Charlie are gone from the scene.So I don't think the Coke position's gonna get touched at Berkshire fora very long time.So why did they make the investment, right?And what went through their minds to make the investment?And so one of the things that Warren and Charlie have said is thatif they had not invested in See's Candy, they would have never,ever invested in Coke.So to understand the Coke investment,we should go back to the See's Candy investment, because that'll give ussome clues.So in 1972, they bought See's Candy.And how many of you are customers of See's?Have you ever had See's Candy?How many of you have never had See's Candy?We have a few unfortunate humans.Maybe you can, next time you're going to some airport,get some peanut butter brittle.That might be a good start.But anyway, so they bought See's in 72.And in 72, they bought See's for 25 million.And the deal almost didn't happen because the family that was sellingwanted 30 million for the company, and Warren was already choking at 25 million.He thought the $25 million price was really rich.
OtherAnd the reason why Warren thought 25 million was rich was See's was a companythat at the time was generating about 2 million a year in cash flow.They had 8 million in net book value, and the purchase price was 25 million.So they were playing more than three times book value for the business.And when the family said they wanted 30 million,Warren just said that, hey, at 25 million and one cent, I'm out of here.So you can either take the 25 million or we'll walk.And they're very grateful that the family didn't walk andsold them the business for 25 million.And 12 years later, in 1984, See's was earning 13 million.So in 72, when they bought it, it was making 2 million.In 84, 12 years later, it was making 13 million.The book value had gone from 8 million to 20 million.And the unit volume over that 12-year periodhad only gone up by about 2% a year on average.So if you look at the See's candy purchase from 1972 andtake it all the way to today, the unit volume growth of See'shas been about approximately 2%, the number of pounds of candy they sell every year,has gone up about 2% a year over the last, let's say, 45 years or 44 years or so.But their earnings have gone up significantly more than that.It's a private company, they don't disclose the numbers.I would guess that See's is probably approaching 100 million,maybe somewhere in the 70 to 100 million,maybe even more than that, in terms of earnings per year at this point.And California GDP from 72 till now has grown up at probably 5 or 6% a year.So See's did not keep up with California GDP growthover that period from a volume growth perspective.And in fact, even the 2% volume growth that has come in,has come in with square footage increase.So their retail space went up by approximately that number,which led to that growth.And Warren and Charlie say that the river of cash that came out of See'sfunded a zillion other things at Berkshire.So they would, if you ask them today, what is the value of See's to Berkshire?They probably couldn't even tell you, but it would be in the tens of billions.It would be very significant in terms of what it did.And if you were to ask them today that, soCharlie says that we were barely smart enough in 1972 to buy See's.Barely smart enough, because he says that if the family didn't budge to our stupiddemand of 25 million, we would have walked.And actually, if you go backwards and think about it,
Questionerthey could have paid 100 million for that business.And it would have been a low price, based on what happened after that, right?So it was a phenomenal business.And the only thing Warren did, the only input he provided to management,they kept the same management, Chuck Huggins kept running the company.The only thing he did was he said that on January 1st of every year,I will send you the new price list.So he took over pricing for the company.So all their peanut butter brittle and all their fudge pricing andeverything else.Beginning of the year, Warren would look at, okay, inflation is 3%.Let's bump all the prices by 12%.And year after year, what he found is thatthey could raise prices significantly above the rate of inflation.And it didn't have any negative impact on sales.Sales just kept going.And what they also found out, a few other things.They got a huge education in brands and branding.And that education in brands andbranding was very fundamental to the Koch purchase.So, SEAS is a California phenomenon.People in California, if I had the same talk going on at Columbia University orsomething, and I asked the same question, they'd look at me like I was from Mars.Probably never heard of SEAS, except for the few that have gone to Omaha.So they repeatedly tried, and Warren andCharlie occasionally would try to nudge management to expand SEAS into othergeographies, and every time they tried to expand other geographies,they would fall flat on their face.So they'd open a store.I think one time they had a store in Chicago, never worked.They've opened stores in several geographies, it's never worked.But slow expansion in California has worked.And so they found that the brand had certain brand value in California.They also found that people were willing to pay a premium forSEAS candies in California, butthat same cache didn't follow through in other locations.So when the Koch idea came in front of them,there were a couple of things that were different about Koch from SEAS.The first thing was that Koch traveled really well, and they could see that.So they had repeatedly tried to take this brand into even the neighboring states.They couldn't do that.There are only two countries today in the world where you cannot get Koch.And I forget, North Korea is one of them.I forget what it's like.Pardon?
OtherYeah, Cuba, that's right.
QuestionerSo Cuba and North Korea are the only two countries where you cannot get Koch today.
OtherBut what they noticed is that even in these two countries,if Koch tomorrow started selling in these countries with no advertising,it would take off in quite a significant way.Because that brand has meaning even to people who have never drunk Koch beforeand never seen an ad because it's so much part of pop culture and movies andwhatnot that it's entrenched.So basically, what they found is that unlike SEAS,Koch traveled really well.And Warren studied this phenomena of the difficulty of traveling with SEASvery carefully because he was very interested in making SEAS global.He would have loved for SEAS to become a global company.And with all the brain power they had, they could never do that.But here was a company that was naturally a global company.The second thing he noticed that was different between SEAS and Koch.So he's been drinking five Kochs a day since he was six years old.And so Koch's been a regular part of his diet for like 80 years or something.And so the second thing he noticed was thatthere was a limit to the amount of fudge you could eat.So as you eat more fudge or SEAS candy, your ability to eat more of it declines.But with Koch, the lack of an aftertaste means that the ability to consumeKoch was quite significantly higher than the ability to consume candy.In fact, a person can consume five or six Kochs a day pretty much fortheir whole lives without really feeling like they were having something monotonous.And many of us do that.How many of you have one or more Koch products daily?No one admits to having Kochs.So actually, you're having other Koch products,you just don't recognize that they're made by the company.They've got like over 100 brands.So the second thing they recognized was thatunlike fudge and peanut butter brittle and such, that peanut brittle, I'm sorry,that you couldn't Koch, you had no aftertaste.And so the volume you could consume andthe frequency with which you consume it was quite different.And in fact, even if you compare it to something like McDonald's,which is a very good model, but if you were eating at McDonald's every day,that could probably get to you much faster than consuming Kochs every day.So they noticed that this particular product has this nuanceof recurring consumption not really being an issue in terms of purchase.So these were some of the models that they knew aboutbefore they started to research Koch.And the third thing they also recognized, different between Cees and Koch,
Otherwas with Cees, you needed retail space, right?So they had to have a Cees store and pay rent and all these things to sell it.But Koch got sold in all these places where the company didn't pay any rent.It was just sold all over the place.So it had, and I'll go through a little more detail about the kind ofthe capital-like model of Koch.So there were a number of reasons why Koch was very capital efficient,far more capital efficient than even Cees was.So even though Cees in 84 was producing 13 million on 20 million invested capital.I mean, that's a very high return, 65% return on invested capital.Really good business.Koch was even better than that.It was a truly remarkable business.And so then the second part of the mental models that come in is thatWarren and Charlie like to go through long histories of these companies thatthey study.So with Koch, both of them read every annual reportsince the company was public.So they read every annual report from 1919,which is when Koch went public, until the late 80s, every single annual report.And they got some insights from reading those annual reports.And one of the insights they got was that from the period of 1919 to,let's say, 87, there had never been a year when Koch'sunit of cases sold was lower than the previous year.So through the Great Depression, through the Second World War,through the Korean War, through all the.acceleration of the 70s, through all of that, unit case volume just every single year wentup over the previous year, nonstop.And the second thing that they noticed was that Coke, which started in Rome, Georgia,went through this major international expansion.So they were repeatedly, over the years, they were first only in the southern US, then theykind of spread out to the US, and then Canada, and then they started spreading out.And in fact, World War II took them to all the places where the US Army went.And so they saw the whole way Coke entered one new country after another, and what happenedafter they entered the country.So they could see that from the reading of those reports.And what they concluded was that the runway was really long, and I'll get to the runway.So the way they defined the runway from reading Coke is that humans need to ingest water tosurvive.So we need to ingest about 64 ounces of water a day to survive.And humans prefer to consume flavored water over plain water.So at least some portion of that 64 ounces, they prefer to consume flavored versus plain.
QuestionerIn fact, Warren's daughter says that she's never, ever seen her dad drink water.
You know, she says she's never seen her dad drink a bottle of water or drink a glass of water.
It never happened.
So Warren, I think, what, 40 ounces a day is coming from Coke.
I don't know where the other 24 ounces are coming from, but she says water is not part of the deal.
And so if you take the 64 ounces that humans have to drink, they figured that at infinity, you'd probably get to something like 50% of that volume gets consumed in one way or another in a flavored format.
And you can take that today where if you look at something like Dasani, which is a Coke brand for water, as part of that, so, you know, some kind of bottled beverage becomes about half of it.
And they felt that Coke could probably take 50% of half of the flavor portion.
So 16 ounces per day per person, which is two servings.
And so they just looked at the unit volume.
They looked at a number of servings.
They looked at a number of humans.
And they looked at that runway.
And they said that we've got a long ways to go here.
And so you've got basically this distribution engine where you can pump a lot of brands through it, you know, Minute Maid and, you know, Monster and all these things.
And world population was growing.
So as world population grew, Coke consumption would grow.
GDP was growing in countries where GDP is very low.
So, you know, if you look at a country like Mexico, for example, the per capita Coke consumption in Mexico is the highest in the world.
It's above the US.
And there are other countries in the world where they are at one hundredth of Mexico's volume.
So Coke would grow as it went into new countries.
It would grow as GDP grew.
It would grow as per capita consumption grew.
And so that was another part of what they learned from reading those annual reports.
And then Warren read this Fortune article, which was written in 1938, about Coke.
And the writer of the Fortune article said that, you know, this is a marvelous, marvelous company in 1938, has done so well.
And then he said, well, of course, the ride's over because the company went public in 1919 at $40 a share.
And now that is worth $3,300 per share.
If you, you know, go back to the Stocksbridge and all that.
So he said, you know, the writer of that article said, you know, it's great to know that, but, you know, the ride's over.
And Warren says the ride was not over because if in 1938 you invested a fresh $40 into Coke,
Questionerby 1993 it was $25,000.So you had, you could have missed the first 20 years, and you still had runway after that.And so they, another model they used was they didn't have an anchoring bias.A lot of times in investing what happens, and in fact I'm very guilty of that, is wetend to look at kind of past performance of a security, and that taints the way we lookat it.And so what you really ought to do is ignore the past, just focus on the future.And so they were really good at not having this bias about, hey, this company's beengrowing from 1884 till 100 plus years, now we want to invest in it.And 100 years after this company got formed, we're putting one-fourth of our capital in.Have we lost it?They didn't think about it that way.And then some of the other things they realized is that the company was currency proof.It was asteroid proof.It was thermonuclear blast proof.It was anarchy proof.It was pretty much bullet proof of any way you look at it.So if you think about a situation where you have, let's say, a LE, extension level event,take place.So let's say an asteroid comes in, and let's say the asteroid takes out 6 and 1 half outof the 7 billion humans.Let's say we're left with a few hundred million.Well, the Coca-Cola company has a trademark, and they have the formula, and they will eventuallystart producing Coke again.And they will probably get back into business and such.And you could not say that about almost any other business when you have that sort ofan event take place.And so even if currencies changed or got devalued or whatever happened, Warren's perspectivewas that people would be willing to trade two minutes of labor for a Coke.And so the trading of labor versus Coke would be independent of currency.So that was another part of the model.And then the notion that our mouths are a very personal space, right?There's a few spaces humans are very sensitive about.Mouth is one of them.And we're kind of sensitive about what we put into our mouths.And so if you see a Coke and you've had it in the past, et cetera, you won't think twice.And even if you're in a different country, you'll have it, no problem.But if you see some kind of unknown brand, it's kind of like you eat Wrigley's chewinggum, and then someone presents to you Glotz chewing gum.And says, would you like some?You're probably not going to take it.And so our mouth is a very personal space, and we're not going to be messing around.
WarrenWe're trying to take the low bid on what goes into our mouth.So they felt that we are creatures of habit.Once we get these habits formed, then we're not going to be willing to change them, especiallywith personal spaces like our mouth.And the second is about humans are creatures of habit.We shave every day on the same side of the face first, or in the case of ladies, thesame leg first.We do things in a certain pattern.And again, once we get to those habits and patterns, we are reluctant to make those changes.So they saw all these things, and they saw all of this was kind of coming together fromtheir reading of the annual reports.And then they looked at the, you know, so I have already probably gone through maybe20 or 30 different models they used.We still have a lot more to go.You know, there's a lot of more models they went through.But in all the models that I've gone through with you, we haven't talked about any numbers.You see, so I went through all this stuff about it being a great investment.We haven't talked about numbers, really.And so now I'll just go through some numbers.But none of these numbers need a spreadsheet.They're kind of very simplistic numbers.So the way the Coke model works is the Coca-Cola company produces concentrate and syrup.So let's go back to the point where there's just one product, which is Coca-Cola.We won't go to the 100 brands they have right now.But let's say there's only one product, Coca-Cola.They produce concentrate and syrup.The syrup gets sold to bottlers around the world.And the bottlers then produce the Coke cans and bottles that you see in supermarkets andeverywhere else.And the Coke company also sells the syrup to various fountain operators.Like Burger King and McDonald's and so on, where you can buy fountain drinks.So there are two models, right?So there's the bottling model and then there's the fountain model.Or let's say a restaurant and such.So the way the bottling model works isthe Coca-Cola company does not set the price of a bottle of Coke.It lets the bottler do that.So they can pretty much set whatever price they want.What it does do is it sets the price for the syrup.And what it does do, just like Warren did on January 1st with See's Candy,is on January 1st, they bump the price of the syrup nonstop.And we're doing it for 100 years.And so the simple economics is that if you have a can of Coke on saleat Costco or wherever, you might get it for about $0.25, a 12-ounce can.
Todd CombsThe $0.25, the Coca-Cola company gets around $0.06,$0.06 or $0.07 of that, comes to the Coca-Cola company for the syrup.And the rest of the, let's say, $0.18 or so is shared betweenthe retail outlet that sells it and the bottling operation that produces it.And so the bottlers is where a large amount of CapEx is happening, right?Because they've got all these bottling plants, they've got all these trucks,they've got drivers, they've got all the distribution going on.The Coca-Cola company just needs a few plants around the world to produce syrup.So, and the number of people that need to do that.So when Warren and Charlie were going to make the investment,the Coca-Cola company had 17,000 employees.All the bottlers had half a million.So the CapEx is on the bottlers.And so this is sea's candy on steroids, because you don't have any retail.It's kind of like it reminded me one time I was visiting Microsoft.I think this was like probably 15 years ago.And they used to sell their operating system to, for example, Dell.So Dell would install Windows on all the machines.So I was talking to one of the Microsoft engineers.So I said, so do you guys send the CDs to Dell?And then when you buy the computer, you get the CDs and such.They said no, or the floppy disk, they said no.He said, we give them one copy, and then everything else is their cost.Okay, so Microsoft wasn't even willing to spend the money on the disk.Even that they dumped on the PC makers, right?So it was even better than the syrup business.At least Coke has to provide syrup.In the case of Microsoft, they just provided the bits once.And then they charged you on the bits, which is why it's such a beautiful model,and Mr. Gates is the wealthiest person on the planet.And so it's very funny, like he said, he looked at me like I was dumb as a doorknob.He said, what do you mean, I'm going to send them CDs?No, I'm not going to send them CDs.I'm going to give them one copy.And then he told me that once it got to streaming,we didn't even send them a copy, we just streamed it to them.You know, not going to send them a single copy, right?So in the case of Coke, it's not quite Microsoft.They still had to sell the syrup.But what they did is they came up with one more enhancement where they gotto concentrate.So the syrup had sugar in it.So what they did is, and it had water.And what's the point of shipping these heavy things?So they actually improved the model to just giving concentrate and
Questionertelling the bottler, add so much sugar and add so much water.And now you've got the concentrate, you've got the syrup.So they even took it down one level further.So you take the $0.25 can, the Coca-Cola can company gets about $0.07.The cost on that is basically next to nothing, it's sugared water.They're not even paying for the sugar.And the bulk of their, they spend about 10% of that on advertising.And approximately about 25 or 30% of that number is pre-tax profits.So that's basically their model.That's on the bottling side.Now when you get to the fountain side, things get even more exciting.So when you go to a restaurant and you ask for a Coke,they don't charge you $0.25.What do they charge you, Alex?Well, because I've seen the cities andI know you get a different amount, but I would say-Couple of bucks.Yeah, so you know that eight or 12 ounce serving is about 12 bucks.The Coca-Cola company is giving it to the restaurant at probably,I don't know, 15 cents or something.And they are very benevolent andthey let the restaurants make a lot of money on the Cokes.And so what happens in that format is the restaurant loves Coke.It's the highest margin product of anything they're gonna sell, right?And people want it and people ask for it by brand name, etc.Like the ones that don't offer Coke and they have Pepsi,they have to ask you, would you like a Pepsi instead?And you cannot say, okay, it's fine.I'll take the Pepsi, take a bullet for the team.And so the fountain sales model,if you think of the ecosystem, everyone makes money.The restaurant makes a lot of money, the restaurant's very happy.The bottler that converts the concentrate to the syrup makes money.They're very happy because they deliver it.They do the last mile stuff.And the Coca-Cola company is obviously very happy.So both these models work really well.And just to give you kind of a sense of the capex differential,before they made the investment, these numbers have gone up quite a bit sincethen, but in scale, they're correct.So all the bottlers were spending in the mid-80s about 1.3 billion in capex everyyear, and the Coca-Cola company is spending 160 million,approximately like 12% of what the bottlers were spending.So most of the volume,most of the benefit of all of this went to the Coca-Cola company.And then you look at, Warren has obsessed over the fact that there was,Branson had started Virgin Cola, and then there was Sam's Choice, and
Questionerthere were all these kind of private label type colas.And they studied that, andbottom line is that none of those ever got any traction.So why didn't they get traction?Well, number one, the personal space, the mouth,you're not quite sure about Sam's Choice, even though you like Sam Walton.And the second is the economics, they can't really undercut.So if you think about a $0.25 can, well,the reason it's at $0.25 is because of global scale.This is a global company selling at a huge volume.I mean, they're buying aluminum at a huge volume, all those things, right?So you try being even Walmart with whatever volumes Walmart has,and then you try to get customers to not buy Coke and buy Sam's Choice.How much can you undercut Coke by?They've got about $0.02 that they're making on that $0.25 as profit,and the bottler is probably making another couple of cents.So you've got about $0.04.So if you had the exact same cost as a Coca-Cola company,if you were at $0.21 and Coke was charging $0.25, you would make no money, right?And if you didn't discount versus Coke, who would buy Sam's Choice?How many of you consume Sam's Choice?Does it even exist anymore?Does it exist anymore?I haven't, I've been to Walmart lately.Does Sam's Choice exist?Alex, you haven't kept up?
OtherNo.
QuestionerAll right, so, but in Costco, I don't remember.Maybe you guys know, because I don't, does Costco have a generic cola?
OtherThey sell, no, I don't think so, right?Do they have?There's a Refresh.
QuestionerSo that's the, that's the, is that the store brand?
OtherIt's cheaper, yeah.
QuestionerSo that's like an Albert's?
OtherThat's Albert's.
QuestionerYeah, so they've got some private label, but they've got the big containers.OK, who drinks Refresh?Is it cheaper?And is it, do they have a cola?
OtherI think they want it.
QuestionerOK.All right, so you see that, so what they foundis that if a competitor tried to come in and the store triedto do a private label or whatever else, they really couldn't undercut them,because the economics just wouldn't allow it.So this is what, what they understood about Coke,some of the things they understood about Coke when they read those annual reports.Now, now we get to another set of mental models,which is the mental models on branding.So the Coca-Cola company, basically, now the market cap of Coke is about $190 billion.And I'm guessing they're probably 17 times or something.I think they're probably making like, I don't know, $12 billion or $13 billion
Questioneror something in after-tax profits.And the Coca-Cola company has always spent less than 10%of their revenue on branding.And one of the things about the branding is, so when you see a can of Coke,the can of Coke is actually branding, right?Because it's all got the Coke brand and everything.Who's paid for that?It's the bottler.Is that part of the 10% that the Coca-Cola company spends?No.That Coke can is completely paid for by the bottler.Those red trucks you see, paid by the bottler, right?That's also not part of Coke branding.Those are all things that are.So every single case and can and stuff about the fountain displays andall that is all kind of continuous branding going on without them spending a dime.Others are spending the money on that.And when Warren invested in the Coca-Cola company,they were spending less than a billion a year on branding at the time.And he said that, if you gave me $100 billionand told me, take away the market leadership of Coke,I would just return the $100 billion to you.It couldn't be done.So even though they had spent, so it had been 100 years.It had grown.They were spending less than a billion a decade or two before that.The unusual thing about branding is that when things get etched in our brains,like Coca-Cola is etched in our brains, it has this kind of multi-year effect.So what Coca-Cola spends in 2016 on branding is not exhausted in 2016.It has residual effects even 50 years from now.So when you have a business that's been at it for 100 years ormore, that brand just keeps getting more and more popular.And one of the things, another of the mental models is that red andyellow are primary colors for humans.We get attracted to red and yellow more than anything else.And that's, so that when I look at logos and they use the color red andyellow, like McDonald's makes great use of red and yellow.Wells Fargo does great use.So especially logos would have those primary colors.I think they have more of an impact long term than the non-primary colors.And so basically, one of the things about Coke is thatthis brand has got itself so deeply etched into our psycheafter all these decades and more than a century.That the cumulative effect of everything they've done in the last 100 yearsexceeds what they've spent in the last 100 years in terms of brand value.It significantly exceeds that.So Warren felt that for $100 billion, you couldn't take away the leadership of Coke.
QuestionerAnd at the time they were investing in Coke, the market cap was less than $20 billion.So they were basically, actually it was I think probably less than, yeah,I think maybe $15 billion or something was the market cap.So they had a huge amount that they could get.And the other thing about Coke is that we'll finally turn on PowerPoint.Sorry to talk so long.Okay, so the other thing about Coke is that these are some scenes fromdifferent restaurants in India, in the middle of nowhere actually.They're not in any cities or anything.So if you see that top restaurant there, it's called Prakash Dhaba.That's in the middle of nowhere in India.And you see all that Coke signage everywhere.So here's how that happens.So the bottler, the Coke bottler goes andmeets the restaurant owner and says, listen, do you want a paint job?And do you need furniture?And all for free.He says, yeah, of course.Furniture's great.So the furniture's going to be red.You see all the red furniture.The one table is probably what they had before.And then the second is, he says,do you want us to put your business name on the top?He says, yeah, sure.So what they do is, you see on the left,the Prakash Dhaba name is a little bit there, and the rest is all Coke, right?And here's the funny thing.The restaurant owner loves that, and why does he love that?He loves that because people trust him.He's got a trusted brand.And so now they think, oh, you know, this place, it can't be so bad.You know, we can get our Cokes and we can get all the other food and all that.So it's what Munger would call the association tendency.So what happens here is the Coca-Cola companygives some matching funds to the bottler.And they tell the bottler, listen, go paint the town red, okay?Literally paint the town red, and we'll give you a little bit kind of a change.And so you see that the second picture on the left is the inside,not the same restaurant, different restaurant.I think that guy's only an outdoor place.So here, same thing.We'll give you a paint job.And all the furniture's red and everything's red.And the guy's probably very happy about it and such.So basically, the thing is that these types of signs andthese types of insignia you would see deep in rural China.You know, very deep in rural China.You'd see very deep in rural India.Middle of nowhere, you'd see this.I mean, the penetration is way beyond the cities and all of that.
QuestionerIt has gone deep into the hinterlands.And so that distribution all the way down at that level is extremely powerful.And so when you look at this brand, even though the company spends less than 10%,the actual amount of impact it has is just massive.It's just huge.One time I interviewed a guy, and he worked for Coke in Atlanta.And he'd lived with them all over the world.He was originally from Morocco.And he was part of the team that managedthe World Cup relationship for Coke with FIFA.That was his whole job, football.And not him, him and probably 30 other guys at Coke.And so I'll get into this a little bit later, butthe association tendency of being at places where humans are happy.So the FIFA relationship with Coke and all the global sponsorships,the Olympics, so these are, Disney.So all of these places, McDonald's, where people are generally happy,Coke wants to be there, right?And so they've got this, the etching of this brand over the decadesin all these places all over the world is huge, right?And then we get to the managers.So, Coke had such an incredible model.And this is a company that just produces fountains of cash.It just gushes cash.You just can't lose money.You just send the syrup and you're getting massive.And so what the company did over the years is, generally speaking,what happens is that when you have businesses with great business models,you end up with dumb managers who do dumb things.Because even when they do dumb things, they look really good.Because the business is so good.And so Coke would put their money into buying shrimp farms in Thailand andall these unrelated businesses.And almost everything they bought was a far worse businessthan the core business that they had.And in 1981, two guys came on the scene.Roberto Goizuera became the CEO, Cuban guy.And then Don Keogh became his, under him, the president.And so these two guys, and Goizuera was,there were some unusual people in the history of Coke going back a decade.But Goizuera was a very unusual guy.So he was really good at marketing and branding,understood this model really well.And he was really good at finance, understood capital allocation really well.Very unusual to have a numbers guy with a branding guy put together.And Keogh was just a great operator.So what they did when they came on the scene in 81 is they started dumpingall the other businesses.They got rid of everything Coke owned, which was not related to beverages.
QuestionerThey got rid of.And the only thing they bought was, they bought Paramount Pictures in 81.And then they realized about five, six years later that even that was dumped.And then 87 or 88, they dumped Paramount Pictures.So what Warren saw was from 1981 till his first purchase in 88,in seven years, that these two guys,finally this was a company that had real capital allocators.And so what they were doing is aggressively buying back the stock.So what the Coca-Cola company started doing was they had this gush of cashcoming in, the dividend was going on.It's one of the only companies that for 50 years, I think more than 50 years now,has raised a dividend every single year.I think there's no other company in the NYC that's done that.It's some that have maintained it, but they've raised dividends every single year.So the first thing they did was they cut out, got rid of all the crappy businesses,sold them.And the second day, they started aggressively buying back stock.And so basically, they took their cash flows, and Goizueta was brilliant.So Warren, I think, saw what was going on with Roberto Goizueta andDon Keogh, coupled with all the other stuff I just told you.So now you finally had a business which had management that got it.And that's why they went in.And Roberto Goizueta himself owned 2.5% of Coke.So he actually had a significant economic interest and went from there.And now, the thing is, many of you are skeptical because of the whole sugar issue.Right, like if I ask you to drink Coke, most people say no,because I don't drink sugar, right?So they actually addressed that this year at the annual meeting.So Warren says that he's 86 years old, in great health.Been consuming five Cokes a day, cherry Cokes, since he was six years old.And so he dismisses all these health issues people bring up with sugar andwhatnot.And he says that he wishes he had an identical twin brotherwho spent his whole life eating broccoli.And he said, if I had this identical twin who would just drink broccoli andplain water, then we'd have a test.We would see him at 86, and we'd see me at 86, and we'd see who was healthier.Okay, and basically, his perspective was that, and I think he talked about it as a joke, but then Munger actually elaborated.He said it is very dumb to discuss negatives about a productwithout discussing the positives, right?So one of the things we have to realize as humans is that,
Questioneryes, excess sugar has problems, causes health issues and whatnot.But having a Coke at certain times will add a lift to your step, right?And so that lift to your step, it's very difficult to quantify.And I think this is the reason why Warren says he wishes he had a twin brother.Because the thing is, the guy lives such a happy life on all frontsthat I think science doesn't fully understand the impactof low stress and happiness on health, right?So there's an impact there which we don't fully realize, butI'm pretty sure it's there.So yes, if you go wild and crazy and have huge amounts of sugar consumption,and then that leads to health issues, there's a problem.But you can be Usain Bolt drinking two Cokes a day and be just fine.So they don't see the sugar issue being a significant issue for Coke.And the second issue with Coke is they now have more than 100 brands.A large number of their brands, including Coke, have no sugar.And a large number of them even have no carbonation.So when you get to these places, they're not pumping Coke over there.They're pumping Coke, they're pumping Dasani, they're pumping Minute Maid,they're pumping all kinds of products through that distribution engine, right?So it's not just sugar being pumped through, it's a sugar.And the other thing about the company is just to tell you howCoke has made a lot of blunders over the years.So one of the blunders they made is that they never wantedthe Coca-Cola product to have anything but the true Coke product in it.So when there was a concern about sugar andpeople were talking about diet drinks, they did not want to create Diet Coke.And they did not want to call it Diet Coke.And they didn't want to take that beautiful bottle andthe red color and mess with it, they didn't want to do that.So what they did is they called that product Tab, okay?How many of you have heard of Tab?Some of you, yeah, see the older guys, older guys have heard of Tab.And for the longest time, Tab was this stepchild, andthen Tab became Diet Coke.Eventually, they realized that we can put the Coke bottle with the diet withoutthe sugar and it might still work, and it worked, so they got to it.And then we're getting to finally the part about what I callthe Glotz section, so how many of you read the Glotz paper?That I think some of the folks have read it, right?So that was a speech which Munger gave when they told him it was useless.
QuestionerSo Munger kind of inverts logic.So he says, how do you create a $2 trillion companywith a $2 million investment, right?How do you create that?And the way he does it is he says, look, let's go in 150 years.He says in 150 years, how do you take 2 million to 2 trillion?And so he says 150 years, 2034, which is 150 years from when Coke was formed.He says that if there are 7 billion humans and they're consuming the 64 ounces,and then half of it is flavored, and then one half of the flavor comes to Coke.And we are getting about two cents a serving.Let's say by then with inflation, we're getting about four cents a serving.You run on the numbers that Coca-Cola at that point is making about 117 billiona year in profit, which would give you a market cap of 2 trillion.And so he says that's how we get to 2 trillion.And he says that, so what are the things we do to create that 2 trillion?He says, first of all, this guy Glotz who's setting up the Coca-Cola companydoesn't want to call it Glotz flavored sugared water.He wants to call it Coca-Cola because he likes that name better.And so he creates a name and he does a lot of stuff to promote the name.And the second is, he says in 1884,consumption of sugar and caffeine is well accepted in society.We have coffee, tea, lemonade.So we'll use sugar and caffeine because people like that.And using sugar and caffeine, we're going to create this product.And not just the sugar and caffeine, what we'll do is,we'll give it a color like the color of wine to make it look kind of high end.And we'll give it carbonation to make it like champagne, okay?So we'll put the sugar and caffeine and the color of wine and carbonate it.And now we've got a great product andthen we sell it really cheap so that everyone can buy it.And then he said, no, we have a choice.Do we create a beverage that's hot, like coffee or tea, or a beverage that's cold?And he said, well,cold beverages can be consumed in a much higher volume than hot beverages.And when you're kind of near the equator and really hot,you can have an almost unlimited ability to consume cold beverages.So he says, it's a no-brainer, you go with cold.So he says, you go with cold.And then he says,now we go into the mental model of the way human brains are screwed up.And so he says, the first is the association tendency, which is that,put it in places where people are happy.Because when people are happy and they see Coke,
Otherthen they associate happiness with Coke.And then we finally get to our next slide, which is my favorite slide,which is the Maryland slide, right?So the association tendency is if Maryland's drinking it,then definitely I want to be drinking it too, right?And so the association tendency, what Coke did in all its ads forthe longest time, and even now, is they associated with celebrities, right?So in India, they'll pick some of the top Bollywood actresses, andthe same thing here.They'll put these people in, because the association tendency,humans kind of do very well with that.And then the social proof tendency of humans is another mental model,which is monkey see monkey do, which is that when we see other peopledrinking Coke, we want to drink Coke too.And so show people having a good time with Coke and all of that.And then he says, do it both ways.Do it with fountains and do it with bottles.And then he says another thing we would do with the Glotzbeverage company is that we would basically create this order around secrecy.So people think there's something unusual about Coke because the formula's secret.It's in a vault in a bank.And quite frankly, the secrecy means nothing.Because he says that eventually, with food science going the way it was going,everyone would figure out how to make something close to Coca-Cola.But by the time they figured it out, we would have had brand andother things come in which would help us kind of keep the competition at bay.And he says the food chemistry that helps our competitorsmake a product like ours also helps us by reducing the unit cost.They went in the US from sugar to fructose, which was a lot cheaper, andthey just made all their efficiencies in how they got there.And then he goes to Jacobi inversion, which is what not to do?What are the things that you don't do to get to the 2 trillion?So he says the first thing that you don't do is avoid losing half the brand name.The Coca-Cola brand name has two parts, the Coca and the Cola, right?And he says, don't lose either part of it.If anyone came up with anything called Cola, sue them and take them out.And so he said that in an ideal world,he would have made sure there was no other Cola.They could call it whatever else, Glotz bottled water or whatever, orcarbonate, whatever, but no Cola, right?So that's the first thing he'd say, you won't lose half your brand name.You would avoid envy by basically having a standard great product at a great price,
Otherwhich they did.And then the final thing he said that don't change the flavoreven if someone comes up with something better.Keep the flavor because it's not about the flavor, it's about the brand.And that brings us to the Cola Wars, which very few of you are familiar with.How many of you are familiar with the Pepsi Challenge?Yeah, the usual cast of characters except you.How do you know about the Pepsi Challenge?Okay, all right, good.So some of us lived through the Pepsi Challenge.Did you take the Pepsi Challenge?All right, there you go.So basically, Pepsi had a problem.In the mid 80s, they had a problem.They knew that people preferred Coke by a huge margin to Pepsi,by like a two to one margin.And they knew that their brand was inferior.If Burger King offered Pepsi and not Coke,then people would not think of Burger King as well.So every way they had to discount stuff and all these things was really hard forthem.So John Scully, before he went to Apple,he became the one who went to Apple and then ousted Steve Jobs.So before he went to Apple,John Scully was the chief marketing officer of Pepsi.So he was brilliant.He said, how do I take out Coke?He said, the way I take out Coke is I take away their brand name.And the way I take away their brand name is I ask consumersto do a blind taste test.And in a blind taste test, so if you put in front of someone a Coke anda Pepsi, they'd go for the Coke because of all that conditioning for the decades.But now if you take away the brand and you just give those tasting cups andthen have them taste it, well, Pepsi is sweeter.It actually tastes better, right?So in the blind taste test, people would say, I prefer this one.Then they'd show you that it was Pepsi, right?And so they started taking market share and Coke got rattled.So Goizuera and Keogh, who were part of Coke at that time, they got freaked out.They said, basically these guys have figured outthat our product is inferior.And so what they did is they came out with new Coke.And new Coke was sweeter, and it was better than Pepsi.And there was a major uproar, right?So all the diehard Coke guys were horrified.That how can you change the formula?I mean, it's all about the formula.I want Coke, I want new Coke, right?So there was this huge fiasco that now they had messed with the familycrown jewels, right?They took away the one thing that was there,which was that secret formula and all the things that were the secret formula.
QuestionerIn reality, Coke had changed its formula many times, butthey never told the public that they changed the formula, right?
They just did it quietly.
This was very visible.
They called it new Coke, and there was a huge backlash.
And then they realized, the Coca-Cola company realized that they screwed up.
So then they introduced classic Coke, okay?
So then there was new Coke and classic Coke.
You remember that?
You had both, right?
That was even more confusing, okay?
And then they finally realized, we've got to kill this whole thing,go back to just Coke.
And that's what they did.
They went back to only Coke, and they survived that.
So what Munger says is that, look,this essay I wrote about taking 2 million to 2 trillion.
He said, in reality, the company started in 1884.
And by 1896, 12 years after they started, they had no earnings, andthey had 150,000 in total assets, so much less than 2 million they started with.
He says, they lost half their brand name, right?
So they were not able to protect the Cola part of the brand name.
They lost that.
And they also screwed up with the envy of Pepsi,and they went to new Coke, and all of that, right?
So they did all these mistakes, and they also had, what they did,I think, in 1900, they didn't think bottling was going to be that big.
They thought bottling is kind of a sideshow.
So they signed these agreements with these bottlers,which fixed the price of syrup permanently into the future.
So in 1900, they said, we will give you syrup at whatever cents per pound forthe next 100 years, fixed price, okay?
Completely destroys the model, because then sugar went sky high, andthey started losing money.
So then they are telling the bottlers, we can't give it to you.
They said, no, you have a contract.
And so then they had to battle the bottlers, andfinally they got some leeway from that.
So they made that mistake.
And then what they had done is the bottling rights.
What they had done originally when they gave bottling rights,it was a day's horse ride.
So the way they set it up was that they looked at how far a horse could go ina day and a back, and that's how they defined the territory of a bottler, okay?
And that didn't make sense once you got to automobiles.
And so first, they had very big territories, because Coke started expanding.
So they wanted to reduce those territories.
The bottlers didn't want to give that up.
And the second is that they had some many useless bottlers, right?
QuestionerSo these bottlers, I mean, this is the license to print money. You got a monopoly in an area. You got the Coke product, it's going to sell. And so you don't need to be that great a businessman. And so they had to really kind of go through Don Quixote, a lot of work, where they brought back a lot of bottlers and did all kinds of things to get their model back. But in spite of all that, Coke from 1884 till now, with all the dividends they've given out, they're now at a, Munger when he gave the speech, the market cap was 125 million in 1996. So he said if Coke's market value grows by about 7.5% a year, you'll get to 2 trillion from 96 to 2034. And if you go to today, of course, 96 I think was an inflated multiple. If you go to today, Coke is at 190 billion. To get to 2 trillion by 2034, you would need to be at about 14.5% a year. I'm not sure they'll do that, but the other thing that could happen by that time is since we get these cycles in stock markets, you might have a 30 multiple on the company. Coke was sitting at a 40 multiple in 1999. So there's a chance you might get some crazy multiple at that time, and that might get you to the 2 trillion. So basically, what I wanted to just say is that you can see the work that Warren and Charlie did. One is they get a little bit of information edge because they're willing to dig deep, they're willing to read a lot and what not, which most people aren't willing to do. The second is where they get a lot of advantage is the synthesis. When they read, what are they kind of extracting out of that model? And the third is that they understand that when you have multiple models interplaying with each other. I mean, when you put a great manager like Goizueta on top of a great business, you just get phenomenal returns. I mean, those are just exceptional in terms of what ends up happening, is great business with a great manager. And then we get to some of these other nuances about personal space and all these other things about brand and such. You get to kind of these loser effects. So in the investment business, I think that this is the holy grail. This is kind of when you get to this level of analysis on a business, you got it, and then you got it there. And so the key is to make very few bets, make very infrequent bets. And when seven moons line up, you bet big. And such, and the rest of the time, you don't do much. So with that, we'll open up for any questions or comments you guys have.
QuestionerWe have two mics. I'll ask the first question. Actually, I'll give the TA to hand the mic to the second person. So just raise your hand, and then the TA will hand the mic to the second person, and we'll just alternate. So I'll ask the first question. So thanks very much for talking about the Coke example. One of the things I was wondering about, though, is you talked about how Coke is this great business, right? And you talked about a lot of the qualities that make the product very good, and also the structure of the company. How do we think about how much the company is worth, though? So even a great business is not worth infinite, right? So how do we go from what's a good business to whether or not it's a good stock to purchase?
WarrenRight. So Munger gives us the answer, right? So he says in 1996, going forward 38 years, that the value of the business is 16 times the current value plus all the dividends. So he tells you that, right? And so the way they got to the value of the business was they just looked at unit volume and humans and market share and did some math on that. And so then the question you have to ask yourself is, how real is that? And the reality is, quite frankly, from the point he made the speech till now, it's quite real. I mean, in the sense that the unit volumes have continued to go up. Coke has continued to increase and expand its brands. They've got a lot of stuff now which is non-sugar, non-carbonated using that distribution engine. And the distribution engine is very expensive to recreate. So if someone comes up with a drink like Monster, for example, for them to replicate what Coke has is very uphill. I mean, it's a huge undertaking. They're better off selling to a Coke, right, even at a high multiple. And for a Coke, even if they pay 50 times multiple for a company that they think has global potential, they'll get that very quickly because of the volume growth by pumping it through their system. So having that distribution channel gives them a huge edge. So you would have to have some change along the lines of humans not consuming liquids or something along those lines. I mean, all businesses, I think, have issues. You can't get to bulletproof. But I would say Coke, I think, gets as close to bulletproof as you can get. It's probably one of them. And I think that's why Warren put a quarter of the pie into it. I know you mentioned as a value investor, you make very infrequent bets.
QuestionerAnd when you do, you're really going big.Could you give us a little insight into what's your daily life like?Obviously, you're not buying and selling every day.So do you constantly just think about stuff, analyze new companies?What do you do on a daily basis as a value investor?
Todd CombsWell, I mean, I think you would do well as a value investorif you enjoy reading and enjoy spending time with yourself.Those are good traits.And while human contact is good, I enjoy those things.And so, I mean, a few years back I was having dinner with Charlie Munger.And he'd mentioned that he would love to see long histories of General Motors.And he said he thought that would be a great class to teach, just the.I said, well, you can see long histories of the business in something likeValueLine.So he said, no, that's not what I'm talking about.He said, I want a hundred year history of GM, okay?And I want a hundred years of numbers for GM.So where can I get that?And I wasn't sure where he can get that.And so, but recently some kids at Boston University,I was talking to them, I was actually doing analysis of American Express.And they said, yeah, they had annual reports from 1950 on Amex.So I just asked them, hey, can you get old reports of General Motors?And they said, yeah, we can get all the reports from the beginning.So they sent me a Dropbox file, which had every GM annual report.I think from like 1911 onwards.And so I emailed Charlie's assistant.I said, hey, Charlie mentioned this to me a few years ago.I have the reports.If you want some, I'll send you the link.He's very excited to receive them.Okay, so then I sent her the Dropbox link.And then she wrote back, this was just before the Berkshire meeting.And then she wrote back saying that I've been instructedto finish printing them before we leave for Omaha, okay?And it was like 24,000 pages, it's a lot of pages, right?And so she said, I'm busy printing, okay?And so this was on a Tuesday,I think normally Charlie leaves for Omaha on a Thursday.And I saw him in Omaha on Friday.So when I saw him on Friday, I said, so did you start reading the GM reports?And then he goes into this whole thing about the nature of the company andall the things in the early years and this and that.And he was plowing through them.And then I met him again after that.And so he was picking up insights into GM.They have no, I don't think they're looking at making investment GM or
Questioneranything like that.I think this is pure curiosity to understand how the world works, right?And so I said, okay, let's do this myself.I said, let's start myself reading GM reports from 1911 tosee what insights can be gleaned.Because I'd never done that.I've never picked up the 1919 Koch report, for example.And so I started reading General Motors, and I actually got through to the 50s now.I've gone through from 1911 to the early 50s.And my God, it was fascinating.Because I think the thing is that it's like you know that a asteroid's coming in,but they don't know it.Because it's like 1928, and everything looks great.And then the crash comes, and then even that crash is nothing.Because in 1932, from 1929 to 1932, really crash.And then even that's nothing, because all through the 30s,you're going through really tough times.And then, like in 1941,1942, the company's informed by the US governmentnot to produce any passenger cars.So from 1942 until the end of the war, GM is producing zero cars.They're producing airplanes and all kinds of things for the military, but no cars.And then you get to 1946, andthe country has not had a single new automobile produced for like four years.So there's this amazing history.And then, of course, you can see the revenues, and the cash flows, andthe brands are being built, and all the different,they introduce the automatic transmission, and all of that.So I actually gained a lot of appreciationthat you get a much deeper,richer insight into these businesses with some of that reading.You can also get some of the same insights from reading biographies,autobiographies, like I'm sure Warren and Charlie read,Goyzera wrote a book, I'd Love to Buy a World of Coke.And then the previous guy that Coke had written several books on Coke.So you could go back and look at the history of the companythrough those biographies and such as well.Yeah, so I think that if you can set your life up in a manner which gives yoularge chunks of time to do reading, but reading not from the context of,I'm going to make an investment, reading from the context of justgetting better at knowing how the world works.And then I think what I find with Charlie is thatwhen you look at recently the Valiant saga, some of you might be familiar withValiant, and I don't think Charlie's ever read an annual report by Valiant.I mean, he sits on a board of a hospital.But a lot of people sit on hospital boards or
QuestionerHello, my question is, what's your biggest mistake as an investor?
OtherThere's a lot of mistakes. I think the mistakes are kind of part of the landscape, and hopefully they teach us a few things. I think that if I think about, I mean, I'm trying to figure out exactly how to answer your question in terms of, if I think about it in terms of percentage of net worth that got lost, or net worth of the funds and such. I would say probably the biggest mistake was in 2008 or so, where we had investment in a mortgage company, Delta Financial, and it went bankrupt. And we lost 60 odd million, which is about 10% of what we managed. And, but you learn, it's expensive, but you learn lessons from that. And so I think that's a big one. I think that in the late 90s, 99, early 2000, I had actually started a private company. It was called Digital Disruptors, and we did some partnerships with brick and motor companies to bring out kind of dot-com variants of those companies. And that didn't go anywhere, so I personally lost about 2 million, which was quite a bit of the net worth at the time. And I had outside investors that lost about 3 million. So, but we actually did really well. You know, the thing is that, so that mistake took place in late 99 and early 2000. But those mistakes actually, at that time, helped us do really well in the early years, because we were able to sidestep a lot of stuff just because of learning. So I think every time, what I have found is that when there are mistakes, if you just look at them carefully, they're actually blessings, because they're going to actually make you better and help you get better. So John Templeton, a great investor, used to say that you're going to be wrong in investing one out of three times. You know, one third of the time you're going to be wrong. And I think he's right. Sometimes you can be wrong where you don't lose money. You might flatline and such. Sometimes you might even make money when you're wrong.
QuestionerBut usually that's the case.And I think even in the case of Warren and Charlie, if you look at their record,they have large numbers of mistakes in their record,even though you can see how bright they are.What's happened with them, which has been really good,is that they've been right on the large ones.But if you look at the sheer number of investments,there will be a large number of investments they've made,which didn't go the way they wanted to go.But the, and some large ones actually they were able to save.Like January was a mistake.They were able to kind of salvage that.So I think the thing is it's very difficultin the investment business to avoid mistakes.I think you're going to make mistakes.The key is to keep learning and getting better.And over time, even with the one-third error rate,because one-third won't mean that you're going to go south on one-third.You might lose something there.You'll end up with probably a better than average record if you keep at it, so.Thank you.
QuestionerYeah, thank you for the talk.We can see that you learn a lot from Warren Buffett and Charlie Munger.And it's not easy to build up the business acumen throughout the years.So my question is, if you're going to decide whether to investin a company that is totally new to you,what will be the first features you will look at, or first a few features?
OtherWell, I would say that it's a very good idea to consider indexing.One of the reasons I wanted to give this talk is that,I think it's not easy to be a weekend investor, if you will.If you think about, for example, the work that they did on Coke,it's a lot of work.It's a lot of work to read 100 years of annual reports.So for a large number of investors,index investing will do quite well for them.And there's nothing wrong with that, that's perfectly fine.And I think that it's a goodidea to study a business forthe sake of studying it.It's not a good idea to study the business just purely from the perspectivewas, do I want to invest in this or not?And one of the things that happens is that humans have a commitment bias.So what happens is that when we spend a lot of time on something,we feel we should get some return for that time.And so it's a little bit of a,I would say, a danger if you say that I'm going to research a company andthen decide whether I want to invest or not.I think you're better off just researching a company with no suchpreconceived notion, because as you go deeper into the business,
Ted Weschleryou're spending more time. And then you're feeling like, well, if I don't do anything, what's the point? And so on. So I think that maintaining the objectivity is important. And just not being compelled to act. My younger daughter's in the room, so I'll repeat a story I told her one time. And so I picked her up, she goes to school in New York. And so she's usually coming in on these late night flights. So I picked her up one time, I think one in the morning, from LAX. And we were driving back, and I think it was December last year. We were driving back home from LAX to Irvine. And she had worked in the summer as an 18-year-old. And she had made a little less than $5,000 over the summer. And the IRA rules allow you to put up to $5,500 into an IRA. Or if you make less than $5,500, then the amount you earned. So if you made $4,000, for example, you could put $4,000 into an IRA. And so I had asked her to open a Roth IRA, and then we'd put the $5,000 or so into that Roth IRA. And so she's in the car, almost falling asleep. And so I was saying, you're 18 years old. Let's fast forward to when you're 68 years old, which is 50 years from now. And let's say that $5,000 is growing at something like, let's say, 10% a year or something, for example. And so I said that, what would it be when you're 68 years old? And so if you're compounding a 10% rule of 72, every seven years, the money's going to double. So 50, you could take 49 years, is 2 to the power of 7. And what is 2 to the power of 7, Faye? Is that 128? So you take the 5,000, and you're at about something like 700,000 or something, 650,000 or something at that rate. And that's at the age of 18. If she does another internship at the age of 19 with something similar, and then eventually, at maybe 22 or 23, enters the workforce. And let's say when she enters the workforce, she gets a $60,000 job or something, and at that point, you're maybe hopefully saving 15% in a 401k and reducing your income by 10% or something. I mean, the key to getting wealthy is to spend less than you earn. And so once I told her that she was going to have like 650,000, she was wide awake, and she said, how did that happen, right? And I explained how it happened. And then I said, but that was at 18, I said then at 19 you do another internship that becomes another 600,000, at 20 you do another internship. And eventually you enter the workforce, and eventually in your 30s you're making probably six figures and so on.
QuestionerAnd if you keep spending less than you earn, what happens when you're 70?
QuestionerAnd eventually she gave up, she said the number's too big, right?
QuestionerAnd so the thing is that that's with doing no stock picking.
QuestionerTo your point, no reading, just party all the time, right?
QuestionerBut just make sure that 15% gets saved.
QuestionerAnd so the thing is that the key to getting wealthyis actually, it's actually very simple.
QuestionerNumber one, spend less than you earn.
QuestionerNumber two, put it into something consistent,some kind of S&P index or something like that.
QuestionerAnd then number three, don't take loans against it and don't use it to go onvacation or down payment for your house or any of that, do all that somewhere else.
QuestionerAnd just let this go.
QuestionerAnd it's amazing what those numbers will end up being at that time.
QuestionerAnd so that's a good way to go.
QuestionerAnd it's not a tragedy if she doesn't get 10%.
QuestionerEven 7% will double every ten years.
QuestionerSo the key is to start early and have a long runway.
QuestionerAnd then you end up doing just fine, so.
QuestionerHello.
QuestionerHi.
QuestionerSo I read that you have an insurance-focused company.
QuestionerAnd this is kind of similar to what Warren Buffett has done with his insurancecompanies.
QuestionerI was wondering what kind of insurance activities you're involved, oroperations you do, and how this might relate with your investment fund.
Ted WeschlerYeah, we bought an insurance company.
Ted WeschlerIt's based in Louisiana.
Ted WeschlerIt does workers' comp insurance in five states around the south.
Ted WeschlerAnd it does 60 odd million in premiums.
Ted WeschlerAnd it's a nice business.
Ted WeschlerBut one of the reasons I wanted to buy the company is thatI felt that I would really learn the insurance business.
Ted WeschlerAnd I'm getting a big education on the insurance business.
Ted WeschlerAnd quite frankly, I think I'd rather own See's Candy.
Ted WeschlerThat's what I learned,is I'd rather own See's Candy than the insurance business.
Ted WeschlerSo that's one of the reasons I did the talk,is to get my head focused on Coke and not insurance.
Ted WeschlerSo insurance, it's a good business because it obviously,you get other people's money to hold.
Ted WeschlerBut also, it has attributes of a commodity business.
Ted WeschlerBecause whenever our insurance company is trying to sell a policy,the people who are buying a policy think of it like a tax.
Ted WeschlerNo one thinks they're ever going to file a claim.
Ted WeschlerSo they want a low price, and they take the cheapest bid.
Ted WeschlerAnd so the economics are very different from the economics of Coke.
Ted WeschlerAnd so one of the things I learned from owning the insurance companyis that I really want See's.
Ted WeschlerSo that's what I'm going to do, is focus more on See's, less on insurance.
QuestionerAnd that's what I'd recommend to you as well. My question is about cloning. So Charlie talks about that you gotta look at what other great investors are doing. And so in particular, when you look at 13 apps, you're kind of looking back in time. So how do you personally, when you look at these things, decide or separate the good decisions from the bad decision? What's your yardstick for this?
Todd CombsWell, I think that when you're cloning, there's a couple of things to look at. One is you want to look at the ideas that are the greatest conviction ideas. There were people. put the most money. So if someone is, for example, an investor who has a 50-stock portfolio and nothing is more than 3% of the portfolio, I think there's no point cloning them, because you just can't see where they have conviction. But if someone is running a 15-stock portfolio and the top three stocks make up half the pie, for example, then you know that they've got conviction on those. So if you understand something about the way their brains work and their past records and so on, then cloning their best ideas, or at least looking at their best ideas as a starting point for research, is a very good thing to do. I mean, I would just say that in the Coke example, by middle of 89, it was public that Warren was buying Coke. And in fact, when the annual report came out, the price was about 10% higher than their cost price. And two years later, it had doubled. So there was a lot of time for anyone to replicate that if they wanted to, for example. It wasn't like, I think, typically, it's not at all too late to look at something a few weeks after someone has bought it. Because typically, if you're cloning people who are value investors, they are making kind of a longer-term bet. And they're looking at relatively large discounts. So if you can reverse engineer their logic, and if you can reverse engineer their reasons, and still looks cheap and runway still looks good, then that gives you some basis to do something.
QuestionerYeah. Do we have a mic? Can you share with us a little bit about your thoughts as it relates to opportunity cost, and when you're weighing up a decision to make an investment, how large of a position you're willing to put into a certain investment as it relates to your entire portfolio?
Todd CombsYeah, that's a great question. Well, I think that I used to run for bribe funds with a very simple model that if we'd make a bet, we'd make it 10% of assets. You know, kind of a 10-stock portfolio, 10, 12 stocks
Todd Combsmade kind of sense to me. And what I found is that during the financial crisis, we were finding lots of companies where there were kind of entire classes of businesses that were really cheap. And we could get some diversification by buying a basket. And I also found sometimes it was better to not always do 10. Sometimes a smaller bet was justified. So now what I do is I'll either do a 2% or a 5% or a 10% bet, just depending on what it looks like. So if we get to the point where you're seeing very high discounts to underlying value, at the same time, very low probability of a loss, then you can step up. And otherwise, you can pull back. But I would say that the less bets, the better. And the more you know about the business and the greater the conviction, the better. So Jeff is in the real estate business. He does very well, and specifically in single-family homes, renting and flipping both. And so the thing is, if you ask someone like Jeff, you might question what he's doing, because everything is in one asset class. It's in almost one geography, maybe a couple of geographies. And so you might say there's a lot of concentration there. But at the same time, the degree of knowledge is very deep. And I sense they know what they're doing. So in fact, looking at the two of us, I would think that I'm maybe too diversified. And you might actually have it right, because you're very close to what you're doing, and you know what you're doing. You've been in that space for a long time. So there's a lot to be said for the depth of knowledge and such.
QuestionerYeah. I have a question, and it is, why did you decide to sell your initial company, TransTech?
Todd CombsOh, because I lost interest in it. So I have a rule I follow, and I've followed that for many. I think I followed that almost from the beginning of my career, that if on Monday morning I'm not fired up to go to work, then I do two things. Number one, I don't go to work. And number two, I hit the Reset button. And so in the past, before I had my own business, hitting the Reset button was easy, because I could just go to my boss and resign, which is what I did. I did it twice, where once I actually moved from one part of a company to another part, because I just was not excited on Monday morning. And the second time I did that was when I quit to start my business, TransTech. And so I ran TransTech from about 1990 till 99, about 10 years. And at about 94 or so, I heard about Warren Buffett
Ted Weschlerfor the first time, and I started to learn about investingand was quite intrigued by that model and approach.And I found that from 94 to 99, Igot more and more interested in investing and less and lessinterested in the IT business, to the pointthat I actually got to a point in, I actuallyremember the date, it's in early February in 99,where I was not excited to go to work.And it was a very strange feeling, because at the time,the company had about 170 people whothought I was excited to be there, and I couldn't fake it.And so I was very confused, because Isaid there's no one to resign to.There's nobody for me to hand my resignationand do something else.And so I actually was part of a group called YPO.And I met my fellow presidents, and Iexplained to them the way I was feeling.And we had a discussion, and they actuallymade it pretty easy for me.They said, you can own the business without running it.So just find somebody else to run the business,and you can go do whatever else you want to do.And so I thought about it.I said, yeah, why didn't I think about that?Sounds like a good decision, easy decision.And they said, look, it'll take you six months, maybe eightmonths, to find someone.I couldn't think of someone in the companywho I could think is obvious to run the business.So they said, just do a search and look for someone.And then when you find someone, you can leave the arena.And they said that since you knowthat you have a finite time, six months,put a smile on your face and go to work every day,because you know it's coming to an end.And so that's what I did.And then they asked me another question.They said, what do you want to do after this new guy comes inand is going to run the business?And I told them that ideally, what I want to dois I want to go work for Warren Buffett.That's really what I want to do.I don't want to run the IT business.I want to go work for Warren.So they helped me write a letter to Warren applying for a job.And of course, in a week, he wrote back saying,thanks, but no thanks.And actually, in just about five or six months after that,the new CEO came on board.And in fact, so after Warren said no,the same group told me, why don't youjust set up a partnership like the Buffett partnerships?And I didn't think that was such a bright idea,because I said, you know, I'm notsure how it would scale or whatever else.So anyway, I set up a partnership,
Questionerbut I treated it more like a hobby.Then this guy came on board in like third quarter of 99.And he took over.And then a month later, he called me and said,someone wants to buy the business.And so he had just moved from Texas to Chicago,so I didn't want to pull the rug out from under him.So I asked him what he preferred,whether he preferred that we keep the business or we sell it.And he said sell it.And I think the reason he said sell itis because all his options, everythingvested right away, one month after he arrived.And the people who wanted to buy the businesswere going to give him a new deal and a new set of options.So he didn't even take two seconds to tell me sell it.And so that's what we did.So the good news was that because this person was alreadyon board, they weren't looking at me to run the business,because I had already left the scene.And then when we were doing the paperwork for the deal,they still wanted a non-compete on me.And they wanted a four-year non-compete.They said for four years, you will not enter the IT business.So I told them, I said, can we make it 40 years instead offour, and just add a couple of million to the purchase price?Because I was absolutely sure I was nevergoing to go back into that business.And they said, no, we're not doing that.We just want four years.So that was that.Sorry for the long, long answer.
OtherSo I want to ask a follow-up to this.So you sold your IT business, and thenyou moved into investing.And of course, Pabrai Investment Funds has been successful.I was wondering what you found to be an unexpected challengethat you wouldn't have expected before youbecame a professional investor.
QuestionerActually, I didn't really find it challenging.What I found very interesting was a couple of things.One is that when I started the funds in 1999,Buffett had ended his partnerships in 1969,1970, almost 30 years.And the best that I could tell, in 30 years,I didn't know of anyone who had set upa model just like the Buffett partnershipsin running with zero fees, and one-fourth over 6%and all of that.And I thought that was kind of strange,because I thought that that's a good way to geta competitive advantage.Because you're basically not telling people.The industry works on just asset gathering and feesand all of that, and it doesn't take into accountthe interests of the investor.So I thought that focusing on giving the investorsa good deal would be very good.
OtherWhat actually ended up happening?
OtherFirst, I thought about the funds as a hobby.
I didn't even think about trying to scale it.
Then when the business got sold, and I actually
started running it, and there was about $2.5 million.
We started with $1 million.
We had about $2.5 million a year later.
I said, why do I treat this like a stepchild?
Why don't I actually focus on building this business the way
Warren built the business?
And of course, there were some issues,
because the SEC doesn't allow you to advertise or solicit
and all that.
So I was always concerned about how
am I going to get more investors and such.
But then that problem also, I figured out a solution.
I used to have, when we first started,
we had eight investors when we started with $1 million.
And a year later, we had 17 investors.
And of course, now it's a few hundred.
So when we had those eight investors,
and I remember we had our first annual meeting, which
was around a conference table.
And then we went for dinner in my old office in the IT firm.
So I told these guys, because at that time
I decided that we want to scale this fund,
but I don't know how to scale it.
So I said, look, you have been put on Earth for one reason.
And the reason you've been put on Earth
is to bring investors to Pabrai Funds.
That is your mission.
And so talk to friends, family, and fools, and bring them in.
And have them contact me.
Because if Jeff contacts his friend and contacts me,
that's fine.
I just can't contact them directly.
And the thing is, what I learned about humans
is that humans are looking for direction.
They need to be told what to do.
Or like Bill Gates says, that even if you're a monopoly,
you have to ask for the order.
So what I found is that these investors were actually
quite happy.
And then they started introducing me
to some of their friends and family and so on.
And we started growing and scaling from there.
So I didn't really see much of an issue.
It was a lot of fun, actually, to try to, in effect,
I was reliving the Buffett Partnerships
about 30 years later.
And the real first storm we faced
was really about nine years after that,
when we hit the financial crisis.
And that's when we had Delta Financial go to zero and so on.
And then had to work through that.
But I found it a very blissful existence.
It was really extremely different from the IT firm
I just left with the 170 people.
Because I had just myself and an assistant working 10 hours.
And that was it.
QuestionerAnd it was afternoon naps and everything else was great. Nothing to complain about. Hi. I read that you have a foundation, the Dakshana Foundation. I hope I'm saying it right. Can you explain what it means and how you thought of it, how you formed it, and how you decided how it would operate?
Todd CombsSure. Yeah, so my wife and I, we set up Dakshana, I think, in 2007. And in 2007, our net worth went over $50 million. And I've always felt that large inheritances actually are a burden on your kids. They're not really helpful to them. And actually, my kids are both here. And I think they would endorse that idea, especially now that my younger daughter knows that she's going to have more money than what she knows how to do with, without any help from dad. So basically, once we crossed $50 million, I said I was in my early 40s that I did not want to start with a give back when I was really old. Because then I wouldn't be able to do much. I'd just be able to write a check. And I knew that giving money away is more difficult than making it. And so I wanted to have many years of ability to make mistakes, and learn, and then get better. So what we did is we set up the foundation in 2007 and decided we'd give away 2% of our assets every year. And so that would give us over $1 million a year. And $1 million gave me enough money to do some experimentation. And the idea was to lose, hopefully, lose and learn. So in 10 years, we'd figure out some model that worked. And what ended up happening, actually, is that we didn't lose any money. Because in the first few weeks, we got traction. I wanted to focus on education. I wanted to focus on underprivileged in India. The idea was to, if you give a man a fish, you feed him for a day. You teach a man to fish, you feed him for a lifetime. So I wanted to teach fishing to very poor kids. And so we found a model where we identified very poor and gifted kids. And we prepared them for the IIT entrance exam. And that model basically forced the Indian government to give large subsidies to these kids once they got in. And it worked really well. I mean, the wonderful thing about Dakshana is that all of the operations and work is in India. And I only go there a couple of times. And usually, when I go to India, I never spend any time in the Dakshana office. I think half the time, I've never even stepped in there. I'm usually going to either the schools where we run a program or to the homes of the scholars in different rural areas.
QuestionerSo the team in India, actually, Iwas very lucky that we got a great partnershipwith the government of India.We got really good people, have a great CEO.And really, they treated it as their babyand built it and such.And so it worked out really well.And now, I think we just bought a 110-acre campus near Pune.And that was a large bet for us.It was a $10 million bet.And we've almost paid it off.We've paid off $8 million so far.And that gives us the ability, long term,to host a few thousand kids there over time.So it actually worked out far better than I thought.We didn't have any issues in terms of traction.The model worked well.In fact, a lot of other people have stepped in and becomedonors to Dakshina.So I think now, half the money comes from my familyand half comes from outside.So it's worked out really well.But it's a good team that helped us do that.So that was great.Sorry.
QuestionerHow do you weigh your focus kind of valueinvesting versus the desire to diversify your fund?I guess, in a way, if you only have 5 to 10 stocksat a certain time, do you still have the desireto diversify across many industries?
QuestionerYeah, I don't actually think about it that way.I just think about it from the point of viewthat what can I find that's worth investing in whichI can understand, which is undervalued.And then if I can get more diversification in the portfoliowithout giving up much upside, then I'm all for that.Sure.No problem.So it just depends on what shows up and what.So there's not a lot of activity.There's not a lot of changes.So we tend to keep things for a while.And so I keep reading stuff and looking at things.And every once in a while, things make sense.And then we can pull the trigger.Does this work?OK.
QuestionerSo to take advantage of these buying opportunities,you need cash.And so given the fact that you aren't ready to sell somethingat that exact time, and having cash on handmeans you're not making money, howdo you decide how much cash to keep on hand at a given time?
QuestionerYeah, so I think one of the things about the Buffett-Mungermodel is that you don't focus on being fully invested.You just focus on putting money to workif it makes sense to put it to work.And if it doesn't make sense to put it to work,let it sit in cash.So the ability to be comfortable with uninvested fundsis part of that patience.So there's nothing wrong with keeping cashif you don't have anything intelligent to do with it.
QuestionerThat's perfectly fine. Nice to have you here. I'm a PhD student in Palmer Rush School, so I have two questions. So the first one is that we are doing research on mutual funds and hedge funds. So I'm just wondering whether you are following the academia research. If you do, do you find it's useful to look at those researchers? And if you don't, do you feel that your research is more advanced than the research in the academia field? And the second question is the opposite to the previous question. So if you have many cash on hand, does it ever worry you that you cannot come up with a better idea than the previous one to invest in?
QuestionerYeah, so those are good questions. Well, I didn't fully get the research question. You're saying, do you think my research is better than the mutual fund and hedge fund? I mean, there are lots of accounting research here. And do you find it's useful? Or do you think that their research is more advanced? Or you think you're better at reading accounting numbers than these professors?
QuestionerWell, I think, like you saw in the Coke example, it's not about the numbers. So I think that's the issue, is that for most investments, the factors that will drive long-term success don't have much to do with spreadsheets. They have to do with other kind of either understanding human nature or understanding nuances about certain aspects of how things work, rather than running spreadsheets. So I think you're better off kind of running it from the vantage point of running spreadsheets. And the second is regarding the cash versus opportunities. One of the simple approaches I use is that we really don't want to buy anything until it's at least half off, 50% off. So if I were, let's say, a 100% cash, and I'm just starting a fund, then that's what I would do. I would look for opportunities where there's a significant mispricing. And of course, one of the reasons I gave the talk I gave today is sometimes the $0.50 bills are not obvious. Like, for example, See's Candy was actually a $0.25 bill or less, but it wasn't obvious. And Coke in the late 80s also was a great bet, but it wasn't obvious. And so the area I'd like to get better at is the non-obvious $0.50 lying all around us. And the thing is that, so there's two ways you can invest, right? So one is, what I've done historically is look for a $0.50, let it get to $0.90, and then sell it, buy at $0.50, sell at $0.90. And hopefully, in the period when I own it, the value grows.
Ted WeschlerSo it's not exactly $0.50 to $0.90, the dollar becomes maybe a $1.20 or $1.50.And so I can buy at $0.50 and sell at $1.35, so that sort of thing.But I think that what is probably an even better model than thatis buying and holding on to these long runway positions.So when we met Warren Buffett for lunch in 2008,one of my daughters asked him, which of the Berkshire companies,they own 70 companies, was his favorite company?And he didn't even hesitate for two seconds, he said, it's Geico.And the reason I think he said it's Geico is because it's got the ultimate long runway.Coke has a long runway.I think Geico's runway possibly may be even longer than Coke.I mean, unless we get to a world of self-driven cars across the board.At that point, the model's gone.But we are at least a decade or more away from there.So he felt that Geico's model had,I mean, he was most excited about owning Geico.Because they used to have 2% market share, now they're approaching 10%.And he said that Warren says that on his 100th birthday, they will pass State Farm.So he's already planned out the next 14 years of them going past State Farm.So I would say that look for the $0.50 bill.Sometimes you find something cheap that's pretty good.But I think getting something that has more of a runway built in andgetting those cheap.And sometimes, the funny thing about the investing business is thatsometimes you can buy something at 20 times earnings.And it can be really cheap, depending on the nature of the motor and the runway.
QuestionerAll right.Hi, thank you for the talk today.I'm also a PhD student here.So my question is, how long does it take for you to terminate a position?Or more in general, how long does it take for you to realize you made a mistake?
Ted WeschlerSometimes a very long time, sometimes too long.I mean,I mean, once I know something is a mistake, I will act on,obviously, then exiting or whatever else we need to do on that front.But sometimes we don't know things that are a mistake until they've goneinto bankruptcy, and that's happened a couple of times to me.And so the mistakes usually become apparent.Sometimes they become apparent while we own the position.Sometimes we find out and we can get out of the profit,which we're very happy to do.But sometimes we may find out that there's some error we made,and there's possibly a loss, but then we'll act on that, take the loss, and move on.
QuestionerFinal question I want to ask, but I wanted to see if,
QuestionerYeah. How many, I'm sorry, how many, I don't know, how many stocks is the fund currently watching at any given time? So if price is fluctuating every day, and you're kind of watching, you want them to hit your value, I assume. How many stocks are on the radar at any given time?
Todd CombsThat's not how I run my life. So, you know, the funny thing is that I always say this story. That Ben Graham would go into a grocery store, and he would look for what was the biggest discounted item. And then he would buy that and come out. And Charlie Munger would go into a grocery store, and he would look for what he loves, and then he would keep going back every day till what he loves was on sale, and then he'd buy it and come out. And clearly, the Munger approach is, I think, superior. And so when I mentioned this a few months back at Columbia Business School, one of the students asked me exactly what you asked me, which is, you know, do you have, somewhat differently than you, but he asked me, do you have a list of things that you love that you're watching? And I felt very sheepish in telling him that I didn't have such a list. And then actually what I did after I came back is I said, you know what, I'm going to prepare such a list, because such a list is actually a very good idea. So I put together, and it's not finished yet, I put together a list of businesses that I truly admire, really great businesses. Now they may not likely be at prices that I'm interested in. So I'm at the stage where I've got, I would say, probably, I think that list will be a living, breathing list. But I probably have 80, 90% of what might come into it in the next year or two, for example, already on that list. I haven't gone through the motion of actually going through it versus present prices. What I was going to do is one of those either automated with a capital IQ feed or something where I can pull triggers in, which is not my normal modus operandi. Or the second is that when there's dislocations, then go in. And actually, I missed one. So for example, February 8th, I was actually in India on February 8th, but February 8th was a great day to buy a few things. Because we had some, and this was for a couple of days, when the indices really tanked and a lot of things tanked a decent amount. And actually, looking back, there were things at that point at prices that I would like to buy now, but they're not at those prices anymore.
WarrenAnd so I missed it, and part of the reason I missed it is becauseI wasn't paying as close an attention as I should.So we will get there, what you're suggesting, but I don't want to spend my,it's not my temperament to spend my days looking at screens.What I would prefer is to have that set up and maybe kind of once a week orsomething, just take a quick look at how far off things are frombeing more interesting in terms of buys and so on.And the second thing that I want to get better at,which is part of the reason for the co-presentation,is that there are these businesses where they are fantastic businesses.When they get paired with fantastic managers, if the runways are big,even at a not a obviously cheap price, those can be great things to buy.And that's a lesson that has not been seared in, because I'm a bargain hunter.And so I need to sear in the lesson that you pay up sometimes, andthen take it from there, so.Feel free to ask questions, I can see there's a few minutes left.
QuestionerYou keep mentioning this runway thing, and you mentioned Goyzueta.
WarrenHe's the wealthiest Hispanic in America now, billionaire.He hasn't-Well, he passed away.He got lung cancer.He was a chain smoker throughout his life, back a day.And then 30 days after being diagnosed, he died.And basically, I think he was, this was in the 90s.And Coke went through a lot of turmoil after that,because his appointed successor wasn't Goyzueta.I mean, wasn't as good.And so they had a lot of issues.But yeah, Roberto passed away a while back.And he passed away in pretty young, like 60s.So in terms of that runway, I think he-His runway got truncated.Oh, the family, I think they had a-But I'm talking about the runway of the company.So Coke is an example of, the Coca-Cola company has a very big runway.It actually had a fantastic runway when Goyzueta was in there,because you had a great business.On top of it, you had a great manager.And the amazing thing about Coke is that then,a few years later, the great manager was gone.A bunch of yo-yos came in to run the business.I still think it's run by yo-yos.And still, the business was done.And part of the reason the business did well was, Warren was on the board.So they brought him on the board.He's no longer on the board.But I think in the years, on the decade plus that he was on the board,he pretty much, I think, ingrained in them the culture of how to allocate capital.So Coke has got, I would say at this point, straight and
Questionernarrow marching orders of how to run the business.And that's what they do.Okay, thanks.God has told them what to do.You know?All right.I think the family has a brand of food products, the Goizueta family.Yeah, I'm not sure what the, well, the school of business,I think Emory University School of Business is named after him.But I'm not sure what happened to the Coke steak or what the family did andsuch, I haven't kept up with that.But it'd be a lot of money.I mean, if they kept the 2.5% steak,it'd be north of 4 or 5 billion today, so a significant amount.Yeah.Thanks.So also, I kept thinking after you said it that if the phrase,if you don't work every morning, if you don't wake up with energy every morning,you should rethink what you're doing.Are you excited about your life?
CharlieYeah, I'm pretty excited, yeah.Just checking.Yeah, that's pretty sad.But would you recommend that idea also to, for example,me as an undergrad, I still have a long way to go.Would you recommend that idea to me, even though I don't have a net worth like yours?Yeah, I mean, I think that it's not a matter of net worth.I mean, I followed this edict when I had no money.I mean, I followed the edict, and I think Warren also says thatyou should go to work for people that you like, admire, and trust.So it doesn't matter, the money's irrelevant.I mean, quite frankly, you're in a country,my father-in-law jokes that the US is one of the only countries where the poorpeople are fat, you're in a country where even if you don't have money,you're not going to starve.So basically, there's plenty of safety nets in this country.So the good news is there is a bottom below which you can't go,unless you've got other mental issues or other things going on.So if you have your facilities about you, you don't have much of a downside.And what you ought to do, because you're well educated andyou've got lots of skills in a society that values those skills,that you focus on working with people that you enjoy working with,and doing work that you enjoy doing.And if those factors are not being met, hit the reset button.Pretty simple.And I think what will end up happening is that if you truly do what you love doing,then you'll do it well, and you will actually do well in your career.So it actually has a payoff.Every time I've actually hit the reset button, it's led to higher highs.So the reset button, at least for me, has never hurt me.
QuestionerEven though when I hit the reset button, I'm actually going into an unknown.But it's been fine.The unknown's been okay.Other questions?Okay, so I figured this would be an appropriate question to end on,which is, so the class has a variety of students.Some want to do finance as a career.Some more or less just, they don't want to spend a lot of time, buteveryone always wants more investment return.And so I was curious what you regard as the biggest mistake foreach of that group.So you touched on that to some extent, but I figured we'd make it crisp.For the last question, what you regard as the biggest mistake forpeople who want to be professional investors andpeople who have other priorities in their life?
OtherYeah, so I think the professional investor,that's actually what I was trying to get across in this talk, is thatI think investing is one of the most interestingdisciplines because it crosses boundaries.I mean, you saw in this talk the range of issues that come up in makingan investment, it goes across disciplines, across all kinds ofkind of understanding human nuances and so on.So I think of investing actually as being one of the broadest disciplines.And so if you are a person who enjoys that,who enjoys reading across different disciplines, reading, learning,understanding how humanity works and how the world works,then this may be the right place to you.And also then look at those three factors, right, the patience andthen the decisiveness and then willingness to be different.If those are you, then it makes sense.And for the crowd that doesn't want to be in this field,there's nothing wrong with that.There's a hundred different ways to live your life.And investing is just one of them, so.
QuestionerI meant, what you regard as the biggest mistake in their investment,like the biggest landmine to avoid.So this is the inversion thing where you want to try and avoid a big mistake.So for the non-professional investors, what would you regard as-
OtherWell, the non-professional investor, I would say,indexing is a very good way to go.And I would say that even if you are trying to pick investment managers,I think that's a very difficult exercise to embark on.It's not the subject of the talk we went to today.But so I would say that if you are a know-nothing investor orinvestor who doesn't do this full time and such,then certainly taking an index approach is a very good way to avoid a lot of pitfalls.
WarrenAnd the key is, like I told you with the example of compounding,Einstein called it the eight wonders of the world.The key is that if you are spending less than you earn, and you just sock it away.And with the ups and downs of the stock market, I mean,the S&P over the last 100 years has still done 9% a year.So you'll still end up at a decent place.So to end, I wanted to do a few things first.
OtherA round of applause for Mr. Prabhat.
OtherThank you.
OtherSo we have two things for you.So one is a UC Irvine cap.
WarrenOh, good.We'll have you decked out in UCI gear.And the second thing is, so the university, solast year, 2015, was the university's 50th anniversary.And they produced this book.And there are a lot of great pictures, actually, from 1965.
OtherOh, great.
OtherWhen the university first started.I had a lot of fun when I was looking at the bookstore.That's great.Yeah.So, those are for you.
WarrenWell, thank you very much.Thank you again for coming to talk to the class.And thanks everyone for coming as well.
OtherThank you.Okay, that's great.Thank you.