Other[Music]great um okay so uh so first of all you know it's a it's a true pleasure and honor uh to to be invited to speak to uh to the the students and you know obviously peaking University uh amongst the best of the best and uh I saw a few of the resumés and they look exceptional so uh we've got lots of horsepower in the room which is great um and uh behind me I don't know if you can see it but behind me is a bust of Charlie Munger and uh so Charlie will be overseeing the proceedings uh for the next couple of hours so uh in case we go off track he'll get us right back on track and um so um so anyway you know um what I what I wanted to do is the the topic for today is um uh the Quest for 10 to 100 Baggers and This this term 100 Baggers actually comes from Peter Lynch uh and it means uh making uh a 100 times on your investment or making 10 times on
Otheryour investment or making 10 times onyour investment or making 10 times on your Investments if you say 10 Baggersyour Investments if you say 10 Baggersyour Investments if you say 10 Baggers it's 10 times 100 Baggers is 100 timesit's 10 times 100 Baggers is 100 timesit's 10 times 100 Baggers is 100 times and um I haven't given this talk beforeand um I haven't given this talk beforeand um I haven't given this talk before uh which is always a lot of fun for meuh which is always a lot of fun for meuh which is always a lot of fun for me because it's very boring if I have tobecause it's very boring if I have tobecause it's very boring if I have to repeat uh uh some talk that I've alreadyrepeat uh uh some talk that I've alreadyrepeat uh uh some talk that I've already given before so uh in some ways you guysgiven before so uh in some ways you guysgiven before so uh in some ways you guys are guinea pigs but in other ways Iare guinea pigs but in other ways Iare guinea pigs but in other ways I think it'll be exciting and because Ithink it'll be exciting and because Ithink it'll be exciting and because I have not given the talk before I'm nothave not given the talk before I'm nothave not given the talk before I'm not exactly sure of the timing uh but I'mexactly sure of the timing uh but I'mexactly sure of the timing uh but I'm going to try to move this along becausegoing to try to move this along becausegoing to try to move this along because there's a lotthere's a lotthere's a lot material uh uh relatively fast uh so uhmaterial uh uh relatively fast uh so uhmaterial uh uh relatively fast uh so uh so it'll it'll feel like it's goingso it'll it'll feel like it's goingso it'll it'll feel like it's going pretty quickly but that's why we havepretty quickly but that's why we havepretty quickly but that's why we have the recording so later you can um watchthe recording so later you can um watchthe recording so later you can um watch it uh kind of more at your leisure ifit uh kind of more at your leisure ifit uh kind of more at your leisure if you want to a certain parts uh but alsoyou want to a certain parts uh but alsoyou want to a certain parts uh but also certainly during the Q&A we can gocertainly during the Q&A we can gocertainly during the Q&A we can go through uh things that uh you have anthrough uh things that uh you have anthrough uh things that uh you have an interest in so um anyway I started my
Questionerinterest in so um anyway I started my journey um as a value investor uh 22 years ago and I uh quite by accident uh heard about Warren Buffett for the first time and unlike you uh when I heard about him I was 30 years old so I was much older and um and when I uh when I read about him I was really stunned I basically so I I have I haven't been to business school I'm an engineer by training um all of you probably know a lot more about Finance than I do uh but but I was really stunned uh with Warren Buffett's approach and the way he had been so successful and uh the Crux the Crux of his success at least what I took away from what I read in 1994 was uh a quote by Albert Einstein which is uh compounding is the eighth wonder of the world and um and so even though Einstein was a physicist he actually figured out a few things about
Questioneractually figured out a few things about about compounding and um you know about compounding and um you know about compounding and um you know obviously in ' 94 when I had read about obviously in ' 94 when I had read about obviously in ' 94 when I had read about Buffett he had been compounding at the Buffett he had been compounding at the Buffett he had been compounding at the rate of about 25 26% a year and uh 26% rate of about 25 26% a year and uh 26% rate of about 25 26% a year and uh 26% is a magical number uh and I thought of is a magical number uh and I thought of is a magical number uh and I thought of was a magical number then because if you was a magical number then because if you was a magical number then because if you compound money at compound money at compound money at 26% it doubles in exactly three years uh 26% it doubles in exactly three years uh 26% it doubles in exactly three years uh so if you if you have $1,000 you so if you if you have $1,000 you so if you if you have $1,000 you compound at 26% you're going to have compound at 26% you're going to have compound at 26% you're going to have $2,000 in uh in three years and so on $2,000 in uh in three years and so on $2,000 in uh in three years and so on and um if you if you go for 30 years uh and um if you if you go for 30 years uh and um if you if you go for 30 years uh that's 2 to the power of 10 and this that's 2 to the power of 10 and this that's 2 to the power of 10 and this group doesn't need me to tell you that 2 group doesn't need me to tell you that 2 group doesn't need me to tell you that 2 to the^ of 10 is to the^ of 10 is to the^ of 10 is 1,24 so we throw away the 24 it's a 1,24 so we throw away the 24 it's a 1,24 so we throw away the 24 it's a thousand times your money so if you had thousand times your money so if you had thousand times your money so if you had $1,000 and you compounded at $1,000 and you compounded at $1,000 and you compounded at 26% uh 30 years later you would have a 26% uh 30 years later you would have a 26% uh 30 years later you would have a million dollars and if you had a million million dollars and if you had a million million dollars and if you had a million dollars and you compound 26% 30 years dollars and you compound 26% 30 years dollars and you compound 26% 30 years later you'd have a billion dollars and later you'd have a billion dollars and later you'd have a billion dollars and that's basically the key uh to to Buffet
Questionerthat's basically the key uh to to Buffet success and so I wanted to I thought it was worth trying to uh do what Buffett did of course no we're never going to have another warrant Buffett but I thought it was worth trying to uh compound at high rates and so I actually gradually over five years switched from being a CEO of an engineering company to eventually being a a hedge fund manager and the key the key uh uh Nuance or you could say mental model I used was very simple which is I I looked for companies that were selling for half or less than what they were worth in two or three years so if I could find a dollar bill for 50 cents then what that meant is that if it got valued as a dollar in two years or three years I would be compounding at 26% and if it happened in two years it would be even higher it' be like 35 36% and it happened in two years it' be
Questioner36% and it happened in two years it' be 26% and so I said you know it's worth 26% and so I said you know it's worth 26% and so I said you know it's worth trying to seeing if we can find these trying to seeing if we can find these trying to seeing if we can find these $50 C because 26% sounds high but find $50 C because 26% sounds high but find $50 C because 26% sounds high but find finding things things that are half off finding things things that are half off finding things things that are half off in an auction driven Market um is not I in an auction driven Market um is not I in an auction driven Market um is not I didn't think it was that hard and I didn't think it was that hard and I didn't think it was that hard and I thought it was worth trying because the thought it was worth trying because the thought it was worth trying because the rewards are so high and uh so that's rewards are so high and uh so that's rewards are so high and uh so that's what I embarked on doing is I said okay what I embarked on doing is I said okay what I embarked on doing is I said okay let's try to find these you know dollar let's try to find these you know dollar let's try to find these you know dollar bill for 50 cents and then you just sit bill for 50 cents and then you just sit bill for 50 cents and then you just sit back and wait for two years or three back and wait for two years or three back and wait for two years or three years and you know markets a weighing years and you know markets a weighing years and you know markets a weighing machine in the long term and they'll get machine in the long term and they'll get machine in the long term and they'll get rewe accordingly and U for the most part rewe accordingly and U for the most part rewe accordingly and U for the most part if I if I look at my uh my performance if I if I look at my uh my performance if I if I look at my uh my performance from from from 95 uh until uh let's say 95 uh until uh let's say 95 uh until uh let's say 2014 uh it's it's done about the 26% 2014 uh it's it's done about the 26% 2014 uh it's it's done about the 26% approximately last two years I'm down approximately last two years I'm down approximately last two years I'm down about oneir so it would have taken it about oneir so it would have taken it about oneir so it would have taken it down a little bit uh but uh but we think down a little bit uh but uh but we think
Otherdown a little bit uh but uh but we think in the next few years we'll make it upin the next few years we'll make it upin the next few years we'll make it up so uh we'll see how it goes I'll reportso uh we'll see how it goes I'll reportso uh we'll see how it goes I'll report to you next year when I'm with you into you next year when I'm with you into you next year when I'm with you in person and um but uh but this journeyperson and um but uh but this journeyperson and um but uh but this journey this uh it's been uh 21 years since Ithis uh it's been uh 21 years since Ithis uh it's been uh 21 years since I started doing this and I had a millionstarted doing this and I had a millionstarted doing this and I had a million dollars uh indollars uh indollars uh in 9095 and I wanted to try to see if that9095 and I wanted to try to see if that9095 and I wanted to try to see if that million in 30 years could convert to amillion in 30 years could convert to amillion in 30 years could convert to a billion so I said okaybillion so I said okaybillion so I said okay basically uh we have the million I don'tbasically uh we have the million I don'tbasically uh we have the million I don't really need it for anything I'm going toreally need it for anything I'm going toreally need it for anything I'm going to try to put it in this box profit enginetry to put it in this box profit enginetry to put it in this box profit engine of compounding and I want to see whatof compounding and I want to see whatof compounding and I want to see what happens to it and the good news is thathappens to it and the good news is thathappens to it and the good news is that even if I miss by 90% it's still a bigeven if I miss by 90% it's still a bigeven if I miss by 90% it's still a big number even if I missed by 95% it'snumber even if I missed by 95% it'snumber even if I missed by 95% it's still a big number they're allstill a big number they're allstill a big number they're all acceptable numbers so it's it soundedacceptable numbers so it's it soundedacceptable numbers so it's it sounded like a good game to play and uh when Ilike a good game to play and uh when Ilike a good game to play and uh when I first set up my uh the first set offirst set up my uh the first set offirst set up my uh the first set of stocks I bought in uhstocks I bought in uhstocks I bought in uh 1995 and this is you know I had one year
Questioner1995 and this is you know I had one year of experience reading about Buffett I didn't have a lot of experience uh I hadn't gone to business school Etc and uh so I I uh basically used to just um if I found a company I would make a 10% bet so my portfolio of a million stocks basically got a million dollars got divided into 10 stocks okay and um so I bought these 10 stocks but then I had a I had an interest at that time in making uh Investments in the Indian market because there were some companies I had noticed in the Indian stock market that looked very compelling and uh it was very complicated at that time in 94 95 to invest in India especially as a US resident and uh for example they didn't have dmat so if you bought shares uh this is like 21 years ago they gave you physical stock certificates and also the Indian government said that if I Broad
QuestionerIndian government said that if I Broad in dollars in I bought Indian stocks I'd be able to take the money back without taxes back in dollars and the country had a lot of exchange controls so I didn't actually believe them you know I was a little skeptical uh that a country which had all all these exchange controls would kind of Honor these things that they were saying if you will and uh so I was skeptical so what I did is out of the million I only allocated $30,000 to India and the $30,000 I allocated to four stocks uh so I had to physically go to Mumbai I opened the brokerage account opened the back account and then I bought these stocks and then a few weeks later I got these physical stock certificates in California and they were almost falling apart like they looked like they almost were worthless they looked so beat up and um so one stock I bought which was
Questionerand um so one stock I bought which was half of the 30,000 15,000 uh was an IT services company that was the business I was in and satam computers and then three others there was one um one was a broker through whom I bought the stocks and two were CER companies if you know kind of like FedEx or DHL because India had very bad uh postal system so I thought that as the economy grew these these companies that were basically of doing what the postal system should be doing but were doing it in private ways like FedEx and DHL and and UPS um so uh and I I I thought these were all very long-term plays so when I got these certificates I said okay I'm going to stick them in my drawer and not look at them for 10 years just let them be but what I noticed is after about five years uh one of the stocks the IT company satam computers I had bought it
Questionercompany satam computers I had bought it for 45 rupees and it was trading atfor 45 rupees and it was trading atfor 45 rupees and it was trading at 7,000 rupees it was7,000 rupees it was7,000 rupees it was up uh 30 or 140 times what I paid for itup uh 30 or 140 times what I paid for itup uh 30 or 140 times what I paid for it and um and at that point actually I'dand um and at that point actually I'dand um and at that point actually I'd been tracking a little bit but in aboutbeen tracking a little bit but in aboutbeen tracking a little bit but in about 1999 uh which was about four years after1999 uh which was about four years after1999 uh which was about four years after I bought I said you know let me justI bought I said you know let me justI bought I said you know let me just study this business again because I knowstudy this business again because I knowstudy this business again because I know the business but this is ridiculous youthe business but this is ridiculous youthe business but this is ridiculous you know and I noticed that the uh theknow and I noticed that the uh theknow and I noticed that the uh the multiple it was trading at it wasmultiple it was trading at it wasmultiple it was trading at it was trading at more than 100 times earningstrading at more than 100 times earningstrading at more than 100 times earnings it was just ridiculously overpricedit was just ridiculously overpricedit was just ridiculously overpriced and one of the reasons it was pricedand one of the reasons it was pricedand one of the reasons it was priced that way is because they had spun off athat way is because they had spun off athat way is because they had spun off a company which they still owned a piececompany which they still owned a piececompany which they still owned a piece of and the market at that time was in aof and the market at that time was in aof and the market at that time was in a major bubble uh for all these dotom somajor bubble uh for all these dotom somajor bubble uh for all these dotom so this company which was just a you knowthis company which was just a you knowthis company which was just a you know system integration IT company had formedsystem integration IT company had formedsystem integration IT company had formed a fun out a subsidiary uh which wasa fun out a subsidiary uh which wasa fun out a subsidiary uh which was doing some Nifty Things on the web and
Otherdoing some Nifty Things on the web and the market gave that spun out company a huge valuation and because of that this company got got a big valuation so anyway I thought this was complete bubble territory and I I was also concerned the 15,000 the exchange rate had moved against me the 15,000 was worth over $1.5 million um so you know I started with a million dollars I'm going to tell you what the remaining $985,000 in a second but 15,000 of the portfolio was sitting at 1 and A5 million and I was concerned whether the Indian government would allow me to take the money back whether I could even sell the stocks whether the shares were fake or real I had a lot of questions so I said you know what we're going to test this out so I contacted the broker I said I'm ready to sell these shares and I sent them the shares they sold the shares I sold within 5% of
Questionerthey sold the shares I sold within 5% of the all-time high of that company and uh they put the money in my Indian bank account and then the next day I asked them to wire it to the US and they wired it everything went Flawless exactly as the government had promised no issues okay I was blown away I said wow no taxes I gave them 15,000 five years later they're giving me 1.5 million no questions asked what a country and um and then uh these other stocks that I had they were all kind of you can say old economy stocks okay and they hadn't done much so the remaining 50 15,000 maybe was worth 20,000 or 25,000 had had not moved much in fact everything else was going down in price at that time except the frenzy for the dotcom even bushire hathway hit a multi-year low at that time and um so in 2001 uh I decided to completely exit my Indian positions and I sold all the the
OtherIndian positions and I sold all the theIndian positions and I sold all the the remaining three one of them uh was downremaining three one of them uh was downremaining three one of them uh was down 50% but the other two we made a little50% but the other two we made a little50% but the other two we made a little bit of money but basically for thebit of money but basically for thebit of money but basically for the remaining 15,000 I got like 20,000 backremaining 15,000 I got like 20,000 backremaining 15,000 I got like 20,000 back or something and the overall result inor something and the overall result inor something and the overall result in India obviously was more than acceptableIndia obviously was more than acceptableIndia obviously was more than acceptable you know 30,000 in one and a halfyou know 30,000 in one and a halfyou know 30,000 in one and a half million out is perfectly fine then themillion out is perfectly fine then themillion out is perfectly fine then the other 970,000 I had there was oneother 970,000 I had there was oneother 970,000 I had there was one company I had in there which went upcompany I had in there which went upcompany I had in there which went up 100x and I had $100,000 this us company100x and I had $100,000 this us company100x and I had $100,000 this us company cmgi uh went upcmgi uh went upcmgi uh went up 100x so that one company became 10100x so that one company became 10100x so that one company became 10 million and U so now I had 10 million inmillion and U so now I had 10 million inmillion and U so now I had 10 million in that one company I had the one and athat one company I had the one and athat one company I had the one and a half million in this one Indian companyhalf million in this one Indian companyhalf million in this one Indian company and the rest of the portfolio had doneand the rest of the portfolio had doneand the rest of the portfolio had done okay because at that time from 95 tookay because at that time from 95 tookay because at that time from 95 to 2000 the US markets had gone up like 25%2000 the US markets had gone up like 25%2000 the US markets had gone up like 25% a year so that it had moved up buta year so that it had moved up buta year so that it had moved up but nothing like these other companies so Inothing like these other companies so Inothing like these other companies so I had like you know I think 13 14 million
Questionerhad like you know I think 13 14 million dollar out of the million dollars in five years and I said monish forget about 26% we've just kind of blown it out of the park very well done good job I was very happy you know it was a fantastic job especially for never never having even attended a single class with the professor at peing University just you know winging it on my own if you will and um now recently I went back so what happened is these other stocks when I went to sell them the other three Indian stocks they told me one particular stock certificate was fake so it was a very small amount of shares but they said it was a fake certificate and the broker said we're not responsible for fake certificates so I didn't really care it was a small amount and I just kept that one certificate in my in my desk and recently I looked at it again I
Otherdesk and recently I looked at it again I said you know it doesn't look fake to me so I sent it again to a broker in India to sell and I asked them can you sell these 100 shares of this company so now what had happened is I had held this one company Blue Dot which was like the FedEx of India for 21 years and I held it for 21 years by accident because that one little piece didn't get sold because of this uh um kind of fake thing and I trace back what because I kept getting these dividend checks all this time and all that that uh blue dot was ultimately a 60x so if I had kept those shares I I had invested in Blue Dot I had invested uh $7,700 and I would have had uh about half a million uh if IID kept those shares so then I went back and said let me check all the four stocks in India what what happened to the other three if
Questionerwhat what happened to the other three if I had not touched them because they wereI had not touched them because they wereI had not touched them because they were designed to not be touched I was stupiddesigned to not be touched I was stupiddesigned to not be touched I was stupid I sold it after six years so what endedI sold it after six years so what endedI sold it after six years so what ended up happening is that blue dot was 60xup happening is that blue dot was 60xup happening is that blue dot was 60x there was another one kak by HRA whichthere was another one kak by HRA whichthere was another one kak by HRA which was my broker that was up 50x and thewas my broker that was up 50x and thewas my broker that was up 50x and the third one uh which was Sky pack whichthird one uh which was Sky pack whichthird one uh which was Sky pack which was compared to Blue that that basicallywas compared to Blue that that basicallywas compared to Blue that that basically went down to half that didn't dowent down to half that didn't dowent down to half that didn't do anything but what ended up happening inanything but what ended up happening inanything but what ended up happening in that portfolio of 14 stocks inthat portfolio of 14 stocks inthat portfolio of 14 stocks in 1995 is I had uh I had four out of the1995 is I had uh I had four out of the1995 is I had uh I had four out of the 14 that all eventually went up more than14 that all eventually went up more than14 that all eventually went up more than 50 times and uh in one of them I had a50 times and uh in one of them I had a50 times and uh in one of them I had a serious position I had a 10% positionserious position I had a 10% positionserious position I had a 10% position which completely altered my net worthwhich completely altered my net worthwhich completely altered my net worth and and then I I started thinking thatand and then I I started thinking thatand and then I I started thinking that you know uh this is not uh this is notyou know uh this is not uh this is notyou know uh this is not uh this is not good that I ended up with thesegood that I ended up with thesegood that I ended up with these companies in mycompanies in mycompanies in my portfolio and I neverportfolio and I neverportfolio and I never recognize how great they were Irecognize how great they were Irecognize how great they were I recognize it in two cases in two cases I
Otherrecognize it in two cases in two cases I was able to now in one case I uh in fact in both those cases both the cases I I um cashed out the 100x were both bubble because of the bubble not because of valuations went up they probably should have been worth 10x or 15x but not 100x but so we over uh we kind of collected more than we should have which was fine but but these other ones these were real businesses like the FedEx of India uh the the Goldman Sachs of India and these were businesses I should not have sold and I sold them so I start I started thinking how often has this happened in my portfolio how often has it happened where we had these uh companies where we I was smart enough to buy them uh but not smart enough to hold them and why is that happening so what I which is the subject of the talk today is kind of a framework what I did is so
Questioneris kind of a framework what I did is so you know the best way to learn is to teach so I have to admit that one of the reasons I wanted to do this uh this talk and this lecture is because I'm trying to learn so whether or not any of you guys learn anything from me I am definitely going to learn from this talk because what I want to do is I'm 52 years old hopefully I have another 30 or 40 years left and the next 30 or 40 years when these 100 Baggers show up in my portfolio and they are guaranteed to show up uh I am at least smart enough to figure out that some of them are 50 Baggers or 100 Baggers and I hold on to them and I not sell them so so what I did is I said okay how do we identify M multi these 100 Baggers and what I discovered is that if I just looked at the examples in my own portfolio and obvious examples around me there are
Questionerobvious examples around me there are basically about uh six um I'm sorry basically about uh six um I'm sorry basically about uh six um I'm sorry there are about five different there are about five different there are about five different categories categories categories that these 10 to 100 Baggers fall into that these 10 to 100 Baggers fall into that these 10 to 100 Baggers fall into now it could be more than five but five now it could be more than five but five now it could be more than five but five is the one I was able to come up with is the one I was able to come up with is the one I was able to come up with before it was time for this lecture um before it was time for this lecture um before it was time for this lecture um if I come up with more I'll update you if I come up with more I'll update you if I come up with more I'll update you next year but we at least have five very next year but we at least have five very next year but we at least have five very distinct kinds of companies which should distinct kinds of companies which should distinct kinds of companies which should give us clues that these are give us clues that these are give us clues that these are businesses uh that we want to hold on to businesses uh that we want to hold on to businesses uh that we want to hold on to so the first the first uh category of so the first the first uh category of so the first the first uh category of companies companies companies that has the potential for these 10 to that has the potential for these 10 to that has the potential for these 10 to 100 100 Baggers is these are businesses 100 100 Baggers is these are businesses 100 100 Baggers is these are businesses which have huge which have huge which have huge Tailwinds uh Tailwinds means they just Tailwinds uh Tailwinds means they just Tailwinds uh Tailwinds means they just have all the all the factors moving in have all the all the factors moving in have all the all the factors moving in in their favor they have very deep modes in their favor they have very deep modes in their favor they have very deep modes they have very long runways they have they have very long runways they have they have very long runways they have very high return on Equity they very high return on Equity they very high return on Equity they typically don't need any debt and uh the typically don't need any debt and uh the typically don't need any debt and uh the most important condition an idiot can
Questionermost important condition an idiot can run these companies so uh like Warren Buffett says invest in businesses that an idiot can run because one day an idiot will run them so which are the companies that a complete stupid idiot can run okay so these are the businesses like C candy Coca-Cola Moody's Visa Mastercard American Express these are the types of businesses which are so deep in the modes that it's uh in fact you know if you look at a company like Coca-Cola they have more than a 100 Year history and uh in the 100 plus year history for several decades the company was poorly managed and uh you have a company in in China uh maai uh maybe some of you even consume the product um with due respect I think maai probably has great management but with due respect to maai an idiot can run that company okay so you do not need anything between
Questionerokay so you do not need anything between your years you can put me in charge ofyour years you can put me in charge ofyour years you can put me in charge of maai and I can run it even a person likemaai and I can run it even a person likemaai and I can run it even a person like me can run that company that is anme can run that company that is anme can run that company that is an unbelievable fantastic business okay sounbelievable fantastic business okay sounbelievable fantastic business okay so there's a good friend of mine you mightthere's a good friend of mine you mightthere's a good friend of mine you might have heard of him his name is Guy Spearhave heard of him his name is Guy Spearhave heard of him his name is Guy Spear and uh he lives in zorich and I thinkand uh he lives in zorich and I thinkand uh he lives in zorich and I think he's going to try to also speak to youhe's going to try to also speak to youhe's going to try to also speak to you next year maybe we'll both come togethernext year maybe we'll both come togethernext year maybe we'll both come together we'll see if we can uh do backtackwe'll see if we can uh do backtackwe'll see if we can uh do backtack lectures so guy has a mental model helectures so guy has a mental model helectures so guy has a mental model he uses and his mental model which he'suses and his mental model which he'suses and his mental model which he's used actually for more than 15 years isused actually for more than 15 years isused actually for more than 15 years is that if he identifies a company likethat if he identifies a company likethat if he identifies a company like Moody's or SNP as a great business orMoody's or SNP as a great business orMoody's or SNP as a great business or let's say if he identifies Coca-Cola aslet's say if he identifies Coca-Cola aslet's say if he identifies Coca-Cola as a great business or let's say thea great business or let's say thea great business or let's say the Coca-Cola bottlers as a great businessCoca-Cola bottlers as a great businessCoca-Cola bottlers as a great business what he does then he he looks around thewhat he does then he he looks around thewhat he does then he he looks around the world for Coca-Cola bottlers in otherworld for Coca-Cola bottlers in otherworld for Coca-Cola bottlers in other countries so if he finds that that beingcountries so if he finds that that beingcountries so if he finds that that being a cocaa a botler is great in Tennessee
Othera cocaa a botler is great in Tennesseea cocaa a botler is great in Tennessee in the US then I want to find the samein the US then I want to find the samein the US then I want to find the same business in Brazil I want to find thebusiness in Brazil I want to find thebusiness in Brazil I want to find the bottler in China I want to find thebottler in China I want to find thebottler in China I want to find the bottler in India and I want to go aroundbottler in India and I want to go aroundbottler in India and I want to go around the world looking for the Coke bottlerthe world looking for the Coke bottlerthe world looking for the Coke bottler and I want to find which one is beingand I want to find which one is beingand I want to find which one is being undervalued and then I want to invest inundervalued and then I want to invest inundervalued and then I want to invest in it because the economics of these Cokeit because the economics of these Cokeit because the economics of these Coke bottlers no matter where in the worldbottlers no matter where in the worldbottlers no matter where in the world they are is about the same they all arethey are is about the same they all arethey are is about the same they all are great businesses so one of thegreat businesses so one of thegreat businesses so one of the businesses which is the ultimatebusinesses which is the ultimatebusinesses which is the ultimate ultimate deep mode business is Moody youultimate deep mode business is Moody youultimate deep mode business is Moody you know they do the um the uh the debtknow they do the um the uh the debtknow they do the um the uh the debt ratings and even in the financial crisisratings and even in the financial crisisratings and even in the financial crisis when they gave all bad and flawed andwhen they gave all bad and flawed andwhen they gave all bad and flawed and garbage debt ratings it still did notgarbage debt ratings it still did notgarbage debt ratings it still did not destroy the company this is a greatdestroy the company this is a greatdestroy the company this is a great business that an idiot can run and um sobusiness that an idiot can run and um sobusiness that an idiot can run and um so uh souh souh so moody guy guy said to himself what aremoody guy guy said to himself what aremoody guy guy said to himself what are the credit rating agencies all aroundthe credit rating agencies all around
Questionerthe credit rating agencies all around the world which have the same business model like Moody because Moody is a model where they'll hire an analyst they pay him maybe $100,000 for each analyst they pay 100,000 they are probably collecting $4 million in fees it's just a great business uh just the economics are fantastic um so he found a company in 2001 in India which was a very small but was the number one credit rating agency in India exactly like Moody was in the US and he found that S&P S&P 500 owned 10% of that company so S&P had done a lot of due diligence and they bought a 10% stake in the company that company was called Crystle and so gu spear at that time he was managing about 30 3040 million he made a small investment in Crystle and uh it went up it doubled or tripled in two three years and then he bought a little bit more and then uh
Otherbought a little bit more and then uh another year or two later he sold it allanother year or two later he sold it allanother year or two later he sold it all he had made like four timeshe had made like four timeshe had made like four times his moneyhis moneyhis money so sometimes I like to pour salt on theso sometimes I like to pour salt on theso sometimes I like to pour salt on the wounds of guys Speer like sometimes Iwounds of guys Speer like sometimes Iwounds of guys Speer like sometimes I want to have fun with him I I I spoke towant to have fun with him I I I spoke towant to have fun with him I I I spoke to him last night when I Was preparing thathim last night when I Was preparing thathim last night when I Was preparing that talk I said hey guy you know thattalk I said hey guy you know thattalk I said hey guy you know that Crystal position that you owned whichCrystal position that you owned whichCrystal position that you owned which youyouyou sold if you had notsold if you had notsold if you had not sold uh it it went up 130 times after hesold uh it it went up 130 times after hesold uh it it went up 130 times after he sold okay andsold okay andsold okay and he's actually the kind of guy whohe's actually the kind of guy whohe's actually the kind of guy who doesn't even trade that much he justdoesn't even trade that much he justdoesn't even trade that much he just buys and holds uh so I said hey by thebuys and holds uh so I said hey by thebuys and holds uh so I said hey by the way you know that Crystal you sold backway you know that Crystal you sold backway you know that Crystal you sold back then why did you sell it he said Mishthen why did you sell it he said Mishthen why did you sell it he said Mish don't remind me that's the dumbest thingdon't remind me that's the dumbest thingdon't remind me that's the dumbest thing I did because basically if he had keptI did because basically if he had keptI did because basically if he had kept Crystal he manages 160 million theCrystal he manages 160 million theCrystal he manages 160 million the crystal position would have exceeded thecrystal position would have exceeded thecrystal position would have exceeded the entire portfolio he has today one oneentire portfolio he has today one oneentire portfolio he has today one one one decision and and what was so hardone decision and and what was so hardone decision and and what was so hard about that decision well it wasn't hard
Warrenabout that decision well it wasn't hard they were a replica of Moody i' already told you an idiot can run moodies just like an idiot can run Coca-Cola and uh and idiots have run it and they've not been able to destroy these businesses and so the first thing to do is when you run into businesses that idiots are running or can run and they still continue to be in business buy those companies if they have these characteristics and then forget the p ratio just buy and hold forever because probably those are very very few businesses on the planet and like I can almost bet uh bet that maybe 10 or 20 years from now maai looks very different very different but it's hard to tell the path it takes but it looks like a great business so that's the first one uh the the the businesses that idiots can run the second is exactly like the first except
Charliesecond is exactly like the first except these cannot be run by idiots so thesethese cannot be run by idiots so thesethese cannot be run by idiots so these are businesses which are exactly likeare businesses which are exactly likeare businesses which are exactly like the first kind which is they have hugethe first kind which is they have hugethe first kind which is they have huge Tailwinds they have deep modes they haveTailwinds they have deep modes they haveTailwinds they have deep modes they have ultr log runways they have high Roe theyultr log runways they have high Roe theyultr log runways they have high Roe they don't need any debt but they need greatdon't need any debt but they need greatdon't need any debt but they need great management and they do have greatmanagement and they do have greatmanagement and they do have great management so these are businesses likemanagement so these are businesses likemanagement so these are businesses like Amazon Costco Geo Amore Pacific uh kotakAmazon Costco Geo Amore Pacific uh kotakAmazon Costco Geo Amore Pacific uh kotak Mahindra Bank the one I bought in IndiaMahindra Bank the one I bought in IndiaMahindra Bank the one I bought in India which went up uh 60 times or somethingwhich went up uh 60 times or somethingwhich went up uh 60 times or something blue dot which is the FedEx repli Bardblue dot which is the FedEx repli Bardblue dot which is the FedEx repli Bard in India satum the IT company thenin India satum the IT company thenin India satum the IT company then restaurant Brands which is the one thatrestaurant Brands which is the one thatrestaurant Brands which is the one that owns owns Burger King and Tim Hortonowns owns Burger King and Tim Hortonowns owns Burger King and Tim Horton McDonald's yum brands Domino's Pizza uhMcDonald's yum brands Domino's Pizza uhMcDonald's yum brands Domino's Pizza uh these are all great businesses but theythese are all great businesses but theythese are all great businesses but they need they do need uh solid Management onneed they do need uh solid Management onneed they do need uh solid Management on top of them to make sure that they keeptop of them to make sure that they keeptop of them to make sure that they keep those franchises but but thesethose franchises but but thesethose franchises but but these businesses have economics that are justbusinesses have economics that are just
Otherbusinesses have economics that are just phenomenal just just great economics sophenomenal just just great economics sophenomenal just just great economics so that's the second type of business umthat's the second type of business umthat's the second type of business um you want to keep and look for in youryou want to keep and look for in youryou want to keep and look for in your portfolio andportfolio andportfolio and and you get these massive runs uh as weand you get these massive runs uh as weand you get these massive runs uh as we saw with blue D and others in India thensaw with blue D and others in India thensaw with blue D and others in India then the Third Kind is uh the ones which havethe Third Kind is uh the ones which havethe Third Kind is uh the ones which have shown up the most in my portfolio so Ishown up the most in my portfolio so Ishown up the most in my portfolio so I have never had the Good Fortune ofhave never had the Good Fortune ofhave never had the Good Fortune of having the first kind of business whichhaving the first kind of business whichhaving the first kind of business which is huge Tailwinds and idiots foris huge Tailwinds and idiots foris huge Tailwinds and idiots for management I've never had that if I evermanagement I've never had that if I evermanagement I've never had that if I ever if I ever get that myif I ever get that myif I ever get that my portfolio uh we're never going to sellportfolio uh we're never going to sellportfolio uh we're never going to sell those we're going to keep those foreverthose we're going to keep those foreverthose we're going to keep those forever um now the third one is when the marketum now the third one is when the marketum now the third one is when the market gets confused between risk andgets confused between risk andgets confused between risk and uncertainty and uh so what I want to douncertainty and uh so what I want to douncertainty and uh so what I want to do over here is I want to go through someover here is I want to go through someover here is I want to go through some examples from my my own portfolio in theexamples from my my own portfolio in theexamples from my my own portfolio in the past in some cases I was able to capturepast in some cases I was able to capturepast in some cases I was able to capture the upside in other cases I was toothe upside in other cases I was toothe upside in other cases I was too stupid and I missed the upside I I made
Questionerstupid and I missed the upside I I made some money but I didn't make a lot of money so the first company I want to talk about and sorry these are not businesses you you may have heard of but uh that's the nature of this game the ones that are going to be 100 Baggers uh they're not going to be the the the biggest names around that you've heard of so in um in 2005 I invested in a uh a steel company in uh which was based in Canada uh they were traded in the US called ipsco so ipco made two types of Steel they made plate plate steel and they made tubular Steels you know kind of like uh pipelines uh drilling for drilling um oil wells and all that so they made these kind of the specialized steel which was either in pipe form a plate form and uh the company had the following characteristics when I invested in it the market cap was two and a half billion they had 900 million
Questionerand a half billion they had 900 million of extra cash on the balance sheet and the company had contracts on the book because there were these pipelines that were going to buy their steel for the next couple of years so they had a two-year backlog where they knew that their earnings for the next two years were going to be 650 million each year so you had a $2 and a half million2 and half billion doll market cap and you had 2.2 billion between cash they already had and then cash that was coming in in next two years and so you would collect about 90% of the market cap in cash cash in 2 years and after two years you still had all the plants and equipment and people and all the knowhow everything was still there but after two years there was no visibility into earnings and we know the steel business can go up and down so the way I looked at it I
Questionerand down so the way I looked at it I said you know what we're going to do is I'm going to make a bet I'm going to put 10% of my assets into this I'm going to just sit there for two years and if it doesn't work we probably get back 90% if the company's completely gone but I don't think it's completely gone I think it's got a it's a it's a real business so what happened is a year later they made the 650 million and the year later they had visibility for one more year and now they said that they would make 650 million for the third year so now they had three years of 650 million which was almost 2 billion plus the 900 million so now we were above my purchase price so the stock that I bought at 45 a year later was sitting at $70 so I said well we are above what we paid but we still don't know what the business does after 3 years why don't we just wait for
Questionerafter 3 years why don't we just wait for another couple of years see what happens
Otherokay so in 2007 I waited one more year and by now the stock had gone to maybe1 or $105 and they got a buyout offer another company came and bought them for $160 a share and when that when the deal was announced for $157 something I sold the stock and so we ended up with almost a Forex in about 2 and a half years okay and we captured the entire Forex right and so this was a situation where um it's a highly highly cyclical business and markets markets hate uncertainty it's a highly uncertain business but the risk theis risk for this business was very low so it is what I call very low risk and very high uncertainty so when you find a combination of low risk and high uncertainty usually that combination is going to give you a high reward because uh markets are not very good at pricing
Todd Combsuh markets are not very good at pricing in uncertainty uh they hate uncertainty and uh so we get some benefit from that and um and and in fact there's a there's a business in my portfolio currently and I don't talk much about my portfolio but I'll just make an exception because I love you guys so much uh is U I own a company called Fiat Chrysler which is based in uh partially in Italy and partially in Detroit and um Fiat price flow is very similar to ipso so the stock is at $6 or and change and the management of the company says that in the year 2018 their earnings are going to be around $5 and so if if the management is correct about uh the future prospects of the business then basically the business is being priced at 1.2 times earnings of for for one year and so my my answer to that is okay we'll hold the stock till 2018
Questionerstock till 2018 uh if if it's completely worthless as a uh if if it's completely worthless as a uh if if it's completely worthless as a business I mean they have 130 billion in business I mean they have 130 billion in business I mean they have 130 billion in sales of cars they just started sales of cars they just started sales of cars they just started manufacturing Jeep in China the Chinese manufacturing Jeep in China the Chinese manufacturing Jeep in China the Chinese love their Jeeps raise your hand if you love their Jeeps raise your hand if you love their Jeeps raise your hand if you think Chinese love Jeeps all right at least a few Chinese love Jeeps all right at least a few Chinese love Jeeps all right at least a few Chinese love their Jeeps that's great uh so so love their Jeeps that's great uh so so love their Jeeps that's great uh so so their Jeep sales are going up like five their Jeep sales are going up like five their Jeep sales are going up like five times in the next three years in China times in the next three years in China times in the next three years in China um but anyway so I happen to think that um but anyway so I happen to think that um but anyway so I happen to think that what they are saying makes sense the ma what they are saying makes sense the ma what they are saying makes sense the ma the the market thinks it doesn't make the the market thinks it doesn't make the the market thinks it doesn't make sense so no problem just like IPO we put sense so no problem just like IPO we put sense so no problem just like IPO we put the stock in the portfolio and forget the stock in the portfolio and forget the stock in the portfolio and forget about it and uh I'll wake up in January about it and uh I'll wake up in January about it and uh I'll wake up in January 2019 and see what happened and if you 2019 and see what happened and if you 2019 and see what happened and if you invite me back in 2019 I'll tell you invite me back in 2019 I'll tell you invite me back in 2019 I'll tell you what happened what happened what happened uh uh to uh to Fiat and between us girls uh uh to uh to Fiat and between us girls uh uh to uh to Fiat and between us girls we may end up with uh five times our we may end up with uh five times our we may end up with uh five times our money if it trades at five times money if it trades at five times money if it trades at five times earnings or seven times our money if it earnings or seven times our money if it
Questionerearnings or seven times our money if it trades at seven times earnings and umtrades at seven times earnings and umtrades at seven times earnings and um and such so that's uh that's ipsco thenand such so that's uh that's ipsco thenand such so that's uh that's ipsco then there's anotherthere's anotherthere's another company uh Torocompany uh Torocompany uh Toro petroleum and uh this is one which wepetroleum and uh this is one which wepetroleum and uh this is one which we did not capture but we should have butdid not capture but we should have butdid not capture but we should have but we didn't sowe didn't sowe didn't so Torro uh you know ipco is in the in theTorro uh you know ipco is in the in theTorro uh you know ipco is in the in the steel business Torro is in the oilsteel business Torro is in the oilsteel business Torro is in the oil refiningrefiningrefining business um they have they have oilbusiness um they have they have oilbusiness um they have they have oil refineries in the United States and inrefineries in the United States and inrefineries in the United States and in the United States in the last 30 yearsthe United States in the last 30 yearsthe United States in the last 30 years not even one new oil refinery has beennot even one new oil refinery has beennot even one new oil refinery has been built because of nimi you guys know whatbuilt because of nimi you guys know whatbuilt because of nimi you guys know what nimi is not in my backyard nobody wantsnimi is not in my backyard nobody wantsnimi is not in my backyard nobody wants the oil refinery near them so in thethe oil refinery near them so in thethe oil refinery near them so in the entire us anyone who wants to build anentire us anyone who wants to build anentire us anyone who wants to build an oil refinery they never get the permitsoil refinery they never get the permitsoil refinery they never get the permits so the oil refineries that we've had forso the oil refineries that we've had forso the oil refineries that we've had for 30 years 30 years ago are the same ones30 years 30 years ago are the same ones30 years 30 years ago are the same ones we have today and um they keep trying towe have today and um they keep trying towe have today and um they keep trying to tweak the oil refineries in in the US totweak the oil refineries in in the US totweak the oil refineries in in the US to get more and more capacity but they're
Questionerget more and more capacity but they're not able to build new ones um and so anyway Toro had a bunch so the oil refining business in the US actually is a is a pretty good business and the reason is pretty good is because all the different states have different requirements for how the gasoline or petroleum is to be produced and the the amount of emissions and all that so you need different refineries for different states to meet the meet the standards which makes it difficult for other competitors to come in so even though oil refining maybe a commodity business it's not really a commodity business because it's got these uh kind of local aspects to it um so anyway what happened with tsoro is that there was another merger taking place with two large oil refiners and in order to make that merger happen they were forced to sell one of the oil refineries to make the
Otherone of the oil refineries to make the merger happen tsoro bought that Refinery they leveraged their balance sheet to buy that Refinery and after they leverage the balance sheet the crack spread which is the spread that refiners get to make crude oil into gasoline the crack spread narrowed to almost nothing nothing so their profits went to next to nothing at the same time when they had a huge amount of debt and so markets looked at the debt and they saw a lot of uncertainty because it is very hard to predict the crack spread so just like the uncertainty of steel prices the UN the refining margins are always uncertain and markets project present circumstances to Infinity so Market said hey the crack spread is small it'll always be small they have all this debt they may not be able to pay the debt what happens if they don't pay the debt what happens if they don't pay the debt what happens if they
Otherpay the debt well what happens if they pay the debt well what happens if they don't pay the debt is they have many don't pay the debt is they have many don't pay the debt is they have many refineries they can just sell a Refinery refineries they can just sell a Refinery refineries they can just sell a Refinery they don't need to go bankrupt they can they don't need to go bankrupt they can they don't need to go bankrupt they can just sell some assets and they can get just sell some assets and they can get just sell some assets and they can get out of the jam they're in so I looked at the the company the balance sheet the uh the the company the balance sheet the uh the the company the balance sheet the uh the debt and so on and the stock was at the debt and so on and the stock was at the debt and so on and the stock was at $75 $75 $75 it had gone gone down a lot it used to it had gone gone down a lot it used to it had gone gone down a lot it used to be at almost $30 it had gone down to 25% be at almost $30 it had gone down to 25% be at almost $30 it had gone down to 25% of the price so I bought 10% of assets of the price so I bought 10% of assets of the price so I bought 10% of assets at at at $75 three months after I bought the $75 three months after I bought the $75 three months after I bought the stock it was trading at stock it was trading at stock it was trading at $133 cents so the the 10% of assets I $133 cents so the the 10% of assets I $133 cents so the the 10% of assets I put in just this alone took my portfolio put in just this alone took my portfolio put in just this alone took my portfolio down by 8% this one position but uh one down by 8% this one position but uh one down by 8% this one position but uh one of the things that always happen happens of the things that always happen happens of the things that always happen happens to me but it only happens to me it to me but it only happens to me it to me but it only happens to me it doesn't happen to you is every stock I doesn't happen to you is every stock I doesn't happen to you is every stock I buy goes down first and it always goes buy goes down first and it always goes buy goes down first and it always goes down I don't know why it doesn't go down down I don't know why it doesn't go down down I don't know why it doesn't go down before I buy but they all go down after
Questionerbefore I buy but they all go down afterbefore I buy but they all go down after I buy somehow it knows and you knowI buy somehow it knows and you knowI buy somehow it knows and you know Bruce burkowitz is a uh is a fundBruce burkowitz is a uh is a fundBruce burkowitz is a uh is a fund manager he calls it prematuremanager he calls it prematuremanager he calls it premature accumulation so I always have prematureaccumulation so I always have prematureaccumulation so I always have premature accumulation and um anyway so 750 we'reaccumulation and um anyway so 750 we'reaccumulation and um anyway so 750 we're down to $133 we're used to that we'redown to $133 we're used to that we'redown to $133 we're used to that we're not going to sell anything we sit therenot going to sell anything we sit therenot going to sell anything we sit there and then a few months later the crackand then a few months later the crackand then a few months later the crack spread widens and they're paying downspread widens and they're paying downspread widens and they're paying down debt and the stocks atdebt and the stocks atdebt and the stocks at $15 and I said Hallelujah from a133 to$15 and I said Hallelujah from a133 to$15 and I said Hallelujah from a133 to 15 10 times from 750 to 15 double less15 10 times from 750 to 15 double less15 10 times from 750 to 15 double less than three years still on track forthan three years still on track forthan three years still on track for 26% we are out of here or like an anash26% we are out of here or like an anash26% we are out of here or like an anash would say ASA baby sold the stock andwould say ASA baby sold the stock andwould say ASA baby sold the stock and moved on now what I didn't realize ismoved on now what I didn't realize ismoved on now what I didn't realize is that Torro had a phenomenal managerthat Torro had a phenomenal managerthat Torro had a phenomenal manager Bruce Bruce Smith just a kickass managerBruce Bruce Smith just a kickass managerBruce Bruce Smith just a kickass manager and he was just a master at extractingand he was just a master at extractingand he was just a master at extracting value from these refineries he boughtvalue from these refineries he boughtvalue from these refineries he bought pipelines and refineries when thepipelines and refineries when thepipelines and refineries when the financial crisis took place and if if I
Questionerfinancial crisis took place and if if Ifinancial crisis took place and if if I had if I had uh kepthad if I had uh kepthad if I had uh kept Toro uh from the the bottom tick ofToro uh from the the bottom tick ofToro uh from the the bottom tick of a133 it went up 200 times till todaya133 it went up 200 times till todaya133 it went up 200 times till today okay so from the time I bought uh itokay so from the time I bought uh itokay so from the time I bought uh it went up about 40went up about 40went up about 40 times uh so I only captured a doubletimes uh so I only captured a doubletimes uh so I only captured a double okay but the rest of the ride Iokay but the rest of the ride Iokay but the rest of the ride I completely missed because what this guycompletely missed because what this guycompletely missed because what this guy was able to do was he was able he was awas able to do was he was able he was awas able to do was he was able he was a master at buying these assets uh youmaster at buying these assets uh youmaster at buying these assets uh you know extracting more value getting moreknow extracting more value getting moreknow extracting more value getting more uh uh get getting more asset they spunuh uh get getting more asset they spunuh uh get getting more asset they spun off a pipeline company a lot of thingsoff a pipeline company a lot of thingsoff a pipeline company a lot of things uh they did he delevered the balanceuh they did he delevered the balanceuh they did he delevered the balance sheet and all of that and and it justsheet and all of that and and it justsheet and all of that and and it just even now I think it's uh uh it's doneeven now I think it's uh uh it's doneeven now I think it's uh uh it's done really well so that was an example of areally well so that was an example of areally well so that was an example of a lowrisk high uncertainty business wherelowrisk high uncertainty business wherelowrisk high uncertainty business where uh I already knew in the period I owneduh I already knew in the period I owneduh I already knew in the period I owned the stock that I was dealing with anthe stock that I was dealing with anthe stock that I was dealing with an exceptional manager because in theexceptional manager because in theexceptional manager because in the conference calls I was in love withconference calls I was in love withconference calls I was in love with Bruce Smith he was just a great guy he
QuestionerBruce Smith he was just a great guy he was uh doing all the right things but we missed that we missed that uh 40x and there was a chance to get a 200x and uh then we going to go to another one which is a shipping company all these wonderful businesses you know um steel business refining business uh shipping and you you know you thought you can only make the money on Alibaba and bu do no you can make the money without Alibaba and paidu um you can make it other places so for example Frontline was this shipping company and um this uh this company basically um focused on uh transporting crude oil so they had something know known as vlccs very large crude carriers that they owned and uh the global Fleet at the time I invested I haven't looked at the shipping business lately but this was uh an investment I made I think in uh around 2 2002 there were about 400
Questioneruh around 2 2002 there were about 400 uh around 2 2002 there were about 400 vccs in the world and uh Frontline was vccs in the world and uh Frontline was vccs in the world and uh Frontline was the largest amongst all of them they had the largest amongst all of them they had the largest amongst all of them they had about 70 of them in their Fleet 70 out about 70 of them in their Fleet 70 out about 70 of them in their Fleet 70 out of 400 were owned by Frontline and this of 400 were owned by Frontline and this of 400 were owned by Frontline and this is the ultimate High uncertainty is the ultimate High uncertainty is the ultimate High uncertainty business the vlccs go are are are business the vlccs go are are are business the vlccs go are are are chartered two different ways either they chartered two different ways either they chartered two different ways either they are time Charters or they are daily are time Charters or they are daily are time Charters or they are daily charters charters charters the entire Frontline Fleet of 70 ships the entire Frontline Fleet of 70 ships the entire Frontline Fleet of 70 ships was on daily Charters and the daily was on daily Charters and the daily was on daily Charters and the daily Charter rate for these ships can vary Charter rate for these ships can vary Charter rate for these ships can vary from $5,000 a day to $300,000 a day it from $5,000 a day to $300,000 a day it from $5,000 a day to $300,000 a day it is a huge variance and at that time I is a huge variance and at that time I is a huge variance and at that time I don't know what the economics are now don't know what the economics are now don't know what the economics are now but in 2002 once the rates went below 12 but in 2002 once the rates went below 12 but in 2002 once the rates went below 12 or 13,000 they were not making any money or 13,000 they were not making any money or 13,000 they were not making any money they were losing money and uh once the they were losing money and uh once the they were losing money and uh once the weight rates went over 30 or weight rates went over 30 or weight rates went over 30 or 40,000 they were just super super normal 40,000 they were just super super normal 40,000 they were just super super normal profits ex ex exponential profits but profits ex ex exponential profits but profits ex ex exponential profits but the exponential profits you didn't know the exponential profits you didn't know
Questionerthe exponential profits you didn't know what would happen the next day becausewhat would happen the next day becausewhat would happen the next day because every day these prices fluctuate butevery day these prices fluctuate butevery day these prices fluctuate but there's a particular Nuance in thethere's a particular Nuance in thethere's a particular Nuance in the shipping business that I understood andshipping business that I understood andshipping business that I understood and I understood this because a friend ofI understood this because a friend ofI understood this because a friend of mine in the real estate business thatmine in the real estate business thatmine in the real estate business that explained this to me he said that youexplained this to me he said that youexplained this to me he said that you know when you build these large officeknow when you build these large officeknow when you build these large office Towers uh it takes the US in China isTowers uh it takes the US in China isTowers uh it takes the US in China is probably much faster but in the US itprobably much faster but in the US itprobably much faster but in the US it takes 3 to five years to get the permitstakes 3 to five years to get the permitstakes 3 to five years to get the permits and actually build these you know 20 30and actually build these you know 20 30and actually build these you know 20 30 40 story buildings and so what happens40 story buildings and so what happens40 story buildings and so what happens is that when um office space is veryis that when um office space is veryis that when um office space is very tight and fully occupied all the realtight and fully occupied all the realtight and fully occupied all the real estate developers rush out to build newestate developers rush out to build newestate developers rush out to build new buildings and they all rush out to buildbuildings and they all rush out to buildbuildings and they all rush out to build new buildings at the same time and thenew buildings at the same time and thenew buildings at the same time and the banks finance all of them at the samebanks finance all of them at the samebanks finance all of them at the same time because everything looks great it'stime because everything looks great it'stime because everything looks great it's a boom business they can see 100%a boom business they can see 100%a boom business they can see 100% occupancy and then five years later all
Otheroccupancy and then five years later all these buildings come on the market at the same time and what happens is the occupancy and the rents collaps at the same time so in these in these kind of high-end Office Buildings you have this boom and bus cycle of um you know very high occupancy and then low occupancy then High occupancy and low occupancy just keep going back and forth forth because the uh the property developers just think whatever is happening right now is the way it's going to be forever and the people who are in the shipping business are even worse than the property developers they believe everything that's happening right now is the way it's going to be forever so what happens is that when these vccs are trading at 200,000 250,000 a day they all go to the Korean shipyards and place a huge number of orders for ships okay
Questionera huge number of orders for ships okay okay and they they said build me theokay and they they said build me theokay and they they said build me the ships same like the building it takes 3ships same like the building it takes 3ships same like the building it takes 3 years or four years or two years toyears or four years or two years toyears or four years or two years to build the ship by the time the ships arebuild the ship by the time the ships arebuild the ship by the time the ships are built all these ships get delivered atbuilt all these ships get delivered atbuilt all these ships get delivered at the same time those rates collapse andthe same time those rates collapse andthe same time those rates collapse and then they go scrambling again and theythen they go scrambling again and theythen they go scrambling again and they got bunch of bankruptcy so the businessgot bunch of bankruptcy so the businessgot bunch of bankruptcy so the business goes to the ups and downs now one of thegoes to the ups and downs now one of thegoes to the ups and downs now one of the things that happens is that when ratesthings that happens is that when ratesthings that happens is that when rates go to 5,000 a day or 10,000 a daygo to 5,000 a day or 10,000 a daygo to 5,000 a day or 10,000 a day crapping of ships increases a lotcrapping of ships increases a lotcrapping of ships increases a lot because they're losing money and theybecause they're losing money and theybecause they're losing money and they what did they take the old ships andwhat did they take the old ships andwhat did they take the old ships and just scrap them so they they make somejust scrap them so they they make somejust scrap them so they they make some money so the the size of the fleet goesmoney so the the size of the fleet goesmoney so the the size of the fleet goes down at the time when the rates are lowdown at the time when the rates are lowdown at the time when the rates are low and as the fleet size goes down it setsand as the fleet size goes down it setsand as the fleet size goes down it sets up the conditions for rates to go up andup the conditions for rates to go up andup the conditions for rates to go up and then when the capacity goes down thethen when the capacity goes down thethen when the capacity goes down the rates start going up you cannot bring inrates start going up you cannot bring inrates start going up you cannot bring in more capacity because it takes three
Ted Weschlermore capacity because it takes three years to build a ship so the only thing that can happen is price goes exponential so anyway I I bought front line at a point when these prices were at 5 or 10,000 a day and the stock had collapsed and it was trading at U uh something like uh I think at about uh $6 a share and just like with Torro a few months a few weeks after I bought it it was trading at $4 a share lost one third not as bad as Toro but one/ thir was gone and then uh it went from $6 to $9 and a short time I wanted to just capture that spread it was above the liquidation value of the company I sold the company anyway because of the very high uncertainty in rates this this company if I had held the stock throughout even with all the recent collapse in shipping um it it would have been a 40 times investment from four to uh 160 uh
Questionertimes investment from four to uh 160 uh I'm sorry not not 40 it be from 6 to 160 about 30 35 times my money so um another company which I just wanted to talk about is uh Tech Kinko and this is again um low risk High uncertainty so during the financial crisis um commodity prices collapsed in 2008 they went to nothing right and this company Tech comos like the IBM of mining they have huge reserves of metallurgical coal and huge reserves of um of uh uh of iron ore and um and you know lots of trade with China and such but they had done an acquisition just before the financial crisis large acquisition they had taken a bridge loan to close that acquisition then the financial crisis happened they couldn't refinance all the prices collapsed and this stock went from $50 to $4 it dropped by more than 90% in 7 weeks and when I looked at the company it's again like the refineries
Questionercompany it's again like the refineries they had all these different mines and assets all over the world some of them were the lowest cost mines you could imagine and the banks did not want to take over this company the banks don't want to be in the shipping business the banks were probably going to do what I would call extend and pretend which is they would you know take some uh fees and penalties from them but they would extend their loans and anyway uh uh in fact China came in as an investor in teeko and um and and uh in a few months the stock was up seven times and I sold uh so we bought at $4 or 5 we sold at $30 and then it kept going it went to $50 so we didn't capture all of it but we captured most of it so anyway that was the uh third criteria which is the um the low risk High uncertainty then the fourth then the fourth criteria is uh what I call B
Othercriteria is uh what I call B bankruptcies reorganizations uh Public lbo special situation so how many of you have heard of samel raise your hand if you've heard of Samzel at least one person the professor well you know I think you should extend an invitation uh you should extend an invitation to Sam to come speak to your class Sam is called the grave dancer he uh he dances on the graves of companies that are left for dead and uh if you get a chance to invest with Sam generally speaking it's going to go really well so uh Sam you know Warren Buffett Sam zel and the pritzkers these are some of the very best people on the US tax code they know us tax code better than anyone else way better than Donald Trump um uh they really know the tax code and um and I don't think Sam zel um has ever sent a much of a tax bill to the US government because he's just so efficient with the
Questionerbecause he's just so efficient with the way he runs his tax Affairs um so anyway there was uh this this story is a interesting story but it goes back it goes back about 26 years so in 199 there was a insurer called Mission insurance that went bankrupt and when this insurer went bankrupt they had 630 million in no's net operating losses so these net operating losses that the company have have a lot of value if you can bring that shell company into a company that has profits because you can Shield 630 million of profits because of that because of that uh that loss so Sam was able to buy that company for like 30 million you know because it had nothing other than the losses and you have to find something to uh so he bought the 630 million of losses for 30 million about seven eight years after the bankruptcy this this was in 98 or 99 and
Questionerbankruptcy this this was in 98 or 99 and then there's another investor Marty then there's another investor Marty then there's another investor Marty whitman from Third Avenue who also bought some of the shares in this bought some of the shares in this bought some of the shares in this Mission insurance and then they went looking the two of them went looking for looking the two of them went looking for looking the two of them went looking for a profitable business that they could a profitable business that they could a profitable business that they could join with these operating losses so that join with these operating losses so that join with these operating losses so that they would suddenly have no taxes on the they would suddenly have no taxes on the they would suddenly have no taxes on the business and they found a uh a a barge business and they found a uh a a barge business and they found a uh a a barge shipping company on the Mississippi shipping company on the Mississippi shipping company on the Mississippi River you know like Tom Sawyer um on the River you know like Tom Sawyer um on the River you know like Tom Sawyer um on the Mark Twain on the Mississippi River uh Mark Twain on the Mississippi River uh Mark Twain on the Mississippi River uh they found this barge company which used they found this barge company which used they found this barge company which used to send uh you know Goods up and down to to send uh you know Goods up and down to to send uh you know Goods up and down to Mississippi and it was profitable so Mississippi and it was profitable so Mississippi and it was profitable so they said okay we'll buy the barge they said okay we'll buy the barge they said okay we'll buy the barge company and now the barge company is not company and now the barge company is not company and now the barge company is not going to pay any taxes because we got going to pay any taxes because we got going to pay any taxes because we got these nool and that's how we'll make our these nool and that's how we'll make our these nool and that's how we'll make our money and then what happened right after money and then what happened right after money and then what happened right after they bought the barge company uh the they bought the barge company uh the they bought the barge company uh the barge business went to hell so the rates
Otherbarge business went to hell so the rates collapsed and the barge company went bankrupt so they now had bankruptcy to the power of bankruptcy and I don't know whether you teach them Professor how to calculate bankruptcy to the power of bankruptcy but it's not good so they are two bankruptcies now instead of one so instead of having 630 million in NOS they now had 800 million in NOS even higher so then they went looking for another company that they could buy so they could take both these things and pair it together and um so they had a company called Danel holding that was trading at $1 a share and then they found um a waste to energy recycler uh so what this company does it's a plant where you put garbage in in on one end and you get electricity on the other end it's a German process and there's a bunch of these plants in the US which convert waste materials garbage
QuestionerUS which convert waste materials garbage into electricity and the the economics of this purchase was this company had two billion in assets it had 2 billion in debt and they bought it for 30 million okay and uh so it had it it was very highly leveraged but it had this kind of energy business and and they thought that they could um tie it in and so they they tied it in and then they needed some Capital so then they started to do a rights issue that's when I found them so the stock was a Dollar by the time I was able to invest in them it was at $9 so it had already gone up like nine times um and then uh they did a rights issue they did two rights issues they bought another company and basically in about 13 months I had a double and I sold um you know and um and basically um if if I had kept if I had kept the position that was about it was
Ted Weschlerkept the position that was about it was about aabout aabout a 40x uh from uh from that dollar price40x uh from uh from that dollar price40x uh from uh from that dollar price they had and about a 4X from where I hadthey had and about a 4X from where I hadthey had and about a 4X from where I had bought and so as you can see you know webought and so as you can see you know webought and so as you can see you know we have all these companies that are inhave all these companies that are inhave all these companies that are in these weird places uh they're not greatthese weird places uh they're not greatthese weird places uh they're not great businesses but they do really well andbusinesses but they do really well andbusinesses but they do really well and then the final uh one I want to talkthen the final uh one I want to talkthen the final uh one I want to talk about which is uh the fifth model isabout which is uh the fifth model isabout which is uh the fifth model is upside withoutupside withoutupside without downside so uh I also call this playingdownside so uh I also call this playingdownside so uh I also call this playing the bubble so what happened in inthe bubble so what happened in inthe bubble so what happened in in um in the you know in the late 90s theum in the you know in the late 90s theum in the you know in the late 90s the dot boom was on in a big way anddot boom was on in a big way anddot boom was on in a big way and everyone thought it's going to beeveryone thought it's going to beeveryone thought it's going to be transformational it's going to changetransformational it's going to changetransformational it's going to change everything so these companies likeeverything so these companies likeeverything so these companies like pets.com Etc they had huge valuationspets.com Etc they had huge valuationspets.com Etc they had huge valuations you know even Amazon was a hugeyou know even Amazon was a hugeyou know even Amazon was a huge valuation Yahoo all these companies nowvaluation Yahoo all these companies nowvaluation Yahoo all these companies now I I had spent some time in technology II I had spent some time in technology II I had spent some time in technology I knew that the internet was important butknew that the internet was important butknew that the internet was important but I also could not tell which companyI also could not tell which companyI also could not tell which company would make it which company would not
Questionerwould make it which company would not
Questionermake it and I was definitely not interested in buying anything uh which was even trading at 10 times earnings you know I like to buy things at three times earnings or even better like Fiat one times earning that's even better so so I was not interested in buying these businesses but there was a bank there was a bank in Silicon Valley uh called Silicon Valley Bank really good bank and it was a normal Bank except that they had one thing what they did was see in Silicon Valley what happens is that if you are um uh a landscaper or a gardener for Google they'll give you stock options if you are a chef for Google you'll get stock options if you are a waiter in a restaurant they'll give you stock options stock options is like breathing in Silicon Valley so this company Silicon Valley Bank whenever they made
QuestionerSilicon Valley Bank whenever they made loans to all these dot companies besides getting all their loan terms they always got warrants and the companies didn't care they gave them warrants so every time they would do some loan or some deal they would get these warrants on these docs and they never disclosed how many warrants they had what warrants they had what the strike prices were no disclosure they only said that we just get warrants so there was a unknown element to what these warrants were worth but the bank itself was trading at a very low valuation just slightly above Book value and a very well-run Bank even now it's in existence has done well over the years so I said okay this is way to play the bubble which is buy Silicon Valley Bank and if those warrants turn out to be useless or worthless we don't lose any money we still have the bank and it turn out to
Questionerstill have the bank and it turn out to be something then we have a a huge huge run and um and basically I think we had a uh we had a two and a half uh yeah we we made about two and a half times our money in 2 and a half years on the on the stock and if I had held it a little bit more another year I would have made five times the money because then they disclosed the warrants just as the 99 2000 bubble was peing and then they started selling those warrants so they monetized them which worked great and then the other company which was the first company in my portfolio that went up 100x was a company called cmgi and they were an incubator of Internet businesses and I bought them just slightly above Book value because at that time people didn't fully understand what that business was doing so they just kept taking stakes in dozens and
Questionerjust kept taking stakes in dozens and dozens of of internet companies and thendozens of of internet companies and thendozens of of internet companies and then they had a whole basket of them and thenthey had a whole basket of them and thenthey had a whole basket of them and then the markets fell in love with thesethe markets fell in love with thesethe markets fell in love with these kinds of companies so they took it tokinds of companies so they took it tokinds of companies so they took it to the stratosphere they took it ourthe stratosphere they took it ourthe stratosphere they took it our 100,000 became 10 million and I sold100,000 became 10 million and I sold100,000 became 10 million and I sold almost nearly at the top I think uhalmost nearly at the top I think uhalmost nearly at the top I think uh maybe 20 30% off the top I I sold and uhmaybe 20 30% off the top I I sold and uhmaybe 20 30% off the top I I sold and uh so this is kind of something that comesso this is kind of something that comesso this is kind of something that comes into playinto playinto play um when you have bubbles it's probablyum when you have bubbles it's probablyum when you have bubbles it's probably not the most elegant way to make moneynot the most elegant way to make moneynot the most elegant way to make money uh but sometimes you can get theseuh but sometimes you can get theseuh but sometimes you can get these upside without downsideupside without downsideupside without downside situations uh when that can play out andsituations uh when that can play out andsituations uh when that can play out and and with that those are the kind of theand with that those are the kind of theand with that those are the kind of the five models uh you know so we have thefive models uh you know so we have thefive models uh you know so we have the huge Tailwinds with the idiots who canhuge Tailwinds with the idiots who canhuge Tailwinds with the idiots who can run the company and the company doesrun the company and the company doesrun the company and the company does well then the second is a huge tailinwell then the second is a huge tailinwell then the second is a huge tailin but you cannot have idiots you needbut you cannot have idiots you needbut you cannot have idiots you need smart people running it kind of likesmart people running it kind of likesmart people running it kind of like Amazon and Geico then the third is
OtherAmazon and Geico then the third is markets get confused between risk and uncertainty uh so we talked about ipsco Torro Frontline and Tech Kinko on that and the final one was the grave dancer samel you know bankruptcy reorganizations public lbos busted lbo special situations um and uh and those can those can all work out uh quite well as well and then you finally have the upside without downside uh which which has happened only once to me because the the most mega bubble I had in 22 years was In the late '90s with the dots when uh most of you were still I think uh maybe not even in kindergarten but maybe just in kindergarten so uh with that I think we can um uh talk about what you want to talk
Other[Music]
Otherabout thank you very much I feel excited I think I quit my professor job and go into real investment there many 100 beggers in Chinese market
Otherthere many 100 beggers in Chinese market I truly believe I just don't have time
OtherI truly believe I just don't have time
OtherI truly believe I just don't have time okay now I open the floor to the uh
Otherokay now I open the floor to the uh
Otherokay now I open the floor to the uh students to ask questions this is one
Otherstudents to ask questions this is one
Otherstudents to ask questions this is one very valuable opportunity okay so every
Othervery valuable opportunity okay so every
Othervery valuable opportunity okay so every word wors like quite a lot of money so
Otherword wors like quite a lot of money so
Otherword wors like quite a lot of money so if you have a question just press the
Otherif you have a question just press the
Otherif you have a question just press the button push uh for the speaker in front
Otherbutton push uh for the speaker in front
Otherbutton push uh for the speaker in front of you uh if the light goes bright then
Otherof you uh if the light goes bright then
Otherof you uh if the light goes bright then you're on allright okay can you hear me yeah sure
Otherright okay can you hear me yeah sure
Questioneryeah uh first of all thank you very much for your insightful speech uh the question I want to ask here is that what do you think is the core competence of an investor and how do one investor actually differentiates from the huge invester group thank you
Warrenokay well uh I think that's a that's a great that's a great question um yeah so I think that uh the the number one skill set uh that an investor needs to have uh is Extreme patience and in fact one of the things I
Questionerpatience and in fact one of the things I learned when I was putting this stock together is like if I look at a company like blue dot which was the FedEx of India I held the company for six years and it didn't do anything for six years and I sold it and it it had its run in the next 15 years and uh there was no good reason to sell it so the number one skill set is patience um so if you are the kind of the kind of person who loves to watch paint dry uh then this is the business for you uh if you love to watch paint dry and um and so if you are a hyperactive person who's always looking for Action um this is not the business for you and um so I think that that uh in many ways the investment business is a strange business I think it's a it's a business that is best for uh people who are what I would call gentlemen or gentle women of leisure where they have some other activity
Questionerwhere they have some other activity which is their primary focus and investing is a secondary Focus so that they don't have uh a compelling reason to act uh usually
Questionerinvestors hurt themselves every time you you trade so Charlie Monger says um that you don't you don't make money when you buy a stock and you don't make money when you sell a stock you make money by waiting and in fact what some of the things I talked about today uh show us is uh is the the huge Advantage is uh that once you once you you know you only learn about a business after you own it so if you do analysis of a business before you own it you may know something about it but you're really going to know more about it after you own it and uh that's when you have an opportunity to perhaps understand which ones have truly multi multibagger possibilities and are the ones that you should not touch uh um and
Otherones that you should not touch uh um and ones that you should not touch uh um and uh and uh and just let them play out for uh and uh and just let them play out for uh and uh and just let them play out for long period so patience is uh very important and that's what separates important and that's what separates important and that's what separates people and in fact one of the things people and in fact one of the things people and in fact one of the things about stock markets is uh they're about stock markets is uh they're about stock markets is uh they're deceptive because if you look at a uh uh deceptive because if you look at a uh uh deceptive because if you look at a uh uh the the market or the the invest the the the market or the the invest the the the market or the the invest the board which shows all the stock prices board which shows all the stock prices board which shows all the stock prices you see them changing all the time all you see them changing all the time all you see them changing all the time all the lights are changing and flashing it the lights are changing and flashing it the lights are changing and flashing it all the signal signals it's telling you all the signal signals it's telling you all the signal signals it's telling you is to be active it gives you all the is to be active it gives you all the is to be active it gives you all the signals to do something and what you signals to do something and what you signals to do something and what you have to actually do is ignore all that have to actually do is ignore all that have to actually do is ignore all that so one of the things for example one of so one of the things for example one of so one of the things for example one of the rules I follow is I do not submit the rules I follow is I do not submit the rules I follow is I do not submit any orders when the markets are open any orders when the markets are open any orders when the markets are open anytime I'm trying to buy or some sell anytime I'm trying to buy or some sell anytime I'm trying to buy or some sell something I usually sell it send it at something I usually sell it send it at something I usually sell it send it at this time after midnight to my broker to this time after midnight to my broker to this time after midnight to my broker to execute the next day because there is no
Otherexecute the next day because there is no price changes taking place there's price changes taking place there's price changes taking place there's nothing taking place everything is calm nothing taking place everything is calm nothing taking place everything is calm and then during the time when the and then during the time when the and then during the time when the markets are open it's very rare that I markets are open it's very rare that I markets are open it's very rare that I will trade I I basically avoid that so will trade I I basically avoid that so will trade I I basically avoid that so you can set up some um tricks if you you can set up some um tricks if you you can set up some um tricks if you will to help you because everything is will to help you because everything is will to help you because everything is everything is designed to make you be everything is designed to make you be everything is designed to make you be active you know your broker does not active you know your broker does not active you know your broker does not make any money if you don't buy and sell make any money if you don't buy and sell make any money if you don't buy and sell stock box you know if you just buy one stock box you know if you just buy one stock box you know if you just buy one company and just keep it forever they're company and just keep it forever they're company and just keep it forever they're never want to any money but it's good never want to any money but it's good never want to any money but it's good for you it's not good for them so all for you it's not good for them so all for you it's not good for them so all the signals are the wrong signal so uh the signals are the wrong signal so uh the signals are the wrong signal so uh patience is the number one that's what I patience is the number one that's what I patience is the number one that's what I would would would say so my question is uh among the five say so my question is uh among the five say so my question is uh among the five categories that you mentioned what categories that you mentioned what categories that you mentioned what what's your proportion like how much do what's your proportion like how much do what's your proportion like how much do you in your portfolio how much do you you in your portfolio how much do you you in your portfolio how much do you put in these five categories and what put in these five categories and what put in these five categories and what are the reasons for the same well let me
Questionerare the reasons for the same well let me put it this way um if you if if you know Charlie Monger says that each of us has a very limited quota of stocks that truly have may have the potential to make us rich there are very few times that we're going to end up with things in our portfolio that are truly got the potential to make us very rich and usually it is not apparent before you make the investment uh usually it'll become apparent maybe after uh you own the business um for some time you know it takes some time uh I mean I I I can think of many examples when I invested in the business I thought I'll get a double and move on but then I start to learn more about the business so it's the wrong way to think about it by saying I want to put 10% in number one or 20% in number two or whatever this is an opportunistic business so uh
Otherthis is an opportunistic business so uh you need to be very flexible like I said the number one skill set is patience what that means is it could be a long time before anything shows up or it could be that five of them show up in one week uh so uh like for example during the financial crisis um in December 2008 and January February 2009 there was so many ideas uh coming at me that I literally had less than one or two days to process each one uh whereas normally I will have weeks even months to process an idea um so so it's not a good idea to do this top down I I have never done it top down what I think what you need to be is you need to be kind of a bargain hunter uh you go into a Bazar and you're just looking for um what looks exciting or cheap and I'll give you the example of uh kind of the difference uh between um Ben Graham and Charlie Munger so Ben Graham will go
QuestionerCharlie Munger so Ben Graham will go into a supermarket and he'll look for what is the most heavily discounted item deeply on sale and then he'll buy that and come out and Charlie Monger will go into the supermarket and look for the things that he loves and then he keeps going back every day until what he loves has dropped in price and that's when he buys it so the Monger approach in my opinion is more superior to the Graham approach and and but the Monger approach requires patience and it requires you to understand what you truly like and then you wait for the right opportunity so it is a very good exercise to make a list of assets that you truly think are remarkable assets and also make a list of what at what prices those assets would be interesting or exciting for you and uh and when you have that list then you just sit back and wait for the world
Otheryou just sit back and wait for the world to come to you uh as opposed to taking my list and trying to go top down the second thing about top down that doesn't work is um it's very unpredictable when these things are available and when they are not available and what is within your circle of competence and what is not so like like the professor said that there are 100 Baggers I would say in every Market definitely in China you have a huge number of 100 Baggers at any given time uh the problem is most of us do not have the ability to see it because we don't either don't have the circle of competence or we don't have enough knowledge about the businesses and uh so this is a business where you want to be a student you want to learn you want to keep educ ating yourself and every once in a while there'll be a business that will show up in your
Questionerbusiness that will show up in your portfolio uh like I can I can think of right now at least three or four companies in my portfolio that could end up being huge home runs now I cannot tell you which one I don't know which one but I'm willing to be patient and watch and let them let them play out because even if one of them is a 10x it's worth letting that play out because they're so rare so uh that's how I would suggest going about it uh thank you for a great talk Mr P uh you spoke about the cyclical nature of the shipping industry um so when Freight rates are high ship owners essentially order a lot of ships and once they arrive Freight rates go down do you think the ship owners are going to learn from their mistakes or is this going to be uh a problem that we keep on seeing in the in that industry
Otherum the ship owners will never learn the property developers will never
Questionerlearn the property developers will never learn the property developers will never learn um learn um learn um humans and our genetic humans and our genetic humans and our genetic makeup isn't going to change in five makeup isn't going to change in five makeup isn't going to change in five years or 10 years of 50 years so we years or 10 years of 50 years so we years or 10 years of 50 years so we vacillate between fear and greed and as vacillate between fear and greed and as vacillate between fear and greed and as long as it as long as there are humans long as it as long as there are humans long as it as long as there are humans driving action in Industries like driving action in Industries like driving action in Industries like shipping shipping shipping uh you're going to see that vacillation uh you're going to see that vacillation uh you're going to see that vacillation in fact there's a there's a really in fact there's a there's a really in fact there's a there's a really really good book uh it's it's in fact a really good book uh it's it's in fact a really good book uh it's it's in fact a work of fiction it's called the shipping work of fiction it's called the shipping work of fiction it's called the shipping man I forget the name of the author but man I forget the name of the author but man I forget the name of the author but I think if you Google it you can find it I think if you Google it you can find it I think if you Google it you can find it uh um so the shipping man is a the guy uh um so the shipping man is a the guy uh um so the shipping man is a the guy was an investment banker uh in the was an investment banker uh in the was an investment banker uh in the shipping business who wrote that wrote shipping business who wrote that wrote shipping business who wrote that wrote that book it's a really funny book that book it's a really funny book that book it's a really funny book because it talks about the Greeks it because it talks about the Greeks it because it talks about the Greeks it talks about the talks about the talks about the Norwegians uh it talks about all this Norwegians uh it talks about all this Norwegians uh it talks about all this kind of cast of characters the kind of cast of characters the kind of cast of characters the Americans uh in this business it's funny Americans uh in this business it's funny Americans uh in this business it's funny as hell and uh and it really teaches you
Ted Weschleras hell and uh and it really teaches you the business uh while entertaining you um so and that author written a book to read uh and in fact Frontline one of the companies I invested in is run by a guy named John Frederickson Norwegian guy and he has a character in the book who I think is a clone of Frederickson which is why I found the book kind of funny um so uh you know uh the shipping business I haven't looked at the shipping business in uh in a lot of detail lately but you know it's it's a challenged business right now and what that means is there's probably opportunity in that business but I would also say that uh tread carefully
Questionerquestion is out of the five uh strategies you mentioned require deep research in the business model and to how much extent you rely on open data source uh to the public and do you have any unique or special channels for
Questionerany unique or special channels for information to uh help you to make the decision
Questioneryeah so all my data sources are open uh because um I am a very lazy investor uh I never meet management I never talk to management uh I never travel uh to see any plants or anything uh I've never done that for any Investments um and um and um the results still work out so um so we're not we're not looking for Superior information what we're looking for is superior Analytics on commonly known information so so for example I I mentioned the boom and bust of the shipping industry and you know the the gentleman asked me about you know is that going to change well number one it's never going to change because we have humans involved and humans are hosed um on on the emotions and uh the second is that uh Market participants we have two advant is against Market participants one is we
Questioneragainst Market participants one is we have analytics uh which can help us because we have some understandings that maybe markets are missing and uh the second is that uh we have patience so uh most investors don't have multi multi-year Horizons they want you know I want to buy a stock at 10 and two weeks later I want to send it at 12 and then I want to buy something else at 12 and sell it at 15 and I want to keep doing that well good luck um if that worked they'd be warn Buffett because the compounding rate would blow away Buffett's compounding rate uh but clearly we still have Warren Buffett in place so therefore that approach doesn't work and um so if you have the patience uh and if you have uh the interest to really dig deep um then what you're going to find is it would common held information on know known information you may come up with
Questionerinformation you may come up with insights that others have not so you know this is what Charlie manga talks about the Lis work of mental models is you look at things through a different lens to try to see uh what can what can be different like I would say that when my friend gpia uses a mental model saying that if Moody is the great business in the US what other businesses are like that in the other parts of the world that's a great model because you may be able to find a business in another part of the world where people have not realized what a great business they have and um and that's why these things uh get to where they are and uh so you know like for example I think all my life or at least all my investing life I hated the automobile industry because it's uh High capex uh it's unionized you got consumer tastes and you got uh a lot of things which uh are
Questioneryou got uh a lot of things which uh are not not good about the business but when I studied the business for I spent about one time about six weeks studying the business I actually realized that many of my underlying assumptions were wrong um and uh and that the reason the auto companies had problems were for different reasons than what people think they have problems so I I did not have access to any data that is not publicly known uh but I just synthesized it from many different sources to come up with some insights and um and those insights were helpful so I think I think the thing is that if you are a curious person and if you are a person who's uh very deeply interested in business and how business Works uh and understanding uh different business or Industries um then uh then you can do quite well right okay uh I have a question that's
Questionerright okay uh I have a question that's related so could you tell us a little bit about your lifestyle how much time you spend on thinking about investment every day uh because uh the size of your asset and management very easily place you into the one of the top 10 uh active stock funds uh from China and I know many of the those uh fund that life is under pressure and very busy and a lot of overwork it's not a good lifestyle for those F managers uh who are managing the similar size of of what you you manage so how is the lifestyle different
Otheryou know uh I should not advertise this but it's the best lifestyle you could possibly have so uh you know I I maybe have uh three or four ideas in a year um you know sometimes we don't have any in a year and sometimes we have many more than that so it it varies um so if you follow the buffet Munger model which I do your life is
OtherMunger model which I do your life is going to be fantastic so here's what happens in the Buffett Mungo model number one I have no staff there are no analysts there are no Associates if you send me your resume I'll be excited to read it but I can't help you with a job because there are no job openings uh because we' we've never had a job opening so um one part of the buffet model is that you do not delegate your investment research so Warren Buffett even today uh when he buys IBM or whatever he buys he does all the work himself uh he doesn't have anyone under him doing any of the work there's no one building spreadsheets for him or anything like that and that's the same thing at P fund so I have I have a few part-time admin assistants who are great they help run all the any of the back office things if you have but even there we don't have
Otheryou have but even there we don't have much going on so in a typical month I don't get any phone calls or any emails from my investors zero okay and I have about 400 families who who have invested with me and these families basically got selected because I have very some very strange rules with how I operate so for example before people invest um I don't meet them and I don't do phone calls with them so the only people who can invest are people who are willing to do reading of their own we can give them access to our website they can read various things if it makes sense to them they can invest so that doesn't work for most people but for the people it works for since they invested the money without talking to me uh they really are not looking to have a lot of conversations even after that and what I tell my investors is that we have a couple of annual meetings every year
Warrencouple of annual meetings every year where they can come and they can ask anywhere they can come and they can ask any questions they want and they come from all over the world so so I investors from everywhere and they show up at the annual meetings and so in effect we are open for business two days a year uh and it's a lot of fun to meet them and talk to them um so basically if you don't have any staff you don't have any HR problems uh and you have no issues and what is the reason that Buffett and Munger don't have analysts well the reason they don't have analysts is that the investment business is a very strange business uh you need your brain at unpredictable times and the rest of the time you don't need your brain so if I if I hired a super smart analyst someone in the audience here who I think each person here is exceptional um that person would want to do something constructive with their lives
Todd Combssomething constructive with their lives so they would either look to me to tell them what to research or if I don't give them any direction and say listen just go look and tell me when you find some great stock let's say I just tell them that listen you work on your own and just figure out and you have a great talk idea and bring it to me let's say I did that for example well what would happen is that because we have different Circles of competence um 95% of the time whatever they come up with I would say no to because 95% of the time what I come up with I say no to myself and um and so since I would have liked this person when I hired them I would feel really bad about saying no all the time because just it just be unpleasant and uh So eventually I would give up and say okay I'll buy the stock that you want even though I'm not sure
Otherthat you want even though I'm not sure about it so and then you've justabout it so and then you've justabout it so and then you've just destroyed the model so what you have todestroyed the model so what you have todestroyed the model so what you have to do if you bring in people is you have todo if you bring in people is you have todo if you bring in people is you have to give them their own pools of capital sogive them their own pools of capital sogive them their own pools of capital so they have full autonomy to do whateverthey have full autonomy to do whateverthey have full autonomy to do whatever they want and they don't come and askthey want and they don't come and askthey want and they don't come and ask you what to do that's what Warrenyou what to do that's what Warrenyou what to do that's what Warren Buffett has done with Ted wler and ToddBuffett has done with Ted wler and ToddBuffett has done with Ted wler and Todd kums he just gave them each n billionkums he just gave them each n billionkums he just gave them each n billion they do whatever they want they don'tthey do whatever they want they don'tthey do whatever they want they don't talk to him that works um so the uh thetalk to him that works um so the uh thetalk to him that works um so the uh the when I look at investment operationswhen I look at investment operationswhen I look at investment operations like you mentioned a bunch of operationslike you mentioned a bunch of operationslike you mentioned a bunch of operations in Chinain Chinain China Etc I look for whileEtc I look for whileEtc I look for while ations of the model so you knowations of the model so you knowations of the model so you know Moses came up with the TenMoses came up with the TenMoses came up with the Ten Commandments we have Commandments inCommandments we have Commandments inCommandments we have Commandments in investing as well they come from the guyinvesting as well they come from the guyinvesting as well they come from the guy with the bust behind me and they comewith the bust behind me and they comewith the bust behind me and they come from Warren Buffett and they come fromfrom Warren Buffett and they come fromfrom Warren Buffett and they come from Ben Graham they have written theBen Graham they have written theBen Graham they have written the Commandments and so one should followCommandments and so one should followCommandments and so one should follow those commandments so when I look at an
Charliethose commandments so when I look at an investment operation um the first first question I ask is how many violations are there and the first place I look for violations is team size so I can almost guarantee that the investment managers you're talking about who seem to be stressed out um are not operating with a team size of one do they have more than one person on the team much more than one like that like how many five 10 no different firms they have different structures but employ analy they also have assistance yeah all sort of things yeah so all that is Hocus Pocus uh there's no need for any of that I mean the bottom line is what is the model the model is buy things buy things at half off and you have 5,000 stocks in the US and you have um several thousand outside the US in China wherever and um we are bargain hunters so why do you need a team to
Questionerhunters so why do you need a team to find bargain you don't and um we didn't find bargain you don't and um we didn't find bargain you don't and um we didn't talk about it in this talk but the talk about it in this talk but the talk about it in this talk but the simplest way to find Bargains is to be a simplest way to find Bargains is to be a simplest way to find Bargains is to be a cloner um and I am what you would call a Shameless Shameless Shameless cloner um I just you know I meet cloner um I just you know I meet cloner um I just you know I meet lelu and who's 100 times smarter than me lelu and who's 100 times smarter than me lelu and who's 100 times smarter than me I say lelu can we meet for lunch and I say lelu can we meet for lunch and I say lelu can we meet for lunch and every once in a while I'll ask him lelu every once in a while I'll ask him lelu every once in a while I'll ask him lelu what do you own and in a moment of what do you own and in a moment of what do you own and in a moment of weakness he'll tell me what he owns and weakness he'll tell me what he owns and weakness he'll tell me what he owns and then I just go go buy it and I'm done then I just go go buy it and I'm done then I just go go buy it and I'm done and I don't even need to pay lelu it's and I don't even need to pay lelu it's and I don't even need to pay lelu it's great uh so uh uh and probably a better great uh so uh uh and probably a better great uh so uh uh and probably a better analyst than anyone I could hire so uh analyst than anyone I could hire so uh analyst than anyone I could hire so uh and then in the US we have 13 F filings and then in the US we have 13 F filings and then in the US we have 13 F filings where every quarter people have to file where every quarter people have to file where every quarter people have to file what they own so just figure out who the what they own so just figure out who the what they own so just figure out who the smart people are look at what they're smart people are look at what they're smart people are look at what they're buying reverse engineer them you don't buying reverse engineer them you don't buying reverse engineer them you don't need an analyst it's actually fun I need an analyst it's actually fun I need an analyst it's actually fun I think my job would not be fun uh if I
Questionerthink my job would not be fun uh if I think my job would not be fun uh if I had so you know um many times by the had so you know um many times by the had so you know um many times by the time I get to the time I get to the time I get to the office uh half the trading day is over I office uh half the trading day is over I office uh half the trading day is over I mean in California the Stock Market mean in California the Stock Market mean in California the Stock Market opens at 6:30 in the morning 6:30 in the opens at 6:30 in the morning 6:30 in the opens at 6:30 in the morning 6:30 in the morning I can assure you I am drooling morning I can assure you I am drooling morning I can assure you I am drooling on my pillow I fast asleep if I'm not on my pillow I fast asleep if I'm not on my pillow I fast asleep if I'm not sleeping till 2:00 in the morning I'm sleeping till 2:00 in the morning I'm sleeping till 2:00 in the morning I'm not getting up at 6:30 tomorrow morning not getting up at 6:30 tomorrow morning not getting up at 6:30 tomorrow morning please don't tell this to anyone this is please don't tell this to anyone this is please don't tell this to anyone this is just between us okay uh tomorrow morning just between us okay uh tomorrow morning just between us okay uh tomorrow morning I will wake up at around 900 a.m. I may I will wake up at around 900 a.m. I may I will wake up at around 900 a.m. I may wake up at 9:30 a.m. there's no alarm wake up at 9:30 a.m. there's no alarm wake up at 9:30 a.m. there's no alarm I'll wake up whenever I wake up okay and I'll wake up whenever I wake up okay and I'll wake up whenever I wake up okay and uh and there's no meetings because uh and there's no meetings because uh and there's no meetings because there's no staff and uh there's nothing there's no staff and uh there's nothing there's no staff and uh there's nothing on the Cal calendar because that's what on the Cal calendar because that's what on the Cal calendar because that's what Warren Buffett told me keep your Warren Buffett told me keep your Warren Buffett told me keep your calendar empty and I have no idea what calendar empty and I have no idea what calendar empty and I have no idea what I'm going to do tomorrow no idea but I I'm going to do tomorrow no idea but I I'm going to do tomorrow no idea but I know it'll be an exciting day because I know it'll be an exciting day because I know it'll be an exciting day because I have so many books to read I've at least
Otherhave so many books to read I've at least got 30 books on my on my desk that I want to get to so I'll pick some book if that's of interest if some company shows up I'll read about the company if uh I want to watch uh a movie with my wife we'll do that uh what whatever man I mean the the key is the key to life is find crystal that's the Moody of India and then just go to sleep for 20 years that's it so the purpose of this talk is for me to understand that to become even less active is not even wake up at 9:30 in the morning wake up at 2: in the afternoon who cares you know because uh because we found Crystal and then the guys at Crystle would make all the money for us so we don't need to do anything and uh so you know Warren Buffett says that it is not a good idea to get married for money right usually if you marry someone because they are rich that's a bad thing
Otherbecause they are rich that's a bad thing usually it doesn't work out very well but it's it's a terrible idea to marry for money if you're already rich okay that's terrible so the fund managers you're talking about I would guess that they are fairly wealthy are they wealthy are they Rich especially for the younger generation uh the young managers when they get promoted go up the herar they become pretty good yeah so so the the young managers it's very simple uh uh if you believe in the power of compounding then a small amount of money on the side can get you to Independence relatively quickly um the analysts and the young managers and so on I think the key is that you spend less than you earn you put something away and then that little little something can become more and more and eventually what you want to do is you want to be your own
Otherdo is you want to be your own boss so forget trying to chase the corporate dream forget all of that just um you know I think one should only be in this business if you love this business and the in my opinion the way to love this business there are some rules number one no staff number two no trading during office hours number three three don't even go to work when the market is open Just Be A Gentleman of Leisure or a gentle woman of leisure and that's it I was very lucky that I never worked in the investment business I didn't even understand the investment business I kind of stumbled upon it and because I never worked anywhere the only models I had was Warren and Charli and so I just looked at how how did Warren run his partnership I set up the partnership the same way how do they run their life oh he if you look at Warren buffins
Questionerhe if you look at Warren buffins calendar it's completely empty and um socalendar it's completely empty and um socalendar it's completely empty and um so you know let's let's keep it empty andyou know let's let's keep it empty andyou know let's let's keep it empty and um and let's do things that are that areum and let's do things that are that areum and let's do things that are that are fun you know like like I think like thefun you know like like I think like thefun you know like like I think like the reason I'm doing this talk is becausereason I'm doing this talk is becausereason I'm doing this talk is because it's fun number one it's fun that has toit's fun number one it's fun that has toit's fun number one it's fun that has to be fun number two I want to get betterbe fun number two I want to get betterbe fun number two I want to get better at the multibagger so I'm using you guysat the multibagger so I'm using you guysat the multibagger so I'm using you guys to pound into my brain to be even moreto pound into my brain to be even moreto pound into my brain to be even more patient to be patient for 20 years Ipatient to be patient for 20 years Ipatient to be patient for 20 years I never held a stock except that one stocknever held a stock except that one stocknever held a stock except that one stock by accident for 20 years so I want toby accident for 20 years so I want toby accident for 20 years so I want to hold something for 20 years and get 100xhold something for 20 years and get 100xhold something for 20 years and get 100x on it uh I want to do that and it'llon it uh I want to do that and it'llon it uh I want to do that and it'll show up it might show up when I'm 60 andshow up it might show up when I'm 60 andshow up it might show up when I'm 60 and we'll hold it till we 80 and I hope thatwe'll hold it till we 80 and I hope thatwe'll hold it till we 80 and I hope that happens I I have another question onhappens I I have another question onhappens I I have another question on your opinion on the differences betweenyour opinion on the differences betweenyour opinion on the differences between uh uh value investor and uh strategicuh uh value investor and uh strategicuh uh value investor and uh strategic investor and we noticed that many uhinvestor and we noticed that many uhinvestor and we noticed that many uh Chinese companies took Equity ofChinese companies took Equity of
QuestionerChinese companies took Equity of overseas companies to help them go intooverseas companies to help them go intooverseas companies to help them go into China like the China fan uh took EquityChina like the China fan uh took EquityChina like the China fan uh took Equity of climat the median uh climate the veryof climat the median uh climate the veryof climat the median uh climate the very uh big uh tour tourist and and uh Hoteluh big uh tour tourist and and uh Hoteluh big uh tour tourist and and uh Hotel Group and help Chinese customers haveGroup and help Chinese customers haveGroup and help Chinese customers have access to those hotels and China wantaccess to those hotels and China wantaccess to those hotels and China want acquire many good film companies inacquire many good film companies inacquire many good film companies in Hollywood and of course they were made aHollywood and of course they were made aHollywood and of course they were made a lot make a lot of money in China inlot make a lot of money in China inlot make a lot of money in China in China's film industry and we uh often uhChina's film industry and we uh often uhChina's film industry and we uh often uh typically we assume that uh valuetypically we assume that uh valuetypically we assume that uh value investor uh is a Outsider of theinvestor uh is a Outsider of theinvestor uh is a Outsider of the business they don't want to do anythingbusiness they don't want to do anythingbusiness they don't want to do anything to help the business so uh what's yourto help the business so uh what's yourto help the business so uh what's your opinion on being a value investor oropinion on being a value investor oropinion on being a value investor or being a strategic investor do you thinkbeing a strategic investor do you thinkbeing a strategic investor do you think you will get information on the theyou will get information on the theyou will get information on the the movement the the action of the uhmovement the the action of the uhmovement the the action of the uh strategic investor and and go behindstrategic investor and and go behindstrategic investor and and go behind with them like follow them follow theirwith them like follow them follow theirwith them like follow them follow their follow their Equity taking well um I Ifollow their Equity taking well um I Ifollow their Equity taking well um I I think we I that's a really good question
Questionerthink we I that's a really good question and a question I've never thought about before so it's a good question to ask because at least I can think about it and I'll Mumble some answer right right now but uh maybe I'll think about some more and uh next year might have a better answer but uh yeah so you know
WarrenBuffett says that I'm a better investor because I'm a businessman and I'm a better businessman because I'm an investor so there is clearly uh an interplay and advantage on those one of the things that happens in um with entrepreneurs or CEOs who are running specific businesses is um they have two things going on one is usually their circle of competence is limited to that business so if they in the hotel business they understand the hotel business if they're in the shipping business they understand the shipping business and that that competence can be
Otherbusiness and that that competence can be an advantage because if they understand the movie business in China uh they probably have a better shot at understanding uh the movie business in the US than a person who's not the business at all so the domain knowledge is a huge Advantage the disadvantage normally that strategic investors have is they may not understand or they don't they may not have a good understanding of value investing so like for example a lot of companies buy back their own stock now if you're in the hotel business it means you understand the hotel business which should mean that you should understand when it is undervalued and when it is overvalued most most company CEOs are not really good at understanding when their businesses are under and overvalued and one of the reasons they don't understand that is because if you are going to be a great
Questionerbecause if you are going to be a great leader you have to be an optimist and you have to be a builder and so you always see the grass as green on the other side and a and value investors are always skeptical they're always looking for what is wrong one of the reasons I sold all these companies much sooner than I should have is because I'm always skeptical about what might go wrong for example and uh so there are different skill sets so if if you have some data which tells you that the CEO of the film company in China is a good cap cap allocator then that can be a huge Tailwind if you have some data that tells you that so the thing that you have to evaluate is are they good Capital alligators and they those are rare so for example obviously Warren Buffett is really good at buying companies John Malone is really good at buying companies Sam zel is um uh really
Questionerbuying companies Sam zel is um uh really good at buying companies so uh but lots of uh you know the the Japanese came into to the US markets in the 1980s and they bought all kinds of real estate uh you know tropy real estate all over the country and they grossly overpaid for it um because they looked at their experience in Japan where these properties were much more valuable because they were in a bubble so they misunderstood what proper valuations were and they didn't do well even though they understood real estate in their own country so I think that that it's very it's a good idea to follow the Strategic investors into other markets if you can figure out whether or not they are value guys they understand value you know like for example the uh the deal for Starwood uh so I forget the name of the Chinese company was the insurance
WarrenChinese company was the insurance company that was chasing Starwood and Starwood is a very Prime asset it's a great asset but I don't know enough to know whether that would or would not have been a good deal for them they were clearly paying up significantly more than what the market had priced that company uh so you would have to have an understanding of how those people think and whether they think correctly any other questions
Otherokay uh all right almost two hours uh we'll leave 20 minutes for internal discussion to absorb what you said today uh it's a great lecture we have recorded and myself will have to listen to it again uh it's really motivating uh make me think about the change of career right all right yeah and and I I enjoyed it very much as well and I look forward to seeing you guys in person next year so even if you're not
Otherperson next year so even if you're not in the class maybe you can uh uh as thein the class maybe you can uh uh as thein the class maybe you can uh uh as the professor to let youprofessor to let youprofessor to let you in yeah everyone is welcome uh from thisin yeah everyone is welcome uh from thisin yeah everyone is welcome uh from this class uh you come next year they willclass uh you come next year they willclass uh you come next year they will still be here most of them uh they'restill be here most of them uh they'restill be here most of them uh they're not graduating uh and also we havenot graduating uh and also we havenot graduating uh and also we have recorded this lecture we will send yourecorded this lecture we will send yourecorded this lecture we will send you and all you tell us that editor you areand all you tell us that editor you areand all you tell us that editor you are using uh so we can ask him or her tousing uh so we can ask him or her tousing uh so we can ask him or her to edit this uh uh lecture according to ouredit this uh uh lecture according to ouredit this uh uh lecture according to our instruction okay uh so put it on theinstruction okay uh so put it on theinstruction okay uh so put it on the YouTube or China'sversion audience yeah great thank youversion audience yeah great thank youversion audience yeah great thank you very much it was a lot ofvery much it was a lot ofvery much it was a lot of fun yeah well definitely we'll see youfun yeah well definitely we'll see youfun yeah well definitely we'll see you in prison next year that sounds greatin prison next year that sounds greatin prison next year that sounds great all right all right bye now you enjoyall right all right bye now you enjoyall right all right bye now you enjoy good evening we give you a round of goodgood evening we give you a round of goodgood evening we give you a round of good Applause
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