Other[Music]today mr. Manish Bombay needs notoday mr. Manish Bombay needs notoday mr. Manish Bombay needs no introduction but I just say a couple ofintroduction but I just say a couple ofintroduction but I just say a couple of words about him he's the founder andwords about him he's the founder andwords about him he's the founder and Managing Partner of reinvestment fundManaging Partner of reinvestment fundManaging Partner of reinvestment fund and CEO of Intuit Wester he's also theand CEO of Intuit Wester he's also theand CEO of Intuit Wester he's also the author of two interesting books I wouldauthor of two interesting books I wouldauthor of two interesting books I would say to read investing books the condosay to read investing books the condosay to read investing books the condo investor and was a perspective oninvestor and was a perspective oninvestor and was a perspective on investing he is also loaded the bodyinvesting he is also loaded the bodyinvesting he is also loaded the body investing circle for paying about 650investing circle for paying about 650investing circle for paying about 650 650 K you a starter for the dinner650 K you a starter for the dinner650 K you a starter for the dinner business of a nonprofit which changedbusiness of a nonprofit which changedbusiness of a nonprofit which changed his lifehis lifehis life and he is low in student community forand he is low in student community forand he is low in student community for being generous with his time to sharebeing generous with his time to sharebeing generous with his time to share his investment with investing system andhis investment with investing system andhis investment with investing system and learning he runs his blog child withlearning he runs his blog child withlearning he runs his blog child with fabre which is regularly updated withfabre which is regularly updated withfabre which is regularly updated with all this content and all his investmentall this content and all his investmentall this content and all his investment thoughts so that's about him it will bethoughts so that's about him it will bethoughts so that's about him it will be starter event small heads up let'sstarter event small heads up let'sstarter event small heads up let's restrict this event just a thing justrestrict this event just a thing justrestrict this event just a thing just the investment philosophy research
Otherthe investment philosophy research process and harmonious of the Technic that's over a period of time let's not ask some specific questions it's an education event and there's convener that we make in that spirit with that out of our way without further ado thank
Otheryou you know pleasure and honor to be with you it's wonderful you know lbs one of the best schools best business schools on the continent which is great and what I'll do is I'll just go through a very quick slideshow and and then we will go through a Q&A and pretty much any question is fine as long as I mean other than asking me what I'm buying right now and what we hold right now I think anything else is fair game I don't know if maybe I'll ask for a show of hands I had I had done a talk with the students at Boston College I just talked with them every year so I dunno
Othertalked with them every year so I dunno walk with them thing November Decemberwalk with them thing November Decemberwalk with them thing November December last year and that talk was about the 10last year and that talk was about the 10last year and that talk was about the 10 commandments of Investment Managementcommandments of Investment Managementcommandments of Investment Management how many of you who just raise your handhow many of you who just raise your handhow many of you who just raise your hand have seen that YouTube video okay wehave seen that YouTube video okay wehave seen that YouTube video okay we have some enlightened Souls which ishave some enlightened Souls which ishave some enlightened Souls which is pretty good so I'm not gonna go throughpretty good so I'm not gonna go throughpretty good so I'm not gonna go through what's in that talk I think for the restwhat's in that talk I think for the restwhat's in that talk I think for the rest of you you can you can go through theof you you can you can go through theof you you can you can go through the talk but just I think a couple of daystalk but just I think a couple of daystalk but just I think a couple of days back someone had sent me a nice noteback someone had sent me a nice noteback someone had sent me a nice note where he took my 10 commandments and hewhere he took my 10 commandments and hewhere he took my 10 commandments and he said it in worse and he said that yousaid it in worse and he said that yousaid it in worse and he said that you know if you give things in worse toknow if you give things in worse toknow if you give things in worse to humans they are easier time kind ofhumans they are easier time kind ofhumans they are easier time kind of remembering it and and it gets muchremembering it and and it gets muchremembering it and and it gets much easier to H into your psyche if it's ineasier to H into your psyche if it's ineasier to H into your psyche if it's in worse so I'm just gonna quickly goworse so I'm just gonna quickly goworse so I'm just gonna quickly go through the 10 commandmentsthrough the 10 commandmentsthrough the 10 commandments the first one is commandment 1 thouthe first one is commandment 1 thouthe first one is commandment 1 thou shalt not skim off the top and you knowshalt not skim off the top and you knowshalt not skim off the top and you know this one refers to not having you know
Questionerthis one refers to not having you know management fees having all the fees being performance fees and I won't really explain these I'd say these are well explained in that Boston College video for those of you haven't seen it you can go through that video but I'll just go through Johnny's take on these the Johnny Bonner is the one who sent me the revised commandment said in verse so his commandment 1 the the quantity of assets under your belt does not entitle big fees to be dealt then we go to the slide number 5 which is commandment to Dowe shall not have an investing team and and Johnny's takes outsourcing investment understanding will result in a hard landing then we go to flight 6 which is commandment 3 thou shalt expect except that thou shalt be wrong at least 1/3 of the time and Johnny actually had two of these for this one he said an
Othertwo of these for this one he said an investment recording winning two of three a rich man or woman you soon will be and also as long as you're right a bit more than wrong your lifelong return will likely be strong and I think the second one actually is actually more true I think that's correct if you're even slightly more right than wrong things will go very well for you and then commandant for thou shalt look for hidden PE or one stocks you know and I think Johnny does it better than I could he says a company selling for what it will earn in a single year if uncovered will prove to be deer then we go to slide ten thou shalt never use Excel of course no one in this room ever uses Excel so we don't even need commandment five good investment decisions do not need excels precision and then commandment six thou shalt always have a rope to climb out of the deepest well
Otherrope to climb out of the deepest wellrope to climb out of the deepest well and Johnny's take you must prepare forand Johnny's take you must prepare forand Johnny's take you must prepare for times of despair for when there's hopetimes of despair for when there's hopetimes of despair for when there's hope for when their hope is rare and thenfor when their hope is rare and thenfor when their hope is rare and then commandment seven thou shalt becommandment seven thou shalt becommandment seven thou shalt be singularly focused like Arjuna maybesingularly focused like Arjuna maybesingularly focused like Arjuna maybe some of you are familiar with the mobsome of you are familiar with the mobsome of you are familiar with the mob harlot and John eaves take a man withharlot and John eaves take a man withharlot and John eaves take a man with focus will see through the hookers andfocus will see through the hookers andfocus will see through the hookers and then commandment thou shalt never shortthen commandment thou shalt never shortthen commandment thou shalt never short a stock and here Johnny goes wild anda stock and here Johnny goes wild anda stock and here Johnny goes wild and crazy' knowing a company would failcrazy' knowing a company would failcrazy' knowing a company would fail he placed a short sale but what washe placed a short sale but what washe placed a short sale but what was under the whale was not the fail but theunder the whale was not the fail but theunder the whale was not the fail but the time scale this is what the Tesla shortstime scale this is what the Tesla shortstime scale this is what the Tesla shorts forgot and then commandment 9 thou shaltforgot and then commandment 9 thou shaltforgot and then commandment 9 thou shalt not be leveraged neither a lender nor anot be leveraged neither a lender nor anot be leveraged neither a lender nor a borrower be I'm you know paraphrasingborrower be I'm you know paraphrasingborrower be I'm you know paraphrasing Polonius and HamletPolonius and HamletPolonius and Hamlet and we go to Johnny's take you needand we go to Johnny's take you needand we go to Johnny's take you need using death to leverage a betusing death to leverage a betusing death to leverage a bet will make you sweat because of thewill make you sweat because of thewill make you sweat because of the threat that one day your obligationsthreat that one day your obligations
Otherthreat that one day your obligations will not be met I think that will searwill not be met I think that will searwill not be met I think that will sear it a little bit better and then the lastit a little bit better and then the lastit a little bit better and then the last commandment which I think is the mostcommandment which I think is the mostcommandment which I think is the most important oneimportant oneimportant one thou shalt be a shameless cloner andthou shalt be a shameless cloner andthou shalt be a shameless cloner and commandment 10 which actually I tweakedcommandment 10 which actually I tweakedcommandment 10 which actually I tweaked a little bit to make it a little bita little bit to make it a little bita little bit to make it a little bit better don't be ashamed to copy the bestbetter don't be ashamed to copy the bestbetter don't be ashamed to copy the best after all it is the road to success okafter all it is the road to success okafter all it is the road to success ok so I think we lived through thoseso I think we lived through thoseso I think we lived through those Commandments pretty fast but but like ICommandments pretty fast but but like ICommandments pretty fast but but like I said if you want to get a fullsaid if you want to get a fullsaid if you want to get a full perspective on them then you can you canperspective on them then you can you canperspective on them then you can you can just check out that Boston College withjust check out that Boston College withjust check out that Boston College with YouTube and with that maybe you knowYouTube and with that maybe you knowYouTube and with that maybe you know your questions if you could tell me youryour questions if you could tell me youryour questions if you could tell me your name and I know where you're at wherename and I know where you're at wherename and I know where you're at where you're at in your lbs journey and thenyou're at in your lbs journey and thenyou're at in your lbs journey and then your question that'd be great yeahthat's a great question and actually itthat's a great question and actually itthat's a great question and actually it is it is quite opportunistic there's nois it is quite opportunistic there's nois it is quite opportunistic there's no there's no game plan so to take a stepthere's no game plan so to take a stepthere's no game plan so to take a step back one of the things I copied from
Questionerback one of the things I copied from Warren Buffett was the power of having an empty calendar and you know Buffett has more than 80 he used to have she's actually more than 80 CEOs reporting to him you know managing more and more than a 200 million dollar portfolio etc except if you see his calendar it's almost completely empty I mean I think he has more bridge games scheduled on his calendar than anything else in the in the evenings and weekends but during the day he has almost nothing on his case and and Charlie Munger is the same way so these two guys basically built one of the largest enterprises on the planet without being you know scheduled by the minute or any of that and the reason they did that was because they wanted a lot of flexibility and time to read and think and to have control over their schedules I mean I think they're one of
Otherschedules I mean I think they're one of the most important things money cannot buy is time and so the first thing is that you know the empty calendar is a side effect of being really good at saying no so if you never get anything else on this talk I think the thing that you should get is I hope you get is being great at saying no and think no isn't easy so you know I'll get I'll get emails from people saying you know Mohnish big fan of yours I'm coming to LA for a week from Australia or New Zealand and but I meet we meet you for coffee and you know of course the request is perfectly fine because the guy is flying halfway around the world but I don't do any meetings with any humans other than Warren and Charlie without extremely compelling agendas and you know in that email there's no compelling agenda and so you know usually my assistant has all the
Otherusually my assistant has all the if-then-else responses when these things show up so she does not even check with me and she sends the response that you know mounish is happy to meet with you at 5:30 a.m. at the south entrance just before the Berkshire Hathaway meeting on Saturday May 4th other than that he's not available warm regards and and you know a few people show up at 5:30 a.m. at the south entrance and so we concentrated all our meetings with humanity at that single point in place in time and so that that works out pretty good so the first thing clean out the calendar I mean if I if I look at like my schedule this week I think this is the only thing I have on my calendar you know this lbs talk and once the calendar has cleaned out then everything else becomes pretty straightforward so the priority with reading is if there is
Warrenthe priority with reading is if there is something I am actively researching or drilling down on then obviously I will set aside a general reading and zoom in on that I I read three newspapers a day so that that happens no matter what so the FT the Wall Street Journal in the New York Times and I read the physical copies of those paper in fact all my reading is physical stuff on paper I do not read on screens I also don't have many emails coming to me almost all the emails go to my assistant and you know she's able to handle most of them without any input from me and a sliver of them that she thinks I should see etc I mean I get a folder on my desk at 11 a.m. usually and that folder has all emails or anything business-related to have to deal with and usually some of you might have might have seen that my responses are handwritten and by 11:15 I'm done
Otherare handwritten and by 11:15 I'm done with that folder so emails etc are 900with that folder so emails etc are 900with that folder so emails etc are 900 seconds a day and and then thenseconds a day and and then thenseconds a day and and then then basically you know my reading is just abasically you know my reading is just abasically you know my reading is just a function of if I'm into investmentfunction of if I'm into investmentfunction of if I'm into investment research or some company which is whatresearch or some company which is whatresearch or some company which is what I'm doing right now then you know I II'm doing right now then you know I II'm doing right now then you know I I put that on priority I mean the threeput that on priority I mean the threeput that on priority I mean the three newspapers a day are still happeningnewspapers a day are still happeningnewspapers a day are still happening and and and beyond that usually all theand and and beyond that usually all theand and and beyond that usually all the magazines etc I catch up with onmagazines etc I catch up with onmagazines etc I catch up with on airplanes and and books I have a largeairplanes and and books I have a largeairplanes and and books I have a large number of books that I have in mynumber of books that I have in mynumber of books that I have in my library that I have not read I I knowlibrary that I have not read I I knowlibrary that I have not read I I know which ones I want to go at next andwhich ones I want to go at next andwhich ones I want to go at next and sometimes I'll you know change my mindsometimes I'll you know change my mindsometimes I'll you know change my mind I'll say okay you know let's go read aI'll say okay you know let's go read aI'll say okay you know let's go read a completely different subject so when I'mcompletely different subject so when I'mcompletely different subject so when I'm looking for reading I'm quite open youlooking for reading I'm quite open youlooking for reading I'm quite open you know it could be a business biography itknow it could be a business biography itknow it could be a business biography it could be some kind of philosophical bookcould be some kind of philosophical bookcould be some kind of philosophical book it could be a kind of wide range ofit could be a kind of wide range ofit could be a kind of wide range of stuff just depends on what is of
Questionerstuff just depends on what is of interest to me at the time and and interest to me at the time and and interest to me at the time and and that's how we take it from there but I that's how we take it from there but I that's how we take it from there but I think the important thing I think from think the important thing I think from think the important thing I think from all of you because I think you have the all of you because I think you have the all of you because I think you have the ability you're like red-clay you can ability you're like red-clay you can ability you're like red-clay you can adapt yourselves is the one is you know adapt yourselves is the one is you know adapt yourselves is the one is you know get freedom from the devices so the get freedom from the devices so the get freedom from the devices so the beautiful thing is someone like Charlie beautiful thing is someone like Charlie beautiful thing is someone like Charlie Munger has yet to use a mobile phone you Munger has yet to use a mobile phone you Munger has yet to use a mobile phone you know so so forget a computer he's never know so so forget a computer he's never know so so forget a computer he's never made a phone call on a cell phone or made a phone call on a cell phone or made a phone call on a cell phone or receive one for that matter or owned one receive one for that matter or owned one receive one for that matter or owned one for that matter and and he definitely for that matter and and he definitely for that matter and and he definitely doesn't have a computer and what that doesn't have a computer and what that doesn't have a computer and what that does work for someone like charlie is does work for someone like charlie is does work for someone like charlie is most of us humans cannot do it is he's most of us humans cannot do it is he's most of us humans cannot do it is he's blasted into twenty books a week a blasted into twenty books a week a blasted into twenty books a week a thousand books a year and if you just thousand books a year and if you just thousand books a year and if you just remove the devices from your life and remove the devices from your life and remove the devices from your life and other humans from your life maybe you other humans from your life maybe you other humans from your life maybe you can get to five or ten books a week can get to five or ten books a week can get to five or ten books a week humans are a big waste of time all right
Questionerhumans are a big waste of time all right
Questionernext next question can you just repeat when you what you said after after first seeing a stock what did you say after that is it like that feeling that comes first or on a number that comes first is it what the I'm sorry account is it what that comes first
Questionerokay well okay I didn't fully get that but I'll give it a shot of what actually happens after I see a stock so my objective whenever I encounter any stocks is to as quickly as possible to reject the idea so I can get back to general reading so the model is not to find investments the model is to find the flimsiest reason to say no and as soon as I get to the first reason I'm done and I move on and usually two things work pretty well for getting rid of stocks really fast the first is circle of confidence you know you encounter like I mean if I look at some pharma company or something it's
Questionerat some pharma company or something it's gone I mean I don't really need to look beyond the name it's gone and the second is that if I if I think I have some understanding of the business then the second is I look at very quickly the the market cap earnings just some thumb metrics on valuation and I'm talking about less than 60 seconds and once I see that it's not at a p/e of one it's gone as well so so basically we want to or at least I want to get rid of for investment ideas for the flimsy reasons as quickly as possible and let's say some some stock is really cheap it appears to be within my circle of competence then for one minute I'll go to five minutes you know I'll give it five minutes and again to find something where I can just get rid of it and if I cannot get rid of it in five minutes then I'll give it 15 minutes and all these exercises that designed and
Ted Weschlerall these exercises that designed and designed to get rid of the stock as soon as possible and the inversion of that is that I'm only looking for if I can find two or three ideas in a year I'm done and I mean Justin I think in daily emails which I get my folder I think on a typical day they're like at least three or four stock tips in that folder and within the nine hundred seconds of processing the folder is those four stock tips each of them gets you know 15 seconds because I just look at the company I look at the price and I very quickly trying to see okay what is this guy saying is the money we're gonna make on it and you know a lot of times the stocks I get oh you know it's trading at ten and it's worth 13 and then you know there's a 40-page right of explaining why it's 13 well once I see it's worth 10 I so Carol I'm going to give this
Carol LoomisI so Carol I'm going to give this human full benefit of doubt I'll accept that it's worth 13 and he didn't say it's worth 16 with trading at 10 so we're done move on and so that's how so basically be a very harsh grader on stocks and the second thing about this business is you know you guys don't play baseball but I think maybe you're familiar enough with the game that Buffett says in investing there are no call strikes so you know baseball three strikes you're out in investing you can let a thousand balls go by 10,000 volts go by you can let 95% of great investment ideas go by and it doesn't matter so there's always more balls being pitched at you and so if in a year you can find three of them and and even have to find three of them if one of them is you're wrong on one of them like one of the commandments hears that's just par for the course it doesn't
Questionerjust par for the course it doesn't matter you write two or three times you'll be quite wealthy agents process yeah when you look at a particular company in when you conduct your due diligence what resources do you use this is just the annual filing or you also hire third party consultants to conduct research or expert networks like GOG
Todd Combsso here's one of the commandments thou shalt not have a team there are no humans needed to find three ideas to invest in I have never paid anyone anything to do any any research of any kind or hired any third parties or any of that all of those are Buffett violations he doesn't do it so the Guru doesn't do it I'm not gonna do it and you know the the scuttlebutt or the amount of time it takes or the due diligence to get comfortable with the investment that varies quite widely I mean it's been as short as three hours
Todd Combsmean it's been as short as three hours from the time I first ever heard about a company what time I started buying it to three months where you know like I think when we made the investment in Fiat Chrysler in 2012 I hated that industry so much I kept trying to find reasons not to invest and after three months of digging I capitulated and and bought it and it's been a 8x since then so so basically the the thing is it it varies it just depends on the business the good thing is that if you run a concentrated portfolio and if you're going to make two or three investments in a year you are more than enough time especially if you're quick to say no and you don't spend time with other humans you have more than enough time to basically do all the research you want to you know you know even even take the tires as you want to and and so on so so
Othertires as you want to and and so on so so that's the that's the Buffett model andthat's the that's the Buffett model andthat's the that's the Buffett model and so you know I think many of the thingsso you know I think many of the thingsso you know I think many of the things you'll hear or you'll see with the way Iyou'll hear or you'll see with the way Iyou'll hear or you'll see with the way I operate first of all all of these wereoperate first of all all of these wereoperate first of all all of these were copied from Warren so I didn't come upcopied from Warren so I didn't come upcopied from Warren so I didn't come up with any of these but it is not the waywith any of these but it is not the waywith any of these but it is not the way the industry operates the and in mythe industry operates the and in mythe industry operates the and in my opinion the English industry operatesopinion the English industry operatesopinion the English industry operates stupidly and and and so you know manystupidly and and and so you know manystupidly and and and so you know many things no team no management fees doingthings no team no management fees doingthings no team no management fees doing all your own workall your own workall your own work concentrated portfolios all of theseconcentrated portfolios all of theseconcentrated portfolios all of these things you know this is the path tothings you know this is the path tothings you know this is the path to Nirvana and that's what you want to beNirvana and that's what you want to beNirvana and that's what you want to be getting to and that's what would yougetting to and that's what would yougetting to and that's what would you want to be doing next question andwant to be doing next question andwant to be doing next question and buyers profit awesome talks about usingbuyers profit awesome talks about usingbuyers profit awesome talks about using a common yardstick in terms in terms ofa common yardstick in terms in terms ofa common yardstick in terms in terms of a discount rate how do you think abouta discount rate how do you think abouta discount rate how do you think about that yeah so you know the the discountthat yeah so you know the the discountthat yeah so you know the the discount rate is you know I mean I think I thinkrate is you know I mean I think I thinkrate is you know I mean I think I think if you if we had a perfect crystal ball
Questionerif you if we had a perfect crystal ball and which told us what the risk free and which told us what the risk free and which told us what the risk free rate of return is going to be for the rate of return is going to be for the rate of return is going to be for the next 20 years then that would give you a next 20 years then that would give you a next 20 years then that would give you a basis to come up with a discount rate basis to come up with a discount rate basis to come up with a discount rate that would be the right way to do it but that would be the right way to do it but that would be the right way to do it but we don't have crystal balls that tell us we don't have crystal balls that tell us we don't have crystal balls that tell us that and Charlie Munger also says that that and Charlie Munger also says that that and Charlie Munger also says that he's never ever seen worn to a he's never ever seen worn to a he's never ever seen worn to a discounted cash flow you know I already discounted cash flow you know I already discounted cash flow you know I already told you told you told you thou shall not use Excel I know that in thou shall not use Excel I know that in thou shall not use Excel I know that in your time at LPS you have never turned your time at LPS you have never turned your time at LPS you have never turned on Excel and I'm so proud of you though on Excel and I'm so proud of you though on Excel and I'm so proud of you though the thing is that we are not really the thing is that we are not really the thing is that we are not really going to fixate on two bird things like going to fixate on two bird things like going to fixate on two bird things like discount rates what we want is obvious discount rates what we want is obvious discount rates what we want is obvious no brainers hitting us over a head over no brainers hitting us over a head over no brainers hitting us over a head over the head with in the u.s. what we would the head with in the u.s. what we would the head with in the u.s. what we would call it two-by-four you know something call it two-by-four you know something call it two-by-four you know something you'd buy at Home Depot so basically you you'd buy at Home Depot so basically you you'd buy at Home Depot so basically you know when I was looking at let's say know when I was looking at let's say know when I was looking at let's say Fiat Chrysler in 2012 I've never run a
Todd CombsFiat Chrysler in 2012 I've never run a DCF I mean I think DCFS are you know for the other birds I mean the market cap of the company was five billion and I thought in maybe five six years they'd make five billion a year and I said okay why don't we just buy the company and hold it for five years and let's see what mr. market will price this business at when it's making five billion a year I'd really like to see it being priced at five billion then and you know be the cheapest stock on the planet and so that was the that was the extent of the DCF there was done and and so basically what we're looking for is we're looking for very obvious no-brainers wildly mispriced severely undervalued opportunities that's what we're looking for and we want to be harsh greater than say no to everything else
Questioneryeah I'm sue Jean from India and I'm doing my full-time MBA 2019 here you
Questionerdoing my full-time MBA 2019 here you talked about your investment process and talked about your investment process and how you analyze the company than all that so can you shed a little bit of light on how do you do your exit process
Ted Weschlerexits are a lot more complicated than entrance in fact I have a chapter in my book how many of you have read tendu investor just raise your hands or we have a few people that's good so there's a there's a book there's a chapter in the book which talks about exits and so you might enjoy that chapter but exits are complicated and I don't do exits well in fact if I go back and look at my track record on exits it's terrible usually I'm leaving a lot of money on the table and and and part of the reason that happens is that you know the business looks I mean it's gone up a few times it looks fully priced or whatever else and then something else shows up on
Questionerelse and then something else shows up on the radar so usually I have not been the radar so usually I have not been the radar so usually I have not been very good exits I'm trying to get better very good exits I'm trying to get better very good exits I'm trying to get better at it but I think the simple the simple at it but I think the simple the simple at it but I think the simple the simple way to approach it is whenever you're way to approach it is whenever you're way to approach it is whenever you're buying a business you by definition have buying a business you by definition have buying a business you by definition have to know what it's worth so you know what to know what it's worth so you know what to know what it's worth so you know what the intrinsic value of the business is the intrinsic value of the business is the intrinsic value of the business is and typically you know when it's getting and typically you know when it's getting and typically you know when it's getting to maybe ninety percent of that value or to maybe ninety percent of that value or to maybe ninety percent of that value or something like that that's probably a something like that that's probably a something like that that's probably a good time to look at exit now if it's a good time to look at exit now if it's a good time to look at exit now if it's a great investment that intrinsic value great investment that intrinsic value great investment that intrinsic value will move up over time and that's really will move up over time and that's really will move up over time and that's really what you're trying to do is trying to what you're trying to do is trying to what you're trying to do is trying to find these great businesses so rather find these great businesses so rather find these great businesses so rather than buying discounted pies it's a far than buying discounted pies it's a far than buying discounted pies it's a far better idea to buy growing pies growing better idea to buy growing pies growing better idea to buy growing pies growing pies are usually a lot better than pies are usually a lot better than pies are usually a lot better than discounted pies even if you buy them at discounted pies even if you buy them at discounted pies even if you buy them at a lower discount in fact you usually a lower discount in fact you usually a lower discount in fact you usually will be forced to buy them at a lower will be forced to buy them at a lower
Todd Combswill be forced to buy them at a lower discount and if they're growing pies then typically intrinsic value is kind of increasing every year every few years and hopefully it always stays somewhat above where the stock prices which means you can hold it for a long time so that's that utopia if you can get there but I am NOT a shining example of being spectacular at Exit sighs I still want to get better at it and I'm trying to get better at my industry substantial number of years in the future to take widely all the possibilities in the time to identify all the things thank you so
QuestionerI think that humans humans vacillate between fear and greed and that trait of humans is not going to change and as long as humans are involved in equity markets even if you have various algorithms or whatever else involved you're going to see vacillations between fear and greed and though markets you
Questionerfear and greed and though markets you know there's a there's a book you guys know there's a there's a book you guys know there's a there's a book you guys might enjoy a lot it's called friend might enjoy a lot it's called friend might enjoy a lot it's called friend watching and it's actually written by a watching and it's actually written by a watching and it's actually written by a TV anchor normally TV anchors are TV anchor normally TV anchors are TV anchor normally TV anchors are useless authors student by TV anchor useless authors student by TV anchor useless authors student by TV anchor called Ron and Sanne but in this case called Ron and Sanne but in this case called Ron and Sanne but in this case Ron did a good job and he chronicles Ron did a good job and he chronicles Ron did a good job and he chronicles like a very wide range of bubbles and like a very wide range of bubbles and like a very wide range of bubbles and you know we we are aware of bubbles I've you know we we are aware of bubbles I've you know we we are aware of bubbles I've probably seen more bubbles than you have probably seen more bubbles than you have probably seen more bubbles than you have but but bubbles are around us all the but but bubbles are around us all the but but bubbles are around us all the time in different asset classes and time in different asset classes and time in different asset classes and different geographies different things different geographies different things different geographies different things are getting inflated and deflated all are getting inflated and deflated all are getting inflated and deflated all the time simply because humans that's the time simply because humans that's the time simply because humans that's how humans operate and so we are we are how humans operate and so we are we are how humans operate and so we are we are always go and the other thing is that always go and the other thing is that always go and the other thing is that the valuation or you know getting to the valuation or you know getting to the valuation or you know getting to intrinsic value of a business is part intrinsic value of a business is part intrinsic value of a business is part art art art science it's not pure science and and so science it's not pure science and and so science it's not pure science and and so I'm skeptical about actually deeply I'm skeptical about actually deeply
QuestionerI'm skeptical about actually deeply skeptical about the ability of you knowskeptical about the ability of you knowskeptical about the ability of you know automated AI algorithms doing better orautomated AI algorithms doing better orautomated AI algorithms doing better or replacing humans I mean already we havereplacing humans I mean already we havereplacing humans I mean already we have a situation where we have index fundsa situation where we have index fundsa situation where we have index funds and for most humans the index ones is aand for most humans the index ones is aand for most humans the index ones is a great way to go we it'll beat 90% ofgreat way to go we it'll beat 90% ofgreat way to go we it'll beat 90% of human managers and so on and so forthhuman managers and so on and so forthhuman managers and so on and so forth maybe 95 percent after fees so wemaybe 95 percent after fees so wemaybe 95 percent after fees so we already have a way to invest whichalready have a way to invest whichalready have a way to invest which doesn't particularly need muchdoesn't particularly need muchdoesn't particularly need much technology or AI or anything and givestechnology or AI or anything and givestechnology or AI or anything and gives you pretty decent returns but I thinkyou pretty decent returns but I thinkyou pretty decent returns but I think that that talk picking will go throughthat that talk picking will go throughthat that talk picking will go through its absent flows you know markets getits absent flows you know markets getits absent flows you know markets get euphoric and stock picking becomes hardeuphoric and stock picking becomes hardeuphoric and stock picking becomes hard and they become depressed and stockand they become depressed and stockand they become depressed and stock picking becomes easy I mean that'spicking becomes easy I mean that'spicking becomes easy I mean that's that's just the nature of markets and sothat's just the nature of markets and sothat's just the nature of markets and so I think that will continue and even ifI think that will continue and even ifI think that will continue and even if you have automatic things going on asyou have automatic things going on asyou have automatic things going on as long as humans are involved so humanslong as humans are involved so humanslong as humans are involved so humans have basically 17-year memories and once
Warrenhave basically 17-year memories and once you get past the 17-year memories their memory start getting kind of faded and distorted and and we see some of that so for example if you if you look at the Dow the Dow Jones Industrial Average from 1965 to 1981 it's absolutely flat I mean I think was around 873 in 1955 and it's 873 in 1981 and in that period from 65 to 81 the United States grew a lot there's a lot of growth in the economy and there was a lot of inflation in the economy and in spite of all that those two end points were identical and then from to $2.99 the god the Dow goes from like you know less than 900 to around 12,000 and so we had one 17-year period which is absolutely flat and we had a second 17-year period if we were doing I don't know 16 17 percent a year great returns and in fact Maggie Maha wrote a great book called bull which chronicles this
Otherbook called bull which chronicles this and you see this in all markets around the world I gave a talk at Trinity College in Dublin and I think that'll go online in a few weeks so I that talk is about these long periods of markets do nothing and then short periods or long periods where they go crazy so then if you look at it from 2002 2016 the next seventeen year period what I knew and actually when I was starting for iPhones in 99 is I was going into a period with a lot of headwinds where markets were unlikely to do well and that actually turned out to be the case it still was fine I mean you know my net worth is a lot higher than was in 2000 so that didn't even with the headwind it worked out just fine so I think that we are going to always have vacillations in asset prices and we love under pricing or pricing fair pricing
Questionerunder pricing or pricing fair pricing all of the above you know way into the future it's just the nature of of the beast and we're gonna see it across the board like you seen pricing on Bitcoin for example I mean you can you can look at asset class after asset class and if you go to run in saunas book you will see that these bubbles are just I never thought bubbles with that common they're very they're extremely common they are just happening all the time so my name is Akshay and I'm doing the Masters of financial analysis here at RBS so my question revolves around management what do you think how do you look at management buying stock especially for growing companies in terms of market share or earnings where there's no sign of management purchasing stock do you still view this as a bad sign because I've read all the time that one of the key things to look for in a
Questionerof the key things to look for in a company's management buying stock so how do you view that
Todd Combsyeah so share buybacks is like any other investment management team should buy back stock if their stock is undervalued and when the stock is overvalued it's a very dumb thing to do and you know there are there are companies that it's like clockwork they they do buybacks every year they don't really care what the price is whatever I mean if you look at a company like coca-cola its formulaic they're gonna take a certain portion of the cash flow and buy back stock it doesn't matter to them whether the coke P is 10 20 30 50 100 500 or 1,000 any of those numbers make no difference them and those humans who are making those decisions are extremely stupid they're extremely good at running the business and they're very stupid about capital allocation
Todd Combsstupid about capital allocation especially in terms of buybacks and we see that also for example coming like MasterCard you know so these are businesses that are the best of the best I mean these are varied wide mode businesses almost indestructible and and such and so they hardly need any money to run the business and the coke can run with no capital mast MasterCard should run with no capital and in the cash cash and so they're really basically only two things they can do with that cash they can can can should evidence which in the case of MasterCard and Coke would be a smart thing to do or they can do buybacks which at present prices I think especially for MasterCard is very stupid but you know the thing is that the thing with with public company CEOs so the number one skill that public company CEOs have to get to the position that they got in is their great sales guys if
Questionerthey got in is their great sales guys if they weren't good at sales they won't have been able to rise to those levels convinced all those people that they were the best thing since sliced bread so so they've got great sales skills I'll even give them they've got live great leadership skills they have got great management skills all of those things and they understand the the domain of their businesses and such so these are the skill sets that get you to be CEOs of large large businesses very little of getting to the top has to do with capital allocation so typically we accidentally run into some CEOs or grade of capital allocation and mostly we went end up with lousy capital allocators and and and that the the lack of great capital allocation skills manifest themselves in two ways in companies one is dumb acquisitions you know they see some fit with some
Questioneryou know they see some fit with some business and whatever and that may or may not be the case but when they look at those fits they ignore price and price is an important variable all their or you know the reality is most acquisitions don't work though so the a lot of money gets wasted in acquisitions and all by do right acquisition is the wrong price and a lot of money gets gets wasted in by backs so we should be buying back stock very heavily when the the business is severely undervalued and you know a lot of these CEOs if you ask them hey you know what do you have in your investment portfolio and say oh I don't I don't do anything i outsource it to X Y Z so you know the personal side they don't think there are these skills to pick stocks and the professional side they're you know pumping billions into buybacks so that's just the way the world is all
Otherthat's just the way the world is all
Questionerright next question hi mr. Perret you recommend all of us to be corners and use platforms like debe corners and use platforms like debe corners and use platforms like de Roma to see what the smartest guys are doing but could you give any examples of how being a cloner and using data room and to see what the smartest guys are doing could go terribly wrong
Otheroh yeah well things things go terribly wrong all the time you know this that's just normal well I think I think maybe when we do cloning cloning is a is simply a starting point of beginning research cloning is not that you go to data roma and five minutes later put in your buy order you would get your head handed to you in that scenario more likely than not and from my vantage point you would deserve to have your head handed to you so that's that's fine yeah so cloning cloning is a very powerful model because what happens is that some investment and
Todd Combswhat happens is that some investment and this is especially the top two or three ideas of very smart investors if some very good investor has a high conviction bet you know it's already gone through one please significant filter where it's gone through their filter and they've put their money where their mouth is if you will and I think for us if that is the universe on which we are picking stocks that is a really kind of like Tooting Tooting fish in a barrel it's you know it's it's a great it's a great hunting ground so so I already said that you know one in three times you're gonna be wrong so it is not it is not etched in stone that if I clone an investment made by Warren Buffett that I won't be wrong you know a lot of people cloned mr. Buffett on IBM and they didn't do so well so so that is not a I mean I think what you can do with coming like IBM is
Todd Combswhat you can do with coming like IBM is if Warren buys that you could use it as a basis to start research and see if you come to some perspectives on what the intrinsic value of IBM is and whether it's a significantly different form for the stock prices and and then see if that's the best that's opportunity in front of you so so yeah absolutely mistakes mistakes will happen whether you clone or not but I think if you clone without doing your research I think that's a very bad idea and probably going to have a lot of negative consequences with increased rate of errors next question
Questionerpunished thanks for your time today and you changed your portfolio construction process in the middle of the credit crunch how do you feel about that now in hindsight and you think it was the right thing to do mid crisis and what do you think would have happened if you stuck
Questionerthink would have happened if you stuck to your original portfolio construction process not just financially but personally and emotionally thank you
Questioneryeah that's a good question I haven't done the numbers of what would have happened if I had made no changes basically what was happening during the financial crisis was that I was drinking from a fire hydrant so while my portfolio was crashing and burning you know I think we were down like 70% there was a lot of incredible ideas very cheap ideas to buy into her in whole sectors have been decimated and and like for example when I was looking at commodity stocks one looked cheaper than the other I mean these were these are just absolutely clobbered valuations and and I actually they were coming at me so fast that I was drowning in ideas it was quite an orgasmic time now now the thing is that
Otherorgasmic time now now the thing is that you know it was orgasmic but you know myyou know it was orgasmic but you know myyou know it was orgasmic but you know my own portfolio crashing and burning I Iown portfolio crashing and burning I Iown portfolio crashing and burning I I lucked out in the sense that I had onelucked out in the sense that I had onelucked out in the sense that I had one stock which was Fairfax Financial whichstock which was Fairfax Financial whichstock which was Fairfax Financial which had large put positions on on equityhad large put positions on on equityhad large put positions on on equity markets and they had large CD s's etcmarkets and they had large CD s's etcmarkets and they had large CD s's etc that they had they had shorted and andthat they had they had shorted and andthat they had they had shorted and and so they their stock was just doingso they their stock was just doingso they their stock was just doing really well while everything else wasreally well while everything else wasreally well while everything else was burning so I actually took theburning so I actually took theburning so I actually took the opportunity to sell Fairfax which wasopportunity to sell Fairfax which wasopportunity to sell Fairfax which was which had gone up in price and move thatwhich had gone up in price and move thatwhich had gone up in price and move that that money and many times I soldthat money and many times I soldthat money and many times I sold businesses that were three timesbusinesses that were three timesbusinesses that were three times earnings in my portfolio to buy stuff atearnings in my portfolio to buy stuff atearnings in my portfolio to buy stuff at three times earnings so in the financialthree times earnings so in the financialthree times earnings so in the financial crisis I think it made sense for me tocrisis I think it made sense for me tocrisis I think it made sense for me to have a basket approach because I was Ihave a basket approach because I was Ihave a basket approach because I was I was going so fast so like in thewas going so fast so like in thewas going so fast so like in the commodity space for example we made acommodity space for example we made acommodity space for example we made a number of bets and we made them all 2%number of bets and we made them all 2%number of bets and we made them all 2% bets and not a single one of those bets
Todd Combsbets and not a single one of those bets lost money I mean we had we had no we're almost no I don't think I can't recall any stocks we bought in 2009 that ended up being losers and and many of those ended up being you know multiples 5 5 X or more and so it was a great time and the portfolio recovered pretty quickly after that I think that if if I encounter those times again I would take a similar approach you just it would just make sense what I couldn't tell which of these pics would would actually do better than the other and there wasn't that much time to research them as thoroughly as I wanted to because the volume the volume of work for me to sift through ten commodity stocks carefully to pick the one to the thought of the best would have taken me months and so I said I'm just putting 2% of all of them because I can't see of all of them because I can't see anything that tells me that any of these
Todd Combsanything that tells me that any of these have a problem and and that worked in the environment that we are in right now I think that we very rarely are not making 10% bets because I think that we're not able to find that much and so so when we do find stuff what is happening now is I have enough time available to drill down as much as I want to and and we want to go to the max exposure once we uncover what we think are a great opportunities and so 10 percent of the max for us and that's what that's what I'm trying to do now so it's a it's just a matter of being flexible based on what the world is throwing at you next question
Questionerhi Manish my question is on behavioral bias so I just wonder what would be your advice to incorporate steps in our research process to identify and counter balance our behavioral biases thank you
Questioneryou know I have to say that is probably
Questioneryou know I have to say that is probably the all-time greatest question I've ever received lbs hits it out of the park so well I mean I think so the the problem we have as humans we have a lot of problems but one of the problem we have as humans is our brains are a mishmash of ancient and modern and the brain actually doesn't even understand what era we live in you know I mean like like my body believes that if I eat a meal it believes that we don't know when or where the next meal is coming from it doesn't understand that there is refrigeration and unlimited resources and supermarkets and everything else and listen don't make me store the food because trust me my next meal will come in a few hours you can you can take that to the bank but the body don't understand that it's terrible and I don't know when it'll understand ER I might never understand that so so we
Questionermight never understand that so so wemight never understand that so so we live in bodies and we live in brains welive in bodies and we live in brains welive in bodies and we live in brains we live with brains that are not adapted tolive with brains that are not adapted tolive with brains that are not adapted to the circumstances that we are trying tothe circumstances that we are trying tothe circumstances that we are trying to deal with and they definitely they weredeal with and they definitely they weredeal with and they definitely they were never designed to do equity research ornever designed to do equity research ornever designed to do equity research or to pick stocks that is not theto pick stocks that is not theto pick stocks that is not the evolutionary trajectory that our brainsevolutionary trajectory that our brainsevolutionary trajectory that our brains have gone through you know so we havehave gone through you know so we havehave gone through you know so we have you know the ancient brain the amygdalayou know the ancient brain the amygdalayou know the ancient brain the amygdala and all that and then we have theand all that and then we have theand all that and then we have the prefrontal cortex and all this is moreprefrontal cortex and all this is moreprefrontal cortex and all this is more recent and so I think you know Charlierecent and so I think you know Charlierecent and so I think you know Charlie Munger spent his entire life studyingMunger spent his entire life studyingMunger spent his entire life studying quarks in our brains I mean that'squarks in our brains I mean that'squarks in our brains I mean that's that's the number one thing he's got thethat's the number one thing he's got thethat's the number one thing he's got the most interest in I mean I when I meetmost interest in I mean I when I meetmost interest in I mean I when I meet himhimhim he's always extremely curious about thehe's always extremely curious about thehe's always extremely curious about the nuances of specific humans and you knownuances of specific humans and you knownuances of specific humans and you know these humans are nobody you knowthese humans are nobody you knowthese humans are nobody you know like it'll be some relative of mine I'mlike it'll be some relative of mine I'mlike it'll be some relative of mine I'm talking to him about and he drilled downtalking to him about and he drilled down
Questionertalking to him about and he drilled down because he's very curious about the screwed up brains of all these humans and and so basically so one is how many of you have read poor Charlie's Armani raise your hand okay we have a few enlightened Souls that's good so if you do nothing else please read poor Charlie's Almanac I would say that were Charlie's Almanac and I hope you excuse me for saying this is what 10lbs degrees okay if you just read and study that book you will get more wisdom than I don't know how many college degrees at any place can give you so I try to reread for Charlie's almanac every year and every year when I reread it I could swear to you I find stuff that I've never seen before and say hey you know this is the first time I'm seeing this stuff and so it has it has many lifetimes of wisdom in that book a lot of that wisdom has to
Questionerin that book a lot of that wisdom has to do with misjudgments in our brains anddo with misjudgments in our brains anddo with misjudgments in our brains and and Charlie did us a huge favor so thereand Charlie did us a huge favor so thereand Charlie did us a huge favor so there the last talk in that book which is thethe last talk in that book which is thethe last talk in that book which is the psychology of human misjudgment whichpsychology of human misjudgment whichpsychology of human misjudgment which goes from page 440 to page 498 those 48goes from page 440 to page 498 those 48goes from page 440 to page 498 those 48 pages probably the most brilliant pagespages probably the most brilliant pagespages probably the most brilliant pages ever and and those pages are like a aever and and those pages are like a aever and and those pages are like a a guide to how to navigate the world andguide to how to navigate the world andguide to how to navigate the world and how to deal with all the groups and ourhow to deal with all the groups and ourhow to deal with all the groups and our brains and and so the human misjudgmentbrains and and so the human misjudgmentbrains and and so the human misjudgment and the way we we are kind of quirkyand the way we we are kind of quirkyand the way we we are kind of quirky about different things it is reallyabout different things it is reallyabout different things it is really important to understand that because itimportant to understand that because itimportant to understand that because it will give you a huge advantage in lifewill give you a huge advantage in lifewill give you a huge advantage in life massive advantage in life and it willmassive advantage in life and it willmassive advantage in life and it will give you a huge advantage in investinggive you a huge advantage in investinggive you a huge advantage in investing so I'll give you I'll give you anso I'll give you I'll give you anso I'll give you I'll give you an example and you know there's a guyexample and you know there's a guyexample and you know there's a guy Robert C eldini who wrote a book calledRobert C eldini who wrote a book calledRobert C eldini who wrote a book called influence some of you might have readinfluence some of you might have readinfluence some of you might have read the book but that's I think another bookthe book but that's I think another bookthe book but that's I think another book I think is up there dealing with all the
CharlieI think is up there dealing with all the human misjudgment and so so just to give you one example of our brains are screwed up so you know if you go back maybe ten thousand years or something and you know humans are living in a kind of small groups and some guy has extreme success at hunting brings down a big beast and brings it to his community and he knows that there's no refrigeration and he cannot eat that big beast so he knows that he has to store it in the bellies of his neighbors and so he calls the communities and look look what I got for you and everyone has a big feast everyone eats everyone's happy and he freely shares with the others in the community then a few days later when someone else brings down a big beast they definitely invite this guy in because one of the things that and it is going back thousands of years humans have
Otherthousands of years humans have reciprocation tendency and that reciprocation tendency is hard-coded in our ancient brain going back thousands of years because of this dynamic of you know people being forced to share whether they want it or not and but there's a quirk in the wiring the quirk in the wiring is that I will remember that John did me a favor by inviting me to eat when I was hungry I'll remember that but I will not be able to calibrate the degree of the favor favor how good was the meal how big was the meal you know how well did it all of that sort of thing all I can remember is John did me a favor and I know John a favor okay so the human brain understands when someone does us a favor and it understand and it has hard-coded in the brain reciprocation tendency what it does not have hard-coded is the calibration of the degree of the favor
Othercalibration of the degree of the favor and you can take advantage of that and a lot of slimy sales guys take advantage of that so and I take advantage of that so for example when someone asks you know Popeye funds is mostly closed but when someone asks hey I would like to get information about Popeye funds for example most other funds deal with stuff digitally you know they'll send out email and here's the documents and what about you need and etc what we do is we send a physical package out and the physical package we send out is pretty high-end in the sense of just the box etc I think cost more than $20 it's nicely designed in the in the package is a very nice cross pen you know probably a I don't know 25 $30 cross pen with our logo on it and and it has my book and a few other things in the package so what happens is that when people get that
Otherhappens is that when people get that package they feel good someone gave them a nice pen you know book to read it looks good everything's fine they have now taken meat from me okay they've been fed and they feel good about varnish and they know that they all mounish a favor and the weight of works is I give you a $30 pen you wire me 2 million and it might be like something like what happens is if I let you study how humans react probably one in two hundred humans will send the entire package back here mr. Potter I thank you for setting the package I looked at it it's not of interest one regards send the package back with the pen because they are concerned that it's creating an obligation and they don't want the obligation but to send the package back is a lot of frictional effort you know you've got to go to the post office and all this nonsense it's
Otherpost office and all this nonsense it's too much effort most humans even if they have a desire to send it back will not send it back and once you don't send it back you feel good about moreish okay and and you feel like he did something for you you gonna do something for him and that's how the world works so so for example that's an example of reciprocation tendency applied in the real world and there are dozens of these quirks in humans and see eldini highlights you know all these quirks can be used or have been used by different humans so I think that it is it would give you a huge advantage in life it would give you a huge advantage in marriage huge advantage with all your human relationships if you understood the way we're wired so for example you know I have relatives and I used to I never have like some disagreement with one of these relatives I would cannot
Otherone of these relatives I would cannot rationally present why I was right and they were wrong and my rational arguments were correct trust me okay but I never made any headway because that is not how humans process humans are not designed where if I tell you hey listen X leads to Y leads to Z and therefore we have these irrefutable truths that means nothing so Ben Franklin said if you would convince focus on interest not on reason so I changed my tactic I was using reason reason is dumb ass and stupid humans are not gonna listen to reason if it's not in their interest so I switched the conversation to interest and I was shocked at the way I can just break through so now you have to understand that if you have a disagreement with a human and you're going through logical steps and arguments good luck that ain't going nowhere but we can if
Questionerthat ain't going nowhere but we can if you get to interest I mean I mean youyou get to interest I mean I mean youyou get to interest I mean I mean you see that you see that in the us-chinasee that you see that in the us-chinasee that you see that in the us-china trade war the us-china trade war willtrade war the us-china trade war willtrade war the us-china trade war will not be sorted out with reason neithernot be sorted out with reason neithernot be sorted out with reason neither party will accept reason they willparty will accept reason they willparty will accept reason they will accept interest they will not acceptaccept interest they will not acceptaccept interest they will not accept reason and so you have to switch thatreason and so you have to switch thatreason and so you have to switch that and you have to think about it from thatand you have to think about it from thatand you have to think about it from that lens the same thing with the Northlens the same thing with the Northlens the same thing with the North Korean he's all about interest is zeroKorean he's all about interest is zeroKorean he's all about interest is zero interest in reason you know and and orinterest in reason you know and and orinterest in reason you know and and or non so so basically I think the thing isnon so so basically I think the thing isnon so so basically I think the thing is that if you understand the poorthat if you understand the poorthat if you understand the poor Charlie's Almanac you you have to readCharlie's Almanac you you have to readCharlie's Almanac you you have to read reread him a lot but the last essayreread him a lot but the last essayreread him a lot but the last essay which actually wasn't a talk he gave hewhich actually wasn't a talk he gave hewhich actually wasn't a talk he gave he actually spent a lot of time rewritingactually spent a lot of time rewritingactually spent a lot of time rewriting that if I call human misjudgment I thatthat if I call human misjudgment I thatthat if I call human misjudgment I that is a really dense almost 50 pages Iis a really dense almost 50 pages Iis a really dense almost 50 pages I would likewould likewould like read that 50 times you know just to makeread that 50 times you know just to makeread that 50 times you know just to make sure and probably read it with some gapssure and probably read it with some gapssure and probably read it with some gaps because there are many lifetimes of
Questionerbecause there are many lifetimes of wisdom there and we'll and if you can switch your mental models of how you approach humans once you understand you know kind of how their wiring works it'll give you a huge advantage in life I'm sorry thank you so much for this my question for you is someone who would like to start his own fund when when is one feel that they confident enough and also just in terms of the investor demographics who should we be essentially approaching for that costly ecology soon okay so you know someone asked Charlie Munger you know you gave your money to Li Lu to manage and that's the only outside manager you ever hired in your 95 years on planet earth why do you do that and how could you tell that this guy was the right guy to give your money to and mongers mangas response is that his approach to the selection of
Questionerthat his approach to the selection of investment manager is really simple his first criteria is the investment manager needs to already be rich and so Munger said look if you are a guy who is going to deliver above average returns you should have been doing above average returns in the past and if you're doing above average returns in the past then you know the power of compounding with even small amounts of capital will make it into significant amounts of capital so Li Lu so Li Lu how many of you have heard of Li Lu a few people have heard of Li Lu all right so Li Lu was a kind of activist in Tiananmen Square he's a good friend of mine and then he you know the Chinese government basically wanted to just put him away and he somehow escaped to Hong Kong and then with the help of some Chinese discerns in Hong Kong he made it to New York and he joined Columbia
Warrento New York and he joined Columbia University and he did the three simultaneous degrees he did a law degree undergraduate degree and an MBA all simultaneously he's the only guy at Columbia had who finished three degrees in four years and and he had no money so it was all student loans and he had about as Charlie would describe it about twenty thousand dollars afloat of the student loan result you know money that came to him before he had to you know give it to the school or whatever else housing etc by the time he graduated just investing the temporary float that he had on the student loans he had nine hundred fifty thousand dollars so the twenty thousand got converted to 950 and and then the nine fifty once he graduated that became several million and then he started managing money and I mean it's a phenomenal record I think he's compounded in probably in the north
Warrenhe's compounded in probably in the north of 20% analyzed rate for for a while of 20% analyzed rate for for a while of 20% analyzed rate for for a while
Warrenmaybe twenty years or more and and so maybe twenty years or more and and so maybe twenty years or more and and so when Charlie met him this track record when Charlie met him this track record when Charlie met him this track record was already there you know and so was already there you know and so was already there you know and so Charlie said okay it's a no-brainer you Charlie said okay it's a no-brainer you Charlie said okay it's a no-brainer you know let's go know let's go know let's go
Warrenso if you are starting and or thinking so if you are starting and or thinking so if you are starting and or thinking of starting an investment partnership of starting an investment partnership of starting an investment partnership the first question you need to ask the first question you need to ask the first question you need to ask answer for yourself answer for yourself answer for yourself is are you a good investor and the only is are you a good investor and the only is are you a good investor and the only definitive way to answer that question definitive way to answer that question definitive way to answer that question is your track record so you know I is your track record so you know I is your track record so you know I always tell people that whenever they always tell people that whenever they always tell people that whenever they get going they should set up a separate get going they should set up a separate get going they should set up a separate brokerage account or discount brokerage brokerage account or discount brokerage brokerage account or discount brokerage account don't write your grocery checks account don't write your grocery checks account don't write your grocery checks from there we just keep it separate so from there we just keep it separate so from there we just keep it separate so later it could be audited it's someone later it could be audited it's someone later it could be audited it's someone wanted to audit it and do your investing wanted to audit it and do your investing wanted to audit it and do your investing in an account and see what the frack in an account and see what the frack in an account and see what the frack record is and see how it compares to the record is and see how it compares to the
Otherrecord is and see how it compares to the indices except for I think that's the very first thing because even later when you go to to manage money so when you when you're looking to get investors to manage money you follow what I call the three FS you go to friends family and fools and the most important is the fools because you know you you want to have a lifelong relationship with friends and family so anyway so you go to the friends family and fools but before you go to the friends family and fools you need to have convinced yourself that you are the best thing since sliced bread on managing money and hitting it out of the park so I think in my case I had sold a portion of my business in 94 which was just when I was hearing or Buffett and I had a million dollars for the first time ever actually I was for the first time ever actually I was for the first time ever I didn't have I
Questionerthe first time ever I didn't have I didn't have credit cards and debt anddidn't have credit cards and debt anddidn't have credit cards and debt and all that and and such why did thisall that and and such why did thisall that and and such why did this million which was completely extra moneymillion which was completely extra moneymillion which was completely extra money and I just was figuring out the buffettand I just was figuring out the buffettand I just was figuring out the buffett model I said hey let's take the millionmodel I said hey let's take the millionmodel I said hey let's take the million and see what we can do with it let'sand see what we can do with it let'sand see what we can do with it let's start investing it and I think from 94start investing it and I think from 94start investing it and I think from 94 to 99 that million became north of 11to 99 that million became north of 11to 99 that million became north of 11 million you know well done Mohnishmillion you know well done Mohnishmillion you know well done Mohnish well done and and actually then therewell done and and actually then therewell done and and actually then there were a bunch of people who came to mewere a bunch of people who came to mewere a bunch of people who came to me because I should just give my friendbecause I should just give my friendbecause I should just give my friend stock tips you know I bought a stock I'dstock tips you know I bought a stock I'dstock tips you know I bought a stock I'd say hey listen go buy this company itsay hey listen go buy this company itsay hey listen go buy this company it was so good and they would make moneywas so good and they would make moneywas so good and they would make money but they would not sometime not see mebut they would not sometime not see mebut they would not sometime not see me for a while whatever else is it so theyfor a while whatever else is it so theyfor a while whatever else is it so they actually came to me and said listen allactually came to me and said listen allactually came to me and said listen all the stock tip does this is random likethe stock tip does this is random likethe stock tip does this is random like some guy would say listen I'm worth 10some guy would say listen I'm worth 10some guy would say listen I'm worth 10 million you give me a stock tip I putmillion you give me a stock tip I putmillion you give me a stock tip I put ten thousand and it it doubles but so
Otherten thousand and it it doubles but so what you know so he says so these guys said instead came and said we want more structure so we want you to manage the money instead of giving her stock tips so I was uh I just thought okay you know you can't really have an investment operation with one or two million dollars so they were like eight or nine investors that collectively gave me a million dollars and you know these were good friends of mine I didn't want to lose the money for them so I made sure I followed on the Buffett rules and I thought it was a hobby I didn't think this was going to become a business but then I think I a year in I really liked the the idea and the well I always enjoyed the investing process but I said hey you know it's interesting I have this little bit of investor capital and I think it'd be fun to actually fill
QuestionerI think it'd be fun to actually fill this into a real business instead of treating it like a you know hobby or a stepchild so about 15 months after pop - started I said okay let's actually start you know trying to get more investors and those sorts of things and that was a very fun journey because I had to work with within the limitations or SEC who's where you know you can't advertise a solicit or any of that you have to actually rely on people you know and so on but but the bottom line is that if you deliver above average returns like Buffett says they will swim to you in shark-infested waters in the middle of the Atlantic and give you money to marriage though you can be a leper and you will get assets if you deliver the bacon so that's how that's what I would suggest you know do it on your own prove it to yourself and after you convince yourself with
Questionerand after you convince yourself with enough yours that you are actually good at it then we go to the three FS and then we go from there I'm on each swathi here from the Ameer program just out of curiosity what's the central theme of your discussions with Charlie and Warren at the a GM's of Berkshire
Questionerhey well there are no discussion that the AGM of Berkshire because they are super busy they have too many humans around them but I don't have I don't really have well I think I think Warren I used to see one stood in the AGM but now I think I I don't get to see him because he doesn't come for that event Charlie I get to see a couple of times briefly but I I play bridge with Charlie every few weeks in in LA which is a blast you know it starts with lunch and then bridge and and I'll always have some some questions or something which I've been thinking about which I'll
QuestionerI've been thinking about which I'll which I'll start with and I rememberwhich I'll start with and I rememberwhich I'll start with and I remember like one time I was going through thelike one time I was going through thelike one time I was going through the the old annual meeting videos so anotherthe old annual meeting videos so anotherthe old annual meeting videos so another great resource is if you go to Buffettgreat resource is if you go to Buffettgreat resource is if you go to Buffett dot C + VC dots cnbc.com Buffett dotdot C + VC dots cnbc.com Buffett dotdot C + VC dots cnbc.com Buffett dot cnbc.com it has the archives of all thecnbc.com it has the archives of all thecnbc.com it has the archives of all the Berkshire annual meetings video archivesBerkshire annual meetings video archivesBerkshire annual meetings video archives all the way back to 94 and those are anall the way back to 94 and those are anall the way back to 94 and those are an incredible treasure trove and they'reincredible treasure trove and they'reincredible treasure trove and they're annotated and so on and so what I'veannotated and so on and so what I'veannotated and so on and so what I've been doing for the last I think lastbeen doing for the last I think lastbeen doing for the last I think last year is while I'm getting ready you knowyear is while I'm getting ready you knowyear is while I'm getting ready you know gaming or showering etc I listen togaming or showering etc I listen togaming or showering etc I listen to about 30 minutes a day and and I have toabout 30 minutes a day and and I have toabout 30 minutes a day and and I have to that 30 minutes is sometimes the mostthat 30 minutes is sometimes the mostthat 30 minutes is sometimes the most exciting biggest learning part of theexciting biggest learning part of theexciting biggest learning part of the day I usually find that's that's greatday I usually find that's that's greatday I usually find that's that's great and so I think I heard in 98 Moffat wasand so I think I heard in 98 Moffat wasand so I think I heard in 98 Moffat was saying that in his personal portfoliosaying that in his personal portfoliosaying that in his personal portfolio everything was in one stock and so youeverything was in one stock and so youeverything was in one stock and so you know I'll meet Munger for lunch beforeknow I'll meet Munger for lunch beforeknow I'll meet Munger for lunch before bridge acceptor and say hey you know
Questionerbridge acceptor and say hey you know Charlie in 98 Warren was saying everything with one stalk and you know what stop was that and his language is a lot more salt here one on one then at the Berkshire meeting and basically I got an answer I have no idea you know for example so so but then you know he'll take that discussion into a tangent and I think he was I think he was saying that you know I think that Warren Warren had I don't know less than I think less than 10 or 20 million in 1970 when he shut down the partnerships outside of Berkshire Hathaway in cash and that that money has always stayed outside that money now is over 2 billion and so this is just the side that you know that Warren was doing not the Berkshire bet and and Charlie said that throughout that period it was always concentrated you know mostly in two or three stocks sometimes sometimes options
Otherthree stocks sometimes sometimes optionsthree stocks sometimes sometimes options sometimes leverage but great returnssometimes leverage but great returnssometimes leverage but great returns so anyway different different subjectsso anyway different different subjectsso anyway different different subjects come up during the during these thesecome up during the during these thesecome up during the during these these sessions and it's a blessed lifesessions and it's a blessed lifesessions and it's a blessed life
Otherwell I think that that's tough because Iwell I think that that's tough because Iwell I think that that's tough because I think that most places you would look atthink that most places you would look atthink that most places you would look at they're violating all the corethey're violating all the corethey're violating all the core principles you know though that'sprinciples you know though that'sprinciples you know though that's unfortunate but I would say the nextunfortunate but I would say the nextunfortunate but I would say the next best thing once you accept that you'rebest thing once you accept that you'rebest thing once you accept that you're violating principles is what Buffettviolating principles is what Buffettviolating principles is what Buffett says which is you go to work for peoplesays which is you go to work for peoplesays which is you go to work for people who you like admire and trust so I thinkwho you like admire and trust so I thinkwho you like admire and trust so I think one of the one of the one of theone of the one of the one of theone of the one of the one of the mistakes a lot of people in yourmistakes a lot of people in yourmistakes a lot of people in your situation make you know people finishingsituation make you know people finishingsituation make you know people finishing Business School and so on is there's aBusiness School and so on is there's aBusiness School and so on is there's a lot of prestige with certain name brandslot of prestige with certain name brandslot of prestige with certain name brands and so usually people are makingand so usually people are makingand so usually people are making decisions based on name brands ordecisions based on name brands ordecisions based on name brands or they're making decisions based on compthey're making decisions based on compthey're making decisions based on comp and both are very stupid so the job you
Otherand both are very stupid so the job you want to take is the job you would do if you weren't getting paid that is the ideal job I mean I would say if I look at my situation you know currently I'm at home but by my setup at home and my setup at work are identical in fact it doesn't make any difference to me when I'm working with where I'm at and if there were no outside funds I would still have an outside office just you know have a little bit of change if you will there be almost no changes to my life whether or not I'm managing outside money it would almost everything would be the same the investment process be the same every almost everything would be the same and that is where you want to get to so I think the most important thing is you know go to work for people who like a buy on trust look very carefully at the individual who's going
Othercarefully at the individual who's going to be your boss to be your boss to be your boss and the individuals who are going to be and the individuals who are going to be and the individuals who are going to be your peers and both should be your peers and both should be your peers and both should be individuals that you highly respect and individuals that you highly respect and individuals that you highly respect and look up to so that's really important look up to so that's really important look up to so that's really important and then the the compensation of the and then the the compensation of the and then the the compensation of the name brands those are irrelevant name brands those are irrelevant name brands those are irrelevant so wish you all the best and even the so wish you all the best and even the so wish you all the best and even the pleasure and the good news of the video pleasure and the good news of the video pleasure and the good news of the video is we can edit a lot of this so it'll is we can edit a lot of this so it'll is we can edit a lot of this so it'll look a lot better than with the way it look a lot better than with the way it look a lot better than with the way it went through but I really enjoyed the went through but I really enjoyed the went through but I really enjoyed the session so thank you