Other[Music][Music][Music] so uh i'll make a briefso uh i'll make a briefso uh i'll make a brief introduction actually i have posted yourintroduction actually i have posted yourintroduction actually i have posted your resume to this uh vcat groupresume to this uh vcat groupresume to this uh vcat group and other students have seen amazingand other students have seen amazingand other students have seen amazing performanceperformanceperformance over the past 20 years plus and actuallyover the past 20 years plus and actuallyover the past 20 years plus and actually uh famous in chinauh famous in chinauh famous in china because of your book and also because ofbecause of your book and also because ofbecause of your book and also because of your two presentations in this classyour two presentations in this classyour two presentations in this class all right so the students love you theyall right so the students love you theyall right so the students love you they are eager to hearare eager to hearare eager to hear your thoughts and insights today so youyour thoughts and insights today so youyour thoughts and insights today so you make the presentation first and then e amake the presentation first and then e amake the presentation first and then e a teaching assistantteaching assistantteaching assistant have collected questions from thehave collected questions from thehave collected questions from the audience so he will ask the question onaudience so he will ask the question onaudience so he will ask the question on behalfbehalfbehalf of the students and we have a and q aof the students and we have a and q aof the students and we have a and q a is that all right sounds great thank youis that all right sounds great thank youis that all right sounds great thank you okay although we are spreading outokay although we are spreading outokay although we are spreading out acrossacrossacross china and actually across the worldchina and actually across the worldchina and actually across the world let's uh give alet's uh give alet's uh give a warm upload to uh mr manish to give uswarm upload to uh mr manish to give uswarm upload to uh mr manish to give us this wonderful talkthis wonderful talkthis wonderful talk okay go aheadokay well it's a pleasure it's aokay well it's a pleasure it's aokay well it's a pleasure it's a pleasure to be herepleasure to be herepleasure to be here with uh with everyone wonderful all
Otherwith uh with everyone wonderful all right so uh anyway right so uh anyway right so uh anyway it's uh it's a pleasure and a it's uh it's a pleasure and a it's uh it's a pleasure and a honor to be uh to be invited back to be honor to be uh to be invited back to be honor to be uh to be invited back to be with you with you with you i always find the uh students at peaking i always find the uh students at peaking i always find the uh students at peaking you you you are the best of any students i interact are the best of any students i interact are the best of any students i interact with anywhere in the world with anywhere in the world with anywhere in the world it's an amazing group of people so i am it's an amazing group of people so i am it's an amazing group of people so i am honored and humbled honored and humbled honored and humbled to be with this august audience and i'm to be with this august audience and i'm to be with this august audience and i'm also very also very also very excited to continue the interaction and excited to continue the interaction and excited to continue the interaction and the dialogue i think this is the the dialogue i think this is the the dialogue i think this is the the fourth time and we've had uh the fourth time and we've had uh the fourth time and we've had uh different venues and different venues and different venues and including once in irvine and once in uh including once in irvine and once in uh including once in irvine and once in uh in beijing and a couple of times now in beijing and a couple of times now in beijing and a couple of times now online online online anyway what i wanted to do was i wanted anyway what i wanted to do was i wanted anyway what i wanted to do was i wanted to share to share to share a few slides and thoughts with you and a few slides and thoughts with you and a few slides and thoughts with you and uh uh uh and then then we can open up to and then then we can open up to and then then we can open up to questions and we can talk about questions and we can talk about questions and we can talk about what what i've just presented or we can what what i've just presented or we can what what i've just presented or we can talk about whatever talk about whatever talk about whatever you'd like to that's on your mind you you'd like to that's on your mind you you'd like to that's on your mind you know the know the know the the thing is that when i look back my
Otherthe thing is that when i look back my life and journey as a value investor there are two years that stand out in terms of being a very significant step function in terms of the learning and growth i went through the first time that happened was in 1994 which is about 26 years ago when i heard about warren buffett for the first time and i had never been in the investing business or never even really i might have bought a stock here and there but really didn't understand investing and i was taken and surprised by buffett's approach to investing to the point that i in the next few years i shifted completely to becoming an investor i am an engineer by training and i was running a it services company and i in a few years made the switch completely to a full-time investor and so 1994 was a year of tremendous learning and growth for me
Questionerlearning and growth for me and uh and it was really helpful andand uh and it was really helpful andand uh and it was really helpful and then the secondthen the secondthen the second time i went through a step function oftime i went through a step function oftime i went through a step function of growthgrowthgrowth was this year in 2020 and for mostwas this year in 2020 and for mostwas this year in 2020 and for most peoplepeoplepeople you know 20 20 in a year they like toyou know 20 20 in a year they like toyou know 20 20 in a year they like to forget and move onforget and move onforget and move on because of the pandemic and all thebecause of the pandemic and all thebecause of the pandemic and all the issues we've had with shutdowns andissues we've had with shutdowns andissues we've had with shutdowns and you know all the fatalities and healthyou know all the fatalities and healthyou know all the fatalities and health issues and so onissues and so onissues and so on but maybe it was because of all the timebut maybe it was because of all the timebut maybe it was because of all the time at home i'm not sure butat home i'm not sure butat home i'm not sure but i found that i went through anotheri found that i went through anotheri found that i went through another renaissancerenaissancerenaissance this year and i wish i had gone throughthis year and i wish i had gone throughthis year and i wish i had gone through thisthisthis second renaissance many many years agosecond renaissance many many years agosecond renaissance many many years ago but still you know i think like charliebut still you know i think like charliebut still you know i think like charlie munger says we aremunger says we aremunger says we are old too soon and why is too lateold too soon and why is too lateold too soon and why is too late and uh but you know better late thanand uh but you know better late thanand uh but you know better late than nevernevernever so i want to talk about one aspect ofso i want to talk about one aspect ofso i want to talk about one aspect of thethethe of the renaissance that i went throughof the renaissance that i went throughof the renaissance that i went through and it's it's changing myand it's it's changing myand it's it's changing my my approach to investing uh quitemy approach to investing uh quitemy approach to investing uh quite significantlysignificantlysignificantly a lot of these things will appear very
Questionera lot of these things will appear very obvious to you some of us like me are not that smart so it maybe is not so obvious but let me share these with you and then we can uh we can talk about it so so if you are a if you're an investor a value investor really at the highest level you've got kind of two kinds of options in terms of the businesses you can invest in you can have you can invest in what in what i would call growing pies which are these are businesses which have strong growth ahead of them they've got long runways and these businesses can get pretty large and one can do quite well investing in growing pies even if one is paying what might appear to be an optically expensive price and and there are many advantages to being being an investor and growing pies you can you know set it and forget it and this is really one of the only ways you can
Questioneris really one of the only ways you can really get to really strong multi multibagger returns maybe 10 times your money or 100 times your money so so growing pies is definitely uh a great way to go the second way to invest is discounted pies and discounted you know 50 cent dollar bills or 40 cent dollar bills and uh here you are on a treadmill of activity because you have to buy and sell then again buy and again sell and keep doing that in uh in taxable accounts it can be tax inefficient and it's difficult to get more than a double or triple because if you bought a if you bought a company at 50 off and it did not grow and you were correct about it then maybe you would double your money uh when that valuation gap closes and maybe even if it gets some growth you might get three times your money or something but it's hard to get uh get more than that
Questionerit's hard to get uh get more than that when i started as an investor in 94 having just heard about buffett and so on i was focused on growing pies and uh the period from 94 to about 2000 99 2000 was a period of very strong stock market returns in the us it eventually kind of peaked with a very massive bubble the bubble of 2000 and then of course the the nasdaq index crashed and burned it dropped about 80 percent and even the s p had uh had a very long period of no returns and i could see i could see by 98 99 that things were getting frothy and i've done really well in that period in fact captured 200 baggers uh in that period i was a individual investor at the time i was not running a fund but uh but then uh i got concerned around late 99 mid 99 that you know this um this party at some point will end and it'll probably end badly so
Questionerprobably end badly so the market was very interesting at thatthe market was very interesting at thatthe market was very interesting at that time because there were a set oftime because there were a set oftime because there were a set of companies that were very overvaluedcompanies that were very overvaluedcompanies that were very overvalued and but there was another wholeand but there was another wholeand but there was another whole set of businesses which were not sexyset of businesses which were not sexyset of businesses which were not sexy businesses which were verybusinesses which were verybusinesses which were very modestly priced and even maybe severelymodestly priced and even maybe severelymodestly priced and even maybe severely underpricedunderpricedunderpriced and so one could actually makeand so one could actually makeand so one could actually make investments in those businesses so forinvestments in those businesses so forinvestments in those businesses so for example in 2000example in 2000example in 2000 the day the nasdaq peaked i think marchthe day the nasdaq peaked i think marchthe day the nasdaq peaked i think march 666 the march 9 2000 was the same day thatthe march 9 2000 was the same day thatthe march 9 2000 was the same day that berkshire hathaway hitberkshire hathaway hitberkshire hathaway hit a multi-year low in stock price i thinka multi-year low in stock price i thinka multi-year low in stock price i think the berkshire stock pricethe berkshire stock pricethe berkshire stock price at that time got down to about 40 000at that time got down to about 40 000at that time got down to about 40 000 andandand it was literally that people wereit was literally that people wereit was literally that people were pulling money out of berkshire hathawaypulling money out of berkshire hathawaypulling money out of berkshire hathaway and putting it into pets.comand putting it into pets.comand putting it into pets.com or chemdex.com all these different uhor chemdex.com all these different uhor chemdex.com all these different uh kind of euphorickind of euphorickind of euphoric e-toys and all these things that weree-toys and all these things that weree-toys and all these things that were going on at the timegoing on at the timegoing on at the time so i i switched in in the early 2000sso i i switched in in the early 2000sso i i switched in in the early 2000s from investing in growing pies to
Questionerfrom investing in growing pies to focusing on discounted pies because i thought the the index would give me a lot of headwind and what traditionally growing pies were quite overheated and such and what i what i should have done probably maybe a few years back maybe three or four years ago five years ago was i should have switched back because uh we did extremely well uh with discounted pies in the funds uh because the index uh you know the uh the nasdaq was flat from 2000 to 2016. it basically went nowhere in fact it went down quite a bit uh before it got back to the same 2000 level and the s p 500 was flat till about 2012 so they took a long time uh to get back to their previous highs so obviously the better way to invest between these two is growing pies but you also need to keep in touch keep it in mind a little bit about where the
Questionerin mind a little bit about where the where the market and the index is at where the market and the index is at where the market and the index is at where you're not kind of you know where you're not kind of you know where you're not kind of you know getting to euphoric if you will so getting to euphoric if you will so getting to euphoric if you will so if you look at this path to if you look at this path to if you look at this path to 10 to 100 baggers basically there are 10 to 100 baggers basically there are 10 to 100 baggers basically there are let's say there could be more but the let's say there could be more but the let's say there could be more but the basically five ways you could get there basically five ways you could get there basically five ways you could get there right so right so right so one is you could buy these what i would one is you could buy these what i would one is you could buy these what i would call focus mouse traps call focus mouse traps call focus mouse traps these are very narrowly focused players these are very narrowly focused players these are very narrowly focused players with long runways with long runways with long runways like you know multi is one in china like you know multi is one in china like you know multi is one in china which has just opened its first store in which has just opened its first store in which has just opened its first store in in china uh mcdonald's and so on in china uh mcdonald's and so on in china uh mcdonald's and so on you could also get there with great you could also get there with great you could also get there with great capital allocators kind of like capital allocators kind of like capital allocators kind of like berkshire hathaway berkshire hathaway berkshire hathaway or danaher or xorint which is based in or danaher or xorint which is based in or danaher or xorint which is based in in europe or you could also get there by in europe or you could also get there by in europe or you could also get there by investing in the uber cannibals so the investing in the uber cannibals so the investing in the uber cannibals so the uber cannibals are companies that are uber cannibals are companies that are uber cannibals are companies that are very focused on stock buybacks and they very focused on stock buybacks and they very focused on stock buybacks and they end up buying back end up buying back end up buying back you know large portions so for example a
Questioneryou know large portions so for example a company like nvr which is a u.s based home builder from 1996 and they started doing stock buybacks until now uh 20 2020 they bought back something like 82 of their shares outstanding so just 18 of the shares outstanding are left and nvr has delivered i think more than uh it says it's more than a 70 bagger uh in that period the stock has gone up more than 70 times in fact in the last 20 years it's gone up more than 55 times and the business actually has not grown that much all they've done is they've taken all their free cash flow every year and and pound it into buybacks autozone is another one these are not rapidly growing businesses but again similar story and then one that happened in the 60s and 70s was teledyne with henry singleton and in fact there's a book that you might enjoy called distant force
Othermight enjoy called distant force
Otherso uh teledyne issued a lot of stock
Otherin the 1960s when it acquired almost 150
Otherbusinesses
Otherwhen the when the market gave it a very
Otherhigh multiple and then in the 1970s when
Otherum the u.s equity markets were
Othervery cheap and collapsed and teledine
Otherwas trading at
Otheryou know maybe single digit single uh
Otherdigit multiple
Otherof earnings henry singleton bought back
Othermore than 80
Otherof the stock and again in the case of
Otherteledyne
Otherthey delivered about 125 times
Otherthe value from 1960 to 1980 it was about
Other125 x
Otherand then you can also get to
Othermultibaggers by buying
Otheryou know deeply undervalued players
Othercompanies that have gone down a lot
Otheryou know i've done some of that and
Otherthese are some companies i've invested
Otherin
Otheruh tech kaminko was one i bought right
Otheruh during the financial crisis in oh
Othernine it became a 10 bagger fiat chrysler
Otherin 2012 it also did very well and then
Questionerin 2012 it also did very well and then great industries more recently but the one i want to talk about today which is part of the renaissance this year is the spawners and the spawners are companies that's that continuously spawned related and unrelated businesses very few companies have the dna to be great spawners and we'll we'll we'll drill down a little bit on the different kinds of spawners and uh basically these are companies that have a deep conviction of and really it's part of the dna to keep adding and incubating new businesses that have the potential to be massive growth engines they expect many of these things to fail and they take failure and their stride and you know a good example is the bezos quote uh you know you know it says staying in day one requires you to experimentally accept failures plant seeds protect saplings and double down when you see
Warrensaplings and double down when you see customer delight and amazon is one of the great spawner companies that we have spawning also has a lot of advantages in fact a lot more advantages than cannibals because cannibals have to pay tax on their earnings and then they can use the money to buy back shares in the case of spawning what you're doing is you're basically reducing your net income which basically then reduces your taxes so in effect you're getting a interest-free loan from the government on very easy terms you know payable and able so for example through most of its history amazon has hardly reported much in earnings their core businesses were quite profitable but they were taking all the cash flows and continuously investing them into new bets you know 30 40 of the money that they were investing would have gone to the government if
Questionerwould have gone to the government if they didn't do that sothey didn't do that sothey didn't do that so it's a very uh capital efficient way toit's a very uh capital efficient way toit's a very uh capital efficient way to do thisdo thisdo this if you are good at spawning soif you are good at spawning soif you are good at spawning so there are different kinds of spawnersthere are different kinds of spawnersthere are different kinds of spawners and i came up with theseand i came up with theseand i came up with these different spawners on my own and theydifferent spawners on my own and theydifferent spawners on my own and they may be more but i think thismay be more but i think thismay be more but i think this this captures a lot of it so adjacentthis captures a lot of it so adjacentthis captures a lot of it so adjacent spawners arespawners arespawners are companies that create businesses thatcompanies that create businesses thatcompanies that create businesses that areareare close to the business they already areclose to the business they already areclose to the business they already are in you know they kind of arein you know they kind of arein you know they kind of are looking at uh you know like amazon whenlooking at uh you know like amazon whenlooking at uh you know like amazon when they started wasthey started wasthey started was only selling books and and then theyonly selling books and and then theyonly selling books and and then they started adding more categoriesstarted adding more categoriesstarted adding more categories they started selling music and they youthey started selling music and they youthey started selling music and they you know kept adding more categoriesknow kept adding more categoriesknow kept adding more categories so it didn't require a lot of change inso it didn't require a lot of change inso it didn't require a lot of change in the business uhthe business uhthe business uh that's what i would call adjacentthat's what i would call adjacentthat's what i would call adjacent spawners embryonic spawners arespawners embryonic spawners arespawners embryonic spawners are companies that acquirecompanies that acquirecompanies that acquire businesses and then nurture them intobusinesses and then nurture them intobusinesses and then nurture them into much largermuch largermuch larger enterprises and uh for exampleenterprises and uh for example
Charlieenterprises and uh for example um through most of its historyum through most of its historyum through most of its history microsoft has not been a acquisitivemicrosoft has not been a acquisitivemicrosoft has not been a acquisitive companycompanycompany it basically kind of grew its businessesit basically kind of grew its businessesit basically kind of grew its businesses organicallyorganicallyorganically but they bought what we know asbut they bought what we know asbut they bought what we know as powerpointpowerpointpowerpoint as a they actually bought the companyas a they actually bought the companyas a they actually bought the company and then they you know changed the nameand then they you know changed the nameand then they you know changed the name to powerpointto powerpointto powerpoint and then made it part of office soand then made it part of office soand then made it part of office so that's the example of an embryonicthat's the example of an embryonicthat's the example of an embryonic spawner cloner spawners uh are notspawner cloner spawners uh are notspawner cloner spawners uh are not you know innovative they just copyyou know innovative they just copyyou know innovative they just copy uh successful products microsoft is auh successful products microsoft is auh successful products microsoft is a good example of clone of spawners andgood example of clone of spawners andgood example of clone of spawners and thenthenthen non-adjacent spawners created by newnon-adjacent spawners created by newnon-adjacent spawners created by new unrelated business areas so for exampleunrelated business areas so for exampleunrelated business areas so for example uhuhuh recently during the pandemic bydrecently during the pandemic bydrecently during the pandemic byd went into manufacturing of n95went into manufacturing of n95went into manufacturing of n95 masks and that business hasmasks and that business hasmasks and that business has nothing to do with what one wouldnothing to do with what one wouldnothing to do with what one would consider the core competencies of eydconsider the core competencies of eydconsider the core competencies of eyd but chengpu wang has never been limitedbut chengpu wang has never been limitedbut chengpu wang has never been limited by core competencies he's repeatedlyby core competencies he's repeatedlyby core competencies he's repeatedly repeatedly gone into businesses when you
Questionerrepeatedly gone into businesses when you would look at him from the outside you would say he has no competence in this but he's repeatedly shown that he can get competence so they entered the car business and they were able to make that quite a success which is difficult they entered the n95 mass business and i'm pretty sure they've uh if they haven't already done some business they will and then uh apex spawner is a business which uses all four of these strategies and such and and generally speaking the reason i'm i'm giving you these spawner categories is is apex spawners are very rare and apex spawners can be amongst the very best investments you can make because they've got so many different ways to nirvana they've got you know it's kind of a swiss army knife they can bring out different tools and they're really good at all of the above
Otherat all of the above
Otherso let's look at the some of these spawners with some examples
Otherso adjacent spawns we can look at starbucks
Otheryou know they've created the consumer packet good the frappuccino bottles which first they did a deal with pepsi which they sold in supermarkets they created the coffee machine
Otheri think now in china they have opened the starbucks reserve stores which have done really well and they're also experimenting with alcohol you know alcohol infused drinks and such which is quite uh quite a significant departure from what is traditionally a starbucks store but they're they're doing all these spawns and it extends the runway
Otherfacebook has been really good at embryonic spawning where they bought instagram and they bought whatsapp they bought oculus and they have uh taken these uh embryonic businesses and they've created
Otherembryonic businesses and they've created pretty significant value and growth the same with what google did with youtube very significant or what google did with android which is also a company they bought microsoft doesn't do much embryonic spawning but like i told you they they bought a company named fort and then later renamed it as powerpoint but they are very good at cloner cloner spawning windows from the mac word in excel from wordperfect and lotus explorer from netscape surface from the ipod azure from you know google and amazon web services and teams from slate and and such apex spawners i told you they are very rare and if you can spot a apex spawner early in its journey it can be very very attractive and can can give you a pretty long runway because what happens is yet you know amazon started with just a bookstore it's like all eggs in one basket
Questionerit's like all eggs in one basket and but as they start doing more things because these are mostly digital bets the return on capital is extremely high and so it can also tolerate a lot of failure so they've done a very good job with obviously the adjacent spawning embryonic spawning like they bought zappos and whole foods cloner you know some of these corners didn't work like they came up with the fire phone which they all offered for i think 99 cents uh but they couldn't they couldn't get any traction and then the fire phone was uh buried and they moved on and then they've done non-adjacent spawning like amazon web services is quite a departure from their typical retail and it's done very well and kindle was quite a departure because it required quite a few different competencies similarly uh alphabet has done all of the above
Questioneralphabet has done all of the above you know they've uh they've done a lot you know they've uh they've done a lot you know they've uh they've done a lot of embryonic stuff of embryonic stuff of embryonic stuff uh they've also done a lot of uh they've also done a lot of uh they've also done a lot of non-adjacent stuff where non-adjacent stuff where non-adjacent stuff where they've gone into things like google they've gone into things like google they've gone into things like google fiber and so on alibaba you guys are fiber and so on alibaba you guys are fiber and so on alibaba you guys are very familiar with very familiar with very familiar with you know alipay uh with with the you know alipay uh with with the you know alipay uh with with the adjacent spawning adjacent spawning adjacent spawning and they've done a number of things on and they've done a number of things on and they've done a number of things on the embryonic front the embryonic front the embryonic front cloners and then even the uh cloners and then even the uh cloners and then even the uh non-adjacent with the alibaba cloud and non-adjacent with the alibaba cloud and non-adjacent with the alibaba cloud and ali trip ali trip ali trip berkshire hathaway reinsurance was a berkshire hathaway reinsurance was a berkshire hathaway reinsurance was a spawn that ajit jain did spawn that ajit jain did spawn that ajit jain did for them probably worth over a 100 for them probably worth over a 100 for them probably worth over a 100 billion in value that billion in value that billion in value that that business has created for berkshire that business has created for berkshire that business has created for berkshire from scratch from scratch from scratch they pretty much didn't have to put up a they pretty much didn't have to put up a they pretty much didn't have to put up a lot of lot of lot of risk capital to make that happen risk capital to make that happen risk capital to make that happen embryonic you know they bought geico and embryonic you know they bought geico and embryonic you know they bought geico and it was a very it had been around for a it was a very it had been around for a it was a very it had been around for a long time but it was pretty small long time but it was pretty small long time but it was pretty small less than two percent market share of less than two percent market share of less than two percent market share of the u.s uh the u.s uh the u.s uh insurance business and now it's more
Questionerinsurance business and now it's more than ten percent mid-american energy has grown a lot nebraska furniture mart has grown a lot they've started some digital insurance comp company recently three insurance and by work uh these are cutting out the agent uh and so uh they've cloned some of the other players like uh i think wilcox and so on and uh and then tencent again has done a number of things on all of the above you know you guys use wechat the uh the games future mobility i mean and baidu is very similar again they've kind of done all of the above and and these these have been tremendous home runs especially if you got them early one one spawner i just want to talk about kota kotak mahindra is a is a company in india i actually was smart enough to make a very small investment in this company in 1995 and i was also very dumb where i sold
Otherand i was also very dumb where i sold the company in 2000 with almost no returns i'll come back to this slide in a second but i just want to show you kind of what happened with kotak so if you see if you see kodak so in uh in 1995 i made uh i invested a small amount of money in india maybe around 25 000 personally i was going to invest in three businesses in in india at the time which i all which i thought they all had huge runways and uh kotak was actually my broker that had opened the account with in dealing with them i was just really really impressed with the quality of the people i was dealing with so pretty much at the last minute i said you know out of this 25 000 i'll put 3000 or so into kotak because they were listed company and such and what happened with me with my 25 000 investment is a one company that i invested about 10 000
Questioneri invested about 10 000i invested about 10 000 in was 140x so it became 1.4 million inin was 140x so it became 1.4 million inin was 140x so it became 1.4 million in about five yearsabout five yearsabout five years and uh i was smart enough to exit that iand uh i was smart enough to exit that iand uh i was smart enough to exit that i waswaswas part of the dot-com boom and then ipart of the dot-com boom and then ipart of the dot-com boom and then i thought you know the other threethought you know the other threethought you know the other three companies had not done muchcompanies had not done muchcompanies had not done much over that period of time so i said okayover that period of time so i said okayover that period of time so i said okay you know you hit the big time at one ityou know you hit the big time at one ityou know you hit the big time at one it doesn't really matterdoesn't really matterdoesn't really matter for no good reason really i sold thefor no good reason really i sold thefor no good reason really i sold the other three companies at 2000 includingother three companies at 2000 includingother three companies at 2000 including kotakkotakkotak and of course if i just kept the 3 000and of course if i just kept the 3 000and of course if i just kept the 3 000 uh dollars in kotak i would have aboutuh dollars in kotak i would have aboutuh dollars in kotak i would have about you know six hundred thousand today butyou know six hundred thousand today butyou know six hundred thousand today but just to go back to kotakjust to go back to kotakjust to go back to kotak you know they they were very smallyou know they they were very smallyou know they they were very small broker uh goldman sachs at the time andbroker uh goldman sachs at the time andbroker uh goldman sachs at the time and taken a 20taken a 20taken a 20 stake in them because again i think likestake in them because again i think likestake in them because again i think like me they were very impressed with themme they were very impressed with themme they were very impressed with them and the key thing that happened to themand the key thing that happened to themand the key thing that happened to them was in 2003was in 2003was in 2003 in 2003 they got a banking license andin 2003 they got a banking license andin 2003 they got a banking license and in india it's really hardin india it's really hardin india it's really hard to get banking licenses i mean the
Questionerto get banking licenses i mean theto get banking licenses i mean the reserve bank has issuedreserve bank has issuedreserve bank has issued very few banking licenses to privatevery few banking licenses to privatevery few banking licenses to private banks and quotabanks and quotabanks and quota today has become one of the largesttoday has become one of the largesttoday has become one of the largest private banks in india they've executedprivate banks in india they've executedprivate banks in india they've executed really wellreally wellreally well and that's where the bulk of their theirand that's where the bulk of their theirand that's where the bulk of their their upside has come fromupside has come fromupside has come from but the company has formed many adjacentbut the company has formed many adjacentbut the company has formed many adjacent businessesbusinessesbusinesses and they've even acquired a fewand they've even acquired a fewand they've even acquired a few businesses and gone from therei told you most companies do not havei told you most companies do not havei told you most companies do not have the dnathe dnathe dna to do spawning spawning is an unusualto do spawning spawning is an unusualto do spawning spawning is an unusual kind of dnakind of dnakind of dna especially the successful spawnersespecially the successful spawnersespecially the successful spawners so for example uh some of you may beso for example uh some of you may beso for example uh some of you may be familiar with chipotlefamiliar with chipotlefamiliar with chipotle which is a very successful mexican chainwhich is a very successful mexican chainwhich is a very successful mexican chain here in the us i don't think they'vehere in the us i don't think they'vehere in the us i don't think they've entered china yetentered china yetentered china yet but mcdonald's actually spotted chipotlebut mcdonald's actually spotted chipotlebut mcdonald's actually spotted chipotle when they just had about 20 or 30 storeswhen they just had about 20 or 30 storeswhen they just had about 20 or 30 stores in denverin denverin denver in colorado and i think they took a 20in colorado and i think they took a 20in colorado and i think they took a 20 or 30or 30or 30 stake in chipotle and thenstake in chipotle and thenstake in chipotle and then later mcdonald's felt that it was alater mcdonald's felt that it was a
Questionerlater mcdonald's felt that it was a distraction for them to own this business so chipotle had grown a lot it had gone from 20 30 stores to a few hundred stores mcdonald's had done really well with investment they could clearly see that there was a long runway ahead but they felt it was a distraction so they divested that stake and of course chipotle has been a major home run for them so mcdonald's kind of is you can say the kind of company where they from a dna perspective are all in on the mcdonald's brand and they have innovated they've innovated inside mcdonald's so for example breakfast for the innovation drive-through was an innovation uh the the big back was a big innovation you know the mcmuffin and most of the most of these innovations came from their franchisees but but mcdonald's basically is a company that is not it's kind of you can say the
Questionerthat is not it's kind of you can say the opposite of opposite of opposite of alibaba or an amazon they don't do very well well well having multiple brands or businesses having multiple brands or businesses having multiple brands or businesses they just want to be they just want to be they just want to be all in on mcdonald's and do that really all in on mcdonald's and do that really all in on mcdonald's and do that really well and that works well for them so well and that works well for them so well and that works well for them so they're they're they're classically a non-spawner another one is classically a non-spawner another one is classically a non-spawner another one is ford ford ford so ford had many many years ago invested so ford had many many years ago invested so ford had many many years ago invested and bought and bought and bought land rover and jaguar and then when land rover and jaguar and then when land rover and jaguar and then when alan mulally came in as the ceo he felt alan mulally came in as the ceo he felt alan mulally came in as the ceo he felt traction because traction because traction because he noticed that most of the ford he noticed that most of the ford he noticed that most of the ford executives were driving executives were driving executives were driving land rovers and jaguars and not really land rovers and jaguars and not really land rovers and jaguars and not really driving ford cars driving ford cars driving ford cars because they were getting employee because they were getting employee because they were getting employee discounts on all the brands so discounts on all the brands so discounts on all the brands so he really wanted to focus only on the he really wanted to focus only on the he really wanted to focus only on the ford band so in 2009 ford band so in 2009 ford band so in 2009 he got rid of these two uh companies and he got rid of these two uh companies and he got rid of these two uh companies and actually they're decent companies they actually they're decent companies they actually they're decent companies they have have have very strong brands built over very strong brands built over very strong brands built over probably you know closer deck uh you probably you know closer deck uh you probably you know closer deck uh you know a century or more know a century or more know a century or more and uh so there's so most businesses
Todd Combsand uh so there's so most businesses are not good at spawning and in fact are not good at spawning and in fact are not good at spawning and in fact these are two examples of businesses these are two examples of businesses these are two examples of businesses that actually got rid of what would have been adjacent businesses been adjacent businesses been adjacent businesses uh just because they they felt it was a uh just because they they felt it was a uh just because they they felt it was a distraction some other examples of non-spawners some other examples of non-spawners some other examples of non-spawners costco is a great example of a non-spot costco is a great example of a non-spot costco is a great example of a non-spot it executes really well i mean if you it executes really well i mean if you it executes really well i mean if you compare compare compare costco to walmart walmart has spawned costco to walmart walmart has spawned costco to walmart walmart has spawned quite a bit they have quite a bit they have quite a bit they have a number of formats of stores and a number of formats of stores and a number of formats of stores and operations globally and they have a operations globally and they have a operations globally and they have a number of formats even in the u.s number of formats even in the u.s number of formats even in the u.s multi is also you can say very multi is also you can say very multi is also you can say very singularly focused singularly focused singularly focused in and around the core multi brand and in and around the core multi brand and in and around the core multi brand and and such so one of the things that spawning does one of the things that spawning does one of the things that spawning does which which which makes it very good from our investing makes it very good from our investing makes it very good from our investing point of view point of view point of view is capitalism is very brutal is capitalism is very brutal is capitalism is very brutal so every company so every company so every company is eventually going to die it's just the is eventually going to die it's just the is eventually going to die it's just the nature of capitalism nature of capitalism nature of capitalism even the strongest businesses there will even the strongest businesses there will even the strongest businesses there will come a time when
Questionercome a time when come a time when alibaba will not be around amazon will alibaba will not be around amazon will alibaba will not be around amazon will not be around not be around not be around because if you just study the history of because if you just study the history of because if you just study the history of businesses that were dominant 50 years businesses that were dominant 50 years businesses that were dominant 50 years ago 100 years ago ago 100 years ago ago 100 years ago they're not with us today ge and ibm they're not with us today ge and ibm they're not with us today ge and ibm were good strong spawners were good strong spawners were good strong spawners if they had not done spawning they would if they had not done spawning they would if they had not done spawning they would have died a long time ago so spawning have died a long time ago so spawning have died a long time ago so spawning extended the runway of these companies extended the runway of these companies extended the runway of these companies microsoft microsoft microsoft originally was just making compilers you originally was just making compilers you originally was just making compilers you know they had a know they had a know they had a basic compiler they were a compiler basic compiler they were a compiler basic compiler they were a compiler company from there they went into company from there they went into company from there they went into becoming a operating system company they becoming a operating system company they becoming a operating system company they actually actually actually bought the company that became ms-dos bought the company that became ms-dos bought the company that became ms-dos and it would just be a shadow itself and it would just be a shadow itself and it would just be a shadow itself without spawning because all these without spawning because all these without spawning because all these things that they've done things that they've done things that they've done is all add-ons to the core business is all add-ons to the core business is all add-ons to the core business and so spawning basically keeps the and so spawning basically keeps the and so spawning basically keeps the mothership young and healthy mothership young and healthy mothership young and healthy so it has a lot of advantages including so it has a lot of advantages including so it has a lot of advantages including i already told you about the tax
Questioneri already told you about the taxi already told you about the tax advantagesadvantagesadvantages some rules on spawningsome rules on spawningsome rules on spawning investing is that uhinvesting is that uhinvesting is that uh you can probably study these statisticsyou can probably study these statisticsyou can probably study these statistics in china but if you look if i look atin china but if you look if i look atin china but if you look if i look at thethethe united states in the last 20 yearsunited states in the last 20 yearsunited states in the last 20 years there were 3 700 ipos in the u.s in thethere were 3 700 ipos in the u.s in thethere were 3 700 ipos in the u.s in the last 20 yearslast 20 yearslast 20 years only nine businesses with an ipo in theonly nine businesses with an ipo in theonly nine businesses with an ipo in the last 20 yearslast 20 yearslast 20 years have exceeded 100 million market cap nowhave exceeded 100 million market cap nowhave exceeded 100 million market cap now if you just make a simple assumptionif you just make a simple assumptionif you just make a simple assumption that a business that you invest inthat a business that you invest inthat a business that you invest in will never get to more than a 50 billionwill never get to more than a 50 billionwill never get to more than a 50 billion market capmarket capmarket cap if you just made that assumption thenif you just made that assumption thenif you just made that assumption then by inversion you get a couple ofby inversion you get a couple ofby inversion you get a couple of rules so if you want a 10 baggerrules so if you want a 10 baggerrules so if you want a 10 bagger you know 10 times your money out ofyou know 10 times your money out ofyou know 10 times your money out of business it means you can't really buy abusiness it means you can't really buy abusiness it means you can't really buy a business which is more than a 5 billionbusiness which is more than a 5 billionbusiness which is more than a 5 billion market capmarket capmarket cap and if you want to buy a hundred baggerand if you want to buy a hundred baggerand if you want to buy a hundred bagger then you really can't buy a businessthen you really can't buy a businessthen you really can't buy a business that has more than athat has more than athat has more than a 500 million market cap500 million market cap500 million market cap important thing with these 100 baggers
Questionerimportant thing with these 100 baggers and 10 baggers so if you look at any public company or most public companies pretty much around the world almost all of them have been hundred baggers at some point most of the hundred bagger is usually captured while they were still private so once they come public they may not be small enough where they can go 100 times but so the the earlier you can get to these businesses the more likely it is that you can get to 10 times your money or 100 times your money so if we if we look at a business like alibaba today you know 800 billion market value can alibaba be a 100 bagger in 20 years anything is possible but it is probably unlikely because you're you're talking about something like 80 trillion dollars it's a it's a really large large number and we don't even have businesses anywhere in the world that are more than three trillion dollars
Questionerthree trillion dollars so or even much more than two trillion dollars so catching multibaggers early is important but also you have to remember that the earlier you go in a company's life the wider the range of outcomes so if i invest in a multi today the path is relatively narrow in terms of outcomes but if i go into a very early stage business the range can be quite wide so there's an art and science here in terms of making sure you have enough traction so my rules you know what i call the pobre spawning rules which i just came up with a few days ago is make an assumption that no business you invest in will ever exceed a 50 billion market cap and so if you want to make 10 times your money you're going to buy below 5 billion if you want to make more than 100 times your money you got to buy below 500 million what i found about spawning is that
Otherwhat i found about spawning is that spawning is not a trait that you can easily screen for automatically so you can run a scheme for low pe you can run a screen for low price to book you can run a screen for a lot of quantitative metrics about a company it is generally at least from what i have found it's not obvious what business is a spawner or is not a spawner until you spend at least a little bit of time looking at the business and and once you look at the business with a little bit more detail then you can get to the nature of the spawning are they a non-spawner or are they a spawner and if they are spawner how long a spawner are they okay does it have strong spawning dna or not one of the things i want to get to in my portfolio eventually is a portfolio that is only spawners and ideally a portfolio that is only
Questionerand ideally a portfolio that is only apex spawners and ideally a portfolioapex spawners and ideally a portfolioapex spawners and ideally a portfolio which iswhich iswhich is only apex spawners where every companyonly apex spawners where every companyonly apex spawners where every company in the portfolio is 100 million marketin the portfolio is 100 million marketin the portfolio is 100 million market capcapcap that to me would be the holy grail so wethat to me would be the holy grail so wethat to me would be the holy grail so we have to look at does it have stronghave to look at does it have stronghave to look at does it have strong spawning dnaspawning dnaspawning dna does it have a great capital allocatordoes it have a great capital allocatordoes it have a great capital allocator running itrunning itrunning it and the what i found about spawning isand the what i found about spawning isand the what i found about spawning is that you don't need to make heroicthat you don't need to make heroicthat you don't need to make heroic assumptions even a 500 million or 300assumptions even a 500 million or 300assumptions even a 500 million or 300 million dollar businessmillion dollar businessmillion dollar business will have enough trademarks in the pastwill have enough trademarks in the pastwill have enough trademarks in the past from the time they were private and whenfrom the time they were private and whenfrom the time they were private and when they were public which will make itthey were public which will make itthey were public which will make it obvious to youobvious to youobvious to you that this company has spawning dna orthat this company has spawning dna orthat this company has spawning dna or doesn't have spawning dnadoesn't have spawning dnadoesn't have spawning dna and the nature of that dna and soand the nature of that dna and soand the nature of that dna and so three businesses in the portfoliothree businesses in the portfoliothree businesses in the portfolio that were great spawners and they are ithat were great spawners and they are ithat were great spawners and they are i think they are allthink they are allthink they are all below yeah they're all below a billionbelow yeah they're all below a billionbelow yeah they're all below a billion market cap and then recently i found amarket cap and then recently i found amarket cap and then recently i found a fourth one
Questionerfourth one which is below 400 million and strong spawning dna and a very long history so you could easily tell uh what's been going on in that business and of course the hunt is on to find more of these and one of the reasons i'm speaking to picking you is my email address is on this presentation the last slide please send me spawners i am desperate for spawners okay so set it and forget it so that's really what we want to do we want to get to you know a portfolio maybe of five to ten spawners i love this quote by thomas phelps and i'm probably guilty of making a lot of errors he says for an individual institution really out to make a fortune in the stock market it can be argued every sale is a confession of error so actually we are if we are doing our jobs right what we really want to do is we want to become silent minority partners
Othersilent minority partners with jack ma or with sam walton or with jeff bezos we want to find these people we want to find them early and then we want to ride with them as long as they are riding and and that is the holy grail and then my friend nick sleep i i love this quote and this is a quote nick put in his last email to me which is a few weeks ago he said that truly brilliant investors weren't investors they were entrepreneurs that didn't sell and he brought up sam walton in this quote in fact one of the things i would encourage i would encourage a professor to do is to see if you can get nick's sleep to speak to you guys so nick sleep ran the nomad investment partnership the nomad investment partnership i think in 2013 they were managing about three billion dollars and the entire portfolio probably 90 plus percent of it was in three stocks it was in amazon
Questionerwas in three stocks it was in amazon costco and berkshire hathawaycostco and berkshire hathawaycostco and berkshire hathaway and probably 70and probably 70and probably 70 of the portfolio maybe 60 or 70 of theof the portfolio maybe 60 or 70 of theof the portfolio maybe 60 or 70 of the portfolio was amazonportfolio was amazonportfolio was amazon and if you look at 2013 i think at thatand if you look at 2013 i think at thatand if you look at 2013 i think at that time amazon wastime amazon wastime amazon was i think around 300 a sharei think around 300 a sharei think around 300 a share so nick wrote to his investorsso nick wrote to his investorsso nick wrote to his investors in early 2014 that he was shutting hisin early 2014 that he was shutting hisin early 2014 that he was shutting his partnershippartnershippartnership and he said look we own three stocks tenand he said look we own three stocks tenand he said look we own three stocks ten years from nowyears from nowyears from now we will own these exact same threewe will own these exact same threewe will own these exact same three stocksstocksstocks uh my partner zach and i are not goinguh my partner zach and i are not goinguh my partner zach and i are not going to make any decisions or sell anythingto make any decisions or sell anythingto make any decisions or sell anything or buy anything by selling any of theseor buy anything by selling any of theseor buy anything by selling any of these three possessionsthree possessionsthree possessions and we quite frankly don't want to sitand we quite frankly don't want to sitand we quite frankly don't want to sit here and write letters to you for thehere and write letters to you for thehere and write letters to you for the next 10 years so what we're doing isnext 10 years so what we're doing isnext 10 years so what we're doing is we're we'rewe're we'rewe're we're shutting the partnership we're returningshutting the partnership we're returningshutting the partnership we're returning all your moneyall your moneyall your money and we recommend to you that you justand we recommend to you that you justand we recommend to you that you just put the money in the three stocksput the money in the three stocksput the money in the three stocks and don't pay any fees to anyoneand don't pay any fees to anyoneand don't pay any fees to anyone and um my guess is both of them nick and
Otherand um my guess is both of them nick and zachzachzach probably had i don't knowprobably had i don't knowprobably had i don't know let's say a couple of hundred millionlet's say a couple of hundred millionlet's say a couple of hundred million each that they had madeeach that they had madeeach that they had made as uh you know with the carry and allas uh you know with the carry and allas uh you know with the carry and all thatthatthat and um when they when they shut downand um when they when they shut downand um when they when they shut down nomadnomadnomad i think that's how that couple hundredi think that's how that couple hundredi think that's how that couple hundred millionmillionmillion was invested it was in these threewas invested it was in these threewas invested it was in these three stocksstocksstocks it's mostly still sitting in these threeit's mostly still sitting in these threeit's mostly still sitting in these three stocks and umstocks and umstocks and um you can just calculate how well they'veyou can just calculate how well they'veyou can just calculate how well they've done they've probably beaten everydone they've probably beaten everydone they've probably beaten every professional manager out there sinceprofessional manager out there sinceprofessional manager out there since thenand so an entire portfolio composed ofand so an entire portfolio composed ofand so an entire portfolio composed of five to ten great spawnersfive to ten great spawnersfive to ten great spawners bought at reasonable prices likely to dobought at reasonable prices likely to dobought at reasonable prices likely to do very wellvery wellvery well you can't i told you you can't easilyyou can't i told you you can't easilyyou can't i told you you can't easily screen for spawners quantitativelyscreen for spawners quantitativelyscreen for spawners quantitatively but then like like buffett says whybut then like like buffett says whybut then like like buffett says why should it be easy to get richshould it be easy to get richshould it be easy to get rich it's worth the effort and not all willit's worth the effort and not all willit's worth the effort and not all will get to nirvana but this approach canget to nirvana but this approach canget to nirvana but this approach can handle several nudgehandle several nudgehandle several nudge so if you look at nick sleeps threeso if you look at nick sleeps three
Questionerso if you look at nick sleeps three positionspositionspositions uh berkshire hathaway costco and amazonuh berkshire hathaway costco and amazonuh berkshire hathaway costco and amazon berkshire actually has underperformedberkshire actually has underperformedberkshire actually has underperformed the s p 500the s p 500the s p 500 for for quite a while uh costcofor for quite a while uh costcofor for quite a while uh costco has probably done maybe a little bithas probably done maybe a little bithas probably done maybe a little bit better butbetter butbetter but nothing to you know get overly excitednothing to you know get overly excitednothing to you know get overly excited aboutaboutabout but amazon was the one that really blewbut amazon was the one that really blewbut amazon was the one that really blew the doors offthe doors offthe doors off so when you have a portfolio of spawnersso when you have a portfolio of spawnersso when you have a portfolio of spawners maybe five to ten spawnersyou would you could you could do reallyyou would you could you could do reallyyou would you could you could do really wellwellwell with just a couple of them hitting homewith just a couple of them hitting homewith just a couple of them hitting home runs soruns soruns so this is an approach that can toleratethis is an approach that can toleratethis is an approach that can tolerate more than a few dads and and actuallymore than a few dads and and actuallymore than a few dads and and actually it's it'sit's it'sit's it's relatively easy to avoid the touchrelatively easy to avoid the touchrelatively easy to avoid the touch because you can look at the track recordso then the question comes up you knowso then the question comes up you knowso then the question comes up you know when to get off the buswhen to get off the buswhen to get off the bus and i love this quote by charlie theand i love this quote by charlie theand i love this quote by charlie the first rule of compoundingfirst rule of compoundingfirst rule of compounding is to never interruptis to never interruptis to never interrupt so don't exitso don't exitso don't exit until it is absolutely clear that auntil it is absolutely clear that auntil it is absolutely clear that a secular decline has started sosecular decline has started sosecular decline has started so so business does not go up in a straightso business does not go up in a straight
Questionerso business does not go up in a straight line they are going to be ups and downs ignore these temporary headwinds but when you are when you have absolute clarity that the business is in a secular decline you can exit and even if you give up 50 you sell at 50 from the peak because it would take a while for the for the market and you to figure out that there's a problem here uh because you've had such a long run for such a long time it doesn't matter the return is still going to be good so if you if you find a long runway and you are a little late at getting off and you are a little late at getting off the bus it is not going to be a problem the important thing is not get off the bus for a temporary hiccup and a quick quick uh word on conglomerate so you know in in korea and japan we have the chables and the kiritsus and these actually were incredible spawners but they're a little bit different in the sense that
Otherdifferent in the sense that they were given a lot of government help they were given a lot of government help they were given a lot of government help and they were given and they were given and they were given a lot of almost almost a lot of almost almost a lot of almost almost assured of success because imports were assured of success because imports were assured of success because imports were restricted licenses to competitors were restricted licenses to competitors were restricted licenses to competitors were restricted so they are a different kind of a spawner but they've done really well a spawner but they've done really well a spawner but they've done really well and if you invested in these and if you invested in these and if you invested in these businesses early in their life like businesses early in their life like businesses early in their life like if you bought into the chair balls in if you bought into the chair balls in if you bought into the chair balls in the 1980s the 1980s the 1980s or you bought in the kiritsu's in the or you bought in the kiritsu's in the or you bought in the kiritsu's in the 1970s you would have done extremely well 1970s you would have done extremely well 1970s you would have done extremely well and mature conglomerate different and mature conglomerate different and mature conglomerate different because pretty scaled and it's unlikely because pretty scaled and it's unlikely because pretty scaled and it's unlikely to be 100x from to be 100x from to be 100x from where they're at and then you know we where they're at and then you know we where they're at and then you know we also have a lot of fake spawners also have a lot of fake spawners also have a lot of fake spawners or spawners who lose their way right you or spawners who lose their way right you or spawners who lose their way right you know ge and ibm know ge and ibm know ge and ibm are two examples of companies that are two examples of companies that are two examples of companies that actually actually actually survived for more than 100 years survived for more than 100 years survived for more than 100 years but then lost their way and but then lost their way and but then lost their way and i i had 200 baggers i i had 200 baggers i i had 200 baggers in the 1990s uh cmgi was one which is in in the 1990s uh cmgi was one which is in in the 1990s uh cmgi was one which is in the us and satyam was in india
Charliethe us and satyam was in india they are both what i would call fake spoilers so i was lucky that i was able to get off the bus um close to the peak in both of them uh but cmgi for example was more than 100x but then uh you know they were spawning.coms and eventually almost nothing works in the company disappeared satyam actually had a real business and then they built a com on top of it so it would have been about a 25 x for me if i had collected what was truly owed to me but i got more than a 140 x because there was euphoria and then we had a bunch of fake spawners in the 99 2000 time plane like internet capital group idea lab safeguard scientific so you have to make sure that the spawners you're going into are not fake they're they're real and uh that they have some staying power and pretty much every public company was or will be a 100 bagger i already told you this
Questioner100 bagger i already told you this walmart has already given the walton cam family more than 100 for the 70 i it gave them another 20 000 x after the ipo so there was a long runway there you could have gotten on that bus for a long time that's an unusual spawner companies like uber etc are unlikely to deliver 100x post ipo because it came public at 50 billion so you would need to get to five trillion uh which i would be skeptical about and um that's the song and dance and uh you see my email address there to send me the spawners and uh i think we can uh open up two questions
Questionerthank you thank you uh very great insights about the spawners mr pepper uh you mentioned that by looking at the histories one can find clues about whether a company has the dna of spelling so my question here is according to your experiences you know how long on average it takes
Questionerhow long on average it takes to you know to discover that a company at its early stage that has this kind of dna
Questionerokay that's a good question it will vary it'll vary by company but uh but what i have found is that you know some of these companies that i have i have found i've invested in they were founded maybe more than 20 years ago and they were maybe like i think i think one in in japan and i won't name these because i'm still buying them but uh but i think the one in japan was founded in 1985 and i think they went public around 2003 uh the founder was 25 years old when he started the company and now he's uh 55 and and now he's uh 55 and he's a young 55 and the business is very he's a young 55 and the business is very non-japanese non-japanese in the way it runs and the kind of things he's done he's an innovative guy things he's done he's an innovative guy and so there's a very long history there and so there's a very long history there i mean there's a 30-year history that i could look at in
Questioner30-year history that i could look at in that businessthat businessthat business and it's very obvious that spawning isand it's very obvious that spawning isand it's very obvious that spawning is very corevery corevery core to uh to the dna so i think that whatto uh to the dna so i think that whatto uh to the dna so i think that what you can doyou can doyou can do is you can say that if you do notis you can say that if you do notis you can say that if you do not obviously see spawning in the dna of theobviously see spawning in the dna of theobviously see spawning in the dna of the business and it doesn't need to be a 30business and it doesn't need to be a 30business and it doesn't need to be a 30 year old businessyear old businessyear old business it can be obvious in 10 years it canit can be obvious in 10 years it canit can be obvious in 10 years it can even be obvious in five years it's youeven be obvious in five years it's youeven be obvious in five years it's you know justknow justknow just some businesses are you can see thatsome businesses are you can see thatsome businesses are you can see that relatively quicklyrelatively quicklyrelatively quickly but i would just say that if you if youbut i would just say that if you if youbut i would just say that if you if you said that i'msaid that i'msaid that i'm going to have a portfolio which is onlygoing to have a portfolio which is onlygoing to have a portfolio which is only a spawner portfolioa spawner portfolioa spawner portfolio and i'm only going to invest when it'sand i'm only going to invest when it'sand i'm only going to invest when it's very obviousvery obviousvery obvious to me that they have great spawning dnato me that they have great spawning dnato me that they have great spawning dna and i also put a you knowand i also put a you knowand i also put a you know upper limit on the market cap you willupper limit on the market cap you willupper limit on the market cap you will find thingsfind thingsfind things uh you know there's auh you know there's auh you know there's a there's a quote from the uh upanishadsthere's a quote from the uh upanishadsthere's a quote from the uh upanishads so the upanishads are uh theseso the upanishads are uh theseso the upanishads are uh these holy scripture books in india which areholy scripture books in india which areholy scripture books in india which are probably written about 3 000 years ago
Otherprobably written about 3 000 years agoprobably written about 3 000 years ago and let me just think if i can uhso the full quote is as is your wishso the full quote is as is your wishso the full quote is as is your wish so is your will and as is yourso is your will and as is yourso is your will and as is your will so is your deedwill so is your deedwill so is your deed no will so is your desireno will so is your desireno will so is your desire and as is your desire so is your deedand as is your desire so is your deedand as is your desire so is your deed and then the punch line your deepestand then the punch line your deepestand then the punch line your deepest desiredesiredesire is your destiny sois your destiny sois your destiny so if you truly want somethingif you truly want somethingif you truly want something you know like you are in love with someyou know like you are in love with someyou know like you are in love with some girlgirlgirl and she doesn't care about you but ifand she doesn't care about you but ifand she doesn't care about you but if you truly want that personyou truly want that personyou truly want that person and you purely and totally focus on thatand you purely and totally focus on thatand you purely and totally focus on that it will happen okay soit will happen okay soit will happen okay so so the same thing with with these theso the same thing with with these theso the same thing with with these the the hunt for spawners if you say thatthe hunt for spawners if you say thatthe hunt for spawners if you say that it has to fit the following criteriait has to fit the following criteriait has to fit the following criteria there are 50 000 stocks globally youthere are 50 000 stocks globally youthere are 50 000 stocks globally you know thousands in chinaknow thousands in chinaknow thousands in china and so if you just you knowand so if you just you knowand so if you just you know systematically go throughsystematically go throughsystematically go through that you only need if you can only findthat you only need if you can only findthat you only need if you can only find one in a year that's enoughone in a year that's enoughone in a year that's enough you know one a year is good so you don'tyou know one a year is good so you don'tyou know one a year is good so you don't need too many soneed too many soneed too many so you have so much time to find one
Questioneryou have so much time to find one and then that's okay okay thank you thanks for the great presentation that was a really interesting perspective um what helps you identify spawners apart from their say m a and their spawning history for example is management an important factor that you look at and how how do i do you identify a good management that might turn the company into a spawner for example for amazon probably to having jeff pieces as a ceo was pretty important for the company to turn into into a spawner
Otheryeah so so far in work is for me it's a very new framework you know it's just a few weeks old probably the framework is still evolving you know and in fact you are the guinea pigs i want to test the framework with so that's good what i have found so far is historically when i looked at businesses so let's let's take a business like google
Questionergooglegoogle okay uh alphabet so alphabet when theyokay uh alphabet so alphabet when theyokay uh alphabet so alphabet when they release their financials the quarterlyrelease their financials the quarterlyrelease their financials the quarterly results of theirresults of theirresults of their annual report they talk about other betsannual report they talk about other betsannual report they talk about other bets okay so they have a section called otherokay so they have a section called otherokay so they have a section called other bats andbats andbats and they make all these investments in thesethey make all these investments in thesethey make all these investments in these other beds okayother beds okayother beds okay historically when i looked at a businesshistorically when i looked at a businesshistorically when i looked at a business like like alphabetlike like alphabetlike like alphabet i would just take the other bets andi would just take the other bets andi would just take the other bets and ascribe a zero value to themascribe a zero value to themascribe a zero value to them okay because i would say who knowsokay because i would say who knowsokay because i would say who knows what's going to happen over here so iwhat's going to happen over here so iwhat's going to happen over here so i would saywould saywould say well i i would say that let's put itwell i i would say that let's put itwell i i would say that let's put it this way it was maybe not an explicitthis way it was maybe not an explicitthis way it was maybe not an explicit value assigned to it but i said okayvalue assigned to it but i said okayvalue assigned to it but i said okay this is upside without downside so ithis is upside without downside so ithis is upside without downside so i just say okay it's good to have thatjust say okay it's good to have thatjust say okay it's good to have that but i really can't right because thesebut i really can't right because thesebut i really can't right because these are two embryonic and who knows what'sare two embryonic and who knows what'sare two embryonic and who knows what's going to happen with these thingsgoing to happen with these thingsgoing to happen with these things now when i look at alphabet i don't looknow when i look at alphabet i don't looknow when i look at alphabet i don't look at it that wayat it that wayat it that way it becomes very clear when i look at a
Otherit becomes very clear when i look at a company like alphabet it's a spawner very clear okay there's no ambiguity about it not only do i know it's a spawner i can tell which categories of spawner they are right i can see have they bought embryos and grown them have they you know created businesses of their own which are very different so google started with only search right and then they bought you know android was not created by google android was bought and then they scaled android right and youtube was bought and they scaled youtube so some things they have grown in-house and some things they have bought and scaled so you can clearly look at the categories of what they've done and now you can say okay it's very obvious alphabet is an apex spawner it's very obvious you can say that about alibaba very obvious 10 cent baidu you can say it
Questionerobvious 10 cent baidu you can say it about all of them about all of them about all of them so these are very obvious because now so these are very obvious because now so these are very obvious because now once you have the framework once you have the framework once you have the framework you can put the categories and you're you can put the categories and you're you can put the categories and you're done right but what is also useful is done right but what is also useful is done right but what is also useful is when you look at smaller businesses when you look at smaller businesses when you look at smaller businesses so some of you may have heard or heard so some of you may have heard or heard so some of you may have heard or heard of chamat of chamat of chamat you know with uh with his whatever you know with uh with his whatever you know with uh with his whatever million followers whatever he has on million followers whatever he has on million followers whatever he has on twitter twitter twitter so chamath is spawning so chamath is spawning so chamath is spawning spacks right the special purpose spacks right the special purpose spacks right the special purpose acquisition companies right acquisition companies right acquisition companies right and what he's saying is that he has one and what he's saying is that he has one and what he's saying is that he has one for every letter of the alphabet for every letter of the alphabet for every letter of the alphabet so i was looking yesterday at a company so i was looking yesterday at a company so i was looking yesterday at a company with the the with the the with the the ticker symbol is ipob okay ticker symbol is ipob okay ticker symbol is ipob okay he has ipo a ipo b ipoc these are all he has ipo a ipo b ipoc these are all he has ipo a ipo b ipoc these are all public companies public companies public companies and he said they will go all the way to and he said they will go all the way to and he said they will go all the way to ipo z ipo z ipo z okay it's very obvious okay it's very obvious okay it's very obvious that chamath is a spawner now the that chamath is a spawner now the that chamath is a spawner now the problem is there's no mothership problem is there's no mothership problem is there's no mothership right i mean i want to invest in the right i mean i want to invest in the right i mean i want to invest in the mothership right mothership right mothership right chamath i want to invest directly with
Questionerchamath i want to invest directly with him not the not ipob because i don't know ipob will make it or not so chamath is going to do really well because he's he's getting these packs going probably more than half or two thirds of them may not work but we don't need a large number of them to work because they're going into such high potential areas like for example ipob is a company the name is open door and they are doing something which i'm not sure whether it will work or not they are basically tend to disrupt the way homes are bought and sold in the u.s so instead of me listing a home for sale they'll just come and say i'll give you the cash today and you're done you don't have to you know have buyers come and look at your home and disrupt your life and all of that will give you five percent less than the market price but you don't deal anything and you're
Questionerbut you don't deal anything and you're done in you know three days so and they're they're able to do billions of dollars worth of home purchases doing this now i don't know whether this business eventually works or doesn't work but it's one of his bets right so i think it becomes easy relatively easy to once you have in the past i did not have the spawner framework so when i didn't have the spawner framework i would just look at like google other bets and just say oh we don't know now i know that if the company has spawn or dna like google if google was less than a 500 million market cap or even a 5 billion market cap i'd want to invest in that because i can say that it's in their dna i mean they're giving one day a year to employees to do whatever they want it's in their dna to create new businesses right so so i think it becomes very obvious when
Questionerso i think it becomes very obvious when you look at a lot of companies with that framework in mind you can tell it's obvious that they are a spawner or they're not a spawner
Questionerokay thanks a lot and perhaps a quick follow-up for long question if that's fine
Questionerso how do you then evaluate that spawning part of the business how would you evaluate google's extra bets because i guess doing a discounted cash flow is pretty difficult on that because
Questionerso i would say i would say you you can't you still can't value it but what you would be willing to do is pay more for the rest of the business
Questionerokay
Questionerso previously i would have taken an approach saying other bets are zero i want it for free i'm not paying for it
Questionernow that i understand the dna is like that i'm willing to pay something for the dna
Questionerokay that makes sense so you make it normal
Questionerso you can say that okay let's say the
Questionerso you can say that okay let's say the business has a value of business has a value of business has a value of for example pieces that you can value for example pieces that you can value for example pieces that you can value and and and this other bets would be zero you might this other bets would be zero you might this other bets would be zero you might say i'll give them 510 billion for that say i'll give them 510 billion for that say i'll give them 510 billion for that other piece you know because uh zero other piece you know because uh zero other piece you know because uh zero might be too extreme might be too extreme might be too extreme
Otherokay that makes sense thanks a lot hi mr pablo pablo pablo and thank you for your sharing i think and thank you for your sharing i think and thank you for your sharing i think that he is really that he is really that he is really knowing who is a spawner and who is a knowing who is a spawner and who is a knowing who is a spawner and who is a fake one fake one fake one early on and in your research what is early on and in your research what is early on and in your research what is the the the common like cultural or management style common like cultural or management style common like cultural or management style that you found among the successful that you found among the successful that you found among the successful spawners spawners spawners and can you give us you know you listed and can you give us you know you listed and can you give us you know you listed a few companies but can you give us a a few companies but can you give us a a few companies but can you give us a company that you thought was a spawner company that you thought was a spawner company that you thought was a spawner at the beginning but over time you found at the beginning but over time you found at the beginning but over time you found that it was actually not that it was actually not that it was actually not
Questionerwell um so i actually invested well um so i actually invested well um so i actually invested in a a fake spawner in a a fake spawner in a a fake spawner in i think 1995 right and now in i think 1995 right and now in i think 1995 right and now the end result was i made 140 times my the end result was i made 140 times my the end result was i made 140 times my money money money on uh i'm not done that was 100x it was on uh i'm not done that was 100x it was
Questioneron uh i'm not done that was 100x it was 100 times the money i made100 times the money i made100 times the money i made i put 100 000 i got 10 million out andi put 100 000 i got 10 million out andi put 100 000 i got 10 million out and then afterthen afterthen after you know god loves me because after iyou know god loves me because after iyou know god loves me because after i sold the stocksold the stocksold the stock it crashed and burned not before whichit crashed and burned not before whichit crashed and burned not before which was great butwas great butwas great but so cmgi was a business whichso cmgi was a business whichso cmgi was a business which was an internet incubatorwas an internet incubatorwas an internet incubator so in 99 in that timeso in 99 in that timeso in 99 in that time frame there were a number of businessesframe there were a number of businessesframe there were a number of businesses created which were allcreated which were allcreated which were all internet incubators so idealab was oneinternet incubators so idealab was oneinternet incubators so idealab was one safeguard scientific was another onesafeguard scientific was another onesafeguard scientific was another one cmgi was another one internet capitalcmgi was another one internet capitalcmgi was another one internet capital group was another onegroup was another onegroup was another one there were a bunch of these and a numberthere were a bunch of these and a numberthere were a bunch of these and a number of these were public companiesof these were public companiesof these were public companies and i because i was in the it businessand i because i was in the it businessand i because i was in the it business i was you can say i was like two stepsi was you can say i was like two stepsi was you can say i was like two steps aheadaheadahead of the rest of the market not very farof the rest of the market not very farof the rest of the market not very far ahead just a little bit aheadahead just a little bit aheadahead just a little bit ahead and so i could see that the internetand so i could see that the internetand so i could see that the internet i mean i remember in i think it was ini mean i remember in i think it was ini mean i remember in i think it was in 93 or 9493 or 9493 or 94 that i saw whitehouse.govthat i saw whitehouse.govthat i saw whitehouse.gov the first website i ever saw was like in
Questionerthe first website i ever saw was like in 939393 white.gov and i was just getting you know looking at the world wide web and all that at that time and i could see that this thing would could be transformational so at that time i was saying okay you know i know the internet will be big i have no idea who the winners are going to be so what if i invest in a company that just keeps spawning these companies right and we don't need a high hit rate and if you're paying very little for the mothership so at the time i invested in cmgi i was not paying much more than cash for the business it was it was not really understood by the market and as they started you know creating these dot coms which eventually didn't go anywhere the market got very excited about about these businesses just like they're excited now about these facts for example right
Otherexample right and those packs may have legs we don't know we'll see uh how it goes and and then later the valuations became so extreme that i just felt that this is in bubble territory now this is i couldn't still tell in in 2000 whether their businesses were make it or not i just felt that the valuation was ridiculous and so i got off the bus so i think it's it may not always i mean i think if you are if you are riding curves and especially if you're riding flavor of the day curves um it may be hard to be able to tell uh which one is a fake and which one is not a fake like like for example you know the year 2020 is the year of the stack you know everyone has a stack you know and and so clearly there is when you have that type of stuff happening it's likely that there is a bubble there it's likely that a lot of those will not
Questionerit's likely that a lot of those will not go anywhere but it also could be possible that if you could find a way to invest in the ships like i would like to invest in chamath if i can find a way to do it cheaply not the space he is creating but directly him without paying high premium that would be interesting so i think i think uh what what you can do if you want to make sure that you avoid the fake ones is don't take flyers on these things where you can't tell so you know set a high bar saying it has to be obvious it's not fake and for example i have these four investments in these four spawners i don't think any of them are fake because they have such a long history so we'll see but i don't know how many of them will actually go to 10x or 100x we'll have to see what happens there i'm pretty sure at least one or two of them will get there sorry
Questionerone or two of them will get there sorry andandand for these four companies that you ownfor these four companies that you ownfor these four companies that you own the spawnersthe spawnersthe spawners um what would you say is the commonum what would you say is the commonum what would you say is the common factor you know commonality among thefactor you know commonality among thefactor you know commonality among the managementmanagementmanagement staff you know like philosophy or theirstaff you know like philosophy or theirstaff you know like philosophy or their management style thatmanagement style thatmanagement style that makes you believe that yeah so the themakes you believe that yeah so the themakes you believe that yeah so the the
Ted Weschlercommon element across all of them iscommon element across all of them iscommon element across all of them is thatthatthat there is a long history that i couldthere is a long history that i couldthere is a long history that i could study about the managementstudy about the managementstudy about the management i could look at their behavior andi could look at their behavior andi could look at their behavior and what they have actually executed over awhat they have actually executed over awhat they have actually executed over a very long period of timevery long period of timevery long period of time i think in the case of the japanesei think in the case of the japanesei think in the case of the japanese company i could see 30 yearscompany i could see 30 yearscompany i could see 30 years some of the other companies i'm able tosome of the other companies i'm able tosome of the other companies i'm able to see well let me just start to think yeahsee well let me just start to think yeahsee well let me just start to think yeah so yeahso yeahso yeah at least at least 10 15 years of historyat least at least 10 15 years of historyat least at least 10 15 years of history which which is a lot towhich which is a lot towhich which is a lot to gives you a lot of data on that so uhgives you a lot of data on that so uhgives you a lot of data on that so uh it's it becomes obvious i think i thinkit's it becomes obvious i think i thinkit's it becomes obvious i think i think as long as a businessas long as a businessas long as a business has if the business doesn't have morehas if the business doesn't have morehas if the business doesn't have more than five or ten years of history
Otherthan five or ten years of history then you have to be able to get that level of history on the ceo or leader you know what they've done in the past you have to have at least that you mean you need to have at least 10 15 years of history on the leader you see and you know one just want to prac on a practical side i looked at you know if if we look at like say facebook google you know tencent or alibaba and if we want to pick them up before they were five billion us dollar in market cap or even 10 billion us dollar in market cap i think at the time they were not spawners they were very small single business with very highly uncertain future so yeah i'm curious the examples you know the the holdings that you hold these are long history but still with long history of respawning but still like under 10 billion is that if i were to give you their names
Questionernames you would be underwhelmed because they are not in the sexy businesses that google and tencent are in okay uh i think google tencent alibaba is you know flavor of the day everyone loves them so i would say that yes i agree with you completely that
Questionerwell i won't i won't say agree completely i would say a business like google was not a spawner but it was not a but it was not a fly-by-night company when it came public so when it came public they dominated search and they had disrupted uh the previous players completely on search and they were like sitting at 90 market share and you could easily tell with adwords that their their revenue potential just on search was huge so so google would have been a bet that would have been a bet based on search right it wouldn't be it would not have been a bet based on spawning but then what what what you could have
Questionerbut then what what what you could have done if you had this presentation at the time is that as they started to spawn then you would know that this is a keeper don't ever sell this because now they're showing so sometimes what can happen is another way to use a framework is that you may invest in a business that does not have any trademarks that it's a spawner and it turns into one i mean i would say that probably when lilu made first investment in byd very early it was not a spawner but then he suddenly enters the car business you know which is completely different than the business they were in in the past and uh and and probably a lot of people are deeply skeptical of that move and he made that work you know and then you can now you can see that he can do all of that so i think yeah sometimes you may stumble into a spawner in the sense that you
Questionerspawner in the sense that you invest in a company which is a one-trick pony but it turns into a multi and then you when that happens you have a way to kind of put a framework around that and say okay i can keep this business because now it has spawning dna thank you very much
Questionersure thank you mr prabhai for such great inspirations so i'm just wondering um when you try to identify new spawners are you concerned if companies may get you know a little bit too excited um in earning cash or get distracted along the way instead of real looking at the things they are truly good at so for example if mcdonald's tried to be a spawner in the early days is it possible that it may just not get to where it is at today
Otheryeah so one of the one of the core dna traits of a great spawner is they are not going to make large early bets so they will be unwilling to bet the farm
Charliethey will be unwilling to bet the farm
Charliei mean this is classically what entrepreneurs do
Charlieso uh what they want is they want a free lunch
Charlieokay i mean i i don't know the details of for example let's if you if we study byd's entry into n95 masks for example completely different business than where they were in the future in the past
Charliebut i'm almost sure if i study the numbers i would find that if that completely failed it would be a rounding error for them it would not affect maybe 90 of everything else that they have
Charlieso a key trait uh a great spawner has to have is that when they make a bet and amazon has this in the dna the bets the met the bets are not very large bets
Charlieso they they do know a lot of capital until they see traction so they'll put some money at it then if they see there's something happening they'll put some more money if they see something's happening
Questionerif they see something's happening they'll put some more money and they'll keep going from there and the moment they start seeing that this is not working they'll pull back so if i look at amazon with their fire phone for example they were very excited about it but when they saw there's no traction they buried it and they moved on so the the bet size relative to the mothership for a good spawner is the bet is always going to be small no good spawner is going to bet the mothership on an unproven flyer so that's one of the dna things you can take to you can look for is when they start doing these things are they doing them on a small scale or are they doing them on a large scale and yeah i mean i think that there's a lot to be said for companies that don't do spawning spawning is hard spawning requires you to have an approach where you can
Todd Combsapproach where you can watch five or ten things and be good at watching five or ten things most humans are not good at that they need to be focused on one thing so very few companies can actually be good spawner companies and so if i look at a company like costco costco is the classic unspawner you know one format and they've just stuck to that format forever and they will not change that format and that works well it's a great investment it's worked out great for a long time so i think you have to make sure that the spawner that you're looking at is not one that's making erratic huge bets i mean i i would say that if we if we look at i mean i i don't know whether tesla is a good example but if we look at tesla one of the things that's bothersome to me about tesla is elon doesn't care about money you know he cares about a lot of other things he
Otherhe cares about a lot of other things hehe cares about a lot of other things he cares aboutcares aboutcares about you know dying on mars just not onyou know dying on mars just not onyou know dying on mars just not on impactimpactimpact okay but he does not care about money heokay but he does not care about money heokay but he does not care about money he just sold all his homesjust sold all his homesjust sold all his homes he doesn't even care about a home andhe doesn't even care about a home andhe doesn't even care about a home and so so the thing is that capitalso so the thing is that capitalso so the thing is that capital allocation by someone like thatallocation by someone like thatallocation by someone like that is kind of bothersome to me rightis kind of bothersome to me rightis kind of bothersome to me right because he could make a really large betbecause he could make a really large betbecause he could make a really large bet on something unproven that would beon something unproven that would beon something unproven that would be entirely within what elon would doentirely within what elon would doentirely within what elon would do it is not entirely what it is not theit is not entirely what it is not theit is not entirely what it is not the way jeff bezos would operate for exampleway jeff bezos would operate for exampleway jeff bezos would operate for example so i think you have to understand thatso i think you have to understand thatso i think you have to understand that again thanks for your sharing and it's aagain thanks for your sharing and it's aagain thanks for your sharing and it's a quite unique hammer and perspectivequite unique hammer and perspectivequite unique hammer and perspective
Questioneri have two questions uh first one isi have two questions uh first one isi have two questions uh first one is i'm very curious about the persistencei'm very curious about the persistencei'm very curious about the persistence of spawningof spawningof spawning because most of these founders ofbecause most of these founders ofbecause most of these founders of authentic spawnersauthentic spawnersauthentic spawners like facebook or alibaba are stilllike facebook or alibaba are stilllike facebook or alibaba are still steering but how about the companiessteering but how about the companiessteering but how about the companies controlled by professional executivescontrolled by professional executives
Questionercontrolled by professional executives and the second question is how to and the second question is how to and the second question is how to balance the whole investment structure balance the whole investment structure balance the whole investment structure and map and map and map to avoid the risk of with a hammer and to avoid the risk of with a hammer and to avoid the risk of with a hammer and the word looks like a nail the word looks like a nail the word looks like a nail proposed by charlie munger thank you
Todd Combsyeah i mean i think that you're yeah i mean i think that you're yeah i mean i think that you're absolutely right absolutely right absolutely right that the spawning dna is very critical that the spawning dna is very critical that the spawning dna is very critical i i think when i look at the more i i think when i look at the more i i think when i look at the more that i have invested in or accidentally that i have invested in or accidentally that i have invested in or accidentally invested in invested in invested in they are founder-led they are founder-led they are founder-led uh the founder has the dna and the uh the founder has the dna and the uh the founder has the dna and the founder still is young founder still is young founder still is young or relatively young and still running or relatively young and still running or relatively young and still running with the same dna with the same dna with the same dna and yes it is it becomes that then you have to study that you that then you have to study that you that then you have to study that you have to make sure that you have enough have to make sure that you have enough have to make sure that you have enough data that can this next generation data that can this next generation data that can this next generation run things in some cases the next run things in some cases the next run things in some cases the next generation can be better than the generation can be better than the generation can be better than the previous generation so for example in previous generation so for example in previous generation so for example in india india india one of the largest companies is reliance one of the largest companies is reliance one of the largest companies is reliance industries and industries and industries and the second generation is running it and the second generation is running it and
Questionerthe second generation is running it and the second generation is better than thethe second generation is better than thethe second generation is better than the founderfounderfounder the son is better than the father and uhthe son is better than the father and uhthe son is better than the father and uh sososo in that but you know it will take inin that but you know it will take inin that but you know it will take in some time tosome time tosome time to understand that's the case and umunderstand that's the case and umunderstand that's the case and um i did not so i think i think yeah youi did not so i think i think yeah youi did not so i think i think yeah you you have toyou have toyou have to if if there's a transition that hasif if there's a transition that hasif if there's a transition that has taken place to professional managementtaken place to professional managementtaken place to professional management and the spawning took place while thereand the spawning took place while thereand the spawning took place while there was a founderwas a founderwas a founder it's a red flag you have to have enoughit's a red flag you have to have enoughit's a red flag you have to have enough data on the professional managerdata on the professional managerdata on the professional manager whether they understand that and one ofwhether they understand that and one ofwhether they understand that and one of the things we don't knowthe things we don't knowthe things we don't know we'd have to see that when a businesswe'd have to see that when a businesswe'd have to see that when a business likelikelike amazon transitions to the next leaderamazon transitions to the next leaderamazon transitions to the next leader has the spawning dna deeply entrenchedhas the spawning dna deeply entrenchedhas the spawning dna deeply entrenched into the business so muchinto the business so muchinto the business so much that the next leader has that hardwiredthat the next leader has that hardwiredthat the next leader has that hardwired and ready to go we'll have to see ifand ready to go we'll have to see ifand ready to go we'll have to see if that isthat isthat is actually the case i did not i did notactually the case i did not i did notactually the case i did not i did not get your second question can you repeatget your second question can you repeatget your second question can you repeat the second question
Questionerthe second question okay the second question is how to okay the second question is how to okay the second question is how to balance the whole investment structure balance the whole investment structure balance the whole investment structure and map to avoid the risk of wizard and map to avoid the risk of wizard and map to avoid the risk of wizard hammer the word that looks like a nail hammer the word that looks like a nail hammer the word that looks like a nail it is proposed by charlie munger it is proposed by charlie munger it is proposed by charlie munger
Questioneryeah so i think i think the the thing is yeah so i think i think the the thing is yeah so i think i think the the thing is that you have to make sure you're not that you have to make sure you're not that you have to make sure you're not you know fooling yourself because you you know fooling yourself because you you know fooling yourself because you are the easiest person to fool are the easiest person to fool are the easiest person to fool but yeah so i think you know take a step but yeah so i think you know take a step but yeah so i think you know take a step back back back one of the things uh one of the things uh one of the things uh charlie munger had told me he said you charlie munger had told me he said you charlie munger had told me he said you know know know it's always good to have somebody to it's always good to have somebody to it's always good to have somebody to bounce your investment ideas bounce your investment ideas bounce your investment ideas with someone to you can talk to with someone to you can talk to with someone to you can talk to about your investment ideas so i said about your investment ideas so i said about your investment ideas so i said you mean like you had warned you mean like you had warned you mean like you had warned so he said i did not always have warned so he said i did not always have warned so he said i did not always have warned he said sometimes i would discuss my he said sometimes i would discuss my he said sometimes i would discuss my ideas ideas ideas with somebody else not always warren with somebody else not always warren with somebody else not always warren buffett buffett buffett but he said that it was in investing it but he said that it was in investing it but he said that it was in investing it is very important is very important is very important and the person you should discuss your
Questionerand the person you should discuss your ideas with needs to be a peer it cannot be like an employee employer relationship because their the hierarchy may make the candid sharing of perspectives harder but if you can share your ideas with a peer who can be honest and candid with you that is one way to avoid thinking everything looks like a nail you know you have to avoid making sure you don't think everything looks like a nail
Questioneri'm really wondering if this spawning whole picture is like the hammer for right now because maybe not every company can be can be classified as spammers or not sponsored
Questioneri think that if you if you look at every business let's say we look at 100 random businesses and we decide that we want to start separating them into spawner and non-spawner for example okay i think what you're gonna find is it's not a binary zero one
Questionerit's not a binary zero one okay so you're gonna find that there areokay so you're gonna find that there areokay so you're gonna find that there are companies that arecompanies that arecompanies that are complete non-spawners extremecomplete non-spawners extremecomplete non-spawners extreme non-spawnernon-spawnernon-spawner and there are companies that are extremeand there are companies that are extremeand there are companies that are extreme spawnerspawnerspawner and then there's throughout theand then there's throughout theand then there's throughout the continuum you will find companies acrosscontinuum you will find companies acrosscontinuum you will find companies across thatthatthat across that continuum so there would beacross that continuum so there would beacross that continuum so there would be companies that would have let's saycompanies that would have let's saycompanies that would have let's say what i would call strong spawning dnawhat i would call strong spawning dnawhat i would call strong spawning dna and then there'd be others that wouldand then there'd be others that wouldand then there'd be others that would have weak spawning dna sohave weak spawning dna sohave weak spawning dna so it would be a continuum it wouldn't be ait would be a continuum it wouldn't be ait would be a continuum it wouldn't be a binary switch if you looked at differentbinary switch if you looked at differentbinary switch if you looked at different businessesbusinessesbusinesses and and so as long as you canand and so as long as you canand and so as long as you can identify where you want to be where youidentify where you want to be where youidentify where you want to be where you want to you say that spawning has to bewant to you say that spawning has to bewant to you say that spawning has to be a strong part of the businessa strong part of the businessa strong part of the business then of course you can i think you canthen of course you can i think you canthen of course you can i think you can you you'll be able to separate them theyou you'll be able to separate them theyou you'll be able to separate them the otherotherother the other thing is that just like inthe other thing is that just like inthe other thing is that just like in baseball there are no callsbaseball there are no callsbaseball there are no calls like so it's okay to letlike so it's okay to letlike so it's okay to let a spawner go which is it's okay to miss
Questionera spawner go which is it's okay to miss a spawner a spawner a spawner it is problematic to it is problematic to it is problematic to think something is a spawner but it's think something is a spawner but it's think something is a spawner but it's not not not so if you miss an alibaba so if you miss an alibaba so if you miss an alibaba you miss a google that's okay you miss a google that's okay you miss a google that's okay but don't bring in mcdonald's thinking but don't bring in mcdonald's thinking but don't bring in mcdonald's thinking it's a spawner it's a spawner it's a spawner when it's not that's more problematic so when it's not that's more problematic so when it's not that's more problematic so so i think what i'm saying is that it so i think what i'm saying is that it so i think what i'm saying is that it should be should be should be obvious that a company obvious that a company obvious that a company has strong spawning dna i think it's has strong spawning dna i think it's has strong spawning dna i think it's pretty obvious to tell that in my pretty obvious to tell that in my pretty obvious to tell that in my opinion opinion opinion and the other the other thing about this and the other the other thing about this and the other the other thing about this is that i i have a is that i i have a is that i i have a hypothesis which is a hypothesis today hypothesis which is a hypothesis today hypothesis which is a hypothesis today because because because i don't have the data but i would i i don't have the data but i would i i don't have the data but i would i would would would you know hypothesize that if i had a you know hypothesize that if i had a you know hypothesize that if i had a portfolio portfolio portfolio of 10 spawners carefully selected of 10 spawners carefully selected of 10 spawners carefully selected 10 bet in each spawner and 10 bet in each spawner and 10 bet in each spawner and i said it and didn't touch it for a long i said it and didn't touch it for a long i said it and didn't touch it for a long time time time i think the odds are good if you've done i think the odds are good if you've done i think the odds are good if you've done your selections properly your selections properly your selections properly that three or four may turn out to be that three or four may turn out to be that three or four may turn out to be really good really good really good and that's all you need if you get two
Questionerand that's all you need if you get two or three that are really good it will make up for all the mistakes that you could come up with in all the other ones so if you just identify a few that gives you very strong returns as long as you don't lose much money on the others you'll be okay so i think it's an approach that can tolerate that can tolerate you being wrong business is difficult trying to forecast future of a business is difficult no matter what and we may we may be wrong on some of these spawners and that's perfectly okay and we don't need to be right on all of them he really was absolutely right on one business and that's all he was really really right on when he first the first amazon shares he bought were at thirty dollars a share in 2002 right and he never sold and he bought at thirty dollars he bought a hundred dollars he bought it
Questionerbought a hundred dollars he bought itbought a hundred dollars he bought it two hundred dollarstwo hundred dollarstwo hundred dollars he even bought a 300 right and sohe even bought a 300 right and sohe even bought a 300 right and so it didn't matter there were about ait didn't matter there were about ait didn't matter there were about a dozen companies in his portfoliodozen companies in his portfoliodozen companies in his portfolio this was the only one of consequencethis was the only one of consequencethis was the only one of consequence that matteredthat matteredthat mattered so and that's it didn't matter what elseso and that's it didn't matter what elseso and that's it didn't matter what else was happeningwas happeningwas happening thank you for sharing everything sothank you for sharing everything sothank you for sharing everything so generously and i have two questionsgenerously and i have two questionsgenerously and i have two questions my first question is because the past 10my first question is because the past 10my first question is because the past 10 years wereyears wereyears were was a bull market so does that make youwas a bull market so does that make youwas a bull market so does that make you change into a framework ofchange into a framework ofchange into a framework of spanish what if the past 10 years havespanish what if the past 10 years havespanish what if the past 10 years have been abeen abeen a bear market would you have a differentbear market would you have a differentbear market would you have a different thinking andthinking andthinking and change your philosophy and a quickchange your philosophy and a quickchange your philosophy and a quick follow-upfollow-upfollow-up on cngi because you somehowon cngi because you somehowon cngi because you somehow capture the whole 100 100capture the whole 100 100capture the whole 100 100 x do you why if the position was not 10x do you why if the position was not 10x do you why if the position was not 10 percent bad why play waspercent bad why play waspercent bad why play was they were 100 bad if they were 100they were 100 bad if they were 100they were 100 bad if they were 100 but would you like would you be like toobut would you like would you be like toobut would you like would you be like too worried about the position so youworried about the position so youworried about the position so you somehow not being able to capture the
Questionersomehow not being able to capture the whole process i know there was a mistake because you mentioned that you said you should have sold at 5x my question is does that position sizing made you become less worried about the position so you could catch the whole process so those are good questions so with with
Ted Weschlercmgi actually what happened at the time was in 94 my net worth was one million dollars okay it was a 10 bet 100 000 okay and i let that bet run for five years and it just kept going up and i saw they were spawning all these companies and i said maybe maybe some of these will hit we'll see and eventually what happened is the the entire portfolio i think was worth about 14 or 15 million dollars close to what 15 million so cmgi was sitting in about two-thirds of the entire portfolio okay but i was not a professional money manager then it was my own
Othermanager then it was my own it was my own money and i i really didn't feel or care that there was this degree of concentration i i was paying more attention to it as it became a larger and larger portion of my net worth and that's why i eventually when it when it got to about 10 million i looked at the numbers i said you know this thing this thing could blow up with the yeah we i'm not sure and i said at that point i felt like 10 mil mil will change my life okay guaranteed to change my life right so i said let's ring the register and you know put the money in the drawer and so that we are we are set with that and uh so that was part of the thing but i didn't really want to do anything with it earlier and i think your second point about you know the last 10 years and so on in in my opinion i think spawning transcends markets just like great
Questionertranscends markets just like great businesses transcend markets businesses transcend markets businesses transcend markets so i think that if we find a great so i think that if we find a great so i think that if we find a great entrepreneur entrepreneur entrepreneur who's executing well they who's executing well they who's executing well they those businesses can do well regardless those businesses can do well regardless those businesses can do well regardless of the markets of the markets of the markets we are in as long as we are able to we are in as long as we are able to we are in as long as we are able to invest with them invest with them invest with them at a reasonable valuation the bear at a reasonable valuation the bear at a reasonable valuation the bear market might make it easier market might make it easier market might make it easier to find those kinds of businesses to find those kinds of businesses to find those kinds of businesses because no one's interested one more question one more question the one more question one more question the one more question one more question the question is about children's suffering question is about children's suffering question is about children's suffering it's like because in 1970 charlie it's like because in 1970 charlie it's like because in 1970 charlie margaret margaret margaret chiang mai has suffered his investment chiang mai has suffered his investment chiang mai has suffered his investment portfolio is suffering like by portfolio is suffering like by portfolio is suffering like by suffering a lot and maurice you also suffering a lot and maurice you also suffering a lot and maurice you also said before that every time you buy said before that every time you buy said before that every time you buy something something something things goes down by like 20 my question things goes down by like 20 my question things goes down by like 20 my question is is is how do you deal with lost short-term how do you deal with lost short-term how do you deal with lost short-term suffering so suffering so suffering so you know there's a saying if wealth is you know there's a saying if wealth is you know there's a saying if wealth is lost lost lost nothing is lost if health is lost nothing is lost if health is lost nothing is lost if health is lost something is lost and if character is something is lost and if character is something is lost and if character is lost lost lost everything is lost so we are just
Warreneverything is lost so we are just talking about wealth if you buy a stock and it goes down 20 which happens to every stock i buy by the way you are not you're not buying a stock you're buying a business right and before you buy the business you've understood what that business does and what that business is worth so then you're not going to get distressed in fact you should get happy if it's gone down you can maybe get some more than what you had before so i it has never bothered me that you know stock prices move around and all that i think it is in the nature of auction driven markets that's we are going to see these swings i think that's just if you just look at the shanghai stock market and you throw a dart at if you have you know page with all the stock names and just throw a dart at any name just look at the 52-week range of prices on that stock
Warrenon that stock it will be 70 to 150 okay or 30 to 70 right i mean every stock in one year has a range which is so wide if we look at home prices over one year the change is five percent or ten percent or fifteen percent it's not fifty percent so auction driven markets are going to give you very wide swings both ways and we can take advantage of those swings so it's just in the nature of auction driven markets that you're going to have uh movement and volatility that's just part of the game
Questionerhi i'm anus how are you thank you very much again for sharing your very candy thoughts with us and my question are a little bit different versus the previous ones the first question is related with berkshire hathaway and now you are quite close with warren buffet and charlie monger so any thoughts about berkshire's latest trade for
Questionerabout berkshire's latest trade for example dumping costco and selling many banks stocks etc and the second question i'm not sure it's a problem or not so feel free to share whatever you can your portfolio seems quite concentrated iemu and srg from some public materials and you had srg in 20 in 2017 and now you load it quite heavily from the second quarter this year so any reason inside you could share with us thank you very much
Todd Combsall right so any uh data i have about uh costco or the banks is not coming from warren or charlie it's just you know what what i think so the the costco sale is a complete surprise to me there's very few companies that charlie loves more than costco every time i meet him in fact the last time i had dinner with him we spent so much time talking about costco every time i meet him we talk about costco you know like he was asking me if i visit
Questionerlike he was asking me if i visit costco and i told him now costco delivers to my home i don't have to go to costco they deliver to my home so he said oh then you have to pay too many fees please go to costco to get cheaper price okay anyway so i have no idea why they sold costco the only thing i would say is investors buy stocks for only one reason they sell stocks for 100 reasons okay so we cannot we cannot tell anything about what someone is thinking when they sell a stock we can tell something about what someone is thinking when they buy a stock all right so just keep that in mind because there are many different reasons uh people could be selling the bank stocks well they're really good at banks so they would know better what's going on there but i know that i know that warren from the actions i have seen deeply loves bank of america
Questioneri have seen deeply loves bank of america and maybe not so much wells fargo and maybe not so much wells fargo and maybe not so much wells fargo anymore anymore anymore just from the actions i'm seeing just from the actions i'm seeing just from the actions i'm seeing regarding my own portfolio regarding my own portfolio regarding my own portfolio
Todd Combswhat gets reported are the us positions what gets reported are the us positions what gets reported are the us positions so we have two holdings in the us so we have two holdings in the us so we have two holdings in the us micron and cerritage and so those show up up up in the uh quarterly filings we have to in the uh quarterly filings we have to in the uh quarterly filings we have to do do do i don't really have a whole lot to say i don't really have a whole lot to say i don't really have a whole lot to say about either one about either one about either one i mean i would say that uh cerritage i mean i would say that uh cerritage i mean i would say that uh cerritage micron we've held for i think about uh maybe more than a couple of years now uh maybe more than a couple of years now uh maybe more than a couple of years now but but but but heritage we uh we bought a but heritage we uh we bought a but heritage we uh we bought a a stake in in the a stake in in the a stake in in the second quarter of this year and you know second quarter of this year and you know second quarter of this year and you know the stock price was down 80 percent 70 the stock price was down 80 percent 70 the stock price was down 80 percent 70 80 80 80 from where it was a few weeks before from where it was a few weeks before from where it was a few weeks before that and that and that and so maybe that gave you some clue as to so maybe that gave you some clue as to so maybe that gave you some clue as to why i might be interested why i might be interested why i might be interested but i do want to clarify that cerritage but i do want to clarify that cerritage but i do want to clarify that cerritage is not a spawner is not a spawner is not a spawner in fact heritage is what i would call a in fact heritage is what i would call a in fact heritage is what i would call a un-spawner un-spawner un-spawner because they keep selling some assets to because they keep selling some assets to
Questionerbecause they keep selling some assets to keep the ship going so it's the opposite of a spawner because it was bought in an era when i did not have the spawner framework but i'm still very happy with that investment okay monish i really appreciate your time so i have really uh two quick questions so the first one is you mentioned you were starting your own business uh while working full-time you know after work and spending on weekends so do you think you will become the investor you are today without that entrepreneurial and operating experience and then my second quick question is that you emphasize like so-called competence right so do you think physical location is a big part of that because for example even though i'm chinese but i live in the u.s so i feel like i understand the business dynamics much more about us than china so do you think the physical
Questionerthan china so do you think the physical location matters obviously you and warren and you know charlie invested in foreign companies without probably visiting those countries so your thoughts on that as well thank you
Questioneruh yeah those are good questions you uh yeah those are good questions you uh yeah those are good questions terence
Otheryeah so i think uh yes i think it's a it's a very big advantage if a business before in fact specifically the spawner the spawner framework i'm not sure i could have come up with the framework if i had not run businesses before because when i was running my it company and i thought about it when i was doing the spawner framework is i was doing spawning in that business and uh it was a jason spawning right and i saw how little capital it took it took some brain power but it took very little capital and some some of these bets that i made where the amount invested was so small but they grew quite significantly
Othersmall but they grew quite significantly so i saw the power of spawning directly and that's when i realized that i have to pay attention so when i transported my own personal experience into some of these public companies and started looking at them i could look at them from the same lens like i had uh looked at so uh definitely i think it is a huge advantage if you have run businesses before and such i think there is no substitute for that the second is that i think uh in terms of circle of competence and where to invest and so on i think you have to have very high conviction any time you're making investments you have to have very high conviction you cannot be concerned that you don't understand something or whatever so the thing about investing is that the size of the circle of competence that we have is irrelevant what is more relevant is that we stay
Warrenwhat is more relevant is that we stay within the circle so uh i've talked i think i've talked even in this class about charlie's friend john ariega who only invests in real estate within two miles of the stanford campus and he's a billionaire so he only understands not only real estate but within real estate he only understands in real estate in a very small area if someone told him to invest in real estate in you know in los angeles or another state or anywhere he would just not be interested and it did not stop him from becoming very wealthy if you look at all these entrepreneurs like sam walton or ray kroc or any of these companies uh you know jim cynical with costco their expertise is very narrow very narrow expertise but they became very wealthy so it's the same in investing so the important thing in investing is to stick to things that you're really
Questioneris to stick to things that you're really good at and things that you really understand well that's where you will get the biggest edge and that's how you should approach it uh mr peppery what uh in your last experience what is your biggest mistake in investing and what influences do they have happened on you
Questionerwell i think the the area investing that gave me the most trouble was companies with leverage so i had many investments over the last 26 years that did not work well and a good number of them are concentrated on companies which had either they had too much debt or they were financial services companies where leverage was inherent in their model and uh so i have been trying uh to make sure that the companies and businesses are investing do not have a big dependency on on debt and leverage i still have businesses in the portfolio even today
Warrenbusinesses in the portfolio even today that have leverage i i think they are okay but we will find out so maybe i'm like an alcoholic who's not given up alcohol yet but uh but i definitely want to minimize a good business should not need debt to do well good business can do well without that
Otherall right all right
Othertwo hours it's uh about the midnight uh in california i think we have a a very wonderful two hours listening to your talk and the uh question announced actually in your first talk to us is through online like this in 2016. the second one is on-site here at the campus in 2017. now we are 20 20 the third time online i hope next year you'll come back to picking university campus to speak to this class again
Warrenyeah well that would be uh that would be a pleasure and an honor i haven't gotten on an airplane for about uh 10 months now and it will be very
Questioneruh 10 months now and it will be very good to be able to travel maybe i think may or june of next year onwards uh in fact one of the first trips i'll be making i'll be making to china so looking forward to it yeah thank you
Questionerokay so i think wherever you want to go was visited in china someone from this class will accompany you to their elect last time
Questioneryeah yeah took you to mud high i'm i'm hoping some of your students will give me a chinese spawner tour everything below 500 million
Questionerall right okay that's that's the goal
Questionerokay uh it also amazed me that uh the value investors as as successful as you is still like you know developing new ideas you know although the title of your talks this time it's the same as the last one but the content is brand new it's uh spawning you know as this is a new source and the new ideas new framework
Questionerso i think this can also tell our students that as a value investor never stopped learning
Otheryeah i was a little uh i was not sure whether i should give this talk because it will mean i will have more competition but it's okay no problem uh it's also uh the plus side is i will get feedback which will be helpful so that's great yeah
Questionerokay thank you very much thank you professor thank you wonderful
Otherlet's see would you say something unless it's a very uh yeah inspiring to to listen to this yeah the you know definitely something like uh you know as value investors we always have to think about you know what kind of companies we were investing and you know how they can generate turn for us right you know when you mention about byd it's actually to us it's more like you know public venture company yeah uh yeah and that you know
Questioneryeah uh yeah and that you know they they do have some uh very they they do have some uh very they they do have some uh very interesting interesting interesting managerial and uh company uh managerial and uh company uh managerial and uh company uh type of you know competitive advantages type of you know competitive advantages type of you know competitive advantages that they leverage on the you know their that they leverage on the you know their that they leverage on the you know their their their their manufacturing power and research uh manufacturing power and research uh manufacturing power and research uh capability capability capability that they leverage genre they also made a lot a lot a lot you know um many bad investment you know um many bad investment you know um many bad investment decisions i like decisions i like decisions i like
Otheryeah but i think i think one thing you yeah but i think i think one thing you yeah but i think i think one thing you probably have seen with byd probably have seen with byd probably have seen with byd is the individual bets cannot sync the is the individual bets cannot sync the is the individual bets cannot sync the company company company
Questioneryeah that's right you know so the bets yeah that's right you know so the bets yeah that's right you know so the bets are sized are sized are sized so that you can have a high failure rate so that you can have a high failure rate so that you can have a high failure rate and it's okay yeah don't need very many and it's okay yeah don't need very many and it's okay yeah don't need very many of them to work of them to work of them to work and if they work then they can scale and if they work then they can scale and if they work then they can scale quite a bit yeah yeah yeah that that's quite a bit yeah yeah yeah that that's quite a bit yeah yeah yeah that that's uh yeah that's very very important the uh yeah that's very very important the uh yeah that's very very important the insight i learned insight i learned insight i learned uh you know the uh the entrepreneurs the uh you know the uh the entrepreneurs the uh you know the uh the entrepreneurs the how they how they how they make investment you are totally right make investment you are totally right make investment you are totally right you know you know you know they may bet that they will not kill
Otherthey may bet that they will not kill themselves that's very important
Otherbecause i i think that they're they are making such early stage bets that by definition there's going to be high failure rate
Otheryou know there's no way to avoid the failure rate it's going to be high
Otheryeah but it also means that the the ones that work have huge runways that's right but the problem is uh
Otheryou know a lot of time when we look at these type of companies they are too expensive for us
Otheryou have to find the ones that the the public doesn't understand
Otheryeah yeah when they are too small it's hard to prove that they are the kind of kind of companies we're looking for
Othergreat yeah thank you very much it's really very it's a lot of learning for me too you know i'm pretty sure our students have learned greatly yeah thank you very much manish it's always very inspiring
Otherwell i always i always find that uh your
Otherwell i always i always find that uh your students professor jiang are the best all right yeah all the students i talk to this is the best group uh yeah they didn't ask very good questions really good all right so thank you very much all right absolutely all right thank you good night to you okay yeah thank you manish
Otherbye