Other[Music][Music][Music]today we have monash prabhai joining us
Othertoday we have monash prabhai joining us
Othertoday we have monash prabhai joining us and he started the praia investment
Otherand he started the praia investment
Otherand he started the praia investment funds which were inspired by the
Otherfunds which were inspired by the
Otherfunds which were inspired by the original 1950s buffett partnerships and
Otheroriginal 1950s buffett partnerships and
Otheroriginal 1950s buffett partnerships and are a close replica of the original
Otherare a close replica of the original
Otherare a close replica of the original buffett partnership rules
Otherbuffett partnership rules
Otherbuffett partnership rules and monish is an ardent disciple of
Otherand monish is an ardent disciple of
Otherand monish is an ardent disciple of warren buffett and closely follows his
Otherwarren buffett and closely follows his
Otherwarren buffett and closely follows his principles on value investing in capital
Otherprinciples on value investing in capital
Otherprinciples on value investing in capital allocation
Otherallocation
Otherallocation and from inception in 1999 through march
Otherand from inception in 1999 through march
Otherand from inception in 1999 through march 2021 you'll have to update our numbers
Other2021 you'll have to update our numbers
Other2021 you'll have to update our numbers but a 100 000 investment would have
Otherbut a 100 000 investment would have
Otherbut a 100 000 investment would have grown to 1.4 million which equals an
Othergrown to 1.4 million which equals an
Othergrown to 1.4 million which equals an annualized gain of 13
Otherannualized gain of 13
Otherannualized gain of 13 fantastic monash was the founder and ceo
Otherfantastic monash was the founder and ceo
Otherfantastic monash was the founder and ceo of transtech an it consulting firm
Otherof transtech an it consulting firm
Otherof transtech an it consulting firm before he started his value investing
Otherbefore he started his value investing
Otherbefore he started his value investing career and he loves playing duplicate
Othercareer and he loves playing duplicate
Othercareer and he loves playing duplicate bridge i don't know monish if you want
Otherbridge i don't know monish if you want
Otherbridge i don't know monish if you want to take it from there charlie it's a
Otherto take it from there charlie it's a
Otherto take it from there charlie it's a pleasure and honor to be with all of you
Otherpleasure and honor to be with all of you
Otherpleasure and honor to be with all of you and just a quick story i hope
Otherand just a quick story i hope
Otherand just a quick story i hope charles do you go by charlie or charles
Questionercharles do you go by charlie or charles
Otheruh charlie usually
Questionercharlie charlie's a better way to go
Warrenyeah i've known uh charlie's dad for more than two decades now i think a wonderful guy larry oberman i met larry many times in omaha when he'd make the annual trek in the 90s and early 2000s one time i went to his office in northbrook illinois and he gave me very generously gave me all the annual reports for fairfax financial like you know 20 years of reports and of course now i have a great friendship with prime watsa at fairfax he's one of the largest donors for our foundation and we did very well actually investing in fairfax when i was being heavily shorted during the financial crisis so i have a lot to thank charlie's dad for but i remember that when charlie was born his dad sent a picture of charlie to warren buffett and said warren
Questionerwarren have a new baby boy and we've named him charlie warren oberman in honor of charlie munger and warren buffett and warren buffett wrote back he said when charlie has his first talk tip call me collect anyway so charlie did you did your dad ever send any stock tips to warren after that
Questioneri don't think so i mean i give my dad stock tips but i don't think he passes them along
Warrenmake sure make sure he knows that he always worn your best idea oh i don't know so give him your best idea and tell him to send it to warren because warren's been waiting for two decades i don't know if i can call him collect anymore he's got a 150 billion because he's waiting for charlie so
Questionerlet's not make him wait anymore what i thought might work well is if he could run the session maybe as a q a it was really fun to get your email you know after a couple of decades
Questionerafter a couple of decades how old are you now i'm twenty one most
Otheronly one exactly so this is like 15 to 22.
Questionerall right so basically this is after 21 years that i'm hearing from charlie warren again which is great but yeah so please take it away we're happy to engage and other than just you know questions on what we currently own i think anything is fair game
Otheryeah so we had some people submit questions who are on the call so i guess to those people we read through your questions and like they're good to go so if you want to send them in the chat you're going to do that but to start off one question that we got a lot of just based on the bio that we sent out when we're trying to market the event is if you could go in a little bit more depth about your relationships with warren buffett and charlie munger and how those developed in 2007
Ted Weschlerdeveloped in 2007 you know i think our our net worth at the time was around like 80 odd million almost all of it i would attribute to me using the intellectual property of warren buffett without paying any royalties and i had such a huge influence on my life just like your dad and just not even just investing in on you know other facets of life unrelated to investing so i felt like i owed him like a big tuition bill because i'd learned so much and buffett runs this annual charity auction on ebay where you can bid and the highest bidder gets to have lunch with him my thinking was that i would bid for that lunch at that time the lunch was going for around a quarter million or so and i said you know uh i think this would be great i can bid for the lunch i had tried a couple of times before that and not always been outbid but 2007 i was ready i had uh net worth
Ted Weschlerbut 2007 i was ready i had uh net worth had gone up and i said okay this time we're gonna go uh make sure we win and i talked to my friend guy speer about it and uh he came in with me as well and i think 650 100 we won that lunch bid and my only expectation was to just thank him you know i said they just gave me a direct kind of one-on-one time but uh warren buffett when he runs this annual charity auction he has a different kind of mental model his model is that whatever people have paid for this lunch and he realizes a big deal for whoever's won it he wants them to believe that they got a big bargain and basically so now the lunch goes for like three four million and he still focuses so when i met him with my family and with guy and his wife in 2008 smith and wolenski steakhouse in new york city buffett basically as soon as he you know
Questionerbuffett basically as soon as he you know sat down and said look i have nothing going on all afternoon i'm here with you as long as you want to hang out with me and when you guys get sick and tired of me you can let me know and i'll leave but i don't have to leave i can be here as long as you want you know he just wants to make sure that he's providing more value and such and uh i was addressing him as mr buffett you know mr buffett dismissed that and then you know both my daughters were sitting on both sides of him one was 10 one was 12. and he said to them look if you call me warren maybe the adults will learn you know and so within about five minutes you feel like you're having lunch with your grandfather he puts you at ease you forget that you're with you know this amazing historical figure and such during the lunch i told warren that my wife uh harina she's
Questionertold warren that my wife uh harina she's a huge fan of charlie munger a lot bigger fan of charlie munger and warren i told him look harina is happy happy to be here but her true love in life is charlie warren is very competitive so he says you know charlie is an extremely old and boring guy okay i'm the one who's really interesting and exciting not charlie he's just you know this commercial you don't want to spend time with him always pessimistic and so on and then you know he told us he said look just to make sure you guys understand who's the better lunch date i'm gonna have you guys meet charlie for lunch and then after that you'll know who's a better company and i thought he was joking you know because charlie doesn't do these lunch auctions you can you can bribe warren and have lunch you cannot bribe charlie and have lunch okay
Questionerbribe charlie and have lunch okay there's no platform to do that but thethere's no platform to do that but thethere's no platform to do that but the following week i got an email fromfollowing week i got an email fromfollowing week i got an email from warren's assistantwarren's assistantwarren's assistant going to charlie's assistant basicallygoing to charlie's assistant basicallygoing to charlie's assistant basically saying i met this couplesaying i met this couplesaying i met this couple ininin california they're really fun and icalifornia they're really fun and icalifornia they're really fun and i think you'll enjoy meeting them andthink you'll enjoy meeting them andthink you'll enjoy meeting them and they seem to have the misconception thatthey seem to have the misconception thatthey seem to have the misconception that you're more interesting than me but onceyou're more interesting than me but onceyou're more interesting than me but once they meet you they'll know that i'm thethey meet you they'll know that i'm thethey meet you they'll know that i'm the guy it was buy one get one free you knowguy it was buy one get one free you knowguy it was buy one get one free you know we got the one lunch and then the secondwe got the one lunch and then the secondwe got the one lunch and then the second lunch with charlie was free and ilunch with charlie was free and ilunch with charlie was free and i actually enjoyed the charlie lunchactually enjoyed the charlie lunchactually enjoyed the charlie lunch more than the war and lunch because hemore than the war and lunch because hemore than the war and lunch because he is he's just so candid you know and sois he's just so candid you know and sois he's just so candid you know and so open andopen andopen and warren is also very candid and open butwarren is also very candid and open butwarren is also very candid and open but there's a veneer of diplomacy which isthere's a veneer of diplomacy which isthere's a veneer of diplomacy which is not there with charlie which is which isnot there with charlie which is which isnot there with charlie which is which is better the lunch with charlie led to abetter the lunch with charlie led to abetter the lunch with charlie led to a nice friendship with charlie because wenice friendship with charlie because wenice friendship with charlie because we were in the same geographywere in the same geography
Questionerwere in the same geography and uh i started meeting himand uh i started meeting himand uh i started meeting him periodically and then a few years laterperiodically and then a few years laterperiodically and then a few years later i started playing bridge with him at thei started playing bridge with him at thei started playing bridge with him at the la country club usually friday afternoonla country club usually friday afternoonla country club usually friday afternoon from likefrom likefrom like noon tonoon tonoon to five or six o'clock we first meet forfive or six o'clock we first meet forfive or six o'clock we first meet for lunch for an hour or twolunch for an hour or twolunch for an hour or two and then we played three four hours ofand then we played three four hours ofand then we played three four hours of cards now charlie doesn't go to the clubcards now charlie doesn't go to the clubcards now charlie doesn't go to the club anymore he's gonna be doing 98 inanymore he's gonna be doing 98 inanymore he's gonna be doing 98 in january so those experiencesjanuary so those experiencesjanuary so those experiences and rick goran used to join for thoseand rick goran used to join for thoseand rick goran used to join for those lunches as well which is great so thelunches as well which is great so thelunches as well which is great so the the warren lunch led to a very nicethe warren lunch led to a very nicethe warren lunch led to a very nice friendship with charliefriendship with charliefriendship with charlie but you know like the ginsu knifebut you know like the ginsu knifebut you know like the ginsu knife commercials but wait there's more youcommercials but wait there's more youcommercials but wait there's more you know warren has this party every year onknow warren has this party every year onknow warren has this party every year on sunday it's a brunch where he invitessunday it's a brunch where he invitessunday it's a brunch where he invites all the managers of berkshire hathawayall the managers of berkshire hathawayall the managers of berkshire hathaway and the board members and his closeand the board members and his closeand the board members and his close friendsfriendsfriends likelikelike bill gates is there sometimes bono showsbill gates is there sometimes bono showsbill gates is there sometimes bono shows up uh it's like you know who's whoup uh it's like you know who's who
Questionerup uh it's like you know who's who there's always some hollywood celebrities there and whatnot and he invites all the past lunch winners to that brunch and so guy and i started getting invited after 2008 and we used to always look at each other and say we are the only two low life in this room you know everyone else is happening and sometimes you know we'd be at the brunch and i tell guy right behind us is bill gates talking to bono okay so we have these and then you know there'd be nfl players there and then the uh founder of spanx you just meet all these amazing that nfl player the big guy uh last name sue nagadanum sue something i anyway such a gentle guy and then i see him on the field he's not at all gentle but in person is so gentle so nice those lunches have continued and then you know i got to know warren's assistant through the lunch
Otherthe lunch and i asked her if she would meet guy and me for lunch and she said oh yeah she'd love to do that so we started having lunch with debbie on the thursday before the berkshire meeting she said normally friday is crazy in the office but if you come on thursday i'm free on third so every thursday once a year in may we'd go to lunch with debbie and i found the lunches with debbie were better than the lunch with warren or charlie because i'd always tell debbie debbie listen between us girls can we talk okay she said what do you want to know monish you know tell me i'll tell you anything you know so this was before we knew whether warren had a cell phone uh you know in 2010 2011 i asked debbie i said debbie does he have a cell phone so she'd laugh she said well he has a cell phone it's a little flip phone but it sits in my desk
Questionerbut it sits in my deskbut it sits in my desk and she said he doesn't know how to useand she said he doesn't know how to useand she said he doesn't know how to use ititit and when she go when he goes on a trip iand when she go when he goes on a trip iand when she go when he goes on a trip i charge it and give it to himcharge it and give it to himcharge it and give it to him and the only thing he knows how to doand the only thing he knows how to doand the only thing he knows how to do with it is when it rings to open it andwith it is when it rings to open it andwith it is when it rings to open it and answer and he knows how to call meanswer and he knows how to call meanswer and he knows how to call me because i put myself on speed dial so ifbecause i put myself on speed dial so ifbecause i put myself on speed dial so if he has to call someone he calls me andhe has to call someone he calls me andhe has to call someone he calls me and then i have that person call them hethen i have that person call them hethen i have that person call them he says you know and there's nothing elsesays you know and there's nothing elsesays you know and there's nothing else he knows how to do with that phone okayhe knows how to do with that phone okayhe knows how to do with that phone okay sososo anyway there were a lot of interestinganyway there were a lot of interestinganyway there were a lot of interesting things i found out about how warren kindthings i found out about how warren kindthings i found out about how warren kind of operated and you know how he spentof operated and you know how he spentof operated and you know how he spent his day andhis day andhis day and different things and we'd go to omaha todifferent things and we'd go to omaha todifferent things and we'd go to omaha to berkshire headquartersberkshire headquartersberkshire headquarters some years warren would be there andsome years warren would be there andsome years warren would be there and then i think one time he gave us a tourthen i think one time he gave us a tourthen i think one time he gave us a tour of the headquarters and then i'veof the headquarters and then i'veof the headquarters and then i've exchanged someexchanged someexchanged some letters with him i sent him some stockletters with him i sent him some stockletters with him i sent him some stock tips since you're not sending his talktips since you're not sending his talk
Othertips since you're not sending his talk to someone's got to send those talk tips
Otherand so i'll send him stock tips once in a while it's uh kind of a little bit surreal for me because you know we are not as human supposed to live in the time of einstein or at the time of newton or at the time of gandhi or anything like that or you know but here we are actually living at the time of what i think will end up being two historical figures that will go down in history and even 100 years from now people 50 years from now will be you know talking about them and such and so the fact that they are in the flesh with us and the fact that you know by accident i got to interact and got to know them it's been a lot of fun that's great so i guess switching gears more to like your process so question that we've had come up a lot throughout the semester especially with
Questionerespecially with it being a lot of undergraduate students in the club is developing a circle of competence when we don't really know that much and i've mentioned in the club like about john arriega which i think is one of your favorite examples but i was hoping that you could expand on that and just help us figure out where we can look to expand our circle of competence
Questioneryeah like the arriega example you know the size of the circle doesn't matter you can have a really really small circle of competence but what is very important is staying within the circle not even going to the edges stay in the epicenter and uh you know to ask the question is to answer it so if you're wondering if something is within your circle of competence or not the answer is it's not in your circle of competence and probably i think at your ages
Questionerwhat is likely the most probable to be within your circle of competence are products and services that you use regularly generally speaking i think a good way to kind of begin your journey in terms of understanding you know what businesses to look at just look at all the products and services you consume do you go on youtube do you go on facebook you use google do you use an apple iphone use a android phone what brand of clothing do you wear what kind of toothpaste you use just you know all your your daily habits what kind of drinks do you like to drink food you like to eat and that's i think a starting point because generally speaking for a brand to come through and be something that you would trust and use is a very high bar and usually have to have some very special attributes and characteristics for the business to get there and so i think
Otherbusiness to get there and so i think that's probably the simplest way to start tackling the circular competence issue and also i think it's not that hard to figure out what is a good business and what is not a good business it's relatively easy to start you know segregating those so if you are familiar and a consumer of products which then you can tell whether they're a good business or not then once you know that there's a few products you use a few services you use that are good businesses then from then on i think you can start trying to figure out whether an investment makes sense and diving deep and figuring it out and so on that's great a lot of people are asking about a combination of your process when you're like reading articles or books listening to podcasts and then also where you're sourcing those from and if you can go into that
Questionerthose from and if you can go into that for a little bit
Otherwell i mean i think that the best way to i think approach this is kind of like as if as if you're a gentleman or lady of leisure i'm curious about a lot of things i'm very curious about a lot of different businesses and how they work i'm always trying to you know i'm reading autobiographies or biographies i was uh just listening to a podcast i'm in the middle of it right now which is between uh reid hoffman and john elkan on reid hoffman's broad podcast you know and john alkin is the chairman of fear chrysler we made that investment maybe nine years ago i'm still learning stuff about the company from that podcast even though i used to own this talk and i've known john for so many years i read a few newspapers every day the physical papers you could do it digitally if you run across interesting
Todd Combsdigitally if you run across interesting books or interesting people to understand them i think what you're looking for is something that hits you like a two by four aha moment where some company or some business you may be a customer of but you've then studied it and then you come up with some major i would say insight into the business that most other market participants probably don't understand and or don't appreciate and if that insight is meaningful and valid that becomes a big edge and you don't need that to happen even more than once a year the reading is just something to enjoy and you know broaden your horizons but through all of that once in a while you get these aha moments
Questionergreat the next question was somebody was curious about when you go through periods of under performance how you handle that especially with outside investors
Questionerinvestors possibly losing confidence or you might need to reassure some people and how that works
Otheryeah i mean i think the the business i'm in all of the assets could leave every year you know people can redeem i mean basically in effect the entire asset base can be pulled so it's a temporary pool of capital and people have a variety of reasons why they would uh you know redeem assets there's only one reason why people give you assets but there's many reasons why they could want to take assets uh only a few of them relate to performance etc it could be you know life circumstances or whatever else is going on with the individual or family you know my take is that that's just part of the game you know part of the way the nature of that business is if i were left with no outside capital and just had to you know work with my own capital i would still think it's a
Otherown capital i would still think it's a blessed life i wouldn't really have any regrets about it i accidentally went into the investment business i just kind of stumbled into it there was no plan to do that the plan was to just you know invest my own money so i think that it's not something worth worrying about i think you do the best you can and uh people will leave for a variety of reasons they'll join for a variety of reasons there's a constant kind of assets coming in as it's going on that's all happening but it's not something i'm i really spend time dwelling a lot into
Questionerhi monish thank you for joining us today i'm reading through some of the responses as well and one of the things that i kind of i well our members really wanted to hear ideally was a lot about leverage and how it affects you know whether you're about valuation or how you kind of determine
Questionervaluation or how you kind of determine valuation or how you kind of determine if if that's the right thing for you and if if that's the right thing for you and if if that's the right thing for you and how can you tell if a business is using how can you tell if a business is using how can you tell if a business is using leverage optimally or how can you tell leverage optimally or how can you tell leverage optimally or how can you tell if if the debt situation is kind of out if if the debt situation is kind of out if if the debt situation is kind of out of control if they have it in control of control if they have it in control of control if they have it in control what are some things that you look at what are some things that you look at what are some things that you look at specifically with leverage specifically with leverage specifically with leverage
Todd Combsyeah so i think with leverage first of all on a personal level yourself as an all on a personal level yourself as an all on a personal level yourself as an investor investor investor it's best to it's best to it's best to minimize or eliminate it i mean i think minimize or eliminate it i mean i think minimize or eliminate it i mean i think it's perfectly fine if you have a it's perfectly fine if you have a it's perfectly fine if you have a mortgage mortgage mortgage it's perfectly fine if your cars have it's perfectly fine if your cars have it's perfectly fine if your cars have loans on them in fact i think it's a loans on them in fact i think it's a loans on them in fact i think it's a good idea for all your depreciating good idea for all your depreciating good idea for all your depreciating assets assets assets to be financed and your home to be to be financed and your home to be to be financed and your home to be financed i think those are reasonable financed i think those are reasonable financed i think those are reasonable things to do things to do things to do but i don't think you should have margin but i don't think you should have margin but i don't think you should have margin debt debt debt in a brokerage account etc i think in a brokerage account etc i think in a brokerage account etc i think that's that's that's not a good idea not a good idea not a good idea and also not to play around much with and also not to play around much with and also not to play around much with options and derivatives on a personal
Todd Combsoptions and derivatives on a personal level so i think that's also not a good idea but when you get past all that and you're looking at different businesses i think it's pretty apparent whether a business is leveraged or not i think that's pretty easy to tell on the balance sheet sometimes there are some liabilities which are off balance sheet like leases etc but if you read the annual reports and such i think it would become pretty obvious uh what their obligations are the ideal great business is one that generates you know very high returns on equity without any use of of uh borrowed money or leverage like you know we have a company in the u.s called fair isaac's it's based in berkeley they're the ones who you know have all the fico scores and so each time some financial institution gives you your fico score you know they get one penny or something
Questioneryou know they get one penny or something
Questionerso it's a great business and basically uh that business is very profitable they don't really need any uh leverage and they are a large portion of the revenue goes to the bottom line but in investing there are always every situation has an exception and they can be really good investments uh one can make on in businesses which are levered sometimes the leverage can be non-recourse or sometimes the terms can be such that the market is misreading it it's causing distress on the equity for not very good reasons and so on so i think uh sometimes the presence of leverage can create great investment opportunities but to keep it simple if you just said to yourself i would not invest in businesses which were levered you could live a very blissful and profitable life
Questionerawesome kind of relating to that too i
Questionerawesome kind of relating to that too i know a lot of people are expecting rates to rise in the next few months or even years is that going to have any effect on how we look at leverage or the amount of leverage some companies take on now that these rates are rising or how's that going to affect stock prices do you think going forward
Questioneryeah i mean if if a business is levered and they're having difficulties or the interest is a very significant part of their earnings at low interest rates and that's a very serious concern because you could easily get to a situation in the upside down or they're tripping confidence and so on so yeah i think it's very important to look at the gearing ratios and how likely the business is to be able to withstand meaningful changes in interest rates and in general you know capitalism is brutal most businesses do not survive for
Todd Combsmost businesses do not survive for more than a few decades even the very very successful ones the ones that have leverage are going to be significantly less likely to be able to survive for multiple decades of time because you're just adding a layer where you could have a very significant business downturn at the same time when rates go up and you're kind of upside down and then your lenders start to turn the screws on you those are not good situations to find yourself in i sort of have a follow-up to that i was curious how much you think about macro events when you're investing or if it's really focused company specific and that's something that's sort of like really at the end where that comes up in your process i think investing is difficult enough if you're just trying to understand a business and how it works i think when you start overlaying and
Warreni think when you start overlaying and trying to make assumptions okay here's what i think will happen to interest rates or unemployment or recession in this year or that year all of those things most people are wrong about everything i thought that would happen with covet in march 2020 turned out to be wrong i mean i would have never guessed that now we'd be sitting at all-time highs on the stock market after you know more than half a million people died in the u.s and we had all these lockdowns and stores and everything shut down and businesses people working remote i also wouldn't have thought that remote work would have led to a more productive workforce not a less productive workforce it's all counter-intuitive and so i think that the best thing to do is not to give too much weight and not to think too much about the macro
Questionermacromacro because it's a lot harder and it may not have an effect in the end at all and then i have another question so i interned at capital group this past summer it was online but i remember hearing about um the best ideas fund i remember you talking about that i couldn't find anything about it but um i'm curious what your checklist is to sort of keep yourself honest make sure that you're not pounding something into your head that might be incorrect just because you've been looking at it for a while i think this is a buffett quote he says that a a horse that can count from one to ten is a smart horse not a smart mathematician if you are looking at a business that is the best in its industry that may simply be the smartest horse but what you want is the smartest mathematician fair isaac might be better than the best steel company for example
Warrenthan the best steel company for example or the best oil and gas refining company for example and so i think that the interesting thing about capitalism is that there are some businesses which are so easy to run which have such strong comparative positions which have pricing power and there are others which are so hard to run no pricing power lots of competition on and on and as investors we have the choice where to go you know be patient and try to look for the businesses who have a natural advantage not just the bond that's the best in the industry
Questionermanish i have another question kind of going like you're talking about picking the best in in the not just the best in industry but picking you know the best mathematician a lot of our members kind of want to hear more about the moat aspect from the value investing principles how can you kind of tell
Questionerprinciples how can you kind of tell what a good mode is or if a company even has a mode i think for the most part it can be quite obvious if you just spend some time thinking about it let's say for example you use instagram or facebook for example you can form some opinion about the stickiness and how long those businesses could thrive and what would it take to unseat them you know i mean these are classic network effect businesses they can be unseated if they're going to lose their way and such some disruptor comes in with a better mousetrap but it's not so easy to do that they would need to be completely sleeping at the wheel for a long time to allow something like that to happen so i think it's something that you can start to put your arms around when you look at different businesses if you look at a business like let's say 7up for example how does sprite affect
Questioner7up for example how does sprite affect it how do the other soft drinks affect it how do other non-carbonated drinks affect it what kind of pricing power does it have and how do consumers think about it versus the substitutes and so on and those will start answering your question about the the nature of the moat and how wide and deep it is and i think that if you cannot get to a point where something is a no-brainer where you have been able to convince yourself that this is amazing it just passed because you know we even if you make one decision a year or two decisions a year or one decision every two years that's perfectly fine kind of a follow-up to that is the mode the only competitive advantage that you're looking for or are there other competitive advantages that you you kind of see from an annual report or somewhere else that you kind
Questionerreport or somewhere else that you kind of factor into your decision to invest
Todd Combsas well well the mode is kind of all-encompassing i mean that's why born and charlie use the term because it's kind of if you look at you know porter's five forces for example it's a lot more complex kind of description of what is a mode but the mode encapsulates things like a low-cost producer sometimes the mode can be that you are just cheaper than anyone else in producing sometimes the mode is all about that you don't need to have as much markup as someone else like kind of a costco you know they're always going to be under everyone else's price and that gives them a strong mode the more i think is a very broad uh kind of shorthand for what gives a business in enduring competitive advantage and the engineering advantage can come from a number of different places
Otherfrom a number of different places sometimes the enduring advantage is hidden you can see it in the numbers like the profits are great or the growth is great but why it's great may be hidden and then you kind of have a treasure hunt treasure hunt to try to figure it out we did a question in the chat that i'm actually going to make slightly more specific than it's written but it's asking how do you evaluate the quality of management when you're looking at a business and i guess i'll add on to that like as students when we can't interact with management because i know that you could probably meet with the managers of the companies that you're looking into
Questioneryeah i think it's actually an advantage if you can't meet the management because you're unlikely to be sold which is a good thing the simple way to evaluate management is simply look at the track
Todd Combsmanagement is simply look at the track record what have they done over the last 10 or 20 years versus what they said 10 or 20 years ago and that's pretty easily available and so you warren and charlie don't care so much about the projections of businesses making or projections the manager is making what they care a lot about is what is the track record of that manager or management team it's fun to go back into a business go back 10 years 15 years look at the nature of the business look at what the manager was saying and then look at what transpired you know did they under promise and over deliver did they over promise and under deliver are they competent or incompetent i think these things start becoming very apparent in most cases when you start looking at those things from a long perspective
Questioneryeah then we had another question that
Questioneryeah then we had another question that was submitted so a lot of the people on the call are obviously interested in finance and investment management and so some people are curious about what it is about the investment profession that you find most rewarding or most challenging or most tedious
Warrenyeah i don't find it tedious i i find it permanently and thrilling and amazing investing in one of the broadest disciplines it cuts across many different disciplines and especially depending on the business you're looking at i mean i gave a talk a few years back it's on youtube about coca-cola and uh at uci uc irvine coca-cola is in many ways a pretty simple business almost all of us are consumers of if not coca-cola one of the products they've got you know 100 brands or something and we can very quickly kind of get an understanding of the nature of the
Questionerunderstanding of the nature of the businessbusinessbusiness but the kinds of things that affectbut the kinds of things that affectbut the kinds of things that affect cokecokecoke you know from a psychology perspectiveyou know from a psychology perspectiveyou know from a psychology perspective how it you know the association tendencyhow it you know the association tendencyhow it you know the association tendency you know celebrity giving coke andyou know celebrity giving coke andyou know celebrity giving coke and endorsement or being used in the ad theendorsement or being used in the ad theendorsement or being used in the ad the impact it has on usimpact it has on usimpact it has on us ororor you know just when we see the brand inyou know just when we see the brand inyou know just when we see the brand in different placesdifferent placesdifferent places and how it works so coke is coke can getand how it works so coke is coke can getand how it works so coke is coke can get really complicated as you start toreally complicated as you start toreally complicated as you start to overlay how it works in differentoverlay how it works in differentoverlay how it works in different settings and geographies and such sosettings and geographies and such sosettings and geographies and such so investinginvestinginvesting even in a simple business cokeeven in a simple business cokeeven in a simple business coke requires you to be open torequires you to be open torequires you to be open to multi-disciplinary thinkingmulti-disciplinary thinkingmulti-disciplinary thinking and that is the case with a lot ofand that is the case with a lot ofand that is the case with a lot of businesses you look atbusinesses you look atbusinesses you look at the factors that affect a business arethe factors that affect a business arethe factors that affect a business are sososo wide-ranging thatwide-ranging thatwide-ranging that you want to make sure you've honed in onyou want to make sure you've honed in onyou want to make sure you've honed in on the stuff that is likely to happenthe stuff that is likely to happenthe stuff that is likely to happen and understand what the likely impactsand understand what the likely impactsand understand what the likely impacts of that areof that areof that are and thatand thatand that generally speaking will cut across manygenerally speaking will cut across manygenerally speaking will cut across many disciplines
Questionerdisciplines so we have a couple kids in the club that are involved on campus and like the entrepreneurship scene and so they were curious how you think being a founder of transtech has helped you identify compounders and just help you in your value investing career like how that all ties together
Questionerwell you know there's a buffett quote he says what is it to walk on land if you try to explain to a fish what it is like to walk on land one day walking on land is worth more than a thousand years of trying to explain to a fish what it's like to walk on land so it's the same way with running a business versus reading about a business i think that when you run a business met payroll made sales and lost customers and had good customer service and bad customer service and employee turnover and challenges and hiring and all these other myrate things that you run into
Otherother myrate things that you run into those those teach you a lot about the way the world works and that experience that you get running a business gives you a better understanding of the challenges any business faces if you know whoever's running it is is facing so it is dangerous to look at a business through some spreadsheets that's that's not a good way to look at a business i think a better way to look at a business is to kick the tires to really put yourself in the driver's seat of the ceo think about what three or four variables would affect most of the outcome and think about whether you can handicap how those three or four variables would play out so i was supposed to actually have a presentation today about incentives for a finance class but it got got pushed back but i was hoping that you could explain some of the people on the call
Questionerexplain some of the people on the call might not be familiar with how the buffett partnership was structured so i guess why you picked that structure from an incentive standpoint and then i'm curious if you could start to put write funds over again from scratch if there's anything about that structure that you would change
Warrenyeah i mean i think i would not change that structure if i were starting again and i think when i first encountered a buffett partnership fee structure uh basically buffett had a number of different arrangements with different investors but then the early 1960s he unif made it all uniform brought them all into a single partnership and basically he said look the first six percent every year that i make is going to go to the investors and above that i'll take one-fourth and the investors get three-fourths and if i have a down year i first have
Ted Weschlerand if i have a down year i first have to make it up you know if i minus 10 in a year i have to come up to base plus six percent annualized from that base and after that earn a fee so everything about that appealed to me i think it made a lot of sense it seemed to be a win-win for everyone it definitely aligned the interest of the investor with the investment manager and i think it gives a lot of incentive to the investment manager it's quite a lucrative scheme if you are a really good investor i mean if you're going to bang out 20 a year you're going to get three and a half percent on other people's money every year that is uh quite a handle quite uh the croupier's take is quite large it can work well and at the same time your investors don't mind you getting that because they're also getting 16.5 after fees which is also really good
Questionerwhich is also really good i have uh another question and it's kindi have uh another question and it's kindi have uh another question and it's kind of more on the informational side ofof more on the informational side ofof more on the informational side of things before you're getting ready tothings before you're getting ready tothings before you're getting ready to actually make that investmentactually make that investmentactually make that investment i know that you can probably never havei know that you can probably never havei know that you can probably never have all the information before you go into aall the information before you go into aall the information before you go into a decision but how do you find thatdecision but how do you find thatdecision but how do you find that stopping point where you say you know istopping point where you say you know istopping point where you say you know i think i have enough information that ithink i have enough information that ithink i have enough information that i feel comfortable making this trade yeahfeel comfortable making this trade yeahfeel comfortable making this trade yeah
Todd Combsthat's a great question actually i thinkthat's a great question actually i thinkthat's a great question actually i think with any investmentwith any investmentwith any investment you'reyou'reyou're looking at let me just i'll take alooking at let me just i'll take alooking at let me just i'll take a tangent and come back to your questiontangent and come back to your questiontangent and come back to your question many years back i was talking to charliemany years back i was talking to charliemany years back i was talking to charlie and heand heand he encouraged me to discuss my investmentsencouraged me to discuss my investmentsencouraged me to discuss my investments not so much withnot so much withnot so much with an analyst who might work for mean analyst who might work for mean analyst who might work for me but with a peerbut with a peerbut with a peer investor whoinvestor whoinvestor who cared about me and was a good investorcared about me and was a good investorcared about me and was a good investor so he said i always had someone to talkso he said i always had someone to talkso he said i always had someone to talk to he said it's a big advantage becauseto he said it's a big advantage becauseto he said it's a big advantage because sometimes we as investors have blind
Questionersometimes we as investors have blind spots so i told them also like in your case charlie for example you have warned to bounce investment ideas off he says well it wasn't always worn but it's very helpful to have somebody who you can discuss your ideas with so we all have our circle of competence we all have our blind spot so one thing that is useful is to generally bring your ideas to some person whose trust who you trust and who cares deeply about you and is also a good investor that's an important thing but i think beyond that you obviously want to get to an aha moment which is telling you here's all the reasons why this investment is a no-brainer and the world doesn't get it but eventually they will and here's why it makes sense i think that the what i have found in you know 25 plus years of investing is the greed portion of our brain
Otheris the greed portion of our brain can sometimes mislead us and so it's really important to have circuit breakers on that grid one of the circuit breakers i have is i have a pre-investment checklist it has like 160 or 170 questions on it and i run any investment through those questions before i invest and the big value the checklist adds is that the first time i run it it'll pop up maybe 10 or 20 questions but i don't know the answer and what that says to me is listen dummy you are not done with the work you can't even answer these questions so first go and figure out the answer and figuring out that answer might take several weeks of work which is fine or might take several days and once you can answer all the questions intelligently the checklist has done its job it's going to highlight things that are likely possible failure points in the investment every single company
Todd Combsin the investment every single company you can come up with scenarios you can come up with scenarios you can come up with scenarios where that business is going to have where that business is going to have where that business is going to have struggles in the future struggles in the future struggles in the future and the question you're trying to answer and the question you're trying to answer and the question you're trying to answer is what are the likelihood probabilities is what are the likelihood probabilities is what are the likelihood probabilities that that happens or doesn't happen in that that happens or doesn't happen in that that happens or doesn't happen in that business versus what that business versus what that business versus what you think are the good things that could you think are the good things that could you think are the good things that could happen in the business so i think the happen in the business so i think the happen in the business so i think the circuit breaker is important talking to circuit breaker is important talking to circuit breaker is important talking to somebody somebody somebody you trust is important being patient and you trust is important being patient and you trust is important being patient and thinking through thinking through thinking through why something would not work why something would not work why something would not work or what are the issues that could cause or what are the issues that could cause or what are the issues that could cause a permanent loss of capital that's where a permanent loss of capital that's where a permanent loss of capital that's where the focus needs to be the focus needs to be the focus needs to be the upside will take care of itself i the upside will take care of itself i the upside will take care of itself i think your aha moment is already think your aha moment is already think your aha moment is already probably showing an upside probably showing an upside probably showing an upside the question is how do you protect the the question is how do you protect the the question is how do you protect the downside could you go through an example downside could you go through an example downside could you go through an example not a current holding but maybe a former not a current holding but maybe a former not a current holding but maybe a former holding that either worked really well holding that either worked really well
Questionercould you go through an example not a current holding but maybe a former holding that either worked really well
Questionerholding that either worked really well and you learned a lesson from or worked not so well and you learned a lesson from just to sort of put some of this into practice
Questioneryeah i mean i think that we don't really learn much for the businesses that we do well with you know those just feel great you know well done monish that's about it that's all you're going to get out of those investments it's the failures i mean it's the same thing when you're in school the classes that are easy a's don't teach you much the classes where you have to struggle and you maybe get a b or you know c level a c average trying to pull a b out or whatever those are the ones that really teach you a lot in investing and that's why it's always important to have a real portfolio a real brokerage account not do this through a spreadsheet because you need to feel the pain
Questionerpain you need to feel the pain when you because you will lose money it's guaranteed you know john templeton said one and one out of three times we're going to be wrong when we invest at least one out of three times i think that failures teach you a lot in 2008 for example i had an investment in a some subprime mortgage lender delta financial went to zero that was painful because we had we had a concentrated portfolio we had 60 70 million invested in it and it all went to zero i've had a number of difficulties over the years with investments in finance and banking companies and i've come to the conclusion that i don't need to go there so generally speaking if a bank comes up on the radar i don't even bother to look anymore i just say it's a pass okay now if you look at someone like warren buffett in his entire career
Questionerbuffett in his entire career he's i believe never been wrong on a banking investment and uh he used to have an investment in a bank in illinois first rockford in the 1960s was one of the first acquisitions berkshire had done and i have a friend who used to be an intern at first rockford at that time and he'd say that warren would show up once a month to visit first rockford from omaha he traveled there and he said the whole place would be in a frenzy for several days before warren showed up because they knew you know he never forgets a number he's asking a bunch of questions but that particular bank was probably one of the best run banks in the country their uh write-offs of bad debts for decades approached zero so the it was a single branch bank in rockford the the founder knew all the major business owners and your founder was very deeply
Questionerand your founder was very deeply involved in all the underwriting decisions so pretty much every loan you know and he had to approve it and he wasn't going to approve loans to deadbeats and they had an exceptional track record in terms of how they with the loans and buffett is a really good banking analyst he he's had investments in wells fargo jp morgan bank of america you know m t bank on and on every one of them has been a home run and it's worked out really well for him on the other hand if you look at his track record with retailers it's been terrible and he doesn't talk about it much because he doesn't like to you know discourage his managers but i would say that almost all of the retail investments berkshire hathaway has made which have been dozens of retail investments only a couple of them have done really well you know nebraska furniture mart
Charliewell you know nebraska furniture mart well you know nebraska furniture mart has done well has done well has done well borshams have done well almost every borshams have done well almost every borshams have done well almost every other jeweler they bought other jeweler they bought other jeweler they bought has done terribly almost every other has done terribly almost every other has done terribly almost every other furniture operation they bought has done furniture operation they bought has done furniture operation they bought has done terribly and almost every other retail terribly and almost every other retail terribly and almost every other retail operation they bought has done terribly operation they bought has done terribly operation they bought has done terribly because because because in general retail is just so hard it's in general retail is just so hard it's in general retail is just so hard it's so hard to do well that even a warren so hard to do well that even a warren so hard to do well that even a warren buffett struggles so there are sic codes buffett struggles so there are sic codes buffett struggles so there are sic codes where where where warren excels warren excels warren excels and there are sic codes were warned us and there are sic codes were warned us and there are sic codes were warned us poorly and that's the situation with all poorly and that's the situation with all poorly and that's the situation with all of us of us of us and the earlier you figure out and the earlier you figure out and the earlier you figure out what you're really good at what you're really good at what you're really good at and what to avoid like i've figured out and what to avoid like i've figured out and what to avoid like i've figured out it i took a lot of painful arrows in the it i took a lot of painful arrows in the it i took a lot of painful arrows in the back back back i wish i knew this 25 years ago and uh i wish i knew this 25 years ago and uh i wish i knew this 25 years ago and uh but you know i don't really want to own but you know i don't really want to own but you know i don't really want to own banks banks banks or finance companies i repeatedly get or finance companies i repeatedly get or finance companies i repeatedly get hoes with those and so i'm i'm done you hoes with those and so i'm i'm done you hoes with those and so i'm i'm done you know enough for a lifetime on the other know enough for a lifetime on the other
Warrenknow enough for a lifetime on the other hand i've done very wellhand i've done very wellhand i've done very well in other areas wherein other areas wherein other areas where i mean like in a lot of commodityi mean like in a lot of commodityi mean like in a lot of commodity businesses which are low cost those havebusinesses which are low cost those havebusinesses which are low cost those have worked really well low cost producersworked really well low cost producersworked really well low cost producers and a number of different kinds ofand a number of different kinds ofand a number of different kinds of businesses which i've been able tobusinesses which i've been able tobusinesses which i've been able to handicap well have worked out wellhandicap well have worked out wellhandicap well have worked out well
Questionerhow do you determine what price you willhow do you determine what price you willhow do you determine what price you will pay for a business how do you calculatepay for a business how do you calculatepay for a business how do you calculate the intrinsic value of a business whenthe intrinsic value of a business whenthe intrinsic value of a business when
Warrenyou go back to circle of competence if ayou go back to circle of competence if ayou go back to circle of competence if a business is within your circle ofbusiness is within your circle ofbusiness is within your circle of competencecompetencecompetence by definition you know what theirby definition you know what theirby definition you know what their business is worthbusiness is worthbusiness is worth and you don't need to do this preciselyand you don't need to do this preciselyand you don't need to do this precisely okayokayokay i mean let's say i take a business likei mean let's say i take a business likei mean let's say i take a business like coca-cola what is coca-cola worthcoca-cola what is coca-cola worthcoca-cola what is coca-cola worth okayokayokay i would say that it's likely thati would say that it's likely thati would say that it's likely that coca-cola's valuecoca-cola's valuecoca-cola's value intrinsic valueintrinsic valueintrinsic value is probably more than 15 times trailingis probably more than 15 times trailingis probably more than 15 times trailing earningsearningsearnings it might even be more than 20 timesit might even be more than 20 timesit might even be more than 20 times trailing earnings maybe it's even 25 or
Warrentrailing earnings maybe it's even 25 or 30 time trailing earnings such a high quality business but let's stick to 15 time trailing earnings because that's a no-brainer we know it's worth more than 15 times trailing earnings if coke is offered to you at five times trailing earnings it's a no-brainer it's an aha moment if it's offered to you at 12 times trading earnings we don't know and once we get to we don't know we can take a pass this is a game with no call strikes and so we can let a thousand balls go by not just three and so coke comes to you at 12 or 13 times earnings yeah not really let it go you know then facebook shows up at 12 times earnings you say let's swing at that one okay and you just keep doing that all day you basically keep saying no to almost everything and what happens is that once in a while there are these aha moments
Questionerthere are these aha moments and i think the key is that it has to hit you between the head with like a two by four where you just cannot ignore it like like you know i've mentioned in some of my previous talks i was visiting turkey and i ran into this company that is the number one warehouse operator in turkey it was really simple to figure out what those you know their warehouses are 99 leased their lease to like amazon car for ikea very very high quality tenants long term leases 10 years whatever and it's really easy to figure out what the cost of a warehouse is you know thirty forty dollars a square foot for the land and you know thirty five forty dollars a square foot for construction costs like you know seventy eighty dollars a square foot and they had 12 million square feet so you know it's maybe worth a billion dollars something like that 900 million
Warrendollars something like that 900 million a billion something like that maybe 800 a billion something like that maybe 800 million to a billion somewhere in that range and there was a couple of a couple of hundred million of that okay so the thing is worth about like let's say 600 to 800 million the market cap was 20 million if you see a cow which is or a bull which is huge you don't need to know the weight to know that it's big and fat okay i didn't need to know whether the liquidation value of resource was 800 million a billion 600 million 500 million all of those answers were fine even 200 million was fine i'm paying 20 million okay so the only question left was am i dealing with a bunch of crooks are they honest you know like what's going on here right and i poked a lot at that and i met met the father and son and i asked people i trusted and they said there's nothing we've ever heard
Questionerwe've ever heard which is untoward about them and so and they came across as you know pretty straightforward smart people and hardworking people and they had built this from scratch you know they worked hard at it so it was a no-brainer so i think what you're looking for is these absolute no-brainers and they do show up from time to time and when they show up then you um step up to the plate i'm curious your idea of being a shameless cloner if you've had to make any updates to that over the years or if you think that that's like a timeless thing and it's gonna stay perfect the way that it is
Questionerwell i think it's a big advantage to be able to leverage what other people have already figured out i think that if you look at something like data roma which lists you know the top holdings of a number of prominent investors for something to make into the portfolio of
Questionersomething to make into the portfolio of chuck akriechuck akriechuck akrie or bill ackman or any of those peopleor bill ackman or any of those peopleor bill ackman or any of those people it's gone through a bunch of filtersit's gone through a bunch of filtersit's gone through a bunch of filters i mean bill runs a concentratedi mean bill runs a concentratedi mean bill runs a concentrated portfolio he might have one or two newportfolio he might have one or two newportfolio he might have one or two new positions he's got a team they look atpositions he's got a team they look atpositions he's got a team they look at hundreds of things right so if somethinghundreds of things right so if somethinghundreds of things right so if something has made it through it's worth checkinghas made it through it's worth checkinghas made it through it's worth checking out and trying to reverse engineer whyout and trying to reverse engineer whyout and trying to reverse engineer why it means and so i think it's a bigit means and so i think it's a bigit means and so i think it's a big advantage to be to use as youradvantage to be to use as youradvantage to be to use as your universe to dig intouniverse to dig intouniverse to dig into what other people have already figuredwhat other people have already figuredwhat other people have already figured out so instead of starting with here'sout so instead of starting with here'sout so instead of starting with here's 50 000 stocks globally let me go figure50 000 stocks globally let me go figure50 000 stocks globally let me go figure this outthis outthis out that's a really tough jobthat's a really tough jobthat's a really tough job but if youbut if youbut if you take that skill set you know that datatake that skill set you know that datatake that skill set you know that data set down to here's 50 stocks which areset down to here's 50 stocks which areset down to here's 50 stocks which are the top holdings of you know 10 or 15the top holdings of you know 10 or 15the top holdings of you know 10 or 15 investors that i really admire orinvestors that i really admire orinvestors that i really admire or there's 20 stocks in that group it'sthere's 20 stocks in that group it'sthere's 20 stocks in that group it's really relatively easy to go through thereally relatively easy to go through thereally relatively easy to go through the list and say okay
Questionerlist and say okay which ones can i understand that'll throw out a bunch of them and which ones are great businesses and that'll again throw out a bunch of not so great businesses and then the ones that are great that you can understand you can look at the valuations and go from there pretty simple
Questionerthat's all the questions i had i don't know if anybody else has anything that they want to ask before we wrap up
Questionerwarren buffett has said that he wants to buy businesses that are going to return on capital employed for a very long time how do you know if a business is able to employ capital at high rates of return over long periods of time it's a great question and you know monger would say why should it be easy to get rich you know so that the ability to answer that question has the possibilities to make you insanely wealthy if you know how to answer that
Warrenwealthy if you know how to answer that properly and it's not easy to answer that properly so let's take a business like geico geico is a direct writer of auto insurance unlike state farm if i buy a policy through state farm state farm pays 10 or so of that premium to the agent who you know independently owned agent uh which is bring that policy in geico uses a call center and and so it has approximately maybe i don't know eight twenty twelve percent advantage over state farm and allstate and that's a secular advantage and that advantages has allowed geico to go from nothing to it usually two three percent of the auto market now it's 8 10 12 and they're continuing to grow but progressive which is also a direct writer of policies has run circles around geico so progressive invested very early in telemetry technology which gave them a lot more data about how the cars were
Questionerlot more data about how the cars were being driven by these drivers and that allowed them to have a much better understanding of the risk so they were willing to they were they knew that certain drivers you could offer even lower premiums than geico bring them in and they'd still be profitable as geico would look at the driver and say i really can't take this guy below a certain premium because they were missing some data points so that's an example of how and berkshire is now trying to fix that they're behind the eight ball trying to help geico catch up to progressive my two sense is that progressive is really good at technology and they've had a long head start they're continuing to jam on this so i think geico's gonna have a hard time they might get there five years ten years they might get there they still have the advantage against
Questionerthey still have the advantage against the other player but they're not the best they were the best 10 years ago they're not the best today and so one would not have been able to predict 10 or 15 years ago that we'd have this kind of issue come up
Questionerwith geico right we just look at geico and say oh you know berkshire hathaway they've got disadvantaged they just keep chewing through and getting more market share they've got great customer service who doesn't like the gecko you know on and on and um you guys might not remember this but you know there were these series of ads geico had for the caveman you remember the caveman ads so the caveman ads were hot and heavy when we met warren for lunch so my daughters my daughter has worn have you met the caveman
Warrenokay and warren said you know i'm sorry i have another caveman can you tell the caveman we really like him you know it's
Todd Combscaveman we really like him you know it's so funny anyway so i mean i think that this you know if you look at coke and the sugar issue and where does that go 10 20 30 years from now is it an issue with a non-issue is most of the portfolio non-sugar carbonated versus non-carbonated you know whatever so i think that if you look at visa and mastercard incredible businesses what do these businesses look like 10 or 20 30 years from now there's so much happening in payments american express so much happening in payments it may not be easy to figure those things out so this question we can clearly tell which businesses we can clearly tell which businesses generate high returns on employed capital that's black and white it's in the balance sheet we can tell income statement it's easy the nature of how long that can continue becomes a much harder question and that's why we want a margin of
Todd Combsand that's why we want a margin of safety that's why we want these aha moments but if we can figure that out in some cases you know i'll give you an example which is going on right now in my portfolio i'll talk a little bit about one of the portfolio holdings there's a company in india that i invested in about three years ago called indian energy exchange it is a network effects business that basically has 95 98 market share where electricity on the spot market is bought and sold through their servers and whatever is bought and sold through their servers they keep one percent of the transacted amount when i first invested in the business it's there's a company called american tower and american tower basically owns i don't know tens of thousands of these cell phone towers and it's a great business because by the time you get the second tenant on
Todd Combsby the time you get the second tenant on that tower anything incremental coming in is like you know almost 100 margin and then when you go from 3g to 4g to 5g each one of those is adding more complexity and such and once a tnt its network and has towers in certain positions if you take out one tower it affects how what i'm saying is that you can't take out one tower and put another one a mile away it affects the whole network so in effect the owner of that tower has a advantage where at t is probably going to keep paying rent well beyond the least term because their network topography would change so much if they had to redo these things every time so for a number of reasons american tower is an incredibly great business and it's been a great business a very long time one of my friends used to be a fund manager at a large fund house
Otherfund house and they had an invest investment in and they had an invest investment in and they had an invest investment in american power american power american power and they went uh they had a like an and they went uh they had a like an and they went uh they had a like an investor day so they invited all these investor day so they invited all these investor day so they invited all these you know you know you know fund managers to their headquarters and fund managers to their headquarters and fund managers to their headquarters and they were going to have some you know they were going to have some you know they were going to have some you know meetings and presentations and then play meetings and presentations and then play meetings and presentations and then play golf in the golf in the afternoon golf in the golf in the afternoon golf in the golf in the afternoon so my friend showed up a little bit so my friend showed up a little bit so my friend showed up a little bit early early early and he went to the cfo's office he knew and he went to the cfo's office he knew and he went to the cfo's office he knew the cfo the cfo the cfo and he saw the cfo just sitting there and he saw the cfo just sitting there and he saw the cfo just sitting there with his feet on his desk with his feet on his desk with his feet on his desk so he asked him hey you know you don't so he asked him hey you know you don't so he asked him hey you know you don't look like you got anything to do he said look like you got anything to do he said look like you got anything to do he said yeah i don't have much to do he says yeah i don't have much to do he says yeah i don't have much to do he says don't you need to don't you need to don't you need to do deals do deals do deals you know you guys keep buying new towers you know you guys keep buying new towers you know you guys keep buying new towers don't you need to do new new tower deals don't you need to do new new tower deals don't you need to do new new tower deals just sitting with your feet he said look just sitting with your feet he said look just sitting with your feet he said look everyone has my number anyone who has a everyone has my number anyone who has a everyone has my number anyone who has a tower for sale tower for sale tower for sale they know how to reach me they know how to reach me they know how to reach me and and and they also know exactly what i'm going to they also know exactly what i'm going to
Questionerthey also know exactly what i'm going to pay he said there's nopay he said there's nopay he said there's no voodoo or work involved the call comesvoodoo or work involved the call comesvoodoo or work involved the call comes in we tell them yes here's the termsin we tell them yes here's the termsin we tell them yes here's the terms here's where you signhere's where you signhere's where you sign we wire the money we move on my feet arewe wire the money we move on my feet arewe wire the money we move on my feet are still on my deskstill on my deskstill on my desk okay you know i don't need to kind ofokay you know i don't need to kind ofokay you know i don't need to kind of you knowyou knowyou know go have a root canal about thisgo have a root canal about thisgo have a root canal about this that's the definition of a greatthat's the definition of a greatthat's the definition of a great business okay and when you look atbusiness okay and when you look atbusiness okay and when you look at something like american tower you knowsomething like american tower you knowsomething like american tower you know it's likely that's going to endure for ait's likely that's going to endure for ait's likely that's going to endure for a long period of time now there could be along period of time now there could be along period of time now there could be a disruptor elon could put everything indisruptor elon could put everything indisruptor elon could put everything in satellites for example okay andsatellites for example okay andsatellites for example okay and at that point he's not going to have hisat that point he's not going to have hisat that point he's not going to have his feet on this desk his feet are going tofeet on this desk his feet are going tofeet on this desk his feet are going to be shaking okaybe shaking okaybe shaking okay under the desk but who knows what howunder the desk but who knows what howunder the desk but who knows what how far that that is and what the odds arefar that that is and what the odds arefar that that is and what the odds are and whatever else and so i think thatand whatever else and so i think thatand whatever else and so i think that when i look at a business like iex thatwhen i look at a business like iex thatwhen i look at a business like iex that we invested in it was about threewe invested in it was about threewe invested in it was about three percent of india's electricity was
Questionerpercent of india's electricity was flowing through their servers when we invested three years ago now it is north of seven percent it's from seven seven and a half percent it's grown a lot and india's per capita usage of electricity is going up as well and the government of announced some policy changes where it's probably going to get to 20 to 25 of the total electricity it might even go higher might be 30 35 it's huge to take a country the size of india where the per capita electricity usage is so small and then you collect and the way that business works 75 of revenue is net income okay when i visited their offices i visited the offices in new delhi a few times it reminded me of chuck akery and and my friend with american tower i saw this country club relaxed place nobody's really stressed they got about like 40 software guys who don't seem to
Questionerlike 40 software guys who don't seem to have much to do and they got a 30 40 other people who also don't seem to have much to do everything's running through like two or three servers they have and the money is flowing you know everyone pays them in advance they have no bad debts nothing and whatever comes in they have no expenses okay it's a bunch of you know bits running around on a server and they collect one percent they've got no expenses they just pay for the software people so as their revenue grows like this 80 percent company might become if it becomes 10 times the size in revenue it might go to 120 people 50 increase in people for 10x the revenue and the 72 percent might become 82 okay so now the question is how long can this continue okay i don't know you know we've we've had so far 5x or 6x returned since we invested
Otherwell done monish you know like i said we
Otherwell done monish you know like i said we don't learn nothing iex teaches us nothing okay it just feels good okay and but i don't know how long it can go on it could go on for 20 years okay if it goes on for 20 years hallelujah you know god loves me you know it could go on it it might also might be like in three years some policy changes come in and something happens or whatever you know upsets the apple cart we don't know it's uh some of these things are kind of hard to figure out but my best guess is let it ride so we have a india fund where iex is now like 40 of the pie and we're like saying it's okay we just keep our investors are informed and i said at 95 percent when it gets to 95 which it might the way it's going as long as we can just let everyone else everyone know listen guys 95 of your money is in one stock and you know disclose that properly if
Questionerand you know disclose that properly if you don't like this you can exit or whatever else i think we are okay but you know you don't get very many opportunities like that and i used to i made a mistake with iex i used to own five percent of the business uh this is the movie so the most we could buy and then go with hit and i was concerned it always looked expensive you know that's the thing when you look at fair isaac like if i look at iex today trailing earnings it might be trading at 80 or 100 times okay because it's a spectacular business that's growing like crazy you know so it's never going to be at eight times earnings so anyway i think that question is a great question and it's a great question to think about and you only need to figure it out once you only need to find one iex or one american tower and if you're right about that runway
Otherand if you're right about that runway for 30 or 40 years just sit there and let it rip and you're done that's it
Otherthank you so much for your time today
Otherthis is good you look a lot like you look a lot like your dad tell him i said hi
Otheris that a compliment
Otherthat's a compliment he's a good looking guy
Otheri'll let him know
Otherall right thank you so much like i said i enjoyed interaction with both your both your parents both wonderful people and uh and it was great to say hi and
Otherdo you guys play clemson often i think that we have a home and home scheduled with um i was looking at it with my roommates i think we have a whole home scheduled with them in the next couple years but yeah we we played them at the beginning of this year i went to that game that was pretty fun clemson lose that one yeah clemson lost yeah i remember that one that was not expected
Questionerremember that one that was not expected yeah a lot of people are saying that clemson's not as good this year but my roommates and i were saying that georgia broke clemson that it was like we did it to them so that's how we're trying to justify it
Otherall right that sounds good well you know you probably know that you know the orange in my room yeah is because you know i'm bleed orange when i cut my wrist or whatever so uh but anyway go bulldogs and go tigers go dogs yeah all right thank you bye
Questionerokay bye