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Otheri think most people are already here so i guess it's good idea to start the session i'm really delighted that we have very big audience today i welcome you my name is tobias anders i'm faculty from the school of management at the asian institute of technology and i'm really delighted that we have a very interesting guest speaker today for a session we aim to make this session as interactive as possible so feel free to reach out with questions either in chat just raise your hand that you can ask the questions when we invite you to unmood without too much ado i would like to hand over the floor to monica by his investor focused on value investments very successful in many terms and maybe you just give us a few words about yourself before we start with the q a session
Questionerprofessor tobias it's a pleasure and honor to be with all of you and also
Otherhonor to be with all of you and also it is a great institution doing some great work so it's uh it's a pleasure to speak to your students i think it's a privileged student body that they have to study here i'm actually very privileged and honored to be invited to speak to this august group we'll basically i mean i have some remarks i would share initially with all of you and then we'll open up to questions and the questions can relate to what i talk about or it can be anything that the participants would like to talk about i think other than you know things we currently own i think talk about anything i think with that maybe i can get going if that's uh okay with you guys there's a relatively famous investor in india passed away recently you may have seen the news even in thailand and rakesh was a billionaire several times over he never managed money
Questionerhe never managed money for others for others for others he only really managed money for himself he only really managed money for himself he only really managed money for himself and he he actually started with nothing and he he actually started with nothing and he he actually started with nothing he actually borrowed about twenty he actually borrowed about twenty he actually borrowed about twenty thousand dollars at about 18 interest thousand dollars at about 18 interest thousand dollars at about 18 interest from some individuals to get going when from some individuals to get going when from some individuals to get going when he passed away recently he had a few he passed away recently he had a few he passed away recently he had a few billion dollars to his name and rakesh billion dollars to his name and rakesh billion dollars to his name and rakesh was a you know he was kind of a split was a you know he was kind of a split was a you know he was kind of a split brain in the sense that he did a lot of brain in the sense that he did a lot of brain in the sense that he did a lot of day trading and rapid fire in and out day trading and rapid fire in and out day trading and rapid fire in and out trading trading trading but at the same time he had some but at the same time he had some but at the same time he had some positions that he held for decades never positions that he held for decades never positions that he held for decades never touched them so for example he had made touched them so for example he had made touched them so for example he had made an investment an investment an investment maybe about 25 or 30 years ago maybe about 25 or 30 years ago maybe about 25 or 30 years ago into a company in india called titan into a company in india called titan into a company in india called titan they actually are a jewelry retailer they actually are a jewelry retailer they actually are a jewelry retailer they used to be a watch retailer but now they used to be a watch retailer but now they used to be a watch retailer but now jewelry manufacturer and retail jewelry manufacturer and retail jewelry manufacturer and retail he had put about like i said about three he had put about like i said about three he had put about like i said about three decades ago about four percent of his decades ago about four percent of his decades ago about four percent of his net worth net worth net worth into titan and he never really touched
Questionerinto titan and he never really touched it after that he also said in one of the interviews that he actually never visited a single manufacturing plant of titan over that period i think it represented about close to half of his network when he passed away so you know something that was a focus on became 50 or more of his portfolio and the rest of his portfolio had also done well so uh this was quite a significant return there was another company a pharmaceutical company lupin which he'd also held for a very long time and there was a third one that he very deeply regretted till the end that he sold so he had made a few times his money on that that was crystal it was a credit rating agency though the best credit rating agency in india so the the thing is that i think the holy grail of investing that i have figured out so far is to have
Todd Combsis to have partial ownership of businesses that can grow and compound for very long periods of time you know whether the business has qualities which allow it to increase intrinsic value over a period of time and usually these companies have some attribute that allow us to maybe identify them one of the attributes that they tend to have they tend to be run by or founded by kind of fanatical leaders you know maverick leaders leaders who don't really fit the normal mold they kind of appear somewhat unusual they're in their makeup so like for example in the in the united states we have an airline called southwest airlines southwest airlines has done extremely well i mean it's been around for 50 years and i don't think they've maybe expected except perhaps during covert they never lost money any year and they actually pioneered the low-cost
Warrenand they actually pioneered the low-cost carrier movement around the world a lot of companies around the world ryanair and asia air and so on they all copied southwest model which herb kelleher came up with what southwest was trying to do is they were not trying to compete with other airlines they were they were a short haul carrier and herb kelleher said that i'm trying to compete with the driver trying to drive in his car to between two cities you know two or three hundred miles and he said i want to make flying cheaper than the person putting gas in his car and going you know one tank of gas to get to another city and so he focused all the cost structures of southwest to make it attractive for that particular type of customer to find southwest attractive and when he was able to make that attractive for that type of customer other airlines just couldn't compete
Questionerother airlines just couldn't compete with them you know they with them you know they with them you know they their cost structures were designed their cost structures were designed their cost structures were designed to compete with other airlines not with to compete with other airlines not with to compete with other airlines not with people driving cars and so southwest got people driving cars and so southwest got people driving cars and so southwest got a a kind of sustainable advantage and you kind of sustainable advantage and you kind of sustainable advantage and you know for a lot for a very long period of know for a lot for a very long period of know for a lot for a very long period of time they compounded time they compounded time they compounded at a higher rate than berkshire hathaway at a higher rate than berkshire hathaway at a higher rate than berkshire hathaway uh in from the 70s on on from there uh in from the 70s on on from there uh in from the 70s on on from there one of the ways one of the ways one of the ways so you know these multi-baggers you know so you know these multi-baggers you know so you know these multi-baggers you know companies that go up 50 times 100 times companies that go up 50 times 100 times companies that go up 50 times 100 times a thousand times a thousand times a thousand times in value in value in value they can come in different stripes and they can come in different stripes and they can come in different stripes and colors but they do have some commonality colors but they do have some commonality colors but they do have some commonality and they do have some common frameworks and they do have some common frameworks and they do have some common frameworks that can help us identify that can help us identify that can help us identify one of the frameworks that is actually one of the frameworks that is actually one of the frameworks that is actually easy to easy to easy to screen for screen for screen for and easy to look for and easy to look for and easy to look for what i would call uber cannibals so what i would call uber cannibals so what i would call uber cannibals so these are companies that are these are companies that are these are companies that are very aggressive very aggressive very aggressive about buying back their shares typically about buying back their shares typically about buying back their shares typically these companies
Questionerthese companies issue no dividends and they are pretty much plowing back sometimes more than 100 percent of cash flow or close to 100 of cash flows into buybacks and there is something very unusual and magical and actually non-linear that happens when you do buy backs kind of ace over a few decades so for example we have a home builder in the united states in the east coast called nvr in the east coast called nvr nvr basically for the last 28 years has plowed back almost 100 percent of the cash flows into buybacks they don't issue dividends they only do buybacks the one thing they changed in their business model about three decades ago is most home builders what they would do in the united states is they will have a lot of investment in land you know they buy land banks and then they develop the homes and then they get rid of the land and they keep buying more land what nvr did is they changed
Questionermore land what nvr did is they changed that approach to being just in time they basically went to land owners and got options you know bought options to buy their land so if a piece of property would cost 10 million or 30 million dollars they might put up you know two or three hundred thousand or five hundred thousand dollars to have the option to buy that land at a fixed price over some period of time and that way they don't have capital tied up then when they need the land they exercise that option so once they go to land not being a factor of production that they need to invest in years in advance it becomes a very capital light business and it becomes a business that generates very high returns on equity and home building is a cyclical business you know it goes through ebbs and flows but because they don't have a lot of fixed costs in their
Questionerfixed costs in their in their model and because they don't in their model and because they don't in their model and because they don't have a lot of capital in their model have a lot of capital in their model have a lot of capital in their model all they do is like when they hit a air all they do is like when they hit a air all they do is like when they hit a air pocket like you know demand is low and pocket like you know demand is low and pocket like you know demand is low and sales are low sales are low sales are low they'll stop the buybacks you know they they'll stop the buybacks you know they they'll stop the buybacks you know they won't have earnings they'll stop the won't have earnings they'll stop the won't have earnings they'll stop the buybacks and from 94 till buybacks and from 94 till buybacks and from 94 till now now now that only happened two years during the that only happened two years during the that only happened two years during the financial crisis financial crisis financial crisis 2008 and 2009 when uh housing demand 2008 and 2009 when uh housing demand 2008 and 2009 when uh housing demand went down a lot in the u.s so went down a lot in the u.s so went down a lot in the u.s so nvr basically has brought bought back nvr basically has brought bought back nvr basically has brought bought back 75 75 75 of the shares outstanding of the shares outstanding of the shares outstanding in the last in the last in the last 28 years 28 years 28 years they used to have like you know about 16 they used to have like you know about 16 they used to have like you know about 16 million million million shares outstanding and i think now it's shares outstanding and i think now it's shares outstanding and i think now it's about like three and a half million and about like three and a half million and about like three and a half million and the shares used to be the shares used to be the shares used to be and they don't split the stocks actually and they don't split the stocks actually and they don't split the stocks actually it's really easy to look at their it's really easy to look at their it's really easy to look at their returns 28 years ago the stock was six returns 28 years ago the stock was six returns 28 years ago the stock was six dollars a share dollars a share dollars a share and it's gone down a little bit in 2022 and it's gone down a little bit in 2022 and it's gone down a little bit in 2022 but at the end of 21
Todd Combsbut at the end of 21 it was about six thousand dollars a share so it went from six dollars to six thousand dollars over a 28-year period it wasn't a hundred bagger it was a thousand bag over a 28-year period it wasn't a company designing software or something you would normally think of as a high return on equity business they're just building homes uh and and basically all their incentives and everything to management is around the return on equity and all of that so it's all very focused in that area there's another company called autozone which is a auto parts retailer in the u.s and autozone again has over the last three decades had a similar story to nvr where they basically have no dividend and in their case they're growing you know they've been adding more stores but again it's a high return on equity business there isn't much equity in the business
Questionerthere isn't much equity in the business its stock has gone up about 200 times in the last so basically when companies do buybacks you know buying back three percent and five percent of the shares that doesn't do a whole lot but if you if they do it for 20 years in a row and that share count goes down 80 percent now it starts getting interesting because in the case of nvr for example in the last 28 years the revenues were went up 10 times okay so the stock went up fourth a thousand times the revenue only went up 10 times and if you look at inflation over this 28 year period you know adjusted for inflation it may be much less than you know so they didn't have extraordinary growth in terms of the top line what they did have was the market recognizing that this is a compounder and the market took multiple really high stock trades like 40 50 times earnings
Questionerstock trades like 40 50 times earnings and maybe 20 30 years ago just be you know single-digit multiples and so on so they got a pop because of the consistency and then so on so one can screen for these types of businesses relatively easily right because you can look at share counts and you can see whether and once you see that a company doesn't issue dividends and the company is consistently buying back shares and the most important thing is the business model needs to be sustainable and enduring so so we can look at the business and it it is not that difficult to tell what is a great business what is a good business that's not really difficult it's more difficult to tell what is a good investment but to actually tell what is a good in business is not very difficult because what you're looking for is you know does the business generate
Questioneryou know does the business generate above average returns on equity without using much leverage is it able to grow does it have some enduring competitive advantage over its competitors and what is the secret sauce that makes it keep going year in and year out so if you study a business like nvr or you study a business like autozone it would take some time but you would be able to figure out what what is the enduring advantage these businesses have when you screen for these types of businesses and then drill down on the ones that have this type of a fanatical approach there's very few of them that have this type of fanatical approach right because most of them most managements generally speaking are not great capital allocated they don't understand capital allocation really well and buybacks are kind of weird from a management perspective it kind of look like cash leaves your door
Questionerkind of look like cash leaves your door and you don't really see anything happen when the cash leaves your door but it happens over a period of time so i think that the multi-baggers can come in many shapes and sizes one of them that is an important one to look at is the ones that have understood the importance and power of buybacks and once they understand that in the business model is very stable then it can be a tremendous advantage you know i was speaking to abu just before we started our recording and you know he brought up that i've mentioned in some previous talks a company in turkey called race resource logistics and resource has never bought back initiates right and and this was a business which uh i invested in 2019 and at that time the market cap was like around 20 million dollars and the intrinsic value was probably well liquidation value was probably
Warrenwell liquidation value was probably seven or eight hundred million
Warrenintrinsic value is probably over a billion
Warreni told the management to race us that look it's almost impossible you guys are really good capital allocators you have a very good news for how you do deals
Warrenit's almost impossible that you can find anything to do which would be superior to buying back your shares because you're buying back at like three percent of liquidation value you know i mean the accretion to that but you know whatever i said to them made no sense
Warrenbecause they've never thought about it in in those terms what they have understood now which took them again a couple of years to understand is that they should buy back more they should buy more shares for themselves and so they've been doing that which is which is good which is pretty good for for them to do that but you know maybe
Todd Combsfor them to do that but you know maybe after a few years and more trust maybe after a few years and more trust maybe after a few years and more trust maybe five years or something five years or something five years or something we may because the that business has the we may because the that business has the we may because the that business has the qualities qualities qualities that we look for you know they they are that we look for you know they they are that we look for you know they they are leasing warehouses leasing warehouses leasing warehouses and they're like the number one and they're like the number one and they're like the number one warehouses company in the country warehouses company in the country warehouses company in the country 99 leased 10-year inflation index leases 99 leased 10-year inflation index leases 99 leased 10-year inflation index leases cash flows are very stable cash flows cash flows are very stable cash flows cash flows are very stable cash flows are more stable than nvr or autozone are more stable than nvr or autozone are more stable than nvr or autozone it's a very predictable recurring it's a very predictable recurring it's a very predictable recurring revenue business which neither nvr or revenue business which neither nvr or revenue business which neither nvr or autozone are and so when you get those autozone are and so when you get those autozone are and so when you get those type of characteristics when a type of characteristics when a type of characteristics when a business is operating business is operating business is operating like clipping coupons on a bond and the like clipping coupons on a bond and the like clipping coupons on a bond and the stock is really cheap you can get stock is really cheap you can get stock is really cheap you can get incredible results incredible results incredible results but it takes time you know it takes time but it takes time you know it takes time but it takes time you know it takes time to build trust and convince management to build trust and convince management to build trust and convince management and so on and we'll do well if they and so on and we'll do well if they and so on and we'll do well if they never do any of that it's just that we never do any of that it's just that we never do any of that it's just that we would do exceptionally well if they did
Questionerwould do exceptionally well if they did something so that that would be fine
Questionerso i think that you know multi-baggers can come in in number of shapes and sizes the most obvious ones can be technology business right so now the issue with technology businesses is that like buffett says industries with rapid change are the enemy of the investor so we would need to find tech businesses which have kind of got attributes like for example a microsoft you know which has a very strong install base of cloud-based applications and such and software which people cannot do without and people cannot change easily and and such and we would need to find those businesses at reasonable valuations usually the problem we get into with these great software companies is everyone knows they're great and the prices reflect the greatness but sometimes you can get aberrations
Questionerbut sometimes you can get aberrations you can get like one of the things that you can get like one of the things that you can get like one of the things that happens is that when a package software happens is that when a package software happens is that when a package software company company company is switching to the cloud is switching to the cloud is switching to the cloud you know so the revenue is going from you know so the revenue is going from you know so the revenue is going from licenses being sold licenses being sold licenses being sold to a recurring subscription-based model to a recurring subscription-based model to a recurring subscription-based model the revenue will take a dip the revenue will take a dip the revenue will take a dip initially because they are as they're initially because they are as they're initially because they are as they're transitioning transitioning transitioning you know you know you know if if microsoft sold microsoft office as if if microsoft sold microsoft office as if if microsoft sold microsoft office as a package a package a package they would collect like 500 or 400 one they would collect like 500 or 400 one they would collect like 500 or 400 one chart for one user chart for one user chart for one user when they do it through a cloud-based when they do it through a cloud-based when they do it through a cloud-based offering they get like you know eight or offering they get like you know eight or offering they get like you know eight or ten dollars a month and so ten dollars a month and so ten dollars a month and so near term your revenue will drop near term your revenue will drop near term your revenue will drop but long term you do a lot better but long term you do a lot better but long term you do a lot better because because because people may not after four years buy people may not after four years buy people may not after four years buy another another another package for you they may run the same package for you they may run the same package for you they may run the same word software for 10 years without word software for 10 years without word software for 10 years without upgrading for example so sometimes you upgrading for example so sometimes you upgrading for example so sometimes you can get a mispricing can get a mispricing can get a mispricing because the market doesn't appreciate because the market doesn't appreciate because the market doesn't appreciate this particular nuance of
Todd Combsthis particular nuance of you know the earnings taking a dip temporarily and such and it's not being normalized earnings and so on so you can get great compounders from the classic you know very stable recurring revenue software businesses or cloud-based businesses and so on that can be a valid way to go you can also get it from companies that are really really good at what they do you know like costco in the united states would be an example walmart might be an example so these are companies in really difficult spaces retail is a really really difficult space to be in but sometimes you get some businesses that are really great at it you know and they are if they've proven they can endure for a long time then it can work out very well one other thing about the these multibagger compounders we go back to the example of rakesh janjanwala
Otherrakesh janjanwala is like i said he put four percent of his portfolio which later became 50 i think titan compounded at more than 30 a year for a long time and it has a great model it'll keep going i mean i think that runway is really long it tolerates a very high error rate because let's take an example that the other ninety-six percent of rakesh's portfolio went to zero if that had happened he would still have a major home run so if we make these compounder bets and let's say we put 10 of portfolio into each bet and we study these businesses carefully and we make 10 of these that's like and we are not a zone and whatever the most important thing which is the most difficult for investors is after that you need to go to sleep so after making the bet because nothing will go in a straight line there will be news coming out all the
Questionerthere will be news coming out all the time invasions into ukraine and there's the inflation in the u.s and the fed is raising rates and the business might take a hiccup here and there or whatever else so there's a hundred different reasons for which one might be tempted to take action and to rakesh's credit considering that he had like four screens in front of him all day long he never touched the titan position for several decades you know died with it so the the important thing in investing is not how smart you are this is not a game of like the highest iq person wins because it's not that difficult to figure out if you gave me or if i gave you a list of 100 the top 100 market cap companies in thailand and i just ask you to rank them in terms of quality of business you know forget the valuation forget everything just quality of business
Questionereverything just quality of business and i'll i asked you know 50 students toand i'll i asked you know 50 students toand i'll i asked you know 50 students to do that that list wouldn't be thatdo that that list wouldn't be thatdo that that list wouldn't be that differentdifferentdifferent you know what companies show up in theyou know what companies show up in theyou know what companies show up in the top 10 might be very similar top 20top 10 might be very similar top 20top 10 might be very similar top 20 might be very similarmight be very similarmight be very similar bottom 20 might be very similar and sobottom 20 might be very similar and sobottom 20 might be very similar and so on so the identification of a greaton so the identification of a greaton so the identification of a great businessbusinessbusiness is not that difficultis not that difficultis not that difficult
Warrenwhat what is the most difficultwhat what is the most difficultwhat what is the most difficult isisis not doing anything after you findnot doing anything after you findnot doing anything after you find yourselfyourselfyourself in the fortunate positionin the fortunate positionin the fortunate position of ownership of these businesses soof ownership of these businesses soof ownership of these businesses so taking rakesh is example if you made 10taking rakesh is example if you made 10taking rakesh is example if you made 10 betsbetsbets and you just said okayand you just said okayand you just said okay no matter what the news is i'm justno matter what the news is i'm justno matter what the news is i'm just going to ignore everythinggoing to ignore everythinggoing to ignore everything and in some cases the news dictates thatand in some cases the news dictates thatand in some cases the news dictates that you should actually sell the businessyou should actually sell the businessyou should actually sell the business has gone intohas gone intohas gone into secular decline for examplesecular decline for examplesecular decline for example and you can tell as well but let's sayand you can tell as well but let's sayand you can tell as well but let's say you take no actionyou take no actionyou take no action you know youyou know youyou know you live with the secular declineslive with the secular declineslive with the secular declines see some of them go to zero all of thatsee some of them go to zero all of that
Questionersee some of them go to zero all of that it would still be an exceptional runit would still be an exceptional runit would still be an exceptional run at the end of 20 or 30 yearsat the end of 20 or 30 yearsat the end of 20 or 30 years andandand and the reason why most investorsand the reason why most investorsand the reason why most investors don't enjoy thosedon't enjoy thosedon't enjoy those great returnsgreat returnsgreat returns is because theyis because theyis because they get in their own wayget in their own wayget in their own way you know they theyyou know they theyyou know they they are notare notare not contentcontentcontent with watching paint drywith watching paint drywith watching paint dry if you are the kind of personif you are the kind of personif you are the kind of person where you know some painter has paintedwhere you know some painter has paintedwhere you know some painter has painted some wallsome wallsome wall white colorwhite colorwhite color and you can just sit there for eight orand you can just sit there for eight orand you can just sit there for eight or ten hours and watch it dryten hours and watch it dryten hours and watch it dry and be really happyand be really happyand be really happy then this is the business for you youthen this is the business for you youthen this is the business for you you know frenchknow frenchknow french mathematician pascal you know so one ofmathematician pascal you know so one ofmathematician pascal you know so one of his famous quotes is thathis famous quotes is thathis famous quotes is that all man's miseries stem from hisall man's miseries stem from hisall man's miseries stem from his inabilityinabilityinability to sit quietly in a room and do nothingto sit quietly in a room and do nothingto sit quietly in a room and do nothing i would just paraphrase pascal to sayi would just paraphrase pascal to sayi would just paraphrase pascal to say allallall investment manager miseries stem frominvestment manager miseries stem frominvestment manager miseries stem from their inabilitytheir inabilitytheir inability to sit quietly in a room and do nothingto sit quietly in a room and do nothingto sit quietly in a room and do nothing and so one of the things i try to do isand so one of the things i try to do isand so one of the things i try to do is i try to do a lot ofi try to do a lot ofi try to do a lot of sessions
Questionersessions with students like you because it absorbs the time you know if i have too much time to you know worry about the portfolio or think about things it might cause action you know buffett plays about 10 or 15 hours a week a bridge and i play about 10 or 15 hours a week a bridge bridge is almost as good of activity for me as investing i think investing still gets a little bit of an edge for me but bridge is a tremendous activity for me i enjoy it a lot if you put me in a prison cell for the rest of my life with three other bridge players and you know the same food being served for every meal i would be extremely happy for the rest of my life that would be a very blissful existence bridge is a very healthy pursuit for investors and so i think that investing is a great activity for gentlemen or gen or ladies of leisure
Questionerof leisure gentlemen of legion or ladies or leisure gentlemen of legion or ladies or leisure gentlemen of legion or ladies or leisure where where where basically you know if you can be really basically you know if you can be really basically you know if you can be really content content content to to not take any actions on your portfolio not take any actions on your portfolio not take any actions on your portfolio you will do really well you will do really well you will do really well and one of the reasons and one of the reasons and one of the reasons the index is so hard to beat the index is so hard to beat the index is so hard to beat is the the index is too dumb to know is the the index is too dumb to know is the the index is too dumb to know that it owns microsoft that it owns microsoft that it owns microsoft and it's too dumb to know that it owns and it's too dumb to know that it owns and it's too dumb to know that it owns alphabet alphabet alphabet and it's too dumb to know that it owns and it's too dumb to know that it owns and it's too dumb to know that it owns autozone autozone autozone and it's too dumb to sell any of you and it's too dumb to sell any of you and it's too dumb to sell any of you and so and so and so what happens with the index is that what happens with the index is that what happens with the index is that every once in a while every once in a while every once in a while the people who run these indices the people who run these indices the people who run these indices make some change make some change make some change right like they'll take right like they'll take right like they'll take ge out of the dow jones take ibm out of ge out of the dow jones take ibm out of ge out of the dow jones take ibm out of the dow jones the dow jones the dow jones usually the changes they're making usually the changes they're making usually the changes they're making are made are made are made such a long time after these absolute such a long time after these absolute such a long time after these absolute loser companies loser companies loser companies have proven that they're losers but have proven that they're losers but have proven that they're losers but they'll never take they'll never take they'll never take a tesla or a microsoft a tesla or a microsoft a tesla or a microsoft or an alphabet or an alphabet or an alphabet which is cranking and climbing which is cranking and climbing which is cranking and climbing out of the index
Questionerout of the index that will not happen right so they usually take out the where they see a decline in sales losses for many years the business has lost its way and so on and so that's the reason why the index is so hard to beat because the index is really good at watching paint dry it just cranks with doing nothing and that's really what you want and and and the only way to get better than the index because the index also owns a lot of losers but like we saw with the rakesh gingerball example a 4 position becomes 50 because he just doesn't touch it and so what ends up happening with the index is apple starts off being really small and apple becomes a really large position and microsoft starts off really small and it becomes a large position and so when you look at the index up to 20 or 30 years you find like seven or eight companies that are like
Questionerseven or eight companies that are like make up 30 40 of the index and such somake up 30 40 of the index and such somake up 30 40 of the index and such so that's why indexing is really goodthat's why indexing is really goodthat's why indexing is really good forforfor almost allalmost allalmost all market participants most marketmarket participants most marketmarket participants most market participants will do betterparticipants will do betterparticipants will do better by focusing on the indexby focusing on the indexby focusing on the index so i think with that what i'd like to doso i think with that what i'd like to doso i think with that what i'd like to do is uhis uhis uh you knowyou knowyou know learn about what you have on your mindlearn about what you have on your mindlearn about what you have on your mind and take it from there so thank youand take it from there so thank youand take it from there so thank you
Questionerokay thank you so much i think that wasokay thank you so much i think that wasokay thank you so much i think that was very interesting and opens the room forvery interesting and opens the room forvery interesting and opens the room for uh some questions i still hope that youuh some questions i still hope that youuh some questions i still hope that you find some time to a good match of bridgefind some time to a good match of bridgefind some time to a good match of bridge without going to prisonwithout going to prisonwithout going to prison and um i wanted to catch up uh you youand um i wanted to catch up uh you youand um i wanted to catch up uh you you mentioned in your talk that it's not somentioned in your talk that it's not somentioned in your talk that it's not so difficult to identify a great companydifficult to identify a great companydifficult to identify a great company and that goes very well with oneand that goes very well with oneand that goes very well with one question that a student sent in evenquestion that a student sent in evenquestion that a student sent in even before the questionbefore the questionbefore the question and do you think having a great companyand do you think having a great companyand do you think having a great company is a good predictor for a greatis a good predictor for a greatis a good predictor for a great investment or let me rephrase a littleinvestment or let me rephrase a littleinvestment or let me rephrase a little bit what do you think if you have a
Questionerbit what do you think if you have abit what do you think if you have a great company is needed on top to makegreat company is needed on top to makegreat company is needed on top to make it a great investmentit a great investmentit a great investment
Questioneryeah so i think that's a great questionyeah so i think that's a great questionyeah so i think that's a great question
Questionerso i think that the identification of aso i think that the identification of aso i think that the identification of a great company is not that difficultgreat company is not that difficultgreat company is not that difficult becausebecausebecause even if you just looked at quantitativeeven if you just looked at quantitativeeven if you just looked at quantitative factors you know we'll get tofactors you know we'll get tofactors you know we'll get to qualitative factors in a second but ifqualitative factors in a second but ifqualitative factors in a second but if you look at this quantitative factorsyou look at this quantitative factorsyou look at this quantitative factors you would want to see okay sales areyou would want to see okay sales areyou would want to see okay sales are growinggrowinggrowing profits are going growing cash flows areprofits are going growing cash flows areprofits are going growing cash flows are growingreturn on equity is consistently over 20return on equity is consistently over 20return on equity is consistently over 20 20 25 return on equity doesn't need a20 25 return on equity doesn't need a20 25 return on equity doesn't need a lot of debtlot of debtlot of debt to to grow and scaleto to grow and scaleto to grow and scale just if you looked at these factors itjust if you looked at these factors itjust if you looked at these factors it would take out 90 of companieswould take out 90 of companieswould take out 90 of companies so most companies will not have theseso most companies will not have theseso most companies will not have these attributes already you will be down toattributes already you will be down toattributes already you will be down to 101010 of the universe or lessof the universe or lessof the universe or less now when you start looking at the namesnow when you start looking at the namesnow when you start looking at the names of the business some businesses may beof the business some businesses may beof the business some businesses may be completely alien to you know some
Warrencompletely alien to you know some chemical business you know nothing about so the other thing about this investing business is there are no call strikes like in baseball a thousand balls go by no one's going to tell you you struck out so we don't pay a penalty by ignoring a company that's truly great we do pay a penalty when we invest in a business that's not so great right so if you see some chemical company don't really understand it don't know much about why it can generate these high returns leave it alone but there will be some other businesses in that list and you say yeah this is obvious you would look at a business like mastercard and say yeah i know why mastercard does well it's a monopoly i know why visa does well i know amex american express does one these are monopolies for oligopoly right and so it it will start becoming obvious when i
Questionerit it will start becoming obvious when iit it will start becoming obvious when i mean like you knowmean like you knowmean like you know if we look atif we look atif we look at louis vuittonlouis vuittonlouis vuitton rightrightright and you look at theand you look at theand you look at the you know financialsyou know financialsyou know financials if you didn't even know it was louisif you didn't even know it was louisif you didn't even know it was louis vuitton you would see some exceptionalvuitton you would see some exceptionalvuitton you would see some exceptional numbersnumbersnumbers you would see very high i mean i thinkyou would see very high i mean i thinkyou would see very high i mean i think their after tax margins are more than 20their after tax margins are more than 20their after tax margins are more than 20 and that's after investing a lot inand that's after investing a lot inand that's after investing a lot in brand and so onbrand and so onbrand and so on and he's he's a serial acquirer he keepsand he's he's a serial acquirer he keepsand he's he's a serial acquirer he keeps buying more and more brandsbuying more and more brandsbuying more and more brands and soand soand so any fool can tell youany fool can tell youany fool can tell you that louis vuitton is a great businessthat louis vuitton is a great businessthat louis vuitton is a great business the question is is it a great investmentthe question is is it a great investmentthe question is is it a great investment so if louis patron was trading at threeso if louis patron was trading at threeso if louis patron was trading at three times earningstimes earningstimes earnings it's a great investmentit's a great investmentit's a great investment it's a great business and a greatit's a great business and a greatit's a great business and a great investment because you can just see ainvestment because you can just see ainvestment because you can just see a long history now if it's trading at 50long history now if it's trading at 50long history now if it's trading at 50 timestimestimes it becomes harder to make that statementit becomes harder to make that statementit becomes harder to make that statement sososo and somewhere between three and fiftyand somewhere between three and fiftyand somewhere between three and fifty times lies the true answertimes lies the true answertimes lies the true answer right at some point
Questionerright at some point the great business ceases to be a great the great business ceases to be a great the great business ceases to be a great investment investment investment because you're just paying too much because you're just paying too much because you're just paying too much try to get a piece of the action try to get a piece of the action try to get a piece of the action right the thing is that right the thing is that right the thing is that it is it is entirely possible it is it is entirely possible it is it is entirely possible that paying a that paying a that paying a 25 times multiple for louis vuitton may be a great investment may be a great investment may be a great investment but it also may not be obvious to but it also may not be obvious to but it also may not be obvious to someone like me someone like me someone like me uh or a cheap skate like me may not be uh or a cheap skate like me may not be uh or a cheap skate like me may not be obvious right obvious right obvious right so we can we can tailor it to what we so we can we can tailor it to what we so we can we can tailor it to what we want so i think the identification of a want so i think the identification of a want so i think the identification of a great business great business great business is very important is very important is very important but it's also not difficult but it's also not difficult but it's also not difficult so we should restrict our universe so we should restrict our universe so we should restrict our universe to only the great businesses so once you to only the great businesses so once you to only the great businesses so once you restrict your universe to the great restrict your universe to the great restrict your universe to the great businesses businesses businesses now it just becomes that you've thrown now it just becomes that you've thrown now it just becomes that you've thrown out all the riffraff out all the riffraff out all the riffraff and you have a small list and you say and you have a small list and you say and you have a small list and you say okay which of these okay which of these okay which of these do i understand really well which i can do i understand really well which i can do i understand really well which i can understand what the business might look understand what the business might look understand what the business might look like 5 or 10 or 15 years from now like 5 or 10 or 15 years from now
Questionerlike 5 or 10 or 15 years from now and maybe there's some nuances theand maybe there's some nuances theand maybe there's some nuances the market doesn't appreciatemarket doesn't appreciatemarket doesn't appreciate which i understand and maybe the marketwhich i understand and maybe the marketwhich i understand and maybe the market doesn'tdoesn'tdoesn't and that can work out well okay great weand that can work out well okay great weand that can work out well okay great we have an another question here a raisedhave an another question here a raisedhave an another question here a raised hand charles do you want to ask yourhand charles do you want to ask yourhand charles do you want to ask your questionyes siryes siryes sir so evening mr probably iso evening mr probably iso evening mr probably i i wondering about the the four percenti wondering about the the four percenti wondering about the the four percent position i think it's quite small soposition i think it's quite small soposition i think it's quite small so what is thewhat is thewhat is the appropriate side to invest in the theappropriate side to invest in the theappropriate side to invest in the the best idea i see one above it whobest idea i see one above it whobest idea i see one above it who happened like 40 percenthappened like 40 percenthappened like 40 percent you know so so what is the right numberyou know so so what is the right numberyou know so so what is the right number
Warreni think a lot of this mighti think a lot of this mighti think a lot of this might depend on what feels comfortabledepend on what feels comfortabledepend on what feels comfortable sososo i would say thati would say thati would say that probably less than five percentprobably less than five percentprobably less than five percent doesn't make too much sense i think youdoesn't make too much sense i think youdoesn't make too much sense i think you need to have some conviction if you'reneed to have some conviction if you'reneed to have some conviction if you're going to invest in so if you had agoing to invest in so if you had agoing to invest in so if you had a portfolio of 20 stocksportfolio of 20 stocksportfolio of 20 stocks i would say that should be the upperi would say that should be the upperi would say that should be the upper limitlimitlimit you know i don't think you should have ayou know i don't think you should have ayou know i don't think you should have a portfolio of 100 stocks for example
Questionerportfolio of 100 stocks for example on the other hand unless you have really really good picking skills taking it down less than 5 or 10 stocks may also not be proven so i would say that probably the lowest amount you should probably consider investing is maybe five percent and the highest amount you might want to consider investing maybe like 20 and in my case i usually don't want to go over 10 i i like a 10 by 10 portfolio so i don't like five percent i'm happy if i can make 10 bets of 10 to me that fits that fits my psyche well but it could be 20 works and it could be that five or seven positions also works
Otherokay great then we have some other raised hands but we also have a question in the chat i will read the question from the chat first how do you do the valuation how do you think about the dcf and what methods do you usually use
Questionerwell you know i think it's usually very straightforward one time
Questionerusually very straightforward one time for example and this happens quite a bit you know i was at my health club and i was just changing to go play racquetball and this other guy in the locker room you know he knows i'm an investor so he asked me what do you think of buying apple i asked him what's the market cap of apple so he said the stock price is like 160. okay i said i didn't ask you the stock point i asked you the market cap right so he said what is that right and so i said well the market cap is what you could buy the entire business right that's what you would pay to buy the whole company so i think that the thing is that one of the first things i think in terms of what should be a model in your head let's say apple has a market cap of two trillion dollars for example okay and let's say it's earning a hundred billion dollars a year you
Questionera hundred billion dollars a year you know cash flows 100 billion dollars aknow cash flows 100 billion dollars aknow cash flows 100 billion dollars a yearyearyear so it's trading at let's say 20 timesso it's trading at let's say 20 timesso it's trading at let's say 20 times earnings for exampleearnings for exampleearnings for example so the question i would ask the investorso the question i would ask the investorso the question i would ask the investor to ask themselves is that if you wereto ask themselves is that if you wereto ask themselves is that if you were managing your family's fortunemanaging your family's fortunemanaging your family's fortune and let's say your family fortuneand let's say your family fortuneand let's say your family fortune waswaswas 10 trillion dollars10 trillion dollars10 trillion dollars okayokayokay sososo out of all the choices available to youout of all the choices available to youout of all the choices available to you would you want to put one-fifth of yourwould you want to put one-fifth of yourwould you want to put one-fifth of your family'sfamily'sfamily's fortunefortunefortune into the complete ownership of appleinto the complete ownership of appleinto the complete ownership of apple okay so you have 10 trillionokay so you have 10 trillionokay so you have 10 trillion you can pay 2 trillion and buy appleyou can pay 2 trillion and buy appleyou can pay 2 trillion and buy apple and against that you get the 100 billionand against that you get the 100 billionand against that you get the 100 billion of cash flows and so when you look at itof cash flows and so when you look at itof cash flows and so when you look at it that way the questions you would askthat way the questions you would askthat way the questions you would ask yourself is okayyourself is okayyourself is okay what is going to happen to this 100what is going to happen to this 100what is going to happen to this 100 billion of cash flowsbillion of cash flowsbillion of cash flows what does this look like five years fromwhat does this look like five years fromwhat does this look like five years from nownownow or 10 years from nowor 10 years from nowor 10 years from now right because you would say i'mright because you would say i'mright because you would say i'm putting out 2 trillionputting out 2 trillionputting out 2 trillion if the cash flows never change it'llif the cash flows never change it'll
Questionerif the cash flows never change it'll take me 20 years to get my money back right if the cash flows just are absolutely flat if the cash flows grow 10 a year for 10 years and then start declining 10 a year for 10 years again it will give you some number of what that is worth so to me when i look at a business like apple you know i'm like saying okay like my family fortune is here if i'm going to put 2 trillion out i want to be able to see that 2 trillion come back to me maybe in 5 or 6 years right i just don't want to go out 15 years to get my money back i want it back in five years or four years or three years or two years you know that feels better to me so if there was a company which was worth two trillion and generating one trillion a year in cash flow and i can see for the next three four five years that's not gonna change i'll say i'm ready to buy it right now
Questioneri'll say i'm ready to buy it right now right right right because i know that in two years i'll get the money back because i have your visibility high probability and then after that i might even double my money for the next two three years and so i think that that's the mindset an investor has to i don't so the dcf i don't so the dcf if you need to go to excel to figure this out it's a pass okay so the moment you think you need excel to figure out whether something is a good investment or not the answer is it's not a good investment from my point of view a lot of other investors would not agree with but i'm just telling you the way i think so i think it was in 2004 or 2005 there was a steel company in the in it was mainly in canada but it was headquartered in the u.s called ipsco ifsco was trading at about forty five dollars a share okay they had no debt they had fifteen dollars a share of cash
Warrenthey had fifteen dollars a share of cash in their treasury in their treasury in their treasury and they had publicly announced that the and they had publicly announced that the and they had publicly announced that the earnings for the next two years earnings for the next two years earnings for the next two years was were going to be 15 a share per year was were going to be 15 a share per year was were going to be 15 a share per year for the next two years for the next two years for the next two years they also said that they have no they also said that they have no they also said that they have no visibility about earnings after two visibility about earnings after two visibility about earnings after two they made tubular steel you know kind of they made tubular steel you know kind of they made tubular steel you know kind of steel that goes into pipelines so they steel that goes into pipelines so they steel that goes into pipelines so they would have these long contracts with would have these long contracts with would have these long contracts with these people building these pipelines these people building these pipelines these people building these pipelines where they knew where they knew where they knew two or three years in advance two or three years in advance two or three years in advance that we're gonna sell so many that we're gonna sell so many that we're gonna sell so many so much steel and so much pipeline so so much steel and so much pipeline so so much steel and so much pipeline so that which is why they had the earnings that which is why they had the earnings that which is why they had the earnings visibility visibility visibility for the next two years because the for the next two years because the for the next two years because the contracts were already in place contracts were already in place contracts were already in place and and and it it was entirely possible it it was entirely possible it it was entirely possible that after two years that after two years that after two years that cash flow could go to zero that cash flow could go to zero that cash flow could go to zero and it could possibly even go negative and it could possibly even go negative and it could possibly even go negative okay it was cyclical business okay it was cyclical business okay it was cyclical business but my my thinking was okay but my my thinking was okay but my my thinking was okay i just want to buy this stock
Questioneri just want to buy this stock i just want to buy this stock and own it for two years and own it for two years and own it for two years and see what the market does to the and see what the market does to the and see what the market does to the stock price stock price stock price when when when there's forty five dollars a share of there's forty five dollars a share of there's forty five dollars a share of cash on the balance sheet cash on the balance sheet cash on the balance sheet so so so i put 10 percent of the fund i was i put 10 percent of the fund i was i put 10 percent of the fund i was running at the time into ebsco running at the time into ebsco running at the time into ebsco and 12 months went by and they announced and 12 months went by and they announced and 12 months went by and they announced that they have one more year of that they have one more year of that they have one more year of visibility visibility visibility and they're going to make another 15 a and they're going to make another 15 a and they're going to make another 15 a share share share for for for and i said hallelujah and i said hallelujah and i said hallelujah god loves me i knew he loved me god loves me i knew he loved me god loves me i knew he loved me okay okay okay so now we are in the money right because so now we are in the money right because so now we are in the money right because it's a minimum of 60 now after three it's a minimum of 60 now after three it's a minimum of 60 now after three years it can again go to zero years it can again go to zero years it can again go to zero and so the stock had moved up to and so the stock had moved up to and so the stock had moved up to about 80 90 dollars a share by this time about 80 90 dollars a share by this time about 80 90 dollars a share by this time so a year later when they announced this so a year later when they announced this so a year later when they announced this it was at about sixty dollars a share it was at about sixty dollars a share it was at about sixty dollars a share then when they said we have another year then when they said we have another year then when they said we have another year of visibility of visibility of visibility the stock was sitting at about 90. the stock was sitting at about 90. the stock was sitting at about 90. and i was thinking you know and i was thinking you know and i was thinking you know you know you know you know it's sitting at 90. it's sitting at 90.
Questionerit's sitting at 90. we bought at 45.we bought at 45.we bought at 45. we know that this thing iswe know that this thing iswe know that this thing is a time bomba time bomba time bomb you know cyclical the contracts go awayyou know cyclical the contracts go awayyou know cyclical the contracts go away you know i don't know what happens rightyou know i don't know what happens rightyou know i don't know what happens right so i'm thinkingso i'm thinkingso i'm thinking it's been a good run we get a doubleit's been a good run we get a doubleit's been a good run we get a double in like 14 15 monthsin like 14 15 monthsin like 14 15 months we can just move onwe can just move onwe can just move on right i was thinking about that and thenright i was thinking about that and thenright i was thinking about that and then as i was kind of trying to digest thatas i was kind of trying to digest thatas i was kind of trying to digest that newsnewsnews a swedish company came in to buy thea swedish company came in to buy thea swedish company came in to buy the businessbusinessbusiness and offered 160 a shareand offered 160 a shareand offered 160 a share for the companyfor the companyfor the company and i said god truly loves meand i said god truly loves meand i said god truly loves me you knowyou knowyou know first i had some doubts that he loved mefirst i had some doubts that he loved mefirst i had some doubts that he loved me or not but now i knowor not but now i knowor not but now i know for sure and the stock immediately wentfor sure and the stock immediately wentfor sure and the stock immediately went to 155to 155to 155 right once this news came out it's not aright once this news came out it's not aright once this news came out it's not a five dollar deltafive dollar deltafive dollar delta i didn't wait for even five minutesi didn't wait for even five minutesi didn't wait for even five minutes you know i put all the sell orders andyou know i put all the sell orders andyou know i put all the sell orders and we were donewe were donewe were done okay sothe economics for methe economics for methe economics for me of the investment in ipscoof the investment in ipscoof the investment in ipsco when i made itwhen i made itwhen i made it were more obviouswere more obviouswere more obvious than it would be today for methan it would be today for methan it would be today for me to make an investment in apple
Questionerto make an investment in apple so an investment in apple requires me to so an investment in apple requires me to so an investment in apple requires me to have a viewpoint have a viewpoint have a viewpoint of what happens in the next 10 years to of what happens in the next 10 years to of what happens in the next 10 years to apple's cash flows apple's cash flows apple's cash flows and i don't know if i'm smart enough to and i don't know if i'm smart enough to and i don't know if i'm smart enough to figure that out figure that out figure that out i think apple i think apple i think apple is is is one of the all-time greatest companies one of the all-time greatest companies one of the all-time greatest companies you know you know you know i read an article the other day in the i read an article the other day in the i read an article the other day in the wall street journal about how wall street journal about how wall street journal about how apple apple apple iphone users cannot ever use android iphone users cannot ever use android iphone users cannot ever use android endostory they can never go there endostory they can never go there endostory they can never go there android users android users android users can never go to apple just those you get can never go to apple just those you get can never go to apple just those you get the habits are so tightly the habits are so tightly the habits are so tightly ingrained in us that you know ingrained in us that you know ingrained in us that you know and they were talking in the article and they were talking in the article and they were talking in the article about this couple where about this couple where about this couple where before they started dating one was before they started dating one was before they started dating one was iphone and one was android iphone and one was android iphone and one was android and then they dated and they got married and then they dated and they got married and then they dated and they got married and they're still iphone and android and they're still iphone and android and they're still iphone and android because neither of them can really because neither of them can really because neither of them can really switch to the other switch to the other switch to the other right that's a great lock you know apple right that's a great lock you know apple right that's a great lock you know apple has a great log it has great margins a
Questionerhas a great log it has great margins ahas a great log it has great margins a great lockgreat lockgreat lock andandand buffett is still buying the shares atbuffett is still buying the shares atbuffett is still buying the shares at current pricescurrent pricescurrent prices rightrightright
Questionerhehehe doesn't even use an iphonedoesn't even use an iphonedoesn't even use an iphone you know until a few years back heyou know until a few years back heyou know until a few years back he didn't even have a cell phonedidn't even have a cell phonedidn't even have a cell phone sososo it's something that i would say wouldit's something that i would say wouldit's something that i would say would probably fall outside my circle ofprobably fall outside my circle ofprobably fall outside my circle of competencecompetencecompetence to try to figure it out so i think thatto try to figure it out so i think thatto try to figure it out so i think that when you're trying to look at a businesswhen you're trying to look at a businesswhen you're trying to look at a business the most important thing to ask yourselfthe most important thing to ask yourselfthe most important thing to ask yourself isisis do you understand the business welldo you understand the business welldo you understand the business well and if you understand the business welland if you understand the business welland if you understand the business well what i mean by thatwhat i mean by thatwhat i mean by that is you would have someis you would have someis you would have some ranges that you could put up on what theranges that you could put up on what theranges that you could put up on what the cash flows are likely to be from thiscash flows are likely to be from thiscash flows are likely to be from this businessbusinessbusiness overoverover some reasonable period of timesome reasonable period of timesome reasonable period of time now if you're buying it really cheapnow if you're buying it really cheapnow if you're buying it really cheap like when i was buying ipsco and buyinglike when i was buying ipsco and buyinglike when i was buying ipsco and buying it really cheapit really cheapit really cheap i didn't need to know much about cashi didn't need to know much about cashi didn't need to know much about cash flows five years agoflows five years agoflows five years ago right that was not really relevant andright that was not really relevant and
Questionerright that was not really relevant and it would be it would have been very hard to actually figure out what those cash flows would have been over that period the same thing like you know for example this warehouse company in turkey it was easy to figure out that you know if we can buy the whole business for 20 million and you could liquidate the business for seven or eight hundred million the odds that you would lose money would be pretty low and i would say that that type of investment would be superior to anything else i can find in the market so it's not the most amazing business that becomes the most amazing investment it is i think then you have to get into the valuations and a few other things but i think that it's important to make sure that you can figure out everything in your head without going to excel and you could explain it to a 10 year old
Questionera 10 year old within five or seven sentence why you are likely to make a lot of money and why you're likely not to lose money so if you are able to do that for the investment then go ahead and if you have to go to excel and build complex models and all of that then i think you're barking up the wrong tree
Otheri see okay thank you so much we have a number of additional questions maybe we tried to address at least a few of them uh people of you have your hand raised already quite a while do you want to ask a question a recent interview you mentioned that the main main goal of investing is to protect the downside so mike so the question is how does one protect the downside in investing is there anything more than just a margin of safety to protect that downside
Questionerthat's a great question
Warrenso you know john templeton said that the the best investment analyst
Questionerthe best investment analyst will be wrong one out of three times that's the best you know even if you look at someone like warren buffett so berkshire hathaway has bought maybe 80 or 90 businesses in the last 50 years or so and at least 30 of them did not work out and now he doesn't like to talk about them because it would you know discourage the managers and so on so warren doesn't like to you know dole out criticism by being specific but they made a lot of investments in furniture retailers most almost all of them except nebraska from japan never worked they made a lot of investments in jewelers and almost all of them they made a lot of investments in retail almost all of them so if every single bet was equal weighted for berkshire hathaway more than one third did not work but the big ones actually work so actually when you when you dollar
Otherwhen you when you dollar when youwhen youwhen you put theput theput the the sizethe sizethe size uh of the batch then he's probably beenuh of the batch then he's probably beenuh of the batch then he's probably been rightrightright maybe 90 of themmaybe 90 of themmaybe 90 of them and that works butand that works butand that works but templeton said that the best of us willtempleton said that the best of us willtempleton said that the best of us will bebebe right only two or three timesright only two or three timesright only two or three times even if you're right half the timeeven if you're right half the timeeven if you're right half the time you will have a home run soyou will have a home run soyou will have a home run so because we are trying to look into thebecause we are trying to look into thebecause we are trying to look into the future of businessesfuture of businessesfuture of businesses and because capitalism is veryand because capitalism is veryand because capitalism is very competitive and brutal it is notcompetitive and brutal it is notcompetitive and brutal it is not easyeasyeasy tototo have a viewpoint on a company 10 yearshave a viewpoint on a company 10 yearshave a viewpoint on a company 10 years from nowfrom nowfrom now and have that viewpoint be accurateand have that viewpoint be accurateand have that viewpoint be accurate that's justthat's justthat's just you know it's a difficult gameyou know it's a difficult gameyou know it's a difficult game butbutbut if you makeif you makeif you make 10 bets10 bets10 bets carefully considering first the goodcarefully considering first the goodcarefully considering first the good businesses and you know filteringbusinesses and you know filteringbusinesses and you know filtering through all of that not paying too muchthrough all of that not paying too muchthrough all of that not paying too much for them and all of thatfor them and all of thatfor them and all of that and five of them don't work now if theyand five of them don't work now if theyand five of them don't work now if they don't work doesn't mean they're going todon't work doesn't mean they're going todon't work doesn't mean they're going to zero they may flatline or they will gozero they may flatline or they will gozero they may flatline or they will go down 20 or something they're not goingdown 20 or something they're not goingdown 20 or something they're not going to all go zero but even if they all went
Questionerto all go zero but even if they all went to zero if you look at the rakesh example it doesn't matter as long as you were patient on the right one so it is not possible it's like a law of physics it's not possible that you would have a lifetime of investing without mistakes it didn't happen to warren buffett who is also known as god and so it's not going to happen to us mere mortals but so i i think that the error rate is baked in if i go back and look at you know every stock investment i mean i'd say probably 40 50 have not worked and and i think even in the future maybe 40 50 won't work and and that's just because the templeton law is like a law of physics just the way it is and we don't need it we don't need them all to work you'll still have a very good life with a 50-60 batting app okay thank you so much we are already running a bit towards the end of our session i'm
Othera bit towards the end of our session i'm not sure if you have a hard a deadline if you have some time then maybe you would allow us this is more question you know this is uh this is so much fun that we should go for five or ten hours because the problem is that anytime you ask me a question i take half an hour to give you an answer so by the time you ask three questions the hour is gone i think we need to go for about 12 hours and then we can get all the questions through yeah maybe you have time for one or two more questions oh yeah i have all the time in the world back to the questions you have already long time waited for your question so here you go
Questioneryup thank you so much dr and thanks so much monister for being here it's really nice to hear from you directly so my question is in regards to capital allocation so earlier you mentioned that 10 by 10 is a good number
Questionermentioned that 10 by 10 is a good number that fits your category it suits you so i want to know if this 10 by 10 rule is actually applicable for people with less investment amount like maybe a thousand dollars or ten thousand dollars
Todd Combsi think that for for most investors or for most individuals indexing is the way to go i think most people will not do well picking stocks because their temperament is going to get in the way they won't be able to watch paint dry and then that's what gets in the way but i think that if you were going to be hell-bent on picking stocks and yeah if you're starting out you could you could start with 20 and then as you your confidence grows you could try to whittle that down sure it's whatever you're you're comfortable
Questionerlet me go straight to the next question from girish hi mr pablo i've been following you since a very long time now and it's a great pleasure to be able to
Questionerand it's a great pleasure to be able to finally talk to you in person my question is regarding what is the correct time and what is the correct philosophy to actually sell or stock as value investors we buy into companies that are very fundamentally strong have strong economic modes so these companies are very rare to find and i've listened in your interview that you said if a company is worth 100 you shouldn't sell it at 120 and what is the correct correct multiple or correct way to think about when to sell a stock
Todd Combsso selling is much harder than buying selling is very difficult to get right i think the bar for selling needs to be really high so you can't look at one quarter or one year or even two or three years i think you have to be very convinced that the business is in permanent secular decline so if the business continues to get better
Warrenif the business continues to get better and the valuation is continuing to get richer the mistake i made in most of my career is i was not willing to hold because i felt it was too richly valued and i think that was a mistake so i think the question to ask is is the business getting better or not if it's getting better give it a lot of leeway and keep it in the portfolio even if it looks expensive now if it gets egregious you know crazy like you know you bought it at 15 times earnings and it's 100 times earnings or something on normalized earnings and you can't really justify that number under any circumstance then yeah you can look at possibly moving on but i would say that you would be served very well by being a very reluctant seller of great businesses regardless of valuations and also not wanting to sell businesses that appear to be not doing well
Questionerto be not doing well until there's absolutely conclusive proof that it's not salvageable the business has gone into decline so if you go back to the rakesh example it didn't really matter what he did with 96 irrelevant what really mattered in not selling titan titan went through many ups and downs over that period which is what was remarkable is he stuck through it throughout because he was able to look through the long term and that's what you have to think about you have to think about the business as if it's a family business as if you own the whole business and what would you do if you owned the business and it's been your family for 50 years and what would you how would you think about it that's kind of what the mindset needs to be okay thank you so much
Otherthere are so many questions out raised hands and uh in the chat that indicates
Questionerhands and uh in the chat that indicates that this is really really interesting for our students but we have to keep also in mind a little bit the timing and now i want to take advantage to ask last question myself or actually to forward one question from one of our students that i find might be interesting for many and our students read that you established a foundation focusing on property innovation through education in the light of the education sector with a new normal do you consider investing in education a profitable undertaking in a monetary sense
Otherwell i mean i think you can do well in a number of industries you could do well in the education space now of course you know if you look at the chinese example of like overnight a bunch of education companies went from euro to zero you know because the tutoring business was kind of banned in china if you will so
Questionerkind of banned in china if you will so sometimes things can come out of left field but i would say that the companies in china that faced that type of a end game were not truly adding value you know they were helping you get seats you know one of the limited seats in one of the elite universities by giving you tutoring and all that but they were not increasing the number of seats right so they were not helping people get well educated they were just trying to be a little bit better in terms of who got the spot and who didn't so it wasn't really i would say a win-win type of business from that point of view you can i don't have any investments in the education space and i don't approach it that way i'm not focused that i have to be in a particular industry or be in a particular area sometimes i may have a lot of competence which will
Othermay have a lot of competence which will be helpfulbe helpfulbe helpful i definitely have to understand thei definitely have to understand thei definitely have to understand the business but i'm more interestedbusiness but i'm more interestedbusiness but i'm more interested ininin whether i can understand the businesswhether i can understand the businesswhether i can understand the business and whether what the future looks likeand whether what the future looks likeand whether what the future looks like so for example i never reallyso for example i never reallyso for example i never really went looking to invest in a warehousewent looking to invest in a warehousewent looking to invest in a warehouse company in turkeycompany in turkeycompany in turkey it's just that when i saw that businessit's just that when i saw that businessit's just that when i saw that business and i saw the economics of that businessand i saw the economics of that businessand i saw the economics of that business and the pricing and so on it made a lotand the pricing and so on it made a lotand the pricing and so on it made a lot of sense so i think it's better to startof sense so i think it's better to startof sense so i think it's better to start offoffoff with a more open canvas in terms of whatwith a more open canvas in terms of whatwith a more open canvas in terms of what you're willing to look at and that canyou're willing to look at and that canyou're willing to look at and that can generally work out better now havinggenerally work out better now havinggenerally work out better now having said thatsaid thatsaid that there's an investor in the u.s tom russothere's an investor in the u.s tom russothere's an investor in the u.s tom russo who's done quite wellwho's done quite wellwho's done quite well and tom russo only invests inand tom russo only invests inand tom russo only invests in luxury brands dominant luxury brandsluxury brands dominant luxury brandsluxury brands dominant luxury brands around the worldaround the worldaround the world andandand dominant premium liquor companies arounddominant premium liquor companies arounddominant premium liquor companies around the worldthe worldthe world both of theseboth of theseboth of these types of businessestypes of businessestypes of businesses havehavehave very strong attributes of great businessvery strong attributes of great business
Othervery strong attributes of great business and they have shown the ability to be around for decades maybe even more than 100 years and such so he's hunting in the right area and he just has a collection of great businesses which works out really well so i think that's more important rather than being too uh honed in on one particular nuance like education education isn't such an easy field to make money because governments really have a objective of educating the masses without a lot of money being spent you know that's you know their mandate might go against what the companies are trying to do
Questionerokay thank you so much maybe we have room for one very last question kantuya do you want to ask your question
Questionersure thank you so much for taking my questions manish i'm just wondering you have invested in other markets um you know being china and um as we know in in the past
Questionerchina and um as we know in in the past uh a year or two uh a year or two uh a year or two regulators and the government has you regulators and the government has you regulators and the government has you know a big role in it just wondering if know a big role in it just wondering if know a big role in it just wondering if your thesis has changed according to the your thesis has changed according to the your thesis has changed according to the change in regulations and you know change in regulations and you know change in regulations and you know regimes change and and whatnot and if regimes change and and whatnot and if regimes change and and whatnot and if you still have the same you still have the same you still have the same view view view of investment in china chinese companies of investment in china chinese companies of investment in china chinese companies
Todd Combsyeah it's a good question so i would say yeah it's a good question so i would say yeah it's a good question so i would say that's a good example of that's a good example of that's a good example of things getting murky things getting murky things getting murky after you make an investment after you make an investment after you make an investment because there is because there is because there is no absolute clarity no absolute clarity no absolute clarity you know it's just some murkiness you know it's just some murkiness you know it's just some murkiness probably the best thing to do is to do probably the best thing to do is to do probably the best thing to do is to do nothing it's really important that the nothing it's really important that the nothing it's really important that the cell decisions cell decisions cell decisions happen when there is happen when there is happen when there is very little ambiguity very little ambiguity very little ambiguity so so so we we had made an investment in alibaba we we had made an investment in alibaba we we had made an investment in alibaba for example for example for example and it went down a fair amount and it went down a fair amount and it went down a fair amount then i noticed after that that 10 cent then i noticed after that that 10 cent then i noticed after that that 10 cent also had gone down a fair amount also had gone down a fair amount also had gone down a fair amount what we did is we swapped what we did is we swapped what we did is we swapped i came to the conclusion between those
Todd Combsi came to the conclusion between those two businesses that 10 cent was a better business i made the swap because we got a tax benefit from tax loss selling time will tell if that was the right decision i think that's okay because we kind of swap one for very similar business but with somewhat superior economics i think but i think that if i had done nothing at all you know just kept that position that's also perfectly fine and that's might be also just fine so time will tell what happens here we have to keep in mind what john templeton says that we're going to have a high error rate and we should not be trigger happy so it's really hard to figure out what these businesses look like 10 years from now that's not so easy to figure out but there is enough of a case to be made that they could be doing a lot better than today 10 years
Questionerthan today 10 years and if there's a reasonable possibility of that then we just want to leave it alone okay great thank you so much for your insight and to take the time today to speak with us and our students it was really a pleasure to have you you see on the number of questions and interaction in the chat that the topic apparently was very interesting for the students i'm pretty sure we could go on with this and there are many questions that are still around so maybe we could do this sometime again for me it was a big pleasure having you i am very delighted and thank you very much thank you to the students for the question and the interaction and we are really delighted that you could make it with us today give us some insight from your perspective as professional investor thank you very much
Otheryeah professor tobias i had a great time
Warrenyeah professor tobias i had a great time i really enjoyed the interaction i'll look forward to maybe another session maybe next year that'll be great and i really enjoyed the questions i think the questions are very insightful you know the best way to learn is to teach so i have a kind of a selfish motive in doing these things because i'm trying to better myself these sessions helped me get there plus it helped me not make sell decisions which is also good it's like playing bridge so thank you very much thank you too thanks everyone and we'll be in touch see you soon