QuestionerSo firstly, thank you so much sir for taking out the time to speak to us even though it's really early in the morning for you and really honored to have you with us today. So Mr. Babra is an extremely regular investor and philanthropist all over the world and he's currently a managing partner of Pabra Investment Funds. Thank you so much for coming. It's an absolute honor and a privilege to be moderating this sessions. So my first question is on mental models. Both you as well as your longtime friend and advisor Charlie Mer have emphasized the importance of having several tool kits or having several mental models to prevent man with a hammer syndrome. So how do we as young investors and students go about developing that in a way that like if we look at a problem we have several ways to analyze it. That's the first part and the second one is how
Questionerwhat are what have been some of your favorite mental models?
OtherYeah. So I think mental models are really important. I think they give you unfair advantage in life. It's always good to have an unfair advantage. A lot of mental models will come from direct experience. So you will increase your repertoire and range of mental models over time. You can take some deliberate action to get more proficient at different mental models. And basically if you notice that you understand something about the way the world works that most of your peers or others around you or people in the planet don't understand that or don't appreciate how important that is that can get you an edge a significant edge. So you have to be an observer and you have to you know pay attention to what's going on. So for example, you could jumpstart your
Questionerexample, you could jumpstart your journey towards having a lattis work of mental models by reading Mer's essay the 25 causes of human misjudgment which is I mean you can pull it up online there's a video also maybe a few videos online and it's a I think the last chapter in poet Charlie's almanac which now is I think published in India as well so you can get that fairly cheap and it took Charlie probably more than four or five decades maybe more to gain the knowledge and perspectives to give that speech. So psychology human judgment is really talk that took Charlie a lifetime to accumulate and understand right and so we will not get it as well as Charlie because we did not live it. we are just reading it. But if you become very intense about reading it and embibing it, I try to read that speech, reread that speech every year because every
Charliethat speech every year because every time I read it, I find stuff that I'm sure I'm reading for the first time. Like I say, hey, I've never really thought about this. So for example, I mean these mental models they're they come from the fact that because evolution is a very messy process and because our brains are a mix of ancient and modern kind of mishmash together, there is a lot of quirks and weirdness in our brains and having an understanding of some of those quirks and weirdness can be quite important. So for example in the times of hunter gatherers someone would go hunting and bring down a big animal. Now when they bring down a big animal and they bring it to their community they cannot refrigerate that animal and eat it over a long period of time because there's no refrigeration. So what the hunter does is he calls all his neighbors and says I
Otheris he calls all his neighbors and says I want to share a big feast with you. And in effect, what he's doing is he's storing that meat in the bellies of his neighbors. And he solves the refrigeration problem with that approach. And then when somebody else brings down a beast, they remember, oh, Karthik gave me a nice feast few weeks back. Definitely I'm going to call Karthik for my feast this time. So reciprocation as a trait in humans probably got hardcoded in us around that time because the people who reciprocated generally did well in life. You know their genes got passed on etc. So the reciprocation became etched but there's a quirk in the way the reciprocation gene exists in most most of us. I can remember that Karthik did a favor for me but I cannot calibrate how large or small that favor was. All that my brain can process is a favorable opinion of
Othercan process is a favorable opinion of Karthik and because of the of this calibration piece missing. I actually have used this for several decades and I continue to use it even today. So for example, if someone asks for information on PBRI funds, they want to invest or they're thinking of investing, etc. Most of my competitors or other funds will, you know, send them stuff online and different things and say, you know, here's all the documents, here's the information, whatever else, and we can talk, etc. And we do that. What we also do is we send them a physical package, and the physical package has some freebies in it. It has a book. It has a very nice cross pen and it has the same documents and everything in hard copy as well which they don't need but it's there. Now when people receive that cross pen or the book what happens is
Questionercross pen or the book what happens is that implicitly they have now gotten uh they are obliged to me. They received something from me and in their brains they think they have to give something back. Favorable opinion of Monish. But the way it works is that I send you a $30 cross pen, you send me $10 million because they can't calibrate because it's not there in the brain. So, how many $30 pens can I send out before I lose my shirt? Like an infinite number, not even a rounding error, right? And now what happens is one or two out of 100 packages we send out, people send the entire package back. I looked at it. I'm not interested. I'm returning your because those people are trying to avoid having the obligation. Now the problem is that to return the package is complicated. You have to like put postage and take it to a post office or UPS or FedEx or something. There's a
OtherUPS or FedEx or something. There's a frictional cost of time and effort involved in doing that. So most people who even want to send it back are unable to do so. And if you don't send the package back, you have a favorable opinion of Monish. And what ends up happening with the favorable opinion of Monish is the Ashoka students want to talk to Monish because somehow they think I'm a great person to talk to. That's one model right the reciprocation tendency and the quirk in how reciprocation works like this. There are hundreds of models and what Mer said is that when multiple models work in the same direction that's when you get Lula Palooa effects where 1 + 1 becomes 11. School 1 + 1 equals 2. Our focus is that 1 + 1 should equal 11. So there's another mental model which has been very important to me and I still don't understand exactly why humans are this
Otherunderstand exactly why humans are this way. But humans have an aversion to cloning. Somehow they think that cloning or copying is beneath them. Schooly actually. So now most humans feel that when they create a company or create an organization or start some endeavor they have to do something new because how can you make things work if you just copy what someone else is already doing. So they look at something being done and said oh that's a good idea but I cannot do that because somebody's already doing it. The reality is that in the world there is room for multiple participants to provide the same product or service. And so just because someone else is doing it doesn't mean that the opportunity is gone. In fact, if you are an intense cloner, you will do extremely well. So the richest family in America is the Walton family, the descendants of Sam Walton who founded Walmart. Now,
WarrenSam Walton who founded Walmart. Now, Sam Walton who founded Walmart. Now, there's no single Walton who's the richest guy, but if you pulled all the Walton family wealth together, they would be the richest. It has been 55 years since the IPO of Walmart. And after 55 years of IPO, and it has been 33 years since Sam Walton died, the Walton family collectively owned 46% of Walmart today. Now, Sam Walton was the ultimate cloner. every single thing that Walmart did, at least for the first 20 years, maybe more. There was no original idea Sam Balton had. He copied Sears, he copied Kmart, he copied a zillion merchants. And anytime his family would go on vacation, like they'd be driving, taking some road trip somewhere, and they're passing some retail store. Sam would tell the family, "Stay in the car. I'll be back in a few minutes." that he would run into the store and he'd want
Otherwould run into the store and he'd want to see what they were doing and what he could copy from them. And Sam Walton said that there is no human alive who has stepped inside more retail stores which are not named Walmart than me. He always always was going into competitor stores and even when the competitors were useless. He was looking say it's
Otheruseless even from useless operators. she was trying to learn and the end result is that Walmart is basically an amalgamation of copied ideas from a bunch of different places and intensely pursuing those ideas and doing well. If you look at Microsoft, Windows is copied from Apple, Word is copied from Word Perfect, Excel is copied from Lotus, you know, Bing is copied from Google. And my friend Warren Buffett says, you know, he tells me, you know, Wes, do you know what Bing stands for? Bing stands for but it's not Google. So everything that
Otherbut it's not Google. So everything that has worked for Microsoft including now AI has been copied from other places and Microsoft spends billions of dollars every year on research. Nothing has come out of it. So their internal research labs with all these PhDs and you know top 100 rank IITs and all of that nothing has been produced by them that we can look at and say oh this is great everything that has worked for them which has created most of the wealth has been from someone else. So that's another mental model. So now when you read the psychology of human misjudgment and you really understand it in fact you need to read it several times that'll get you going but the other thing you can do is you need to be a curious person and you need to read and embibe a lot of things from a lot of areas but you also need at the same time to go
Otheryou also need at the same time to go deep into an area that you have a deep interest in don't go into an area which is popular AI popular henna. In fact, my advice to to you would be ignore what is popular. What is more important is try to understand who you are. Understanding who you are is very complicated. But if you can understand who you are, if you can understand what your strengths are, if you can understand what your passions are, and if you can go allin on those, that is excellent. And I'm sorry to tell you this, but school is not a good place to figure all this out because school test nothing comes outside the syllabus. You will guys will protest this is outside syllabus sir and the real life is that you encounter issues and problems where there is no syllabus. In fact, most things in real life you have to figure out and many problems nobody has figured out. So basically
Othernobody has figured out. So basically that's the skill you need to hone in.
OtherWhat school does unfortunately now Ashoka does a better job than others but what school does unfortunately is they make you into really good test takers. Test number grade. This is what school teaches you. That has no relevance in the real world. So sorry to break it to you now. A question session but this is the way I am. So let's try your next question.
QuestionerThank you. Thank you for that answer. So you mentioned clon as a mental model for you. So when you look at uh say Buffett or Bonga holding a stock a top stock and then how do you how do you get through the bias of them owning that stock and develop your own thesis of say the buying or study but no thesis at all. How do you get over that bias of them owning it?
OtherOne of the important questions to ask I play bridge. I like
Questionerquestions to ask I play bridge. I like playing duplicate bridge. I wouldplaying duplicate bridge. I wouldplaying duplicate bridge. I would recommend you guys take up bridge,recommend you guys take up bridge,recommend you guys take up bridge, especially duplicate bridge. Andespecially duplicate bridge. Andespecially duplicate bridge. And recently I started playing duplicaterecently I started playing duplicaterecently I started playing duplicate bridge with a former world champion.bridge with a former world champion.bridge with a former world champion. This guy became world champion at 23 andThis guy became world champion at 23 andThis guy became world champion at 23 and he's like now like 38 or something.he's like now like 38 or something.he's like now like 38 or something. Anyway, he was telling me that mostAnyway, he was telling me that mostAnyway, he was telling me that most important thing when you're playingimportant thing when you're playingimportant thing when you're playing bridge and you're playing a hand is askbridge and you're playing a hand is askbridge and you're playing a hand is ask yourself the question, what is going onyourself the question, what is going onyourself the question, what is going on here? If you see some strange card comehere? If you see some strange card comehere? If you see some strange card come out that makes you do a double take, askout that makes you do a double take, askout that makes you do a double take, ask yourself the question, what is going onyourself the question, what is going onyourself the question, what is going on here? Now, when this guy plays bridge,here? Now, when this guy plays bridge,here? Now, when this guy plays bridge, it's like the opponents have exposed allit's like the opponents have exposed allit's like the opponents have exposed all their cards to him. Whenever I playtheir cards to him. Whenever I playtheir cards to him. Whenever I play bridge with him, it's like he alreadybridge with him, it's like he alreadybridge with him, it's like he already knows what people are holding. Evenknows what people are holding. Evenknows what people are holding. Even though they're holding the cards inthough they're holding the cards inthough they're holding the cards in their hand, in his head, he alreadytheir hand, in his head, he alreadytheir hand, in his head, he already knows every card where it is. It's just
Otherknows every card where it is. It's just amazing, incredible to watch, actually.
OtherSo the Buffett partnerships which was what Buffett originally started with were run from 1956 to 1969 13 years and the Buffett partnerships had unusual rules. One of the rules they had was that Buffett had was he didn't charge a management fee. You know all mutual funds charge management fees and hedge funds charge 1 and 20 or 2 and 20 or whatever. His fee structure was 0625 zero management fee 6% hurdle and above the hurdle he got 1/4 and investor got 3/4s. Now when I heard about Warren Buffett for the first time in '9495, it had been more than 25 years since he closed the partnership, shut it down. And when I looked, I could not find a single case of anyone who had set up a partnership or an investment fund following Buffett's rules of no management fee. Zero. So now what that
Charliemanagement fee. Zero. So now what that told me is wide openen opportunity right. So there are multiple mental models coming in here. The first is what my bridge partner Roger says. What is going on here? So well what is going on here is we already know humans are idiots about cloning model of the greatest investor ever the greatest returns. Nobody wants to touch it. Well the Indian guy is going to go touch it and take it because it's just sitting there. I saw that that model was not cloned. I know that humans are bad at cloning. That is why Walton did well and that is why Bill Gates did so well because people are not willing to stoop so low as to create a company like Walmart or Microsoft. They think that's beneath them. These are lowquality businesses and lowquality operations because they have done copying. So no one is interested in
Othercopying. So no one is interested in these companies. So I said model isthese companies. So I said model isthese companies. So I said model is there. Nobody wants it. I can go do it.there. Nobody wants it. I can go do it.there. Nobody wants it. I can go do it. And when I took that model, now when IAnd when I took that model, now when IAnd when I took that model, now when I go to potential investors, I have ago to potential investors, I have ago to potential investors, I have a unique proposition. I tell my potentialunique proposition. I tell my potentialunique proposition. I tell my potential investors, everybody else is going toinvestors, everybody else is going toinvestors, everybody else is going to take a fee from you. They will get richtake a fee from you. They will get richtake a fee from you. They will get rich when you get poor. No matter whatwhen you get poor. No matter whatwhen you get poor. No matter what happens, they'll get rich. In my case, Ihappens, they'll get rich. In my case, Ihappens, they'll get rich. In my case, I only get rich when you get rich. We areonly get rich when you get rich. We areonly get rich when you get rich. We are aligned. So, it became unique. And soaligned. So, it became unique. And soaligned. So, it became unique. And so the model of I mean I took a littlethe model of I mean I took a littlethe model of I mean I took a little detour from your question because Idetour from your question because Idetour from your question because I wanted you to understand this notion ofwanted you to understand this notion ofwanted you to understand this notion of offering gaps. There was someone hadoffering gaps. There was someone hadoffering gaps. There was someone had come up with a model 25 years hadcome up with a model 25 years hadcome up with a model 25 years had passed. In fact it was 30 years by thepassed. In fact it was 30 years by thepassed. In fact it was 30 years by the time I started the model. Now later whentime I started the model. Now later whentime I started the model. Now later when I became friends with Warren and CharlieI became friends with Warren and CharlieI became friends with Warren and Charlie I told Charlie this. I said Charlie thisI told Charlie this. I said Charlie thisI told Charlie this. I said Charlie this is the what was going on. He said,is the what was going on. He said,is the what was going on. He said, "Monish, there were a few people who had
QuestionerMonish, there were a few people who had copied that model.
OtherI said, "Yes, but Charlie, I could never find them." He said, "Yeah, yeah, you would never be able to find them. These are very obscure people." So again, it was like 99 plus% of humans had not done that. How do you overcome the bias of legit investor buying a stock? How do you overcome that bias by looking at it yourself? First of all, if you limit yourself to stocks that are largest or second largest or third largest position of maybe 20 investors that you admire. So let's say you made a list of 20 great investors and let's say you look at their top two or three holdings. So you're now looking at like 40 to 60 stocks. So there are 50,000 stocks in the world. So we would have already cut out 99.9% of stocks by doing that which is beautiful. Cloning helps you trim the data set properly. Now the second
Questionerdata set properly. Now the second question you have to ask when you look at those 50 or 60 stocks most important question is this stock in my circle of competence? And most of the time the correct answer is no because most of us are only going to understand a few things right. So out of those 50 60 stocks maybe 45 will disappear because they outside circle of competence. So now we are left with five or 10 stocks and then those are within our circle of competence and we can go into a deep dive and the deep dive is focused on first answering the first question. Why did Mr. XYZ buy this stock and make it one of his largest positions? Why did he do that? Why did he or she do that? and then we go down from there. So, so my next question revolves around the fact that in several podcasts as well as interviews you mentioned the importance
Questionerinterviews you mentioned the importance of buying a good quality well-run company and holding it through thick and thin everything surrounding the company which is mainly noise to ignore that but given the current scenario especially with the Trump tariffs how do you differentiate between something that is actual noise versus something that is substantial and might eventually use the world order Trump tariffs are mostly irrelevant
OtherAnd the reason they are irrelevant is let's take the example of a great business in India called Demart. Raise your hand if you are familiar with Demart. And raise your hand if you have been inside a Demart. All right. Very good. So what impact do Trump's tariffs have on Demart? Do we think Demart has become a useless business now because of Trump tariffs? relevance are we let's take a business like Indigo what impact
Questionertake a business like Indigo what impact does the Trump tariffs have on Indigo so
Otherdoes the Trump tariffs have on Indigo so
Otherwhen we look at demart and you know
Otherwhen we look at demart and you know
Otherwhen we look at demart and you know
Otherclearly the Trump tariffs will have some
Otherclearly the Trump tariffs will have some
Otherclearly the Trump tariffs will have some negative impacts if global GDP growth
Othernegative impacts if global GDP growth
Othernegative impacts if global GDP growth slows down but we don't actually know
Otherslows down but we don't actually know
Otherslows down but we don't actually know exactly how those things may play out so
Otherexactly how those things may play out so
Otherexactly how those things may play out so one of the things about the whole tariff
Otherone of the things about the whole tariff
Otherone of the things about the whole tariff situation is that in a free and fair
Othersituation is that in a free and fair
Othersituation is that in a free and fair trade scenario overall the world is
Othertrade scenario overall the world is
Othertrade scenario overall the world is better off. Now Trump's pet peeve is
Otherbetter off. Now Trump's pet peeve is
Otherbetter off. Now Trump's pet peeve is that trade is not fair. And if you look
Otherthat trade is not fair. And if you look
Otherthat trade is not fair. And if you look at it in the context for India, I
Otherat it in the context for India, I
Otherat it in the context for India, I completely agree with Trump in the sense
Othercompletely agree with Trump in the sense
Othercompletely agree with Trump in the sense that a lot of American goods coming into
Otherthat a lot of American goods coming into
Otherthat a lot of American goods coming into India attract very high duties coming
OtherIndia attract very high duties coming
OtherIndia attract very high duties coming in. You know, a car made abroad coming
Otherin. You know, a car made abroad coming
Otherin. You know, a car made abroad coming to India, very high duties and so on.
Otherto India, very high duties and so on.
Otherto India, very high duties and so on. And so it's not free and fair trade. So
OtherAnd so it's not free and fair trade. So
OtherAnd so it's not free and fair trade. So if the end result is that India reduces
Otherif the end result is that India reduces
Otherif the end result is that India reduces its barriers to foreign goods coming in
Otherits barriers to foreign goods coming in
Otherits barriers to foreign goods coming in I think in general that'll be good for
OtherI think in general that'll be good for
OtherI think in general that'll be good for India because what would happen is that it would force on the margin it would force domestic producers to sharpen their pencil and get better and it also would force resources within India going into areas where India has an edge. So India has an edge in shrimp farming. In Andra the rice farmers have become shrimp farmers. There was no government program. The government didn't even know this was happening. India has become the number one shrimp exporter in the world. It used to be Thailand and out of nowhere in a very short period of time India has become dominant in shrimp farming. The reason it became dominant is because various factors of production when you put them all together India has an competitive advantage. It has a competitive advantage in pharma manufacturing. It has a competitive advantage in outsourced IT services. So
Otheradvantage in outsourced IT services. So what India needs to focus on is the places where it has a serious competitive advantage and remove the shackles which restrict growth. There are gazillion shackles in India which restrict growth. For example, farms are not allowed to become large. The buying and selling of agricultural land is very restricted because there is inherent distrust. But in the US all we have are large farms. It used to be in the US that 95% of the population was focused on farming. Now less than 2% is focused on farming and we producing so much that we need to export it in the US. In India still a majority of the country is focused on farming. We only need five or 10 million people focused on farming, let the farms become efficient, remove the shackles, let's go. So anyway, when we have headlines like Trump tariffs
Warrenwe have headlines like Trump tariffs this and that, all that is not really relevant. What you have to do is you have to look at a particular business and you have to play that tariff out in the context of that business. And what you'll usually find is internal micro factors or factors around that business with its competitors have most of the impact of how that business does in the future not some global macro thing. So tariffs are like whatever. So while starting out we've been restricted to researching Indian businesses and restricted to the Indian market. So, so you have a very global perspective of how you invest and what are the benefits of having a global perspective and what is the biggest challenge you face while looking at you know multiple geographies or investing? One doesn't necessarily gain an advantage by having a large canvas to draw on. I've mentioned a few
Charliecanvas to draw on. I've mentioned a few times in previous talks there was a very good friend of Charlie Mer John Ariga. Johnga was a real estate investor. He was a billionaire and in fact his daughter is married to Mark Andre. So that's billionaire to the power of billionaire you know. So anyway Johnga in his entire life only invested in real estate within 2 miles of the Stanford University campus. That's all he did. Nothing else. And he became a billionaire. So what is John Ariga's circle of competence? Well it's this small. It's really tiny. One can get extremely wealthy by having a very tiny circle of competence. One of my mental models which I actually came to realize it's a very simple model. I came to realize this during the financial crisis is that if you are a commodity producer and now when I'm going to describe it to you you're going to say like you know
Questioneryou you're going to say like you know you you're going to say like you know this guy's a total idiot. But if you're this guy's a total idiot. But if you're this guy's a total idiot. But if you're a commodity producer producing let's say a commodity producer producing let's say a commodity producer producing let's say iron ore or coal or oil or whatever and iron ore or coal or oil or whatever and iron ore or coal or oil or whatever and you are at the low end of the global you are at the low end of the global you are at the low end of the global cost curve and you have a lot of cost curve and you have a lot of cost curve and you have a lot of reserves that is a business that is with reserves that is a business that is with reserves that is a business that is with a very wide and deep note all they're a very wide and deep note all they're a very wide and deep note all they're doing is you know basically mining some doing is you know basically mining some doing is you know basically mining some commodity so if you look at a business commodity so if you look at a business commodity so if you look at a business like let's say Saudi Aramco right I mean like let's say Saudi Aramco right I mean like let's say Saudi Aramco right I mean it used to be that Saudi Aramco used to it used to be that Saudi Aramco used to it used to be that Saudi Aramco used to produce oil at $1 or $2 a barrel That was produce oil at $1 or $2 a barrel That was produce oil at $1 or $2 a barrel That was their cost. And I don't know what their their cost. And I don't know what their their cost. And I don't know what their cost is right now, but I would be cost is right now, but I would be cost is right now, but I would be shocked if it's more than $10 a barrel. shocked if it's more than $10 a barrel. shocked if it's more than $10 a barrel. Maybe it's like $5 or $7 a barrel most Maybe it's like $5 or $7 a barrel most Maybe it's like $5 or $7 a barrel most of the oil they produce. Now, everybody of the oil they produce. Now, everybody of the oil they produce. Now, everybody else would stop producing oil if oil else would stop producing oil if oil else would stop producing oil if oil went to $20 a barrel, but Saudi Aramco went to $20 a barrel, but Saudi Aramco went to $20 a barrel, but Saudi Aramco would still be producing and still be would still be producing and still be would still be producing and still be making money. That is a very durable
Questionermaking money. That is a very durable making money. That is a very durable mode, right? So it's a very simple model mode, right? So it's a very simple model mode, right? So it's a very simple model which is that if there is a commodity which is that if there is a commodity which is that if there is a commodity producer and they're sitting on the low producer and they're sitting on the low producer and they're sitting on the low end of the Oscar and they have a lot of end of the Oscar and they have a lot of end of the Oscar and they have a lot of reserves you know that's a license to reserves you know that's a license to reserves you know that's a license to print money you're going to make money print money you're going to make money print money you're going to make money no matter what and there's a company in no matter what and there's a company in no matter what and there's a company in my portfolio which produces my portfolio which produces my portfolio which produces metallurgical coal which is used to metallurgical coal which is used to metallurgical coal which is used to produce iron and steel they have produce iron and steel they have produce iron and steel they have extremely low costs they're very close extremely low costs they're very close extremely low costs they're very close to the port they can send their products to the port they can send their products to the port they can send their products globally they have very long lasting globally they have very long lasting globally they have very long lasting reserves they have no debt reserves they have no debt reserves they have no debt Where do I sign? Right? So that becomes Where do I sign? Right? So that becomes Where do I sign? Right? So that becomes very simple. Trump tariffs, whatever, very simple. Trump tariffs, whatever, very simple. Trump tariffs, whatever, who cares? So what we want to do is that who cares? So what we want to do is that who cares? So what we want to do is that when something hits us over a over the when something hits us over a over the when something hits us over a over the head with a 2x4, now the 2x4 is an head with a 2x4, now the 2x4 is an head with a 2x4, now the 2x4 is an American term. It's not the metric American term. It's not the metric American term. It's not the metric system 2 in x 4 in. It's a log of wood system 2 in x 4 in. It's a log of wood system 2 in x 4 in. It's a log of wood commonly used for construction of US
Charliecommonly used for construction of US houses. If something hits you in the head with like a cricket bat, let's say that in short 2x4, that's what we want. We want things that are like total no-brainers with like what's going on here, you know, take it from there. So, we don't need large circle of competence. John Arriga proves that to us. We we can have a very tiny circle of competence and we don't need to know a lot of things about the way the world works. We need to know a lot about a few things. So it's better to be an inch wide and a mile deep than to be a mile wide and an inch deep. So if you really understand very few businesses or very few industries but you understand extremely well and then you invest in them in periods where it you know appears you can't lose then that's over time may work.
QuestionerSo Misha my next question is the fact that Babra investment funds
Questioneris the fact that Babra investment funds has no analyst no hired analyst apart from you. What is the rationale behind that and doing it all by yourself?
OtherWell, I do have a couple of guys now who are very helpful to me, but that was because, you know, I had started a business that didn't work and we got out of the business, but I like the guys and so I wanted to keep them. And I told them, I don't want them to generate ideas. they don't generate ideas but they've been very helpful to me in terms of the deep dives you know when I have specific things I want to kind of go deeper into or whatever so it's been helpful but if that accident had not happened I wouldn't have had anyone the reason is that in a year I'm buying one or two things and maybe I'm selling one or two things and if the job is done right which I don't think I do the job
Otherright which I don't think I do the job right but if the job is done right thenright but if the job is done right thenright but if the job is done right then one would never sell so anytime there'sone would never sell so anytime there'sone would never sell so anytime there's a fail of anything, it means I've made aa fail of anything, it means I've made aa fail of anything, it means I've made a mistake. And it when I look back, thatmistake. And it when I look back, thatmistake. And it when I look back, that means I've made a lot of mistakes. So,means I've made a lot of mistakes. So,means I've made a lot of mistakes. So, the bottom line is that we don't need tothe bottom line is that we don't need tothe bottom line is that we don't need to own a lot of things. We don't need toown a lot of things. We don't need toown a lot of things. We don't need to find a lot of things. What we're lookingfind a lot of things. What we're lookingfind a lot of things. What we're looking for is we're looking for no-brainerfor is we're looking for no-brainerfor is we're looking for no-brainer anomalies, like when things don't makeanomalies, like when things don't makeanomalies, like when things don't make sense. Like, I like to invest whensense. Like, I like to invest whensense. Like, I like to invest when things make no sense. And when thingsthings make no sense. And when thingsthings make no sense. And when things make no sense, that's when I get kind ofmake no sense, that's when I get kind ofmake no sense, that's when I get kind of excited to kind of look into what'sexcited to kind of look into what'sexcited to kind of look into what's going on. Like for example 7 years ago Igoing on. Like for example 7 years ago Igoing on. Like for example 7 years ago I started visiting Turkey and when I wentstarted visiting Turkey and when I wentstarted visiting Turkey and when I went the first time in 2018 I had no bigthe first time in 2018 I had no bigthe first time in 2018 I had no big agenda. I was only going to basicallyagenda. I was only going to basicallyagenda. I was only going to basically visit Istanbul once and the reason I wasvisit Istanbul once and the reason I wasvisit Istanbul once and the reason I was making that visit is I had a very goodmaking that visit is I had a very goodmaking that visit is I had a very good friend in Istanbul who's a very goodfriend in Istanbul who's a very good
Questionerfriend in Istanbul who's a very good value investor. In fact problem is he's too much Graham and too little Munger. But anyway I told him you know Turkey was screening extremely cheap. everyone was exiting and I said I'd like to visit companies in his portfolio starting with the ones that were the largest positions and then going down the list and I didn't want to visit any companies that he didn't have money in and if he was okay with doing that and he was very excited to do it he said yeah it'll be great let's hang out so when I visited Turkey the first time I remember the first company he took me to was a PE of 0.1 it was trading at 1 month's earnings and I won't go into the details of that business because that'll use up the rest of your time without getting to the point. But I found Turkey incredibly cheap. I found that everyone was
Othercheap. I found that everyone was exiting. And so then I said, "Okay, let's look at the businesses that are immune to whatever, you know, currency and inflation and things are going on." And the second year I visited and usually what I was doing is when I visiting Turkey, I did no work on the businesses we were going to visit until after we visited them because I didn't want to waste my time. I said okay I'm going to see how the meeting goes see if there's anything that interests me about the business and then after that if there's interest I'll dive in. So usually when we were driving to a business, I would ask my friend some few questions. You know, what business are they in, what industry they in, what's going on, why did you invest, etc. Just a few questions. So I'm actually not a complete village idiot at the meeting. And so as the second visit in 2019, he
QuestionerAnd so as the second visit in 2019, he was taking me to his company. He said, "Monish, the market cap is $16 million. Liquidation value is $800 million." And I said, "Is it a fraud? Like it's trading at 2% of liquidation value?" He said, "No, I have money in the business. I have it's in my portfolio." I said, "Why is so cheap?" He said, "Well, everything in Turkey is cheap." So when I visited the company, it seemed like a pretty normal company, very basic, boring business. They rent warehouses to large Fortune 500 companies, you know, Amazon, IKEA, Carour, Mercedes, Toyota, all these are like clients of theirs, Dupont and so on. 99% lease inflation index or dollar leases or euro leases. And you could have gone to any realtor in Istanbul, showed them the portfolio, and they would have told you in about half an hour, this is worth a billion dollars.
Questionerhour, this is worth a billion dollars. and there was 200 million of debt. So he was right. It was worth 800 million and the liquidation value was 16 million. I mean the market value was 16 million. Then I thought there wouldn't be any volume to buy the stock whatever. But Turkey is a country of gamblers. So the average float of a Turkish company cycles through in about 21 days. Very high trading volume. So the float is just continuously cycling through. Typical retail Turkish investor invests at 10:00 and wants to exit at 3:00 and make 10%. That's their model. Invest at 10:00, sell at 3:00 and make 10%. You know, where do I sign? So Buffett has a quote that the stock market is a mechanism to transfer wealth from the active to the inactive. And it couldn't be truer in Turkey. So when we started buying the stock there's huge volumes
Ted Weschlerbuying the stock there's huge volumes and for I think $8 million we got one/ird of the company and now 6 years after that the market cap is about a billion. The Turkish LRA is decimated. So in Turkish Lra returns are infinite but in dollars it's gone from 16 million to a billion but now the liquidation value of the business is over 2 billion maybe close to 3 billion. So you know the thing is that I go to Istanbul once a year. I meet the founders. We have fish on the Bosphorus. Blue fish on the Bosphorus is wonderful. And basically I tell them that the business is our family business, their family and my family. It's not a portfolio position and that I'm not selling that business or whatever until they do something. If they sell then I would sell or whatever. So what I discovered after making the investment is that I bought this business at a huge discount to what it
Li Lubusiness at a huge discount to what it was worth. But I didn't realize at the time that it had gifted capital allocators. I've seen them 6 years. I've not seen them make any single mistake. All their reinvested capital is invested at 20 to 35% or more dollar returns annualized. So this company is going to keep compounding for a while. And my main job is to talk to students at Ashoka and do nothing. just sit there and do nothing you know and lay bridge and so on. So we don't need too many insights. We don't need to understand too many things. What we do need is look for things that make no sense. Look for anomalies. Look for weird things. Try to answer the question what is going on here and then take it from there. So So you wrote the bando investor like 20 years ago.
QuestionerIf you had to rewrite it today, so which are the concepts maybe you would remove
Questionerare the concepts maybe you would remove or completely rewrite uh maybe based on the mistakes that you have made or what you have learned since from the other investors also have you really moved away from the cigar but approach like from the pioneer distilleries to more compounding bets like Micron or Demart as you talk about?
QuestionerYeah, that's a great question.
OtherYeah. So I had really flawed models in terms of how how I was investing earlier. So many mistakes because of those flaws. So if I could go back, one of the big tweaks I made, you know, it's so easy to understand this and just shows you how dumb I am, is that basically if you find yourself in the fortunate situation of partial ownership of a great business with great management. What I used to do is I used to try to calculate the intrinsic value of that business. And when it got to
Questionerof that business. And when it got to about 90% of the intrinsic value, Iabout 90% of the intrinsic value, Iabout 90% of the intrinsic value, I would sell that business to buywould sell that business to buywould sell that business to buy something that was at half off. And thatsomething that was at half off. And thatsomething that was at half off. And that is really stupid. And it's really stupidis really stupid. And it's really stupidis really stupid. And it's really stupid for a few reasons. The first thing is wefor a few reasons. The first thing is wefor a few reasons. The first thing is we don't know what intrinsic value is. Wedon't know what intrinsic value is. Wedon't know what intrinsic value is. We may have some idea, but we're probablymay have some idea, but we're probablymay have some idea, but we're probably going to be wrong about it. Secondly,going to be wrong about it. Secondly,going to be wrong about it. Secondly, these great businesses with greatthese great businesses with greatthese great businesses with great managements are very rare. They aremanagements are very rare. They aremanagements are very rare. They are anomalies. And so if you find yourselfanomalies. And so if you find yourselfanomalies. And so if you find yourself in the happy situation of partialin the happy situation of partialin the happy situation of partial ownership of such a business, I mean,ownership of such a business, I mean,ownership of such a business, I mean, I'll give you an example, you know, likeI'll give you an example, you know, likeI'll give you an example, you know, like for example, when I first startedfor example, when I first startedfor example, when I first started investing in equity markets for theinvesting in equity markets for theinvesting in equity markets for the first time in '95, I had $1 million tofirst time in '95, I had $1 million tofirst time in '95, I had $1 million to put into the equity markets, my ownput into the equity markets, my ownput into the equity markets, my own money, and I was going to see how I domoney, and I was going to see how I domoney, and I was going to see how I do with that. I had no prior experiencewith that. I had no prior experiencewith that. I had no prior experience investing in stocks, etc. This was 30investing in stocks, etc. This was 30investing in stocks, etc. This was 30 years ago, 1995. And out of that 1years ago, 1995. And out of that 1
Questioneryears ago, 1995. And out of that 1 million I put 20,000 of that into Indian stocks. I made four bets in India. There were Satyium computers. There was Blue Dart, Skypack. I was only going to make these three bets. Satyium, Blue Dart and Skypack. And then while I was going through the process, I was interacting with Kotak because Kotak was my broker. And at that time, they didn't have their banking license. And I was interacting with Faloney Ner. Some of you might have heard of Faluni. and she was running Kotuk's London office at that time. So Faluni helped me open my account and all of that and I was extremely impressed with the Kotak team both in London and in Mumbai when I so last minute I decided to put some of that money into Kotak. So basically out of the 20,000 10,000 went into Satyam and maybe two 2,000 or 3,000 went into Kotak and
Othertwo 2,000 or 3,000 went into Kotak and then the rest was between Blue Dart andthen the rest was between Blue Dart andthen the rest was between Blue Dart and Skyack. Now the Satyium fraud happenedSkyack. Now the Satyium fraud happenedSkyack. Now the Satyium fraud happened much later that was more than 10 yearsmuch later that was more than 10 yearsmuch later that was more than 10 years after I invested. But in 5 years afterafter I invested. But in 5 years afterafter I invested. But in 5 years after that in the year 2000 Satyium was upthat in the year 2000 Satyium was upthat in the year 2000 Satyium was up 140x so the 10,000 I had invested in140x so the 10,000 I had invested in140x so the 10,000 I had invested in Satyium was sitting at 1.4 million.Satyium was sitting at 1.4 million.Satyium was sitting at 1.4 million. Okay. And the 980,000 that I hadOkay. And the 980,000 that I hadOkay. And the 980,000 that I had invested outside of India in the US wasinvested outside of India in the US wasinvested outside of India in the US was sitting at about 13 million. So just thesitting at about 13 million. So just thesitting at about 13 million. So just the Satyium bet and these other had taken aSatyium bet and these other had taken aSatyium bet and these other had taken a million to like 14 million or somethingmillion to like 14 million or somethingmillion to like 14 million or something and I said okay Monish well done life isand I said okay Monish well done life isand I said okay Monish well done life is good okay and then inexplicably for nogood okay and then inexplicably for nogood okay and then inexplicably for no really good reason in 2000 I realized wereally good reason in 2000 I realized wereally good reason in 2000 I realized we sitting on a mega bubble and like satyamsitting on a mega bubble and like satyamsitting on a mega bubble and like satyam is ridiculously overl etc and in Januaryis ridiculously overl etc and in Januaryis ridiculously overl etc and in January of 2000 I told Kotak unload and I gotof 2000 I told Kotak unload and I gotof 2000 I told Kotak unload and I got out of Satyam within 5% of the peakout of Satyam within 5% of the peakout of Satyam within 5% of the peak price cashed in the whole thing. Iprice cashed in the whole thing. Iprice cashed in the whole thing. I wasn't even sure the Indian governmentwasn't even sure the Indian governmentwasn't even sure the Indian government would allow me to pull the money back. I
Questionerwould allow me to pull the money back. I would allow me to pull the money back. I said, "These guys are not stupid. I put 10,000 into India. I'm going to pull 1.4 10,000 into India. I'm going to pull 1.4 10,000 into India. I'm going to pull 1.4 million of foreign exchange out. They're million of foreign exchange out. They're million of foreign exchange out. They're going to someone's going to protest going to someone's going to protest going to someone's going to protest somewhere." But no, they just wired the somewhere." But no, they just wired the somewhere." But no, they just wired the money. It was like it was very very money. It was like it was very very money. It was like it was very very smooth. And then at that point, I said, smooth. And then at that point, I said, smooth. And then at that point, I said, well, you know, God is not so well, you know, God is not so well, you know, God is not so benevolent. He likes Monish. He loves benevolent. He likes Monish. He loves benevolent. He likes Monish. He loves Monish, but he doesn't like Monish Monish, but he doesn't like Monish Monish, but he doesn't like Monish infinitely. So these other stocks, Kota, infinitely. So these other stocks, Kota, infinitely. So these other stocks, Kota, Blue Dart, and Skyack, had done nothing Blue Dart, and Skyack, had done nothing Blue Dart, and Skyack, had done nothing at that point. They were sitting at that point. They were sitting at that point. They were sitting approximately where they were like maybe approximately where they were like maybe approximately where they were like maybe 10 20% up. So I wanted to clean up my 10 20% up. So I wanted to clean up my 10 20% up. So I wanted to clean up my books. I sold those three stocks. Well, books. I sold those three stocks. Well, books. I sold those three stocks. Well, Kotuk is like Kotuk is like Kotuk is like 350x after that. Okay, 350x after that. Okay, 350x after that. Okay, 350x. Blue dart I think is 350x. Blue dart I think is 350x. Blue dart I think is 500x. Okay, Skyac went nowhere. I know 500x. Okay, Skyac went nowhere. I know 500x. Okay, Skyac went nowhere. I know maybe been a fraud or whatever. No idea. maybe been a fraud or whatever. No idea. maybe been a fraud or whatever. No idea. But basically there was no good reason But basically there was no good reason But basically there was no good reason to sell blue dot or skypack or cotak.
Warrento sell blue dot or skypack or cotak.to sell blue dot or skypack or cotak. There was no reason and they were soThere was no reason and they were soThere was no reason and they were so small it didn't matter you know. So whensmall it didn't matter you know. So whensmall it didn't matter you know. So when I go through and look at the last 30I go through and look at the last 30I go through and look at the last 30 years, there are so many exceptionalyears, there are so many exceptionalyears, there are so many exceptional businesses I invested in and sold. Well,businesses I invested in and sold. Well,businesses I invested in and sold. Well, in the case of Kotuk and Blue Dart, itin the case of Kotuk and Blue Dart, itin the case of Kotuk and Blue Dart, it was sold for stupid reasons, but inwas sold for stupid reasons, but inwas sold for stupid reasons, but in other cases was sold because I thoughtother cases was sold because I thoughtother cases was sold because I thought they were fully priced. Well, you cannotthey were fully priced. Well, you cannotthey were fully priced. Well, you cannot come up with an intrinsic value for KOKcome up with an intrinsic value for KOKcome up with an intrinsic value for KOK or Blue Dart or any of these businessesor Blue Dart or any of these businessesor Blue Dart or any of these businesses because what will management do in thebecause what will management do in thebecause what will management do in the future? We don't know what they'll do.future? We don't know what they'll do.future? We don't know what they'll do. And if they're exceptional, they can doAnd if they're exceptional, they can doAnd if they're exceptional, they can do exceptional things. And so the idea isexceptional things. And so the idea isexceptional things. And so the idea is that what took me a long time to learn,that what took me a long time to learn,that what took me a long time to learn, forever and ever to learn, is that doforever and ever to learn, is that doforever and ever to learn, is that do not sell a great business when it'snot sell a great business when it'snot sell a great business when it's fully priced, do not even sell it whenfully priced, do not even sell it whenfully priced, do not even sell it when it's overpriced. Basically, just sit onit's overpriced. Basically, just sit onit's overpriced. Basically, just sit on it until it just becomes completely
Questionerit until it just becomes completely egregious. Like you cannot possibly come up with any scenario where that valuation makes sense. But the good news is I got that message etched in my brain well before I'm going to die. Hopefully there's a 29 years and few months of compounding left and so we can apply those lessons. Life is good. Let's take the last question. Hello sir, thank you so much for the session. I wanted to understand how do you distinguish between businesses that are distressed and businesses that are value traps and how how do you gauge whether these businesses are going to come back in favor? And just a small followup to that. Do you time these investments for teams that are out of favor and how do you go about timing that accurately?
WarrenYeah, that's a great question. So in the late60s and early '7s, there were the concept in the US known as Nifty50,
Questionerconcept in the US known as Nifty50, which is very different and nothing to do with the Nifty50 in India. Forget the Nifty50 in India. In the late '60s in the US, the idea was you put 2% into 50% 50 stocks wherever your portfolio and the 50 stocks were the bluest of the blue chips, you know, ADP, McDonald's, Coke, Proctor and Gamble and you know Xerox, Polaroid, Kodak, all of them. There were these 50 stocks Avon and so on. And basically the idea was you set it and forget it. You don't worry about valuation, don't worry about anything. Now there's some controversy whether Walmart was part of that nifty50 or not. Let's say for our discussion let's say it was part of that nifty50. So what happened is in 7374 there was a major downturn in the US market. It was a crash in slow motion but like 60 70% of equity markets value got wiped out and
Questionerequity markets value got wiped out and these Nifty50 they were taken out backthese Nifty50 they were taken out backthese Nifty50 they were taken out back and shot like decimated that portfolioand shot like decimated that portfolioand shot like decimated that portfolio got decimated and after 1974 no one evergot decimated and after 1974 no one evergot decimated and after 1974 no one ever talked about the Nifty50 but let's taketalked about the Nifty50 but let's taketalked about the Nifty50 but let's take a scenario where you own the Nifty50 youa scenario where you own the Nifty50 youa scenario where you own the Nifty50 you put 2% into Walmart and the remainingput 2% into Walmart and the remainingput 2% into Walmart and the remaining 98% goes to zero and you forward this98% goes to zero and you forward this98% goes to zero and you forward this whole portfolio for 55 years from 1970whole portfolio for 55 years from 1970whole portfolio for 55 years from 1970 to now well what happens is that withto now well what happens is that withto now well what happens is that with 98% error rate, the Nifty50 compounds at98% error rate, the Nifty50 compounds at98% error rate, the Nifty50 compounds at almost 15% a year for 55 years and blowsalmost 15% a year for 55 years and blowsalmost 15% a year for 55 years and blows out the S&P which does a respectableout the S&P which does a respectableout the S&P which does a respectable 10%. Okay? And that's with 98% going to10%. Okay? And that's with 98% going to10%. Okay? And that's with 98% going to zero. I took like AMX to zero, Coke tozero. I took like AMX to zero, Coke tozero. I took like AMX to zero, Coke to zero, Proctor and Gamble to zero. I tookzero, Proctor and Gamble to zero. I tookzero, Proctor and Gamble to zero. I took all these companies to zero right now. Aall these companies to zero right now. Aall these companies to zero right now. A bunch of companies in the Nifty50bunch of companies in the Nifty50bunch of companies in the Nifty50 actually went to zero like you knowactually went to zero like you knowactually went to zero like you know Xerox and Kodak and Polaroid and allXerox and Kodak and Polaroid and allXerox and Kodak and Polaroid and all that. But if you took them all out. Sothat. But if you took them all out. Sothat. But if you took them all out. So the reality with this business is thatthe reality with this business is that
Questionerthe reality with this business is that anytime you enter the investing business, you are going to make a lot of mistakes, value traps, frauds, whatever. All part of the landscape. No matter how good you are, you're not going to be able to avoid them. Even the best investor, John Templeton said, will be wrong one out of three times. more than likely you're going to be long maybe even one and a half or two two out of three times. Warren Buffett out of maybe 400 plus decisions that he's made in the last 60 years only 12 have move the needle for Berkshire like the 3 or 4% hit rate and that's God we're talking about. So the important thing is not the avoidance of the value traps. You can try and do that and you may or may not be able to completely do it but you can try. The important thing is recognize and hang on to your winners and the traps won't matter. Well, thank you so
Othertraps won't matter. Well, thank you so much. It was such a pleasure spending time with you guys. Thank you so much, Manish. It was an absolutely wonderful session and we hope that the next time we interact and have a session, it's in person and not just you but Mr. Spear as well. He was also quite enthusiastic about interacting with the club. So, we really hope that we have you guys in person at I look forward to that. That'd be wonderful. Thank you.
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