Summer Summit 2021
 Moderated by Luis Alberto and Iglesias Gómez
  (00:00:00) - Introduction
  (00:00:39) - Entrepreneur’s advantage
  (00:03:36) - Finding order in chaos
  (00:07:09) - Investment in Turkiye
  (00:07:40) - Investment in China 
  (00:10:14) - Growth vs Value  
  (00:12:15) - Microsoft 
  (00:16:29) - Nick Sleep
  (00:18:21) - When two worlds collide 
  (00:19:41) - Reysas 
  (00:22:22) - Rain Industries
  (00:23:38) - Market trends
  (00:24:27) - Ron Insana: Trend Watching
  (00:27:37) - Your deepest desire is your destiny
  (00:32:47) - Holdings of Agnelli family
  (00:34:56) - Auction driven markets
  (00:37:52) - Discounts in equity market
  (00:41:05) - Balancing personal and professional life
  (00:45:38) - Friendship with Charlie Munger
  (00:47:32) - The Dakshana Foundation
   

I hope you get to enjoy this as much as I'm sure we will.

And it is really our pleasure and an honor to have you here and always so enjoyable to listen to your wisdom.

So 1 thing that just comes to my mind, there's many things we can talk about, but you know, just, you know, when, when so many people in this industry, call it asset management, investors, portfolio managers, whatever, very few have the background and the ability to having running a business.

And in your case, not only you were running a business, you founded a business, you were an entrepreneur at heart.

You went through how hard it is to scale, to deal with suppliers, with customers, to, I don't know, meet payroll, to do things that on the other side of investors, we don't really get to understand unless it's in your skin.

So I wonder as you did that and eventually sell your business before you became officially a professional investor, if you could explain how that really helped you or if that gave you an edge, I think it would be an interesting angle for people to hear that.

He said, I'm a better investor because I'm a businessman, and I'm a better businessman because I'm an investor, there's a interplay between the 2.

And I think the second quote that I like better is he says, how can you explain to a fish what it is like to walk on land.

And he says, a thousand years of talking to a fish about walking on land does not have the same impact as 1 day actually walking on land.

And so basically the thing is that I actually get perplexed when I look at professional investors who have never run a business, because I think at a deep level, they're kind of missing some very fundamental.

So you really cannot look at businesses through spreadsheets.

And in fact, entrepreneurs who are running businesses typically don't use spreadsheets.

They usually have 3 or 4 variables that are going to drive most of the outcome in their head, and they focus on those 3 or 4 variables.

And as an investor, you need to get to those same variables to understand what the outcome might be.

And it's hard to get to those variables if you have not been in the driver's seat yourself.

So I think it's a huge advantage to have had, run a business, met payroll and scaled and had all the HR issues and marketing branding issues and so on.

I think those are important to understand and it's also important So you can try to project what is the likely trajectory of the business.

It's very dangerous to project the likely trajectory through Excel.

And so actually understanding the messiness of business is important.

You know, the other day, a few weeks ago, when I was reading the book from your friend, William Green, which I have it here for people, it's a fascinating book.

So so Richard, why is it happier, which obviously you are chapter chapter 1 of these amazing great investors.

And it came to my mind that I was picturing the 2 of you guys driving in India, and all the chaotic traffic and things that for you are natural, because you grew up there until you went to college.

He wasn't used to that chaos and that ecosystem that seems so foreign to many of us who visit, not just India, to Asia.

We see that it is so hard to live your day with so much competition.

Just the fact of getting food on the table, which we find very basic, there's so much competition.

So I wonder, growing up in that ecosystem, that for some of us might consider chaotic, allow you to see order where other people don't when you're looking for stocks and kind of in the low P.E.

Environment, I kind of picture this as a line mine, but there's a lot of traps that you have over the years been able to pick these gems and this so I wonder if growing up in this environment it helped you or you think this is genetic that your skills?

No I think that's a that's a good question And it was a lot of fun hanging out with William in India for, we were, we were together for, I think, 5 or 6 days.

And, you know, most people who go to India, you know, tend to stick to the major cities and usually their travel is with airplanes and such.

We were actually going to visit different areas of the foundation I work on.

And so we went very deep into rural India.

And so it was not just India that he was experiencing.

We were experiencing in India that usually most people would not.

And so he had, you know, sticker shock to the power of sticker shock, if you will.

I think he had a great time and it worked out well.

But I think that 1 of the things that you see when you're growing up, So, you know, I had wonderful parents and I had a lot of structure and stability in the household.

And so within the chaos, You also see a lot of organization.

And 1 of the things you see, which you appreciate, which I appreciate about many other countries because of my experience in India, is you cannot paint a country with a white brush in 1 color.

So it's really a rainbow, you know, it comes in many colors.

So for example, within India, you know, when I was growing up, Coca-Cola was within the fabric.

Of course, later they were thrown out because they wanted to nationalize that.

But When you looked at some of these companies like Coca-Cola and other large businesses in India, you saw very well-organized operations, lots of structure, great people, et cetera.

So when I look at different emerging markets or developing markets around the world.

For me, it's very clear that there are lots of great teams and entrepreneurs and businesses inside that chaos.

And 1 has to kind of dive in and start separating them out and figure it out.

And so I think the childhood experience I had in India gives me a lot of comfort.

So like, for example, we have some investments now in Turkey.

And whenever I bring up Turkey to any of my friends or anyone else, they just say, oh, you know, the currency or the leadership, and it's too wide a brush.

You know, yeah, the currency has issues, leadership has issues, there's inflation, but when you, you know, peel all the layers through that, you can find great businesses and great teams that can transcend all that So that's what the direct result of the experience I had

Alberto if I may I would like to read 1 question from the audience.

Burry recently bought Alibaba Which makes him Jose think that that's because it's at a good price.

Yeah, I mean, like, so China's a good example of what we just spoke about is that I think it would be too wide a brush to take a complex country like China and, you know, put it into 3 sentences, if you will.

So I mean, I think there are great businesses and great management teams all over the world.

I think like Charlie Munger would say that the Chinese are natural entrepreneurs.

They're actually natural capitalists who were trapped in a socialist system.

And so when those shackles were lifted, you actually unleashed something quite dramatic.

I would say capitalism and entrepreneurship is still very embryonic in China, but it is coming about really quickly.

So I think I would be, I mean, given my circle of competence, I think most of China would be off limits for me just because I just probably couldn't understand it well enough.

Small sliver of it, I think I can understand.

And especially if you look at some businesses, like let's say, if you look at a business like Tencent, or if you look at a business like Alibaba, these 2 companies specifically, very early in their journey had Western investors or non-Chinese investors.

And both these companies right from the beginning, I think of them more as being, happen to be based in China.

And because it's such a large market, happen to have most of their operations in China.

But they're really in many ways, multinational in their views and how they look at things.

They've had a lot of, I would say, non-Chinese infusion into their DNA and thinking very early.

And many of those elements are a bit positive for them.

So yeah, I mean, I would think that I think China is a, would be a difficult country for most investors because you need to understand the nuances.

A little bit of it, I think can be understood.

I will now read another question, this time coming from Manuel.

In your 2020 letter, you mentioned the big evolution you have had.

Have you perhaps abandoned deep value investing?

No, I think it's more like a Swiss Army knife and adding, I would say not 1 knife, but maybe 4 or 5 new knives to it.

So I think that a lot of my experience and I would say biases relating to great businesses and compounders was colored by the experience I had in the late 90s and early 2000s.

So when I first started investing in the mid 90s, I had run an IT business which had grown very quickly, and I had seen the power of having capital, like high ROE tech businesses and what they could do in terms of scale and growth.

And in that period, I was mostly invested in tech businesses around from 95 to close to 99 or 2000.

But then when the when Pabrai Fund started in mid-99, I could probably see the NASDAQ bubble popping not much before anyone else, probably maybe 3 to 5 months before.

I was very concerned that this thing doesn't look sustainable.

I had taken a different path when Pabrai Fund started.

The first year, from mid-1999 to mid-2000, we were up like 70%, more than 70% while the NASDAQ had already crashed and so on.

And part of that was because I kind of sidestepped the euphoria.

And I remember in kind of early 2000, I was visiting Microsoft headquarters in Seattle and Redmond, Washington.

And actually 1 of my early investors was a former Microsoft employee very early.

And he had mentioned to me, Hey, listen, if you're ever in Seattle, I could introduce you to a bunch of current and former early Microsoft employees who are ex-employees who may have an interest in your fund.

And at that time, the fund was very embryonic.

I said, I'm going to be there on Thursday.

So I spent a day visiting Microsoft in early 2000.

At that time, it was amongst the most valuable companies in the world.

There were 3 companies in the world in early 2000, which had a market cap of over 600 billion, Microsoft, GE, and Cisco.

All 3 of these businesses were valued at over 600 billion.

They were the 3 most valuable businesses on the planet.

And I told these Microsoft employees I met that it looked like a bad investment to me.

I said, it's a great business, but a bad investment.

And because I think at that time, their cash flows were well under 10 billion.

So it was trading at, you know, 60, 70 times earning.

And they said to me, you really don't understand our business.

So I actually told them, I said, look, you earn your livelihood from Microsoft.

All your portfolio, maybe 80, 90% of it, other than your home, is Microsoft stock or options.

And probably not a good idea to have all of that.

And they probably thought of me as some cheesy salesman.

So Microsoft did continue to do well after

the stock was flat, 0 returns for 13, 14 years, even though Revenues had increased dramatically, profits had increased dramatically, because it was just so heavily overvalued.

Not only was it flat, it was a very rollercoaster ride.

It would have been very hard to hold on to the stock.

It lost 60%, 70% of its value in the next 2 or 3 years, then it came back and again in 2009, 2008 and 2009, again, lost a lot of value.

It was a very tumultuous ride in those 13, 14 years.

While I had a strong belief in high growth and compounders, when I started in the mid-90s, I went to Graham in the late 99, early 2000 timeframe, because I knew that I would have downside protection.

So I switched from basically a growth tech investor into a gram investor.

And that actually turned out to be really wonderful because all the indices did terribly for the next 10, 15 years, because they were just so elevated.

It dropped almost 80% from the peak from 2000 to 2002 or

But What I forgot to do is I should have switched back.

because the best way to invest is to own a stake in a business which generates high returns on capital and has a long growth runway ahead run by great management.

If you can find that combination, sometimes even if you pay up for that combination, it can work out quite well.

And Microsoft actually is an interesting example of that.

So if you had stayed with Microsoft from 2000 and somehow you were able to stomach the ride, it's not a great outcome, but you have about more than 3 times starting capital, even from an elevated level.

I mean, it's not a great return, 3x in 21 years is not that interesting, but at least you didn't have a loss of capital.

So when I read about, William Green had sent me the book's galley copy about a year ago.

And when I read chapter 6, which was on Nick's sleep, it reminded me that I need to go back.

So Nick has been a good friend of mine for close to 2 decades, wonderful guy.

And, you know, he's somewhat reticent to be out in public, but you should try and nudge him and see if he'll do something with you guys.

And so Nick himself had been on the same journey as I had, where he started out as a deep value investor.

He was buying things like Zimbabwe cement, where it was trading at less than 1 times earnings.

And there was issues with the state had confiscated a lot of your land and materials and You had currency control.

There were a lot of ugly things about that, but he went in.

He evolved from there to understanding Amazon, understanding nuances of what he calls a scaled economy shared, and it worked out very well for him.

So I realized that I had overdosed too much on Gram for a long time.

And of course, the way to live life is to overdose on Munger and less on Gram.

So I used to be Buffett and Munger in the mid 90s.

Then I was Graham for probably close to 20 years.

And now getting back to Nick Sleep and Buffett and so on and Munger.

And I actually think it's a mix of both that works well.

So sometimes you can find incredible deep value investments that will do better than great compounders.

And most of the time, great compounders will do the best.

Now I'm just going to add to that, that you know when you, I was just picturing you as if you were a musician and you know you're going to play heavy metal, you have certain guitar, if you're going to switch to blues you have to change the guitars.

So I was wondering in your mind when you're dealing with the universe of call it the low P or the cigar butt or whatever people call it or when you go into compounders which you've done both as you were saying do you really switch your hat?

Do you change the way you think or how do you do that?

I mean, I think it uses the same parts of the brain.

At the end of the day, what I'm focused on is I put a dollar out today and what am I getting in 5 or 10 years.

And in the gram way, usually you're trying to maybe you're buying a $2 bill for a dollar, you're getting 50, 60% off, then it's just a matter of how long that convergence takes.

In the Munger method, you're putting out a dollar, but the dollar's increasing in value over time.

And again, it's the rate of increase and how long that takes.

And sometimes the interesting thing is that the 2 worlds meet and it's really orgasmic when the 2 worlds meet.

So for example, last year I invested in, not last year, in

And when I invested in the business, the market cap was like 20 million and liquidation value was like maybe

And so it was a total no brainer, as long as you know, the main thing I was just checking is, is all this real?

You know, the main focus is that, you know, what part of this is real and what part of this is a fraud, and I couldn't find any fraud.

So We went in and Turkey has mostly short-term investors.

They have very high trading volumes because the market participants think of it as a casino.

This particular company, for example, I think every 15, 17 days, the entire free float was turning over.

People are basically in Turkey will invest for a few hours.

They want to buy something for $10 at 10am and sell it for 12 at 3pm and be done.

We ended up owning a third of the company for about $7 million.

And I knew that it wasn't a cigar, but they actually had some great assets.

And not only did they have great assets, they had 2 really good capital allocators on top of that.

Just in the last 2 years, the 500 million has moved to probably 800 or 900 million.

The market cap has gone from like 20 million to like north of 100 million.

Okay, so there's been some movement in the market cap, in spite of the currency, these all dollar numbers, the currency didn't really matter.

But the important thing here is that we were buying something at

or 4% of liquidation value, and that liquidation value is going up.

I would say this is Nick's leap on steroids.

The only negative is that we could only put 7 million in because it was so small.

But what I can take from the Nick's sleep framework, which would not be part of the Graham book, is just set it and forget it.

So as long as the capital allocators are in place and they're doing things, even if the discount goes away, just stick with it.

And Like I said, when the 2 worlds collide, that's really, you only need that to happen a couple of times in your lifetime to find.

we bought a company in India called Rain Industries.

That was trading at what I would call a future P of 1.

The company had a market cap of $200 million and they had revenue of close to 2 billion.

I thought they would come a year in the next 3, 4 years where they'd make 200 million in 1 year.

I said, I just want to see what the stock price is then, whether it can still be at 200 million if they make that much in 1 year.

So Rain, actually by 2018, had gone to more than a 2 billion market cap from 200 million.

It went up almost 10x because that earnings came in.

But by then I fell in love with the business and the management team.

So even though it was really cheap, it wasn't really a cigar bunch.

So it wasn't a great business, but it was a good business with a great capital allocator.

And so I think that, you know, it's all of the above, you know, you can do well with Alibaba, where you are definitely not buying below liquidation value and all those sorts of things.

So I think it's good to keep a flexible mindset.

I will now read 1 another question from the audience.

Pobrai, it's really a pleasure having you.

What do you think about current valuations?

Really worth waiting for the next downturn?

Or do you still identify some 10, 20 time baggers in this context?

Well, I think that 10 baggers are few and far between.

It's difficult to find those in any market.

And I would say that it's, I think it's a treasure hunt to do that.

And I think that there are undervalued businesses at all times.

It's just that the geographies and the industry and different things kind of change.

So there's a book that I really like, which came out many years ago called Trend Watching.

He used to be an anchor at CNBC and usually news anchors are not good writers, but Ron Insana did a good job.

So that book chronicles a wide number of bubbles.

It's just a story of all these different bubbles around the world at different times.

And what you come out after reading that book is that bubbles exist all the time in different markets, different asset classes, different geographies, different industries.

You will get some areas of the markets which are ridiculously overvalued at times.

And at the same time, you can also get markets which are deeply undervalued, all of the above.

So when I look at markets today, usually it's difficult to tell when you're in a bubble.

It becomes a lot easier to tell in hindsight, but some things in my mind are clearly bubble-esque.

So if I look at the market caps of GameStop or AMC or Bitcoin, I would put these in bubble territory.

Of course, when you say that about Bitcoin, you're committing blasphemy, but such is life.

You know, any eggs thrown cannot get to me through the video, so it's okay.

So I think that we always have some areas where you can clearly tell there's a bubble.

1 thing is that whether I'm right or wrong on Bitcoin is not relevant if I am not long or short.

It's irrelevant whether I'm right or wrong.

What really matters is, am I right on the things that we actually invested?

See all Chai with Pabrai transcripts on Applepodcasts

Value School (Madrid, Spain); Q&A with Mohnish Pabrai on July 9, 2021