The Global View With Mohnish Pabrai And Guy Spier

Here are my notes from a recent interview on ET NOW with Mohnish Pabrai and Guy Spier. Link here for people who are looking to watch the full interview.

Discussion in the interview begins with the hosts concerns on how far the market has moved and if that is a concern for either of the guests. Pabrai doesn’t think those are really important data points to follow and that they can be more distracting rather than helpful. He recommends focusing on business fundamentals and limiting your opportunity set to companies you are able to understand well. If the market moves substantially higher or lower it isn’t really going to impact a valuation of individual business. Often the incentives of people discussing broader market movements are not aligned for the reader or viewer. They are often looking to get your attention for advertisement revenue, page views or likes. What people think will happen next quarter or next year on a macro basis just isn’t all that useful in my view.

The host then dug into the duo’s views on Trump. Spier started discussion with highlighting how it’s both difficult interpret political information and to also understand how markets will react. In the United States if you knew what trumps policies were going to be it would still have been difficult to understand all the second and third order impacts it would have on markets. One change to policy has implications in many places where people don’t initially think of but can still be important. Trump had recently tore up the Trans-Pacific Partnership and many people who are pro-trade were very outraged and really concerned about the direction the government was going. It turned out there was a very valuable silver lining because as a result of the USA removing itself as a trade leader of the world it opened an opportunity for others like China and India to lead. So to re-hash, optics were quite bad but resulted in a valuable rebalancing of power among the economic powerhouses of the world.

This followed with the ongoing passive vs active management discussion which appears to re-surface daily. Pabrai highlighted that for most people index funds are a great way to go. He agreed with Buffett’s recent writing on the topic as well. When you pay more in fees either to people who help you allocate the capital or from additional middlemen you will simply earn less of the underlying asset returns. The basic formula to be very wealthy is to save early in your life time, continue saving over a lifetime and continue to dollar cost average.  It’s a shame that some active managers make money off their investors rather than with them. I’m all for high fees where performance justifies it. Perhaps that means only using active managers where the competition is weak or non-existent. You need to play in games where it’s easy to win. Where are the forced sellers in investing?

The host then asks Pabrai and Spier if they focus on looking for 3-4 baggers in today’s environment or do they focus on a margin of safety for each investment. Pabrai says that if Spier tells him an idea that isn’t at least a 5x it would be waste of time. Pabrai uses an analogy from a Miller Beer commercial where the taste is great but the beer is less filling. Ie) good benefits but less cost. In investing you try to find similar situations where the potential is high and that you also have a built in margin of safety. For an investor to be successful at this they should look to limit risks of capital loss and retain high optionality. What this typically looks like for an investor is long period of inaction and studying followed by brief periods of activity when a mispricing occurs.

Next up was the automotive sector in India given Pabrai & Spier has made similar investments outside of the country. Pabrai said he had only purchased Fiat-Chrysler because of its very undemanding valuation at a P/E 1x in 2019 and that he hasn’t been able to find similar opportunities elsewhere. If Pabrai was an investor today in India he would spend all of his time on small publicly listed businesses and keep tearing them apart and trying to understand it all. What about airlines in India? There are some notable similarities and differences about the sector in India. The major difference was that fuel costs represent a higher proportion of total costs compared to the USA. Since oil isn’t very likely to move higher above $50-60/bbl a major component of costs for the sector are going to be relatively capped. Frackers have become the new swing producer in the world. Overall, the airlines in India aren’t as cheap and don’t have a similar opportunity in his view. That said they both discussed how the opportunity set is much larger in India than in developed markets. There are ~4,000 publicly traded businesses and over 90% of them aren’t covered well by sell-side analysts. This results in a wider dispersion of returns. That is what you want if you believe you have good judgement and an edge over your competitors. There is more of a chance for your head to get cut off but also to outperform meaningfully.

How do you evaluate commodity companies? Spier says to always focus on companies with the lowest cost of production as this increases odds that they will survive through the cycle. If this relative advantage is in place then you have an implied margin of safety. P/E’s of 1x are possible to find but only if you believe you can find them. Below a $100 million in market capitalization is a great place to start looking for these opportunities.

Pabrai then begins to talk about how patient Munger really is. He read Barron’s magazine for ~50 years and in most cases each issue had at least about 10 investment recommendations which means he read over ~26,000 recommendations without acting once. Then an opportunity presented itself with an obscure auto parts company which he made a $10 million investment. Based on Pabrai’s twitter account the company is Tenneco. The investment turns into $80-$90 million and Li-Lu turns it into even more. What Pabrai thinks you can learn from this is that you need extreme patience, like really just be able to watch the paint dry and keep looking for anomalies. If you study ~4,000 businesses in India for the next few years and eventually make 3-4 bets you are likely to end up with way more money than you can consume. Spier says there are two types of bears some that chase all the salmon in the stream while others just wait on shore ready to strike at what falls into their lap.

Then discussion about the insurance sector comes up, was there a similar opportunity in India? Spier talked about how he would really want to be comfortable understanding the management teams and their actions for a long period of time before he would invest money in the sector. It would only be clear over a long cycle which teams are taking appropriate risks and are well managed. Pabrai thinks the better question is “Where are the no brainer investments in India?” The insurance sector has grown at a very high rate over the past few years in India and as a result investor focus seems to already be on the sector. Pabrai thinks there could be opportunities looking back over time but they just aren’t that clear to him today. Up next was the technology sector which includes companies like Infosys. Pabrai thinks they could be reasonable investments but they don’t fall into the category of no brainers. He thinks changes to regulations make it too hard to tell where the company will be in 5 or 10 years’ time. There are also some headwinds as Trump is exploring changing the H1 Visa program and in some ways these technology companies are abusing the regulations. He thinks optimal policy in the United States would be to retain the best talent in the country. If the United States wants to be very competitive long term one lever they can pull is to dramatically increase the amount of immigrants they allow into the country from today’s 65-80 thousand cap today and make it up to half a million. If these individuals are well educated, and able to contribute it could do wonders for the economy there. Pabrai thinks the American government should tighten regulations and limit what could be done elsewhere. Other places in the world such as Canada are working on building similar hubs to service US businesses, the example he used was Vancouver, Canada.

The conversation closed with the two guests highlighting again of the world of opportunity in India for investing and that competition in Western Europe and USA is just disproportionately higher.

If you are looking to learn more about Mohnish Pabrai or Guy Spier i’d recommend both of their books. Click here to purchase The Dhandho Investor  and The Education of a Value Investor: My Transformative Quest for Wealth, Wisdom, and Enlightenment

Hope this helps, let me know if you have any feedback or commentary

The Global View With Mohnish Pabrai And Guy Spier

Jack Bogle Interview Highlights

http://www.bloomberg.com/features/2016-jack-bogle-interview/

JB I glance at anything favorable to indexing; I pore over anything unfavorable. You don’t need people to tell you you’re right all the time. You need people to tell you that you’re wrong. But this was an absurd paper. First, take the simple part. The stock market has nothing—n-o-t-h-i-n-g—to do with the allocation of capital. All it means is that if you’re buying General Motors stock, say, someone else is selling it to you. Capital isn’t allocated—the ownership just changes. I may be an investor, you may be a speculator. But no capital goes anywhere. This is basically a closed system. You have new IPOs and whatnot, but they’re very small compared to this vast thing we call a market, which is now around $24 trillion. The allocation of capital? That’s just nonsense. 

MR And the correlation of stocks?

JB There is some evidence that the correlation of stocks, which has always been very high—something like 65 percent, maybe 70 percent now—could very well be caused by indexing. But so what? The efficient market theory ignores the fact that for every buyer there’s a seller. I don’t know why we can’t get this through people’s heads. Cliff Asness is the one who got everything right. He’s one of the smartest guys in the business. One of his headlines was, “Indexing Is Capitalism at Its Best.” I’ll let him be the defender of that, but this Bernstein note was just a sensational thing. It’s a bit like asking your barber if you need a haircut: He has a vested interest in this.”

…”MR Is it a problem if indexing gets to 100 percent?

JB It’s 10 to 15 percent now, and it could easily get to 50 percent. The example I use is stock market turnover, which has run between 150 and 250 percent of late. If we went from no indexing in this theoretical thing to half indexing, say, the turnover would be 125 percent. You immobilize half of the market. For decades the turnover was 25 percent a year, not 125 percent. We don’t need all that turnover, but we have a brokerage business in which turnover generates the returns that the brokerage business earns. And, as everybody knows, if a salesman sells nothing in a month, he brings home nothing—so he has to sell something. He has to believe what he’s doing is right. And he may be doing what’s right, but as a rule he can’t be doing what’s right because there’s someone on the other side of every trade. And all that trading means zero until the croupier in the middle puts his rake down on the table and scrapes off his share of the winnings. Wall Street is a casino, that’s a fact.

  • This is on point. It’s not clear that we need all this additional turnover.
Jack Bogle Interview Highlights

How to Get Lucky By Max Gunther

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My first post will be on the book “How to Get Lucky” by Max Gunther. The notes below are mostly excerpts from the book alongside some simple notes I’ve made on each of his techniques. Gunther starts the book with defining luck as “events that influence your life but are not at your making.” Well, let’s start with some common misconceptions about luck. Some people totally deny it and claim they have achieved or earned “x” item in their life due to hard work, determination, and skill. On the other end of the spectrum, people claim most of their success was due to luck. As with most things in life it probably depends on various factors visible and not. Gunther’s first suggestion to improve your luck is to first acknowledge its existence.

First Technique: Making the Luck/Planning Decision

“When a loser loses, it’s because his luck was bad. When he wins, it’s because he was smart.”

  • I think it’s a good idea to be skeptical of outcomes when luck may have had any influence. It’s too easy to pat yourself on the back and claim it was due to smarts. Peel the onion. It might not be an onion at all.

“For now, the point to be appreciated is that every run of luck must end sooner or later”

  • How many people do you know who have won the lottery consistently (without cheating)? Sometimes people get lucky once, twice but how long does that usually last? In my experience, it’s usually short-lived and you’re just borrowing tomorrow’s luck.

Second Technique: Finding the Fast Flow

“To be singled out as a lucky target, you must make something of yourself known to those who are your primary links in the network. These can be what we’ve called “weak” links but they must be at least strong enough so that people know who you are, what work you do, what your interests are, what kinds of rewards you look for in life”

  • For you to benefit from luck, people need to be able to identify you, your skills, passions and what your real motivation is. Being within the “fast flow” means you’re in contact with people, you’re involved, and you’re not benched.

Third Technique: Risk Spooning

“There are two ways to be an almost sore loser in life. One is to take goofy risks; that is, risks that are out of proportion to the rewards being sought, and the other is to take no risks at all.”

  • We need to take risks in life for us to be in a position to benefit from something that isn’t in our control. Taking too much or too little each has it’s own issues. Trying to find a balance between adequate and inadequate amounts of risk is important but probably easier said than done.

Fourth Technique: Run Cutting

“Don’t push your luck”

  • Assume that a given run of luck will be short and you’ll be better off in most cases. Being a pessimist could help implementing this technique but in my opinion, that’s a miserable way to live.

Fifth Technique: Luck Selection

“To put it another way, they have the ability to select their own luck. Hit with bad luck, they discard it, freeing themselves to seek better luck in another venture”

  • Ignore the sunk costs when making a decision. It’s not what you should focus on if you want to grow or make progress over time.

Sixth Technique: The ZigZag Path

“It turns out that lucky men and women, on the whole, are not straight-line strugglers. They not only permit themselves distraction but they invite distraction. Their lives are not straight lines but rather zigzags”

“This doesn’t mean making a change just for the sake of it. It means that you shouldn’t reject something because it does not fit a particular plan”

  • Be careful with today’s long-erm “plans”. Don’t cut off your legs before you decide which way you are going to walk.

Seventh Technique: Constructive Supernaturalism

“As a breed, lucky people tend to be supernaturalists. Some are devoutly religious, while others harbor the most peculiar superstitions.”

  • Believing in certain things can help you make difficult decisions faster. Think of situations where limited information, and uncertain environments can lead to indecision. It might just be better to guess and pick one of the potential choices if the negative consequences are minor or nonexistant.

Eight Technique: Worst Case Analysis

“I know a situation can go wrong. Now I’ve got to ask how can it go wrong. What is the worst possible outcome? And if the worst possible outcome does occur how can I save myself”

  • If you want to do well in a particular field where luck has an influence make sure you position yourself to last during some period of bad luck. For you to be able to participate in the good run of luck, you need to be able to survive. The first step to most things is to show up.

Ninth Technique: Closed Mouth

“The trouble with too much talk is that it can constrict that valuable freedom and flexibility. Talk can tie you up, lock you into positions that seem right today but may be wrong tomorrow”

  •        Try to be careful when discussing things that can lock you into something for the long term. Flexibility regardless of what aspect of life you are thinking about is pretty important. By limiting your own explanations you don’t need to spend as much time justifying why you are doing something. In short, keep quiet, watch, listen, and learn.

Tenth Technique: Recognizing a Nonlesson

“A trait of the lucky is that they know what they can’t learn from”

  • Don’t try to learn from every piece of data you gather as some of it is noise. Don’t fall victim to the common correlation equals causation relationship that is so easily obscured.

Eleventh Technique: Accepting an Unfair Universe

“Bad luck is hard enough to take when you recognize it as bad luck. When you blame yourself for it, it can destroy you”

  • Life is unfair. Feeling bad for yourself about some event that didn’t go your way when it wasn’t in your control isn’t a good way to spend your time. Think about what in your life is controllable and knowable. Those are the things you can focus on and where the effort will pay off.

Twelfth Technique: The Juggling Act

“Lucky people tend to have many ventures going on at the same time. Even at the height of a particular venture, the lucky man will usually have secondary ventures going or under preparation.”

  • This is similar to viewing things from a portfolio approach but applied to the activities you are involved in.

Thirteenth Technique: Destiny Pairing

“The two liked each other instantly. Perhaps each recognized in the other some trait or group of skills or strengths he had often wished to find in himself. Neither had often wished to find in himself. Neither had made much of himself alone, but together, they may have sensed, they had the potential to go far”

  • Working with people who complement your skills and weaknesses is a prudent way to build a team in my view. I once read that some people build teams where they only add people stronger than the current members of the team. Seems like over time if this occurs, new additions will inevitably bring up the average quality of the team.

Life isn’t just some plan you can follow from day one. If you start with a plan it will end up useless due to changes in circumstances or the environment. Each of the techniques mentioned above can help shift your luck into your favor. There aren’t any guarantees as Gunther says but there are edges in life you can find. Find yours and cultivate.

How to Get Lucky By Max Gunther