🧗 Our Investing Journey (#6): Chai with Pabrai
Discussing the lecture titled Circle the Wagons by Mohnish Pabrai
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Circling my wagons
In 2023, I was fortunate enough to attend the Berkshire annual gathering in Omaha. The event is famous for gathering notorious investors and celebrities. In fact, if you ask me, most people attend the event as a way of networking. For me, the real highlights came in the form of several “side” events, one of which was the event hosted by none other than Mohnish Pabrai.
I would like to share with you my conclusions from a lecture hosted by the University of Nebraska titled Circle the Wagons. Feel free to check out the recording at the end, please don’t judge too harshly the not-so-brilliant question I happened to ask in min 47:05 ;D.
The presenter, known for his impressive mustache and appreciation for tea, ran through case studies of extraordinary investments to extract the properties (pun intended) that made those decisions so successful.
The core of the lecture stems from an extract of the 2022 Berkshire Hathaway Annual Letter. Here, Buffet pointed out that in 58 years as Berkshire’s operator, he made many mistakes and about a dozen decisions that moved the needle.
According to the lecturer, these were See’s, Geico, Coca-Cola, Berkshire Energy, American Express, BNSF, Apple, and Ajit Jain. The host encouraged listeners to become replicators by “circling the wagons” or, in more portfolio management terms, by safeguarding their best ideas. I thought the following points were highlights from the conference:
1. High multiples do matter: One must only consider buying at cheap or modest valuations. Most companies will be fairly priced at most times. One should focus on obtaining, filtering, and understanding asymmetric information rather than acting like an automaton.
2. Concentration, especially on the way up, is crucial (if you’re right): The best example is Tencent within Naspers’s portfolio. The company spent $32M for a 30% stake in 2001 and has held onto most of it. Today, they own 27% of the company and it’s worth $120 bn. In addition, today’s market cap of Prosus/Naspers is $92 bn which tells you a lot about HoldCos.
3. Averaging on the way up can be a great idea: Mohnish mentioned the acquisition of a stake in Titan by Rakesh Jhunjhunwala. He bought 5.9% for $3.4M and then bought an additional 5.1% for $77M (20x). At first, this might sound like a bad deal, but - when you look at the “final destination” - he compounded at 56% for 37 years (including non-Titan positions) and died at 62 with a net worth of $5.8bn
4. Popular opinions are overrated: Nifty Fifty vs S&P vs Walmart. Which one would you choose if it were 1965? Which one would you choose now?
5. Hold on to great businesses, even though sometimes you are better off selling a bit sooner: This is best exemplified in Buffet’s position in The Coca-Cola Company.
1988-98 → Coca-Cola 32.3% vs S&P500 19.2%
1998-2023 → COKE 4.2% vs SPX 7.3%.
1988-2023 → COKE 12.0% vs SPX 10.5%
6. Silicon Valley Bank (SVB) factor: 25% compounder for 22 years, then goes bust. It happens.
7. You only need to get rich once. Avoiding the permanent loss of capital should be the #1 priority.
In keeping with the tradition of learning from masters of their craft, here is a story sourced from another lecture by the legendary Mustache in Chief (Mohnish Pabrai) that ties perfectly with my investing philosophy. The story comes from the Mahabharata, an Indian epic, and tells the story of Arjuna, a young prince with a singular purpose.
“Dronacharya was going to test the princes on their archery skills. To do that, he put a fish on a pole and inserted the pole into a pool of water. He pointed out the specifics to each student and asked them to shoot the eye of the fish out. But first they had to answer a question
One by one, as the princes step forward, he asked each one “what do you see”". They each give different answers:
‘I see the pole’, ‘I see the fish on the pole’, ‘I see the water’, ‘I see the fish…’
As each student answered, the professor told them to step back. Finally, Arjuna came up with his bow and responded the following,
‘I see the center of the center of the eye of the fish’
Dronacharya permited him to fire at will and Arjuna proceeded to take out the eye of the fish.”
The story illustrates the power of focus. I do not know whether the war in Ukraine will end tomorrow, where the price of oil is headed in the next twelve months, or whether interest rates are going up, down, or sideways. But then again, these items, while meaningful for a functional global economy, are not relevant to the operations of the companies I’m looking at.
My focus, my singular purpose, is finding companies that are misunderstood and consequently mispriced, that can provide an adequate rate of return, with fanatical managers, and with a clear 5-10-year path.
As promised, here’s the lecture by Mohnish
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