We Study Billionaires - The Investor’s Podcast Network - TIP442: Investing in Stocks w/ Mohnish Pabrai

Starting point is 00:00:00 You're listening to TIP. Since inception in 2000, today's guest, Manus Paprai, has returned 781% to his investors' net of fees in his flagship fund. This is compared to only 378% for the ASEP 500. In today's conversation, we cover Alibaba, Tencent, his investment in racist logistics, a personal letter from Warren Buffett and much more. You do not want to miss out on this one, so sit back and enjoy my conversation with diligent investor, Moniz Paprai.

Starting point is 00:00:32 You are listening to The Investors Podcast, where we study the financial markets and read the books that influence self-made billionaires the most. We keep you informed and prepared for the unexpected. Welcome to The Investors podcast. I'm your host, Dick Broderson. I'm thrilled to have invited no other than Money's Pop-Rai to join us today. Moniz, thank you so much for making time. Stig, it's always a pleasure.

Starting point is 00:01:07 and a year goes by so fast, and it's wonderful to be back with you, and it'll be even more fun to be back in Omaha. It will. Let's jump into the very first question, Manish, you received a letter from no other than Warren Buffett the other day, and you posted it together with the comment, I must already be in heaven. I cannot help but ask, Manish, what did that letter say? The letter, well, first of all, I was floored. I was floored when I got the letter because, you know, Warren has been a big fan of Daxana for a very long time. I mean, I think the first time I met him in 2008 for the lunch with Guy Speer, I had sent him the very first Daxna annual report before the lunch, and he had read every word, and he

Starting point is 00:01:55 has a photographic memory. So he's telling me like, hey, on page five, there's an error in your report. And I'm trying to remember what is on page five. But anyway, I was able to prove to him that there was no error. But since then, you know, I've been sending in the reports and sometimes I'll get a note saying, send me 20 copies. I want to send it to my kids and the board and grandkids, whatever. And he'd scribble a note, this is wonderful, this, that, whatever, right?

Starting point is 00:02:22 But this time, he took the time to actually write a formal letter, which, you know, Warren has got a lot of things he could be doing with his time. time. It takes a lot more time, difference between scribbling a note and actually getting Debbie and dictating something and making sure it's perfect and all of that and then sending it out. I mean, that's, I'd say, 20 minutes or something of his time. So that was really surprising. But basically, he expressed deep admiration for what has happened at Daksana and he forecasts that it'll continue to do amazing things. And then I think obviously Buffett is so humble. He said something like, I'm glad that my annual report doesn't get compared to the Daksana Annual Report,

Starting point is 00:03:04 which of course is, he's being facetious. I think the bookshan annual reports are the ultimate standard we all try to aspire to. And then finally, he said that it's an honor to even be quoted in your annual report. And I have learned everything from Buffett quotes. Buffett has not learned anything from my quotes. So he was very humble. He was very gracious. And it really floored me.

Starting point is 00:03:27 Moniz, you have this wonderful story about you and Guy being giving a tour on Warren Buffett's office. And in this Buffett's office, you found this Japan's version of Moody's Manual called the Japan Company Handbook. And at this point in time, whenever this happened, Buffett was well into his 80s. So it wasn't about the money. The investment he would find in that book won't like move the needle. And so you met Buffett multiple times and you're close to Charlie, who you played bridge

Starting point is 00:03:56 with regularly back whenever you lived in California. I have to ask, what do you think the driver is to continue doing what they do well into the 90s? I think that it's kind of like Michelangelo or Picasso, you know, they love their art and they're very passionate about their art and they want to keep learning and keep improving. I think that if you pursue something that you are very passionate about. By definition, you'll do it well. So both these guys have a very deep passion for Berkshire Hathaway, for investing, for running businesses the right way and associating with the right people and, you know, exhibiting the right behaviors, all these different things. And so I think for them it is just about how well they can practice they are, just like

Starting point is 00:04:44 Michelangelo would be, you know, how amazing can I make the next statue or sculpture, painting and so on. So if you can put the spotlight, on you, Monash. You know, I've read your annual reports with absolutely wonderful. You're very transparent about your net worth. And whenever I've read that, I was like, what? Because people usually don't talk about that stuff for whatever reason. And so you obviously, not just because I think we all knew that, but you're obviously a very wealthy person, nine figures. And so I can't help, but is it the Michelangelo gene with you? Like, why do you continue doing what you're doing? You clearly don't need to pay rent. You can already do that with what you have. So what's your

Starting point is 00:05:20 driver. I think all of us are looking for purpose and meaning in life and something to make life, you know, the best that you can be and make our days the best that they can be. And so you really want to pursue things that you are excited about. And for me, you know, when I play bridge, I'm really happy. When I'm drilling down on a possible investment, I'm really happy. When I'm reading a great book, I'm really happy. And when I'm interacting with some smart, high quality people, I'm really happy. So basically, what I try to do in my life is increase the time I spend on things that make me really thrilled and happy and eliminate things that are deterrent or a distraction from that. And so it naturally leads, it's not driven by money. A very long time ago,

Starting point is 00:06:11 I got to the point that I would not be able to consume the money I had. And, and, and, my happiness. That happened a few decades ago. I think for me, the pursuit was about how to leave the world a better place than I found it, how to try to practice the art of investing the best I can. And then, you know, when Daksana started, I never wanted to actually get involved in a nonprofit. I really was trying to find a organization I could just give money to, you know. It's much easier to write checks. And basically, I came up blank. I could. couldn't come up with a single organization on the nonprofit side that actually impressed me in terms of how it did work. So I said, well, I can't do suboptimal. Even though it's hard, I'm going

Starting point is 00:06:58 to try to do it on my own. And if it doesn't work, then I can always write checks and so on. And so far, it worked. And I was able to, what was amazing about Daksana is that I was able to translate the model and the way I thought a nonprofit should run. into reality. I ended up with a really good team, really good leaders, and they were able to execute all this, you know, utopian idea I had for how a non-profit should be run. And amazingly, it worked. I mean, it's worked very well for about 14, 15 years. And I think it's likely to continue working. So it's been, I mean, on all fronts, it's all about trying to make life interesting and trying to add some value. Are you a part of operations or is it more, you know,

Starting point is 00:07:47 writing the check, how much are you part of curriculum? What is your more operational role, if any? I am not involved in the management of Daksana. And in fact, when I go to India, I spend almost all my time with the students. I spent almost no time with the management and the team. Probably 90% of the time I spend, and it's not much. I mean, like last three years, I've hardly been able to go to India because of COVID and so on. So I don't do much in terms of interacting with the students. My role at Daksana has been one of providing direction. Number two is identifying and selecting the leadership.

Starting point is 00:08:29 And the most important objective has been to say no. I find myself saying no to almost anything and everything people proposed to me. So my management team will come to me with the government wants to do this or a state government wants us to take over this facility and do XYZ or whatever else. And Daxana has done well because we say no to almost everything. So that part of it is very similar to investing. Because in investing also, you really have to be good at saying no, no, to almost anything. So the role at Daksana has to be, has been for me to stick to a very pure model of

Starting point is 00:09:10 what, how a non-profit should operate is to try to make. that work in the real world, and it's really hard to make it work in India. Because, like, for example, you know, we will never pay any bribes. You know, we will not even pay one rupee or $1 by bribe to anyone ever. We've never done that. But many times in India, government officials don't care that you're a non-profit or whatever. So like, for example, when we bought this large property, it has to go through a series of approvals. And at each approval point, it's standard to pay bribes. that approved. And we couldn't. So it took us years and years to get those done when it would have taken a few days or a few weeks. And we had to eventually apply pressure from some high level

Starting point is 00:09:57 government officials and such to try to move our case along. So that's been hard. But we've been able to stick to our principles and we've been able to make it work. But it hasn't been an easy journey. Most of the time, the bribes are like, you know, less than $100 or less than a couple hundred dollars and it causes us issues that cost us sometimes tens of thousands of dollars in lost productivity and time and so on. But the thing is that would cause a major problem. My management team and the entire team at Daxana is there because they know that Daxana is such a awesome organization with such a great culture, we cannot cut corners on that culture. because I won't be able to retain those people.

Starting point is 00:10:41 We just don't have a choice. It would just go into a downward spiral if we try to cut corners or any of our principles. Integrity is really important. The other thing that's really important is the efficiency of our spending. That's another area that we are very, very careful about. We want very high social returns on invested capital. And I think these are the things that Buffett appreciated because he has direct knowledge of the foundations run by his three. kids of the Bill Gates Foundation. And the advantage I have versus those four entities is I'm a lot

Starting point is 00:11:16 smaller. And it's a lot easier for me to keep it optimized. I think for those four entities, it's a lot harder because the numbers are such so much larger. Just like in investing, you know, when you have much larger amounts to invest, you really have to let go many things that would have been a great investment if you had much smaller amounts of capital. to work. So let's talk about investing. As you set out on your value investing journey in 1994 and to where you are today, you clearly made more right than wrong investing decisions.

Starting point is 00:11:51 Have you ever made an investment decision so bad that it made you doubt whether you should be a professional investor? I've made a lot of mistakes. So that's just, I would say, part for the course. You know, John Templeton used to say that the best analyst will be right two out of three times. Peter Lynch said that, you know, if you're right 60% of the time, you'll do really well. And no one's going to be right 90% of the time. So even the Warren Buffett's and Charlie Mungers of the world make plenty of investing mistakes. Investing is hard because we have to look into the future.

Starting point is 00:12:28 We have to look at a business and try to extrapolate what that business looks like five years or 10 years from now in the future. And capitalism is brutal. So it's really hard to all always be correct on that. I've never felt with any mistake that this is not going to work, that I'm in trouble or anything like that. I think that many of us who practice the art, we try to be perfectionists, right? We try really hard before we make an investment to dot all the eyes, cross all the trees, run the checklist and try to make sure that it won't come back to bite us in some way. But even after we do all that, we'll still. will be wrong 30, 40, 50% of the time.

Starting point is 00:13:11 And so that's the difficult part of our investing is that, well, it's also, I would say it's also the thrilling part because it means you'll never master it. So the goal is always to protect your downside. But no matter how much you try, you're never going to be perfect at it. I mean, that downside is there. But the nature of investing is that if you make a bunch of bets and they're made in the right with the right frameworks, a minority of the investments might get you to the promised land. They say that the best things in life are free. Do you think that's true in stock investing as well,

Starting point is 00:13:50 meaning do fund managers who put more money behind research tools have a significant advantage compared to retail investors? I don't think you get a big advantage by having a big team. I don't think that's true in investing. I think investing, what gives you. you an advantage. First is the amount of capital you manage. The less you manage, the greater the advantage. The second big advantage is how many decisions you make, how many investments you make. And the fewer investments that you make in a year or two, the stronger your advantage, because you'll be able to put your money against your very best ideas. So, if an investor is making one to three new investments a year versus another one who's making 10 or 20 investments

Starting point is 00:14:36 a year, probably the person making the one to three investments will come out ahead. Let's take a quick break and hear from today's sponsors. All right. I want you guys to imagine spending three days in Oslo at the height of the summer. You've got long days of daylight, incredible food, floating saunas on the Oslo Fjord, and every conversation you have is with people who are actually shaping the future. That's what the Oslo Freedom Forum is. From June 1st through the 3rd, 2026, the Oslo Freedom Forum, form is entering its 18th year bringing together activists, technologists, journalists, investors,

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Starting point is 00:18:33 sign up for your $1 per month trial today at Shopify.com slash WSB. Go to Shopify.com slash WSB. That's Shopify.com slash WSB. All right. Back to the show. So, Manist, I wanted to talk to you about natural. biases. And let me just give one example. Something like investing in gold has never been easy for me. And it's not just because, you know, Buffett has spoken against it and it doesn't pay any

Starting point is 00:19:07 pay out any dividends or anything like that. But more importantly, growing up in Denmark, I never experienced demonization, rapid inflation, monetary instability in any kind of way. However, I have a good friend in India. And whenever I talk to him and some of his friends, gold is just perceived very differently. And I read that 11% of average household wealth, is stored in gold. My question to you is not about your view on gold per se, but more about your personal experiences. Do you have any personal experiences, whether a childhood or later, or just the way you grew up that gives you a natural bias in any direction? Well, I would say one of my natural biases, which comes from very direct experiences my father

Starting point is 00:19:46 had and I had, is that entrepreneurship and business can be magical. What I mean by that is that my father must have started about 20 different businesses in maybe 10 or 15 industries in his entire career. None of the businesses that he started took more than a few hundred dollars of capital to get going. And at that time, India didn't really have a venture capital industry and the banks were pretty tough and so on. But I saw some of those businesses get some sizable scale, a few hundred employees and so on. And I saw how one person coming up with an idea, without having much resources, was able to create an organization. And so that is the magic.

Starting point is 00:20:30 I think that is the magic of entrepreneurship, and that's the magic of business. And this something out of nothing is what is magical about capitalism. And when you look at what I would say quote unquote nonproductive assets like gold, I don't see that magic. And that's what Buffett says, that he says, you could take all the gold in the world and melt it all down, and you'd get a cube, which is 80 feet on each side. And he said, you could go fondle it, you could caress it, you could polish it.

Starting point is 00:20:59 But it's not going to become 160 feet on each side in 10 years or 300 feet in each side, but a business. I mean, when Ray Kroc saw McDonald's and he went after it and he got all the franchisees and you saw the movie, the founder, I mean, that is magic. Okay. And what happened with Starbucks or any of these companies, you know, what happened in Microsoft. is magic. And to me, if we can ride their coattails, if we can have a piece of the action of these incredible magical businesses, and just be patient and let it ride, you could do extremely

Starting point is 00:21:39 well, even if you're wrong six or ten times. Because the magic that you see happen with a Walmart or a Starbucks or a Microsoft or a Google is just amazing. And that's what's, amazing about capitalism. So gold or any of these kind of weird things which you look at it and say, either I don't understand it or it's obviously not productive, you can just let them go. I'm happy that you brought up your father. It takes me to one of the other questions I prepared for you here today because you previously here on the show back on episode 121 talked about how your father was a serial entrepreneur. Some of the businesses also didn't go as well. And you also said that you found this to be a blessing because you felt that at age 19, you had

Starting point is 00:22:27 multiple MBAs because you had such an intense introduction to business. And also at an age where like all these magical things happens to your brain, you're just ready to take in all this new information. And you're in this situation where your daughter is now in their mid-20s, one of them, entrepreneur. Whenever I think about your story, the success you had and also the upbringing, I was curious about how do you talk to your daughters about investing in money and What have you, general, found to, if we talk about parenting, to be useful whenever you speak to your children about those topics? I hardly spent any time talking to my daughters about investing because I really wanted them to find their own calling in life. And I didn't think investing would be their calling in life.

Starting point is 00:23:13 My younger daughter has zero interest in investing. And I think if I tried to talk to her about it, she would just wonder why. Why are we talking about something I'm not interested in? The older one, surprisingly, is deeply interested. She started a fund recently. She's raising capital. And I think she has probably a better temperament and better mental models than me. And I think she'll do very well as an investor.

Starting point is 00:23:37 With my older daughter, I've had plenty of conversations. And actually, I've learned a lot from those conversations because I just saw the way a natural biases were. Her natural bias is to only buy great businesses. She's not a bargain hunter. She's a person who really likes to look for tremendous businesses. And then her second great trade is that she has no desire to sell. Once she buys something, what I've seen is,

Starting point is 00:24:07 whatever's happening to the stock price or whatever, it really doesn't affect which is a really, really good. These are really difficult things to teach. So I think in investing, you know, your temperaments and your natural biases go a long ways. After eight years of speaking with hundreds of investors, I finally decided to invest with just one. Starting April 1st, I invested with pari funds. And it made me think of a lot of things that I look for in an asset manager. Now, I don't think the audience is too interested in hearing about my process, but rather,

Starting point is 00:24:41 I wanted to hear about yours. What would you look for in an asset manager? Stick, first of all, it was a surprise, and I felt a huge word of confidence that you elected to send some money our way. And I will be a great steward of your precious assets, and I will do the best I can with them. So I think it will be a good ride for you. The selection of an investment manager is a difficult exercise.

Starting point is 00:25:08 It's not an easy exercise because we want to see a long track record, but we also want to want to have the benefit of a long runway. If you pick someone who's in their 60s or 70s, 80s, then you know, you have the benefit of looking at a very long track record, but you're not going to benefit too much from it because the runway may be very short. We need to find someone who's got enough 10, 20 years of historic record, which is respectable. And they are passionate and there's a runway ahead. I think Peter Kaufman once talked about the five aces, and I don't know if I can rattle off the five aces, but you know, he's definitely looking for integrity. If I was looking for someone, they have to be very high integrity. I think they have to have enough history and they have to be relatively young so that there's a runway ahead. The third is a alignment of interest, which is a fee structure that is a win-win for the manager and the investor. Another important trait is, you know, their temperament and just how they, you've got to be able to understand the framework that they're using. There are a number of different ways to skin the

Starting point is 00:26:20 cat. And so you've got to make sure that you're in alignment with the way the manager things. So I think those are the main things one should look for. Yeah, we've done this for eight years, and we've been speaking with so many investors, is that I don't think I've met anyone who picked stock with the same level of conviction bets like you, which is one of many things I really liked. And I know you even restrain yourself to some extent because you're, you know, you have a fun way that works. Because as an investor, I don't want to invest in someone's 50th best idea. You want to invest in the best idea. And you previously said hearing the show that you generally want to make 10% session bets and then the winners run. And whenever I read through

Starting point is 00:27:00 your annual audit reports, I can see that you put your money where your mouth is. I also heard you talk about how you personally, in your own portfolio and Fondaxana, have been running a more concentrated portfolio. What are your thoughts on setting up a fund where you only have one, two, or three stocks? After all, investors can just manage their exposure and thereby getting your highest conviction bet. What are your thoughts on that compared to having, say, 10 picks in your portfolio? I haven't really thought about it that way, but I would say this. If anyone were to invest today with me in my funds, even though we limit ourselves to 10% beds, the top three positions for, I think all my funds are 50 to 60 percent of assets because they've run up,

Starting point is 00:27:45 right? So we bought Micron a few years back and it's doubled and so on. If you had invested with me when I was starting out, then yeah, we would not have the same degree of concentration because things haven't run up. But typically when investors have joined me, they've always come into a fund that probably the top three positions are 40 to 60 percent type concentration. And then by the time you get to the sixth or seventh position, you're looking at 90% of assets or something like that. I don't think I need to start a fund and say, I'm going to only have three picks. I could do that, but I think that the nature of investing is such that it would get there anyway. And one of the things to keep in mind is there is this very high error rate, right? We've talked

Starting point is 00:28:32 about 40, 50% error rates. And so if you have 40, 50% error rate, and you have 40, 50% error rate, And you have three pigs. You could be wrong in two out of three of them. And if you're wrong has a range of outcomes, right? Wrong means something could flatline, just doesn't go anywhere or something is a 20% loss. Or wrong could also be permanent wipeout, zero on that. All of those are mistakes. Three bets could work as long as you don't have the wipeouts, right?

Starting point is 00:29:04 I think you could have two of the three bets go sideways or, be very modest winners and one could carry you. That's possible. But I don't think you need to be that way. But I would say this, you know, sometimes we do get a chance to make investments where the odds are just so heavily stacked in your favor and the economics are so compelling that you would want to try to do more. So sometimes that can happen.

Starting point is 00:29:32 I was just thinking about this, that in 2019, I made. this investment in this Turkish company called RASAS. And in 25 years of investing, the situation with RAS never happened to me. And I don't think it'll happen to me again till I pass away. I think this is a max once in a lifetime. So RAS was a situation where a business which was worth something like $600 million liquidation value, not even intrinsic value, just you could sell everything and quickly get $600 million, was available for $20 million. So you were able to get a dollar bill for $0.3. And it was a dollar bill that was likely to grow because they're really good capital allocators. So this wasn't just some Ben Graham

Starting point is 00:30:21 type ultra cheap net net, where the dollar would just sit at a dollar or might even decline to $0.80. This dollar might be worth $5 in 10 or 20 years. And we were paying $3 for it, right? And anyway, I looked at it, I really couldn't see a way that we would lose money. It looked extremely bulletproof from a number of different ways I looked at it. But I still have to be cognizant of the fact that, you know, there's the 40, 50% error rate always there. But if I were not running a fund and I came across this investment, I would have no trouble putting a third of my net worth into it.

Starting point is 00:31:00 Because I just think that something like that being one or three bets, I would make that bet all day long, just because what I saw in terms of downside versus upside. So sometimes that can make sense. But like I said, a Raysas happened to me only once in a quarter century. So we can't really kind of build a framework around it. Chuck Acree, you know, who's a great investor, he says that in his lifetime of investing, he's had two 100 baggers. One of them was Berkshire Hathaway, which he started buying in the 80s, early to mid 80s. And the second was, American Tower. Both of these ended up being 100 baggers. And like I said, I think in a lifetime, in a portfolio, you cannot expect to have more than one, two, or three hundred baggers. That's

Starting point is 00:31:49 pretty much the limit of what might happen. But even if you run a 10 by 10 portfolio and one of your bets ends up being like that, that's why the error rate doesn't matter so much. In the case of RASAS, we were running about 600 million or so in capital. And all we could invest in the company was $7 million. $7 million got us one-third of the company. In effect, it was like a 1% bet. Now, I wanted that bet to be larger. But that's all we could put in because the market cap is $20 million and that was that. But the thing is that that one-third, and I think the value of the business has gone up, maybe a couple of hundred million at this point, is large. to three years. To me, what is very simple and what is very important is that we never touch

Starting point is 00:32:39 race us. Unless there is something which is, you know, there's an integrity issue or something comes up from left field. I just hope I'm smart enough to sit here 20 years and not touch that position. And I just want to cheer them all from the sidelines. I think that's my way of thinking about concentration. I think you don't need to go to three stocks. I think you'll get there normally just even with a 10-12 stock portfolio. I had to ask because of the influence of Nick Sleep and how we saw those three businesses. This was very interesting. So I was just very curious to hear how you thought about that now.

Starting point is 00:33:14 So thank you for your elaboration on that. One thing, you know, we just on Nick Sleep is if you think about the three businesses he put all of his money into, Amazon, Costco and Berkshire, these three businesses have a few things in common. One of the things they have in common is they have a really strong and admirable culture. Each of these three businesses is very different, but the culture is really strong. Also, all three of them have incredible modes, unbelievable modes. And the third is they have incredible leadership. If you think about the three bets that Nick's Leap made, it's hard to improve on that. It's hard to get to a higher quality business than cost.

Starting point is 00:33:59 or Berkshire. It's just really hard to do that. So I think that when I look at what Nick did and then he rode off into the sunset and, you know, hung up his boots, I think there was a lot of thought that went into. It wasn't the number three that was so critical. It is which were the three. And why did he pick those three? And I think that's where the genius comes. So it's kind of like, you know, in the late 80s, Buffett put like, I think 30% of Berkshire's total. And I think, net worth into a single stock. He put a, you know, 30% into Coke, right? And it was a very big bet for Berkshire.

Starting point is 00:34:37 But the conviction level was so high. And it worked out spectacularly for that. So once in a while, you know, these things line up. I mean, a business like Coke is so resilient, such an amazing business that, you know, Warren, when he finally figured it out, he just bought every share he could. Let's take a quick break and hear from today's sponsors. No, it's not your imagination. Risk and regulation are ramping up, and customers now expect proof of security just to do business. That's why VANTA is a game changer. VANTA automates your

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Starting point is 00:38:30 And one way to mitigate that is to invest in companies that have fixed and recurring payments in more established currencies such as the euro or the dollar. And one could mention racist logistics as an example. But it's not so much the specific company, but just more about your process this question goes to. On that note, I heard you say in this wonderful Q&A you did for the Value School in Madrid, Spain, that you were not too concerned about the currency depreciation in Turkey. Could you talk to us more about not just only the revenue side, but the cost side, like how do the value of the cost side of a company who is situated in a country

Starting point is 00:39:03 there have secular inflation pressures? Yeah, it's a great question. So Turkey is, inflation is running at about 50% a year in Turkey. I do not believe that the 50% number will come down meaningfully even if there is regime change. So even if Erdogan is the election next year and some new leader comes in and the new leader is very concerned about inflation, even in that scenario, it will be very difficult to really bring it down. I mean, they may be able to bring it down 5, 10% a year. It may take them 5 or 10 years more to bring it down to something like 20%. So inflation is really hard, and the reason it's hard to bring it down is because what has

Starting point is 00:39:49 happened in Turkey and what's happened in many other countries is the government has a certain level of expenditure. And they have transfer payments going on to large portions of the population. And they stay in power because of those payments. You cannot just come in one day and say, oh, I'm going to balance the budget by just cutting all these transfer payments. Because next day you will be out of power because those voters will not keep you. So what we had happened in the United States with Paul Walker in the early 80s where he took a sledgehammer.

Starting point is 00:40:23 US treasuries went to 18% and he brought it. He broke the back of inflation is really hard to do in democracies. It's almost impossible to this. That's why what Walker did is was amazing. So our investment in Turkey was made under the premise that 50% inflation is there, let's say, forever. I also assumed that not only there be 50% inflation, because of the way the currency will react,

Starting point is 00:40:52 the lira will devalue accordingly. So, for example, in 2019, when we made the investment in RAS, it was $5 Lira to $1. Now, less than three years later, it's $15 to $1. A year from now, I would forecast it will be $22 to $1.1.1.1. $1. And two years from now, it'll be 33 Lera to $1. And even when those things take place, we will do really well on our investment.

Starting point is 00:41:24 And what has happened in the last three years is when we've gone from 5 to 15, in dollars, we have quadrupled our money in Raysas. It's like a 4x in the last three years. In local currency, it's even more. but who cares about it. So why did that happen? How can you invest in a high inflation environment and still do well? There are businesses in Turkey where the revenues are in euros and the expenses are in Lira. There's a sliver of businesses which are like that. What has happened in Turkey because of all this turmoil, everyone and their brother has left the country. All the foreign

Starting point is 00:42:08 investors that were exited, everyone's gone. Only Monish has gone in. Okay. And it's the cheapest market in the world. That's why I went in because I just couldn't, I thought it was ridiculous the way the market was priced, still ridiculously priced. So, for example, there's a juice manufacturer in Turkey. We don't have any position in the juice manufacturer. Ninety-eight percent of their products are exported to the European Union. Turkey is part of the European common market. They can export anything to Europe with no duties of tariffs. So all their cause, are in Lira and all their revenues are in euros. Their profits are at all time highs because in a high inflation environment, one of the things that happen is wages do not keep up. Turkish

Starting point is 00:42:52 citizens are becoming poor because inflation is running 50% and maybe their wages might be going up 20 or 30%, but not 50%. So this company has a workforce where in euros their payroll costs is shrinking. And even when they buy produce and buy fruits and all of that to make into juices, those are not keeping up at inflation or not keeping up with the euro revenue. We limited ourselves to businesses in Turkey that have this weird tail with. There are businesses in Turkey where all revenue is in euros and large portions of the expenses are in lira. And because the baby got thrown out with the bathwater, investors don't. care about those businesses. They just look at that it's Turkey. And some manager in New York

Starting point is 00:43:42 just speaks to the phone and tells us his people exit Turkey completely. And that's why you get this weird mispricing. In the case of RAS, what I found is that there was an asset base, which was worth like a billion dollars, these 12 million square feet of warehouses. Those warehouses are land, cement, concrete, steel, etc. Those are all inflation index. So when you have 50% inflation, the land price is going up, the steel price is going up, the replacement costs of these warehouses is going up. Reyesas as a company sees its rents go up pretty dramatically. But the CAPEX was done in yesterday's lira.

Starting point is 00:44:26 They're not doing much CAPEX anymore. Their billion dollar asset pays is not becoming worth less than a billion because there's an international price for steel and cement and concrete. And the replacement cost is going to adjust and the rent is adjusting. So if I own an apartment building in Austin, okay, and I bought that apartment building for $1 million, and after five years, it costs $5 million to build that building. I still paid only $1 million, but the rents will be based on the $5 million. So the rent is going to go up dramatically. So someone like me who paid a million is going to be looking really good. The rent is going to look good because I paid in yesterday's. And not only that, RASAS, because the government

Starting point is 00:45:10 tries to keep the interest rate so low, their borrowing cost is 14% average. They have very little borrowing, but they're borrowing at 14% in Lira. And their rents are going up at least 20 to 30%. Even if the rents are not keeping up in inflation, they're twice their borrowing costs. And they hardly have any debt, so it doesn't matter. But so what I'm trying to say is that a lot of businesses in Turkey are not investable because in a high inflation environment, investors are going to have a lot of trouble. But there are a sliver of them where the economics work out really well. You talked about the Coke bottler. So I was in Istanbul for three weeks earlier this year. I had a great time. You know, the blue fish on the banks of the bosphorus grilled is really good.

Starting point is 00:45:58 and I met the Coke bottler in Turkey. When I met them the first time, I told them, they were the very high-quality people. I was just impressed with the quality of the operation. They're really, really a blue chip firm. And they're 20% owned by the Coca-Cola company. So I told them, listen, I did a talk a few years back at UC Irvine on Coca-Cola.

Starting point is 00:46:21 It's a two-hour talk. If you just Google me and Coca-Cola, the talk will come up. why don't you guys, you guys might enjoy watching that. So they did. They actually went and watched the talk. Then they contacted me and said, Monish, we are your greatest fans.

Starting point is 00:46:36 We love you so much. So then I actually had some more questions for them after the first meeting. I said, listen, can we meet again? They said, of course,

Starting point is 00:46:45 we want to meet you as many times as you want to meet us because, and just the second time I met them for lunch, they are asking me what their strategy should be. You know, I'm not in the bottling business, okay, but they thought they never met an investor who understood Coke as well as I did. And just to tell you how amazing that business is, so they own bottling rights in about 12 different countries. It's not just Turkey. They have 49% of the bottling

Starting point is 00:47:14 rights of Coke in Pakistan. Pakistan is not some, you know, Mickey Mouse country. It's a large 200 million people, very hot country where people like to drink coke, and coke has 50% market share. And at some point, the Coca-Cola company, which owns 51%, will probably sell that 51% to these guys. Maybe it happens in two years or three years or whenever, okay? They have operations all over the, in all these, you know, Uzbekistan, Kazakhstan, Turkmenistan, all these different places, Jordan, Syria, whatever. They're Coke bottlers and all these places where this company owns. Again, when I look at their lira exposure, yeah, Turkey is a big market, but you know, something like 60% of their revenue is outside Turkey. And that's increasing. And that business is inflation indexed. They have the ability to raise prices. And they do raise prices as they need to keep up. And a business like that, I think you could invest in and you would do very well.

Starting point is 00:48:15 Manis, I know that generally you don't talk too much about your current positions, and so thank you for sharing about racist statistics. And it's also very understandable that you don't want to do that and be susceptible to confirmation bias. Sometimes you are willing to talk about previous positions. So I want to hear if you were willing to share some thoughts on Alibaba. Sure, yeah. We invested in Alibaba.

Starting point is 00:48:37 I think Alibaba is an incredible, amazing business. It's done really well over the long time. But then after I made the investment, I was able to complete research and drill down on Tencent. And when I compared the two investments and companies, Alibaba and Tencent, I felt that Tencent was a superior business. That was the perception I had. And Alibaba had gone down significantly from where we had bought it.

Starting point is 00:49:04 And we always, at your end, we want to do tax planning so that if we have positions that have declined. We need to look at whether we need to do a tax loss selling and then maybe buy it back after 30 days. It's always a complicated decision because given my luck, the stock will move within those 30 days. We get host. But in the case of Alibaba and 10 cent is I could sell Alibaba and five minutes later buy Tencent. So I didn't have this 30 day waiting period where normally in tax law selling, I need to sell all the Alibaba, have a 30 or 31 day period where we don't buy anything and then buy it back to capture the tax loss. And in this case, we were able to do it right away because it's a different security. And I was able to kill two words with one stone.

Starting point is 00:49:51 One is that we captured the tax loss. And the second is which I think we got into a better position of business that I thought was better. So that's why we did what we did. And specifically for Tencent, I heard you say that Tencent might be the best of the big tech companies and then perhaps Amazon would be number two because they're so much better at allocating capital. Well, I mean, I think one thing to keep in mind with both Alibaba and Tencent, which gave me pause, is these are mega caps. Okay, so these are, you know, companies worth hundreds of billions of dollars, right? And so anytime you buy a business, which is hundreds of billions of dollars, how much runway is there, right? That always comes up. I mean, like Apple

Starting point is 00:50:33 is like three trillion or whatever, but how many companies become trillion plus market cap? Or there's zero company that $5 trillion market cap, for example. So there's always an issue of runway that comes up in my mind is how big can these things get? Whereas when I look at a business like Raysas at $20 million market cap, we can see a very long runway, right? Because just liquidation value was a billion. So one thing to keep in mind is that we may do well, I mean, investors may do well with Tencent or with Alibaba. But your starting point at these companies is that they already have sign. significant size and scale. And so you have to keep it in mind. But having said that they have,

Starting point is 00:51:15 I mean, Tencent has, I mean, I think that the two engines they have in company, one is their army of software engineers, which they are able to very nimbly move into different areas. And the return on invested capital you get, I mean, eChat was created by probably 20 people. Okay. So if you think about, you know, the revenues and profits that come out of V-Chat versus maybe like, you know, $10 million or something that went into it. It's like asymmetric to the power of asymmetric. When we are making digital investments into these large, scalable businesses where you have the intellectual property, the returns can be spectacular. So Tencent has done really well in the video game business. They dominate in the video game business globally. They dominate in messaging.

Starting point is 00:52:04 and wherever they've put their attention, they've done really well. And of course, because they're in the software business, you cannot put much capital in the software business because there's only so many engineers you need to do whatever you want to do. They've been really good at taking the excess capital and building a second leg, which most companies don't have. Most companies do not have investing prowess. Tencent built incredible investing prowess amongst great private businesses.

Starting point is 00:52:34 that they could take a stake in and use that excess cash. And the returns they've generated on that portfolio has been spectacular. I think it's in the 30, 40 plus percent analyzed return rate. It's a really spectacular return. So they get very high returns on invested capital when they hire software engineers. That's just off the charts. But even when they invest in a meet one or, you know, JD.com or C or whoever else they're investing in globally, they've generated very high returns.

Starting point is 00:53:04 So I think the combination of these two is incredible. Now, of course, one of the things that's come up for both Tencent and Alibaba is the Chinese government considers all of this wild west behavior not acceptable. And they've been putting curbs on them. Businesses are very, I would say most businesses are very fragile. If you start shaking up the core underlying premise of foundations of who they sell to and how they sell and how they market and how they get revenue, most businesses would have a very hard time with that and they would be in trouble. I think both Tencent and Alibaba need to understand this

Starting point is 00:53:45 new landscape. And one of the problems is understanding the new landscape has been that it's been shifting. The CCP will come up with certain guidelines and changes and then you think, okay, they're done. Then after two months, they come up with more guidelines and more changes. Then you think you're done and then they keep going. But for what I have seen of the behavior of Tencent and even Alibaba, they are adapting really well. So I think Tencent will shift its focus very heavily away from China. They've already had a global footprint both on their video games and their investing. And so I think that footprint will become even more global and they will reemphasize certain businesses in China. That's my best guess.

Starting point is 00:54:29 or they will look at businesses which are non-controversial, like the cloud business and so on. So that's what I expect would happen. Whenever I looked into Alibaba and took a position, of course, one had to look into all these things about deal listing and all the things that came out. And then CCP said one thing and then they said another thing. And I was wondering, for investors investing in China and for someone like you, are you looking into buying them at the exchange in Hong Kong instead of buying it in America? It's a regulation thing to do one or the other. I don't think one needs to sweat that. I think the VIE structure and I think that if you have a choice, you're better off buying it in Hong Kong.

Starting point is 00:55:10 I think that's fine. I don't have a concern about the VIE structure. I don't have a concern that the ownership is like quicksand. You know, it might shift or change. I don't have those concerns. I think if investors run into issues, it will be because of the core business. It won't be because of the structure. So I think if investors are correct about where the core business is in a few years, they will do fine.

Starting point is 00:55:37 And if they are not right on that, then they'll pay the price. And then in fact, recently, even the Chinese government has been pretty cooperative about the company sharing data in the U.S. to enable the U.S. listings and so on, to stay in place. Even they have shown a degree of cooperation which surprised me. Manis, the last question I have for you here today, you've been very generous for your time, so thank you for that. You have these wonderful Q&As with students that you upload on YouTube, and one of the most common questions that you get is students ask about the circle of competence, and you rightly say that asking the question is also answering the question. So if you ask,

Starting point is 00:56:17 is this within my circle of competence? Well, it's probably not, because why would you ask the question, then? Fearing that I would walk into the same trap here. We previously, talked about here on the show how we learn differently whenever we have a position in the stock compared to just doing research on the stock. And I found that to be true. Therefore, the question remains, when do we know that we know enough to build a position in the first place? You know, you really learn about a company after you own it. And you learn a lot about the company after it drops 50% after you own it. That's when you truly understand the business. business. Okay. What different gaps you have in your understanding will become crystal clear at that point.

Starting point is 00:57:03 That's the unfortunate part. Some of the lessons can be very expensive. But yeah, I mean, I think the nature of investing, like I said, I think that the kinds of factors that affect a business are so myriad. I mean, they're so broad. Things can come from left field. And so that's what makes this such an exciting and challenging endeavor is that these things will always surprise you. Sometimes a surprise is very heavily in your faith, and sometimes a surprise can be a negative surprise. But I think that if you have a curiosity and you pay attention to circular competence and you pay attention to do you really understand the business and those sorts of things,

Starting point is 00:57:47 it can be really helpful. I just want to say that it's always an honor speaking with you, Monish. I'm actually going to tell the audience that I'm going to record a specific episode with my friends, Harry Ramachandra and Tobias Kyle Lyle, that will be published on May 21st, where we're going to talk more in detail about Pupri Funds. All these disclaimers, I don't need paid or anything like that, but I am investing with Monash, which is an absolute privilege. So I just wanted to say that we are creating an episode around it in case people are interested

Starting point is 00:58:14 in why the decision was made. But I would also say Stig, this time our interaction was special because you are now a partner and our fortunes are a little bit tied at the hip which makes me very happy. And so I'm grateful for the word of confidence. So thank you. Thank you for saying so, Manus. And thank you for spending a little more than an hour here with us here today. So thank you so much for your time.

Starting point is 00:58:41 All right. Pleasure. Thank you. Thank you for listening to TIPS. Make sure to subscribe to millennial investing by the Investors Podcast Network and learn how to achieve financial independence. To access our show notes, transcripts or courses, go to theinvestorspodcast.com. This show is for entertainment purposes only, before making any decision consult a professional. This show is copyrighted by the Investors Podcast Network.

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