We Study Billionaires - The Investor’s Podcast Network - TIP550: Masterclass w/ Mohnish Pabrai

Starting point is 00:00:00 You're listening to TIP. Since its inception, in 2000, today's guest, Monizpabrai, has returned 989% to its investors net of fees in his flagship fund. This is compared to only 401% for the S&P 500. In today's conversation, Monashapai generously share his thoughts on various stocks, including Alibaba, Constellation Software, Raysal Logistics, and Shinokin. However, more important than the stocks we discuss, I hope you would appreciate how thoughtful monos pari is and how important it is to understand the process and separate the signal

Starting point is 00:00:35 from the noise. I hope you enjoy the conversation with the leisure investor monos pari as much as I did. Here we go. 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. I'm your host. Dick Broderson, and it's Berksieh weekend, at least it's Berksi whenever you're listening to this. And I'm thrilled to have invited no other than Monis Papari to join us today. Monis, thank you so much for taking the time to speak with us today. Stig, it's always a pleasure at this time of the year just before the woodstock

Starting point is 00:01:26 for capitalists gets underway. So it's like our tradition, right? This is the kind of pre-game tailgate party. Well, well said. I don't think, I can beat that money. So I'm going to go right into the first question here. So, you know, I've been, which is also a tradition, I guess, I've been reading mongers. Yes, this is just wonderful book, Paul Charles Almanac, but especially the psychology of humans misjustment. It's just amazing. And I've heard you say that you always learn something new whenever you read the book and I feel I do the same thing. But specifically for that speech, it really makes me humble because I feel I'm susceptible to so many biases. And I thought of you as I was reading it. Full is closer.

Starting point is 00:02:11 I'm an investor in PAPRA funds. And, you know, I can say that since I joined it, I've been very, very happy about it. I hope I don't make you shy by saying so much, but it's been a wonderful experience. And I've started to wonder and worry if I like you a bit too much, Anish. And I am a bit worried in its own way because I kind of have all these. associations with you in terms of, you know, compounding my net worth and like all these warm, fuzzy feelings, right? So I kind of feel whenever I read something from you, whenever I watch a video with you or whatnot, I kind of feel I find myself filtering the information differently. And that worries me. And I guess I could say the same thing about, you know, Charlie and Warren

Starting point is 00:02:55 in the sense that if they do something wonderful, they're like, oh, my, you know, you think you're so smart. And if they talk about a mistake, you're like, oh, they're also smart. Look how much they'll learn from their mistake. So my first question to you is sort of like with that as a backdrop is how do you make sure to stay objective? Whenever you process information from people that you really like, perhaps you even admire them, and you have this lot of pluser cascade of different biases that can make you susceptible to not seeing the world the way it really is. Yeah, that's a great question, stick, and it's really difficult to do. And I think most of us, definitely myself, we fail at it.

Starting point is 00:03:33 So, yeah, I mean, our brains, you know, they've evolved over the millennia and they are not optimized for being great investors. They were really our brain was optimized to help us survive. And surviving on the African Savannah needed a certain type of wiring and we need a different kind of wiring to be great investors. So our brains have a lot of quirks and a lot of biases. and I would say reading Munger's essay and reading C.ldini's book, you know, is going to be helpful in at least being aware of the pitfalls.

Starting point is 00:04:14 But we are susceptible to it, you know, the commitment and consistency biases, a number of the biases that come in and that are very much part and parcel of who we are. it's just part of who we are the best. The best that we can do is try to be aware of it and try to sidestep as many of the pitfalls as you can, but I don't think anyone has succeeded in sidestepping all the pitfalls. And so, yeah, I mean, I think that's a great essay and it is helpful. It's helpful to reread it.

Starting point is 00:04:52 And it's helpful to be aware that we are quirky living creatures with quirky brains, which don't necessarily follow a rational path all the time. One of the things that I do in preparation is I always go into the YouTube channel, which is just wonderful. And all these videos, so I sort of like do it once a year, probably like, I don't know, 30 hours of content, what, not a year that goes up. It's always interesting sort of like to have that kind of compound.

Starting point is 00:05:25 experience. I always like after each video I type up my notes and sort of like what you, I don't know, three to five points that that's most important from that video. And it's also interesting to hear about how you, you know, you play Brits. I know you talk about that for a long time, but also it seems like you're speaking with what there's more content that used to and you talk about how, you know, speaking with students also helps you to perhaps be a list activity market. I kind of felt that was, there was kind of interesting take. But anyways, whenever I, whenever I listen to you, to be some themes. And I don't know if you're aware of this or I don't know, I might be all analyzing this, but you know, it's sort of like whenever you see your nephew, you haven't

Starting point is 00:06:04 seen for, you know, two months, like he's grown, but whenever it's your own kid, you don't really see it because you see him every day. And so whenever I compared my notes from the previous year, and you talked a lot about the spawner framework, sort of like one of the things that came after COVID. You talk a lot about like sleep. And then you also made this reference to the Walton family quite a few times. Now, all the past 12 months, and I could, again, with all my biases, I could be completely wrong. You do mention the Sleep's framework from time to time, perhaps even more with the Walton family, perhaps it's just because, you know, not so much the Spawner framework, and perhaps it's just because you completely adapted that. You don't

Starting point is 00:06:43 really talk about it anymore. Who knows? And it also seems like you've been perhaps a bit more open about some of your investments, especially in Turkey. Reyesas, you talked about TIV, airports and my question is not so much your specific holdings. I don't want to make you susceptible to confirmation bias. That's not the point of saying this, but more about the Turkish stock market. And I heard you reference that 80% of the stocks are held by insiders and foreigners that don't generally don't trade a lot. And then you have 20% that are traded by retail traders. And they have a quite significant turnover. And whenever I heard the first time, I sort of like had to rewind like, did money just say nine days?

Starting point is 00:07:24 Did you really say the average-only period of nine days? And you also talked about how whenever you translate the Turkish word, it's into, you don't invest. It's like play the stock market. And that sort of like makes me think about what that dynamic due to the efficiency of a market. Graham said decades ago, it took like 18 months to revert back to intrinsic value. Linz had talked about two to three years, again, with a wide, variance, but that's sort of like whenever they were asked to put on the spot, that's what they said.

Starting point is 00:07:58 Again, this would take it to go. How do you think about the whole inverting to intrinsic value? How is that different than, say, the data series we have about the states, if at all? Well, I mean, I think Graham's bedrock that we all believe in is that in the long run, the stock market is a weighing machine, and in the short run, it's a voting machine. So I think that applies universally. I think in the end, all companies get correctly valued. And if they're undervalued, they're going to go up.

Starting point is 00:08:33 If they're overvalued, they're going to come down. So I think that is part of the bedrock that applies globally. But I think that in a place like Turkey, and actually when I mentioned to local Turks about the nine days, they are actually surprised. is they expected it to be a lot shorter. All the people they know basically invest at 10 o'clock and want to wrap it up by 2 o'clock. And so they actually expected that the holding period

Starting point is 00:09:03 would be like two or three days on average. So they were actually surprised that it's long as long as nine days because they just said like I said that the way they look at the stock market is they're playing the market. and not really investing. And that's really the only explanation one can come up with, you know, for the wide mispricing we've seen in businesses like Raysas, for example, is that no one is weighing the, weighing the companies.

Starting point is 00:09:37 They're just, you know, dancing in and out of them. And, you know, Buffett has a great quote. He says that the stock market is a mechanism to transfer wealth from the active to the inactive. And it could not be more true than a place like Turkey. So, yeah, actually, I, it's kind of like, I would say it's almost a little bit of a time warp. It's like going back to the 60s and 70s in the U.S. I think that's or it feels like the early 90s in India, where you had a lot of very high quality businesses at single digital. multiples. And so that existed in Western markets, existed in India, and it doesn't exist anymore.

Starting point is 00:10:28 You know, so these places have, we will always have fear and greed and we will always have mispricing. But the degree of mispricing that I can find in a place like the U.S. is much, much less than many other places. Back in September, you had this wonderful Q&A, and we'll be sure to link to that in the show notes. And the gentleman interviewing asked you how you read any reports. And you, and please correct me if I'm wrong, I'm just, I'm just referencing what a thing I heard. But I just wanted to like mention because it was really interesting. And then perhaps at the end of it, there might be a question there. But you talked about how you're looking for reasons to say no, you know, it could be seconds, it could be minutes. But then if it's sort of like, you know,

Starting point is 00:11:17 you know, passed that test, like a very, very quick test. You sort of like went through four steps, the first one looking at the Val Investors Club for a write-up because it saves you so much time. You get overview the company. There are some quantitative, some qualitative. And so it sort of like it saves you a bunch of time. And it also gives you a bit of filter because the quality in there is relatively high. Then if it passes that filter, you ask your assistant to print out the management letters.

Starting point is 00:11:42 But only if it's written by the management or the CEO. if it's like a PR company that types it up. And so you get to see whether or not the overpromise or under the deliver or the other way around. You get to see how they react before, during and after the great financial crisis, the pandemic. And then it goes to step three. So you would look through the transcripts with the Q&A about the business. So not all the curated stuff, but like whether sort of like put on the spot to understand the business better. Of course, disregarding those analysts who just want the management to, fill out their Excel sheet when they can start like estimate the next quarterly earnings.

Starting point is 00:12:21 And then it goes to the final step four, which is you actually reading the reports, any reports. And so with all of that said, I also heard you say in another video that here in 2020, you wanted to study 50 businesses if it passed those first few hours of tests. So I'm curious what you learned. And again, not to put you on spot of any kind of specific stocks, but whether you found, I don't know, perhaps a new mental model you want to share or a new perspective on things. Yeah, I've made some good progress on the 50 businesses.

Starting point is 00:12:59 I think it's up to close to 20 so far. I have to pull it up maybe like 17 or 18 or something like that, which is I'm on track because basically, I'm behind if I'm not at least one per week. So I'm very pleased with that. And of course, when I make a trip, like I made a trip to Turkey, I see all these new companies. So I get a lot done during a week like that.

Starting point is 00:13:27 But yeah, I mean, I think that one of the things I am excited about is it's kind of a new way of me looking at things is what I call. the circle the wagons, circle the wagons approach to investing. And, and you know, this year, for example, Buffett in his letter mentioned that Berkshire has a few truly extraordinary businesses, many pretty good businesses and a very large number of mediocre or below average businesses. And he also mentioned that in 58 years, it's really been 12 decisions. that have created most of the great outcome for Berkshire. And most of the other decisions have just been at best so-so. So if you look at something like Berkshire Hathaway over 58 years,

Starting point is 00:14:25 Warren has bought more than 80 companies in that period. He's probably made at least 10 key hires and probably bought at least 210 stocks over that period. So collectively, well over 300 decisions. And when he says that 12 stand out, it's like one in 25. It's like a 4% hit rate for someone as great as Warren Buffett. And, you know, Charlie Munger said many times if you took our top 15 decisions and took them out, our record would be useless. And we actually see this particular phenomena of, you know, this 4% play out over and over. So, for example, if you look at the nifty 50, you know, in the early 70s, which is very popular

Starting point is 00:15:15 by the, you know, 50 bluest chip stocks and don't worry about the valuation, kind of set it and forget it, there is some controversy whether Walmart was part of the nifty 50 or not. If you assume that Walmart is part of the nifty 50, we'll take two cases here, but let's say you assume Walmart is part of the nifty 50, and you assume that it has a 2% weight in the nifty, 50 because they're 50 stocks. Each one has a 2% weight. And you assume that the other 49 stocks go to zero. They just get wiped out. And you assume that you bought Walmart and the IPO in 1970. And you held it till today. The nifty 50 with 49 out of 50 gone to zero would have ended up with something like a 13.3% annualized return and the S&P is 10 and change, you know,

Starting point is 00:16:09 10.3% or something. So with just 2% of the portfolio surviving and being there for the entire 52 year period, you still significantly outperform the S&P. And of course, 49 of the other names didn't go to zero. They were like McDonald's and Coke and Procter & Gamble. There were a lot of a good company. There were some bad companies like, you know, Polaroid and Xerox and Kodak and boroughs and a lot of these companies basically went to zero. But you can just see that the one decision whether Walmart is part of the group and whether you keep it or not has such a outsized impact. Now, if you take the other case, which is that let's assume that Walmart is not part of the Nifty 50. And you assume that you invest in the Nifty 50 at the all-time high in

Starting point is 00:17:01 1972 just before the big crash of 7374. And you run it till today. What you find is that the annualized return is 10.2% annualized and the S&P is 10.3%. So even with buying at ridiculous valuations and but just holding them. Of course, what happened in 7374 is the nifty 50-50 went down 50%. Nobody was in the nifty 50 by 1975, you know, that everyone exited. But if they had held on and if they had held on until today, they would pretty much be tour to tour with the S&P. It's not that much of a difference. And, and you know, this lesson again plays out where we had this great investor in India who passed away last year, Rakesh Junjunwala. And Rakes Junjadvala never managed money professionally.

Starting point is 00:18:02 He was an individual investor. And maybe close to the end of his life, he was starting a business. Basically, he was all passive investing. And he started with $400 when he was 25 years old. And at 62, when he passed away, it was $5.8 billion. And in 2003, Rakesh, put 4% of his portfolio into a company in India called Titan Industries. And it was a $3.4 million bet on Titan.

Starting point is 00:18:32 He had about $85 million in total assets at that time. So you invested $3.4 million. If you, again, like the Nifty, take everything to zero that he had in 2003, except for Titan, and he owned like a little over 5% of Titan, you run it till when he passed away. Now, his widow has kept tightened, so it's still compounding. It became $1.4 billion, excluding dividends. If you reinvest the dividends, it's even higher.

Starting point is 00:19:03 So $3.4 million was a 400x return. And so even if you took everything else to zero, he'd still have $1.4 billion. So again, we see this phenomenal, and these are not venture investments, right? I mean, when Buffett buys coke or sees candy, these aren't like, you know, we're not early stage like Sequoia making a bet on Amazon when it's an early stage business. These are mature, you know, businesses with a lot of history. And we see the same thing with Nick Sleep with Amazon. I mean, if you pull Amazon out of the equation, Nick Sleep's record isn't that great. And when you put it in, it's an exceptional record.

Starting point is 00:19:45 So the important thing, and then of course the most extreme case of all of this is NASPERS in South Africa. So NASPERS in 2001, it's almost a 100-year-old newspaper company. That's how it started about 100 years ago. In 2001, they have a market cap of about $500 million. They put $32 million into 10 cents. and they get a 46% stake in 10th. And the most surprising thing about the NASPERS 10th cent adventure is they basically never sell. They sold a little bit of the IPO, but they still owned 36% of the company in 2018.

Starting point is 00:20:33 And in 2018, their stake was worth 170 billion. And in 2021, at the peak of a 10th cent, their stake was worth $2,000. 270 billion. So here's a sleepy old media company in South Africa, they suddenly start seeing some Chinese company become 99% or even more than 99% of their total assets. And they don't trim it. And they don't hedge it. They just keep it. And they end up with an astronomical annualized return over the last 20 years. And so if you look at the 10 cent bet, it was 6% approximately 6% of the value of NASPERS at that time. And NASPERS made hundreds of bets.

Starting point is 00:21:28 Everything else really didn't matter. There were only two things that mattered, buying 10 cent and more importantly, not selling 10 cent. So the circle the wagons concept comes from the 19th century on the American frontier. So when the pioneers and the settlers were moving west to, you know, stake out and take over land and start farming it and so on, these wagons used to get attacked by the American Indians. And the defensive posture they took to defend against the Indians was to circle the wagon. which means, you know, you put everything, your crown jewels in the center of the circle,

Starting point is 00:22:11 and then you fight and you try to protect the center. And it's a similar concept in investing with the nifty, 50 with Walmart, you really need to not touch it. It only works if you don't touch it. Similarly, with Seas Candy and American Express and Coke for Berkshire, you know, all of these, you know, hiring Ajit Jane and so on, you need the long runway. And NASPERS needs the very long runway with 10 cent. And so the key in investing is to recognize two things. One, we're going to make a lot of mistakes.

Starting point is 00:22:48 Two, this is a very forgiving business. You can be wrong even 98% of the time, still come out smelling really nice. And three, that is only going to happen if you are able to buy business. businesses with great economics at reasonable valuations and then hang on to them forever. So when they get fully priced, they don't get sold. When they get overpriced, they don't get sold. It's only possibly when they get completely ridiculously, egregiously overpriced that you can consider selling.

Starting point is 00:23:27 And so this framework of Circle the Wagons is very fundamental. I think it's very hard to beat the market if you don't have this framework because you're going to be cutting the flowers and watering the weeds. And what we need to do is make sure we don't cut the flowers. And it really doesn't matter whether you water the weeds or not. But the important thing is you just don't cut the flowers. It's okay if you want to water the weeds. Let's take a quick break and hear from today's sponsors.

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Starting point is 00:27:54 Go to Shopify.com slash WSB. That's Shopify. All right, back to the show. It's so well said, Moniz, and I think you brought up this stat of the index is like 5% that generates all their turns because the index is too dumb to sell Amazon and alphabet. So they're not cutting the flowers. And then you had this joke where you're like, yeah, and you don't want to pay up for it, good luck. You know, good luck finding them. And of course, there are exceptions where we can get a wonderful, one.

Starting point is 00:28:32 wonderful company for small, most of all. But, you know, it is. That's why, Stig, that's why we hang out in Istanbul. You know, so you have to see how the jigsaw puzzle fits. So we have to find the great businesses. And we have to go fishing where the fish are. Thank you. Thank you for that handoff, Mani, so I'm going to talk a bit about Turkey and then see if I can zoom in and zoom out to to Turkey here. So, you know, it's about repurchase of shares. And, you know, you, I heard a lot of fantastic questions asked to you over the videos I just mentioned before. And there was this really brilliant student who said, why, why is it that hard for CEOs to buy back CS below the intrinsic value? And you made the really good point that, you know, CEOs, you know, they generally,

Starting point is 00:29:24 they didn't rise to the top because they were great capital. perhaps with good salespeople. You also talked about how they're optimist. You need to be an optimist to lead a company. So you're like, yeah, that's why it's difficult for CEOs to buy back shares below the intrinsic value, not destroy shareholder value unless you are the single tons of the world, but there are very few of those. So all of that made a lot of sense. And then I also heard you talk about the father-son team at races. And again, I'm not trying to give you any kind of confirmation bias. I'm usually more as an example. Then perhaps we can talk more general about it.

Starting point is 00:29:58 So whenever you're talking about the father and son team, I'm like, they're just such smart people, you know, you talk about the hurl rates and the payback period, of course, three years. You come up with this example about their solar panels whenever they got installed, where the payback period perhaps was a bit longer, but then they talked about how, you know, the assets, how long the longevity of that and the price is going up. And I don't know, say that the 50 million is worth 200 million, whatever. It's not so much of that. But what sort of like tying those two stories together, I would say, I understand why your conventional CEO would not understand capital allocation well.

Starting point is 00:30:33 But if you're, if you founded Races or perhaps we can talk about one of your, your previous holding Sinoquin, which I know there are also some cultural differences in terms of Japan and how they do capital allocation. But could you paint some color around why a founders who are clearly very good at capital allocation, not necessarily good at buying back their own stock, when it's clearly below their liquidation value, which they would know better than anyone with their liquidation value is of their assets. So why is that the case? Yeah, so just to give you an update on Shinokin,

Starting point is 00:31:08 there was a take under, and they did a tender offer, offering a small premium, and they took the company private. And so the founder with some investors, basically in effect, did what you're suggesting they should do. And it took them some time to understand.

Starting point is 00:31:29 We had a number of conversations. I had a number of conversations which, you know, can including, I actually sent them a PowerPoint in Japanese, on the benefits of buybacks, explaining, because I realized that a builder may not understand that, you know, an entrepreneur, a builder. And what ended up happening, actually, they took my advice in very large,

Starting point is 00:31:52 doses. So instead of nibbling at a buyback like I was suggesting, I mean, we had already sold the stock because we were a little bit frustrated that they were not really acting the way they should because they had significant amounts of cash flow and they could retire significant number of shares, but they were nibbling. It was a very small amount that they were buying back. And then we exited And I think a year or two later, they basically took one big gulp and bought it all at actually a spectacular discount to what the business was worth. Shiniken was an exceptional business because it has very strong recurring revenues from all the properties they're managing. I mean, the visibility into cash flows go out, you know, many, many years. It's actually a exceptional business.

Starting point is 00:32:49 And one of the things that had attracted me to Shiniken in the first place was that it was founder run and that he did not fit the template of most Japanese managements. Most Japanese management and boards run the business for the benefits of the employees. They do not run the business for the benefit of the shareholders. So their number one concern is to make sure that the business. business is very stable and can survive downturns without layoffs. And the shareholders pay a very big price for a business that takes that approach. And so I generally find Japan difficult to invest in for two reasons. That's one reason. And the second is the demographics of the declining population. So last year, 1.6 million Japanese citizens died and 800,000 new ones were born. So we're

Starting point is 00:33:51 looking at almost a net 1 million reduction in the population in a single year. And South Korea is even more extreme than that. So we did see the Founder Act very rationally, eventually, for his own self-interest. In the case of RAS, I think that, again, they were very focused on building, and they have very much woken up to the fact that they blew it. I think that if they look back, they wish they had given a 50% premium and bought the whole company, taking the whole company private, for example. And they've been trying to fix that mistake by increasing their holdings. they've been buying back shares in the last couple of years or so. So they did wake up to the fact that, oh, we should have kind of approached this differently.

Starting point is 00:34:46 But it's not easy for CEOs, even founder-led CEOs, to look at things like buybacks. Basically, what ends up happening is you see cash leave your treasury and you don't immediately see a pop in the stock price. So you see something go away and you don't see anything on the other side. So it's really, you have to have a kind of faith the way Henry Singleton had faith that when you retire a very large number of shares, and of course you're going to see the stock react to that. And thank you for paintings and color running because I did notice that you're saying

Starting point is 00:35:27 they are actually buying back shares themselves but not for the company. I was like, huh, how one without the other, but it makes a lot of, sense now that you outlined like that. So thank you, Monies, for that. In one of our previous conversations, you talked about your best investment and I don't refer, and I just want to say in all modesty to you, you don't refer to one of your 200 beggars that you made in the past, but the owner's manual that you got from Jack Skeen and the business partner of him decades ago. I want to say 1999 or so. And they told you that you like to play games. where you felt you had an edge, and you liked the single-play games, which also led into the whole thing about

Starting point is 00:36:11 selling TransTech started Paribir funds, which was the perfect game for you. So if you look at the stock market, or if you look at the game of investing, well, as a game, has that changed since you started in 1999? And if it has, how are you adapted to the new rules of the game? Well, I very much enjoy the game. And one of the things with this particular game, it's actually very similar to Bridge, is that, you know, Bridge is a game that would take you 15 minutes to learn, and you cannot master it in a lifetime. So you can keep learning forever.

Starting point is 00:36:53 There's really no plateau that shows up in Bridge. Even if you were playing 30, 40 hours a week for your whole life, you would still be learning. And I think investing is very similar in the sense that this is a game with a lot of twists and turns. And anytime you look at a business, the myriad of factors that affect where it might be in the long run are so diverse. And some of them you may be able to understand. Some of them may be within your circle of competence. A lot of them may not be. So, you know, lifelong learning is going to serve you very well. So I think I am as excited about the investing game as I was nearly 30 years ago when I was just getting started with this.

Starting point is 00:37:41 But I think what has happened in the previous almost three decades is that more competency has been built up. More mental models have been refined and incorporated. And so the pattern recognition is probably faster now than it used to be. And it's broader now than it used to be. So I wanted to talk a bit about shares and dilution and buying back shares. It's just such a fascinating thing. And you, I heard your talk about NVR, over the past few years and how they have been doing a wonderful job buying back shares.

Starting point is 00:38:28 They've also been deluding some of their shares, giving to shares to management and whatnot. And I spoke with Chris Broomstone here last week. And he said he ran some numbers on the S&P 500. And he said it was 2% that they've been issuing shares to the management. So we're not talking about raising capital shares. We're talking about giving away in stock-based compensation. Do you have a threshold for how much sharehold dilution you will tolerate in companies you invest in? Well, you know, we would ideally like compensation.

Starting point is 00:39:03 I think you can set compensation and incentives quite well without giving out equity. And you could encourage management to buy equity. And I think, for example, Constellation software does that. and they do an excellent job. Berkshire does that in the sense that a lot of the Berkshire managers have significant ownership of Berkshire, but they've basically taken after-tax earnings and bought it with those earnings.

Starting point is 00:39:37 And so, and that's worked out well for them and everyone. So I think Silicon Valley and the tech world is overdosed on a certain model, you know, which is that, you know, you give away equity to everyone and their brother. And, you know, boards don't understand the value of this equity. And many times, CEOs don't understand it. And because it is non-cash, it becomes attractive because you're not really using the company's cash. So one good thing that happened in accounting is that the gap accounting rules changed a while back to force them to, you know, treat stock-based compensation as an expense and to show it as an expense on the income statement. And so the

Starting point is 00:40:32 companies have gone to, you know, metrics like adjusted EBITDA or adjusted net income and adjusted whatever, you know. And yeah, so it's an unfortunate state of affairs. It is sub-offer. It is sub-offensive. optimal. We can still do well in some businesses, even with that drag, can still work out okay, but it's far from ideal. I'm happy you say that because it sounds like such a plausible thing that you give out options. Everyone's now an owner, so now everyone's going to work a lot harder. And what you basically mainly see is just that existing shareholders are being diluted. Well, it's heads they win and tails they don't lose, you know. And so there's no real skin in the game there. And I really like the plan that Mark Leonard put in place at Constellation. I think that if you're, if you don't believe that, you know, just cash comp alone is going to do it for you. You could go into a plan like that. And the results at Constellation speak for themselves. I'm happy that you mentioned

Starting point is 00:41:49 consolation. We have talked about it a bit here on the show and about how they set up this kind of unique structure. I want to say it's between 25 and 75% of the compensation or bonuses, I should say, that has to be bought back in the open market. And Michael Lennon is just amazing.

Starting point is 00:42:05 Now he's traveling a bit more comfortable than he used to, but he's also paying it out of pocket, which is an example to follow. Yeah, and he takes no salary. Yeah. He has no salary and no bonus. Because he's owner and he's thinking like an owner. Yeah. But you can contrast that, for example, with someone like Larry Ellison at Oracle.

Starting point is 00:42:30 So one can argue Larry is a founder. He has a significant ownership stake. Why would he need a stock-based compensation plan to be aligned with other shareholders? But if you study Oracle and you look at the historical amount of compensation that's gone to Ellison, it's been quite spectacular. Now, he would argue that he's worth it. And I would say probably, absolutely he's probably worth it. But he would have worked just as hard because he had the incentive with the ownership. And so it was a add-on that was a tax to the shareholders. That never happened with Bill Gates at Microsoft.

Starting point is 00:43:13 So Gates basically always had a very modest salary and never granted himself any options or anything like that. Consolation software is so interesting for so many reasons. It's not to derail the conversation too much. Whenever you have a return on equity on, sorry, return on investor capital for 30% for decades. And you're sort of like, like with so many things, it's almost like whenever you look at an asset manager, you're like, you want the long runway, but you also want the long track record. So it's sort of like, you want to have your cake and eat it too, right? So you're like, yeah, Constellation software that makes a lot of sense to have a track record.

Starting point is 00:43:53 But now they're like 50 billion plus, what, market cap. So it's probably going to be hard to do for the next two decades. Well, but I would also, but I would also not bet against Mark. Mark has an uncanny ability to pull rabbits out of the hat. So I don't have an investment in constellation. And many times I think it's a mistake, even at the size and the multiple that they're at, because the quality of the manager is so exceptional. And the business model is so exceptional. In many ways, Constellation is embryonic.

Starting point is 00:44:28 So I would not be surprised at all if Constellation continues to do very well in the years ahead. I would also not be surprised at all if Leonard takes the company in some different direction, where he might allocate, you know, he's not really a software guy, he's a capital allocator. And he found a mousetrap that worked really well, and he could hit that mousetrap had a deep vein and they couldn't mine that, that vein of great opportunities. But I know that they're looking at other, other, you know, sectors and areas that could hold promise to deploy capital. Let's take a quick break and hear from today's sponsors. No, it's not your imagination.

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Starting point is 00:48:40 If you look at a serial acquire, what is there to look out for other than the track record? Assuming that the management do not change. Would you have anything or you're like, this is interesting? Well, usually I don't, I'm not a big fan of roll-ups and I'm not a big fan of serial acquirers. I think that companies like Constellation and Berkshire are cut from a different cloth. So if you look at Constellation, they have a internal list of about 40,000 vertical market software companies, small companies, you know, 40,000 of them.

Starting point is 00:49:19 And they nudge them probably two or three times a year. And basically, and they have a whole biz-d-deaf team, emin. team. So basically they'll kind of like what Buffett would do with his letters to different companies like IKEA, he'd say, hey, you know, if you ever decide to do something, please think of us, you know, that sort of thing. And amongst these 40,000 companies, you know, there are founders who are getting old who may want to retire. They could be divorces. There could be other reasons why somebody wants to sell and move on. And for most of them, concentration might be the only buyer. These are usually not rapidly growing companies. They may have stable revenues and cash

Starting point is 00:50:05 flows or might have just very low growth. And so private equity is not interested. Venture Capital's not interested. And even to venture capital is actually, Constellations a great exit. So they make, you know, 20 bets in a portfolio and one outlier is going to generate most of the return. they hope and 15 or 17 end up being either they're going to disappear or just be on, you know, flatline, you know, just kind of limping along. And the partners of these venture funds don't want to sit on those boards anymore and waste their time. So they want those companies off their ownership. And so a place like constellation is perfect for them. You know, they can stop doing the babysitting. They get rid of these things.

Starting point is 00:50:57 that they thought might have a great moonshot. Now they know there's no moonshot. And they can focus on their one or two outliers and take it from there. So the in effect constellation is in the funeral business. And the funeral business like I wrote about in my first book, Mosaic, is a really good business. So somebody has to take care of these businesses at some point. And Constellations, the caretaker. And they are really good at it. So when they acquire a business, they have a lot of ways in which they can help the business, not by being overbearing, but by telling them, listen, we've got seven others like this. And these are what we've learned could be helpful and so on. So yeah, I think that mousetrap is exceptional. And they're the only

Starting point is 00:51:46 ones with that mousetrap. So, Moniz, I wanted to talk to you a bit about investing mistakes and sort of how to bridge that with wonderful companies, such as Constellation Software. And, you know, show me an investor who tells you that he hasn't made a investing mistake and I'll show you a liar or at least someone who hasn't started investing. And so personal anecdote, it's about Alibaba, but it's not about Alibaba. I'm just sort of like using it as a point of reference. So it's not so much of that. But I, you know, I made an investment in Elibaba, which I know a lot of investors in our circles did together with Charlie and Kai and you and so many others. And whenever I look at it now and a lot of things has happened again, this is

Starting point is 00:52:30 about Edibaba, but not about it, Ababa. So I'll see if I can get to a question there at the end. But I think that I made a mistake in my assessment of the intrinsic value. And also that the company wasn't the, was perhaps still a compound, but not the type of compound I thought it was. And so I think at the time of recording, I think I just looked up here before we started recording like $84 or whatnot. It was a bit painful to look at. But it's still undervalued with this new price. And so I guess assuming that this is a mistake, and again, it could be any other stock. Like you have this kind of interesting paradox where you realize it's a mistake.

Starting point is 00:53:08 But whenever you realize it's a mistake, the market more often than I'd also realize it's a mistake. Perhaps you realize because the market told you there it was a mistake. And so you might think you bought it at 50 cents on the dollar or whatever kind of arbitrary number, but it still trades a 50 cents of the dollar just like from a very low level. And so, and I'm like, what do you do? Because, you know, you have this weird situation where, you know, there might be some tax loss harvesting you can think about, the opportunity cost, whatever our bias is with loss aversion anchoring, you name it. Like a lot of stuff or like, there was like fireworks in the brain whenever you see that happening. And so do we as investors, whenever we make a mistake, wait for the stock to revert back to the intrinsic value, again, knowing that it can take a long time before it happens and perhaps we even wrong in our new assessment of the intrinsic value as much as we cut it? Or do we cut our losses and say, well, you know, monies have told us invest in wonderful business and pay up and be patient. Let's go to the constellation

Starting point is 00:54:08 softwares of the world. I don't know if there's a question there, but do we challenge the premises of the question? Please do it if you want. How do you think about this realizing you made a mistake and the opportunity cost? I guess that's my long way of asking the question. Yeah, so, you know, we have to separate the signal from the noise. And as we saw with these examples of the Nifty 50 and NASPERS and Buffett and so on, is this is a business with a high error rate. Even the best investors will be wrong at least half the time. And so one of the backdrops we have to keep in mind is that if you have a portfolio of 10 stocks, more than likely half our mistakes. Now, you may not lose money or them. They may not just compound.

Starting point is 00:54:55 at a high rate. They may, you know, be 4% compounding instead of 15% that you're expecting, for example. So you don't lose money, but you don't make the money you were thinking you'll make. So knowing that there's a high error rate and separating the signal from the noise, when you have a good amount of data telling you that the signal is saying that you were probably wrong, then yeah, you cut your losses and you move on. And I think in the case of Alibaba, we saw actions by the Chinese government that quite frankly become very hard to handicap in the future. So we've seen a bunch of actions in the past, which we didn't see when the

Starting point is 00:55:42 investment was made. And those actions destroyed value for the investor. And we don't know what the endgame is. We don't, so I would say that, you know, what the Chinese government does and the impact it has on Alibaba goes into the too hard pile. We just don't know. And the second is, you know, which is, you know, one of the things that I've always, I've tried to avoid the mega caps. And I made an exception for Alibaba, which didn't help me. And I moved that. investment to process, which I think with 10 cent is a better bet. But I think the fact remains that if you're buying a business with a hundred or 200 or 300 billion dollar market value, what is the runway? You know, that remains a question. Now, you could buy Apple at 200 billion

Starting point is 00:56:41 and it could go to 2 trillion or 2.5 trillion. And that's fine. But those are few and far between. So my bias has been to try to look for businesses that were much smaller where the runway was not in question. That, you know, there was room for them to grow. It doesn't mean that, you know, they're always going to work out. But that's the goal is that they have, they're not sitting at these massive mega-cap numbers where you're saying, okay, even a double from here may not be that easy. Well, hey, that's why we go to Turkey. So I wanted to shift

Starting point is 00:57:26 gear here a bit and talk a bit about life for like a better words. And, you know, my wife is generally not too interested in Wadadhi, but she asked me before I jump on this call with you, what are you most excited about speaking with Monez about? And I said, you know, I have two questions here at the end. And it's about living a life according to Monez. I'm pretty excited about that.

Starting point is 00:57:48 That's going to be my buildup. Just know this has been filtered by my wife. And so I wanted to talk to you about Power v. Forrest, which is this book by David Hawkins. And one of the lessons you took away from the book is that we subconsciously can know if a person is lying, pattern recognition, whatnot. There's just something there. We don't really like to be around that person. We can't tell you why they're lying because it is subconscious, but there's just something there. And one of the things I really admire about the way that you lived your life is about how transparent

Starting point is 00:58:20 and truthful you live your life and have caught out the big lies and the small lies. And I heard you mention this story where you're supposed to take out your wife, an our ex-wife, to the movies. And she asked you how she looked in a dress. And you were very honest about what you said. And you didn't go to that movie. But you also said that, you know, it was for the same reason why you could split. nine figures in less than 30 minutes without lawyers and why your wife is your biggest investor

Starting point is 00:58:51 in your funds because there's this trust like you can be trusted you are trustworthy person because you sort of like you live that fully and I guess I was just so fascinated about that and I spoke to my wife about this exact situation this morning and not because I want a divorce her to say something about how she dresses but my wife and I talked along about how to practice a life more similar to that and we have also put into practice. I've heard you talk about this years ago and I think it's very fascinating, but it also gives you a lot of bruises. At least it does for us. So perhaps if you could share your journey in how you started cutting out the small and the big lives and what that has meant for you and the way you live your life today.

Starting point is 00:59:37 Yeah, well, I think that's a great question. It is going to feel uncomfortable. I think that it is, the small white lies are just very comfortable, you know. You don't hurt anyone and why would anyone care and just move on, you know, like, oh, your dress looks great. How is anyone ever going to know that you really thought it didn't look great, you know, and so you move on, but it's not authentic. And I think that many times when we meet people, we don't know why, but we, some of the sometimes just don't want to be around certain people. We can't put our finger on it. And it may be that there's too much implicit and explicit lies around what that person is saying or doing. And so I think that the inversion of that is that if you want to build trust, you have to make a commitment to the truth. And the truth is going to not be easy many times.

Starting point is 01:00:42 But I think that once you can cross that Rubicon and are on the other side, what you're going to find is that trust goes up a lot. And basically this world functions on trust. It doesn't function on contracts. People do business with people because they trust them. And the best contracts are ones that you never look at after you sign them. And so I think that if you want to have a lot of success in business, you have to have a very high standard for candor and integrity. And if you want to have, you know, great deep relationships, great friendships, then again, that same thing is really important. I think your friends need to know that you've got their back and that, you've got their back.

Starting point is 01:01:39 when they come to you, they're going to get very authentic answers, you know, even if those answers are not what they want to hear. And so those are, I think these are very powerful principles where once you kind of get comfortable with it and start to apply it in your life, the paybacks are so enormous that it just becomes a no-brainer. I think any other way of living is kind of dumb. and it's going to make your life a lot more pleasant. It's very easy when you don't lie because you don't have to remember your lies. You know, it just makes it really simple. Anytime you're saying something or talking about something,

Starting point is 01:02:23 you don't have to remember, oh, I said this and I said that, and I got to keep consistent with that or any of that. Just say the truth, you know, and that's the end. It's like they say, it's simple, but not easy. But it's a great journey to go on and it's a journey which is going to lead to a lot of growth. So it will feel unnatural and uncomfortable at times. But you will yourself start noticing very quickly that you feel so much better. That's so true.

Starting point is 01:02:59 And just as a personal anecdote, in my early 20s, I told all my friends and families, I didn't want to go to their birthdays or go to weddings or anything like that because I just felt uncomfortable. And it's hard. It's hard whenever you say that. And the trigger is to say, but I'm going to bring a six-pack or whatever you want. And this is you next Tuesday. It's not because I don't like you. It's because I don't want to sit next to your uncle and six hours whenever I could be reading a book or doing something else I really won't. And I can say that's been one of the best decisions that I've made, but it's hard. And especially, in the beginning. Now I'm in the lucky situation that people don't ask me anymore. But it's hard

Starting point is 01:03:40 to be that true to other people. But you're right. Minesh, you don't have to say, because I had to go another event. You don't have to remember what an event was whenever you speak to her. Yeah, I think candor, candor in that situation, you'll be surprised. And you probably already seen that, that your friends and relatives really appreciate you for the candor. and they'll understand, you know, weddings, you know, my take on weddings are painfully boring, you know. And, you know, they just, I mean, the only, I would say the only redeeming grace of weddings is if you get to meet a bunch of long lost, you know, friends and relatives that you've been longing to hang out with, that can be a great upside. But you are also going to meet a lot of dysfunctional relatives and hang out with them as well. and that may not be so much fun.

Starting point is 01:04:28 Yeah, so I think the candor is, will be welcomed by everyone. So on that note, I wanted to ask the last question I have here for today. And because another of the challenges is sort of like related to this, this idea about living truthfully, living with candor,

Starting point is 01:04:45 my wife and I have a, we have a hard time talking about money in some settings with other people. Because like what we talked about before, you don't want to hurt anyone's feelings, right? You invite people who don't want to see not to hurt their feelings and they come not to hurt your feelings. It's sort of like there's this, there's this irony in it. But anyways, you know, Mojah and I come from this middle class background and we just don't talk about money. And I think most people don't talk about money. It might

Starting point is 01:05:13 be a little different from some of the circles that we run in money where it's sort of like the center, but in most social situations, we don't talk too much about money, especially if you have significantly less or significantly more money than your peers. Now, you've been very open about your background, having a father that was a Syrian entrepreneur, many failed businesses behind him. And I think you references as a lot of fees to famine over the years. How has your journey into becoming financial independent and the success you have today? How has that changed your relationships with the people you knew before and after you got

Starting point is 01:05:51 financial independent? Yeah, so actually what I have found is that, you know, your remarks about people don't like to talk about money, I think that is universal across cultures. So it's not just, I don't have a bunch of friends who love to talk about money. Okay, there's no such thing. And, you know, Guy always gets a chuckle because many times he and I will be in a conversation with someone who's, who's a guy. having, has some important issues, folk in the road, trying to figure out what to do. And, you know, I'll be asking a bunch of questions to try to get the data, to try to help the person. And one of the first questions will go to really understand in detail the financial situation, you know, what's the network, what's the income, what's the expense and all that. And Guy always kind of goes into a cubby who says, oh, there we go again, Monish, asking all these uncomfortable questions. But he's now learned that Monish is going to ask those questions. And what I find surprising is the people who hear those questions who have never answered those questions to anyone,

Starting point is 01:07:11 openly give the answer. And then they say, I want to let you know, I have never discussed this with anyone. No one knows this. Please don't. I said it's all confidential. We're not going to talk about it to anybody. But people actually get relieved to be able to share the data. Recently, I had a call with a friend who wanted advice, career advice, you know, and he was, he's at a age where he could retire or he could take job A or job B or whatever. And one of the first things I asked him is I needed to know his financial situation before I could tell him what made sense for him, you know, and so he shared, he shared his information that he's never shared with anyone. I think other than his wife, he had never talked about it. I don't think his kids are

Starting point is 01:08:00 aware of it. But that gave me the information to be able to be most helpful to him. And also, I think he felt relieved that he was not having a conversation around eggshells, you know, where I'm in a vacuum trying to say, well, if this is your situation, then do this. I actually knew exactly what a situation was and I could tell them what I would do in that situation. So yeah, I mean, I think people don't like to talk about money, but many times when they're confronting different issues, those conversations can be very enlightened the load for them. And I think it's important that in a safe and confidential environment with the people near you, when you're you're trying to help them with some things where that information may be relevant, that you go

Starting point is 01:08:50 there, you go to the land you're not supposed to go to. That's okay. Wonderful to set, Manu's and perhaps you should end on that note. Thank you so much for your time. It's always a pleasure having this annual call here in April just before Berksia. So I just want to say thank you on behalf of all our listeners. Stig, I always enjoy hanging out with you. And it was a wonderful pleasure for me to have you join as an investor. So that added another dimension to our relationship. That's wonderful.

Starting point is 01:09:27 And though I still feel you've kept the objectivity, which is great. Yeah, so I do enjoy hanging out with you. And I also want to say that you and Preston are doing God's work. I enjoy your podcast a lot. I listen to many of your guests. And I think you've done a tremendous service to the community with the podcast. So thank you for that. Wow.

Starting point is 01:09:52 I don't think we can end on any better note. So just want to humbly say, thank you. Manasita. It means a lot. Thank you for listening to TIP. 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.

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