You're listening to TIP.
Since its inception in 2000, today's guest, Manish Pabrai 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, Manish Pabrai generated CCS thoughts on various stocks including Alibaba,
Constellation Software, Ray-Sett Logistics and Shinoken.
However, more important than the stocks we discuss, I hope you appreciate how thoughtful
Manish Pabrai is and how important it is to understand the process and separate the signal
from the noise.
I hope you enjoy the conversation with a legend investor Manish Pabrai 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, Stik Broderson, and it's Perksher weekend.
At least it's Perksher weekend whenever you're listening to this.
And I'm thrilled to have invited no other than Manish Pabrai to join us today.
Manish, thank you so much for taking the time to speak with us today.
I think it's always a pleasure at this time of the year just before the Woodstock for
Capitalist gets underway.
So it's like our tradition, right?
This is the pre-game tailgate party.
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 Mungers.
Yes, it's just wonderful book, Paul Charles Almanac.
But especially the psychology of human Smith's Jasmine.
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.
I'm an investor in Pabrai 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.
I don't make you sad 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 when that's 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 we'll say the same thing about, you know, Charlie and Warren in the sense that
if they do something wonderful, they're like, Oh, 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 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 even admire them.
And you have this lot of pollution 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, Stig.
And it's really difficult to do.
And I think most of us are definitely myself.
We fail at it.
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 a brain with 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 CLD, Nie's book, you know, is going
to be helpful in at least being aware of the pitfalls, 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 sidesteping 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 and it's helpful to be aware that we are quirky living creatures
with quirky brains, which don't necessarily follow a, you know, 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, all the, 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 compact 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's most important from that video.
And it's also interesting to hear about how you, you know, you play Brits.
I know you talked 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 this active in the market.
I kind of felt that was, that was kind of interesting take.
But anyways, whenever I, whenever I listen to you, there seems to be some themes and I
don't know if you're aware of this or I don't know, I might be all in analyzing this, but
you know, it's sort of like whenever you see your nephew, you haven't 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, I compared my notes from the previous year and you talked a lot about
the spawner framework, or sort of like one of the things that came after COVID, you talk
a lot about the sleep and then you also made this reference to the walls and family quite
a few times.
Now all the past 12 months, I could, again, I, with all my biases, I could be completely
wrong.
You mentioned like sleep, sleep, from time to time, perhaps even more with the Walton
family, perhaps it's just because, you know, not so much the spawner framework, perhaps
it's just because you completely adapted that you don't really talk about anymore.
Who knows.
And it also seems like you've been perhaps a bit more open about some of your investments,
especially in, in Turkey, racist, you talked about TAV airports and, 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, the point of saying this, but more about the Turkish stock market.
And I heard you reference that 80% of stocks are held by insiders and foreigners that don't
generally don't trade a lot.
And then you have 20% are traded by retail traders and they have a quite significant turnover.
And whatever I heard the first time I saw like had to revise like, did money just sit
nine days?
Did you really say that every, it's only a period of nine days.
And you, 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 make 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.
Lynn's have talked about two to three years again with a wide variance, but that sort
of like whenever they were asked to put on the spot, that's what they said.
Again, this would take hits ago.
How do you think about the whole inverting to intrinsic value?
How is that different than, than say the data series we have about the states, if at
all?
Well, I mean, I think, 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, they're overvalued, they're going
to come down.
And so I think that's that 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're actually surprised.
They expected it to be a lot shorter.
All the people they know basically invested 10 o'clock and want to wrap it up by two o'clock.
And so they actually expected that the holding period would be like two or three days on average.
So they were actually surprised that it's as long as nine days, because they just said,
like I said, that they're 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, for the wide misfrizing we've seen in businesses like race us, for
example, is that no one is weighing the companies.
They're just dancing in and out of them.
And 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, 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 US.
I think that's all it feels like the early 90s in India, where you had a lot of very
high quality businesses at single digit multiples.
And so that existed in Western markets in a existed in India and it doesn't exist anymore.
So these places have, we will always have fear and greed and we will always have misfrizing.
But the degree of misfrizing that I can find in a place like the US is much, much less
than many other places.
Back in September, you had this wonderful Q&A and we'll make sure to link to that in the
show notes.
And the gentleman interviewing asked you how you read annual reports and you and I'm
please correct me if I'm wrong.
I'm just, I'm just referencing what sort of like what I think I heard.
But I just 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, past that test, like the very, very quick test,
you sort of like went through four steps.
The first one looking at the Bell investors club for a write up because it saves you so
much time.
You can overview the company, there are some quantitative, some qualitative.
So, 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 theirs is relatively high.
Then if it passes that filter, you ask your assistant to print out the management letters.
Not only if it's written by the management or the CEO, not if it's like a PR company that
like types it up.
And so you get to see whether or not the or promise or under the liver or the other way
around, you get to see how they react before, during and after the great phase of crisis,
the pandemic.
And then it goes to step three.
So you would look through the transcripts for the Q&A about the business.
So not not all the curated stuff, but like where there's 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, whether they can start like estimate the next quarterly earnings.
And then it goes to the finals, like step four, which is you actually reading the reports
and your reports.
And so with all of that said, I also heard you say in another video that here in 2023,
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 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.
I think 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.
But yeah, I mean, I think that one of the things I am excited about is 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 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, 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 a 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 was very
popular by the 50 blue strip stocks and don't worry about the valuation, can I 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 at 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, 10.3% or something.
So with just 2% of the portfolio surviving and being there for the entire 50 to year period,
you still significantly outperformed 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 and Gamble.
They were a lot of good companies.
There were some bad companies like, you know, Polaroid and Xerox and Kodak and Burrows 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 1972,
just before the big crash of 73, 74 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 73, 74 is a Nifty 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 held on till today, they would pretty much be toe
to toe with the S&P.
It's not that much of a difference.
And you know, this lesson again plays out where we had this great investor in India who
passed away last year, Rakesh Jhindranwala and Rakesh Jhindranwala never managed money
professionally.
He was an individual investor and maybe close to the end of his life, he was starting a
business for basically was all passive investing.
And he started at $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.
He had about $85 million in total assets at that time.
So he invested 3.4 million.
If you again, like the Nifty take everything to zero that he had in 2003, except for Titan,
he owned like, you know, a little over 5% of Titan.
You run it till when he passed away.
Now his widow has kept Titan.
So it's still compounding.
It became 1.4 billion excluding dividends.
If you reinvest the dividends, it's even higher.
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, and these are not venture investments, right?
I mean, when Buffett buys Coke or Cs candy, these aren't like, you know, we're not early
stage like Sequoia making a bet on Amazon when it's early stage business.
These are mature, you know, businesses with a lot of history.
And we see the same thing with Nick's sleep with Amazon.
I mean, if you pull Amazon out of the equation, Nick's sleep record isn't that great.
And when you put it in, it's an exceptional record.
So the important thing, and then of course, the most extreme case of all of this is Naspers
in South Africa.
So you know, Naspers in 2001, it's a, you know, 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 cent and they get a 46% stake in 10 cent.
And the most surprising thing about the Naspers 10 cent adventure is they basically never sell.
They sold a little bit of the IPO, but they still own 36% of the company in 2018.
And in 2018, their stake was worth 170 billion.
And in 2021, at the peak of 10 cent, their stake was worth 270 billion.
So here's a, you know, sleepy old, you know, 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, you know, astronomical analyzer turn over the last 20 years.
And so in, if you look at the 10 cent bet, it was 6%, approximately 6% of the value of
Naspers at that time.
And it, and Naspers made, you know, hundreds of bets.
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 wagons,
which means, you know, you put everything, your crown jewels in the center of the circle,
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 C Scandy and American Express and Coke for Berkshire, you know, all of these,
you know, hiring a GJ 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.
Two, this is a very forgiving business.
You can be wrong, even 98% of the time.
You still come out smelling really nice.
And three, that is only going to happen if you are able to buy 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.
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 wonder what are the weeds.
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All right, back to the show.
It's so well said, Manizan.
I think you brought up this stat of the index is like 5% that generates older turns because
the index is too dumb to sell Amazon and Alphabet.
They're not cutting the flowers.
Then you'll have this joke where you're like, yeah, and you don't want to pay up for it.
Good luck.
Good luck finding them.
Of course, there are exceptions where we can get a wonderful, wonderful company for small
most of all.
That's why we hang out in Istanbul.
You have to see how the jigsaw puzzle fits.
We have to find the great businesses and we have to go fishing with a fish hour.
Thank you for that handoff, Manizan.
I'm going to talk a bit about Turkey and then see if I can zoom in and zoom out to Turkey
here.
It's about the purchase of Shias.
I heard a lot of fantastic questions asked to you over the videos I just mentioned before.
There was this brilliant student who said, why is it that hard for CEOs to buy back shares
below the intrinsic value?
You made the really good point that CEOs, they didn't rise to the top because they were
great capital allocators.
Press of goods, salespeople.
You also talked about how the optimist, you need to be an optimist, lead a company.
You're like, yeah, that's why it's difficult for CEOs to buy back shares below the intrinsic
value and not destroy shareholder value unless you're 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 Racist.
Again, I'm not trying to give you any kind of confirmation bias.
I'm usually more as an example than perhaps we can talk more generally about it.
So whenever you talk about the father and son team, I'm like, they're just such smart
people.
Talking about the hurdle rates in 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 the assets, how long the longevity of that and the prices
going up.
And I don't know.
Say that the 50 million is worth 200 million.
Whatever.
It's not so much that.
But it was sort of like tying those two stories together, I would say, I understand why your
conventional CEO would not understand capital allocation well.
But if you founded Racist or perhaps we can talk about one of your previous holdings,
Shinokan, 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 founders were clearly very good at capital
allocation, not necessarily good at buying back their own stock, when it's clearly below
their their degradation value, which they would know better than anyone, but their
like, like, their value is of their assets.
So why is that the case?
Yeah.
So just to give you an update on Shinokan, 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 we had a number of conversations, I had a number
of conversations with Shinokan, 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, entrepreneur or a builder.
And what ended up happening is actually they took my advice in very large 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, you know, 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 a actually a spectacular discount to what the business was worth.
Shinokan is was a exceptional business because it has very strong recurring revenues from
all the properties they're managing.
It's, I mean, the visibility into cash flows go out, you know, many, many years.
So it's actually a exceptional business.
And one of the things that attracted me to Shinokan in the first place was that it was
founder run and that he did not fit the template of most Japanese management's.
Most Japanese management's 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 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, 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 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 RASAS, 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.
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 fate, the way Henry Singleton had faith that
when you retire away, large number of shares and of course you're going to see the stock
react to that.
And thank you for paying some color around it because I did notice that you're saying
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, Manus, for that.
In one of our previous conversations, you talked about your best investment that I don't
refer and I just want to say all the modesty to you.
You don't refer to one of your two hundred baggers that you made in the past.
But the owner's manual that you got from Jack Skeen and the business partner of him,
they came to go.
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
like the single play games, which also led into the whole thing about selling TransTech
started by Rifons, 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 1999?
And if it has, how have 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.
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 my rate 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 maybe within your circular 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.
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 you talk about NDR over the past few years and how they have been doing
a wonderful job buying back shares.
They've also been deluding some of their shares, giving to shares to management and whatnot.
And I spoke with Chris Brumston here last week and he said that he rents some numbers
on the S&P 500 and he said it was 2% that there have been issuing shares to the management.
So we're not talking about like raising capital shares, we're talking about giving away in
stock based compensation.
Do you have a threshold for how much shareholder dilution you will tolerate in companies you
invest in?
Well, you know, we would ideally like compensation.
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 there's a lot of the Berkshire managers have significant
ownership of Berkshire, but they basically taken after tax earnings and bought it with
those earnings.
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 routes 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 companies have gone to, you know, metrics like adjusted e-bid or adjusted net
income and adjusted whatever, you know.
And yeah, so it's an unfortunate state of affairs.
It is suboptimal.
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 sees just that existence, shareholders are being deluded.
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 don't believe that, you know, just cash comp alone is going to do
it for you, you could go with a plan like that.
And the results at Constellation speak for themselves.
I'm happy that you mentioned Constellation.
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 of bonuses, I should say, there
has to be, have to be bought back in the open market.
And Mark Leonard is just amazing.
You know, he, now he's, he's traveling a bit more comfortable than he used to, but he's
also paying it out of pocket, which is, you know, is an example to follow.
Yeah.
And he, and he takes no salary.
Yeah.
He has no salary and no bonus because he's an owner and he's thinking like an owner.
Yeah.
But you can contrast that, for example, with someone like Larry Ellison at Oracle.
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.
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 too derail the conversation too much.
Whenever you have a return on equity on, sorry, a return on invest capsule for 30% for decades.
And you sort of like, like with so many things, you're like, it's almost like whenever you
look at an SMN, you're like, you want a long runway, but you also want a long track record.
So you want to have your cake and eat it too, right?
So you're like, yeah, consolation software that makes a lot of sense to have a track record.
But now they're like 50 billion plus what Mark Cap.
So it's probably going to be hard to do for the next two decades.
Well, 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.
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 mouse trap that worked really well and he could hit that mouse trap had
a deep vein and they continued to mind that that vein of great opportunities.
But I know that they're looking at other sectors and areas that could hold promise to
deploy capital.
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All right, back to the show.
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 where you're like,
this is interesting?
Well, usually 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 an internal list of about 40,000 vertical
market software companies, small companies, 40,000 of them.
They nudge them probably two or three times a year.
They have a whole Biz Dev team, Emory team.
Basically, they'll kind of like what Buffett would do with his letters to different companies.
IKEA, he'd say, hey, if you ever decide to do something, please think of us.
That sort of thing.
Amongst these 40,000 companies, there are founders who are getting old, who may want
to retire.
They could be divorces.
They could be other reasons why somebody wants to sell and move on.
And for most of them, Constellation might be the only buyer.
These are usually not rapidly growing companies.
They may have stable revenues and cash flows or might have just very small, very slow growth.
And so private equity is not interested.
Venture capital is not interested.
And even to venture capitalists, actually, Constellation's a great exit.
So they make 20 bets in a portfolio and one outlier is going to generate most of the returns,
they hope.
And 15 or 17 end up being either they're going to disappear or just be flatlined, 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.
They can stop doing the babysitting.
They get rid of these things that they thought might have a great moon shot.
Now they know there's no moon shot.
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 Constellation's the caretaker.
And they're 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 Maostrap is exceptional.
And they're the only ones with that Maostrap.
So Marissa, I wanted to talk to you a bit about investing mistakes and sort of like 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 that, but I made an investment in Alibaba with a lot of investors in our
circles, debt 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 about Alibaba,
but not Alibaba.
So I'll see if I can get to a question at the end.
But I think that I made a mistake in my assessment of the intrinsic value.
And I 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 it just looked up here before we started
recording, it's 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.
But whenever you realize it's a mistake, the market more often than I'd also realize it's
a mistake.
Perhaps you realized because the market told you that it was a mistake.
And so you might think you bought it at 50 cents on the dollar or whatever kind of uptrend
number, but it still trades at 50 cents on the dollar, just like for a very low level.
And so, and I'm like, what do you do?
Because you have this weird situation where there might be some tax loss harvesting you
can think about, the opportunity cost, whatever our biases 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, minus have told us invest in wonderful
business and pay up and be patient.
Let's go to the constellation software of the world.
I don't know if there's a question there, but do you challenge the premises of the question?
Please do 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 to 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 on them.
They may not just compound at a high rate.
They may be 4% compounding instead of 15% that you're expecting, for example.
So you don't lose money, but you don't keep making the money you were thinking you'll
make.
So, knowing that there's a high error rate and separating the signal from the noise,
then 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 investment was
made, and those actions destroyed value for the investor.
And we don't know what the end game is.
So I would say that 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, one of the things that I've always 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 100 or 200 or 300 billion
dollar market value, what is the runway?
That remains a question now.
You could buy Apple at 200 billion and it could go to 2 trillion or 2 and a half 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 there was room for them to grow.
It doesn't mean that 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 gear here a bit and talk a bit about life, for like a better word.
And my wife is generally not too interested in what a D, but she asked me before I jump
on this call with you, what are you most excited about speaking with money about?
And I said, you know, I have two questions here at the end.
And it's about living a life according to money.
So I'm pretty excited about that.
So that's going to be my build up.
Just know this has been filtered by my wife.
And so I wanted to talk to you about Powell versus Forrest, which is this book by David
Hawkins.
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 live your life is about how
transparent and truthful 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 and now your
ex wife to the movies.
And she asked you how she looked in a dress.
And you're 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 in
your funds because there's this trust.
Like she, you can be trusted.
You were just worthy with the 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.
Not because I wanted a divorce or to say something about how she dresses, but my wife
and I had 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 and how you started cutting out the small
and the big lies and what that has meant for you and the way you live your life today.
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 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.
But I think that once you can have crossed that group economy, you know, 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.
You know, 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 when they come to you, they're not, 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 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, just makes it really simple.
Anytime you're saying something or talking about something, 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.
And just as a personal anecdote, in my early twenties, I told all my friends and families
that I didn't want to go to their birthdays or go to weddings or anything like that because
it just I felt uncomfortable.
And it's hard.
It's hard whenever you say that and the trick is to say, but I'm going to bring a six-pack
or whatever you want.
And this is your 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 want.
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 to be that true to other people.
But you're right, you don't have to say because I had to go to another event.
You don't have to remember what that event was whenever you speak to your friend.
Yeah, I think candor, candor in that situation, you'll be surprised and you've probably already
seen that your friends and relatives really appreciate you for the candor.
And they'll understand, my take on weddings are painfully boring.
And I would say the only redeeming grace of weddings is if you get to meet a bunch of
long lost 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 dysfunction relatives and hang out with them as well.
And that may not be so much fun.
Yeah, so I think the candor will be welcomed by everyone.
So on that note, I wanted to ask the last question I have here for today.
Because another of the challenges sort of related to this idea about living truthfully,
living with candor, my wife and I 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, you don't want to see not to hurt their feelings and they come not
to hurt your feelings.
It's not like there's this irony in it.
But anyways, you know, my wife 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 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 referenced this as a lot of fees to famine over the years.
How has your journey to 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
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 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 net word, what's the income, what's the expense and all that.
And Guy always kind of goes into a cubbyhole and says, oh, there we go again, Monish asking
all these uncomfortable questions.
And what he's now learned that Monish is going to ask those questions.
Okay.
And what I find surprising is the people who hear those questions, who have never answered
those questions to anyone, openly give the answer.
And then they say, I want to let you know, I've never discussed this with anyone.
No one knows this.
Please don't.
I said it's all confidential.
I'm not going to be talking 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 his information that he's never shared with anyone.
I think other than his wife has never talked about it.
I don't think his kids are 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 him 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 trying to, you know, help them with some things where that information
will be relevant, that you go there, you go to the land you're not supposed to go to.
That's okay.
Wonderful to set, Manish, 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 Brooks.
Yeah.
So I just want to say, 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.
And though I still feel you've kept the objectivity, which is great.
Yes, 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.
I don't think we can end on any better note.
So I just want to humbly say thank you and minus it means a lot.
Thank you for listening to TIP.
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