23 April 2022

On today’s show, Stig Brodersen talks with legend value investor Mohnish Pabrai. In the interview, Mohnish Pabrai shares his thoughts on Alibaba, Tencent, a personal letter from Warren Buffett, and much more.

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  • What Warren Buffett’s letter to Mohnish Pabrai said.
  • What is Mohnish Pabrai’s driver for being an asset manager?
  • What is Mohnish Pabrai’s role with Dakshana Foundation.
  • Is it an advantage to spend money on research tools.
  • Mohnish Pabrai’s natural biases.
  • What to look for in an asset manager.
  • How and why to invest in a country with secular inflation.
  • The investment case for Reysas Logistics.
  • Thoughts on Alibaba and why there is no concern with the VIE structure.
  • Thoughts on Tencent and why it might be a better business than Alibaba.


Disclaimer: The transcript that follows has been generated using artificial intelligence. We strive to be as accurate as possible, but minor errors and slightly off timestamps may be present due to platform differences.

Stig Brodersen (00:03):
Since inception in 2000, today’s guest, Mohnish Pabrai has returned 781% to his investors’ net fees in his flagship fund. This is compared to only 378% for the S&P 500. In today’s conversation, we cover Alibaba, Tencent, his investment in Reysas Logistics, a personal letter from Warren Buffett, and much more. You do not want to miss out on this one. So sit back and enjoy my conversation with legend investor, Mohnish Pabrai.

Intro (00:31):
You are listening to The Investor’s Podcast. While 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.

Stig Brodersen (00:47):
Welcome to The Investor’s Podcast. I’m your host, Stig Brodersen. I’m thrilled to have invited no other than Mohnish Pabrai to join us today. Mohnish, thank you so much for making time.

Mohnish Pabrai (01:08):
Stig, it’s always a pleasure and a year goes by so fast it’s wonderful to be back with you and it will be even more fun to be back in Omaha.

Stig Brodersen (01:19):
It will. Let’s jump into to the very first question, Mohnish. You received a letter from no other than Warren Buffett the other day, and you posted it together with the comment, “I must already be in heaven.” I cannot help but ask, Mohnish, what did that letter say?

Mohnish Pabrai (01:37):
The letter, well, first of all, I was floored. I was floored when I got the letter, because Warren has been a big fan of Dakshana for a very long time. I mean, I think the first time I met him in 2008 for the lunch with Guy Spier, I had sent him the very first Dakshana annual report before the lunch and he had read every word. And he has a photographic memory, so he’s telling me like, “Hey, on page five there’s an error in your report.” And I’m trying to remember what is on page five. But anyway, I was able to prove to him that there was no error. But since then I’ve been sending him the reports and sometimes I’ll get a note saying, “Send me 20 copies. I want to send it to my kids and the board and grandkids, whatever.”

Mohnish Pabrai (02:21):
And he’d scribble a note, “This is wonderful that whatever.” But this time he took the time to actually write a formal letter, which Warren has got a lot of things he could be doing with his time. It takes a lot more time, different between scribbling a note and actually getting Debbie and dictating something and making sure it’s perfect and all of that and then sending it out. I mean, that’s I’d say 20 minutes or something of his time. So, that was really surprising. But basically he expressed deep admiration for what has happened at Dakshana. And he forecasts that it’ll continue to do amazing things.

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Mohnish Pabrai (02:58):
And then I think obviously Buffett is so humble. He said something like, “I’m glad that my annual report doesn’t get compared to the Dakshana annual report,” which of course he’s being facetious. I think the Dakshana annual reports are the ultimate standard we all aspire to. And then finally he said that, “It’s an honor to even be quoted in your annual report.” And I have learned everything from Buffett quotes. Buffett has not learned anything from my quotes. So he was very humble. He was very gracious and it really floored me.

Stig Brodersen (03:30):
Mohnish, you have this wonderful story about you and Guy being giving a tour of Warren Buffett’s office. And in this Buffett’s office you for out this Japan’s version of Moody’s Manual called the Japan Company Handbook. And at this point in time, whenever this happened, Buffett was well into his 80s. So it wasn’t about the money, the investment he would find in that book won’t move the needle. And so you met Buffett multiple times and you’re close to Charlie who you played bridge with regularly back whenever you lived in California. I have to ask, what do you think the driver is to continue doing what they do well into their 90s?

Mohnish Pabrai (04:08):
I think that it’s kind of like Michelangelo or Picasso, they love their art and they’re very passionate about their art and they want to keep learning and keep improving. I think that if you pursue something that you are very passionate about, by definition you’ll do it well. So both these guys have a very deep passion for Berkshire Hathaway, for investing, for running businesses the right way and associating with the right people and exhibiting the right behaviors, all these in different things. And so I think for them it is just about how well they can practice their art. Just like Michelangelo would be, “How amazing can I make the next statue or sculpture, painting and so on?”

Stig Brodersen (04:53):
So, if we can put the spotlight on you, Mohnish, I’ve read your annual reports, was absolutely wonderful. You are very transparent about your net worth. And whenever I’ve read that, I was like, “What?” Because people usually don’t talk about that stuff for whatever reason. And so you obviously, not just because I think we all knew that, but you’re obviously a very wealthy person, nine figures. And so I can’t help, but is it the Michelangelo gene with you? Why do you continue doing what you’re doing? You clearly don’t need to pay rent. You can already do that with what you have. So what’s your driver?

Mohnish Pabrai (05:25):
I think all of us are looking for purpose and meaning in life and something to make life the best that it can be, and make our days the best that they can be. And so you really want to pursue things that you are excited about. And for me, when I play bridge, I’m really happy. When I’m drilling down on a possible investment, I’m really happy. When I’m reading a great book, I’m really happy. And when I’m interacting with some smart, high-quality people, I’m really happy. So basically what I try to do in my life is increase the time I spend on things that make me really thrilled and happy, and eliminate things that are deterrent or a distraction from that. And so it naturally leads, it’s not driven by money. A very long time ago I got to the point that I would not be able to consume the money I had and enhance my happiness. That happened a few decades ago.

Mohnish Pabrai (06:24):
I think for me, the pursuit was about how to leave the world a better place than I found it. How to try to practice the art of investing the best I can. And then, when Dakshana started, I never wanted to actually get involved in a nonprofit. I really was trying to find a organization I could just give money to, it’s much easier to write checks. And basically I came up blank. I couldn’t come up with a single organization on the nonprofit side that actually impressed me in terms of how it did work. So I said, “Well, I can’t do suboptimal. Even though it’s hard, I’m going to try to do it on my own. And if it doesn’t work, then I can always write checks and so on.”

Mohnish Pabrai (07:07):
And so far it worked and I was able to, what was amazing about Dakshana is that I was able to translate the model and the way I thought a nonprofit should run into reality. I ended up with a really good team, really good leaders. And they were able to execute all this utopian idea I had or how a nonprofit should be run. And amazingly it worked. I mean, it’s worked very well for about 14, 15 years, and I think it’s likely to continue working. So it’s been, I mean, on all fronts it’s all about trying to make life interesting and trying to add some value.

Stig Brodersen (07:47):
Are you a part of operations, or is it more writing the check? How much are you part of curriculum? What is your more operation role, if any?

Mohnish Pabrai (07:56):
I am not involved in the management of Dakshana. And in fact, I go to India, I spend almost all my time with the students. I spent almost no time with the management and the team, probably 90% of the time I spent, and it’s not much, I mean, like last three years I’ve hardly been able to go to India because of COVID and so on. So couldn’t do much in terms of interacting with the students. My role at Dakshana has been one, of providing direction. Number two is identifying and selecting the leadership. And the most important objective has been to say, “No.” I find myself saying no to almost anything and everything people propose to me. So my management team will come to me with, “The government wants you to do this. Or this state government wants us to take over this facility and do XYZ,” or whatever else. And Dakshana has done well because we say no to almost everything.

Mohnish Pabrai (08:57):
So, that part of it is very similar to investing. Because in investing also, you really have to be good at saying no, no to almost anything. So the role at Dakshana has to be, has been for me to stick to a very pure model of what and how a nonprofit should operate is to try to make that work in the real world. And it’s really hard to make it work in India, because for example, we will never pay any bribes. We will not even pay one rupee or $1 by a bribe to anyone ever. We’ve never done that.

Mohnish Pabrai (09:30):
But many times in India, government officials don’t care that you’re a nonprofit or whatever. So for example, when we bought this large property, it has to go through a series of approvals, and at each approval point it’s standard to pay bribes that approved. And we couldn’t. So it took us years and years to get those done when it would have taken a few days or few weeks. And we had to eventually apply pressure from some high-level government officials and such to try to move our case along, so that’s been hard. But we’ve been able to stick to our principles and we’ve been able to make it work, but it hasn’t been an easy journey. Most of the time the bribes are less than a $100 or less than a couple 100 dollars. And it causes us issues that cost us sometimes tens of thousands of dollars in lost productivity and time and so on.

Mohnish Pabrai (10:25):
But the thing is that would cause a major problem. My management team and the entire team at Dakshana is there because they know that Dakshana is such a awesome organization with such a great culture. We cannot cut corners on that culture, because I won’t be able to retain those people. We just don’t have a choice, it will just go into a downward spiral if we try to cut corners on any of our principles. Integrity is really important.

Mohnish Pabrai (10:52):
The other thing that’s really important is the efficiency of our spending. That’s another area that we are very, very careful about. We want very high social returns on invested capital. And these are, I think these are the things that Buffett appreciated, because he has direct knowledge of the foundations run by his three kids, of the Bill Gates Foundation. And the advantage I have versus those four entities is I’m a lot smaller, and it’s a lot easier for me to keep it optimized. I think for those four entities it’s a lot harder because the numbers are such, so much larger, just like in investing. When you have much larger amounts to invest, you really have to let go many things that would have been a great investment if you had much smaller amounts of capital to work.

Stig Brodersen (11:43):
So, let’s talk about investing. As you set out on your value investing journey in 1994 and to where you are today, you clearly made more right than wrong investing decisions. Have you ever made an investment decision so bad that it made you doubt whether you should be a professional investor?

Mohnish Pabrai (12:01):
I’ve made a lot of mistakes. So that’s just, I would say part for the course. John Templeton used to say that, “The best analyst will be right two out of three times.” And Peter Lynch said that, “If you’re right 60% of the time, you’ll do really well.” And no one’s going to be right 90% of time. So even the Warren Buffetts and Charlie Mungers of the world make plenty of investing mistakes. Investing is hard because we have to look into the future. We have to look at a business and try to extrapolate what that business looks like five years or 10 years from now in the future. And capitalism is brutal. So it’s really hard to always be correct on that.

Mohnish Pabrai (12:43):
I’ve never felt with any mistake that this is not going to work, that I’m in trouble or anything like that. I think that many of us who practice the art, we try to be perfectionist, right? We try really hard before we make an investment to dot all the I’s, cross all the T’s, run the checklist and try to make sure that it won’t come back to bite us in some way. But even after we do all that, we’ll still be wrong 30, 40, 50% of the time. And so that’s the difficult part of our investing is that, well, it’s also, I would say it’s also the thrilling part because it means you’ll never master it. So the goal is always to protect your downside. But no matter how much you try, you’re never going to be perfect at it. I mean, that downside is there. The nature of investing is that if you make a bunch of bets and they’re made with the right frameworks, a minority of the investments might get you to the promised land.

Stig Brodersen (13:47):
They say that the best things in life are free. Do you think that’s true in stock investing as well? Meaning, do fund managers who put more money behind research tools have a significant advantage compared to retail investors?

Mohnish Pabrai (14:02):
I don’t think you get a big advantage by having a big team. I don’t think that’s true in investing. I think investing, what gives you an advantage first is the amount of capital you manage. The less you manage, the greater the advantage. The second big advantage is how many decisions you make, how many investments you make. And the fewer investments that you make in a year or two, the stronger your advantage, because you’d be able to put your money against your very best idea. So, if an investor is making one to three new investments a year, whereas another one who’s making 10 or 20 investments a year, probably the person making the one to three investments will come out ahead.

Stig Brodersen (14:45):
So, Mohnish, I want to talk to you about natural biases. And let me just give one example, something like investing in gold has never been easy for me, and it’s not just because Buffett has spoken against it and it doesn’t pay any dividends or anything like that. But more importantly, growing up in Denmark, I never experienced demonitization, wrapped inflation, monetary instability in any kind of way. However, I have a good friend in India, and whenever I talk to him and some of his friends, gold is just perceived very differently and 11% of Everett’s household wealth is stored in gold. My question to you is not about your view on gold per se, but more about your personal experiences. Do you have any personal experiences, whether at childhood or later, or just the way you grew up that give show a natural bias in indirection?

Mohnish Pabrai (15:34):
Well, I would say one of my natural biases, which comes from very direct experiences my father had and I had is that entrepreneurship and business can be magical. What I mean by that is that my father must have started about 20 different businesses in maybe 10 or 15 industries in his entire career. None of the businesses that he started took more than a few 100 dollars of capital to get going. And at that time India didn’t really have a venture capital industry and the banks were pretty tough and so on. So, but I saw some of those businesses get some sizeable scale, a few 100 employees and so on. And I saw how one person coming up with an idea without having much resources was able to create an organization. And so that is the magic. I think that is the magic of entrepreneurship and that’s the magic of business.

Mohnish Pabrai (16:27):
And this something out of nothing is what is magical about capitalism. And when you look at what I would say, “non-productive assets” like gold, I don’t see that magic. And that’s what Buffett says that he says, “You could take all the gold in the world and melt it all down and you’d get a cube which is 80 feet on each side.” And he said, “You could go fondle it, you caress it, you could polish it, but it’s not going to become 160 feet on each side in 10 years, or 300 feet in each side.” But a business, I mean, when Ray Kroc saw McDonald’s and he went after it and he got all the franchisees and you saw the movie, The Founder, I mean, that is magic. Or what happened with Starbucks or any of these companies, what happened in Microsoft, is magic.

Mohnish Pabrai (17:17):
And to me, if we can ride their coattails, if we can have a piece of the action of these incredible magical businesses, and just be patient and let it ride, you could do extremely well, even if you’re wrong six out of 10 times. Because the magic that you see happen with a Walmart or a Starbucks or a Microsoft or a Google is just amazing. And that’s what’s amazing about capitalism. So, gold or any of these kind of weird things, which you look at it and say, “Either I don’t understand it, or it’s obviously not productive.” You can just let them go.

Stig Brodersen (18:00):
I’m happy that you brought up your father. It takes me to one of the other questions I prepared for you here today, because you previously here on the show back on episode 121, talked about how your father was a serial entrepreneur. Some of the businesses also didn’t go as well. And you also said that you found this to be a blessing because you felt that at age 19 you had multiple MBAs because you have such an intense introduction to business. And also at an age where all these imaginable things happens to your brain and you’re just ready to take in all this new information. And you’re in this situation where your daughters now in their mid-20s, one of them entrepreneur. Whenever I think about your story, the success you had and also the upbringing, I was curious about, how do you talk to your daughters about investing in money and what have you general found to, if we talk about parenting, to be useful whenever you speak to your children about those topics?

Mohnish Pabrai (18:52):
I hardly spent any time talking to my daughters about investing, because I really wanted them to find their own calling in life. And I didn’t think investing would be their calling in life. My younger daughter has zero interest in investing. And I think if I tried to talk to her about it, she would just wonder, “Why? Why are we talking about this, something I’m not interested in?”

Mohnish Pabrai (19:15):
The older one surprisingly is deeply interested. She started a fund recently, she’s raising capital. And I think she has probably a better temperament and better mental models than me. And I think she’ll do very well as an investor. With my older daughter I’ve had plenty of conversations, and actually I’ve learned a lot from those conversations. Because I just saw the way her natural biases, her natural bias is to only buy great businesses. She’s not a bargain hunter. She’s a person who really likes to look for tremendous businesses. And then her second great trait is that she has no desire to sell. Once she buys something, what I’ve seen is whatever is happening to the stock price or whatever, it really doesn’t affect her, which is really, really good. These are really difficult things to teach. So I think in investing, your temperaments and your natural biases go a long ways.

Stig Brodersen (20:16):
After eight years of speaking with hundreds of investors, I finally decided to invest with just one. Starting April 1st I’m investing with Pabrai Funds. And it made me think of a lot of things that I look for in an asset manager. Now, I don’t think the audience is too interested in hearing about my process, but rather I wanted to hear about yours. What would you look for in an asset manager?

Mohnish Pabrai (20:38):
Stig, first of all, it was a surprise and I felt a huge word of confidence that you elected to send some money our way. And I will be a great steward of your precious assets and I will do the best I can with them. So I think it’ll be a good ride for you. The selection of a investment manager is a difficult exercise. It’s not a easy exercise, because we want to see a long track record, but we also want to have the benefit of a long runway. If you pick someone who’s in their 60s or 70s, 80s, then you know you have the benefit of looking at a very long track record, but you’re not going to benefit too much from it because the runway may be very short. We need to find someone who’s got enough, 10, 20 years of historic record, which is respectable, and they are passionate and there’s a runway ahead.

Mohnish Pabrai (21:34):
I think Peter Kaufman once talked about the five Aces. And I don’t know if I can rattle off the five Aces, but he’s definitely looking for integrity. If I was looking for someone, they have to be very high integrity. I think they have to have enough history and they have to be relatively young so that there’s a runway ahead. The third is a alignment of interest, which is a fee structure that is a win-win for the manager and the investor. Another important trait is their temperament and just how they, you’ve got to be able to understand the framework that they’re using. There are a number of different ways to skin the cat. And so you’ve got to make sure that you are in alignment with the way the manager thinks. So I think those are the main things one should look for.

Stig Brodersen (22:20):
Yeah, we’ve done this for eight years and we’ve been speaking with so many investors, is that I don’t think I’ve met anyone who picks stock with the same level of conviction bets like you, which is one of many things I really liked. And I know you even restrain yourself to some extent, because you have a fund the way that works. Because as an investor, I don’t want to invest in someone’s 50th best idea. You want to invest in the best idea. And you previously said here in the show that you generally want to make 10% decision bets, and then let the winners run. And whenever I read through your annual auditing reports, I can see that you put your money where your mouth is.

Stig Brodersen (22:57):
I also heard you talk about how you personally, in your own portfolio and for Dakshana have been running a more concentrated portfolio. What are your thoughts on setting up a fund where you only have one, two or three stocks after all investors can just manage their exposure and thereby getting your highest conviction bet? What are your thoughts on that compared to having say 10 picks in your portfolio?

Mohnish Pabrai (23:20):
I haven’t really thought about it that way, but I would say this, if anyone were to invest today with me in my funds, even though we limit ourselves to 10% bets, the top three positions for, I think all my funds are 50 to 60% of assets, because they’ve run up, right? So we bought Micron a few years back and it’s doubled and so on. If you had invested in me when I was starting out, then yeah, we would not have the same degree of concentration because things haven’t run up. But typically when investors have joined me, they’ve always come into a fund that probably the top three positions are 40 to 60% type concentration. And then by the time you get to the sixth or seventh position, you’re looking at 90% of assets or something like that.

Mohnish Pabrai (24:07):
I don’t think I need to start a fund and say, “I’m going to only have three picks.” I could do that. But I think that the nature of investing is such that it would get there anyway. And one of the things to keep in mind is there is this very high error rate. We’ve talked about 40, 50% error rates. And so, if you have a 40, 50% error rate and you have three picks, you could be wrong in two out of three of them. And if you’re wrong it has a range of outcomes, wrong means something could flatline, just doesn’t go anywhere. Or something is a 20% loss. Or wrong could also be permanent wipe out, zero on that. And all of those are mistakes. Three bets could work as long as you don’t have the wipe outs, right? I think you could have two of the three bets go sideways or be very modest winners, and one could carry you, that’s possible.

Mohnish Pabrai (25:06):
But I don’t think you need to be that way. But I would say this, sometimes we do get a chance to make investments where the odds are just so heavily stacked in your favor and the economics are so compelling that you would want to try to do more. So sometimes that can happen. I was just thinking about this, that in 2019 I made this investment in this Turkish company called Reysas. And in 25 years of investing, the situation with Reysas never happened to me. And I don’t think it’ll happen to me again until I pass away. I think this is a max once in a lifetime. So Reysas was a situation where a business which was worth something like $600 million liquidation value, not even intrinsic value, just you could sell everything and quickly get 600 million, was available for 20 million. So you were able to get a dollar bill for three cents. And it was a dollar bill that was likely to grow because they’re a really good capital allocator.

Mohnish Pabrai (26:12):
So this wasn’t just some Venn diagram type ultra cheap net net, where the dollar would just sit at a dollar or might even decline to 80 cents. This dollar might be worth $5 in 10 or 20 years, and we were paying three cents for it. And anyway I looked at it, I really couldn’t see a way that we would lose money. It looked extremely bulletproof from number of different ways I looked at it. But I still have to be cognizant of the fact that there’s the 40, 50% error rate always there. But if I were not running a fund and I came across this investment, I would have no trouble putting a third of my net worth into it, because I just think that something like that being one out of three bets, I would make that bet all day long. Just because what I saw in terms of downside versus upside.

Mohnish Pabrai (27:02):
So sometimes that can make sense, but like I said, a Reysas happened to me only once in a quarter century. So we can’t really kind of build a framework around it. Chuck Akre, who’s a great investor, he says that in his lifetime of investing he’s had two 100 baggers. One of them was Berkshire Hathaway, which he started buying in the ’80s, early to mid-’80s. And the second was American Tower. Both of these ended up being 100 baggers. And like I said, I think in a lifetime, in a portfolio you cannot expect to have more than one, two or three 100 baggers. That’s pretty much, I think the limit of what might happen.

Mohnish Pabrai (27:44):
But even if you run a 10 by 10 portfolio and one of your bets ends up being like that, that’s why the error rate doesn’t matter so much. In the case of Reysas we were running about 600 million or so in capital. And all we could invest in the company was seven million, seven million got us one third of the company. In effect it was like a 1% bet. Now I wanted that bet to be larger, but that’s all we could put in because the market cap is 20 million and that was that. But the thing is that that one third, and you might think the value of the business has gone up maybe a couple 100 million at this point the last two, three years.

Mohnish Pabrai (28:25):
To me, what is very simple and what is very important is that we never touch Reysas, unless there is something which is, there’s an integrity issue or something comes up from left field. I just hope I’m smart enough to sit here 20 years and not touch that position. And I just want to cheer them all from the sidelines. I think that’s my way of thinking with contemplation. I think you don’t need to go to three stocks. I think you’ll get there normally just even with a 10, 12 stock portfolio.

Stig Brodersen (28:57):
So I had to ask, because of the influence of Nick Sleep and how we saw those three businesses. This was very interesting. So I was just very curious to hear how you thought about that now. So thank you for your elaboration on that.

Mohnish Pabrai (29:10):
One thing we just on Nick Sleep is, if you think about the three businesses he put all of his money into, Amazon, Costco and Berkshire. These three businesses have a few things in common. One of the things they have in common is they have a really strong and admirable culture. Each of these three businesses is very different, but the culture is really strong. Also, all three of them have incredible modes, unbelievable modes. And the third is, they have incredible leadership. If you think about the three bets that Nick Sleep made, it’s hard to improve on that. It’s hard to get to a higher quality business than Costco or Berkshire. It’s just really hard to do that. So I think that when I look at what Nick did, and then he rode off into the sunset and hung up his boots, I think there was a lot of thought that went into. It wasn’t the number three that was so critical. It is, which were the three, and why did he pick those three? And I think that’s where the genius comes.

Mohnish Pabrai (30:14):
So it’s kind of like, in the late ’80s Buffett put I think 30% of Berkshire’s total net worth into a single stock, he put 30% into Coke. And it was a very big bet for Berkshire, but the conviction level was so high, and it worked out spectacularly for them. So, once in a while these things line up. I mean, a business like Coke is so resilient, such an amazing business, that Warren, when he finally figured it out, he just bought every share he could.

Stig Brodersen (30:47):
I mean, doing the job for me here, Mohnish, because I wanted to talk about Turkey and Coke. So we didn’t plan for this, but this is absolutely amazing. You’re investing in developing countries with high inflation rates. And one way to mitigate that is to invest in companies that have fixed and recurring payments in more established currencies, such as the euro or the dollar. And one could mention Reysas Logistics as an example, but it’s not so much the specific company, but just more about your process this question goes to. On that note, I heard you say in this wonderful Q&A you did with the Value School in Madrid, Spain, that you were not too concerned about the currency depreciation in Turkey. Could you talk to us more about not just only the revenue side, but the cost side? How do we evaluate the cost side of a company who is situated in a country that have secular inflation pressures?

Mohnish Pabrai (31:36):
Yeah, it’s a great question. So Turkey is, inflation is running at about 50% a year in Turkey. I do not believe that the 50% number will come down meaningfully, even if there is regime change. So even if Erdoğan, the election next year and some new leader comes in and the new leader is very concerned about inflation. Even in that scenario it would be very difficult to really bring it down. I mean, they may be able to bring it down five, 10% a year. It may take them five or 10 years more to bring it down to something like 20%. So inflation is really hard. And the reason it’s hard to bring it down is because what has happened in Turkey and what’s happened in many other countries is the government has a certain level of expenditure. And they have transfer payments going on to large portions of the population, and they stay in power because of those payments.

Mohnish Pabrai (32:35):
You cannot just come in one day and say, “Oh, I’m going to balance the budget by just cutting all these transfer payment.” Because next day you’ll be out of power because those voters will not keep you. So, what we had happened in the United States with Paul Walker in the early ’80s, where he took a sledge hammer, U.S. Treasuries went to 18% and he brought it, he broke the back on inflation, is really hard to do in democracies. It’s almost impossible to do, that’s why what Walker did was amazing. So our investment in Turkey was made under the premise that 50% inflation is there, let’s say forever. I also assumed that not only will there be 50% inflation, because of the way the currency will react, the lira will devalue accordingly. So for example, in 2019, when we made the investment in Reysas, it was five lira to $1. Now, less than three years later, it’s 15 lira to $1, a year from now I would forecast it’ll be 22 lira to $1. And two years from now, it’ll be 33 lira to $1.

Mohnish Pabrai (33:46):
And even when those things take place, we will do really well on our investment. And what has happened in the last three years is when we’ve gone from five to 15, in dollars we have quadrupled our money in Reysas. It’s like a four X in the last three years. In local currency it’s even more, but who cares about. So why did that happen? How can you invest in a high inflation environment and still do well? There are businesses in Turkey where the revenues are in euros and the expenses are in lira. There’s a sliver of businesses, which are like that. What has happened in Turkey because of all this turmoil, everyone and their brother has left the country, all the foreign investors are exited, everyone’s gone. Only Mohnish has gone in, okay? And it’s the cheapest market in the world. That’s why I went in because I just couldn’t, I thought it was ridiculous the way the market was priced, still ridiculously priced.

Mohnish Pabrai (34:51):
So for example, there’s a juice manufacturer in Turkey. We don’t have any position in the juice manufacturing. 98% of their products are exported to the European Union. Turkey’s part with the European Common Market. They can export anything to Europe, with no duties or tariffs. So all their costs are in lira and all their revenues are in euros. Their profits are at all time highs, because in a high inflation environment, one of the things that happen is wages do not keep up. Turkish citizens are becoming poor because inflation is running 50% and maybe their wages might be going up 20 or 30%, but not 50%. So this company has a workforce where in euros their payroll cost is shrinking. And even when they buy produce and buy fruits and all of that to make into juices, those are not keeping up with inflation, are not keeping up with the Euro revenue.

Mohnish Pabrai (35:48):
We limited ourselves to businesses in Turkey that have this weird tailwind. There are businesses in Turkey where all revenue is in euros and large portions of the expenses are in lira. And because the baby got thrown out with the bath water, investors don’t care about those businesses. They just look at that it’s Turkey and some manager in New York just picks up the phone and tells his people, “Exit Turkey completely.” And that’s why you get this weird miss pricing.

Mohnish Pabrai (36:20):
In the case of Reysas, what I found is that there was an asset base, which was worth a billion dollars. These 12 million square feet of warehouses. Those warehouses are land, cement, concrete, steel, et cetera. Those are all inflation indexed, okay? So when you have 50% inflation, the land price is going up, the steel price is going up, the replacement cost of these warehouses is going up. Reysas as a company sees its rents go up pretty dramatically, but the CapEx was done in yesterday’s lira, they’re not doing much CapEx anymore.

Mohnish Pabrai (36:58):
Their billion dollar asset base is not becoming worth less than a billion, because there’s an international price for steel and cement and concrete. And the replacement cost is going to adjust and the rent is adjusting. So, if I own an apartment building in Austin, and I bought that apartment building for $1 million. And after five years it costs five million to build that building. I still paid only one million, but the rents will be based on the five million. So the rent is going to go up dramatically. So, someone like me who paid a million is going to be looking really good. The rent is going to look good because I paid in yesterday’s. And not only that, Reysas, because the government tries to keep the interest rates so low, their borrowing cost is 14% average. They have very little borrowing, but they’re borrowing at 14% in lira, and their rents are going up at least 20 to 30%.

Mohnish Pabrai (37:54):
Even if the rents are not keeping up at inflation, they’re twice their borrowing costs. And they hardly have any debt, so it doesn’t matter. But so what I’m trying to say is that a lot of businesses in Turkey are not investible, because in a high inflation environment investors are going to have a lot of trouble, but there are a sliver of them where the economics work out really well.

Mohnish Pabrai (38:17):
You talked about the Coke Butler. So I was in Istanbul for three weeks earlier this year. I had a great time. The bluefish on the banks of the Bosphorus grilled is really good. And I met the Coke Butler in Turkey. When I met them the first time I told them with the very high quality people, I was just impressed with the quality of the operation. They’re really, really a blue chip firm. And they’re 20% owned by the Coca-Cola company. So I told them, “Listen, I did a talk a few years back at UC Irvine on Coca-Cola, it’s a two hour talk. If you just Google me and Coca-Cola the talk will come up. Why don’t you guys, you guys might enjoy watching that.” So they did. They actually went and watched the talk.

Mohnish Pabrai (39:02):
Then they contacted me and said, “Mohnish, we are your greatest fans. We love you so much.” So then I actually had some more questions for them. After the first meeting, I said, “Listen, can we meet again?” They said, “Of course, we were want to meet you as many times as you want to meet us, because.” And so the second time I met them for lunch, they are asking me what their strategy should be, okay? I’m not in the bottling business. But they thought they never met an investor who understood Coke as well as I did.

Mohnish Pabrai (39:32):
And just to tell you how amazing that business is. So they own bottling rights in about 12 different countries, it’s not just Turkey. They have 49% of the bottling rights of Coke in Pakistan. Pakistan is not some Mickey Mouse country. It’s a large 200 million people, very hot country where people like to drink Coke, and Coke has 50% market share. And at some point the Coca-Cola company, which owns 51%, will probably sell that 51% to these guys. Maybe it happens in two years or three years or whenever. They have operations all over the, in all these, Uzbekistan, Kazakhstan, Turkmenistan, all these different places, Jordan, Syria, whatever. There are Coke bottles in all these places, which this company owns.

Mohnish Pabrai (40:21):
Again, when I look at the lira exposure, Turkey is a big market, but something like 60% of their revenue is outside Turkey, and that’s increasing. And that business is inflation indexed. They have the ability to raise prices, and they do raise prices as they need to keep up. And a business like that, I think you could invest in and you would do very well.

Stig Brodersen (40:45):
Mohnish, I know that generally you don’t talk too much about your current positions. And so thank you for sharing about Reysas Logistics. And it’s also very understandable that you don’t want to do that and be susceptible to confirmation bias. Sometimes you are willing to talk about previous positions. So I wanted to hear if you were willing to share some thoughts on Alibaba?

Mohnish Pabrai (41:04):
Oh, sure, yeah. We invested in Alibaba. I think Alibaba is an incredible, amazing business. It’s done really well over the long time. But then after I made the investment, I was able to complete research and drill down on Tencent. And when I compared the two investments and companies, Alibaba and Tencent, I felt that Tencent was a superior business. That was a perception I had. And Alibaba had gone down significantly from where we had bought it. And we always, at your end we want to do tax planning so that if we have positions that have declined, we need to look at whether we need to do a tax-loss selling and then maybe buy it back after 30 days, always a complicated decision because given my luck, the stock will move within those 30 days we get hosed.

Mohnish Pabrai (41:53):
But in the case of Alibaba and Tencent is I could sell Alibaba and five minutes later buy Tencent, right? So I didn’t have this 30-day waiting period where normally in tax-loss selling I need to sell all the Alibaba, have a 30 or 31-day period where we don’t buy anything and then buy it back to capture the tax loss. And in this case, we were able to do it right away because it’s a different security. And I was able to kill two birds with one stone. One is that we captured the tax loss. And the second is we, I think we got into a better position of business that I thought was better. So that’s why we did what we did.

Stig Brodersen (42:34):
Specifically for Tencent, I heard you say that Tencent might be the best of the big tech companies and then perhaps Amazon would be number two, because they’re so much better at allocating capital?

Mohnish Pabrai (42:44):
Yeah. Well, I mean, I think one thing to keep in mind with both Alibaba and Tencent, which gave me pause is these are mega caps. So these are companies worth hundreds of billions of dollars. And so anytime you buy a business which is hundreds of billions of dollars, how much runway is there? That always comes up. I mean, Apple is three trillion or whatever, but how many companies become trillion plus market cap? Or there’s zero company that’s five trillion market cap, for example. So there’s always an issue of runway that comes up in my mind is how big can these things get? Whereas when I look at a business like Reysas at a 20 million market cap, we can see a very long runway. Because just liquidation value was a billion.

Mohnish Pabrai (43:25):
So one thing to keep in mind is that we may do well. I mean, investors may do well with Tencent or with Alibaba, but you are starting, your starting point at these companies is that they already have significant size and scale. And so you have to keep it in mind. But having said that, they have, I mean, Tencent has, I mean, I think that the two engines they have in the company, one is their army of software engineers, which they are able to very nimbly move into different areas. And the return on invested capital you get, I mean, WeChat was created by probably 20 people. So if you think about the revenues and profits that come out of WeChat versus maybe 10 million or something that went into, it’s asymmetric to the power of asymmetric.

Mohnish Pabrai (44:17):
When we are making digital investments into these large scalable businesses where you have the intellectual property, the returns can be spectacular. So Tencent has done really well in the video game business. They dominate the video game business globally. They dominate in messaging and wherever they’ve put their attention, they’ve done really well. And of course, because they’re in the software business, you cannot put much capital in the software business, because there’s only so many engineers you need to do whatever you want to do. They’ve been really good at taking the excess capital and building a second leg, which most companies don’t have. Most companies do not have investing progress. Tencent built incredible investing progress amongst rate private businesses that they could take a stake in and use their excess cash. And the returns they’ve generated on that portfolio has been spectacular. I think it’s in the 30, 40 plus percent annualized return rate. It’s a really spectacular return. So they get very high returns on invested capital when they hire software engineers, that’s just off the charts.

Mohnish Pabrai (45:25):
But even when they invest in a MEET.ONE or JD.com or Seal or whoever else they’re investing in globally, they’ve generated very high returns. So I think the combination of these two is incredible. Now, of course, one of the things that’s come up for both Tencent and Alibaba is the Chinese government considers all of this wild west behavior not acceptable, and they’ve been putting curbs on them. Businesses are very, I would say most businesses are very fragile. If you start shaking up the core underlying premise or foundations of who they sell to and how they sell and how they market and how they get revenue, most businesses would have a very hard time with that, and they would be in trouble.

Mohnish Pabrai (46:10):
I think both Tencent and Alibaba need to understand this new landscape. And the one of the problems of understanding the new landscape has been that it’s been shifting. The CCP will come up with certain guidelines and changes, and then you think, “Okay, they’re done.” Then after two months they come up with more guidelines and more changes, then you think they’re done and then they keep going. But from what I have seen of the behavior of Tencent and even Alibaba, they are adapting really well. So I think Tencent will shift its focus very heavily away from China. They’ve already had a global footprint, both on their video games and their investing. And so I think that footprint will become even more global and they will de-emphasize certain businesses in China, that’s my best guess. Or they will look at businesses which are non-controversial, like the cloud business and so on. So, that’s what I expect would happen.

Stig Brodersen (47:07):
Whenever I looked into Alibaba and took a position, of course, one had to look into all these things about the listing and all the things that came out. And then CCP said one thing and then they said another thing. And I was wondering, for investors investing in China, and for someone like you, are you looking into buying them at the exchange in Hong Kong, instead of buying it in America? Is it a regulation thing to do one or the other?

Mohnish Pabrai (47:30):
I don’t think one needs to sweat that. I think the VIE structure. And I think that if you have a choice, you’re better off buying it in Hong Kong, I think that’s fine. I don’t have a concern about the VIE structure. I don’t have a concern that the ownership is like quick sand, it might shift or change. I don’t have those concerns. I think if investors run into issues, it will be because of the core business, it won’t be because of the structure. So I think if investors are correct about where the core business is in a few years, they will do fine. And if they are not right on that, then they’ll pay the price. And then in fact, recently even the Chinese government has been pretty cooperative about the company sharing data in the U.S. to enable the U.S. listings and so on to stay in place. Even they have shown a degree of cooperation, which surprised me.

Stig Brodersen (48:27):
Mohnish, the last question I have for you today, you’ve been very generous with your time, so thank you for that. You have these wonderful Q&As with students that you upload on YouTube. And one of the most common questions that you get is students ask about the circle of competence. And you rightly say that asking the question is also answering the question. So if you ask, “Is this within my circle of competence?” Well, it’s probably not, because why would you ask the question then? Fearing that I would walk into the same trap here. We previously talked about here on the show how we learn differently whenever we have a position in the stock compared to just doing research on the stock, and I’ve found that to be true. Therefore, the question remains, when do we know that we know enough to build a position in the first place?

Mohnish Pabrai (49:13):
You really learn about a company after you own it. And you learn a lot about the company after it drops 50% after you own it. That’s when you truly understand the business, okay? For different gaps you have in your understanding will become crystal clear at that point. That’s the unfortunate part. Some of these lessons can be very expensive. But yeah, I mean, I think the nature of investing, like I said, I think that the kinds of factors that affect a business are so myriad, I mean, they’re so broad, things can come from left field. And so that’s what makes this such an exciting and challenging endeavor is that these things will always surprise you. Sometimes a surprise is very heavily in your face. And sometimes a surprise can be a negative surprise. But I think that if you have a curiosity and you pay attention to circle of competence, and you pay attention to do you really understand the business and those sorts of things, it can be really helpful.

Stig Brodersen (50:20):
I just want to say that it’s always an honor speaking with you, Mohnish. I’m actually going to tell the audience that I’m going to record a specific episode with my friends, Hari Ramachandra and Tobias Carlisle. And it will be published on May 21st where we’re going to talk more in detail about Pabrai funds. All this disclaimers. I don’t get paid or anything like that, but I am investing with Mohnish, which is an absolute privilege. So, I just wanted to say that we are creating a episode around it in case people are interested in why decision was made.

Mohnish Pabrai (50:46):
But I would also say, Stig, this time our interaction was special, because you are now a partner. And our fortunes are a little bit tied at the hip, which makes me very happy. And so I’m grateful for the word of confidence. So thank you.

Stig Brodersen (51:04):
Thank you for saying so, Mohnish, and thank you for spending a little more than hour here with us here today. So thank you so much for your time.

Mohnish Pabrai (51:11):
All right, pleasure. Thank you.

Outro (51:13):
Thank you for listening to TIP. Make sure to subscribe to Millennial Investing by The Investor’s Podcast Network, and learn how to achieve financial independence. To access our show notes, transcripts or courses, go to theinvestorspodcast.com. This show is for entertainment purposes only. Before making any decision, consult a professional. This show is copyrighted by The Investor’s Podcast Network. Written permission must be granted before syndication or rebroadcasting.


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