Transcription
The guest speaker today, Manish Prabay. We're very thankful that you are here, Mon, as always. Uh, he is the founder and CEO of Paray Investment Fund, which you founded in 1999. Just right before the bursting of the tech bubble. As I told you in the email that I sent you this morning, he has one of those records that is a staff of legends, okay? Over the last 25 years, where I don't remember the statistics exactly, but you know, had you given him a dollar in 1999, it would have been like $415 today. It would be $7 in the S&P 500. So it's a remarkable record of excellent performance. You came here to study, uh, engineering, if I'm not mistaken, and he ran, uh, an IT consulting business for a while before you actually founded, uh, investment fund. So he's seeing things from both sides. And I always, I think you talk about this in the podcast, you know, that I like investors who have the experience of running something themselves and who can invest, uh, themselves. Okay, that see things from both sides. So, Manish's interview with Manish in the podcast is fantastic. Please join me in welcoming him.
It's always wonderful to be here. You know, we're on hallowed ground with Ben Graham, etc. And I'm going to be asking you, as part of his models, to underdose a bit on Ben Graham, but we'll get to that in a minute. So, anyway, always wonderful to be here. This particular presentation I'm giving today, I haven't given before. So I actually don't know how long it takes, but I'm going to try to move it along as fast as I can, and hopefully, we'll have time to talk about what you have on your mind.
So, Charlie Munger gave a speech at Harvard a few decades back, "The Psychology of Human Misjudgment." Probably all of you have read it, and probably read the expanded version in Poor Charlie's Almanack. So he gave the original talk, and then he actually revised it for Poor Charlie's, and it took me, I would say, multiple decades to understand that talk. I try to reread it every year, and even when I read it now, every year I pick up things that I've never seen before. I swear I haven't seen it before. So it keeps bringing up things. But I think I finally figured out what Charlie was trying to say. I wanted to give you my kind of take on it. And so what I'm doing here is mental models can be used in different ways. It can be used as we go through life. Can be used for starting a business, running a business, allocating capital, you know, having a great marriage, a lot of different uses. But the core model is the same, which is that our human brains are a combination of modern and ancient. And they're kind of a mishmash of different things that came together. And so we don't actually naturally see reality the way it is. We see a distorted reality because of that evolution of our brains. And so sometimes you'll run into some things which are true and which is the way the world works, but which is not the way you thought it works. And when those things happen and you have these kind of aha moments, those are mental models that can give you an edge versus other humans because other humans see life the way you used to see it, but you start seeing it in a little different light. And what Charlie said is that as you start overlaying these models on top of each other, one on top of each other at the same time, that's when you get what he says were lollapalooza effects. One plus one becomes eleven, and one plus one plus one plus one becomes over a thousand, and so on.
The bedrock model, I think you cannot have any other models if you don't have this one, is to take a simple idea and to take it seriously. And "seriously" is the most important word there. So basically, when you encounter these models, and I'm going to talk to you about 30 models today, we get through them. When we encounter these models, some of you or many of you will be skeptical about them, whether they are true or not, whether they're real or not, etc. So you cannot get the benefit of the model unless you go all in, cult-like, full immersion, not even a hundredth of a percent doubt about the model. If you have a skepticism about it, you're better off not even touching it because then it won't work. So you either go all in, or you just live life the way you've been living it. But you can't kind of go halfway with the issue. You have to believe or not believe. You know, we're going to start blasting through it as fast as we can because we don't have that much time.
So, the gateway drug for all of us in value investing, unfortunately, is Ben Graham. Ben Graham had three amazing ideas: Mr. Market there to serve you, not to advise you; margin of safety; buy stocks as if you're buying the whole business. What Charlie said was that because Graham's entire experience got seared by the crash and the subsequent Great Depression, 25% unemployment, which we have not seen in almost a century, including the pandemic, including the financial crisis, all of those things never went to the point that things went in the '30s. And so Ben Graham came up with a model which was bulletproof when things go to hell. So if you follow that model, you cannot get hurt. But the problem with following that model, and I followed that model most of my life, Warren Buffett, you know, followed that model most of his life, etc. But when you follow that model too rigorously, it hurts you. And so instead of taking two tablets a day of Ben Graham, you take half a tablet once a week, and that's enough. Which is just those three things, and everything else, you know, Security Analysis and everything else in The Intelligent Investor, for the most part, we don't need. In fact, you're better off if you don't know it. So that's the first big pill you've got to swallow. So you're not, we're not going to overdose on Ben Graham.
What we are going to overdose on is these three books: Poor Charlie's Almanack, Phil Fisher, and Joel Greenblatt. I'm imagining, given that you are in the program, you've read all three. So you already know what to follow and what not to follow.
Model 4: Also be aware of the 20 punch card, which is, you know, assume that in your whole life, you're only allowed to buy 20 stocks. And every time you buy a stock, you punch the card. And when the 20th card is punched, the 20th time you punch the card, you cannot buy any more stocks. And if that rule were ironclad and you were required to follow it, you would become extremely anal about what you would invest in, and you would be very careful about what you invest in. So this is a very good mental model to have about that, you know, great ideas are rare. I'm going to violate this model in some subsequent models coming up, but don't focus on that. It's okay. You know, you'll figure out there's a violation, but you know, we won't worry about that till now, for till we're later.
Then you know, we get to circle of competence, which obviously we care about a lot. And you know, size of the circle is irrelevant. You know, people want to know all kinds of things, everything about everything. Whatever. Really a bad idea. Stick to what you understand really well, and stick to being in the epicenter of that. The size of the circle is not relevant. Being in its center is very relevant. You may not recognize some of these people in that picture. On the left is Mark Andreessen. In the middle is his wife, and on the right is his wife's father, John Arrillaga. So John Arrillaga, billionaire, multi-billionaire, passed away a few years back. And you know, his daughter is kind of billionaire to the power of billionaire now because she was a billionaire and then she married a billionaire on top of that. So she's doing fine. But John Arrillaga basically only invested in real estate within one mile of the Stanford campus in his whole life. That's all he invested in. And he became a billionaire doing just that. So his circle of competence was not real estate. It wasn't even California real estate, or even Northern California real estate, or even Bay Area real estate. It was real estate in a very, very, very tight radius around Stanford. And if you walked with him around Stanford, every building, he could tell you the full history of the rents of the building for the last 50 years. He could tell you what you could buy it for. He could tell you all the transactions that took place. He took, he knows everything about everything in that radius. And he stayed underlevered. When crisis hit, he went in and bought all the marquee stuff he wanted to buy, just in that area. And then, you know, laid back, relaxed, and then, you know, waited for the next cycle and so on and, you know, became a billionaire doing that. So we don't need to know a lot about a lot of things. We need to be an inch wide and a mile deep. So that's what we want to do.
I think model check should be an extremely high error rate is guaranteed. Not just that, a higher error rate is guaranteed. So John Templeton, just say the best investment analysts will be wrong at least one-third of the time. Half the time you could be wrong, two-thirds of the time you could even be wrong 80% of the time, and still be doing extremely well. And you know this, you know, 4% of public companies in the US in the last 90 years have delivered all the stock market returns. So the other 96%, you know, just kind of treaded water.
And the term "circle the wagons" that comes from the 19th century when the pioneers were moving west, and these wagon trails moving west, trying to, you know, capture the frontier and so on. They would get attacked by the Native Americans or bandits and so on. And so the best defense was to circle the wagons and then, you know, shoot at whatever is coming at you and put your crown jewels at the epicenter of the circle. And so that's kind of the model I'm trying to get across here, which is when we find ourselves in the great situation of owning a great business, don't sell it. Don't sell it when it becomes fairly priced. Don't sell it when it becomes overpriced. Possibly only sell it when it gets absolutely egregiously overpriced where you just can't justify the valuations anymore. It has to be very extreme. But basically, we want to hang on to the great businesses forever. And then, you know, we just saw the 4% rule with the stock market. And Buffett said this in two, three years ago, where he said that in 58 years of running Berkshire, now it's been 60 years, but 58 years of running Berkshire, 12 ideas created Berkshire Hathaway. And he didn't say which the 12 ideas were. I took a stab at which those 12 ideas were, and they may or may not be the exact 12, but at least probably 80, 90% is correct. So basically, even for a Warren Buffett, it was a 4% hit rate. For us mere humans, you know, God is at 4%. We're not going to be at 4%. So basically, again, when we find a great business, in the case of Berkshire, because GEICO wasn't a publicly traded company, he didn't kind of trade it, just kept it, right? He kept it throughout. But if you look at his portfolio, the longest period any stock has been held that he's holding today is Coca-Cola. It was bought in '88. If you think about that, it's Coke has now been held for 38 years. Warren Buffett, 95, going to be 96 this year, which means that his buy and hold journey, as far as common stocks go, started when he was past his mid-50s. I'm trying to get it started for you in your 20s. So we get a little head start on that. But again, because of the overdose on the gateway drug, and then he had Charlie Munger, so he was able to kind of ride the ship. And I have so many examples in my portfolio of these great businesses that got sold because even 5 years ago, I didn't understand. If I knew these models when I was your age, it would have been a huge advantage. My fund used to own almost 1% of Ferrari. Bought at almost nothing. I think the effective market cap I paid for Ferrari at that time would have been less than a billion dollars at that time, effectively. So basically, I paid like $10 million for 1% of Ferrari. And you can look up what that is now. And Progressive Insurance, I invested in it, I think 25 years ago, and should have just left it alone. And then Goldman Sachs during the financial crisis. Buffett buys it at 130, I buy it at 65. I buy it half the price he buys it at. And then of course, you know, I sell it and I make some good money, but it should never have been sold. Never sell the great high-quality business. Do not cut the flowers and water the weeds.
And here's the litmus test which I use. If I want to know how good a portfolio manager is, and they've been running for a few decades, I just look at one very simple thing in their portfolio. What is the total size of the top two or three positions? Top three, two or three positions are not at 70%, they're in violation of the model. I can't even find these people that I'm looking for. Why do we have this model? Well, we have this model because very few times are you going to find a great business. And when you put that great business in your portfolio. So let me go back to the Nifty 50, which was a concept in 1970 or 1969, where you, you know, the idea was just buy these 50 businesses and do nothing with them. Don't worry about the market caps or multiples, whatever else. And the Nifty 50 was very popular in the late '60s, early '70s. And then in the '73, '74 crash, it got taken out back and shot. And then by then, you got to '76, '77, no one was talking about a Nifty 50. Everyone has sold everything, moved on, didn't want to touch equities, all of that. There is controversy whether Walmart is part of the Nifty 50 or not. It went public in 1970. But if you take the view that let's, because just to prove my point, that let's say Walmart is part of the Nifty 50, and you assume that it's a 2% weight because everything is 2% Nifty 50 when you start. It's a 2% weight, and you assume the other 98%, which is like Coke, McDonald's, you know, Kodak, Xerox, whatever else, Proctor & Gamble, so on, all of that goes to zero. So you take a portfolio in 1970, which is 2% Walmart, other 90% go to zero, 98% error rate, and you run it till today, you blow out the S&P by a pretty significant margin. So 2 cents of the dollar left, 98% zero, still blew out the S&P. The reason is because the flower wasn't cut. And that's why the top two positions need to be 70, 80%. And if they're not 70, 80%, sometimes I'm reading these interviews with these very smart, very accomplished managers with good records. I see they own Constellation Software, Canadian company, and they've owned it almost since the time it was public, and it's been like, you know, until recently, like 35% annualized compounding or like 15 years or whatever. And whatever size it was when it started, if you didn't touch it, it's going to be a big portion of the portfolio because it's compounding at a much higher rate. But then the manager says, "Nothing can be over 10%." So they don't know Model 8.
And I hope you overdose on Model 8. Be a shameless clone. We don't need to come up with ideas of our own. I recently looked at my entire portfolio. There is not one single idea in that portfolio that I came up with. Not even one. You know, and I said, "Well done, Monish. Continue to be shameless." So we have Value Investors Club. You know, Greenblatt set it up for us. Long live Mr. Greenblat. If we were limited to only buying companies, you know, that are written up in Value Investors Club, nothing else, you do extremely well. You don't even need anything else. Even if you were limited to A through J in Value Investors Club, not even the rest of the alphabet, or even A through H, you would still do very well. So you don't even need a whole Value Investors Club. And then you have Data Roma, comes out every quarter, tells you what everyone's bought and sold, all the luminaries, whatever else. And then we have this picture which my daughter loves. You know, she's sitting right here in the front. And this is Gimsa Grosa. Gimsa Grosa is Turkey's Costco. So it's 2026. You heard the term Gimsa Grosa here in the class. History does not repeat itself, but it does rhyme. So no one's interested in the Turkish market. 70% of my portfolio is in Turkey in three stocks. I'm disappointed it's not two stocks. It needs to be two stocks. You know, I told you 70% in two stocks, but we'll get there. When I grow up, we'll get there. The US markets were orgasmic from like '75 to '85, you know, just amazing valuations, you know, Coke at seven times PE and that sort of thing. And I started making trips to Turkey in 2018. And then I think in 2019, this friend of mine, I just told him, I just want to look at what you have invested in in your portfolio. Don't take me to any companies that you haven't invested in. So he used to send me names of all the companies we were going to visit. They were all Greek and Latin to me. I never heard of these companies. I know nothing about them. And I'm too lazy to do any work on them. You guys are very hardworking. I'm lazy. So I decided I'm not going to do any work on these companies till after I've met them, just so that I don't appear like a total idiot when I go into the meetings. As we're driving to the companies, I start asking my friend a few questions, you know, what do they do? What's the market cap? You know, why are we going there? Why did you invest? You know, just a few things so that when we end the meeting, they just don't think I'm like a total idiot, you know. So we're driving to this company in 2019, and my friend tells me the market cap is $15 million and the liquidation value is $800 million. And I say, "Is it a fraud?" He said, "No, I've invested in it. It's a very simple business. They rent warehouses to like Amazon, IKEA, Carrefour, Toyota, Mercedes. And it's 99% lease inflation indexed leases." And he said, "You can go to any realtor in Istanbul, commercial realtor, show them the portfolio, they're going to tell you it's worth a billion, and there's 200 million of debt." So I said, "Why is it at $15 million market cap?" He said, "It's Turkey. Everything is cheap." And so I went, met them. The father and son who own it look great to me. I don't see any problem with them. I think they're fantastic people. I go look at the portfolio. It looks good. And then I think, how much stock can I get? I mean, I manage $1.3 billion now, but I said, what can I invest here? But for $8 million, I got 1/3 of the company. And then I kept buying. So now we have like over 40%. And the market cap is like $1.5 billion now, and liquidation value is $2.5 billion. And what I didn't realize is that I thought I was just buying a cigar butt, you know, overdose on Graham and all of that. And dumb luck, you know, my middle name is Forest Gump, you know, Monish Forest Gump Pabrai. And so I did this presentation to educate myself, not to educate you, just to educate myself. You're just a side effect of their presentation. So no need to do anything. Just sit on it. You know, sit on it forever. Buffett found 12 things in 60 years, and he's Warren Buffett. You know, like Munger says, you're going to get very few trips to the pie counter in your life. Very few trips. When you get to the pie counter, load up on a lot of pie because if you get three or four trips in a lifetime, that's it. So when you get to a pie counter, don't be shy. Heavily overdose on pie.
Then Model 11: Can't explain your investment thesis to a 10-year-old in three or four sentences. Please don't invest. And this one might need a little bit of explanation, but we're doing pretty good time. So I can give you the long version. So my dad was a very rational guy, engineer, and not very religious or anything. So he went bankrupt several times in his life, and he was a kind of quintessential entrepreneur. He'd come up with some great business ideas. His ideas were really good. They would get going. He was always very aggressive with leverage, like he was just trying to run every business as good as fast as he could. And the first storms that came would blow the business away. And because my parents were very poor savers or everything, so whatever was happening with the business was happening with us and the family. So there would be no money for rent. There'd be no money for groceries. We, they're borrowing from relatives and friends and whatever. It was just tough. So my father, I think I was like 11 or 12 years old. My father had just gone bankrupt for the nth time. I noticed that there was on Sundays, there was this astrologer who was coming to our place. He was wearing like orange robes with all these marks on his head, and my father would sit with him, and he would tell my dad what is going to happen in the future, you know, what's going to happen to him. And I was a meek little kid, but I mustered up some courage and went to my dad and said, "You have to know that whatever he's telling you is total nonsense, and we have very little money, and some of it is going to this guy, and that's not good." So my dad said to me, "I'm at the bottom of a well. I'm at the bottom of a very deep well, and I need a rope to get out of that well. And when this weirdo comes over, he knows that to come back the next week and the week after, he has to lay out a beautiful future. So he tells me this beautiful path that's coming in the future of all these successes that are coming. And that's my rope. I need the rope to get out of the well." Reality distortion field, as Mr. Steve Jobs calls it. This was my dad's reality distortion field. I saw it work. So, we hit the financial crisis, and my portfolio is down like 67%. Like, it used to be $600 million and it's $200 million without redemptions, just going straight down. And I'm at the bottom of a well. And I said, "How do I get out of this well?" And I remembered my dad. I said, "Oh, we need a rope. Let's go find a rope." And even though it's going to come up later with a violation of the model, the rope was Excel. I have to admit, I turned on Excel, and what I did is I just took my portfolio and put valuations of what I thought these companies were worth, and it was much more than $200 million or $600 million, etc. It was a very big number, and I just meditated on that number, and life was beautiful. So to me, that is what the portfolio was worth, and that was a rope. So you will find yourself for various reasons, portfolio, life, business, whatever, health, at the bottom of some deep wells. Find a rope, then everything's okay.
Then we have my friend Nick Sleep. Nick came to Columbia. Did you guys hear him? How many of you heard him? All right, some of you were there. Good. So all his letters are being converted into a book. I think they're coming out later this year, which will be nice. But I think, you know, his story, right? You know, Nick's story. So basically, Nick is running $2.5 billion, and the UK regulator is saying that you are non-diversified. Clearly, the UK regulator has not seen my presentation, you know, and you are not diversified, blah, blah, blah. You can't do this. You can't have so much in Amazon, this and that. And he and his partner, Zach, looked at each other. And I'm guessing they had $400 or $500 million by then of their own, which they never expected to have. And they looked at each other and said, "We don't need this. If we return everyone's money, no one's going to tell us how concentrated we are." So they stunned their partners and said, "We're returning your capital." Then Nick said, "I know you guys are disappointed, but please put the money in three stocks." And he said this, I think in 2014 or something, 2013, 2014. Put one-third in Amazon, one-third in Berkshire, one-third in Costco. And he said, "That's what I'm doing." And I said, "If you do this, you don't owe us any fees, and just keep these three stocks forever." Okay? Now, if you did that in 2014, you blew out every fund manager who's come here to talk to you. Okay? You blew them all out. And Nick had the absolute right idea. So then, you know, there's this book, Zen and the Art of Motorcycle Maintenance. How many of you read the book? Three humans read the book. I had such a hard time with it. Did you have a hard time? Yeah, my grandpa gave it to him when I was younger. And so it's a tough read. Was it tough sledding? But you made it to the end. Yeah. What about the ghost? I didn't want to let him down. No. But what about, how, how do you deal with the ghost? You know, the ghost shows up in the book frequently. Did the ghost throw you off? Yes. So don't worry about how hard it is. The value program is hard. Pound through the book. Don't give up. Okay? Go through the book. It's not going to make any sense to you. Then go through it again and again, and then finally you'll realize that you need to pursue quality very intensely. So don't take my cliff notes version. Go hold it this way. Don't hold it this way. Okay? So read the book. All these three companies that Nick invested in are extremely high-quality businesses. I mean, you know, how can you get higher quality than Berkshire and Costco? Like, it's just at the top, and Amazon is right there as well. And then, you know, what happens is Amazon goes wild and crazy after 2014. And Berkshire and Costco are still good, but they can't keep up with a digital business like that. And it becomes 80% of the portfolio. So he's 80-10-10 or something like that. There's a fourth business which he likes, ASOS, which I told Nick is useless, garbage. How can you put ASOS in this class? You know, desperation of Zen and the Art of Motorcycle Maintenance. So he takes half of Amazon, sells it, and puts you into ASOS. The thing is that when you have the three stocks and one is 80%, you already have escape velocity, right? You guys understand escape velocity. Even though you're not physicists, you know, he's never going to go to a soup kitchen. He's past all that. When you start with $200 million and it's cranking like crazy and has become $800 or $900 million, and $80 million is in Berkshire, you don't need to worry about diversification or anything. Just let it ride. But even though he had, you know, a violation of the model, even with the ASOS bet, he still blows out everywhere. When you find the great business which meets the Zen and the Art of Motorcycle Maintenance standard, just keep it.
Then we get to the violation. You know, "Thou shalt not use Excel." I only used it for deep rope. Otherwise, I have no use for Excel. Columbia makes you overdose on Excel, unfortunately. Don't do it. When you leave here in two weeks, just delete Excel. We don't need Excel. If you can't do the math in your head very quickly, it's a pass. So why do we need Excel? Use a pre-investing checklist. I have 213 questions on my checklist. It's all based on previous mistakes great investors have made. Saves me a lot of trouble. Just look at what, you know, why did Buffett buy Dexter shoes? Why did he lose money on that? And so on. Just use a checklist. And then the checklist, this is the kind of cliff notes version of my checklist. I made these different questions, and then I categorized them because they were in particular categories. The biggest number one reason why big investments did not work was leverage. Number two reason was some misunderstanding of the moat, and number three was some kind of an issue with leadership and ownership. So those are the big ones that cause issues. You know, there might be unions and things that might have caused problems in some businesses, but these were the three big ones. So don't buy levered businesses, and try to make sure you've understood the business well.
The Indians in the room understand this image. The non-Indians, I think we still have time. We can try and explain the picture. In India, the kings sent their princes to the forest to be trained under a guru in various things, you know, the classics and warfare and everything. So there was a guy named Arjuna who became the greatest archer in the world, and he was phenomenal. So the guru was conducting a test of all his students. So he said, "There's a bird in the tree. I want you to shoot the eye of the bird out with your bow and arrow." And so the first student comes up. He says he's about to shoot, and the guru asks him, "What do you see?" He says, "I see the tree. I see the bird. I see the eye." He said, "You're not ready. Sit down." Second guy, ready to shoot. Asks him the same question, gets the same answer, tells him not to shoot, sit down. Keeps going till he gets to our hero, Arjuna. And he asks Arjuna, "What do you see?" He says, "I can only see the center of the center of the eye of the bird." And the guy says, "Fire at will." And he takes the eye out. Right? So we need to, when we find these things that we are interested in, we need to go all in. We need to be like Arjuna. Only see the center of the center.
So on the left-hand side is a horse with the unfortunate name. Read the footnotes. That's the name of the horse. You know who owns it? You should know who owns it. Seth Klarman. So Seth Klarman grew up near Baltimore. That's Pimlico racetrack. And all his horse names come straight from Ben Graham. I feel sorry for the horses. I feel sorry for the announcer. "Read the Footnotes," "By a Nose," "Read the Footnotes." They keep saying "Read the Footnotes" throughout the. Anyway, "Read the Footnotes" has passed away now because "Read the Footnotes" was a horse he owned a while back. But please read the footnotes.
Then we have "Turn Every Page." That's Robert Caro on the left. Have you read Caro? Who's read Caro? All right. All of them. Two of the LBJ books and the Robert Moses book. We need to go in order. We need to start with The Power Broker. The most delicious thing in the world is Robert Caro books. It's better than the best orgasm. So you need to start with the first one. And you know, the unfortunate thing for me is I'm currently reading the last Caro book, and he has one more coming before he passes away, which is The LBJ Presidential Years, and I think they're going to release it maybe just, you know, a week before he passes away or something. He's 97 or something. Anyway, Robert Caro is the best researcher in the world, and he's the best writer in the world. And there's a Netflix documentary called "Turn Every Page," and that's what he does. He sits there, goes to the LBJ Library, which has 50 million pages. And he turns every page. And so that's what we need to do. Read the footnotes, and then turn every page, and keep going.
Then we have Model 17: Enjoy hunting for needles in haystacks. So there's this kid in Omaha who's like 12 years old, and there's a racetrack called Ak-Sar-Ben, which is Nebraska spelled backwards. He goes to the racetrack every weekend, and he gathers up all the used tickets on the ground which people have thrown away because they didn't win anything. Thrown the tickets, and he goes through each ticket one by one at home to find tickets that are actually winning tickets that some drunk just threw away. And he finds some winning tickets, but he cannot take it to the window because he's underage. So he gives it to his Aunt Alice, and Aunt Alice would take the tickets to the window, collect the money, and give it to him. And that's Warren Buffett. And what Warren Buffett was doing at the. So who we are as humans is hardcoded at the age of five between our genetics and the first five years of experiences. The cake is baked, you know. So when you have kids, when the kid turns six, you're pretty much done. Whatever had to happen happened in the first five years. And definitely after the age of 12, you have zero influence because after 12, it's all their friends. The only thing you can do is control who their friends are. So after 12, your job is to make sure they have great friends, not low-quality friends, high-quality friends. And when you find that they don't have high-quality friends, that's when you do a major insertion into their lives. You become very unpopular, but you make that insertion and you take out that friend, no matter what the collateral damage is. That's your job as a parent. Focus for the first six years, course from years 6 to 12, and then after 12, just focus on the friends. Anyway, so at 12, he's getting the ticket to the racetrack one by one by one, going through it every night. Then at age 23, he's got the Moody's Manual, and he's going through every single stock in the Moody's Manual, right? And he finds Western Insurance. Western Insurance, by the way, which Buffett sold, which, you know, I think it was like $15 a share with $25 earnings. That's kind of weird stuff. He was looking for the, you know, like the tickets the drunk had left behind. And so he goes to the Moody's Manual, finds these companies, and Western Insurance, for example, if you kept it from then till now, which he never did, it's compounded at 19% since like 1951 or something, still going, you know. But anyway, he made a lot of money doing that. And then more recently, we have the Japan bets. He has a subscription to Japan Company Handbook, I think. Guys, and I met Warren Buffett for lunch in 2008, which was fantastic. And then Warren introduced me to Charlie, and Charlie became a good friend. And, you know, I played a lot of bridge with Charlie, and we used to have dinner at his place once a quarter. One of the best experiences I had, better than the Buffett lunch, was the lunches I had with Buffett's assistant, Debbie. Guy, and I would go to Omaha every year, and we had interaction with Debbie setting up the lunch and all that. So we asked Debbie, "Debbie, would you like to go to lunch with us?" And she said, "Look, Friday before the meeting, it's a zoo. But if you come on Thursday, I'm free on Thursday for lunch." So we went to Omaha on Thursday. We had lunch with Debbie. And lunch with Debbie was 50x better than lunch with Warren. Like, way better because, you know, I could get to his core inner secrets because I told Debbie, "Debbie, us girls, can we talk?" And she said, "What do you want to know about it? I'll tell you everything." You know, and so I'm getting all this stuff about how Warren operates, which is a lot of fun. But anyway, one year we go to have lunch with Debbie on a Thursday, and we go to the 14th floor in Kiewit Plaza, which is now Blackstone Plaza, and Warren's at the elevator bank. And I thought maybe he's going somewhere, but he's come there to greet us, you know, the two yo-yos, Forest Gump and his buddy. So he says, "You guys want a tour of headquarters?" I said, "You know, if you want to waste time with a couple of yo-yos, no problem." So he takes us through headquarters, showing us, "This is the letter I sent to, you know, this fund that was going under, Long-Term Capital Management," and "This is the first stock certificate of this and that," all this memorabilia all over the place. And he showed us his Coke fountain machine, of all of that. Then we go into his office, and in his office, I notice he has the Japan Company Handbook, and it's like right on his desk, like he's kind of been leafing through it. And I had a subscription to Japan Company Handbook at the same time, and I had been through that issue. So I told Warren, "Instead of you going through this one by one like you do, how about I just dog-ear the pages for you?" And I didn't wait for him to answer. I just proceeded to mutilate his copy, you know, dog-eared whatever I wanted to. It turned out that most of the good stuff was in the back. I said, "You know, Warren, you're going through from the front, but most of the good stuff is at the back." He said, "Yeah, that's the case. I start with the A's, but the good stuff is in the back." Anyway, so he's been going through Japan Company Handbook, I think, for at least 15 or 20 years. Okay, no action, just reading through it. And then he finds the five trading companies. And then he goes in, and the five trading companies, what he does is they all have 7 or 8% dividend yield at the time. They're very cheap. He can borrow in yen at half a percent. Berkshire doesn't need to borrow. They're drowning in cash. But Warren likes to play games, right? So he borrows the entire amount at half a percent in yen in Japan and buys the whole thing, levered. Okay? Which means because the equity that went in is zero, the return is infinite, right? And then after a few years, all those companies double their dividend. So now he's getting 15% a year, paying half a percent. And the stocks have tripled. So like, total home run. And then Charlie says to me, "That was Warren just right on point, doing so well, blah, blah, blah." And he says, "Berkshire's so big that whole thing is just lost in there. Can't even see it, you know, it's so small." But the kid from 12 to 23 to 90, even 95, is the same kid because the cake is baked at five. So he's doing the same thing he was doing when he was 12 years old.
Then we have this quote, some of you might have missed from the, might be missing in the Columbia curriculum, 2,700 years ago from the Upanishads: "As is your desire, so is your will. As is your will, so is your deed. As is your deed, so is your destiny." And then the punchline: "Your deepest desire is your destiny." So what does this mean? What this means is if you say, "I want to find PE 1 stocks," and it's your deepest desire, you've gone all in. No skepticism. You will find it. The first company I visited in Turkey with my friend Erol was a PE of 0.1. Not a PE of 0.1. PE of 0.1. I mean, one month's earnings was equal to the entire market cap. What an orgasmic experience. Then I asked him why it was at a zero PE of 0.1. And when he explained it to me, there was too much hair even for someone like me. I couldn't go there. But he owned it. If you want great compounders at bargain prices, you will find them. If you want great compounders at less than 2% of liquidation value, not even 3%, you will find them. The key, most important thing is, what is your deepest desire? You can't have five deep desires. You have to have only one deep desire, and you have to go all in. So if you buy into Model 18, it will happen.
Then, you know, Charlie said to me, "You should always have someone to discuss your investment ideas with." So I said to him, "Oh, you mean like Warren Buffett?" So he says, "Monish, it wasn't always Warren Buffett. There were other people." But he says that our brains, I already told you, are a messy place. And you will be convinced that some idea that you've come up with is the best thing since sliced bread. But let me just tell you, it's not the best thing since sliced bread. So share it with someone else. They will tell you why it's not the best thing since sliced bread. And so when I met Charlie, he had already adopted Leeloo as his son. So he told me, "Monish, I want you and Leeloo meet each other frequently for lunch, not less than once a month." So I told Charlie, "If Leeloo wants to spend time with a yo-yo like me, I have no problem." So since Leeloo was given a commandment from God, "Thou shalt have lunch with Monish," you know, he had to have lunch with me. And at that time, there was only one location, Din Tai Fung, had in the United States. Now we have one in New York. So I told Leeloo, "Why don't we have all our lunches at Din Tai Fung? At least that way, you know, the food is going to be great. The conversation will be great. Everything will be great." And those were great. And then, you know, of course, he's in Seattle now, and I'm in Texas now, and we don't get to see each other as much. And so Munger's plan didn't quite work out. And then, you know, I have my friend Guy Spier. And again, I had a lot of fun discussing a lot of stocks with him. I don't call them "God stocks" these days, but I try to spend as much time as I can with him. But very important to have someone that you completely trust and that you respect a lot, that you can discuss your stuff with. That's really important.
The mistress always looks hotter than the wife. But let me just tell you, in reality, the wife is hotter. Don't go by what your brain is telling you. Your brain is lying to you. What do I mean by the mistress and the wife? So the wife is the stock you already own, and the mistress is a stock you're looking at. The stuff you already own is awesome. Be very reluctant to switch the wife for the mistress.
Then there's Polonius in Hamlet, and Warren edited Polonius, and I decided to keep his editing: "Neither a short-term borrower nor a long-term lender be." If you're going to go into debt, you want to lend short and borrow long. Please remember Model 21.
Model 22, which Charlie told me many times, I think he told all of you: Introduce randomness into your life. Randomness is really important. So, this is before Monsoon's born. I think it's like 2 years before she was born, in London, vacationing with my wife. And I'm looking for something to read on the plane. And I go to the bookstore in the airport. And I've never bought a stock in my life, but I like this book. Looks interesting. So I buy this book, Peter Lynch. And I read the book. And I really like it. So then I looked up that Peter Lynch had another book, you know, Beating the Street, and I read that book. Then I was out of Peter Lynch books, and I said, "This is so sad because I was really liking the guy." But then, you know, he's talking about this guy, Warren Buffett. I've never heard about Warren Buffett before. It's like 1994 or something. So I said, "Let me find out about this Buffett guy because he's talking about him in like, you know, reverential terms." And then that opens up this huge universe, you know, all the books, shareholder letters, and there were the first few biographies on Warren, and I start reading all of those, and I'm like in heaven, you know, it's just great. And I end up, you know, I've never worked in the industry before. It's because I picked up this book that I heard about Buffett, that I started to invest, that then my friends told me to set up a fund, and then here I am, just pure Forest Gump. Okay. So, basically, randomness is really important because I don't know where I'd be if I hadn't read that book. And that book was a total random thing I picked up. I wasn't looking for a book in that subject. So, really important. Then
Now we're going to do some violations of the previous web model, and I'm sorry about that. But, you know, we need to be a Swiss Army life. You know, like Warren has so many different blades he brings out at different times. So, even though I we have the 20 punch card, the 20 punch card is there. Those are the compounders. You're going to find one every five or 10 years and we keep that. But pay attention to the spin-offs. And then focus on the uber cannibals, the companies that are eating themselves.
So we have this company Alpha Metallological Resources in my portfolio. And you know, gold prices go all over the place. In the last four years, they bought back 32% of their shares. Apple bought back 11%. Microsoft bought back 10%. They bought back more than any other company. And they just take all the extra cash and buy the shares. Beautiful focus on the spawners, you know, companies that are creating other companies like Alphabet and Amazon. And then arbitrage is great. You know, like these are Mickey Mouse games we play while we're waiting for the real game to show up. So like I own a company called Trans Ocean. They're acquiring Valeris and if you buy Valeris and buy Trans Ocean and you know deal closes, you make some money.
Then there's, oh, we're already 710. We got to bring this to an end, but we're model 28. We only got two, three more to go. Almost there. So heads I win, tails I don't lose much. You know, we want upside without downside. We always want that. So I'll just tell you this story very quickly because it's a nice story.
There's a Canadian company and I I find in like 2004, 2003, 2004, I think, and $15 a share in cash, $40 stock price, and they have guidance saying the next two years we're going to have $15 a year in cash flows, no debt. So include the two years of cash flows, you got $45 of cash and $40 stock price, plant, equipment, inventory becomes free. So I said after that it could be losing money, it could go negative, whatever. But why keep such muru's thoughts in your head? So I said we just going to buy this stock. We're going to own it for two years. Going to see what Mr. Market does with this. So we put 10% of the portfolio into IPSCO just understanding this math. And a year goes by, they say we're going to have one more year of $15. Hallelujah. And now the stock's at 90 and it's been over a year long-term gains. And I'm saying bonish, it could still go negative. You know, could bleed. It's a >> while I'm thinking these thoughts, some Swedish company comes in, offers to buy them at 160. Stock goes to 155. One fto a second later, I sell it. We move on.
Then someone on Twitter on X basically puts a message. Console energy looks, you know, David Einhorn's bet and console energy looks like Monish's Ipskco bet. This is why I mention these things like IPSCO because they go on videos and then people tell me I say there is a God who loves me. I go's back and then I look at console with the lens of IPSCO and I realize it's almost exactly like that. I said let's go buy console and then that leads me to Metco and that's been great.
So anyway, you want to focus on low risk, high uncertainty bets. So if a business has low risk and high uncertainty kind of like let's say an oil company, you know, who knows what the oil price is, uncertainty is very high. Then the rewards are likely to be very high. So that's the formula. Low risk plus high uncertainty is likely high reward. So always focus on the low risk, high uncertainty. Wall Street loves low risk, low uncertainty. ADP, you know, payroll processor, ultra low uncertainty, price to perfection. We want the opposite of that where Wall Street cannot figure out what the earnings are and then it gets confused and then we can make money and then model 30 which might be hard for all of you do not skim off the top. You know the 1% 2% 1 and 20 2 and 20 go 0625 and life is better. I think Warren and Charlie both became friends because they appreciated that that and the foundation. So now I have to skim off the top because I have an ETF. So kicking and screaming I have to skim off the top but try not to do that.
When you combine all these mental models it's a very large number. The key is you use them all at the same time. If you use them all at the same time you are a very invincible machine. Nothing can stop you. Then a few more models. You know these three books they can help you get more models. These are models for starting a business. We not going to go into them. You can watch the slide later. And then these are models for life in general to be given at a future stock not over here. These are the models we talked about. And that's it. Thank you so much. >> Thanks for being here. I hadn't realized your portfolio was maybe concentrated in Turkey. And I was wondering if you could talk a little bit more about what you see in the country demographics. a friend had just pitched me on Caspie which I think was in the news and I think he's pretty I was wondering if you talk more about Turkey as a market um and where you see the >> So I'm Indian I'm not Turkish right and I find India a very difficult market to invest in and I find Turkey a very easy market to invest in and the reason is that in Turkey the float of the average public company cycles every 17 days. And in fact, my Turkish friends tell me their surprise is that much they thought it'd be like 5 days or 10 days. So the average Turkish retail investor and maybe even their professional investors, they want to buy at 10:00, they want to sell at 3:00 and they want to make 10%. That's their business model. No one does any research on anything. Warren has a quote that the stock market's a mechanism to transfer wealth from the active to the inactive. Couldn't be truer in Turkey.
So when I was buying RAS which is you know sitting at you know 15 20 million the broker tells me I have a 5% block 5% of the company block available for a million dollars Templeton Funds is selling you want it he said that they want 5% above the market price okay I said take it out right so Templeton Fund is not a Turkish entity some yo-yo in New York issues an order to the guy in Turkey sell everything in Turkey okay with no consideration for what is actually being sold. The 5% that they sold me for $1 million currently has a value of $125 million. But actually, I think that in three or four years is probably about eight or 400 million. So, and it's not done there because I think they're going to compound for like 20 years from now. India on the other hand has two issues. One is there are very few businesses that are publicly traded in India which have great corporate governance. So if I look at 5,000 listed companies in India, I could come up maybe 100 maybe 150 businesses that have exceptional corporate governance. So that's basically your universe. Lots of smart investors all in those names. And so I find a great business in India and it'll be trailing earnings 50 times P, 70* P, so on. And I find the same great business in Turkey and it'll be at four times, six times, seven times, whatever.
the lattis work of mental models first model take a simple idea take it seriously we're going all in on Turkey full on no consideration over anything else deep go deeply into it now next question >> thank you for coming I think your daughter is also interested in investing and actually might have come to Nick Sleep's lecture I was wondering how you think about you know the pressure that's on her to replicate and what you've done is you know >> I never talk to my kids ever about investing or becoming investors I always told them find what you love to do and then go do that. Okay? And what ends up happening is it's not that the apple falls near the tree. It falls directly under the tree like at the epicenter of the right near the trunk. You know, that's the way life is. But the thing is that she is very advanced compared to me in the sense that she's only interested in the great businesses which took me so long to get to which is great. The negative is she pays too much and we've had that conversation. Now we're having it in public. Okay. So, but she'll get there. The good news is her favorite stock or maybe her second favorite stock is Turkish Costco. So, we're getting there. Life is good.