Collection: Mohnish Pabrai - #104 'Would You Sell a Business with Great Moat When It's Overpriced?'



[Transcript]

AUDIENCE MEMBER 00:00

Do you have a stock that you believe is that like – Coke or Moody’s – to a point is that worth selling? Though it's a 100x or 150x, like when you do you feel comfortable and how?


MOHNISH PABRAI 00:14

You know that is a really good question. And the reason it is a good question is because I think in the past I have not been good about that. And I think the thing is that there is an asymmetry that I had a hard time understanding.


And you know, someone like Tom Russo understands this really well, someone like Tom Gayner understands this really well, even someone like Charlie Munger and Warren Buffett understands this really well.


And – But I think like for example with Tom. You know, Tom is always buying companies that are either no.1 or no.2 on the list. Either they can be run by idiots or they have great moats that need non-idiots. I never seen things in his portfolio which goes to no.3, 4 or 5. They're always on no.1 or no.2, right? So he is always playing in the no.1 or no.2 space. Which is a great place to play.


The only critique I would have, if I would critique something about Tom is that they haven’t been, in my opinion, the level of price discipline in buying as perhaps might be better to have.


So, you know, there is a – there is this story about the differences between Ben Graham and Charlie Munger. So Ben Graham will go into a grocery store. And he looked for what item is discounted the most and he will buy that item and come out. And Charlie Munger will go to grocery store and look for item that he truly loves and then he keeps going back every day till it goes on sale. And then when it is on sale, he will buy that and come out.


And clearly, the Charlie Munger approach, in my opinion, is a better approach. Sometimes, some people have taken the approach of just going into a grocery store and buying what they love regardless of price or without too much attention being paid to price.


Where even a nearly fully price is okay and that can work out fine. I mean, you could buy CRISIL at a full price 20 years ago and still done well. So clearly with some of these incredible moats, you can do really well even at full price. I had a hard time with that. I think that is something I'm probably never be – That's a bridge I'll probably never be able to cross. But what I believe I can cross is – I can buy – I can identify these assets.


I mean I have a company in my portfolio today which is like Coke. I never thought that would happen. But I have a company like Coke. This is a company that can be run by idiots. I never thought that it could happen. I actually have a business can be run by idiots. So awesome!


And it is no.1, it's like one of those absolute no.1 companies, almost impossible to destroy the business, almost impossible to destroy the moat. I believe that moat will be around a 100 years from now. It maybe around 300 years from now, it is super super powerful in terms of the quality of the moat.


I have decided that for that one business. I'm just never selling it, okay? Because I never have the good fortunes of such things happening. So, I will leave that one alone and I will play Mickey Mouse games with the shipping companies and the other stuff. And leave with it that way, leave that one alone.


So to answer your question I would just say this, if you are able to get a Coke for 14 times earnings. My two cents to you is, you know, Warren said that he made a mistake in hindsight of not selling Coke in 1999 or 2000.


So if Berkshire – So you know, 1999 or 2000 Coke was selling at 40 times earnings, and then that multiple dropped very significantly to less than half of that. And they never sold. And he said it was probably a mistake not to sell and – But the reality is the action he took was not to sell.


I don’t believe Coke is going to be sold by Berkshire in either of their lifetimes. And I don’t believe Coke would be sold by their successors for maybe a decade or more, after they are gone.


So Berkshire may be holding Coke for at least let’s say 2 or 3 more decades or even beyond that. And quite frankly that might be a wise decision because how many businesses can you identify, that are like that.


I mean, Coke is not even about sugared water. If you look at their portfolio of the 100+ brands that they have, and how many of those brands have anything to do with sugar, I mean that number is going down. So actually, when people think of Coke, they think of the sugared water product. There were gazillion other products, and they have the distribution engine and all the different economic that makes it such a great business.


So my two cents to you is that, if you are able to buy these type 1 businesses at a modest multiple, probably really good things will happen to you.


I mean, let me put it this way, I think the businesses that I bought, I would say that if I got to a 50x on it, which may or may not happen in my lifetime, I might sell. I don’t think I'm selling at 10x.


(Source: https://youtu.be/IOoaNYQHaYY)

 

[YAPSS Takeaway]

Every investors struggle; "Should you sell a great business when "you think" it's overpriced?"

2016 Mohnish Pabrai: Yes, I would when it is truly overpriced.

2021 Mohnish Pabrai: No, I wouldn't. (After the lessons from Nick Sleep)