Collection: Mohnish Pabrai - #105 'Circle of Competence and Apple Inc'



[Transcript]

AUDIENCE MEMBER 00:00

Watching your previous videos, you talked a lot about your circle of competence. And I realized I didn’t know what my circle of competence was, so how do you recommend we discover that or develop that?


MOHNISH PABRAI 00:19

You know, I will just give you Charlie Munger’s question – I mean, Charlie Munger’s answer to that question which is to ask the question is to answer it. If you are wondering, if something is in your circle of competence, it is not in your circle of competence. So, it’s as simple as that.


ARVIND NAVARATNAM 00:44

Another questions?


AUDIENCE MEMBER 00:49

One of the companies or two companies that you mentioned you missed were Apple and Amazon. You mentioned it was out of your circle of competence as well. And I was wondering what exactly about those companies kind of placed you concern about your understanding of them because it seems that you are pretty well of knowledge in – you know, tech in general?


MOHNISH PABRAI 01:13

Yeah I mean, I think Apple – Apple is a – You know, I have a very good friend of mine who is a venture capitalist in Silicon Valley. And right after the first iPhone came out, he called me and we had a long conversation. And he is an investor in my funds.


And he told me that I needed to buy Apple in Pabrai Funds, this was I think in 2007. And he told me and try to explain to me the App Store and what that meant. And kind of where this was going with the App Store and the ecosystem. And he also tried to explain to me. It was the most eloquent discussion I had with anyone about why to invest in Apple.


And you know, he highlighted the moat and but he also highlighted the fact that, you know, one of the – [BROKEN RECORDING].


– a pretty powerful computer in each of our palms. And he thought that was a very significant game-changer. And you know, this was in 2007, it was well before Uber came out. It was well before a lot of companies came out. And a lot of these companies could not exist if the iPhone did not exist.


I mean you just wouldn’t have Uber if you didn’t have an iPhone. It is just not possible to do without a smartphone. And so it basically became the infrastructure on which everything got built.


But you know, I'm one of these stupid people that when people hit me with a two-by-four on my head with a great idea. I'm still not able to see it. And somehow, we still live along and do okay. And Arvind still want me to talk to you guys.


So I looked at Apple at that time, it wasn't in a single digit P/E. The moment something is not a single digit P/E, I am gone, you know, you already lost me. The moment you get to something at 11 times earnings or something, you know, I'm gone. So clearly, I did not appreciate (it). I mean, I understood what he was saying but I didn’t want to pay up. You know, I wanted a lot cheaper price to get a business like that. But even then, I was always been skeptical.


And even today, if you look at Apple today – forget about 2007 – let’s look at 2016. So Apple trades at a pretty modest multiple. You know, if you look at their earnings stream versus the market cap. It is very different from Amazon and Facebook. I mean, it actually produces massive earnings. And it is trading at less than – you know, after you take out the cash – I don’t know, I think less than 12 or 13 times the earnings? I think Arvind may have the exact number.


And that is not a high multiple for a business like that. But you know, I also playback in my head, the graveyard of companies in technology like Blackberry and Nokia, and these other ones that had huge runs and disappeared. And Apple has something more than those companies have. Because they have the App Store and they have habits.


The important thing – this is what my friend in 2007 was saying, “Mohnish, humans’ habits are changing with the iPhone. And you have to understand when habits changed, that is very enduring." That was a great talk. I wished I record that talk, because if I could play it for you, it would be better than me babbling here. And so he was telling me about habits, economy and all these habits were very important. And I didn’t appreciate that.


So today, we have a situation where Apple, I think unit sales are dropping but their earnings are still rising. And because the ecosystem just gets larger. You know, there are over a billion devices which have apps on them. And every quarter, the number of devices that have apps on them increases even if their quarter over quarter sales declined. And of course, they got a – you know, free tailwind from the woes of Samsung, if you will.


But you know, my take is that this is one of the things where you want absolute no brainer and any time in your – in the investing world, you have doubts in the head. Then, you are better off just not going there.


So for example, for me, drilling into the shipping company half off is a lot more tangible to get comfort than I could get with Apple at 12 times earnings today is just – and that may be a mistake. But it's just the way I am wired. And so someone else can hopefully figure that out and do better with it.


And of course, since that time, my venture friend sprinkles salt on wounds and reminds me what his Apple's position is worth versus what his Pabrai Fund position is worth.


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

 

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