Collection: Mohnish Pabrai - #136 'Lesson & Story of Warren Buffett at Ak-Sar-Ben Race Track'
AUDIENCE MEMBER 00:00
The question is you talked about the Few Bets, Big Bets, Infrequent Bets, and as you know today the markets are if you consider one side, this thing is extremely bullish, you know, where we are today, you know, we are at the tops.
Maybe there is still some growth left, but I mean are there opportunities like that in today’s marketplace and if there are, where would – let’s say the students are the ones with bigger means, you know, I’m talking about $1000, $5000 dollar invest, where would they put their money?
MOHNISH PABRAI 00:30
Sure, yeah that’s a great question and well I hope to – I hate to quote Jim Cramer but Jim Cramer has a great quote, "there’s always a bull market somewhere."
So there are even if you just look at publicly traded equities, there are probably a hundred thousand stocks around the globe that are publicly traded. And there are probably several thousand of them or maybe at least several hundred of them that are in one way or another trading significantly below intrinsic value. And so in many ways it’s a treasure hunt or like Munger would say why should it be easy to get rich, but I think that if one were intensely focused on that, one would get there.
So I’ll just give you a story from Warren Buffett’s childhood when he was a teenager. So when he was a teenager in Omaha, he used to go to the horse racetrack, it was called the Ak-Sar-Ben racetrack, it’s a Nebraska spelled backwards.
And he’d go after all the races had finished and he collect all the tickets that had left on the ground which were all losing tickets. And he collect them all and then he carefully go through each one to see some drunk had discarded a winning ticket.
And once in a while, he usually find one, two, three or a few tickets that were actually winning tickets that have been tossed and then because he was under age, he sent his aunt Alice to the window to collect.
And then you know, he put that money away and then next Sunday, he was again there to collect his winning tickets, and so those were free lunches, right? I mean there was an effort involved but for a kid, it was a free lunch if you will.
And when he was about 21 years old, Buffett went through something known as the Moody’s Manual. So these Moody’s manual covered a number of different industries, they were about 20,000 pages in all and they came out every year.
So he said that in 1951, he went through all 20,000 pages in these manuals twice. So in a year say 2,000 working hour probably for Warren 4,000 working hours, he’d gone through 20,000 pages or 40,000 pages. Now if you’re going through 40,000 pages, how many pages is that per day? If you have let’s say you have 400 days, so what would we have? 1,000? No, be 100 pages a day, right, approximately 100 pages a day.
Not that much, you can do it, 100 pages is not that much and what he was doing even 100 pages a day, you’re going pretty fast and he was going fast so he was going through those 100 pages a day, the exact same way he went through the Ak-Sar-Ben tickets. You can take the kid out of Ak-Sar-Ben, you cannot take Ak-Sar-Ben out of a kid.
Okay, so what was he looking for? Well, so for example, he found – I think he was saying page 1433, Western Insurance two years back, they made $22 a share and then last year they made $29 a share and the stock was between $3 and $13 was arranged for the last 52 weeks and they had $135 in book value, okay. So for him, Western Insurance was identical to the Ak-Sar-Ben ticket that the drunk had tossed, it shouldn’t be there, right. Western Insurance should not be trading at a range of $3 to $13.
And then he said he saw Western Insurance, he stopped, you know, he’s flipping pages, stops. Pulls up the AM Best manual which is the insurance manual for insurance company, looks at it, he says there’s nothing wrong with it, talked to a couple of insurance brokers, they said the company is fine. He put some money into Western Insurance, he said 10 pages later he finds another insurance North American something sure deal or casualty or something, again very similar numbers and such. And then he says the book really got hot and heavy towards the end, you know, there were all these exciting things going on.
And in 2011 – so this was 1951 right, and then the Ak-Sar-Ben escapades were taking place probably around 1943 or something when he was 13-14 years old. 2011, my friend Guy Spier and I were visiting Warren and we were in his office, in his private office.
And I noticed there was a book on his desk, and it was called the Japan Company Handbook and I was very familiar with the Japan Company Handbook because at that time Guy Spier and I was leafing through that book looking for Japanese net nets, very cheap Japanese stock.
The problem is that when you find – and it's in English which is great – when you find those stocks, you’d be lucky to get half a million dollar into it or $100,000 into it, I mean it was – these are small thinly traded Japanese companies but the thing is the Japanese Company Handbook with about 600 pages, 2 stocks per page.
So I see it on his desk and I said, “Warren, what are you doing fooling around with the Japan Company Handbook, I mean Berkshire Hathaway you’re deploying hundreds of billions of dollars, that is nothing in that book that’s going to help Berkshire Hathaway.”
Okay, because this is Mickey Mouse stuff. And so of course he’s a poker player, his expression doesn’t give away anything so then I picked up the book and I took it to some pages which I knew the stocks that I had found that was – I said, “Warren, let me make this faster for you, you know, here’s some Miyoshi Corp whatever else..."
And without asking him, I dog-eared a bunch of his pages in his book mutilated his book and give it back to him. And again, poker face he doesn’t, you know, say anything. And but what he was doing is he was probably going through that more for his personal account and more importantly the reason he was going through it because you can’t get Ak-Sar-Ben out of the kid, he still loves the treasure hunt. Okay, so he can put money into those things, but he loves the hunt.
In 2006, he told MBA students he did the same thing with some – a booklet someone sent him, City Corporate put this booklet together of Korean Stocks. And he found, he made 20 investments of companies in that book on one Sunday afternoon, he put a $100 million of his personal funds into 20 stocks from that book.
And so for example, one of the companies he invested in was Daehan Flour. Daehan Flour in Korea got 1/4 of the flour market, you know, people have to eat and it was trading for 35,000 won, the last three years of earnings were like between 18,000 and 25,000 won and it had a 100,000 won in cash and investment and no debt. So it’s 1/3 of liquidation value, there’s no business and on top of that there is a business, right?
And so coming back to your question about what do I do with $5000? Well, quite frankly, the $5000 is a huge advantage. Buffett has a disadvantage at $400 billion, that’s a problem, $5000 is not a problem.
So the question is are you willing to be like the kid at Ak-Sar-Ben? Are you willing to flip through 40,000 pages looking at 6 numbers per page to see whether you should flip the page or wait. And so, with 100,000 stocks in the world and auction driven markets, there are always mispriced securities and not only are they mispriced, in some cases they are extremely mispriced.
Two years back, someone sent me a stock tip and you know, usually when I come into work – one of the good things is that every day when I come into work, usually my assistants hand me a folder and there are usually two or three stock tips in there. Okay, it’s great, my email address firstname.lastname@example.org, please feel free.
Okay, so every day I come into work, I look at my folder and there they are, you know, two or three stocks I never heard of, that people sent in. And I just look at 2 numbers and then it goes in the garbage, before I send to garbage, thanks a lot, you know, appreciate you sending it.
But I look at 2 numbers, I look at the price the stock is trading at which is normally mentioned in there and the price the person is saying it should be trading at, right. If those 2 numbers are not apart by at least a factor of five or ten, I’m done.
So, unfortunately every day when I come in, this is what happens, Some guys send me a 15 pages elegant write-up immaculately done a lot of charts, etc., I’m just looking for these two numbers the stocks at 13 and after ten pages, it says it was 18. What do you think I do, Sanjay? "Thank you very much, warm regards," and but don’t let that dissuade you.
All I want to say to you, please don’t send it to me unless it’s at least a 5x and preferably a 10x and ideally 100x Delta between those numbers because you know, we need to get to Tenneco, right.
But the thing is almost exactly 2 years ago, some person I never interacted with, sent this 10 page very well-written report, I looked at two numbers, the two numbers were apart by a 10x, I said lo and behold, someone has sent this in, right? I said this is great.
So I have a like a Ekornes easy chair in my office, you know, Lin knows my office the Ekornes – I left my desk, I went to my Ekornes easy chair, put my feet up and started to read the report because now I was into an orgasmic experience, I want to make sure I fully enjoy the experience.
And I read the report and I couldn’t find anything wrong with it, I mean everything – I never heard of this company, but assuming everything he was saying was accurate because I didn’t know whether that was accurate or not, all I knew was he was describing some company and blah blah whatever else and then there was a factor of 10 delta. I said okay, the fairy tale looks awesome, now let’s see the fairy tale is true.
So I just – all I did was I spent about 2 hours just checking every number, I just opened up Google Finance and opened up a few other websites and I just went through the company’s website and I just check the way he saying debt is so much, is the debt so much, it’s non-recourse, is it a non-recourse, blah blah blah.
I just went through the checks and after two hours, I looked and said I’m done, everything is there, there’s nothing more to do and I put $20 million of Pabrai Funds into the company. It’s now at I think north of $50 million and I think we probably will get a hundred, maybe not a hundred, might even get $200 million out of it, we’ll see.
And you know, the guy who sent in I still haven’t met him, I did thank him, and I said: “Please keep them coming,” and I haven’t heard – I haven’t seen anything else from him, but if I see something from him, I’ll definitely go back to my Ekornes chair to read what else he has to say.
So the bottom line is that if one word to be unreasonable and say I only want 10 baggers or 5 baggers or whatever else, they gonna show up. If as long as you're willing to be patient and be unreasonable about it, but the thing is what it takes, it takes the intensity of the person in Ak-Sar-Ben, you know, that’s a very unusual teenager who’s doing that and that’s a very unusual 21 year old who’s doing that. I don’t know any investment analyst who pound through 40,000 pages. Maybe they do but I don’t know that, you know, and who are going through with the intensity that Buffett went through.
And one of the things is that, you know, Einstein used to say that compounding is the Eighth Wonder of the World and the reason he said that is that, so Sanjay if you have a thousand dollars and you find one of these five baggers.
Let’s say even every 10 years, right, and you start at the age of 20 and you’re dead at the age of 80 for example, so you got six decades right, every decade your money multiplies 5x. So $5,000 becomes $25,000 when you’re 30, it become a $125,000 when you’re 40 and it becomes $625,000 when you’re 50, it becomes little over $3 million when you’re 60, it becomes $15 million when you’re 70, and you got $75 million when you’re 80 and dead and that’s what about $1000 or $5000, right. So we don’t need – this is the magic of compounding is can you find one five bagger every 10 years?
You got, you know at least 20,000 hours in 10 years if you just work 40 hours a week to find one, one should be able to find one. So that’s the name of the game. Other questions?