Video Link: https://youtu.be/N5ABlpQzQoI
In this episode, Mohnish Pabrai was asked when he is analyzing a company does he only look at the financials and how much time does he spend on it?
In this episode, you’ll learn:
How long does it take for Mohnish Pabrai to analyze a stock?
What is the main purpose of analyzing a stock?
How to create a basket of Net-Net investments?
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AUDIENCE MEMBER 00:00
I'm former VC and currently investment banker. I'm big fan of Mohnish since I was doing my CFA, so great to see you speak here. You know, the business I am in, we spent a lot of time looking at the product and technology and where it’s going. And we don’t get to see as much past financial and find those things, right.
So, when you gave this wonderful examples, you know, Blue Chip and Tenneco and those and even – you know, the Moody’s Manual and Japan Company Handbook – and how you kind of pin it down to couple financial ratios or multiples and figure that one out.
But when like Charlie figure out Tenneco or he figured out, you know, Buffett and team, you know, Blue Chip. And when you do your work, how much – once you find that five bagger or ten bagger – how much work goes into like looking at the product or the business itself besides just financial, right. And because you look across so many sectors, like me you can't – one cannot be expert of all the sector, right.
MOHNISH PABRAI 01:10
AUDIENCE MEMBER 01:10
So what role does that play if at all or it is purely financials?
MOHNISH PABRAI 01:16
No, no that’s a great question.
So the answer is there’s a wide variance in some cases the time spent is very short, I would say that with the tip that individual sent me, it didn’t take much time. And one of the reason it didn’t take much time was that the quality of that report was extremely high and actually what I discovered because I was really blown away with a high quality of that report.
So I’ll answer your question but just to give you some a little bit of a kind of backdrop. So I never talk to that company or interacted to them in any way when I bought the position.
Very recently I went and I was in the same city as the company, I said let’s go meet them, you know, let’s see what’s happening, right. And so I arranged a meeting and the CEO wasn’t there but the CFO was there.
AUDIENCE MEMBER 02:19
You did this one after you made the investment?
MOHNISH PABRAI 02:22
Couple of years after I made the investment, right. And so I go in and you know, we owned close to 10% of the company so we’re one of the largest owners of the stock outside of the family that controls it.
And so I meet the CFO for the first time, he says; "you know, Mohnish, all these years all these people have been badgering me about why you invested in our stock and I kept trying to explain to them I’ve never interacted with this guy, okay, I’ve never had any interact and they don’t believe me, they don’t believe that someone will take a 10% position in a company without ever having met them so they think I'm kind of lying to them. But I told them there’s nothing there.”
I explained to him that I had received this, you know, very well written thing and what ended up happening is that he gave me some data that completed the picture.
So there was an Italian analyst – this is a company based in Hyderabad in India – this Italian analyst who have also never met, visited the CFO probably – visited the CEO and CFO in Hyderabad probably 4 times over 2 or 3 years doing a very detailed drill down on the business and he was really going back several years before I bought the company and then he put together a write-up, I haven’t seen that write-up till later and then this other individual took that write-up and then build on it, right.
So by the time I got involved, I have these two great unpaid analyst who done a phenomenal job and it worked out well. And so in that particular case because so many of the pieces were kind of put in place for me, there wasn’t much – I didn’t spend much time. Others had spent hundreds of hours on it to make it easier for me, so thank you very much.
But you know, I was – I would say about 5 years ago, I was looking at the auto industry which I always hated and in that case it took me I think probably about 2 months of you know, staying up to 3:00 or 4:00 in the morning reading to finally get to the point that I was ready to make an investment. So in that case it took a significant amount of time, probably the most time they get to hundreds of hours to get to where we need to get to.
So there’s a range if you were going to build a basket of Japanese Net-Nets, that probably wouldn’t take you that much time, you probably won’t need to spend even more than 30 minutes on a company and also you would probably make the bet size really small and you’d make a bet with 10,15 or 20 companies becoming a basket bet and you could do that.
And even today, you know, if you look at for example, the South Korean market. The South Korean market today is probably one of the cheapest markets in the world according to me, I think the small cap Indian market and the South Korean market are relatively cheap.
But South Korea has these preferred and there are lots of them, they created huge discounts to the common, the only difference in the voting rights which really don’t matter. And so, in some cases the preferred are trading at one-third of the common when economically they’re identical and this is in 2017 when it shouldn’t be happening, but it is happening, it’s happening right now.
So there are – I would say that there is a range, sometimes it takes a lot of time, sometime takes little time and it’s just wherever it falls, you know, that’s perfectly fine.