Collection: Mohnish Pabrai - #162 'Does Currency Risk Matter in Foreign Stocks Investing?'



[Transcript]

ARVIND NAVARATNAM 00:00

You talked a lot about investing in Turkey and in other foreign economies, non U.S. economies. How do you think about currency risk?


MOHNISH PABRAI 00:11

I'm sorry, how do I think about what?


ARVIND NAVARATNAM 00:12

Currency risk.


MOHNISH PABRAI 00:14

Oh yeah so it’s irrelevant.


So basically the bottom line is that if you are right on the business, the currency is not going to matter. And you know like I mean my first investment in India which I made personally in 94, basically went up like a 150x in 5 or 6 years, the currency moved like 30% against me – 30 or 40% against me in that period – it was irrelevant.


And I think even now when we are investing at these P/E of 1 type situations, I think the currency is – Well, in some cases we are actually investing in assets that actually have an international value and so I’m not really concerned.


I mean I’ll give you an example, I probably won’t make an investment in this company but one of the things I found unusual about Turkey was, so I visited a cement company in Turkey and cement is an industry where you are very tied in geographically, you know, transportation cost of cement is very high relative to production cost.


So basically a cement plant typically starts to get non-competitive, once you are getting to be a 100 or 200 kilometers or miles away from the plant. So it tends to be very geographically, so once you’re about 200 miles away, another plant is going to have typically have some advantage over you because the transport cost starts eating it. And so most cement plants are geographically constrained, they can only supply within a region and be competitive.


So when I visited this company I noticed that they had a small percentage but a percentage of exports and I’ve never seen a cement company exporting cement. So I was kind of confused by that, you know, one of the things I – you know, the thing what this industry is that all knowledge is cumulative and I have met with about at least 10 cement companies in India.


You know and one of the 10 CFOs I met who I like a lot, just told me this is a shit business don’t invest in it and let me explain why you don’t want to invest in it. He instantly became my friend and he ran through the numbers and explained why I should never invest in the business. And anyway I had already got into similar conclusions but not with his precision.


So before I even went into the – you know, I go into these meeting like this cement company, I tried to even cancel the meeting because I said listen this is going to be a waste of time, I’m just never going to invest in cement and but the meeting was already set so whatever, so we – Anyway, so I said okay, you know, what I always find with these things I think it’s going to be like a wasted hour, but it turned out to be like incredible.


Every time I’m always wrong when I’m thinking that this is a useless business whatever else, there's no point, it ends up being a great hour of business school you know, and this was another great hour of business school.


So I’m talking to the company I said, listen I’m noticing you got like this, you know, relatively small percentage but like you know 8-9% of your volumes are being exported, so you know I’m the village idiot you can’t run cement – you can’t transport cement very far, can you explain what’s going on here like how can you get to actually exporting?


So the CFO says that our plants are sitting on the coast and we have a dedicated port, and I didn’t realize but Turkey has incredible advantage on production of cement. And I think it must be because and actually I haven’t figured all this out, but I think that 2 big ingredients of cement – 3 big ingredients are limestone, cheap coal and cheap energy. Those are the 3 things you need to make cheap cement.


And they have all 3 of these are cheap – I think I have to research the limestone – but definitely the coal deposit – Turkey has no petroleum, it has a lot of coal – and the power rates are very low. So their cost of production of cement is very low in Turkey and they are able to take that cement put it on a ship and get it to the East Coast of the U.S. and get it into the Horn of Africa and – not on the Horn I’m sorry, on the other side, on the West Coast of Africa.


And in both cases, they’re very competitive and of course, when they get into the East Coast they can’t go very far, but just the way geography is in the U.S. we have high population density on the East Coast, so once you’re at the port you don't need to transport very far to get to humans who need cement.


And so basically when he explained the economics, so I told him listen the devaluation makes you even more competitive. And so the CFO explained that their domestic cement business, he said listen don’t look at our number in the past, I’m just telling you they’re going to be terrible in the future okay. Because he says the brunt of the financial crisis has not shown up into our numbers yet, I said I’m so grateful for the candour, thank you so much.


And but he said look what’s going to happen is that by 10% or 9% of volume that’s being shipped, it’ll take me some time but I will get to 50% being shipped – being exported – because I was competitive before, but I am way more competitive now because of the exchange rate.


And so this is an interesting business in the sense that it’s almost as if the currency doesn’t matter so much because if the currency drops further he’ll go to 70% exports eventually and such. And the other thing is the currency goes the other way, it probably is because the economy is getting better so his domestic volumes start increasing.


So I just found it interesting that, you know, the only other company that I know of like this is Posco in South Korea, it used to always be that you couldn't really have a steel industry unless you had iron ore in country. And what Japan and South Korea proved that you could just bring it in and ship it out.


And so Posco if you look at it in South Korea you know their port infrastructure, one of the most advanced in the world is set in U where the ships that drop off the ore are the same ships that pick up the finished product in just a u-turn, a very efficient logistic.


And so Posco was able to bring all the resources in they needed to make steel and ship them all out and still be super competitive. And all of this works very well because ocean shipping has become super cheap over the years.


So there’s a great book you guys might enjoy it’s called 'The Box', I think Marc Levinson is the name of the author. And it talks about the whole incredible transformation we saw because of the container, you know, we don’t pay attention to container but container shipping transformed shipping.


And then I’m reading another book which is even funnier in the same way, I think it’s called 'Ninety Percent of Everything' I think that's what it's called, but this lady goes on these container ships – this journalist – and she’s kind of, you know, explaining the industry while being a passenger and she has a lot of funny experiences on these ships and her writing style is quite funny. So that’s another great book which is kind of a mix of entertainment and education, so 'Ninety Percent of Everything' I think is that name, but that’s another great book.


But anyway so I think one of the things should understand about ocean shipping is for practical purposes, ocean shipping is nearly free. I mean I can get from Turkey to the U.S. cheaper than I can get 150 miles inland into Turkey you know. So it’s the quirk of ocean shipping so anyway hope that answers it.


(Source: https://youtu.be/9tGjXPhnp-s)

 

[YAPSS Takeaway]

  • Currency risk is irrelevant if the business has international value.

  • Two books on shipping industry; The Box and Ninety Percent of Everything.