AUDIENCE MEMBER 00:00
What is your normal precision calculus look like when you decide whether to sell the investment that you held other than opportunity cost for speaking in the new investments like for the one you just described them, what price would have to go to for you to say, "I'm out of this even if I don't have alternative to put my money in."
MOHNISH PABRAI 00:21
Yeah, I mean I think it’s – so let me give you an example of why buy and hold is not such a good idea. So from 1988 to 2000, the Berkshire investment in Coca-Cola which both Arvind and I are enjoying. Cheers Arvind.
And basically, they put about a billion dollar into Coke and I’m going to exclude dividends just to keep it simple, but the billion in 12 years went to 12 billion approximately. So Berkshire got about 12x return from 1988 to 2000 on the Coke investment kind of mid 20s per year return. Very nice.
And then from 2000 to 2018 that it went up from a billion – I mean from 12 billion to about 18 million. So in 18 years it went up 50% about 2.3% a year. So they made about 25% a year in the first 12 years and they made less than about – well including dividends everything they made 3.5% a year.
Clearly and there are almost no moats – In fact, I would say there's probably is no moat that is more resilient than the Coke moat. You know, It’s kind of like the ultimate moat. And so here you have 2 guys were really smart, you know, the smartest guys in investing and they identified a great asset, they identified at a great price and they had a great run, but it hasn't been a great run for 18 years.
And I think Warren at one point said I think in the early 2000s that it was probably a mistake not to sell Coke. Of course today it doesn’t make much sense for them because they have so much cash, they’ll just end up going to cash and at least they’ve getting a few percentage points. And there's a new CEO and might change – he looks pretty good after a few decades of idiots running the company we’re back to having intelligent life.
So anyway basically – so if you look at a business like, let’s say, we look at Mastercard. So Mastercard has had an incredible run over the last – I mean since it when public – I don’t know the numbers but I think it might be more than 50x in the last 10 years or so – that it’s been public – it’s been a huge home run.
And a lot of smart investors own Mastercard, if you go on Dataroma you’ll find out who’s who of investors from probably Todd Combs at Berkshire... You know, we’ve got – Well, I think I can pull it up if you give ma a minute. Let me just pull up the August list of Mastercard investors, give me a second Arvind because it’s quite an interesting list.
ARVIND NAVARATNAM 03:49
Sure, sounds great.
MOHNISH PABRAI 03:53
Yeah so the people who own it in descending order of percentage of the portfolio; Chuck Akre, Thomas Russo, Sequoia owns it – it’s about 7.6% – my good friend Guy Spier, Bill Nygren, Wallace Weitz, Tweedy Browne, Thomas Gayner – very small part of his portfolio though – and of course, Warren Buffett which I think is one of the 2 managers and such and so on.
So it’s an August list of people like for Thomas Russo it’s like 12.5 percent of the portfolio, for Chuck Akre it’s a 13%. So if you ask me what’s going to happen to Mastercard from let’s say 2018 to 2030, I wouldn't be surprised if the numbers are something like Coke you know.
In fact, it would be if you run the math I mean I think it’s at 50 times trailing earnings, if you run the math using, you know, the market cap versus the current earnings which is 2% of the market cap and then you start discounting that and then look at what kind of return you want, and if I want a 25% return or something I mean it's just – you just can’t get there.
So I think the thing is that it’s not about – in my opinion – buying great assets and holding them forever. I think probably the best thing to do is some middle ground where if it’s a tremendous assets like Mastercard, probably not a bad idea to let it run past 40 or 45 times earnings, but I would say at present prices I would be a seller. You know, I would take my money and move on.
Sell if the stock is over overvalued and take that money to invest into other alternative.