Collection: Mohnish Pabrai - #173 | Great Investment and Great Business is a Different Concept



[Transcript]

MOHNISH PABRAI

There's a friend of mine, Guy Spier. And he’s an investor, he manages about 200 odd million and many times we talk about different stocks and ideas to – you know, just get different perspectives. So Guy loves to own these great businesses that have very strong moats and they are blue-chip, really good businesses, okay?


The problem is that when you own these really great businesses, everybody knows they are great, okay? So the price is very high – usually the price is very high.


And I tell him, you know, it’s not about the great business, it’s about the great investment. So a company can be really good, it doesn’t mean it will be a good investment. And a company can be not so good and it could be a great investment.


So the interesting thing about the investing game is, if the game was simply about finding the best assets or the highest quality businesses, it would be a very simple game. Because we can obviously figure out what business is great and what business is not so great. That’s not hard to figure out.


So I found this okay-business in India which I thought was going to become better business. People haven't heard about it, it’s kind of unknown. And I told Guy this business this quirky unknown business is going to be a great investment. Great investment.


And I told him – so he owned Mastercard in his portfolio. Mastercard is a very good business, very high quality, you know, almost an oligopoly 2-3 players own the market, they don't need any capital to run the business, I mean like 40% of revenue is profit, it’s a great business. I said this Mastercard is like a 30 times earnings you made a lot of money. He already made like 12 times what he put in – he bought a long time back. He put 1 million it became 12 million.


So I said you made a lot of money, it’s not going to go from 12 million to 144 million. You know if last 12 years, it went from 1 million to 12 million, let me just tell you next 12 years it's not going from 12 to 144.


So I said Guy, listen – I shook him up – it’s time to sell Mastercard and buy Sunteck Realty in Mumbai, okay? This unknown company. And of course, Guy, in polite terms, told me get lost. So you know what I do when people do that is, I like to play mathematical games. You know, it’s just fun to play mathematical games.


This is a picture of of a small poster in my office and I have many of these. At any given time I have maybe 10 of these because I run into these humans who don't understand the concept of great investment and great companies.


So I told Guy, okay, here’s what we’re going to do, it is October 14th 2018, this is when I have this conversation with him. In your corner is the phenomenal Mastercard with the impregnable moat, oligopoly business, great CEO, everything is fantastic and that’s called the Guy Spier pick. At that time Mastercard was 204 dollar a share. In my corner, this small stupid company in Mumbai, Sunteck Realty, no one even heard of it right?


And Mastercard the market cap was 212 billion okay? 212 billion, it’s a blue-chip company. Sunteck is less than 700 million. It’s absolutely I agree with Guy, the guy running Sunteck is not as good as the guy running Mastercard, the moat of Mastercard is a lot better than the moat of Sunteck, but that’s not what this contest is about.


This contest is about – I gave him 12 years, so I said we’re not going to like have a 1-year contest because anything can happen in 1 year – because basically one of the things that Munger and Buffett said that if you have a business with great economics. Great economic over the long term, your results will match the returns that the business generates over the long term.


So Mastercard generates great returns and I said, Guy you’ve got such a great company, I got this useless company, we’re gonna go for 12 years. And every year, now when it is October 13th 2019, it’ll be a pleasure to go to work in shorts and send Guy an email, "Dear Guy, it has been 1 year. Here’s where we stand so far, one round is over, another 11 rounds to go."


So let’s look a little further in these 2 businesses. Look at that, this is Mastercard. If you bought Mastercard at the IPO – when the IPO in 2006 – it was $4.23 in the IPO in 2006. And now, yesterday it’s $254, more than 50 times – maybe 55 times – in 13 years. Unbelievable. And Guy didn’t even buy over here. I think he bought at maybe around $20 a share, maybe somewhere here. 2009-2010 somewhere here he bought.


And every time I meet Guy, I tell Guy, Guy have you sold Mastercard? No, I cannot sold Mastercard, it is too precious, precious cannot sell it. How can I sell it? Look at this, can you sell this? You can’t sell this, okay.


And then we have – just some data, okay so it’s 261 billion market cap, the trailing P/E is 42. I'm almost having like a cardiac – 42 times trailing P/E – trailing return on equity is a 106%, and annualised returns since the IPO 37%. Unbelievable great, but that’s in the past it’s not gonna help Guy in the future. We care about the future, we don't care about the past right?


So now here’s Sunteck, look at the stupid chart, okay. Mastercard so beautiful, Sunteck so useless. Okay, now let me tell you why – I don’t want to make this session about stock tips so don't think this is stock tip. It’s just to explain some concepts okay?


(Source: https://youtu.be/Kax8XnBU1ik)

 

[YAPSS Takeaway]

"It’s not about the great business, it’s about the great investment. So a company can be really good, it doesn’t mean it will be a good investment. And a company can be not so good and it could be a great investment." ~Mohnish Pabrai