MOHNISH PABRAI 00:07
Yeah, I mean, I think the question I tried to ask myself is that was it obvious? Before the investment was made that this was a possible failure point and a significant failure point. And not something obscure just, you know, headlines front and center.
And you know, so like, you know, if you look at Dexter Shoes, you know, can the business be decimated by cheap foreign competition? You know, that's a question on the checklist.
You know, when I looked at Longleaf Partners and their investment in GM, you know, they have lot of commentaries when they owned the stock at the time when they are bullish on the stock.
And they were bullish because you know the big three automakers in the U.S. dominated the truck business. And they still do, they dominated at the time Longleaf owned it and they still dominated the truck – In fact, they dominated in a very incredible way.
And those trucks actually are just cash cow, you know, I think they've – these guys are making like $10,000 a truck so very high profit margins on those trucks and so that's a great franchise.
You know, Longleaf focused on the power of the franchise and they were right, you know, the truck has a great franchise, but you know, there's other layers in that business; the unions, the labor relations, the high CAPEX nature, and those should have been major red flags.
You know, and of course, one of the things that happened in a GM post bankruptcy is that Detroit used to be one of the worst places on planet to build a car in, let's say 2003 to 2007 for example. You know, very high labor costs and all these very highly inflexible labor.
In fact, labor was not a variable input into manufacturing in U.S. Auto. It was a fixed cost. So if GM and Ford did not need a worker the UAW contracts require them to pay them full paid while they sat at home. And full paid was you know, with benefits approaching $60-$70 an hour. So, you know, how do you compete against people who are making $5 a day with those sorts of labor cost.
And so, you know, the case of Longleaf to meet with obvious that the main thing you should focus on their or they should have focus on there would have been the issues related to labor and capital intensity and such.
And of course then, the big three have another problems with quality and other things which are non-truck. So these are – anyways, I don't want to beat up on Longleaf. I just using that as an example and they are exceptional investors.
But these are just some examples that stood out and in many, many cases when investors made mistakes we couldn't tell – I couldn't tell what the failure point was.
So we – you know, just like when Baupost makes an investment in some pharmaceutical company, I can't figure out why and so if they lose money I also can't figure out why. You know, and that's why you don't need to know all of them but doing the checklist we need to – needed to just understand enough to build a decent list.
Focus on the downside. What could possibly go wrong?