Collection: Mohnish Pabrai - #82 'What Is Within My Circle Of Competence?'
[Transcript]
ARVIND NAVARATNAM 00:00
Just on that topic, Mohnish. You know, you been investing for 15+ years at this point, what do you feel is currently in your circle of competence?
MOHNISH PABRAI 00:09
Yeah, that's a good question.
I would say that I'm not very good at industries with rapid change. So I think in general, I would stay away from those because I just don't think I'm really good at kind of figuring out where those are headed and so on so forth.
I did make an investment in Google but I think that's a little bit different in the sense that just the way that companies configure and the pricing was pretty good and such. So – and it was small investment so that's hopefully will work out.
But I would say that it's – the main thing I look for are no-brainers. I feel that the best investments are the ones that are, you know, squarely in circle of competence or ones that are really really simple to explain to someone in three or four sentences.
I mean let's say you know, the WL Ross investment. Now, WL Ross may go outside circle of competence once he invest the money, that's when the work would start, that's actually when we have to evaluate whether we are in or outside the circle. And figure out whether we want to stay in or stay out of the game. But I would say that at the time the investment was made, it's a very simple sort of economics of making that.
So you know, I think I understand commodities quite well in terms of commodity producers being in the lowest quartile. I think I've learned to gain a better understanding – though I'm still not there – on the power of brands and the power of intangible assets. So I'm getting there, I'm not fully there yet, but there's still hope for me.
One time I was having dinner at Charlie Munger's place – And the good news after the lunch was that he saw fit to invite me to dinner. And we weren't even at his club, we were at his house, so I felt like I died and gone to heaven.
And so I'm sitting with Charlie in his study with the big portrait of Samuel Johnson on the wall, and as we were about to go to the dining room to start dinner, he just makes a casual comment, and he says that you know a good investment operation needs to focus on just three things; The Cannibals, The Cloners and The Spin-Off.
And then he just walks off taking his seat. So I said "wait wait wait Charlie wait, what you just say?"
So I said "what do you mean by The Cannibals?" He said oh the companies that are eating themselves, the ones that are buying back stock.
And of course, The Cloners – I'm all about The Cloners – he said, you know buy ideas that other people have invested in. So I was very happy that the shameless cloner got an endorsement from Moses himself on his cloning techniques. So that was great.
And of course The Spin-Off, you know, we got Greenblatt's book "You Can Be A Stock Market Genius." Which is all about spin-offs and so that gives you all the reasons why spin-off make sense.
And you know, if you look at Berkshire's permanent holdings, all the permanent holdings are Cannibals. You know, American Express, Coca-Cola, IBM – I don't know IBM is permanent but it's large – Wells Fargo. They all aggressively buying back stock, and they have been aggressively buying back stock for decades. And I didn't appreciate how powerful Cannibals are.
So you know, just like brands, I think that – And you know, we're – one of the things I have is, I have this thing which – I started a holding company last year called "Dhandho Holdings." And one of the things we're working on is. we're working on launching an ETF hopefully next year. And that ETF focuses on these three areas, it is an ETF which will do Cannibals, Cloning and Spin-offs.
And you know, I spent about six months doing all kind of backtest with a very talented crew on this. And I have spent more time then I would like to admit on Cannibals. And it's incredible what kind of performance and what kind of outperformance you get versus the indices with The Cannibals.
So you know, the learning continues – I would say that I'm always looking for no-brainers, I'm looking for undervalued businesses and I'm looking for simple businesses, I'm looking for things that are easy.
I mean like, you know we made an investment – we still own the investment – about three and a half years ago in Fiat Chrysler. And at the time we made the investment, Fiat Chrysler had a market cap under $5 billion.
And I just found it incredible that a company doing over a hundred billion in revenue had a market cap of $1 to $5 billion. And they just spun out Ferrari and Ferrari has a market cap of $10 billion. And you know, Fiat sells 5 million cars and Ferrari sells 7,000 cars. So they took a very small sliver of the business and spun it out. And the small sliver of business being spun out is at 2X the valuation that we had – that the market had price the business at three and a half years ago. And the rest of the business is still there.
So you know if you would ask me; if Autos are within my competence? I would have told you before 2012 that yeah maybe I understand them but it's such an ugly business, I would never invest in it. And here I am deeply pregnant with the Autos business.
So I think stay flexible, keep it simple, go for no-brainers, keep reading, don't focus too much on expanding the circle it will expand on its own by osmosis, and that's it.
(Source: https://youtu.be/7F2IGzES7Uc)
[YAPSS Takeaway]
1. Cannibals, Cloners and Spin-Off.
2. Be flexible and keep learning.
