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Collection: Mohnish Pabrai - #90 'Businesses That Idiots Can Run'

Updated: May 4, 2021


Video Link: https://youtu.be/vJo1BkOVN8w


In this episode, Mohnish Pabrai talks about the first category of potential 10-100 baggers; businesses that idiots can run.


In this episode, you’ll learn:

  • The first category of potential 10-100 baggers.

  • Guy Spier's 100x investment mistake; CRISIL.

To check out all Collection: Mohnish Pabrai <click here>

 

[Transcript]

(Source: https://youtu.be/Jo1XgDJCkh4)

MOHNISH PABRAI 00:00

So what I did then I said, "Okay, how do we identify these 100-baggers?"


And what I discovered is that if I just looked at the examples in my own portfolio and obvious examples around me, there are basically around six... Sorry, there are about five different categories that these 10 to 100 baggers fall into. Now, it could be more than five, but five is the one I was able to come up with before it was time for this lecture. If I come up with more I'll update you next year.


But we at least have five very distinct kinds of companies which should give us clues that these are businesses that we want to hold onto.


So the first category of companies that has the potential for 10 to 100-baggers is, these are businesses which have huge tailwinds. Tailwinds means they just have all the factors moving in their favor, they have very deep moats, they have very long runways, they have very high return on equity, they typically don't need any debt, and the most important condition, an idiot can run these companies.


So like Warren Buffett says, "Invest in businesses that an idiot can run because one day an idiot will run them." So which are the companies that a complete moron, stupid idiot can run? Okay, so these are the businesses like See's Candy, Coca-Cola, Moody's, Visa, Mastercard, American Express. These are the types of businesses which are so deep in the moats.


That it's – In fact, you know, if you look at a company like Coca-Cola they have more than 100-year history. And in the 100 plus year history for several decades the company was poorly managed.


And you have a company in China, Maotai. Maybe some of you even consume the product. With due respect, I think Maotai probably has great management, but with due respect to Maotai, an idiot can run that company. Okay, so you do not need anything between your ears. You can put me in charge of Maotai and I can run it. Even a person like me can run that company. That is an unbelievable fantastic business.


Okay, so there's a good friend of mine, you might have heard of him, his name is Guy Spier and he lives in Zurich. And I think he's going to try to also speak to you next year maybe we'll both come together. We'll see if we can do back-to-back lectures. So Guy has a mental model he uses.


And his mental model which he has used for more than 15 years is that, if he identifies a company like Moody's or S&P as a great business. Or let's say if he identifies Coca-Cola as a great business, or let's say the Coca-Cola bottlers are the great business.


What he does then, is that he looks around the world for Coca-Cola bottlers in other countries. So if he finds out that being a Coca-Cola bottler is great in Tennessee, in the U.S. then (he) wants to find the same business in Brazil. (He) wants to find the bottler in China, (he) wants to find the bottler in India. And (he) wants to go around the world looking for the coke bottler and find which one is being undervalued. And then (he) wants to invest in it because the economics of these coke bottlers no matter where in the world they are is about the same, they're all great businesses.


So one of the businesses which is the ultimate deep moat business is Moody's. You know, they do the debt ratings, and even in the financial crisis when they gave all bad and flawed and garbage debt ratings, it still did not destroy the company. This is a great business that an idiot can run.


And so Moody's, Guy said to himself, "What are the credit rating agencies all around the world which has the same business model like Moody's?" Because Moody's is a model where they'll hire an analyst, they'll pay him maybe $100,000. For each analyst that they pay $100,000 they're probably collecting $4 million in fees. It's just a great business. It's just the economics are fantastic.


So he found a company in 2001 in India which was very small, but was the number one credit rating agency in India exactly like Moody's was in the U.S. And he found that S&P 500 owned 10% of the company. So S&P had done a lot of due diligence and they bought a 10% stake in the company. That company was called CRISIL.


And so Guy Spier at that time was managing about $30-40 million. He made a small investment in CRISIL. And it went up – it doubled or tripled in two, three years and then he bought a little bit more. And then another year or two later he sold it all. He had made four times his money.


So sometimes I like to pour salt on the wounds of Guy Spier. Sometimes I want to have fun with him. I spoke to him last night when I was preparing the talk. I said, "Hey Guy, you know that CRISIL position that you owned which you sold. If you had not sold..." It went up 130x after he sold – Okay, and he’s actually the kind of guy who doesn't even trade that much, he just buys and holds.


So I said, "Hey, by the way, that CRISIL you sold back then, why'd you sell it?" He said, "Mohnish, don't remind me that's the dumbest thing I did." Because basically, if he had kept CRISIL he manages $160 million. The CRISIL position would've exceeded the entire portfolio he has today.


One decision and what was so hard about that decision? Well, it wasn't hard. They were a replica of Moody's, I already told you an idiot can run Moody's, just like an idiot can run Coca-Cola. And idiots have run it and they've not been able to destroy these businesses.


And so the first thing to do is when you run into businesses that idiots are running or can run and they still continue doing business, buy those companies. If they have these characteristics and then forget the P/E ratio. Just buy and hold forever, because probably those are very, very few businesses on the planet.


And like I can almost bet that maybe 10 or 20 years from now, Maotai looks very different. Very different but it's hard to tell the path it takes, but it looks like a great business. So that's the first one, the businesses that idiots can run.

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