Economy B

Are you in Coronatime?

On April 3rd 2020 a veteran trader said that no one gave an economic model to work inside something like corona when people cannot even meet one another, before the pandemic hit.

And then..

Yes

Yours truly .. This brutally good looking author, came up with a economic model for Coronatime in October 2019, before the pandemic even hit

But this is not it.. 

Today by reading these words you will meditate on this modus operandi

Maybe.. Just maybe.. This will be a trigger for something greater.

Now..

Who is this Extremely Good Looking fella?

Peter.. Who? 

Screw that. 

Let's see what he says in this article:

https://www.inc.com/staff-blog/2005/11/14/druckers_four_pitfalls.html

(We paraphrase) 

Entrepreneurs Are Morons: 

1) They Think its about profits while it is about Cash flows. Growing Bodies Need Food.. More Food..

2) When the business expands, you can't do it all

Gibe responsibility to others

D.e.l.e.g.a.t.e

3) You think you know more than the market?

You have one brain

Market have thousands

They demand

Supply them

You think one market needs you while another one is dying to look at your offerings

Don't be rude

And Finally

4) Do what Your Business Need not what You need

Your favourite activity and inclination is irrelevant.

Your Business needs different skills than you want.. So go get em. Put those “chul” aside.

Summary:

CashFlow

Delegate

Listen to The Market

Do What Your Business Need

Do these Four and You will succeed

This is the summery of PRE corona world

You need to work with OTHERS

which is represented by way of 

Cash (give me this piece of paper because I did some work so I can give it to someone else and get something else)

Delegation (You have learned how to dig a ditch when someone else does it for you)

Market forces (I need others to give me things, so I need to give others what they need, for that I need to listen to what they have to say.. All hail market research)

Business first (take care of business and business will take care of you. Because people only pay when they get what they want from you)

[0:15 am, 17/07/2020] Dheeraj Dadhich: This is the summery of PRE corona world

You need to work with OTHERS

which is represented by way of 

Cash (give me this piece of paper because I did some work so I can give it to someone else and get something else)

Delegation (You have learned how to dig a ditch when someone else does it for you)

Market forces (I need others to give me things, so I need to give others what they need, for that I need to listen to what they have to say.. All hail market research)

Business first (take care of business and business will take care of you. Because people only pay when they get what they want from you)

[0:16 am, 17/07/2020] Dheeraj Dadhich: Now

Comes the Atma-Nirbhar

The Lone Ranger

Remember

In Communism

Not just the country was "communist".. But everyone was too

As is above, so is below

Kings and Subjects mirror each other. 

Think of the reaction we just had to "Corona time": Everyone thought Atma-Nirbhar (people joke that it means "you are on your own")

This reaction was neither accidental nor unpredictable. 

Systems and supply chains Do breakdown. Institutions were already alien and on the verge of betrayal if you were paying attention.

Atma-Nirbhar is not just for your own country.. Why does the country have to be Atma-Nirbhar? 

You got a valid reason? Here are a few:

Less dependence on critical functions

keeping cash in the entity

Not funding the competitive and hostile interests

Not getting cheated on a deal as seller at times knows more about the long-term faults than the buyer

Ad infinitum.. 

Right now.. I don't even need to tell you reasons for Atma-Nirbhar as you "know" That you have to

Something is in the air

You "knew" the benefits of outsourcing, globalization, coordination and symphony of international markets etc

Now you know why you need to "Apne Haath Jagannath"

There are pros and cons for both approaches

But something is in the air

Why does Only the country need to be Atma-Nirbhar? 

Why not state? 

Why not the city? 

Village? 

Family? 

Person? 

In communism.. Everyone was communist

In Atma-Nirbhar Bharat, MAGA USA, Brexit Britain, Reliant Russia, Chowmin ChingChong China

Everyone soon will be "sovereign individual"

The logic of Atma-Nirbhar is not just for one

Walls for Mexico

Masks for everyone

The inevitable

In communism..

What are the principles of this new "sovereign individual" world?

I am not a very creative person

Our PreCorona principle was:  Others

And the checklist was:

CashFlow

Delegate

Listen to the Market

Do what your Business needs

Do these four and You will succeed

Our CoronaTime principle is: Sovereign Individual

It's Checklist just literally opposite (yeah.. Not that creative.. But better than your "omg this is so unprecedented")

Here goes

Burn Rate

Consolidate

Hedge Against the Market

Acquire what your family needs

Do these four

And you need not even succeed

1. Burn Rate 

"A meat tub, from which it is taken to eat, but not refilled, is soon empty"

- Benjamin Franklin

That's Your Burn Rate

You have focused on different ways you can manage cash flows

Now you need to shift to burn rate thinking

I have some.. I consume some.. How long it will last.. How to fill it? How to keep it from getting rotten and destroyed.. Etc etc.. To be explored.. Just take a note and meditate on this alright! 

You are so demanding! 

"Get what you can, and what you get hold;

'Tis the stone that will turn all your lead into gold"

Ben baba (again)

Longer Drought.. Bigger Bawadi

2. Consolidate

Just opposite of delegate

Know everything

Train Everything

No help is coming

Every function in-house

Why?

Because that's opposite

That's why

Just do it

Yourself

"Why are we just inverting without any reason?"

Because the reason is deep

EVERYTHING is so deeply connected that the only Gap in the market is in Self Reliance and Not being reliant on the market itself

Bouncer above head? 

Don't worry

Consolidate

Build on solid foundation

When ground is shifting for everyone else

3. Hedge Against the Market

Opposite of Listen to The Market

Well

Whatever you want 

Is available

On a Ready Market

Everything you Need

Has to be there

When you need it

Logic of the market was to listen to it's signals and respond

Logic of self is to provide for it Regardless of what is happening in the market

You don't just hedge against the "market"

You realize deep hedging

That some class of risks cannot be hedged ("there is no perfect hedge" as they say) 

So those risks should not be taken

4. Do what your family needs 

This is the opposite of "do what your business needs"

"keep the shop, and thy shop will keep thee"

Shift from Market to Self and you get Focus to the Family

Assuming you have kids at 25.. You have a new generation in every 25 years

You will die but you will live on

So much work with the market.. You handled over the business and assets

Now that Market is Self.. The interest changes

Getting incredibly good would be easy if you start early

All skills reinforcing each other

No more lektures about "internships" And "apprenticeship model"

Surrender to the Inevitablity of Hope

Bonus: "Provide these four and you need not even succeed"

Are You In CoronaTime?

Mohinish Pabrai Talk at MDI

Take a single idea and take it seriously.

(Third Mohinish Pabrai talk at MDI; for notes on previous talk … see this link which is also a good introduction to the subject matter)

<the format is “transcript like notes”. All mistakes belong to me; please give your suggestions in comments below. We are thankful to Prof. Sanjay Bakshi, Mohinish Pabrai and MDI for arranging such an awesome event and providing recordings of same. you are advised to use this as a supplement while watching the video>


*+*+*+*+*First Video*+*+*+*

HOW DOES ONE COMPOUNDS AT 26%?

DO NOT INVEST IN ANYTHING THAT DOES NOT LOOK LIKE A 2-3x IN 2-3 YEARS.

* IF A STOCK TRADES AT 10 … IT IS A PASS (i.e. we do not invest) EVEN IF INTRINSIC VALUE IS 13, 15 OR EVEN 19.

Of 50000+ businesses worldwide, you need 2-3 annually.
So go for these three: *Cannibals*Spinoffs *Cloning


Portfolio strategy (Since 2009)

+.  1^st 75% of cash minimum 2x in 2-3 years.
           10% of cash minimum 3x in 2-3 years.
             5% of cash minimum 4x in 2-3 years.
               5% of cash minimum 5x in 2-3 years.          
                5% of cash More than 5x in 2-3 years.

Recent Additions (Since 2009)

+.  PRE INVESTMENT CHECKLIST  
      permanent loss of capital under 1%

+.  PRE INVESTMENT CONVERSATION WITH A PEER INVESTMENT MANAGER.

  TAKE A SINGLE IDEA AND TAKE IT SERIOUSLY – Vivekananda.

 

The checklists have done well to aviation because; it makes flights safer and takes out most of the uncertainties.

FAA= Death Agency (called so because it goes to work when there is a crash)
+. Whenever a crash happens and the go there and try to find out HOW the crash happened and spend a lot of time finding that out.
+.How many people  ...will die  ...in next 10-15 years …. if we did nothing?
 
They Consider one human life Costs something like $ 3.5 million; and if this is the cost... The improvement cost budget cannot be more than that cost (which means that we cannot force airline companies to expend more than that).

 Nuclear industry thinks of human life worth ‘Infinite’; thus making it more costly.

If aviation would have done the same, the flight from NYC to London would have cost a lot.

“This notion that you make aviation cheap, safe and cost effective from crashes and only from crashes is I think is a very powerful notion”

… and I say why don’t we apply that to investing !! So in investing an equivalent of plane crash would be a permanent loss of capital.

You invest your capital and you lost it, आपका plane crash हो गया. (Your Plane Crashed!!)

Now, why don’t we go to the site and find out why the crash happened

...And I think the Real question was… were there factors… that were CLEARLY visible in hindsight before the crash happened, the flaws in machine that were visible and I would have known that.

 In my own experience I have found that in event of ‘every’ crash these factors were clearly visible before making an investment.

Now my own mistakes will take decades to accumulate, so along with my own mistakes I looked and did the air crash investigation on other investors I admire, like Warren Buffett.

.. So I said when I find a crash I will put it on my checklist. So when Buffett’s Dexter Shoes got decimated by foreign competition …

 The question I put on my checklist is: can this business’s cash flows be negatively affected by cheap foreign competition?

Because that is .a.real.plane.crash.

So we take those portfolio mistakes and create a checklist. Buffett Munger and BRK.H is easy because they talk about their mistakes.

So NetJets was a mistake, Dexter shoes was one, Berkshire mills was mistake so I would take it mistake by mistake and create a checklist.

So we keep on doing it and we got about 97 questions on it.

.. And Every Question... Or Most of them are coming from same Failures conducted by 20 different investors.

 For example businesses that depends upon Debt recourse... All is going good… and then... > Credit wobbles and > Business tumbles, all these kind of mistakes.

..And when I made the whole list … I recognized a pattern, and it got itself into a nice Business School like themes, and we got five Themes/buckets ….

1. Leverage > various issues
 

2. Traits of Management and Ownership > various issues (for India special perspective see this )

3. (The most important) Moats and competitive advantages >... And there were lots and lots of mistakes happening because of misleading or ignorance or misunderstanding moats. (Best book on topic …The Little Book That Builds Wealth)

4. Valuation > what were you paying? And if cash flows were looking inflated because of boom time condition and you thought they were normal conditions.

5. Personal Bias: Buffett have lost money 2-3 times in aviation industry, each time he losses it and losses it again.


These days when I am done with all through research, then I run checklist and it take 15-20 minutes to do so. I find at least 10 or so questions I don’t know answers of…..

That is where it adds value, because I thought I have studied the business. But it points, I really have not these issues; then I go back and try to find answers to these questions.

Sometimes it may take weeks to do so and then I run the checklist and I have all through and then I can see there is going to be no business that is going to be okay or nice …… not one I have find ……. Now you can pinpoint mistakes and you are good at finding mistakes.

 …… and you can look at the stock compared to other things like your portfolio ….. And most of your stocks are highly leveraged …. So when economy goes down …….. A lot of stocks go down……… a common failure point, so that’s an issue.

Since 2009 we have been running it and loss has been 1% of new investments made since; compare that to a bank ……… if it stays there (it will not be), it will be a huge advantage to have it (checklist).  

 Q. (Ashish Kila) what you would be doing if you would be starting in India?

A. (MP) The Indian Small cap Rocket Fuel companies. They would require a different skill set.
 You need to handicap management and find growth trajectory for well before it is shown in sales figures... But rewards can be astonishing.

Look at businesses below 100 million, which have some traction but have a huge highway ahead of them. Some things are you can say trend is going to increase; you can go through many categories like bank accounts, banking services.

Then the question will be of what kind of company you can find so you can have high probability of success and low probability of failure.

Q. you said you would look at categories like mobile banking …

(MP) no no I would say… I would have some Indian macro insight… on what is happening at macro level but I would not have a lot on macro… I want to focus on obvious, not on ease of capital... So there are many many obvious things

Is the number of travelers going to go up? Maybe yes

Will the number of airline seats go up? Will number of bank accounts go up? Will number of bank deposits go up?

But things can be disruptive too

Now I will look at promoters, managers or CEO, I really admire and are trusted. They have sufficient of track record so I can have backing on the things in future based on things done in the past. So I can see some history and track record on it.
And unlike US I would like to meet them and even like to figure out more about them. Not only for meeting (…? …),

and then compare it to them v/s other businesses and check on what is the risk reward pattern.
In US I can have fairly matured businesses with fairly growth rates and I will be relaying on mis-pricing. Here what happens is I don’t need to rely on mis-pricing I can even be paying 15-20 times earnings.
    
“It would not be about finding cheapest deal in town but about finding the best rocket ship with least downside.”

So I would be just aware of these strengths and will look at businesses with these strengths.

So just be a student of different businesses, different sectors and keep reading about them and see what makes sense.

98% of what you look at should go to too-hard-to-understand… for most things you would be looking at ought to be……….

Q. (Anvesha) your screening approach for us (Indians)? …. To come up with initial list…

A. (MP)    … First, Be a shameless clone.

     (To prof. bakshi) does India have something like 13F…?
 
     (Sanjay Bakshi) … it is just a disclosure… If you own 5% of a company then change in every 1% needs to be reported… and if you own 1% of a company, it is needed to be reported anyway.

(MP)  so look at (in exemplary and suggestive tone) Sanjay, Amitabah Singhi, ex students, Sanjay’s client list, Tactica people etc.
  

     If you can get list of 25 to 30 businesses, then now you are down from 4000 to 30. Then read them ………. When seven moons lineup……. go ahead.

You have to bring the data set down to a low level because data is too large;

Ways you can do it:
1) screens> …. Low PE, 52 week lows ….. etc. …… small cap…. Buybacks …spinoffs
2) but one … I would say is what other great investors have?

Zebras in savannas make the lions go blind in groups... (Because of straps and all that).
Lions have learned to focus on zebras outside such pack. (See book zebra in the lion Country)

Now don’t look at 300 but 7 zebras and think which one to kill …….. Chase one …….. Something doesn’t work …… leave it alone and go for the next one.

Q. (Arpit) How from these one offs (as you called them) Zebras, you buildup a portfolio …. Concentration…

(MP) then you go like John Arriaga( A friend of Munger who lives at Stanford university and buys real estate only in 2 mile radius of it …. Became a billionaire doing just that) … 100% of one asset class.

The notion of building Noah’s Ark of two of everything is stupid way of building a portfolio… Munger would say 4 stocks are sufficient to get a diversified portfolio John Arriaga would say one asset class would do that.

(MP) More then 12-13 businesses add not much advantage. So don’t focus on being in every industry etc. you have 8 stocks and they happen to be in 3 industries and I am comfortable.
I actually look at what I have in portfolio and what I am looking to add in ……………. if I am looking at something totally new, that is interesting to me because it adds some diversity to portfolio I mean things are not going to … mogestep ( can’t hear it properly … new word for me …. Something related to not wobbling) ….. But I don’t go ‘looking’ for that.

Q. (Arpit) some when you like something with high convection and like build 25% position of your portfolio…….

(MP) You have to be like lion …..  You find something …. You make the kill…

(Arpit) alright

(MP) Finish the Full feast …… as soon as you can because vultures are coming

(Arpit) mhmm…  

(MP) …… so I don’t like to...Stage... any buying…. I just finish the kill.

Q. (student) but doesn’t that deny the principle of margin of safety?

A.   Thing correlates in a very strange way….. In 2008-09 everything went down so exposé to 14-15 industries doesn’t work.
   Even if you are a Buffett or Munger it is very hard for you to know about 25-30 businesses, to really know what is happening...

        Actually you really know about a business after you own it ……… you may call it incompetence or something but…..  And …….. You actually get an education … when the price falls from about 40-50% from what you bought it for …. (Laughter)

…… then you truly get educated ……..
 (Looking down …… picking up his jacket)

 but… that’s an expensive way to get educated (looking down …. Putting his jacket down)
…. Because... Umm … hopefully you get somebody else to get education.

       You are not gaining much by adding 20-30 things, you are losing much, having said that investors should do what they are comfortable with you know... If 20 make you comfortable don’t go to 4 if it makes you uncomfortable.  

(at 58 minutes ) < a good friendly praise by both SB and MP for OID (Outstanding Investors Digest)
MP: long live OID
SB:  …………… OID doesn’t have deadlines……….. You don’t pay for a year; you pay for number of issues.
    Good discussion …. Listen in >


*+*+*+*+* Second video*+*+*+*+*

(MP: and tell me about my choice of Bollywood Music)

WHY DOES WARREN OPRATES ALONE WITH NO TEAM.

WHY MUNGER

WHY GUY SPIER

WHY DO I?

EVEN A 10 PERSON INVESTMENT TEAM CAN ONLY EVALUATE A FEW HUNDRAD PUBLIC COMPANIES EVERY YEAR.

* THERE ARE 50000+ PUBLICALLY TRADED BUSINESSES GLOBALLY.

* THE INVESTMENT MANAGER WOULD BE REDUCED TO GETTING ‘CLIFF NOTES’ VERSION FROM ANALYSTS OR HIS PARTNERS. SECONDARY DATA.

CONCLUSION:

* THERE IS NO WAY FOR AN INVESTMENT MANAGER TO BE ON TOP OF THOUSANDS OF BUSINESSES NO MATTER HOW LARGE THE TEAM.

* THE INVESTMENT MANAGER HAS TO TAKE SHORTCUTS WITH OR WITHOUT A TEAM

 > THE DATA SET IS TOO LARGE EITHER WAY

.,.,.,.,.,.,.,., HOW MANY TIMES CAN YOU SAY NO?.,.,.,.,.,.,.,.,.

(And the song says ….. कच्ची मैं कली हूँ, मुझे पूरा खिला जा. I am a virgin rosebud …… make me bloom to full)

*DIFFERING CIRCLES OF COMPETENCE

*NATURAL BIAS FOR ACTION
                          > SWING, YOU BUM!!

*LARGE MOTERS AREN’T GOOD AT GRINDING AWAY WITHOUT RESULTING ACTIONS.
*INCENTIVE PROBLEM

                         >HOW DO YOU COMPENSATE SOMEONE WHO GENERATED ZERO IDEAS THAT GOT ACTED UPON?


SHORTCUT ONE: BE A CLONER ….. LONG LIVE 13F

Gurufocus.com
Valueinvestorsclub.com
Sumzero.com
Cornerofberkshireandfairfax.com
Manual of Ideas
EDGER online
SEDAR
Graham & Doddsville
 
***

(girl) in the video showed names like Gurufocus.com etc. if I may add to the list I found an iPhone app named  iBillionaire that…

(MP) whoh whoh whoh … hang on a sec, what (Laughter)

(girl)  an app that shows all these information in real time.

(MP) …… real time oh! We will add it to ours too ….. So that we can get even lazier (Laughter)
          I actually found Dataroma.com recently….. But don’t tell my investors (Laughter)

Q.(girl) I actually had a related question that the times of Buffett we have to dig up everything and nowadays we have multiple screens and apps like iBillionaire …. So the edge of cloning approach is in human behavior right?

A. (MP) I actually haven’t figured it out yet you know …. Why people don’t like cloning... Evolutionary something... But actually tools like iBillionaire.me adds an advantage to me ….. The more these tools we have the more it … suggests... people to be more active.

“The more active you are, the less wealth you make.”

So action will not essentially help you get better performance. Activity will help your broker get rich.

to some extent when you compare it to Buffett having moody’s manual and going through it and having nothing else… compare to today’s investors having everything at fingertips …….. The problem with information is…….   It is the zebra problem……. They can’t ….. Hard to focus…… they see so many things.

So you see iBillionaire.me , some 13F filling, some Dataroma, Valueinvestorsclub.com, you consistently see all kinds of things on your radar. Compare it to Buffett, going through page by page, looking for quantitative measures of cheapness….. Seeking the obvious ones…… he went to it right. These things are good for people with certain way of behavioral edge; so you … I would agree

“I would say the most important thing you can bring to an investment operation is Patience.”

None of these tools help to get patience. Pascal used to say that all misery of men starts by his inability to sit quietly in his room and do nothing. So the best thing you can do is you ……. Sanjay send them to meditate for a week without speaking……… that sort of thing…… So be happy with yourself, doing nothing.
So… but that’s a great question.

Q. (student) so get on the list for cloning … but how do you value and choose what to clone……. Like valuing…

(MP) well it gets down to circle of competence in the sense that if you really know about a business than by definition you know what it is worth and I would sell it at 90% of intrinsic value … because IV is an estimate. Be somewhat conservative in your estimates.

So… and Second ….. The thing John Templeton would say is that even the best analyst would not be right more than 2 out of 3 times.

 So it’s not likely that you will lead a loss free or mistake free investment life. So the mistakes and losses are part of the landscape……. Like earthquakes in California…. We live with them.   ….. So take them in strive and use them as a learning tool.  You can reduce the risk but can’t take it to zero.

It’s an entrepreneurial thing like if a man take a MacDonald’s franchise in an emerging town and the expected population never materialize ….. He takes a risk. There are no absolutes in investing; there are no absolutes in business. So when you take equity cap investments you take a risk and things doesn’t work out sometimes and it’s perfectly fine …. It’s your betting average that matters. You don’t need to hit all sixes; you can play with some singles too.

Q. (sardarji 2^nd year) <not loud sufficiently for notes> methodology …. Number

(MP) so before you pull a trigger or go anywhere near to make an investment, it has to be obvious.

 If you are asking questions like I don’t know what the Intrinsic Value of a business is….. Then it’s very simple, it belongs to 98-99% of the things you send to a file you don’t look at.
Unless you take it as pure learning exercise….. No longer looking at it as an investment. I think it has to be obvious fairly quickly after you have been looking at a business that I absolutely understand how to value it and I know what the value is …… and you cannot put a number on it ……… which should happen most of the time …. Most of the things I look at I don’t know what the value is and perfectly fine…… you take a pass on them.

Q. (Boy near Arpit) what is your selling criteria … how do you make that decision?

(MP) Exit decision is known before entry decision is made…. Ok... so I always write like a 4-5 line description before I make an investment ……. If I cannot encapsulate in about five sentences, I believe I could not understand the business.
It has to be able to articulate in a short amount of space.

you can invert this so let’s say you talk to any  business owner, take a guy that runs MacDonald’s franchise in Gurgaon and you talk to him and you ask him you how do run this business?

What are the factors that matters. What are the things you are focused on to run this operation … what he is probably going to tell you is that he does not run it by instructions (?)  ………. He would not say there are few things that matters…….. I keep my boys happy I make sure that food quality is maintained….. Place is clean …… and so when you run an investment business ….. You have to look at a business the same way a CEO running a Business would ……. The same variables ……

They are looking forward at three or four variables that are going to control 80% of the outcome. Something comes out from that other field and surprises you … but that’s fine.  And that is what we are trying to do, we want to go through 3-4 variables that matters …. Those are going to control the outcome ….
So the key is identifying the right variables and once you know what they are then you would know what the value is …. It’s pretty obvious.

Q. investment failures, one you could talk about
(MP) one of them would be delta corp. (Detailed postmortem in following link http://www.hedgefundletters.com/wp-content/uploads/2010/01/Pabrai-Funds_010108.pdf)

Delta Corp.’s ROE was off the charts …… they were sensible about landing …….No NINJA
landing (No Income No Job or Asset). Then the financial crisis came…….. They got caught with mortgage and no ability to market or securitize them ………. Our investment reached from 65 million to zero, so the first question on checklist is………….

Is the company leveraged? And I put the name of failure in front of every question and there are numerous questions on checklist where the name Delta pops up …… But that’s just one failure …. We had others too.

Q. regarding investment in delta corp.……. the error was investing or in not getting out of it in time?

(MP) the mistake was investing……. Because they have so little equity and they are highly leveraged, basically the issue was that ……. If the music stopped in any way or changed, they were…….

Like Prem Watsa (runs Fairfax Financials …… the Lombard in ICICI Lombard) would say …… we don’t want to be relying on the goodwill of lenders and things like that…

(SB) ……..

(MP)Pardon

(SB) ….. Kindness of strangers.

(MP) Perfect. We don’t want to rely on kindness of strangers; Right.
                
  All those people have lent them based on ………. Everyone ranked the same pooling and so the issue of leverage that delta brought home to me is the mistake wasn’t <?>you know….. It is not the stupid landing…..

Let’s take another situation where delta has no debt. They are 3 Billion equity and 3 Billion mortgage…… there is no pressure……. So the issue with leverage is that somebody else is holding the strings …… and those strings can start getting pulled….. At the wrong time….. At the bottom of the cycle.

And what I noticed where when I did the checklist is that various number of failures ………… not various numbers of questions …….. Various number of failures were related to leverage ……… most companies repeatedly failed because of leverage.

……….. And so I became very acutely aware that things cannot be really pristine with leverage on balance sheet and you have to stress test them in various scenarios. I have not done that at delta and that is the issue with leverage that you have to see various things like ……. Is that recourse or non-recourse is it at the parent level or at subsidiary level, you know….. What can be pulled when things start getting wrong? What avenues does the company have to get around? ..... So those things become very important.

Q.  Wouldn’t that be true for any <collection?>?

(MP) Absolutely, in fact….. You know my friend Li Lu who invests money for Charlie Munger…. Has never …. And will never, buy any Bank or financial services company……… Zero. And you know I have investments in financial services……… but if I were talking to Li Lu about it, he just …… his brain get (choked?), he might say that… he likes me, but he meant to say is……. I am not interested in financials and we can move on to something else…. And yeah absolutely…. making investments in financial services companies that I have been …. Leveraged…. I mean any bank…….. I don’t know about Indian banks but you know most banks have 10 to 1 leverage and some have 20 to 1 leverage ….. And 10 – 20 leverage is pretty serious leverage …..

So if you are landing…. You are gone for sure if just your depositors line up…. even if you have perfectly fine landing standards….. But just have a run …. And you are done….. You don’t even need much of a run …. Right and we saw that in 2008-09 so I think the thing is that leverage has these ….. Attributes… that it will look very fine and pristine condition but it can change overnight so I became more acutely aware of pitfalls of that issue…. And I started looking… I think I was more interested in businesses… that have great prospects without the need for… any debt.

  
Q. (Gaurav, Final year) You said about leverage, so would you not invest in companies that have strong moats but need more debt to expand its horizons… in India… it have its competitive advantage… and..

(MP) Company का नाम बता दो ना …… (Giggles) why aren’t you telling me the name of company.

Let us also…. Fill our stomachs (Giggles)
 
Is there a company in mind?


(Gaurav) Sanjay Sir will be covering…

(SB) A company called Relaxo… sales 100 million pairs and earns 25% ROE…

(MP) How great!!

(SB)    The leverage which allows them <?> more than 500000, but they do need money to grow …. <Because they add this inventory to our story?>. They so need to Finance that growth because they can’t do it through operating cash flows.

(MP) Sure.

(SB) so that’s the only issue <?>

(MP) so … ummm…. What do you think?

(GRV) Sir के साथ हूँ (I am with sir) (Laughter)

(MP) No but you have invested in the business?

<video cut and skipped. for detailed discussion on Relaxo as a teaching tool see
first,
second
and finale >

(MP)… and so directly in the US basically have satellite based television… and subscription model… you know just like cable TV… (we have that in India too sir :)  ….. And they have very strong recurring earnings coming to them… and people have subscription cable and all that…. And they are connecting people from cable …. So they have growth also in US. But what the company does….. They are actually borrowing more… they produce lots of cash…. This is not the same as Relaxo…. Because they have buy back more stock then they have cash producing.

For every year the dollar amount of debt on the balance sheet is increasing but if you look at ratio and stuff… it’s pretty balanced.

You know they are growing as well and they can’t come down and such… but when you are doing these very aggressive buybacks and CBS is doing same thing and <some broadcaster> is doing the same thing, the book Value of the company…… Negative.

So now there is no equity value in it, they bought so much stock back…. And when they are doing theses buybacks, the returns to investors look extra.

Because you know, the (big buck?) coming to coca-cola and they say we are not doing the buybacks; cash is producing zero rate of return…. Interest rate in US is 0.1% ... nothing… … so Relaxo doesn’t have the same problem, but have some of the similar problems in the sense that they are basically able to spend more than the cash flows, right.

Because to grow they need to spend more than the cash flows and there is a lot in difference.

So the 800 million dollar question or 800 dollar question is:      

   Is It the prudent use of cash? And is anything going to work out? Is that your question?
Are you looking at me who knows nothing about Indian markets (Giggles) Ok so my take is that umm…

“The answer rests, in my opinion, in the Business”…

Which is what can happen to the Business, if we cut the volume in half…..
So I am assuming they are business which has to invest in infrastructure, building, plant, equipment and people to keep driving this…


but what happen if their customers have a sudden taste change and supplier change you know China become cheaper and something happens and cuts the volume in half.
Now everything changes ….. Everything goes Topsy-turfy. So the question you are going to ask yourself is “What are the odds of that happening?”

  And to answer that What are the odds of that happening? …. You basically have to understand the dynamics of whole ecosystem…. And I have no knowledge about the ecosystem.
I will look at financial leverage ratios and all that …but I will hone on
How the Business will look like in the next 2-3-5 years and what are the range of possibilities.
what would be the worst case, what would be the best case…. And in the worst case I am looking at a loss and what are the odd of this case. Basically you are a bookie जैसे अभी वो IPL चल रहा है ना... Bookies होते हैं ना, वैसे आप Bookie हो (You are like a bookie in a sport league). Only difference between you and them is that you are legal and they are illegal. That’s all.

Q. if you bought a stock you thought will go to $40 from $10 in three years and it reaches there in half the time…. Would you still hold unto it?

(MP) I will not hold an investment above IV…… I will reassess it ….. Can hold some for tax issues though….. Every 3 months or six months I take them if it is now worth $60 …we are still in.

We don’t do that very often as business values can go up and down and you keep reassessing Intrinsic Value but at least once in six months I take another look at value to see..

Q. (Relative of Ashish Kila) Sir I have two more Questions.

(MP) Go Ahead

(RAK) As a person starting out on an investment career… so in value investing as Professor Bakshi has pointed out The key is to be quiet or do something else when portfolio grows so I think a lot of people taking investment will also take up jobs …… as so that you have income stream from something you do and you want to start allocating some money & start building a portfolio which will eventually generate your capital returns so How does one come up with the decisions of what do you spend, what part do you put in portfolio, what targets you will have as a young person building up a portfolio,

(MP) ya, mean I think it’s a loaded question. It will depend on your circumstances    .

The first question I will ask is

 Are you single or married? Right? And a good scenario would be to marry a spouse who is vastly valuable in job market (giggles)

is that your situation?

(RAK) I would rather not answer that (Laughter)

(MP) OK……………..SO I Would say marry above your grade level ,that would be a good thing….. One thing when you marry above your grade level is that you can give her power of compounding and all that and… you know cover that before the marriage
and say that we will run the ship on your engine and my engine .we will run the ship on your engine and my engine we will put on compounding and if she buys it and all set.

Now if you are single then live out of a shoebox & compound everything hell out of that and don’t spend money… no problem you know… and buy only Relaxo Hawai Chapple (Laughter)
and if they make shirts   & pants go with that too. (Laughter) so that just depends on your circumstances.

The thing is that you don’t need above index beating returns to get wealthy. You can just match the index which is easy to do, it is a question of how much you are willing to save………

(MP) what are starting salaries of MDI graduates? What is the range?

(SB) they officially…..
(Couldn’t contain his smile and the hall erupted into Laughter)

(MP) I don’t know this lingo in US “officially”

(SB) I don’t know… about 30000 dollars……………..am I right?

(Students) $25000

(MP)  वो Indian money में कितना हुआ? Rs. 1500000 or something.

(Student) 14 to 15 lacs

(MP) how much you need to live? You are in second year?

(SB) they also have loans outstanding.

(MP) how much MBA charge

(class in unison including SB) 12lacs

(MP)So Mr. Singh(our sardarji) are you going to be under debt when you graduate? What will be your debt if you don’t mind sharing?

(Mr.Singh) 6lacs

(MP) nothing, वो Relaxo है ना (Laughter) that can just wipe it out but will you start in 15(2015) when are you graduating… you have a job?

(Mr. Singh) yes

(MP) over 15 or under15

(Mr. Singh) Over 15

(MP) Over 15! Can you share? (Laughter)

(Mr. Singh) 16

(MP) 16! Alright, that’s good.

How much you need to live? Are you married or single?

(Mr. Singh) single

(MP) single! Oh! That’s good. Always many above (Laughter) ………….make sure Mrs. Kaur is you know...  (Laughter)

(Clappings)

Now 16lacs

How much do you need to live? Ignoring the loan part… just your living expenses.

(Mr. Singh) Rs. 15000 per month

(MP) तो Rs. 200000 per year main काम चल जाएगा?

So you could theoretically clear the loan in few months. Are you planning to do that? Yes. Ok. So let’s say you live on 200000 and clear the loan…….
you know if you do the math…….. You are going to end up with at least 5lacs a year even in the first year may be… and second year onwards. वो 16 का 17 हो जाएगा (16 shall become 17) .you are going to do a great job for your employer even if you do the math on 5 lacks or 10 laces a year of savings, even at a 10% rate of return & you start running that number over 30 years or
so, you might be staggered at what that number will look like and…. You can endow a chair or two here.

(SB) In fact you can talk to other (sardar?) in this room…. Juspreet……..
I think made his first crore after couple of years of passing out of MDI. That only from under spending his income and took upon in Capital. (Clappings)

(MP) Sardarji से बात कर लो (Laughter) Are we done with the questions?

(SB) I think we are done.

(MP) well, was a pleasure, thank you very much.

(Class) thank you (Clappings)