How to find the true value of any business and Learn to Calculate Competitive Advantage (Moat)
Premium Issue - 8
Hi, Welcome to the 8th Special Edition
Brief Overview of What We will cover in this Issue
Detailed Key Takeaways from the book I am reading Currently
Key Takeaways from Investing Articles and Blogs
Calculate Competitive Advantage (Moat) (+5 Articles)
Small Important Investing Video Clips
1. Underpaying vs overpaying for Quality
2. How to find the true value of any business
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The Education of a Value Investor (Part 2)
Why You Should Start to Write (Continue)
In sending out this cascade of letters, I began to open up to people in a way that I never had before, and I started to see everyone around me as someone I could learn from. As I now understand, this habit of writing letters is an incredibly effective way of compounding goodwill and relationships instead of merely compounding money.
My letter-writing crusade had begun as a way of marketing my fund, but it ended up giving me a richness of life that I could hardly have imagined. Rather than becoming a good salesperson, I found myself starting to care about the people I was writing to and think about how I could help them.
The paradox is that, as I became more authentic and discarded my agenda, people became more interested in investing in the fund. This was an unintended consequence of becoming less selfish and more honest about who I am.
When Guy Spier Send a letter to Mohnish Pabrai after attending his talk
It was one simple note out of at least a dozen letters that I sent that week. I had no agenda in writing it and expected nothing in return. I mailed it and then forgot about it. But Mohnish later told me that I was the only person who wrote to him after that meeting, and my note clearly stuck in his head. About six months later, he sent me an email to say that he was going to a meeting in Greenwich, Connecticut. Did I want to meet for dinner? I most certainly did.
I didn’t understand this at the time, but I now see that every letter I wrote was an invitation for serendipity to strike. To many people, it might seem like a waste of time. But I couldn’t win the lottery without a ticket, and these tickets were almost free. In a sense, this is a value investing approach to life: pick up something cheap that may one day prove to be precious.
Be Truthful & Authentic
Charlie Munger points out that it’s always easier to be truthful because you don’t have to remember your lies.
Mohnish talked to me during that meal about a book called Power vs. Force: The Hidden Determinants of Human Behavior. The author, David Hawkins, explores the theory that we have a greater capacity to influence others when we’re an authentic version of ourselves since this truthfulness evokes a deep psychological response in others.
Consistency of doing small right things
This might sound over the top. But it’s an illustration of something I had learned from Mohnish: some businesses succeed because they get one thing right, but most succeed because they get a lot of small things right. This is what made a company like Wal-Mart so successful.
A key aspect of my real-world education involved learning to take more and more of these intelligent but practical actions on a micro-level: writing thank-you notes, picking a great place for breakfast, listening actively to what people told me, or treating them the way I wished to be treated.
Lunch with Warren Buffett
Mohnish knows that so many charitable donations come with nothing more than a meaningless plaque featuring the donor’s name, which is designed primarily to burnish their reputation or inflate their ego. In this case, the donation would bring with it something infinitely more valuable:
I was worried that the bidding might get out of hand. I was still a young money manager running a small fund, and Lory and I were expecting our third child, so we might need to move to a bigger home in Manhattan. I told Mohnish that I was good for $ 250,000 but said that I didn’t think it was prudent for me to go beyond that. If the bidding went above $ 750,000, as he expected, I might well have to drop out. Mohnish paused for a moment. Then he assured me that, if this happened, he’d cover the balance himself so that my contribution would be capped at $ 250,000. I was flabbergasted by his generosity. We didn’t even shake hands on this deal, let alone draw up a written agreement. I found this level of trust deeply touching. It reminded me of the way that Buffett himself had often made financial agreements with barely a written document. Nobody in business other than my father had ever treated me this way.
Our lunch was set for June 25, 2008. This would give me several months to prepare myself— just enough time, I hoped, to make sure that I was worthy of meeting the grandmaster himself. After all, if you’re going to meet someone better than you, you had better work on yourself first.
Warren had been introduced to GLIDE by his late wife, Susan, who was an extraordinarily generous soul. He began to support the charity by auctioning his annual lunch online, and he continued to do so after Susan passed away in 2004.
Warren had brought gifts for the two girls, beamed with pleasure and goodwill— more like an amiable grandfather than one of the world’s richest men and the greatest investor of all time.
I told Warren how I had changed my fee structure so that he wouldn’t think I was just another greedy, two-and-twenty hedge fund guy. I also mentioned how hard it had been to convince my fund’s lawyers that this unorthodox approach made sense since it was fairer to my shareholders. I’ll never forget Warren’s response: “People will always stop you from doing the right thing if it’s unconventional.”
Our( Mohnish and Guy) growing friendship was one of the most precious rewards of the Buffett lunch since that rich experience drew Mohnish and me so much closer together. I was amazed by his generosity in sharing his unconventional wisdom with me, and it’s hard to do justice to his importance in helping me to make the right investments throughout the credit crisis.
Inner Scorecard > Outer Scorecard
“It’s very important always to live your life by an inner scorecard, not an outer scorecard,” he said. To illustrate this, he then asked us, “Would you prefer to be considered the best lover in the world and know privately that you’re the worst— or would you prefer to know privately that you’re the best lover in the world, but be considered the worst?”
I began to realize just how much of my life I had spent measuring myself by an outer scorecard. I had always been so eager for people to like and respect me— to win the plaudits of my professors at Oxford and Harvard, to be seen as a successful investment banker and deal maker at D. H. Blair, to be admired as a top-notch fund manager.
His strength comes in part from this rock-solid sense of who he really is and how he wants to live. There’s no artifice. No need to live according to other people’s standards or opinions.
As Warren helped me to understand, people too often justify their improper or misguided actions by reassuring themselves that everyone else is doing it too.
Berkshire Unique Decentralized Structure
When I asked if he had consciously created Berkshire’s unique decentralized structure, he emphasized that it operates that way because it suits his personality, not because it maximizes returns.
As an investor, Warren Buffett has always remained true to himself. During the tech bubble, when so many other people got carried away, he had no trouble sticking to his principles, even though this meant that he massively underperformed the market before it imploded.
Key Lesson: Don’t Use Leverage
one of the key lessons of our lunch came when Mohnish asked what had become of Rick Guerin, a friend of Buffett’s whom he had mentioned in his article on“ The Super-investors of Graham-and Doddsville.” For a while, Guerin’s investment record had been spectacular. But Warren told us that Guerin had been“ in a hurry to get rich” and had used leverage to juice his returns. When the market crashed in 1973– 74, Guerin was hit hard and was forced to sell various holdings, including thousands of shares of Berkshire Hathaway that would now be worth a fortune.
One of the key financial decisions I had made as an adult was that I would never live beyond my means or fall into debt.
I don’t invest borrowed money because this added stress would make it impossible for me to remain calm and clearheaded.
For an individual investor, debt can be disastrous, making it even harder to stay in the game— both financially and emotionally— when the market turns against you.
Perils of debt and the virtues of patience. “Charlie and I always knew we would become very wealthy,” he told us, “but we weren’t in a hurry.” After all, he said, “If you’re even a slightly above average investor who spends less than you earn, over a lifetime you cannot help but get very wealthy— if you’re patient.”
Noise Free Environment
His legendary personal assistant Debbie Bosanek helps to shield WB from unnecessary distractions. She once told Mohnish and me that Warren usually keeps his cell phone switched off and doesn’t even have an email address.
Thankfully, this is one aspect of what Buffett does that other investors can replicate: we can clone the environment and processes he has created to keep the noise at bay.
For me, this has meant not only moving away from Wall Street but blocking out other types of noise that would otherwise muddy my thinking. For example, I totally ignore market predictions and focus instead on investing in companies that should grow significantly over the long term.
Becoming Next Warren Buffett?
This became my own goal: not to be Warren Buffett, but to become a more authentic version of myself. As he had taught me, the path to true success is through authenticity.
Instead of trying to compete with Buffett, I should focus on the real opportunity, which is to become the best version of Guy Spier that I can be.
We like to think that we possess the calmness, courage, and strength—not to mention the intellectual clarity and understanding— to act rationally when almost everyone else is panicking. But what really happens when the market crashes and there’s blood in the streets? I would find this out firsthand in 2008–2009 when the financial world tumbled into the void, dragging me and my fund with it. As Warren Buffett has said, if you weren’t scared, you weren’t paying attention. God knows I was scared :))
Lahman Brother Crisis
But 2008 was something else. I’d never experienced an avalanche-like this within my portfolio. The serious damage began in June when the fund fell by 11.8 percent. The following month, I was down another 3.5 percent. And then things started to get really ugly. In September, the fund fell by 6.8 percent; in October, it plunged by 20.3 percent; and in November, it tumbled by another 12.5 percent. For the year as a whole, I was down 46.7 percent. On paper, almost half of my shareholders’ money and my family’s money had gone up in smoke.
For my temperament, this approach works. Emotionally, 2008 was painful for me. But I could deal with these massive paper losses because I understood that they didn’t reflect the intrinsic value of my investments.
Guy Spier had a long-awaited opportunity to be a dispassionate buyer of companies whose shares had plunged to ridiculously low prices.
but He had spent enough time studying economic history and investors like Buffett to know that this might well be the best time in his entire life to buy stocks.
Both (Warren and Mohnish) bought cheap assets hand over fist at precisely the moment when weaker-minded investors were seeking the emotional comfort of cash.
Psychology During On-going Crisis
The pressure intensified in other ways that I could never have predicted. For example, at the time, I employed a bright, hard-working equity analyst whom I regarded as a dependable ally. Then, one day in the fall of 2008, he came into my office, which I had come to think of as my bunker, and told me that he’d sold all of the stocks in his personal brokerage account. “I’ve gone to cash,” he said. “I’m going to wait till things settle down and the outlook is clearer.” I was stunned. “Are you out of your mind?” I asked, unable to conceal my disgust. Here was a guy who had proudly claimed to be a value investor and whom I was paying to be rational. He was supposed to be a like-minded soul, helping me to seize these incredible opportunities that the market was gifting us. Yet his emotions were so out of control that even he was getting swept up in the panic. He just couldn’t take it anymore. This is a measure of how acute the stress can become at a time like this— even for an intelligent and level-headed analyst who had previously come up with some highly profitable investments for the fund.
Before the crisis, my fund had about $ 120 million in assets under management. The market crash had slashed this to barely $ 60 million. To make matters worse, shareholders redeemed around $ 10 million more.
At that moment, what I most envied about Buffett was not his prodigious intelligence, but his structural advantage: he had permanent capital to invest since Berkshire is a company, not a fund. This meant that he didn’t have to worry at all about how to meet shareholder redemptions. As a result, he was free to make enormous investments in equities at the perfect moment. According to Warren, temperament is more important than IQ when it comes to investing. This is no doubt true. But I’m convinced that having a structural advantage is even more important.
As for Mohnish, he had set up his fund so that investors could redeem shares only once a year. His investment losses in the market meltdown were even worse than mine. But he had to deal with redemption requests only once during the financial crisis, at the end of 2008.
after all this time, I was paying the price for my mistake. It was a potent reminder of how important it is to create the right structure from the very beginning.
Looking back now on the financial crisis, I’m pleased with how well I kept my emotions in check. By then, I had a sufficiently strong emotional core that I didn’t get swept away by all of these intense pressures. It also helped that I was a true believer in the enduring power of value investing. This approach had worked for me for a decade, and I had absolutely no doubt that it would continue to work for me over the long term— if only I could stay the course.
Why you should meet other great investors
if you encounter someone who has exceptional qualities, it’s worth investing the time and energy to travel so that you can be in their force field.
Behavioural Investing
Unfortunately, most investment books tend to focus on technical skills. It’s fine to study basic concepts like return on investment, P/ E ratios, and the like. But these things aren’t hard, and they will get you only so far. Anyone who’s smart enough to make it through business school can figure out how to dissect 10Ks, 10Qs, and other financial documents. The real challenge, in my view, is that the brain itself— which got us to where we are— is the weakest link. It’s like a little boat, adrift in a sea of irrationality and subject to unexpected storms. And it’s incompletely understood by even the most brilliant neuroscientists, let alone by investors.
When I started to read up on behavioral finance and neuroeconomics, there was a thrilling sense that I was fathoming some of the deepest mysteries of how the brain functions and malfunctions.
As I read about the brain’s shortcomings, I would nod knowingly, reassuring myself that I wouldn’t trip up now that I had a better understanding of where these mental tripwires lay.
But I gradually learned that intellectual knowledge and self-awareness are simply not enough. The difficulty is that we can’t use the brain to override the brain. So we remain vulnerable to these mental shortcomings even when we know about them.
I began to realize just how critical it is for investors to structure their environment to counter their mental weaknesses, idiosyncrasies, and irrational tendencies.
The goal isn’t to be smarter. It’s to construct an environment in which my brain isn’t subjected to quite such an extreme barrage of distractions and disturbing forces that can exacerbate my irrationality. For me, this has been a life-changing idea. I hope that I can do it justice here because it’s radically improved my approach to investing, while also bringing me a happier and calmer life.
I needed to be in a place where I could think calmly and invest for the long term without the pressure of other people’s expectations or the distraction of all the frenzied activity buffeting me in New York.
Here( Zurich) I could focus on my family and my fund without undue disturbance. Occasionally people ask me, “But isn’t it boring there?” My answer: “Boring is good. As an investor, that’s exactly what I want.” Because distraction is a real problem. What I really need is a plain, unobtrusive background that’s not overly exciting. And I’m certainly not alone in finding Zurich conducive to clear thought.
For outsiders, it’s too easy to get unbalanced by the unbridled appetites— including greed and envy
To borrow a memorable term from Nassim Nicholas Taleb’s book The Black Swan: The Impact of the Highly Improbable, these big cities are “Extremistan.” As we know from various studies, the disparity between our own wealth and our neighbors’ wealth can play a significant role in determining our happiness.
Information Overload (Never-Ending Loop)
The Bloomberg terminal delivers such a relentless flood of news and data into investors’ brains that it’s hard to muster the self-discipline to turn off the spigot and concentrate on what matters most. You see stock tickers flashing before your eyes, news alerts blaring for your attention. Everything links to something else, so you often find yourself ricocheting into deeper and deeper recesses within this informational netherworld.
India Visit
In 2009, for example, I took a ten-day trip to India with Mohnish. In the past, I would never have embarked on an adventure like this. I had felt obliged to work nonstop, so I would have convinced myself that I needed to stay home and watch over my stock portfolio. But I went to India with no agenda, and it turned out to be a marvelously enriching experience, helping me to see the world as a new. Among other things, I got to observe the remarkable work that Mohnish’s Dakshana Foundation is doing to help educate kids on an industrial scale. It might sound like a platitude, but it also affected me deeply to see how happy many people were in India, despite having so little on a purely material level. It helped me to recognize how twisted our values can become in richer countries.
Excerpts and Learning from Articles/Blogs
Choose Your Status Game Wisely
whatever status game you choose in life ultimately determines what you optimize for. Choose money and you’ll end up working all the time. Choose beauty and you’ll always want to look better. Choose fame and you’ll constantly be seeking attention.
Each of these choices has consequences too. Your pursuit of wealth could leave your personal relationships in shambles. Your pursuit of beauty could impact your mental and physical health. Your pursuit of fame could end up ruining your reputation.
Once you start to attain some status, you won’t want to stop.
If you want something extraordinary, you have two paths:
1. Become the best at one specific thing.
2. Become very good (top 25%) at two or more things.The same is true with status. You don’t have to be the best at any one thing. But if you can get pretty good at a few things, you can avoid the pitfalls of trying to be #1 and the status battles that can go along with it.
How to Calculate Competitive Advantage (Moat)
Coca-Cola Moat
At the other extreme, you’ve got Coca-Cola. In order to have the economies of scale necessary to distribute heavy products like soft drinks you typically have to have something like a 25% local market share. That’s a situation where there’s tremendous consumer loyalty.
If you look at it in contested environments, two-tenths of a share changes hands every year, so to get to 25% it’s going to take you at a fifth of a percent every year. It’s going to take you 125 years. That’s an enormous moat.
5 things investors must not ignore
Don’t ignore the Bottom Up.
You have to be careful of what price you are buying. It's very hard to make money when you're buying at exalted multiple to sales because you need those sales figures to first of all scale rapidly, you need perfect execution, and you need unit economics and operating leverage to be visible and evident as they play out.
Don’t ignore the long-term vision or the short-term detail.
Don’t get misled into thinking that you are a great investor based on a one-year record, that too in a rising market. It's the longevity that defines greatness. There are Sachins and Gavaskars, and there Vinod Kamblis.
The long term is a series of things that you do right in the short run. Like it's said in the Upanishads you are your deep driving desire. Your desire shall shape your will, your will shall shape your habits, and your habits shall shape your destiny. So, you need to get a series of short-term things right while keeping your eyes focused on the long run to get that right.
Crisp note on what is happening in Micro-Finance Sector by Amit Mantri
10 Book’s Summary by Edelweiss
Some hard investing truths from Kenneth Andrade
Small Video Clips
Don't buy equities if you are not getting cash flow (12:30 to 13:37)
Return expectations from Equities (19:30 to 23:06)
Underpaying vs overpaying for Quality (24:31 to 28:02)
Index Fund investing, is it good or not? And why Active Investing has some advantages over an index fund (28:58 to 32:52)
Lessons from Chandrakant Sampat (42:44 to 45:17)
Investing in China, Turkey, Russia? (Guy Spier) (14:23 to 19:32)
Guy Spier on Exchange Companies and Credit Rating company (27:06 to 29:50)
Why screening stock should be your 1st step, not your last step (41:14 To 43:54)
How to find the true value of any business (Mohnish Pabrai) (9:12 to 12:20 )
Are macro events impact investing or should you avoid them? (Investing during High-Inflation time) (25:16 to 39:23)
Great Write up. Enjoyed reading this on Sunday, Good insights offered. Thanks much