Mohnish Pabrai and Guy Spier on Equity Investing in Japan and Beyond

[fareastwarriors]

Let's throw some darts in the dark:

 

Fiat.

 

* Marchionne is one of the best CEOs I've seen.

* priced at just 0.05x sales.

* Good balance sheet.

* Chrysler is killing it in the US and provides a margin of safety in case Italy goes bust.

* Fiat is earnings positive despite horrible utilization in Italy, and if it ever rebounds …

* convoluted way of claiming Ferrari, Maserati, and Lamborghini (don't tell Bigliari).

 

Now, 40x in 10 years… probably not. Double digit x, I would say yes.

 

How was Fiat doing before they got Chrysler? I know Chrysler  is kicking ass right now  but I am just curious about how Fiat was doing before this deal.

 

Is Marchionne the real deal? Please enlighten me.

 

Thanks,

 

 

 

[thomcapital]

Let's throw some darts in the dark:

 

Fiat.

 

* Marchionne is one of the best CEOs I've seen.

* priced at just 0.05x sales.

* Good balance sheet.

* Chrysler is killing it in the US and provides a margin of safety in case Italy goes bust.

* Fiat is earnings positive despite horrible utilization in Italy, and if it ever rebounds …

* convoluted way of claiming Ferrari and Maserati (don't tell Bigliari).

 

Now, 40x in 10 years… probably not. Double digit x, I would say yes.

 

Ah Plan Fiat came to me on my drive home tonight and you beat me to it. What triggered it for me was Guy's tweet/comments on Fiat from last week. Agreed, if it's not the warrants I vote Fiat.

[PlanMaestro]

How was Fiat doing before they got Chrysler? I know Chrysler  is kicking ass right now  but I am just curious about how Fiat was doing before this deal.

 

Is Marchionne the real deal? Please enlighten me.

 

Thanks,

 

http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/fiat/msg93449/#msg93449

http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/auto-manufacturers/msg84526/#msg84526

 

Sportsgamma, DCG and others have been over it. Maybe 17thStreetCapital may also add.  I will just say that if Italy leaves the Euro, it would be a boom for Italian manufacturing and there is lot of spare capacity.

[rjstc]

China. BYD.

[JRH]

Just thinking out loud a bit:

 

10x = ~25% CAGR for 10 years

40x = ~45% CAGR for 10 years

 

The problem with a long horizon is that you don't know the terminal valuation, which prompted, I suspect, Pabrai's wording that he "wouldn't be surprised to see it at [...]".  I guess you just have to choose some possible terminal valuations based on whatever limited knowledge you might have.

 

You could break CAGR into ROE and valuation changes - i.e., lower ROE is necessary if you buy at 0.5x book and it reprices to 2x book at the end of the period.  Repricing from 0.25 -> 2x book only requires a ROE over 10 years of ~17% to create a 40x return.

[stahleyp]

Sanj,

 

do you know what it is?  :-X

[claphands22]

Just watched the video. Manualofideas does a terrific job! In the video he gives out hints. Two areas that looked better than Japan were money centered banks and the auto industry. It is run by an incredible manager, in a misunderstood industry, there is a confluence of factors causing the price to fall and lots of tail winds in their future. It also could increase 10-40x in ten years. I am going with planmaestro, it's probably Fiat. 

 

Although, I wonder what makes the car industry misunderstood.

[PlanMaestro]

Although, I wonder what makes the car industry misunderstood.

 

Some tweets from last week with some initial ideas on that issue:

 

* Entertaining the thought that the Big 3 automakers are starting to enjoy a similar positive change as the railroads.

 

* Both great industries in their beginnings, but then plagued by overcapacity and competitors w/advantages … advantages that are shrinking lately.

 

* Railroads vs trucking benefiting from regulation, interstate highway system, and low oil prices.

 

* Big 3 vs foreign auto manufactures w/o high wages and legacy costs, consequence of a long history of union frictions.

 

* And both railroads and autos innovation had been stale, leaving an opening for competitors, but experiencing a renaissance lately.

 

* So both industries that for decades no one in his right mind would think about investing in … until they changed.

 

* One of the first VP posts I used GM as the example of the unrepentant alcoholic: the type of company that stands up only to fall again …

 

* But now … it looks different.

 

 

A big issue is that the labor arbitrage spread has been shrinking,

 

http://economix.blogs.nytimes.com/2012/12/07/when-cheap-foreign-labor-gets-less-cheap/

 

Also the Big 3 have moved out of Detroit. The transplants and Mexican plants are as productive as the Japanese, and GM is competing head to head in markets like China.

 

Lean Manufacturing and Global Sourcing are not sources of competitive advantage anymore. Some are ahead, like Ford, but all are moving in the same direction. It is not clear to me at least that imports have a big advantage anymore when all are sourcing from similar places. 

 

You can see it with the Big 3 competing successfully once again in sub-compact and compact cars, markets that many thought they had abandoned for good.

 

And Fiat knows how to design cars, especially small cars. They just did not have the cost base and distribution to compete in the US.

 

http://farm9.staticflickr.com/8487/8262555755_9eb8cfc462.jpg

[Parsad]

Sanj,

 

do you know what it is?  :-X

 

Well, the guess that one of Mohnish's best friend's threw out has been mentioned today.  Whether it is the one, I don't know because Mohnish of course was very coy about the idea over dinner a few months ago.  But some of the stuff I've heard leads me to believe that the guess may be correct. 

 

Although I'm not sure about that 10 times to 40 times return comment regarding this guess...I don't see it...but hey, I'm neither Mohnish Pabrai, nor Guy Spiers!  ;D  I'm a shameless clone.  Cheers!

[Parsad]

By the way, my guess if you are talking about 10 times to 40 times return, and you know how Mohnish really digs Munger's thought process about disruptive businesses, I would be inclined to say it is BYD.  But who knows, you'll have to get it out of him to know the truth!  Cheers! 

[txitxo]

By the way, my guess if you are talking about 10 times to 40 times return, and you know how Mohnish really digs Munger's thought process about disruptive businesses, I would be inclined to say it is BYD.  But who knows, you'll have to get it out of him to know the truth!  Cheers!

 

  I would also go with BYD because of the long term energy situation. The first tailwind is the physical certainty of cheap peak oil. Oil prices can fluctuate but eventually they will go to 200$, 300$ and we will stop burning gas for transportation and move to all-electric cars. The second tailwind is that a such a shift is a good, popular excuse for governments to spend lots of money in Keynesian stimulus programs. Good for the left  (clean energy) and good for the right (cash to big companies)

 

This will produce a huge demand for batteries, not only for cars, but also for alternative energy sources. The number of produced cars will also increase (people will have to get rid of their old cars faster). If you assume that the car production will double with respect to the current levels and that each battery pack in a new car costs ~10000$, this will be a market of 120Mx10k= 1.2T $. From what I've read, BYD seems like one of the best positioned companies in the world to capture a large fraction of that windfall, plus whichever share it gets of the growth in the world and China car markets. A factor 10 increase in market cap would put it at ~150B$, a factor 40 at ~600B$, >3 times larger than the current size of GE, which may be too much. But >20% returns 10 years from now do not seem outlandish.

 

Another nice statistical tailwind is that the Chinese stock markets are very cheap now. I am certainly going to have a deeper look at BYD. It would be good to see the more knowledgeable people in this forum do their best to kill this company. 

 

 

 

 

 

[JRH]

A factor 10 increase in market cap would put it at ~150B$, a factor 40 at ~600B$, >3 times larger than the current size of GE, which may be too much. But >20% returns 10 years from now do not seem outlandish.

 

It is easier to imagine a technology company achieving these kinds of returns than an auto company, in any case.

 

The interesting thing is that Fiat actually works as a play on higher future energy prices, too, given their predilection towards smaller cars.  But I can't get to 40x return on Fiat without assuming they just miraculously achieve amazing margins, or miraculously achieve enormous market share (helped by shift to smaller cars??). 

[claphands22]

Plan,

 

Railroads are monopolys of land-carry, no one is going to build another railway that competes head to head with an established railway. Cars will. You could say with recent consolidation of the auto industry, the car industry is more likely to be less competitive with higher profit margins/roic, but I don't know how durable that advantage will be.  Efficiencies in labor will just translate in cheaper vehicles for everyone; just like Berkshire Hathaway's textile operations spending lots of money buying an expensive machine, above profits only last until a competitor buys the same machine or better and the advantage vanishes.  Having multiple car companies with similar distribution networks, labor costs, off-balance liabilities and scale for engineering/marketing talent should be equally advantaged. I don't see how the auto industry has changed so much.

 

In terms of durable competitive advantages, I think the auto industry is closer to the blood-sport airline industry with it periodic consolidations then the toll collecting & efficiency helping railroad industry.

 

Partly playing devils advocate here, but would love to more of the dynamics. GM has lots of cash, almost 100 in revenue per share and selling for 25. I keep on thinking, 4-5% profit margins shouldn't be too much to ask for in this industry, should it?

 

Any book recommendations to understand the industry better? How is once upon a car?

[value-is-what-you-get]

  I would also go with BYD because of the long term energy situation. The first tailwind is the physical certainty of cheap peak oil. Oil prices can fluctuate but eventually they will go to 200$, 300$ and we will stop burning gas for transportation and move to all-electric cars. The second tailwind is that a such a shift is a good, popular excuse for governments to spend lots of money in Keynesian stimulus programs. Good for the left  (clean energy) and good for the right (cash to big companies)

 

This will produce a huge demand for batteries, not only for cars, but also for alternative energy sources. The number of produced cars will also increase (people will have to get rid of their old cars faster). If you assume that the car production will double with respect to the current levels and that each battery pack in a new car costs ~10000$, this will be a market of 120Mx10k= 1.2T $. From what I've read, BYD seems like one of the best positioned companies in the world to capture a large fraction of that windfall, plus whichever share it gets of the growth in the world and China car markets. A factor 10 increase in market cap would put it at ~150B$, a factor 40 at ~600B$, >3 times larger than the current size of GE, which may be too much. But >20% returns 10 years from now do not seem outlandish.

 

Just to clarify here - BYD is 15B HKD not USD.  That takes a 600B HKD market cap down to 77.5B USD at a 40x based on 793.1Million shares O/S.

 

However there are 2.35 Billion shares o/s which would put the 40X number at 232.5B USD.  Not so crazy.

 

Also, they are really a battery company, not a car company.

 

Every time I do more research on them they are selling batteries of ever increasing sizes for all sorts of applications from cell phones to shipping container sized 500kwh sized monsters yet the media keeps calling them an electric car company.

 

It's hard to get good info on BYD . . . hence misunderstood.

 

[txitxo]

A factor 10 increase in market cap would put it at ~150B$, a factor 40 at ~600B$, >3 times larger than the current size of GE, which may be too much. But >20% returns 10 years from now do not seem outlandish.

 

It is easier to imagine a technology company achieving these kinds of returns than an auto company, in any case.

 

The interesting thing is that Fiat actually works as a play on higher future energy prices, too, given their predilection towards smaller cars.  But I can't get to 40x return on Fiat without assuming they just miraculously achieve amazing margins, or miraculously achieve enormous market share (helped by shift to smaller cars??).

 

The point is that BYD is an auto company and a technology company. All big car companies will do well when internal engine cars are substituted by the new electric cars, but, as you say, how is Fiat going to grow a factor or even 10?  The same applies to the auto division of BYD, despite being in a much better position because of the expected growth of the chinese market. So the key are the batteries.

 

 

[oddballstocks]

This thread is awesome, and it really going to the point about Japanese equities.  Of the hour long presentation maybe 1m at the most was Monish talking about some pick he concentrated in.  The rest of the talk was about Japanese net-nets and how abandoned and ignored they are.

 

So what happens on the thread discussing the video?  Everyone ignores the cheap Japanese companies and focuses on the 1m segment about some 60-90% portfolio allocation.  That is a cool soundbite, but it seems everyone here just totally missed the forest for one single tree.

 

Maybe Japanese equities will never revert to the mean, they will always sell below book value, and will remain ignored forever.  I have a suspicion though that in a few years, maybe one or two, or maybe five people on this board will be talking about how they missed out on the epic run in some of these stocks. 

 

[value-is-what-you-get]

This thread is awesome, and it really going to the point about Japanese equities.  Of the hour long presentation maybe 1m at the most was Monish talking about some pick he concentrated in.  The rest of the talk was about Japanese net-nets and how abandoned and ignored they are.

 

So what happens on the thread discussing the video?  Everyone ignores the cheap Japanese companies and focuses on the 1m segment about some 60-90% portfolio allocation.  That is a cool soundbite, but it seems everyone here just totally missed the forest for one single tree.

 

Maybe Japanese equities will never revert to the mean, they will always sell below book value, and will remain ignored forever.  I have a suspicion though that in a few years, maybe one or two, or maybe five people on this board will be talking about how they missed out on the epic run in some of these stocks.

 

You got that right oddballstocks!

This is a perfect example of confirmation bias and social proof bias at work.

We all want the mystery stock heavily owned by the Guru who wishes to up his concentration to be the same one we own!

We're just so darned predictable  ;D

[JRH]

This thread is awesome, and it really going to the point about Japanese equities.  Of the hour long presentation maybe 1m at the most was Monish talking about some pick he concentrated in.  The rest of the talk was about Japanese net-nets and how abandoned and ignored they are.

 

So what happens on the thread discussing the video?  Everyone ignores the cheap Japanese companies and focuses on the 1m segment about some 60-90% portfolio allocation.  That is a cool soundbite, but it seems everyone here just totally missed the forest for one single tree.

 

Maybe Japanese equities will never revert to the mean, they will always sell below book value, and will remain ignored forever.  I have a suspicion though that in a few years, maybe one or two, or maybe five people on this board will be talking about how they missed out on the epic run in some of these stocks.

 

Your point is well taken, but I see it from a different angle.

 

It's all in the assumptions you make, including Mohnish's confidence and his skill - to ultimately ascertain whether this one company is LIKELY to return 10x or 40x or 2x over ten years.  I understand some people really, really like value investing.  I find it interesting.  But if you tell me how to sit on my hands and earn 40x over ten years, I'm fine never reading another annual report again.  I'd rather be traveling! :)

[txitxo]

  I would also go with BYD because of the long term energy situation. The first tailwind is the physical certainty of cheap peak oil. Oil prices can fluctuate but eventually they will go to 200$, 300$ and we will stop burning gas for transportation and move to all-electric cars. The second tailwind is that a such a shift is a good, popular excuse for governments to spend lots of money in Keynesian stimulus programs. Good for the left  (clean energy) and good for the right (cash to big companies)

 

This will produce a huge demand for batteries, not only for cars, but also for alternative energy sources. The number of produced cars will also increase (people will have to get rid of their old cars faster). If you assume that the car production will double with respect to the current levels and that each battery pack in a new car costs ~10000$, this will be a market of 120Mx10k= 1.2T $. From what I've read, BYD seems like one of the best positioned companies in the world to capture a large fraction of that windfall, plus whichever share it gets of the growth in the world and China car markets. A factor 10 increase in market cap would put it at ~150B$, a factor 40 at ~600B$, >3 times larger than the current size of GE, which may be too much. But >20% returns 10 years from now do not seem outlandish.

 

Just to clarify here - BYD is 15B HKD not USD.  That takes a 600B USD market cap down to 77.5B USD at a 40x based on 793.1Million shares O/S.

 

However there are 2.35 Billion shares o/s which would put the 40X number at 232.5B USD.  Not so crazy.

 

Also, they are really a battery company, not a car company.

 

Every time I do more research on them they are selling batteries of ever increasing sizes for all sorts of applications from cell phones to shipping container sized 500kwh sized monsters yet the media keeps calling them an electric car company.

 

It's hard to get good info on BYD . . . hence misunderstood.

 

That's right, thanks. 

 

 

[rkbabang]

This thread is awesome, and it really going to the point about Japanese equities.  Of the hour long presentation maybe 1m at the most was Monish talking about some pick he concentrated in.  The rest of the talk was about Japanese net-nets and how abandoned and ignored they are.

 

So what happens on the thread discussing the video?  Everyone ignores the cheap Japanese companies and focuses on the 1m segment about some 60-90% portfolio allocation.  That is a cool soundbite, but it seems everyone here just totally missed the forest for one single tree.

 

Maybe Japanese equities will never revert to the mean, they will always sell below book value, and will remain ignored forever.  I have a suspicion though that in a few years, maybe one or two, or maybe five people on this board will be talking about how they missed out on the epic run in some of these stocks.

 

You got that right oddballstocks!

This is a perfect example of confirmation bias and social proof bias at work.

We all want the mystery stock heavily owned by the Guru who wishes to up his concentration to be the same one we own!

We're just so darned predictable  ;D

 

I'm pretty sure whatever it is, it isn't one I own.  So I want to know what it is so that I can look into whether or not I want to own it.  Also I'm an actions speak louder than words type who finds it interesting that despite said guru's talk about Japanese stocks being so undervalued, he has a 60-90% position in some non-Japanese stock. Clearly undervalued Japanese stocks aren't among his best ideas either.

 

[T-bone1]

what are some other examples of investors betting the farm on one company (that they do not control) for the long term?

 

I believe Claude Shannon probably has the best investing track record of all time, but there was probably some luck involved with being around for the genesis of silicon valley (huge early stakes in HPQ and others).

 

Bill Ackman went big into Target (and now JCP).

 

I don't include Eddie Lampert, Prem, or Buffett because they took the reigns.  I guess Buffett and Geico could be included - before he took control.

 

I know Seth Klarmen has said he wouldn't put more than 10% (not sure if this was of his fund or net worth) into an equity he didn't control - at any price.

 

Do people have other examples of smart, accomplished investors making a huge long term bet on one company? 

 

 

[oddballstocks]

This thread is awesome, and it really going to the point about Japanese equities.  Of the hour long presentation maybe 1m at the most was Monish talking about some pick he concentrated in.  The rest of the talk was about Japanese net-nets and how abandoned and ignored they are.

 

So what happens on the thread discussing the video?  Everyone ignores the cheap Japanese companies and focuses on the 1m segment about some 60-90% portfolio allocation.  That is a cool soundbite, but it seems everyone here just totally missed the forest for one single tree.

 

Maybe Japanese equities will never revert to the mean, they will always sell below book value, and will remain ignored forever.  I have a suspicion though that in a few years, maybe one or two, or maybe five people on this board will be talking about how they missed out on the epic run in some of these stocks.

 

Your point is well taken, but I see it from a different angle.

 

It's all in the assumptions you make, including Mohnish's confidence and his skill - to ultimately ascertain whether this one company is LIKELY to return 10x or 40x or 2x over ten years.  I understand some people really, really like value investing.  I find it interesting.  But if you tell me how to sit on my hands and earn 40x over ten years, I'm fine never reading another annual report again.  I'd rather be traveling! :)

 

I actually agree with you.  My view has been that the best way to get rich investing is to buy a moat company and let it ride.  But here's the key, not some franchise company that's had it's run and is now enormous (Starbucks), but buying one when it's tiny and undiscovered.

 

Why settle for a 40x gain when a lot of these go up 100x or 1000x?  The focus for investors who love the business dynamics/competitive advantage stuff should be looking at small companies with growth potential and competitive advantages.  You're never going to see your money go up 100x on a 50 billion dollar company, but it could happen easily for a company that's $60m and runs to $6b.  The problem is most investors don't really know how to do this, they can identify a moat looking in reverse, but not going forward.

 

Personally I find it easier to find items that are mis-priced and buy until they revert.  But for anyone who can identify a competitive advantage in a small and growing company they will do much better than myself.

[oddballstocks]

This thread is awesome, and it really going to the point about Japanese equities.  Of the hour long presentation maybe 1m at the most was Monish talking about some pick he concentrated in.  The rest of the talk was about Japanese net-nets and how abandoned and ignored they are.

 

So what happens on the thread discussing the video?  Everyone ignores the cheap Japanese companies and focuses on the 1m segment about some 60-90% portfolio allocation.  That is a cool soundbite, but it seems everyone here just totally missed the forest for one single tree.

 

Maybe Japanese equities will never revert to the mean, they will always sell below book value, and will remain ignored forever.  I have a suspicion though that in a few years, maybe one or two, or maybe five people on this board will be talking about how they missed out on the epic run in some of these stocks.

 

You got that right oddballstocks!

This is a perfect example of confirmation bias and social proof bias at work.

We all want the mystery stock heavily owned by the Guru who wishes to up his concentration to be the same one we own!

We're just so darned predictable  ;D

 

I'm pretty sure whatever it is, it isn't one I own.  So I want to know what it is so that I can look into whether or not I want to own it.  Also I'm an actions speak louder than words type who finds it interesting that despite said guru's talk about Japanese stocks being so undervalued, he has a 60-90% position in some non-Japanese stock. Clearly undervalued Japanese stocks aren't among his best ideas either.

 

And for those that believe in the idea that you dilute your returns by diversifying away from your best idea then yes, Japanese stocks aren't for you.  I also wonder how many concentrated investors walk the walk and are willing to do what Monish is going to do, go 90% in his best idea.  To me that's conviction and that's the logical end of the don't waste ideas meme.  Why go for the second idea, just pile into the first.

 

I hope him well, essentially he gets one shot with this, 90% into a company doesn't leave much room for error.  Many entrepreneurs do the same exact thing, but they can control the outcome, and influence decisions being made, I'm not sure Monish is in the same position.

[JRH]

I actually agree with you.  My view has been that the best way to get rich investing is to buy a moat company and let it ride.  But here's the key, not some franchise company that's had it's run and is now enormous (Starbucks), but buying one when it's tiny and undiscovered.

 

Why settle for a 40x gain when a lot of these go up 100x or 1000x?  The focus for investors who love the business dynamics/competitive advantage stuff should be looking at small companies with growth potential and competitive advantages.  You're never going to see your money go up 100x on a 50 billion dollar company, but it could happen easily for a company that's $60m and runs to $6b.  The problem is most investors don't really know how to do this, they can identify a moat looking in reverse, but not going forward.

 

Personally I find it easier to find items that are mis-priced and buy until they revert.  But for anyone who can identify a competitive advantage in a small and growing company they will do much better than myself.

 

I fully agree with this!  By all means, when you find the person that can pick out a small company for which they have justified confidence will maintain a competitive advantage for decades (or several that have a probability-weighted chance of such sustained outperformance), send them my way! ;)

 

Insights like the one that got the attention of this thread are simply the "next best thing" that I, personally, know of.

[Parsad]

This thread is awesome, and it really going to the point about Japanese equities.  Of the hour long presentation maybe 1m at the most was Monish talking about some pick he concentrated in.  The rest of the talk was about Japanese net-nets and how abandoned and ignored they are.

 

So what happens on the thread discussing the video?  Everyone ignores the cheap Japanese companies and focuses on the 1m segment about some 60-90% portfolio allocation.  That is a cool soundbite, but it seems everyone here just totally missed the forest for one single tree.

 

Maybe Japanese equities will never revert to the mean, they will always sell below book value, and will remain ignored forever.  I have a suspicion though that in a few years, maybe one or two, or maybe five people on this board will be talking about how they missed out on the epic run in some of these stocks.

 

Or Japan finally blows up from its debt load, and those Japanese stocks plummet in dollar terms as the yen crumbles.  Cheers!