rishig

None of the stocks above have a chance in heck to compound sales/earnings at 10-15% for 10-20 years. GOOGL might have the highest growth rate in next few years, but they also have the highest risk of growth falloff. And their market cap with such growth would cross 1T really fast. This is the biggest issue with wide moat high growth investing. Unless you get in early, no trees grow to the sky and the 25 -40 PE is not really undervalued. In case people doubt this, please look at KO and the financial shenanigans it had to resort to to maintain the illusion of wide moat high growth. Buffett has realized this long time ago. That's why cash flow from See's is not invested in See's. Unfortunately, for most companies the money is either invested in diworsefication or in overpriced share buybacks. So, yes, buy wide moats when they are cheap. But don't expect great returns by buying them at inflated multiples. The reason to invest in wide moat stocks is not because they have the highest top or bottom line growth - it is because typically they have high sustainable ROIC for years to come with a reasonable growth rate. And that by itself can create more wealth for shareholders than a higher growth rate company with low ROIC or a unsustainable ROIC. As an example, for the period from 1968 to 2007, net income at the phar­macy chain, Wal­greens, grew at 14% annually and it was among the fastest grow­ing com­pa­nies in the United States. Dur­ing this period, the aver­age annual share­holder return (includ­ing div­i­dends) was 16%. Now, con­trast this with per­for­mance at the chew­ing gum maker Wm. Wrigley Jr. Com­pany during the same period. Wrigley’s net income dur­ing the same period grew much slower at about 10% a year, but the aver­age annual share­holder return of 17% a year was higher than at Wal­greens. The rea­son Wrigley could cre­ate more value than Wal­greens despite 40% slower growth was that it earned a 28% ROIC, while the ROIC for Wal­greens was 14% (which is quite good for a retailer).

MA, AIG, MKL, BAM, JPM Warrants, BRS

I have all their letters in hard copy going back to Jan 1998. If you are in Northern California or plan to visit, let me know.

Nice discussion, but I wish that someone would have asked how he quantifies "risk adjusted" and what is his favorite valuation method? Maybe Saurabh, Rishi or one of the google guys who had an offline discussion can shed some light. Thanks to this group we get to see alot of these talks!! Chetan, Yacktman has talked about this in the past. Basically, they buy when current FCF yield + reasonable growth rate is in double digits. For the types of businesses they buy, forward growth rate is easier to estimate since these businesses have a narrow range of outcomes. Thanks Rishi. You are right. I first came across that a few years ago. I think Gurufocus had a nice interview on it. I guess the part that is ambiguous for me is how do you adjust for risk. ie, how do quantify how risky a company is. BTW, nice call on PCP!! I bought around 200 this summer, was hoping for it to go down some with the weakness in the oil space. But Buffett beat us to it. You have good taste :) Chetan, In the talk Yacktman talks about focusing on companies with a narrow distribution of outcomes. So, I think that's how the adjust for risk. PCP, Buffett beat us all to it. In fact, given that debt is so cheap for BRK, if we account for the debt raised to buy PCP, Buffett got it at marginally higher price than the ~$195.

Nice discussion, but I wish that someone would have asked how he quantifies "risk adjusted" and what is his favorite valuation method? Maybe Saurabh, Rishi or one of the google guys who had an offline discussion can shed some light. Thanks to this group we get to see alot of these talks!! Chetan, Yacktman has talked about this in the past. Basically, they buy when current FCF yield + reasonable growth rate is in double digits. For the types of businesses they buy, forward growth rate is easier to estimate since these businesses have a narrow range of outcomes.

I would be very careful here of a particularly pernicious form of bias (which I have just made up) called academic consistency bias. When you spend a lot of time researching a topic or technology, esp. in an academic setting, you are inherently biased to think that it is a bigger deal than it is, perhaps going as far as thinking it is revolutionary. This is because otherwise you would have to admit you spent a lot of time researching and writing a thesis on something that had little value, and thus you wasted a lot of your time (and in my experience much of academic research is a waste of time). I am not really saying here that blockchains are not important - they might be. I am just pointing out the inherent bias that comes from spending so much time being forced to research something for academic reasons. I do think though when someone says what they are researching is as important as the introduction of computers and the Internet, that is a potential sign of academic consistency bias. And SD I am not saying this to be mean in any way. I truly think that one of the biggest hurdles to clear thinking is the various biases and cognitive defects that we are subject to. The best way to prevent such things from corrupting our thinking is simply to be aware of their existence. +100

You haven't responded to my primary question. Why do large number of people change what they do today to using bitcoin to transact? What problem is this new technology solving for the common man. I understand it is very cool and great for under the table transactions. The common man doesn't care if the cost of transaction is lower for someone else or if it is very cool. But we are talking about disrupting the current processing system at a massive scale.

This is true in USA, but not so true in (a lot of?) other countries. People have to pay for credit/debit cards, disputing fraudulent transactions is not easy, etc. I don't think this negates your points, but just FYI. :) This is true in most of the developed world. But say for a country like India where 90% of transactions are in cash (as per RBI), you don't any of these fancy technological solutions. You need a simple peer to peer payment system like mpesa that bypasses the bank (http://www.bloomberg.com/bw/articles/2013-03-06/what-africa-can-teach-us-about-the-future-of-banking). However, to put this into perspective, will this be how the 90% cash transactions be transacted? I think the unbanked population doesn't wish to be unbanked. And now Mr. Modi, the Indian prime minister, wants to solve this problem. (http://in.reuters.com/article/2014/08/27/india-modi-banks-idINKBN0GR1OQ20140827). So over time, the unbanked will move over to the ways of the developed world. In the end, investing is all about probabilities. Question is at current prices are we paying too high a price that these long tail outcomes can cause permanent impairment of loss? MasterCard is trading at 28x P/E on a trailing basis. EPS is compounding at 20%. If the stock stays exactly where it is for the next 5 years, then it will be trading at 11x given that EPS will be 2.5x of today. Can these long tail outcomes become real in the next 5 years? And if it does, will paying 11x then EPS be too high a price to pay?

A few thoughts and questions: (1) For most people when they get paid, the money goes into a bank account often as a direct deposit. (2) Also, for most people, when they pay for expenses, they do it in using a check, debit card, credit card or cash. Three out of four of these are associated with a bank account. (3) Sure, over time, most people will always be connected on their phone. Are we saying that most people will put an app on their phone that will allow them to pay for expenses that bypasses their bank through a blockchain technology or some other new technology? (4) If so, how does money from the bank account show up in this new technology account? It requires consumers to go into the app and say here is my ACH account. Please debit money from here when I transact. (5) Here is a question: Why would most people do this? Do you enter your ACH account on random apps installed on your phone. Is there a particular problem that most people are facing today with the system of using card/check/cash that is being solved by this new technology from a consumer point of view to force people to do this? What is this problem being solved? In my opinion, we are creatures of habit. We don't change our habits unless there it is an absolute necessity. New technology gets adapted widely when it offers a much superior experience to an existing experience. Within the engineering community, this is known as innovation for 10x improvements. (6) In my opinion, there is nothing wrong with the current system. The bank is in fact giving massive incentives to use the credit and debit card. Fraudulent transactions can be contested pretty easily + part of the interchange fees they make from the retailers is being passed to the consumer in the form of points. Sure, the system of carrying a plastic card around will go away. Banks will adopt these technologies. But that's day and night difference from saying the entire system of processing transactions will disappear and be replaced with something new. (7) OK, then the argument is may be the banks will adopt this system and disrupt Visa/MasterCard. Really? Banks jointly used to own Visa/MasterCard. There is a reason they don't want to be in this business. Setting interchange fees was viewed as a massive regulatory risk. The banks were being litigated for colluding through their ownership of Visa/MasterCard on setting the interchange fees. So why would they want to do this jointly again? Or worse, why would they want to do this individually? Via Visa/MasterCard they get the leverage to negotiate with the large retailers. Through the existing system, they make most of the benefit via interchange fees and a tiny bit is passed to Visa/MasterCard. Don't believe me? When the Durbin Amendment was passed, the FED published data that is publicly available that shows that Visa/MasterCard is making less than a cent on debit transactions when banks like JPM make 12c on the debit transactions. (8) OK, then the argument is that may be the banks will not want to charge an interchange fee. They'll just let the consumer use their ACH account for performing such transactions. Really? Propose this to Jamie Dimon.

Buffett has hit the limit on AXP ages ago. BRK might have been keen to buy it numerous times since then - we will never know. My reading on Munger and Buffett comments on AXP is "luke warm". But I might be wrong. It's not cheap enough for me. At the Berkshire AGM, I took down the following, for what it's worth: Qs: American Express. How does Amex protect it's moat? There's a lot of loyalty with card holders. We're very happy with Amex. Has a history of adapting. Feel like a more important person with your American Express card. Delighted to own 15% of the company. Hope the price falls so the share repurchase has a greater effect on their ownership. BRK has not bought AXP since the 90s. It initiated its position in AXP in 1994-1995 and bought a few additional shares in 1998 but has not purchased any additional shares since then. It did not purchase any shares in the 2008-2009 crisis. Shares Owned Cost Market Value 1994 27,759,941 723.9 819 1995 49,456,900 1,392.7 2,046 1996 49,456,900 1,392.7 2,794 1997 49,456,900 1,392.7 4,414 1998 50,536,900 1,470 5,180 1999 50,536,900 1,470 8,402 2000 151,610,700 1,470 8,329 2001 151,610,700 1,470 5,410 2002 151,610,700 1,470 5,359 2003 151,610,700 1,470 7,312 2004 151,610,700 1,470 8,456 2005 151,610,700 1,287 7,802 2006 151,610,700 1,287 9,198 2007 151,610,700 1,287 7,887 2008 151,610,700 1,287 2,812 2009 151,610,700 1,287 6,143 2010 151,610,700 1,287 6,507 2011 151,610,700 1,287 7,151 2012 151,610,700 1,287 8,715 2013 151,610,700 1,287 13,756 AXP split 3:1 in 2000. Do what Buffett does, not what he says!

The Visa Europe transaction is hairy. Currently owned by the European banks, they want to hand off all liabilities to Visa Inc. Similar to the US, the retailers in the European Union want to sue Visa and the banks want Visa Inc. to be liable for these charges (even if it from an earlier time). If you purchase for $20 billion, you could still be liable for another $5 to $10 billion over time. As far as China opening up, based on conversations I have had with people in the payments industry, this is mostly a rubber stamp thing for China. They want to portray themselves as being a free trade economy. However, folks in the payment industry aren't very certain that V/MA can be very profitable. Banks are going to run very hard negotiations given Union Pay's incumbent position. Having said that I am long MA/V since 2010 but at current valuations I am starting to think harder about what to do.

Why isn't he simply trying to be buy the best value (defined as expected risk adjusted returns) regardless of the cash he has left? He seems to imply that higher potential returns correlate with higher risk while in practice it can often be the other way around. (A bit in the same league as saying that volatility equals risk, while it's often more an indicator of opportunity that can provide return.) I'm probably misreading what he meant though. well you can't be sure that your estimated "risk adjusted returns" are accurate. Pabrai tried something along the lines of Kelly criterion, the theoretical optimal bet sizing, but in real life there is a lot of uncertainty and I think his current strategy is not as fragile as Kelly or the method you're suggesting. On this topic, I would point you to Joel Steven's (on the board @racemize) very thoughtful article on "Why Hold Cash?": https://www.dropbox.com/s/96hwafdp5egf460/2014-15%20Why%20Hold%20Cash.pdf?dl=0

I posted a review for Jeff Hood's book on Amazon: http://www.amazon.com/review/R2M6LVMOB5HALG I think this is one of the most underrated books on investing out there. I highly recommend reading Jeff's book.

Check your PMs. I would like to know as well. Thanks for the reports.

My not so short summary on one response to a student question: "How to gather capital base when you are just starting out in the investment business" Guy: Life is hard, you need lots of luck and things to line up... Mohnish: Guy, you are totally wrong. It is actually very easy (class laughter). Let me show you. (To the student) What will your salary be when you graduate? Student: huh.. (class broke out in laughter). Mohnish: OK OK, what is the median salary of a Stanford MBA Professor: 150K Mohnish: Is 150K good enough for you? Student: No, not really. Why are you asking me this hard question and putting me on the spot? Mohnish: Well, you asked the hard question and we need to resolve this now (more laughter). How about 200K? Student: Getting there but not quite Mohnish: How about 300K? Student: Closer but not there yet Mohnish: 350K? Student: OK, I'll take that but need to take off 50% for taxes (He was wrong here, the marginal tax rate is 50% - effective tax rate won't be 50%, but whatever). Mohnish: OK, so you'll end with 175K a year. What will be your living expenses? (Student again squeamish, class in laughter). OK, let's say you live on 100K. Don't spend one more penny than that. Forget the BMWs. Who needs that? That anyway won't make you happy. What makes you happy is another class altogether and we won't go there yet. (I am thinking to myself the student is thinking Mohnish is nuts - all these MBA grads joined Stanford they will be living this fancy life with the BMWs and Teslas). The remaining 75K you just save. Max out your company matching 401K, IRA, Roth IRA and whatever other vehicle you have. Put it all in an index fund. How old are you? Student: 27 Mohnish: Do it till you are 37. How much do you expect to make at 37? Student: $2 - $5 million? (I am thinking wtf. This guy really has his head in the sand). Mohnish: Great. At that point, I let you raise your lifestyle to 200K a year (class laughter). Also, I recommend that you marry up (more laughter). . Your life expectancy is about 50 - 60 years more. If you just do this, you can't help but get super wealthy. Guy: If you compound at 15%, you double every 5 years. If you compound at 11%, you compound every 7 years. Let's say you compound at 11% Mohnish: Guy, can you do the math and tell me how much "capital" (emphasis his) our student here will have gathered (more laughter) Student: No offense, I get the point but that is not the question. I have already taken up so much time, but let me clarify my question (I am thinking this guy is really over his head. The class is super large and there are so many people waiting to get their questions answered). You are assuming I go get another job and save up money like you are saying to invest on the side. But how does one go about into the investment business full-time and gather capital? Mohnish: Very easy. You have a brokerage account? Student: No (wow - this guy does not have a brokerage account, but he has all these ambitious goals. This is what a Stanford MBA does to you? Gives you an entitlement mentality?) Mohnish: TODAY I want you to start an account. Go to www.tdameritrade.com and open an account (more laughter as he spells out the URL). Put it whatever money you have. $10,000, $100,000.. $1,000 whatever. Don't buy groceries from this account and start investing this money. 1.5 years later when you graduate, you will have a track record. Then you approach three kinds of people - Friends, Family and Fools. (very loud laughter). All three should be willing to hand you their hard earned dollars if you have a decent track record and you have this great Stanford MBA grad certificate. Let me give you one more secret from Guy and me. Investing doesn't really take that much time. I suggest you also get a day job. It's free money, take it. Believe me, that's what you want to do. You will have three things going - your day job, your savings, and the investing on the side. Student: OK, I get the point, let's move on to the next question. Mohnish: Have I resolved your concern? .. It showed to me that MBA doesn't really give you wisdom or even prepare you as an investor. In fact, it is quite easy to fall trap into an entitlement mentality. Basis tenets of being frugal can go such a long way that sometimes sophisticated MBA students don't get it. This was super fun imho.

My friend Saurabh Madaan recently hosted Pat Dorsey at Google to talk about investing in wide moat companies. I was in the audience and had the chance to ask questions. Loved the talk. Here is the recording:

Here is my spreadsheet for SP500 TR (populated automatically using yahoo finance). https://docs.google.com/spreadsheets/d/1zUXc6FnUeIFR9NsAAd5bh3Yjporo_ymtEl2fS6NPFS8/edit#gid=0 Using the adjusted close column in my spreadsheet, the data I get agrees with what Morningstar reports when comparing funds performance to sp500 tr. See here: http://performance.morningstar.com/fund/performance-return.action?t=SEQUX&region=usa&culture=en-US

Oil prices stay low, they dig up their low cost reserves to produce cash flows, not replace depleting resources due to shareholder pressures of focusing on the short term and/or OPEC keeping oil prices low and effectively letting the company go into liquidation.

I applaud the incredible amount of work. As an engineer by profession, I also was naturally inclined to doing "deep" research of this nature. However, after a few years of investing, I re-read Seth Klarman's Margin of Safety book and the following paragraph stood out for me and hit me like a ton of bricks. "Some investors insist on trying to obtain perfect knowledge about their impending investments, researching companies until they think they know everything there is to know about them. They study the industry and the competition, contact former employees, industry consultants, and analysts, and become personally acquainted with top management. They analyze financial statements for the past decade and stock price trends for even longer. This diligence is admirable, but it has two shortcomings. First, no matter how much research is performed, some information always remains elusive; investors have to learn to live with less than complete information. Second, even if an investor could know all the facts about an investment, he or she would not necessarily profit. This is not to say that fundamental analysis is not useful. It certainly is. But information generally follows the well-known 80/20 rule: the first 80 percent of the available information is gathered in the first 20 percent of the time spent. The value of in-depth fundamental analysis is subject to diminishing marginal returns. Most investors strive fruitlessly for certainty and precision, avoiding situations in which information is difficult to obtain. Yet high uncertainty is frequently accompanied by low prices. By the time the uncertainty is resolved, prices are likely to have risen."