Low-Cost Indian Carriers Look Good to Keep on Our Radar
Our job is to sit and do nothing for long periods of time and when we find a stock that shows anomaly or is mispriced or people cannot see it, we step up and hit the ball for a six, say Mohnish Pabrai, managing partner, Pabrai Funds, and Guy Spier, author of The Education of a Value Investor, in an interview to ET NOW. Edited excerpts:
Globally, the markets are at a high. What is driving this rally? Mohnish Pabrai: Just a couple of data points. One, while the US markets are at all-time high, in reality we are not that far off from the highs in, let us say, 2,000 or so. So the annualised returns from then till now are still below long-term market averages. If you just take a very long-term view, we are not in an unusual territory. But, probably more importantly, investors are better off just ignoring that. The name of the game is focusing on specific businesses and businesses that you understand without trying to figure out what the market might do in next month or next quarter or next year.
But Guy, looking at the rally, I am trying to figure out where do you guys think the world markets are headed without getting into one week or one month? Everybody had thought that if Trump comes in, there could be some gyrations in the market. Does not seem like the US markets or the world markets are too bothered with that. In fact, they are celebrating what has happened over the last couple of months. Guy Spier: The morning Trump was elected, the markets were down. I do not know by how much and then they very quickly turned around. But some of the smartest guys that I know and close observers of the US markets and people who are very closely connected politically, could not have figured it out. What we really have to do is what Mohnish just said. Just ignore it completely and think of the next 30 hours. We observe the market very, very closely and we got surprised by the direction that the market takes. Everybody was surprised by the Trump election and so you just ignore him. The brain cells are wasted.
There is a lot of talk about the French elections and if indeed the right wing Marine Le Pen comes in, then maybe we are looking at a sovereign debt crisis in the European region. What is your view? Spier: I will tell you one thing, Trump got elected and one of the first thing that he did was he got rid of TPP (the Trans-Pacific Partnership), and all of us free traders threw our arms up in the air and said Oh My God! what is he doing, this is terrible.
But I spoke to somebody from the free trade organisation in Geneva. China took up the baton and actually a lot of the free traders are saying that is really a good thing. It is no longer that the United States has to lead. The developing world has now realised the benefits of free trade and China and India and other countries can take up the baton. Often what we think is a disaster is not a disaster. There are all sorts of good things going on. What is the probability that there will be crisis in Europe over the next 10 years, 100%; but we should not allow that to affect the way we invest.
Warren Buffett, in his annual letter, has said not to look at active fund management, look at passive funds or look at active funds which charge less fees. Do you think investors will be better off betting on index funds? Pabrai: Index funds are a great way to go and in fact one of the great points Warren makes in his letter is that he has been talking about index funds and the benefits of index funds investing for a long time but he says that the people who are rich, the people who have large amounts of money, may be with institutions, endowments, pensions funds, feel that they are entitled to superior service because they brings in more assets. There is a quote: “Wall Street is the only place where people who travel in Rolls Royces go to take advice of people travelling by subway.” The rich believe you get what you pay for and in the investing business that is not at all true. You do not get what you pay for and the ability of even a pretty smart investor to be able to forecast what an investment manager is likely to do in terms of performance relative to the index over the next 5, 10 or 15 years is not an easy thing to figure out. So, for almost everyone, the best answer is the Nifty 50 index. No salesman is going to show up at your doorstep saying please buy the Nifty 50. The only salesman who is going to say that is yours truly because I love your viewers. The best thing that investors in India can do is go into the Nifty 50 and do dollar cost averaging. The important thing is start saving early, always spend less than you earn and just keep putting something away and you will and in a few decades you will be very rich. Spier: Though it sounds easy, the process is never feels easy. Mohnish has a more optimistic nature. There are so many times when I have beaten myself up over how I felt about my investments and then I look back and said actually I did not do so badly, it is okay. So just keep doing it and trust the process.
Guy, I read somewhere that you did mention that the idea right now or at least some year ago was to try and figure out how to buy those businesses which will go up 2x, 3x, 4x over the course of the next three-four years. Spier: I learnt that from Mohnish.
At the current market juncture, across the world are you looking for 3x, 4x ideas right now or are you assigning more weightage to margin of safety looking at the current market scenario? Spier: I sent Mohnish an idea recently. He said then if it is not a 3x or 4x, I am not interested in it. Pabrai: No, no I told him it is not a 5x, do not waste my time there. The conference is called value x. I told him to rename it value 5x and there is an old Miller beer commercial, it taste great and it is less filling. One of the things about investing is if you find companies that may go up three times or five times or 10 times, what probably is there they are trading really cheap and so they have a high margin of safety. A high margin of safety comes with high returns and we are not in a business where it is high risk high return. If you follow value investing, this is a business which should be low risk and high return. There are a 100,000 stocks around the world. Our job is to sit and do nothing for long periods of time and every so often there is something that is an anomaly or it is mispriced or people cannot see it. That is when you step up and hit the ball for a six.
Though there are some consumer sectors in India, I heard you recently speaking somewhere that India from an airplane, looks like it needs a paint job really badly. But these are sectors that are not available cheap in India. What does an average investor do there? Pabrai: Well so recently I was talking to Charlie Munger and he said that he had been a reader of Barron’s investment magazine for 50 years and in 50 years he made one investment that he found in Barron’s. That means 2,600 issues and at least 10 stock recommendations in each issue, something like 26,000 stock recommendations. He let 25,999 go for five decades and then found an anomaly and put in about $10 million or so into this auto parts company in 2001. Made about 8x on it so the $10 million became about $80 million in three years. Indian airlines have some similarities to the US airlines and they have some differences as well. One of the differences is that in India, the airlines sector is actually a little bit better than the US because fares are lower, fuel is a bigger portion of the pie than it is in the US and one of the reasons for the bet on airlines in the US is that we are never going to see, for any sustained period of time, oil over $60 and in fact we may not even see it over $50. In India the, the dynamics are a little different, but I do believe that some of the low-cost carriers like IndiGo and such are extremely well managed. They are not cheap but it is good to keep them on the radar.