Low-Cost In­dian Car­ri­ers Look Good to Keep on Our Radar

The Economic Times - - Money -

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.

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