The Art Of Contrarian Investing And Identifying Underrated Industries

If you have a point of view that everybody else does, you make no money. So, in order to compound your money, in the stock market world, not only do you have to be right, you have to prove everybody else wrong. Apple’s a great company. It’s going to report 10 bucks of earnings. And lo and behold, Apple does turn out to be a great company, and it does report 10 bucks of earnings, but you don’t make money off that call. Even though you’re correct, because everybody else had the same point of view that you did, it’s already in the price. I identified that Microsoft was at enterprise staple. Google Sheets existed to compete with Excel. It was free and yet nobody went to Google Sheets. And to me that was a litmus test of the entrenched staple nature of Excel. You really come up with a thesis. It’s not enough to come up with why it will work. You need to also stress test why it will not work and and test it on adversity. If you don’t know how your company will do in tough times, you’ve not done your research. Money is made when you’re uncomfortable and not confident. The auto industry, everybody knows the industry is cyclical. It’s a tough industry. It’s competitive. It’s going through two transitions from combustion engine to EV and from self-driving cars, autonomous vehicles, right? The tire industry is an exception to this rule. If you look at the mining industry, we need copper, iron ore for this technological feast that we’re going to have through AI. If the mining industry under goes a boom, the mines are further and further away from the ports and the railroads. And so, you have to truck this copper, this lithium ion, long distances. The trucks are monster trucks. They have these monster tires. The bigger the circumstance from the tire, the higher the profit margin on the tire. Who are the companies who make these tires? It’s these two. Bridgestone and Michelon located mostly in Japan and in France, the most highest cost manufacturing countries in the world. And yet these guys are competitive. It’s because of the high-tech nature of the tire. Think about e-commerce. Uh we are all buying stuff which is delivered home to us instead of going through how does it come? It it comes through trucks, right? The long-distance part. So now you need trucking tires. So, I’ve just given you examples to play e-commerce, to play AI, and to play EV through the tire companies that cost us roughly 11 times earnings and give you roughly a 4 and a half 5% dividend yield. I actually look for companies who are able to lower costs every year as opposed to raise prices every year. Very few people invest in those companies. They’re like, oh, they don’t have pricing power. This is another sort of investment framework that I’ve exploited arbitrageed you know taken advantage of over decades frankly is this who has been time- tested in having to lower costs every year in this world Walmart Costco who’s experienced deflation for a long time in the world

Japanese companies recently Warren Buffett also invested in fifth he did yeah they actually started manufacturing koshers believe it or not in Finland they’re actually buying a Finnish con or a German one a lot of Louis Vuitton actually manufactured in China and not in France

you have studied 50 countries What are some business models, companies, sectors have the capability to do great things but are awaiting the right opportunity?

So right now I know a lot of people in the IT industry giving a lot of IT work to Argentina because

Hi everyone, I’m your host Shivank and we are part of the 01 network by Zerodhub. Together we intend to bring you insights from the top thinkers in the field of entrepreneurship, technology and investing.

My intent is simple. There are three things that I want to do for some time. I want to be your intellectual successor. I know you can’t do that in 1 hour, but can we try to frame everything that you have learned about the world and investing? Second, uh you wrote this book a decade ago. You took a lot of examples from your lifetime. Um, you know, you you spoke about Japanese market, you you spoke about real estate play, you spoke about how you, you know, when the Swiss Frank was happening, how you shorted Nestle, how you took money out of Nestle, you took a lot of examples, but can we update those examples for the world of 2025? That’s my second objective. In your book, you take a lot of examples of contrarian thinkers, right? Edward Jenner, Professor Ununis, Professor Hley, Billy Steve Jobs. In the world of investing, what memes come to your mind who are truly contrarian and truly right?

My team [laughter]

of course.

Um I think couple of decades ago you had people like a David Drummond uh who wrote a book on contrary investing. Uh I don’t actually subscribe to his view of contrarian investing which is why I did not mention him.

Mhm.

But he’s he’s known to be a contrarian. I would say there are people see contrarian investing is not to be contrarian just for the heck of it. Investing is a very different sport in most things in life. If you get something correct, you’re off to the races. You know, you’re a student, you get the right answers, you’re going to ace the exam. Uh you’re a lawyer, you put the right presidents, you know, you’re going to win the case. Um in investing, when people apply that principle and thinking, you know, oh, I think, you know, Apple’s a great company. it’s going to report 10 bucks of earnings. And lo and behold, Apple does turn out to be a great company and it does report 10 bucks of earnings, but you don’t make money off that call. Even though you’re correct because everybody else had the same point of view that you did, it’s already in the price. So, investing is a far tougher sport. It’s not enough to be correct. In most other things in life, it’s enough to be correct. And people think, “Oh, I’m pretty intelligent. You know, I get a lot of things correct. Uh, I can do this, too.” Well, the trick is and this is why a lot of people fail in investing is because it does not translate. If you have a point of view that everybody else does, i.e. your correct point of view is consensus, you make no money. So, all that effort is gone.

You have nothing to show for it. You can get an ego boost but not really making you know uh you’re not really going to compound your money that way. So, in order to compound your money, not only do you need to be correct, but your view needs to be non consensus. So, it’s not in the price. That’s what you arbitrage. And think about it, markets exist not to make you feel happy or to, you know, allow you to make a lot of returns.

It exists, it you have to serve a purpose. And what is a purpose? The market wants you to serve.

Markets exist to discover the fair price. If you can contribute to that effort, no matter who you are, you can be a quant investor, a contrarian investor, a momentum investor, a any kind of active investor. Uh there can be different, you can be a growth investor, a value investor, a small cap investor, you know, there are many many different forms, right, of people who specialize. But all of them they need to serve this purpose. Are you discovering the fair price? Because markets exist for everybody else who’s not in the business of discovering a fair price. So they get a fair price. And what is a fair price? where neither buyer nor seller takes advantage of each other. It’s a fair price. Neither come out ahead. And in doing so, it’s a fair exchange. Someone needs liquidity. They have an asset. They want to convert that illquid asset uh or semi-liquid asset or liquid asset into cash because they need it for some purpose. And if they are going to sell, they want to make sure they get a fair price. And the market has set that price. They may not know, but the market gives them the clearing price. So whether it’s a price of strawberries or bananas, you go to the supermarket, you’re not thinking, oh, is the price of strawberries the right price or the bananas, you know, the market has set the price. Why are strawberries far more expensive than bananas? Because bananas are less perishable. They have a thick skin. They don’t spoil as much. Strawberries do. Uh, you know, and and so the price of strawberries are almost 5x the price of bananas. The market has discovered the fair price, and it’s a constant effort, right? competition in in the goods world I’m going to call it but in the stock market world investors that’s the role you play and if you play it effectively the market rewards you because that’s what it wants if you do it ineffectively the market penalizes you so the biggest thing with markets is not only will you make money not make money if you’re correct but non but consensus you will lose money if you’re incorrect even if it’s consensus right so it’s a really hard thing. Not only do you have to be right, you have to prove everybody else wrong. That’s a very different kind of sport. And in order to do that, not only do you know what is already priced in. So you need to know the consensus view and you need to come up with a non-conensus view. That takes a lot of effort and it takes a lot of practice, a lot of judgment, a lot of skill. This is why it takes a long time to learn. And the other thing is it’s dynamic. Uh it’s not something that is formulaic. So you know you think oh xyz worked for me and now I can keep you know copy pasting. It’s not like a recipe, you know, if you’ve made some recipe, you do it once, you do it twice, 10 times, you’re good at it, you can keep repeating the recipe, you’ll get the same outcome.

It’s not like that.

Not like that in investing. So, because it’s not formulaic uh and there’s always some dynamic, you know, and there are so many influences uh that go into it and there’s almost a confluence of factors, some of which are going to be helping you, hurting you, uh and and the investment that you’ve made. So lots of puts and takes you know some working in the right direction some so you got to kind of synthesize all this you got to sort of you know make sense of all this stuff um and after you make sense of it figure out if other people have not made sense of it yet. So it is um remember you know in most things in life right we all say oh it’s a very competitive job market or it’s a very competitive you know to get into this college or school or whatever it is. No matter what that competition, think about it. You’re probably competing against perhaps a couple of thousand people or a couple of hundred thousand people or maybe even millions of people, right? Let’s just, you know, I or something. I mean, I’m sure there’s like that that applicant to acceptance ratio is like off the charts, right? Now, we all see that as competitive and we say, okay, that’s really hard. Like, not everybody will get into Harvard or we’ll get into in markets. People think it’s easy. They don’t see the competition, but you’re competing against billions of people. All eyes on the market. Information is available at your fingertips now. Uh, and so, and that’s the raw material, you know, to make investment decisions. So, information is not only everywhere, it’s an overload. So, now you need to figure out how do I separate the noise from the signal because you’re one human being

and you have 24 hours, you know, and there’s like a constant news cycle almost, right? And so I think all of these things make investing really hard but because they are hard only a few people can really do it well and then they get the success that you often see in the markets. In that journey though when it’s a bull market a lot of people succeed and a lot of people conflate luck and skill

and so my question to anybody and and again any investor should judge uh accordingly is have you managed money through different market cycles have you managed money in different environments you know uh and so I was very fortunate my career started out of course in India on the street Um and and uh I think you may know I I grew up in a family of bankers and brokers. So in that sense I had a bit of a head start. Uh but nonetheless um coming to the US because you know if you want to be the best in in your profession

not just learn from the best but more importantly when you compete against the best right that’s how you learn from the best.

So I wanted to beat the S&P 500 right you want to beat the benchmark that is supposed to be unbeatable. uh and so of course I I came to this country uh because I wanted to be amongst you know the most toughest market in the world to beat uh and that’s how I became a better investor but my journey pivoted uh from you know really following us Indian markets and US markets to really following global markets so over my 30 plus year career now I’ve covered 50 countries and 50 markets therefore uh and everything from deflation in Japan to you know inflation in in the emerging markets like Brazil and and there are so many other environments that you can think of uh you know an environment in Switzerland you know where the currency does nothing but appreciate and it’s a country of exporters right um and and and you know everybody says that in order to be able to export you know you need a currency that’s weak I mean typically that’s what people associate success with and here you find these anomalies that Switzerland has you know the most appreciating currency and yet it still is a manufacturer of the world right it still manufactures an export so you want to understand you know how is this possible this does not make sense so a lot Investing is not about making sense. It’s about what does not make sense and then exploring that the disconnects, not the connects. So a lot of investing is what I call upside down thinking. So you’re wired a certain way, you almost need to rewire. So I go back to your original question, you know, this notion of who are the other contrarians. Anybody who can think uh laterally and play devil’s advocate with themselves, you know, make almost being a lawyer for the defendant and the plaintiff at the same time.

That’s incredible. That’s kind of what you have to do.

I believe in the current world there are a couple of contrarian investors that I love.

Peter the Stanley Reken Miller George Soros and in us you started your career at the Soros fund. I really want you to go back to that time and think and share about a couple of instant in instances and stories which played a pivotal moment which you picked up from Soros. I’m sure that you must have interacted with him during your time there. What were some learnings if you see I know you share that one of the pivotal point was of course you know in your early days when um you were rich but because your lifestyle and family was associated with markets and then you become you know you have my book yeah you you become there is a lot of volatility and then being poor is one thing and being poor after you’re rich is another thing right there that was one of the biggest you know orbital shift in your point but what was the orbital shift when you came to us two things happened one you are working with Soros and second you shifted your focus to global equities walk me through the most important learnings you had there from hindsight

so um I want to take a step back um uh my first job in the US was not soros uh after I graduated I wanted to very much work on the buy side you know picking stocks and doing research

um but um the markets were tough and I didn’t get a job on the buy side um and I only got a job on the sell side and I had to take it because I needed a work visa so that would facilitate it to stay in this country again otherwise all my plans would come to note. Um so I took a job at at u a sellside firm uh which I hated at the time because I wanted to pick stocks not pitch stocks right the opposite um it turned out to be the best experience uh that to date I draw from

and that’s why I want to share with you because as it turns out it was actually I have to say a higher force looking out for me uh because knowingly I would not have chosen to start my career there but being on the sell side and I was covering emerging markets because that was you know the only expertise I had Indian markets etc. This is the early ‘9s, right? Uh and and India had just deregulated. You know, we’d gone through the currency DVAL and it it was a very different time and again people were sort of, you know, bullish. Uh and anyway, emerging markets were coming into their own and hedge funds, you know, were very active in them, of course, but I had the uh vantage point that I could pitch stocks to the who’s who of money managers in this country and abroad. So, everybody from Wellington Management, Troll Price, Templeton, like you name it. Capital Guardian, they were all my clients. Uh Bailey Gford, you know, growth investors, value investors. I mean, all of them were clients, which means I got a chance to observe so many different investment disciplines at a formative stage of my career. How they think, how they evaluate, you know, what is going to work with a particular client because again, if you’re pitching, you need to customize your pitch to, you know, what they’re looking for. So then you start understanding what they’re looking for. And so I would say that was actually the most formative thing that I got exposed to so many different investment disciplines. There are attributes of growth investing which are very good. There are attributes of value investing which are very good. But there are attributes of both which are very bad.

Okay?

And so I can blend all of this stuff. And so my investment philosophy uh is neither growth nor value and it’s both.

Um and it’ll take a long time to explain that and unpack that but it’s sort of in my book on non-conent investing. But I would just tell you that that was just amazing, right? Because here I can figure out the pluses and minuses of all these investment disciplines because I’m I’m living it. Also, what is so interesting is hedge funds were also my clients, not just long only.

So with hedge funds, you don’t just have to come up with long ideas, you have to come up with short ideas.

And so it really developed my my antenna for how to think about not just what can go right and how much can the stock go up, but also what can go wrong and how much can the stock go down. And in fact some of my first pitches uh to some of the hedge funds were short ideas. They’re always in short supply. So I wanted to differentiate myself. You know you’ve got to do something different. Uh and some of the ind uh Indian companies back then uh I would recommend them shorting because I would read the prospectuses and I you know I I have a investment banking background. Earlier I worked at ICICI so I don’t get daunted by reading you know these like things that nobody reads I guess. Uh and I could tell that this is like just overvalued fluff. Uh and Dr. Read these labs actually was the first and biggest short that I recommended you know to tiger Julian Roberts. Uh and so that’s how I got in front of Soros right because they were a client

and so for two years I did this and you know because they saw my work and my work spoke for itself which is again amazing um uh they said you don’t belong to that side why don’t you come join us so that’s how I made this transition but anyway my my journey with Soros was like prior to sor joining soros only because you know they were a client but I would say uh the best thing for me is being exposed to so many different ways in which to address marketing efficiency And I’m not saying there’s one way to skin this cat. Uh but if you can I almost feel like you know I custom designed my investment process you know which I’ve used now for 30 years and which has culminated in this uh what I call non-conens investing because I was very surprised you know people trash active right I mean it’s very popular in America to trash active uh given the record of active is it’s underperformed. It’s not actually. So if you dig deeper and this is very important you know people get caught up in headlines uh and then you know the narrative becomes an echo chamber and everybody believes it without really understanding the underlying study. So what really happened with active and the reason they underperformed is because active managers were not performing were not managing actively. They were closet indexers charging high fees. Well of course now you’re going to destroy the record of the genuine active because you are the pseudoactive and and you are a bigger portion of that data set. And so that sort of made everybody think, oh, there is no advantage. You know, there’s no such thing. Well, markets need active managers to discover the fair price. Again, we are the only ones who do the research. And I’m not saying my way is the only way to do the research. You can have a diversity of investment disciplines. As long as you’re trying to discover the fair price. Quant will do it in a certain way. Growth investors do it in a certain way or in a certain universe. All that’s fine. You can be US, global, small cap, all cap, I don’t care. But as long as you’re trying to figure out what is a fair price in the long run, stock should reflect their fair price. And so I go back to this notion of you know I figured out how did capital guardian do this or how did Soros do it or you know what and then Bailey Gford I mean again very different kinds of investors and yet uh I think that there is a way to improve upon you know what you learn from the masters. So for example, Warren Buffett was not my client but of course you know everybody’s guru so of course mine might as well but I found that a lot of his investing concepts had been mined a lot you know by the time I’m in my 20th year of managing money I mean everybody knows consumer staples are franchises and Coca-Cola and you know it’s all like well known right and I’ve told you if it’s well known it’s already in the price so there is no advantage even if you’re right on their sort of thesis of owning consumer staples. So every person you know you you you do sit on the shoulders of those before you and you learn from them but then the application of the knowledge is up to you in the current circumstance. So that’s when I came up with this idea of owning enterprise staples as opposed to consumer staples. Now back then people did not think in those terms. I think even today they don’t. But think about it. You know the notion of the consumer staple is that it’s a staple. Not that it’s a consumer it’s a staple. That’s the that’s the real you know genius of the investing and the value right uh so the same thing should occurr if you’re an enterprise staple the only difference is this is a B2C business model this is a B2B business model but the same and so I identified um again almost 15 years ago that Microsoft was at enterprise staple

and at that time everybody thought you know this is back in 2010 11 12 you know that sort of period so I’m really dating myself here but Apple was going to eat Microsoft’s lunch because Apple was killing it with the iPhone and you know we had BYOD like bring your own device and people said okay it’s going to be Apple Apple all the way in the enterprise and we saw that Windows and Excel and and Word um were workhorse products and super cheap I mean dirt cheap you know for what you get out of them versus what you pay for them and the other thing that we always do in our research is you know you want to have a litmus test I I like to stress test my ideas that’s one lesson I have learned that few people do I want to know how do I debug bunk my thesis

that this enterprise staple is a franchise, right?

Okay.

So, what’s the penultimate competition that you can’t compete against?

If someone offers that product for free, that’s hard, right? Like it’s one thing to like, you know, have a premium. If someone is able to offer that product for free, like that’s game over, right, for any business. Well, guess what? Google Sheets existed to compete with Excel. It was free. And yet, nobody went to Google Sheets. And to me that was a litmus test of the entrenched staple nature of Excel and Word and PowerPoint. You had all these free options and yet nobody chose them. They were lacking in some way. And again enterprises have very particular use cases. You know they need to have regulatory compliance, security compliance, licensing and and you can’t do that with these consumer products. So again I want to tell you when you really come up with a thesis it’s not enough to come up with why it’ll work. you need to also stress test why it will not work and and test it on adversity um and then you know if it’s really a franchise or it’s just you know fad or it’s good for here and now but it does not have legs you know this notion I saw you Ramdev you know talking about quality growth longevity is a very important element of of QGPA yes uh of of u of of value creation right uh and so the definition of a franchise is it has to be long-lasting uh but they rarely last long uh and and I say rarely in the context of you know 30 50 years you know for for a for a couple of years sometimes even decades it can seem like uh they’re very good uh but I’ve lived through all of it right I mean Kodak you know was the the apple of its day used to be the apple of Japan uh and so on and so forth I mean it was a juggernaut if you looked at Sony Sony uh literally again people don’t know Sony today I mean you know it’s consum electronic brand. Uh but back in the day it was a cool thing to have. You know they were [clears throat] the ones who launched the Walkman and the CD and like you know you had your own personal device which I mean think about Apple. That’s kind of how we think about the iPhone and it’s been done before and you’ve been through those cycles as to what it takes to succeed and then what causes failure. So I would say that one of the distinguishing attributes of a contrarian investor Warren Buffett is a contrarian too right? He says, you know, buy when everybody’s fearful and greed like, you know, these are all

contrarian thinking.

Contrarian thinking,

uh, uh, Charlie Munger, of course.

Um, but it’s not enough to be contrarian. Just do the opposite of what everybody else is doing. That is no anchor. So that’s why I don’t like to call myself contrarian because it appears like, you know, your behavior is driven by someone else’s. That’s not the non-conensus investing is to be independent in your thinking.

Okay?

Your thinking just happens to not be the consensus thinking. That’s independent thinking. It’s not driven by the consensus either in favor of or against of you just have your own independent point of view and that’s again what Buffett does and what I think the great investors do. But coming back to this notion of you know I think you if you don’t know how your company will do in tough times you’ve not done your research. Uh I almost have this again another litmus test in my head you know uh Confucious said this and I I really love it. Um you know nothing till you’re not confused.

That’s so true. A lot of people say investing is about conviction. You know, I had conviction and I went in. Oh, no. Investing is not about conviction. It’s about how correct and non-conensus you are. Conviction is just confidence that could be misplaced. Could be misplaced. So, I don’t talk about conviction. Uh to me, conviction is all about the the greater the disparity of your views versus the consensus, the magnitude, right? how far away you are from consensus and how correct you are compared to consensus.

The more money you will make

that’s yes it’s not about how confident I feel about it. I mean that is no that’s an emotion and a feeling and you know God help you. I mean might make you sleep better at night but

no in fact your best money is made when you’re uncomfortable and not confident. It it tells you that you’ve reached that point of having no confidence. You know you’ve reached a point of realizing oh my god I’m confused. You know a lot and yet you only go that deep and you really know the weaknesses of your thesis and and the vulnerabilities and the pressure points when you feel confused. If you’re not at that point, you’ve not done enough research

with all this learning and frameworks and litmus test that we have. Can we apply something in the context of 2025 with your independent thinking? what are certain things that you have come up with which is completely non-conensus to the world to the newspapers to the media to anything that we are reading now watching now hearing now

so I think one example uh let’s take an industry that has been very well covered and has existed for hundreds of years you know like 100 years or so right like that that’s well researched you would say right not a new industry the auto industry is that fair like cars have been around since 1920s let’s face it Right. Sure.

So, and and everybody knows the industry is cyclical. It’s a tough industry. It’s competitive. It’s going through like one of the two transitions at the same time, right? From combustion engine to

EV uh EV uh and from uh you know self I mean self-driving cars, autonomous vehicles, right? So, like you know two transitions like it’s a lot to handle, right? And you’ve got um the winners and losers are changing, right? because you know the Americans used to have the lead in the industry then the Japanese and the Koreans and now it’s the Chinese right so

it’s another whirlwind right even even the incumbents uh no matter who they are and what they’re

um and and and then you look at the auto components industry it’s caught up with the auto industry right it’s the same saga correct the same food chain value chain it all so this whole industry has been trashed because it’s it’s tough for the for the incumbents right and they are the big companies uh which makes sense right I mean you wouldn’t dispute anything that I’ve told you so far which I actually don’t agree with. It’s a consensus view and I agree with it. But there is an exception to all of this stuff in [snorts] one part of the auto auto components industry that people have not sufficiently I think understood or valued

okay

in all this you know landscape that I’ve just talked to you about. So, I don’t disagree with the premise that a lot of the auto components companies are going to go out of business eventually because you don’t need so many components in the car to begin with, right? And it’s it’s a game and you know, you have to have a battery and you have to have but there’s so many other players that will go out of business. So, you really don’t it’s a it’s like

declining.

Declining. Yeah. You know, it’s it’s uh you’re catching a falling knife almost or at least a value trap.

Um the tire industry is an exception to this rule. We all use tires. I mean, I’m sure everybody in the world knows what a tire is. So, it’s it’s um and and everybody thinks, you know, just this round donut thing, right? Like, which

look at the tire and think about it whether you have it’s the one portion of the car, the one component that is actually getting higher and higher spec because in an electric vehicle, you need more torque, you need braking distance, right? both for an EV as well as for self-driving cars because that’s what determines the safety, you know, if you get into an accident, right? Like how quickly you break and and what determines how quickly you break is the grip of the tire to the ground.

Y

on the same side, at least for the combustion engine side, uh not entirely for the EVs, but still, um you need to have fuel efficiency. We still drive hybrids. we still drive, you know, like there’s too many, you know, the vast majority of the cars right now are still.

And think about it, for uh for fuel efficiency, you don’t want the tire to grip the ground. That works against for safety, you want the tire to grip. So here you’re asking the tire to do two mutually exclusive things.

Okay?

Right? Literally the tire that can do that effectively solve for both rather than just one or the other is the definition of doing something that is extremely difficult to do. You’re solving two mutually exclusive propositions. It’s like my telling you, you know, everybody says you want to have high returns, you got to take high risk, right? Or if you don’t want to take, you want low risk, you can settle for low returns. And I’m like, no, I want the mutually impossible. I want low risk and high returns.

Not all, right?

And so this is the tire. So a lot of people misunderstand that actually the tire is becoming more and more high-spec and and if you look at you know the players who are participating in the EV market they’re just a handful uh the Chinese cannot you know the low end of the commodity producers they just can’t participate they don’t have the technology and the knowhow so we talk about technology in the Silicon Valley sense but we don’t talk about technology in some of these old school industries and the tire is an extremely high tech product very high-tech

okay

very hard to make that’s why you don’t have so many tower companies in the world actually and and the two leading companies are Bridgestone and Michelon think about it they they’re located mostly in Japan and in France they have factories all over the world don’t get me wrong including in the US right

so you would think why is it that the tire industry is not lost out you know to the emerging market companies right like you know all other goods get produced because the tar is very bulky you can’t ship it over long distances you need to make it locally and Japan and France must be two of the most highest cost manufacturing countries in the world. We have to accept and yet these guys are competitive. It’s because of the high-tech nature of the tire.

Go buy four sets of, you know, if you try to replace the tires in your car,

they’ll cost you more than a

Mac Air. Yeah.

Why? Everything else is deflationary. The tires cost more.

More and you have to pay up. So now I’ve just given you something that should be wellnown and understood. Nothing I’ve told you is insider information or you know some sort of rocket science sci-fi stuff happening in the future. It’s here and now. And then if you look at the mining industry, you know, more and we need copper, iron or we need all these sorts of, you know, materials, right, for this technological feast that we’re going to have through AI as we’ve been told. And everybody wants to pay up for all these companies. Uh, but think about it. If the mining industry underos a boom, the mines are further and further away from the ports and the railroads, you know, because now you have to mine in in far off regions. And so you have to truck, you know, this copper, this lithium ion, whatever it is, long distances. The trucks are monster trucks. They have these monster tires. The bigger the circumstance from the tire, the higher the profit margin on the tire. Who are the companies who make these tires? It’s these two, Bridgestone and Michelon. So the mining tires, think about e-commerce, right? Uh we are all buying stuff which is delivered home to us instead of going to How does it come? It comes on wheels. I know it comes in, you know, emerging markets, but it comes through trucks, right? The long distance part. So now you need trucking tires. The truck drivers are so expensive, right? People are getting more expensive every year in the world, especially in Europe and the US. Labor shortages, insane.

You do not want the truck to be stuck on the road on the highway because the tire is flat or something, right? So now you want really high-spec tires to make sure that that your economics of the entire journey is well maintained. So, I’ve just given you examples to play e-commerce, to play AI, and to play EV through the tire companies that cost us roughly 11 times earnings and give you roughly a 4 and a half, 5% dividend yield.

This is very interesting.

So, it’s not priced into those stocks. Now, I’m not saying that they’re going to be turbocharged in terms of their growth rates, you know, like an Nvidia. Uh, but then you also pay off for an Nvidia. So, the whole exercise that you have to perform is, you know, how is it? So I told you the stress testing. So the stress testing we did in the tar industry is how is it that there are no uh that the number of players in the EV market are fewer than what they used to be in the uh combustion engine market. Right? You should have more entrance into the tire business because tires you need them in autonomous driving. You need them in a self. It doesn’t matter who drive it’s Uber. It doesn’t matter. You need tires. And guess what? Tires are a staple. Coming back to they’re a consumer staple and an enterprise staple. B2B trucking, e-commerce, mining, B2C, SUVs, whatever vehicle you drive or or you get driven in, it’s a staple. Why? Because every couple of years, you got to replace your tire. It’s a consumable. It’s just the replacement cycle is a couple of years, not every couple of quarters, but so what? It’s still a consumer. It’s still a staple. So, I wanted to give you this is the way you want to think about framing your investment ideas um and doing the research to validate them and to stress test them. uh making sure that you don’t have new entrance in the EV market. So we look at the design wins. You know, companies issue press releases all the time. So you get a proof point who’s getting those design wins because you know the car gets designed 3 years in advance. So you know which tire is going to go to that car and typically the consumer will replace and you should replace the tire with the tire that came with the car because it’s optimized for that vehicle model.

Yes,

you get better outcomes. So again I want to keep I I this is research research that anybody could do in some ways but few do few do it. Um and I would say that they are also sometimes unexcited because these are not turbocharged growth rates they’re not exciting they’re almost borderline boring but if you can compound at a certain rate and you can keep ekking out better and better margins and not see a lot of competition. So you’re not maximizing your returns in any one period but you’re maximizing them over a long period. You keep your competition at bay almost forever. Nothing like forever in the long run.

There are three things.

Yes.

You know there is a chapter in your book where you mentioned that knowing the information which everybody knows won’t make you money but asking the right set of questions will do. now and you also spoke about the force of transformation where you specifically gave the example of Blackberry the RIM thing and how the force of technology

move that company. So here the most important question we also need to ask is there a piece of technology which can change tires a technology such as you know mag lev or if any technology comes we also consider these kinds of questions when you are thinking about this thesis of tires

absolutely I told you one of the things that is critical to making a good investment decision is to stress test your investment thesis part of that is asking the question what can disintermediate this business model you know what can um again replace it completely right like obsolescence risk for example I actually think that um if you think about conventional wisdom Warren Buffett talks about it a lot and it’s become like you know many successful investors talk about this they want to see companies with pricing power right I mean I’m sure you’ve heard this as like a given recipe for a high quality business they should have pricing power right

I actually flipped it around

Mhm. And I said, let’s see companies who don’t have pricing power and yet are successful. Okay,

that should not happen, right? Yeah. Yeah. So again, I’m stress testing. You don’t have pricing power per se and yet you’re succeeding. How how is that? Like I always want to examine the counterfactual. You see what does not make the case or the exception to the rule. And so what I found and this is another sort of investment framework that I’ve exploited, arbitrageed, you know, taken advantage of over decades, frankly, is this. I actually look for companies who are able to lower costs every year as opposed to raise prices every year. Just flip it around, right? Imagine your genius is not raising prices. Your genius is lowering costs. Still, it’s a genius. No, very few people invest in those companies. They’re like, “Oh, they don’t have pricing power.” Well, but they’re able to lower their costs every year, which is a form of pricing power, right? They don’t have to raise prices. That’s a phenomenal. Like your customers will love you. You don’t have to raise prices on them. There are many companies of that sort. So you ask me how do I apply it in today’s world and I’m telling this to you because everybody you know because of this inflation spike that has gone on you know everywhere in the world like suddenly people have oh which companies have pricing powered and like they’re all actually look elsewhere look in a different way. Uh and right now I would tell you the companies that don’t need to raise prices are actually going to be the ones that you might want to actually consider investing. The ones who know how to lower costs. Uh and again there’s a way to understanding who are the companies that know how to lower cost.

What’s the way for that?

Uh I I think some of the best companies who know how to do that. I’ve given you the answer but you’re not connecting the dots. So I I’ll give it to you in the interest of time in this video. Otherwise I will let you sleep on it. I’m sure you’ll you’re bright. You’ll come up with the answer. Who has to lower costs every year? Who has been time- tested in having to lower costs every year in this world?

Time tested to lower the cost.

Yeah. Who’s who’s had to do it?

I gave you a clue in my answer just now.

What did I tell you? What’s happening in the world right now? What are people most concerned about?

Automobile.

No.

Give me a hint.

Inflation.

Inflation. Oh,

pricing power. Yes, we talked about that, right?

So, what’s the opposite of inflation? The opposite of inflation is

deflation.

Deflation. Yes.

Who’s experienced deflation for a long time in the world?

Countries like uh Japan.

Countries like

a guest who’s very good at knowing how to lower costs.

Japanese companies.

Exactly.

Oh, I think that’s why recently Warren Buffett also invested in FIFA with Japanese.

He did. Yeah. For a different reason. Not

because look, the wider you can cast your net, the more selective you can be. But I’m high. I’m I’m trying to get you to think on a very different level

and in a very different way. But after you come to that sort of way of thinking, you’re like, but of course. So a non-conensus investor needs their point of view to become consensus at some point. I mean, that’s how you arbitrage the difference and you move on to the next idea.

Mhm. So all I can tell you is a huge opportunity in the market is look at companies who don’t need to raise prices who can lower cost so that they can just keep the same price or even lower the price for you. Who does that successfully year in and year out and has done it over time

in a deflationary world which is

uh or or in a in a not necessarily in a deflationary world but still as a business model.

Okay.

I’m flipping it around for you. Find the success story the poster child of having done that. Walmart, Costco. Yeah,

they lower prices. They don’t raise prices. They’re still very successful.

H

just as an example since you asked.

But does does it is is it the only marker? Is it the only marker that I need to look?

No, I’m just giving you examples. Look, you need to have a [clears throat] very wide range of investment frameworks that you can apply in different contexts in different environments. I just wanted to give you a sampling of a few. I’m not saying this is the only way. Uh but you asked me to give you some contemporary ideas which I’ve not discussed in my book for example which might feel I gave you the example of enterprise staple. I gave you the example of the tire industry uh how to make you know it’s a thematic play on a lot of these variables. Uh and then I just gave you an example of inflation deflation. It can be macro, it can be micro, it can be sectoral, it can be geographic, it can be B2B versus B2C. Uh it comes in many different forms. ideas are not formulaic. It’s how you apply what you’ve learned in a particular context that matters.

Now since you’ve come to this thesis of tires, how do you apply the current frameworks to go deep down and pick one player?

Again, uh you want to understand which company has succeeded against the odds, not with the odds. Uh to me, that’s a very big marker. So as I just told you, Bridgestone manufactures in a very high cost country. If you’re a manufacturing company, typically again conventional wisdom, which is common sense, you have to be in a low cost,

but they’re in a high cost country. A lot of their tires are still made in Japan. A lot of the towers of Michelin are still made in France or at least in Europe, you know, and so you want to really stress test how is it um that that they have not been upended uh by Goodyear who manufactures in the US, by Cooper Tires, by Continental Tires, who manufactures in the Czech Republic. I mean predominantly I’m just giving examples. So you stress test that despite all these players, they are still not able to win business. The businesses I mean auto companies are always dying to cut costs. they’re not going to take you know they’re not going to pay a high price if they can’t they they really squeeze if they are still going with these two there must be some reason I need to find out why that is and so that’s what we what we are finding is that the dominant market share uh in in EVs tires is Michelon and Bridgestone it’s like 8020

the two of them you know it’s like how Nvidia’s cleaned up in the in the semi-arket chip market it’s these two

so you need to have validation of your thesis this but again just look at all the winds that you’re seeing it’s not good year it is not it’s not a show tires and I’m just like you know giving an example here uh and and even when you learn about the Chinese companies in fact uh more and more of the Chinese companies and we saw this happening in the EVs uh of of European companies and even Asian companies uh they’re using tires made by the Japanese companies like why would they do like do you understand this is against the odds So there are companies that succeed because they have the wind at their back. We love to see companies that succeed when the wind is not at their back. When they’re against the odds, you know, that’s a franchise. When it’s easy to succeed and you succeed, it’s one thing. And and all power to people who do it their easy way. I’m like, but to me, you you need to I remember, you know, I was watching Porsche. This is a car company as you well know for a long time. This is back in the day ‘9s. And you know, they were like just a super success story. Um, but one of the things that made Porsche very successful is that they had had a near-death experience in the early 1990s when they just got slaughtered in a mini recession that occurred in the post Gulf War period and you know, luxury car sales and they’re a luxury car. Um, they were almost going to file for bankruptcy. Uh, and they cleaned house all the way the next decade. They became lean. uh they actually started manufacturing Porsches, believe it or not, in Finland. Just think about that. You’re actually buying a Finnish con or a German one. People think that, but uh this is you know what they had to do. Uh no different than you know a lot of Louis Vuitton are actually manufactured in China and not in France but I’ll I’ll leave that aside. But they cleaned house and they developed a strong balance sheet and for years I had watched them you know it used to be a high-flying stock then of course cratered and again we don’t do distressed investing. You know I’m not neither interested. A lot of people this is my beef with contr investors. you know a lot of them devolve into distressed investing. I want a depressed investment opportunity, not a distressed. There’s a big difference. Um September 11th, you know, 911, uh in America, uh unfortunate incident happened as you know. And of course, sales of Porsche cars just like plummet, right? I mean, who’s thinking about buying a Porsche and the stock just craters? But I had watched this company for years and years. It was always out of my reach. But I knew that they knew how to manage adversity because they were designed is one of the few car companies that is very flexible in this manufacturing. Uh when you’re a low volume producer, you don’t have scale economics in your favor. You just don’t like by definition. So you need to be very flexible and lean to still be able to, you know, and and I knew that about it. I’d studied their business model. So I knew they would uh survive this. And then we always examine the counterfactual. What if instead of everybody just you know getting all worked up and worried which again 911 was like never you know it never happened before right someone attacking America the counterfactual and we always do scenario analysis in companies what do people realize I don’t have a long life to live what do I really want to do with the money I have and the time I have and one of the answers was I want to I want to buy a Porsche right I’ve been waiting to buy a Porsche and this is maybe they’ll all go buy out yeah so we have this and you know that’s exactly what happened. Porsche sales took off like a rocket ship and we participated. But I’m trying to give you an example of you know sometimes you can do the research far far removed and far in advance of the actual opportunity presenting itself. So our goal is to figure out what is the capability of a company. Opportunity may not be there. So it may not do that well but the capability is still there. And when capability meets opportunity,

you have studied 50 countries and you know three decades, two decades of experience. What are some business models, companies, sectors which you’ve came across which have the capability to do great things but are awaiting the right opportunity.

Tire industry comes to mind. they were always a high-tech industry, but till the EV and the autonomous driving stuff came along, they were just ekking it out. Uh so that’s that’s

gamechanging opportunity for them. I’m just giving you an example of an industry that’s been around for a long time.

Other industries um I I you know sometimes it can be a geography um

right that is very interesting. India’s moment is sort of coming and I think that covid is a gamecher for emerging markets uh because in the past you know the big wave that occurred was goods got produced overseas and India was not very good at that India is not a very good at manufacturing it’s good at services but not as much as manufacturing uh and India has shown what the IT industry is a service industry you can export services right so I think that with co with remote work uh and everybody moving to the cloud more and more of that work can go to emerging markets uh because people discovered during co I think that work is an activity not a location uh and if it’s an activity then it can be performed in Kansas City or Kolkata or you know anywhere you know depending upon the talent now think about it when I came to the US India lost me in the sense that it was called a brain drain rightfully so um when I earned income in the US. I spent in the US, right? And and the government of the US taxed me again. All legitimate stuff that happens. When I left India, I didn’t just leave my country. I left my colleagues, my clients, my cuisine, my friends, my currency, my clothes,

everything that my culture, right?

Imagine today you can get that same kind of work opportunity that I had to leave my country to get. I had to physically move to a certain location where there was better opportunity. Now that opportunity comes to you. It’s a reverse. So right now I know a lot of people in the IT industry um giving a lot of IT work to Argentina cuz Argentina went through hell, right? There are a lot of talented people there, educated people there, etc. But they currency their mismanagement, right? So the currency is like dirt cheap and hyperinflation. So the people there want to work and and they want to get paid quickly uh and in dollar terms because right so there’s a huge IT industry that grew up in Argentina and the time zone advantage right India has that one disadvantage that that you don’t have the complete overlap you know this is English speaking so I’m just giving you an example of how co and how this whole opportunity you know to work remotely means that unlike people like me who had to leave the country now that income stays in Argentina, the consumer spending stays in Argentina, the taxation is in Argentina because it’s a you know [snorts] almost like a a lot of the companies that do this kind of offshore work is M andC’s you know it’s digital transaction so you can track and trace you can tax it you get what I’m saying like you you’re getting anything that could happen have happened in the black market is sort of in the white market which is amazing for governments so now the government is retaining the human resource the taxation the consumer spending this is amazingly positive so to me the impact of co in the long run is very positive for emerging markets. This is not a thesis that people think about. So I’ve just again I’m trying to give you examples of things that have actually happened where you can connect the dots. You’re already getting proof points. It’s not some sci-fi stuff that I’m imagining and hoping and you know I can actually see this happening. So emerging markets u are are uh something that I’m very bullish on compared to developed markets just as an example. uh but everything has its time and place and valuation and you know all of things but again you keep asking me for examples and I wanted to share one with you this is a gamecher between decades ago and now

now since at the border level you understand that emerging markets is the game to play how do you double down on that

so it’s all about company specific research we’ve done this for decades you know we’ve learned about these companies we know their business models uh you know we wait for for the valuation to get attractive um that the whole book is written to teach you how to do that research. You know, I was very disappointed. A lot of um books and and I love reading books. Um they contain a lot of platitudes. You know, they say buy low, sell high. I mean, yeah, it sounds great. You know, it’s like be a good person. I mean, be smart. I mean, how, right? Teach me the how. Uh and I I wrote this book because it was, you know, a lot of people asked me this question. Uh and I wanted to showcase because I’m a practitioner. I’m not a professor. I do this for a living. And frankly this is a secret of my success in my eyes at least uh my own opinion uh but I wanted to share uh because I am a big believer uh if if the world becomes smarter and better and more competitive it’s good for all of us it skews the curve up

so one of my life principles has always been you know a lot of students come to me for career advice um and and one of the things I tell them which like they don’t want to hear but I tell them this and I would tell you this as a closing thought if I may is invest in yourself. You know, everybody wants to invest in the markets and that’s fine. Um, but if you don’t invest in yourself and and you need to create your own wealth creation power, right? your own income, your own earnings, whatever the source might be as a doctor, lawyer, freelancer, entrepreneur, you know, nurse, I mean, whatever that is, make sure you you you develop your earnings power and you can invest a surplus and you should know how to create a surplus and all that, but I would say that in order to become better in your profession,

Mhm.

work, seek out and work and this is what I did in my career. So this certainly I will attest to has helped me for the most demanding bosses out there. George Soros is not easy to work for standen. These are not you know almost every one of my bosses if I may say so. But easy is not the recipe to learn. They skew the curve up on you. My I’m so grateful to all my former bosses. Really I am because they made me better. If they had not pushed pushed, pushed I would not have reached you know I mean one fine day I remember this happened to me you know 25 years ago my boss just came and told me tomorrow you’re going to start covering Japanese equities I don’t even speak the language you know I just like I nowhere I didn’t speak the language I didn’t know and all the Japanese financial information is in Japanese I mean it was you would say that I would just say no I won’t do it but I did it against the odds Because when you’re given opport you know people if they give you impossible tasks I mean you think okay this is crazy I could have complained I could call it you know I mean all sorts of things but look it as a learning opportunity as a growing opportunity so work for the most demanding bosses they will get the best out of you won’t even know what you’re capable of till they skew the curve up on you and because you’re so demanding themselves they will keep pushing right so like you know you get carried across in that current like you want that to happen for you so that’s my biggest advice is work for the most demanding bosses and then you know when it comes to any situation I always believe if you work for the most difficult thing to do like why did I go to the US because it was the most difficult market to beat why did I do international global because it’s hard it’s not easy covering one country is hard enough covering 50 like who signs up for that but now I can be so selective because I know 50 markets and I can compare and contrast I can see you know playbooks that I’ve worked in e-commerce in Granger in the US versus Monurro in Japan. I mean, companies you’ve not heard of and that’s okay, but we can be so much more selective because of this knowledge that we have built up and knowhow over the years. So, this is not a profession where you can just turn the dime on. It’s it’s it’s it’s a profession that you learn by doing. So, the other thing I tell people besides reading books and stuff and that’s fine, but you go to apprentice, you learn at the feet of the masters. And again, I go back to my former bosses. I mean, they were amazing teacher. They didn’t teach me, but I learned. That’s the other thing, you know, this notion that someone’s going to teach you. No, it’s osmosis. Just surround yourself, be in that be in that um ecosystem. Um and and you know, then you be a sponge. Uh so that that’s kind of what I think it takes to be a good investor.

This was terrific and I really look forward if we can continue sometime uh if you are there in Bombay next time. would love to extend this because I had so many things to ask and which I’m insanely curious about. Um I’ll go back and do a couple of more rounds of research for this and next time I really look forward for a more interesting and you know similar similarly uh exciting conversation. Thanks a ton for this.

Well, don’t sell yourself short. You did an amazing job uh in this interview. You covered a lot of ground. Uh you got a lot out of me which you know is is pretty difficult to do. uh in a conversation that is so time bound and um uh investing is such a complex and layered and nuances topic. Uh so well done uh and keep it up uh and I would love to give you an autographed copy of my book so that you have won for the road. Lovely.