Monsoon Pabrai VALUEx BRK 2025

In a discussion featuring Monsoon and Guy, the focus is on the investment potential of the National Stock Exchange of India (NSE), highlighting its dominance and profitability as a "toll bridge" in the financial market. Monsoon emphasizes the NSE's significant role in India's shifting investment trends, with a growing number of brokerage accounts and increasing interest in securities over traditional assets like gold and real estate. Regulatory challenges and market dynamics, such as competition with the Bombay Stock Exchange and the impact of government policies, are also explored. The conversation underscores the NSE's promising growth prospects amid India's evolving financial landscape.

• The speaker shares a personal connection with Mish and Monsoon, likening their relationship to that of siblings.
• The speaker recalls shared experiences with Mish and Monsoon in India, highlighting informal and personal moments such as traveling and waiting for meetings.

"I've been on trips with Mish and with Monsoon in India where I don't know why we related to each other as siblings and it was so much fun having breakfast with I don't know she's a sibling in a way that's the relationship that I have with her."

• The speaker emphasizes the familial and informal bond shared with Mish and Monsoon, setting a personal tone for the discussion.

• The speaker expresses excitement about attending the Berkshire Hathaway weekend and anticipation for Warren Buffett's insights.
• The presentation is structured around discussing one of Buffett's principles, its application in the current market, and an investment idea.

"This weekend is my 13th Berkshire Hathaway weekend and I'm very excited for what Buffett has to say tomorrow."

• The speaker conveys enthusiasm for the event and outlines the structure of the presentation, indicating a focus on investment principles and opportunities.

• Buffett's principle: In an inflationary world, owning a toll bridge is advantageous due to capital costs being incurred in old dollars while revenues are generated in new dollars.
• The principle is applied to dominant stock exchanges, likening them to toll bridges due to their natural monopoly and profitability.

"Buffett says in an inflationary world, a toll bridge would be a great thing to own because you've laid out the capital costs, you've built it in old dollars, and you don't have to keep replacing it. You make all your money in new dollars."

• Buffett's principle highlights the financial advantage of investments that require upfront costs but generate ongoing revenues, relevant to stock exchanges.

• Dominant stock exchanges are described as natural monopolies with high return on equity, high margins, and significant operating leverage.
• These exchanges profit from every transaction, regardless of market direction, as they charge fees for digital transactions.

"The toll bridge I want to talk about today are dominant stock exchanges. So dominant stock exchanges are natural monopolies. They are exceptional businesses across the globe."

• Stock exchanges are likened to toll bridges, emphasizing their profitability and role as essential infrastructure in the financial market.

• The NSE is highlighted as a platform for companies to list and IPO, with a significant number of IPOs in the previous year.
• The NSE's role in the Indian market is compared to NASDAQ and NYSE, emphasizing its importance in an emerging market.

"The stock exchange I want to talk about today is the National Stock Exchange of India or the NSE. So the NSE provides a platform for companies to list themselves to IPO."

• The NSE is positioned as a key player in India's financial market, with a notable number of IPOs and a role similar to major global exchanges.

• Traditionally, Indians prefer investing in tangible assets like fixed deposits, real estate, and gold.
• India holds a significant portion of the world's gold, with Indians owning 25% and Indian women owning about 16%.
• There's a cultural preference for investments that are tangible and can be physically experienced.

"Indians traditionally love to invest in three things: fixed deposits, real estate, and gold. Indians own 25% of the world's gold, and Indian women own about 16% of the world's gold."

• Indian investment habits are deeply rooted in cultural practices focusing on tangible assets.

• A noticeable shift is occurring in India towards securities and stocks as a serious asset class.
• The number of brokerage accounts in India has seen significant growth, especially during the COVID-19 pandemic.
• Despite initial skepticism, the trend of opening new brokerage accounts continues post-COVID.

"In 2015, we had 25 million brokerage accounts in India... Right before COVID, we had 40 million brokerage accounts, and during COVID, we saw the biggest bump."

• The growth in brokerage accounts indicates a significant shift towards stock market investments in India.

• During an 18-month period during COVID, 60 million new brokerage accounts were added.
• Since 2022, 25 million new brokerage accounts have been opened annually.
• This growth represents a penetration of less than 7% of the total Indian market, showcasing vast potential for further expansion.

"Ever since 2022, every single year we've added 25 million brokerage accounts, new brokerage accounts to India."

• The ongoing increase in brokerage accounts highlights a growing interest in the stock market among Indians.

• The New York Stock Exchange (NYSE) and Bombay Stock Exchange (BSE) share 1,300 trading partners.
• Despite the BSE often receiving first market entry, the NYSE quickly captures the majority market share.
• The NYSE holds a significant advantage in daily liquidity across various financial metrics.

"The NYSE holds the majority of the daily liquidity across every metric, derivatives, equities, debt, everything, mutual funds."

• The NYSE's dominance in liquidity and market share signifies its strong position in India compared to the BSE.

• The BSE trades at 60 times profit, while the NYSE trades at 30 times profit.
• The NYSE is privately held by 22,000 shareholders, while the BSE is publicly traded.
• This results in a 50% discount valuation for the NYSE compared to the BSE.

"The NYSE trades at 30 times for every dollar of profit, and the BSE trades at 60 times for every dollar of profit."

• The valuation difference underscores the NYSE's potential as a high-value investment opportunity.

• The NYSE is considered an agnostic toll bridge, profiting regardless of market direction.
• It benefits from healthy flows from the Indian financial market and a young population with a median age of 29.
• The NYSE is a high-growth business with significant potential, trading at a discount compared to its competitors.

"The NYSE is a high growth business growing at a significant discount to its significantly worse competitor."

• The NYSE's growth potential and favorable market conditions make it an attractive investment opportunity.

• India has a complex regulatory framework that significantly impacts business operations, especially in the stock exchange and energy trading sectors.
• The regulatory environment is characterized by stringent rules and severe penalties for perceived issues.
• The Indian government has historically imposed measures in response to security and economic concerns, affecting international investors.

"The national stock exchange wants to go after the energy trading business... but they're not a publicly traded company. No. And they're also highly regulated."

• The energy trading sector in India is highly regulated, posing challenges for non-public companies and international investors.

"What they knew was that one of the terrorists had visited India twice on a visa within a six-month period... they turned back that rule after almost three years."

• India's regulatory decisions can be reactionary, often based on security concerns, leading to strict measures such as visa restrictions.

"Delhi does not want to have Indians gambling... they put a 26% goods and services tax on betting in India but it's not on the gains or the losses. It's on the bet."

• The Indian government imposes heavy taxes on activities it deems undesirable, such as gambling, to deter participation.

• The Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE) are central to India's financial markets, with the NSE holding a significant share of the derivatives market.
• Regulatory bodies like SEBI (Securities and Exchange Board of India) enforce rules to ensure market competition and transparency.
• Historical events like the Harshad Mehta scandal have shaped the current regulatory landscape and led to the establishment of the NSE.

"Between the NYSE and the BSE, all the liquidity is on NYSE. The regulator does not like that... they put different roadblocks into place."

• The Indian regulator aims to balance market competition, often imposing rules to distribute market share between exchanges.

"99% of derivatives in India go through NYSE... they put a rule that any contract expiring on Friday has to clear through the Bombay stock exchange."

• Regulatory interventions are used to redirect market activities and ensure that multiple exchanges remain viable and competitive.

"The NYSE was born out of a problem with the BSE in 1992, the Harshad Mehta scandal... the NYSE was their solution."

• The creation of the NSE was a direct response to past financial scandals, intended to improve market transparency and regulation.

• Futures and options trading in India is highly popular, particularly among individual investors, and is a significant revenue source for the NSE.
• There are concerns about the speculative nature of these markets, with government scrutiny on their potential impacts on the economy.
• The regulatory environment seeks to manage the risks associated with high levels of individual participation in these markets.

"The futures and options trading in India is very high relative to anywhere else in the world and it's a bit gambling."

• The high level of futures and options trading in India is akin to gambling, raising regulatory and economic concerns.

"A lot of the earnings for NSSE are from that. Yes. So how do you feel about that and could it go down a lot?"

• The NSE's reliance on futures and options trading poses risks if regulatory changes or market shifts reduce trading volumes.

• Recent regulations have been implemented in India to prevent inexperienced investors from losing money in futures and options trading.
• The NYSE supports these regulations despite potential short-term revenue and profit impacts.
• The goal is to ensure market participation from financially literate individuals.
• An increase in high-frequency trading from European and US funds in India is seen as a positive development.

"The NYSE is going to see a hit on revenue and profit from that, but when I talk to the NY's team about it, they agree with that regulation."

• The NYSE acknowledges the potential financial impact but supports the regulations for long-term market health.

"They're pushing for financial literacy and we're also seeing a lot of high-frequency trading coming in from European and US funds into India."

• The focus is on improving financial literacy and attracting sophisticated investors to the Indian market.

• Indians tend to hold equities for longer periods compared to other countries.
• The holding period is speculated to be longer than in the US, influenced by traditional investments in real estate, gold, and fixed deposits.

"Indians probably are holding equities longer than Americans just because of the real estate, gold, fixed deposit holding tendencies."

• Cultural investment tendencies contribute to longer equity holding periods in India.

• Portfolio allocation is considered on a company-by-company basis rather than purely geographical.
• Current portfolio allocation: 30% in India, 50% in the US, and 10% in Europe.
• The Indian market's volatility impacts the decision not to increase its share significantly.

"I don't think about it geography by geography. I think about it company by company, but I would say geography does play a role."

• Individual company performance is prioritized over geographical distribution in portfolio decisions.

"The Indian market is quite volatile. So I don't like to size it up too much."

• The volatility of the Indian market influences the decision to limit its portfolio share.

• The challenge of managing rapidly growing investments, as illustrated by a company spun out by Fiat.
• Consideration of when to sell down shares when a company becomes a significant portion of the portfolio.
• No strict country bias in portfolio composition despite individual company growth.

"I find repeatedly that I have companies I put in at 5% and suddenly become 25% 30% of the portfolio and I wonder at what point I need to do John Elcan and sell down."

• The speaker contemplates the timing of rebalancing investments when a company grows substantially within the portfolio.

"I have no bias towards how much in any particular country."

• The focus remains on individual company performance rather than country-specific allocations.