Mohnish Pabrai: One Example Of Why Micro Trumps Macro

In this presentation to the Indian School of Business, Mohnish Pabrai discusses one example of why micro trumps macro. Here’s an excerpt from the presentation:

Pabrai: Yeah, so actually for the most part you should ignore macro. Going back to my example of the McDonald’s franchise and Ford dealership, etc.

I live in Irvine, California. There is a McDonald’s which is, I don’t know 3/4 miles from my house.

Recently they made that drive-through 24 hours. So actually you can’t go into the restaurant 24 hours, but you can drive through and pick up stuff anytime, 04:00 a.m., 03:00 A.m., anytime. And in fact, that McDonald’s is so well run and does so much business.

So what is the impact of any of the factors that you are talking about on the cash flow that McDonald’s will produce this month, or next month, or next year, or two years from now, or five years from now, is irrelevant. So I’ve always believed that the micro in many, many ways trumps the macro.

And so if you were looking, let’s say that McDonald’s came on sale, let’s say it came on sale for $5 million, for example, and let’s say your family had a net worth of 10 million, the question is, is that an asset that you would put 5 million into? And let’s say it was producing $400,000 a year in cash flow, for example.

So it’s at twelve times cash flow or something. So the question you would ask yourself, if you were looking at that sort of a transaction, you would ask yourself, well, how long can that $400,000 a year in cash flow continue?

Can it increase? What will affect it to go down? Et cetera. And so it would be factors around that McDonald’s that would dominate that discussion.

It’s completely irrelevant what the Fed policy is and completely irrelevant what exchange rates are and all these things.

All those things become irrelevant. As an investor, you’re always better off focusing in on the business, because the eventual kind of results of that business, 90% of it will be from what happens inside the business.

So I would say that when I look at an so McDonald’s is an example of wholly owned business you can buy. The same thing applies. We’re looking at looking at stocks is you have to look at it as if you’re buying the whole company.

You can watch the entire discussion here: