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My First MillionThis Guy Copy-Pasted Warren Buffett’s Strategy (And Became A Billionaire)
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EVERY SPOKEN WORD
105 min read · 20,954 words- 0:00 – 1:41
Intro
- MPMohnish Pabrai
An idea is like an asshole. Everyone has one.
- SPShaan Puri
[laughs]
- MPMohnish Pabrai
Okay? Ideas don't mean anything.
- SPShaan Puri
This guy is known as the Indian Warren Buffett. He's billionaire investor Mohnish Pabrai, and last month I went to his house and asked him to teach me everything he knows about investing. How did you make your money?
- MPMohnish Pabrai
After taxes, after everything, I got a million dollars, and I for the first time had money in the bank.
- SPShaan Puri
Right.
- MPMohnish Pabrai
That million became, what, 13 million, and, uh, I said, "Wow, well done, Mohnish." And, uh, so I got 70 percent a year compounded.
- SPShaan Puri
How the hell were you getting these returns?
- MPMohnish Pabrai
I'm always looking at what is hated and unloved. The key to moving the needle is inactivity.
- SPShaan Puri
You have met and become friends with Charlie Munger and Warren Buffett.
- MPMohnish Pabrai
Good afternoon, Mr. Buffett, and good afternoon, Mr. Munger. My name is Mohnish Pabrai.
- SPShaan Puri
How does that happen?
- MPMohnish Pabrai
It shouldn't happen. When I look at a CEO, I always try to find out, did they run a lemonade stand when they were 12?
- SPShaan Puri
Right.
- MPMohnish Pabrai
Because if they didn't run the le- lemonade stand when they were 12, they're not gonna be that great at business at 30.
- SPShaan Puri
[laughs]
- MPMohnish Pabrai
How stupid can you be?
- SPShaan Puri
[laughs]
- MPMohnish Pabrai
If you know the big picture, you can change the big picture.
- SPShaan Puri
[laughs]
- MPMohnish Pabrai
The most important thing in life is-
- SPShaan Puri
Are you a fan of, uh, Bitcoin? Are you a believer?
- MPMohnish Pabrai
If you put a gun to my head, I would say-
- SPShaan Puri
What do you think about, uh, Elon Musk?
- MPMohnish Pabrai
Elon is not human.
- SPShaan Puri
If I said, "What's the number one trait that makes a great investor?" what comes to mind? [upbeat music] All right. Welcome. [laughs] Good morning.
- MPMohnish Pabrai
Great to be here, Shaan.
- 1:41 – 4:40
Why entrepreneurs make the best investors
- SPShaan Puri
You are a great investor, but you started as a businessman. I'm a businessman trying to become a great investor. Uh, how do those two relate?
- MPMohnish Pabrai
In our brains, we actually use the exact same part of the brain, uh, in both activities. So, uh, Warren, Warren Buffett has a great quote. He says, "I'm a better investor because I'm a businessman, and I'm a better businessman be- because I'm an investor." And, uh, and in his case, uh, a lot of people don't know, but Warren had done a lot of different businesses in, uh, different areas before he was 17, starting when he was, uh, I think five or six years old. His very first business was, uh, buying, um, buying Cokes from his grandfather's store at, uh, at a nickel a piece and then selling them at a dime a piece.
- SPShaan Puri
Right.
- MPMohnish Pabrai
And, uh-
- SPShaan Puri
Buy wholesale, sell retail. [laughs]
- MPMohnish Pabrai
Yeah, so that, that was, uh, one of his first, first ones. And one of the things that a lot of, uh, people, uh, don't, uh, understand about the way our brains work is the human brain actually, when we are born, i- it is the most underdeveloped organ-
- SPShaan Puri
Hmm
- MPMohnish Pabrai
... uh, when we're born because the birth canal is not wide enough. So for the first five years of life, the brain is the fastest-growing organ that we have as humans. The, the neuron connections are growing at a exponential rate. Uh, from the age of about 11 to about 20, uh, that window is when the brain is set up to specialize-
- SPShaan Puri
Hmm
- MPMohnish Pabrai
... and, um, the neuron connections get cut. Uh, so they actually go down quite a bit, but the brain allocates areas to hone in and specialize. So, you know, if you think of someone like Michelangelo or, uh, Bill Gates or even Warren Buffett, these, these guys started specializing at 10 or 11.
- SPShaan Puri
Hmm.
- MPMohnish Pabrai
And, uh, if you start writing code at the age of 10 or 11, for example, um, like, like Bill Gates did, by the time he was 20, the expertise that he had, someone else starting at 20 would not be able to match him even at 50. So that 10-year window is a very critical window in human development, and, uh, unfortunately, our education system doesn't recognize that.
- SPShaan Puri
Right. And unfortunately, I'm 35-
- MPMohnish Pabrai
[laughs]
- SPShaan Puri
... so it's too late. [laughs]
- MPMohnish Pabrai
We hope there are some 11-year-olds listening, or we hope-
- SPShaan Puri
Yeah
- MPMohnish Pabrai
... when you have kids-
- SPShaan Puri
Tell your kids, yeah. [laughs]
- MPMohnish Pabrai
... you... It's not all... The, the, the cake's not fully baked yet.
- SPShaan Puri
[laughs]
- MPMohnish Pabrai
Uh, so I think the, the thing with Warren was that I think when he was about 10 or 11 years old, he was running, uh, a bunch of very interesting businesses.
- SPShaan Puri
What was he doing? I've never heard these, so, uh, yeah, like, I didn't
- 4:40 – 9:56
How Warren Buffett’s pre-paid for his college education
- SPShaan Puri
know this backstory.
- MPMohnish Pabrai
One first businesses was he used to go to this racetrack in Omaha called Aksarben, which is, uh, Nebraska spelled backwards.
- SPShaan Puri
[laughs]
- MPMohnish Pabrai
And, uh, he used to publish racing tips called Stable Boy Selections, basically telling you what, what horses to bet on. And, uh, and then also what he would do is when all the races had been run, he'd collect all the discarded tickets on the ground, and he'd go home and go through each one carefully to see if some drunk had thrown out a winning ticket.
- SPShaan Puri
[laughs]
- MPMohnish Pabrai
And, and he'd find a few. He'd find a few, but he was too young to go to the window to collect because under 18, so he would give them to his Aunt Alice, who would go and collect for him. Around the age of 14 or 15, um, he had a very good friend in high school called Don Danly, and, and Danly was a tinkerer. He was, like, very mechanically inclined. So one time, I think, uh, Warren went to his home, and he saw that, uh, Don's working on a pinball machine in his garage. And, uh, he asked Don what he was doing. He said, "Oh, I just bought this pinball machine that wasn't working. They gave it away. It w- I paid, like, 15 bucks for it, and I think I can get it working." And, uh, Warren asked him, uh, "How much is it gonna cost?" He said, "It's gonna cost, like, $3." ... in parts and maybe a couple of hours to get it working. And then Warren says, uh, "Can you find more machines like this which don't work?" He says, "Oh yeah, there's a lot of machines you can buy-"
- SPShaan Puri
[laughs]
- MPMohnish Pabrai
"... which people, people don't want them because they don't work, et cetera." So Don and him formed a, a company in their minds. They never actually incorporated anything.
- SPShaan Puri
[laughs]
- MPMohnish Pabrai
They called it the Wilson Coin Operated Amusement Company. And, uh, they went to barber shops in DC, and these two boys, you know, kind of, you know, uh, nerdy looking 15-year-olds-
- SPShaan Puri
[laughs]
- MPMohnish Pabrai
... they w- went to the barber and said, "Look, we work for a Mr. Wilson." And Mr. Wilson did not exist.
- SPShaan Puri
Right. [laughs]
- MPMohnish Pabrai
It was a fictitious character. "We work for Mr. Wilson, and Mr. Wilson has asked us to present you with a proposition that we can put a pinball machine in the barber shop, and we'll come by once a week, and whatever coins are in there, we'll split it 50/50 with you, half for you and half for Mr. Wilson." So the barber said, "Yeah, put it in the corner." Right? And so Warren got Danly busy fixing pinball machines.
- SPShaan Puri
Right
- MPMohnish Pabrai
And the two of them would go on weekends and, you know, get barber shops signed.
- SPShaan Puri
Yeah, every week they're making some money.
- MPMohnish Pabrai
And, and so I think he had eventually something like 40 barber shops with, with these machines, and Warren said that the first week he went back to the first barber shop, he thought he'd died and went to heaven.
- SPShaan Puri
[laughs]
- MPMohnish Pabrai
So there was, like, five or six dollars in there, and, uh, so their take was about, like, you know, $3 on $18 of capital in one week.
- SPShaan Puri
Right. [laughs]
- MPMohnish Pabrai
And, uh, and he w- he just told Don, "Go as fast as you can."
- SPShaan Puri
Danly-
- MPMohnish Pabrai
[laughs]
- SPShaan Puri
... what are you doing right now? [laughs]
- MPMohnish Pabrai
[laughs] Yeah, exactly. Warren had all these different businesses that he was a senior partner, and whoever he was working with was a junior partner.
- SPShaan Puri
[laughs]
- MPMohnish Pabrai
One time, uh, uh, Danly showed him an ad for a Rolls-Royce for sale for $300, but it didn't run. It was a old beat-up Rolls, and, uh, you know, people was giving away, like, like, junk, right? And he thought he could fix the Rolls. So they bought the Rolls for 300, maybe another 50 bucks in parts, and Danly had it running. And then they, you know, spruced it up, and they would rent it on weekends for $100 to weddings.
- SPShaan Puri
[laughs]
- MPMohnish Pabrai
And, uh, and then on the weekdays, the two of them would go to school, the high school, in the Rolls.
- 9:56 – 13:57
Becoming Ben Graham’s Protege
- MPMohnish Pabrai
So when he finished his undergrad, he applied to Columbia to go to business school there so he could, uh, he could learn directly from Ben Graham, and he joined, uh, Columbia's MBA program. Must have been 20 or something.
- SPShaan Puri
Hey, real quick, as you know, we're big on ideas here. We love bringing new ideas, business ideas, brainstorming ideas for the podcast. Well, a lot of people ask, "What do you do with all those ideas? Can we go find them? Is there a list somewhere?" The great people at HubSpot have put together a business ideas database. It's totally free. If you just click the link in the description below, you can go download a collection of over 50 plus business ideas that are from the archive, listed out for you, curated. And so, uh, what are you waiting for? Go download it. It's free. Check it out. It's in the description below. All right, back to the show.
- MPMohnish Pabrai
And then, of course, after that, uh, uh, Graham hired him, and, you know-
- SPShaan Puri
Isn't there some story where he tells Graham, like, "I'll work for you for free," and Ben Graham says, uh, "Your price is too high"?
- MPMohnish Pabrai
That's correct, yeah. [laughs]
- SPShaan Puri
So he still ended up convincing him somehow.
- MPMohnish Pabrai
So actually, Graham, uh, at that time, Jews were very heavily discriminated against.
- SPShaan Puri
Right.
- MPMohnish Pabrai
There was a lot of antisemitism on Wall Street. So Ben Graham, who was Jewish, wanted to give the few jobs that he had to Jewish kids-
- SPShaan Puri
I see
- MPMohnish Pabrai
... and, uh, and young Jewish people because there just weren't many opportunities. So he basically told Warren, "Look, I gotta take care of the community."
- SPShaan Puri
Right.
- MPMohnish Pabrai
But, but then Warren went back to Omaha, and about a few months after that, uh, uh, Graham called him and said, uh, "If you, uh, wanna come to New York, I got something for you."
- SPShaan Puri
Mm.
- MPMohnish Pabrai
And Warren never asked him what the salary was, what the position was. He just took the next train to New York-
- SPShaan Puri
Wow
- MPMohnish Pabrai
... uh, with his, uh, with his wife. His experience as a businessman, uh, he was very lucky. It got seared in in that window of time. And both Warren and Charlie, they can crack businesses and business models really fast. So when we, when we start a business, uh, we will spend maybe 3 or 4 or 5% of our time on figuring out the strategy. You know, what's gonna be the product, service-
- SPShaan Puri
Market, price point
- MPMohnish Pabrai
... uh, pricing. Yeah, all the... How are we gonna make it work-
- SPShaan Puri
Right
- MPMohnish Pabrai
... and all the different plans, right? And then 95, 97% is all the blocking and tackling to make it happen.
- SPShaan Puri
Right. It's Danly fixing m- machines. [laughs]
- MPMohnish Pabrai
Yeah, exactly. And so- In the case of investing, we use the same brain cells that we use in that 3 to 5% of time. And, and basically, uh, one of the things that attracted me to investing was that basically that 3% becomes 80%.
- SPShaan Puri
Hmm.
- MPMohnish Pabrai
Because, uh, we don't need a Danly. We've got public companies and all of that.
- SPShaan Puri
Right.
- MPMohnish Pabrai
And, uh, we just have to pick which businesses we wanna own partially, uh, and which ones we wanna ride and so on. And so I think that, um, I, I always find it strange if I run into investors who haven't been entrepreneurs, because I think they're missing a very key part.
- SPShaan Puri
Right.
- MPMohnish Pabrai
And on the other hand, I find that entrepreneurs are very naturally, um, already set up to be great investors if they make a couple of tweaks. And, but what, what ends up happening is that we don't see a lot of entrepreneurs becoming investors, and we also don't see... Uh, we, we see a lot of investors who haven't built businesses, met payroll, and so both, uh, both have flaws.
- SPShaan Puri
Right.
- 13:57 – 17:53
What Buffett learned about branding from See’s Candies
- SPShaan Puri
There's a great, uh, I don't know if you've seen this, but I didn't know... Like, I always heard, okay, Warren and Charlie, great investors. I read the shareholder letters, and the shareholder letters are often, um, they're amazing, but they're very, like, they're high level, and they're philosophical in a way. Then you have, um, I saw this letter of Warren writing a letter to this, I think the CEO of See's Candy. I don't know if you've seen this. But it's a, it's a letter, and it's... I expected it to be very, again, philosophical, amusing. Instead, he's like brass tacks right away. He's like, "I went to the store, and I have a few ideas for you."
- MPMohnish Pabrai
[laughs]
- SPShaan Puri
It was a very operational, tactical, "I noticed this price point, and I noticed this." And I was like, oh, he's, he's a businessman. Like, he's just, uh, like, today we only think of him as one bucket, but actually he's got both gears.
- MPMohnish Pabrai
See's is a wonderful, uh, wonderful business. It taught, it taught them a lot. It taught them more than they ever thought they'd learn from a stupid candy business.
- SPShaan Puri
Right.
- MPMohnish Pabrai
Uh, but one of the things Warren did when he first bought See's is he told, uh, he told the CEO, "Listen, you got free rein. Run the business like you've been running," and so on and so forth. "But on December 26th, uh, I'm going to set the prices for the next year."
- SPShaan Puri
Okay.
- MPMohnish Pabrai
Okay? So he would sit down with the entire See's price list, and he would bump all the prices by 10 or 15%. And, uh, inflation might have been 3%, right? And so he would raise prices significantly above inflation, and what he would observe is volumes went up.
- SPShaan Puri
Hmm.
- MPMohnish Pabrai
So, and then the year after that, he'd again bump it b- by another 10, 12%, and volumes still went up. And, and so both him and Charlie were amazed that you could have a business where you're continuously raising prices significantly above the rate of inflation, and there's no resistance from the customer base to accepting those prices. And that's what gave them a huge lesson in brands. And, uh, you know, he was a dyed-in-the-wool, hardcore, deep value investor. It was really hard for them. They paid three times book value for See's. They were choking almost-
- SPShaan Puri
Right
- MPMohnish Pabrai
... when they paid that amount. Uh, so, uh, I think they bought See's for, like, 25 million. Looking back, they could have paid 200 million, and it would have been a great-
- SPShaan Puri
Still would have been a good deal. [laughs]
- MPMohnish Pabrai
Yeah. And See's has, uh, sent dividends to Berkshire in the billions.
- SPShaan Puri
Wow.
- MPMohnish Pabrai
I mean, it's been about 50 years since the purchase, and billions of dollars have flowed from See's to Berkshire, which has then been used to buy a whole plethora of other businesses. And, and if you look at their, uh, their purchase of Coke, for example, um, they, they put a quarter of the entire book value of Berkshire Hathaway into Coke in 1988. If they had not bought See's, they would have never bought Coke.
- SPShaan Puri
Right.
- MPMohnish Pabrai
So the lessons that they learned about branding and the power of brands is what led to the Coke investment, which was a much bigger home run. And they've made many more brand investments-
- SPShaan Puri
Right
- MPMohnish Pabrai
... since then.
- SPShaan Puri
Half the portfolio's in Apple right now, right?
- MPMohnish Pabrai
Yeah. So, and Apple-
- SPShaan Puri
One of the best brands in the world.
- MPMohnish Pabrai
And, and I think, I think Warren understood this notion of consumer behavior and how powerful brands can be and, uh, how powerful habits can be, and, uh, and then he went from there. So yeah, absolutely.
- SPShaan Puri
And, uh, one of the interesting things about See's is that See's wasn't this fast grower. It wasn't, uh, they bought it and then it, sales exploded. But what, I think the, the beauty of See's, if I remember correctly, is that it was just no additional capital had to go in. So everything was just free cash flow coming
- 17:53 – 20:54
Buffett’s failed play to be a candy mogul
- SPShaan Puri
out.
- MPMohnish Pabrai
Yeah.
- SPShaan Puri
And so-
- MPMohnish Pabrai
So, so See's is very much a California story, right? I mean, it, it, it was, it was, uh, founded in California. Almost all the sales were in California. If you look at See's from the time they bought it till today, about 50 years, um, the unit volume has go- gone up on average 2% a year.
- SPShaan Puri
[laughs]
- MPMohnish Pabrai
Okay? California GDP ... probably at least in the '70s, '80s, '90s, was going up about at least 4 or 5% a year. So they were actually... And part of that might have been the, the price increases.
- SPShaan Puri
Right.
- MPMohnish Pabrai
Okay? But even with those heavy price increases, they still got the volume going up slightly.
- SPShaan Puri
Yeah.
- MPMohnish Pabrai
Uh, but when you overlay that, you know, you do 50 years of 10%, that's, that's a very big number.
- SPShaan Puri
Right.
- MPMohnish Pabrai
Right? And so See's is not cheap today.
- SPShaan Puri
Yeah.
- MPMohnish Pabrai
Right? And now Warren was very excited about being the candy mogul of the world, so they tried really hard to send See's everywhere, right? I mean, they would open a store in Chicago, and then fall flat on their face. Then they'd open in Arizona, and they'd fall flat on face. They repeatedly tried over and over and over again to broaden See's-
- SPShaan Puri
Right
- MPMohnish Pabrai
... and expand it. And by and large, those, uh, those efforts didn't work. Even today, the bulk of the volumes of See's is in California, right? And, um, and so when the Coke investment came about, uh, they disco- they, they found something very different than See's. They knew See's doesn't travel well, but they could look at more than 100-year history of Coke, and they knew Coke travels really well.
- SPShaan Puri
Hmm.
- MPMohnish Pabrai
There are two countries in the world where you can't get Coke, uh, North Korea and Cuba.
- SPShaan Puri
[laughs]
- MPMohnish Pabrai
Okay? If they opened up to Coke in either of those two countries, and Coke did not advertise at all, sales would take off. It's so embedded in the pop culture.
- SPShaan Puri
Right.
- MPMohnish Pabrai
So even in countries and places where they've never done any branding before. You know, um, people in Pakistan or India or Bangladesh, they're having Indian food with a Coke.
- SPShaan Puri
Right.
- MPMohnish Pabrai
Right? So it's, it's ubiquitous, and that did not exist with See's Candy. It wasn't ubiquitous. And, and Warren understood, uh, you can't conf- you can't consume infinite amounts of candy. You know, there's an after-
- SPShaan Puri
Right
- MPMohnish Pabrai
... taste and all that. Coke you can actually consume a lot of.
- SPShaan Puri
Right. There's no, uh, what is it called? Taste memory?
- MPMohnish Pabrai
There's no aftertaste.
- SPShaan Puri
Yeah.
- MPMohnish Pabrai
Yeah, that's right.
- 20:54 – 21:47
Identifying offering gaps
- MPMohnish Pabrai
well.
- SPShaan Puri
So you talked about, uh, specializing kind of that 11 to 20 years old-ish window.
- MPMohnish Pabrai
Yeah.
- SPShaan Puri
Um, today you've done phenomenally well. You manage, I don't know, almost a billion dollars or maybe more, who knows. Uh, a lot of money, uh, and, and have done incredibly well investing. Uh, did you, did you do that when you were, uh-
- MPMohnish Pabrai
Yeah, so-
- SPShaan Puri
... 11 to 20, or, or were you a late bloomer?
- MPMohnish Pabrai
So, uh, no, actually, it was just dumb luck. A lot of things in my life have been dumb luck.
- SPShaan Puri
[laughs]
- MPMohnish Pabrai
Um, so my dad was a quintessential entrepreneur, and, um, he was really good. So, you know, a great entrepreneur, one of the first traits you need is you need to be able to identify offering gaps, some product or service that ought to exist but doesn't.
- SPShaan Puri
Right.
- MPMohnish Pabrai
Like Starbucks before Starbucks, or McDonald's before McDonald's, and so on, right?
- 21:47 – 26:12
Getting an MBA at age 14 as the son of an entrepreneur
- MPMohnish Pabrai
And so my dad was really good at figuring out that, oh, this product should be there but isn't. And he was really good at identifying these offering gaps. He was also really good at starting businesses from scratch, but his downfall was that he was always very aggressive, and he was always over-levered. So when the businesses were going, he was literally taking every last dime of profit coming in and everything that he could borrow, and just pounding into the growth as aggressively as possible. And the negative was that when the first headwind showed up, the businesses had no staying power.
- SPShaan Puri
Right.
- MPMohnish Pabrai
And so they would run into trouble. So my brother and I, uh, I think after we were, like, maybe nine or 10 years old, um, we were like his board of directors.
- SPShaan Puri
[laughs]
- MPMohnish Pabrai
Okay? And I remember, like, when I'm, like, 10 or 11 years old, my dad, my brother, and me would sit down in the evening, and we had to figure out how to make the business survive for one more day.
- SPShaan Puri
[laughs]
- MPMohnish Pabrai
So all the walls were caving in. There were everything going bad, and there were a lot of moving parts, and we'd put our heads together, and we'd try to figure out how to l- make it last, right? And then we'd make it past the one day, and the next night, the same thing over.
- SPShaan Puri
Same thing. [laughs]
- MPMohnish Pabrai
Right? And so I finished many MBAs-
- SPShaan Puri
[laughs]
- MPMohnish Pabrai
... before I was-
- SPShaan Puri
By 12. Yeah. [laughs]
- MPMohnish Pabrai
By, by s- And, and I think at 15 or 16, I was... I don't know why my dad did it, but I'm really grateful he did. He used to take me on sales calls.
- SPShaan Puri
Hmm.
- MPMohnish Pabrai
And you know, who takes 15-year-old-
- SPShaan Puri
Right
- MPMohnish Pabrai
... on a sales call? You know, it just doesn't fit, but my dad didn't care. And that was just incredible for me because I was getting to see, um... You know, I was in, um, I finished high school in Dubai, so I was in Dubai from the age of 16 to actually 19. And in, in that window of time, my dad had a gold jewelry business. And, uh, so we used to go, I used to go with him, uh, to these, um, uh, he was manufacturing gold jewelry, and he was selling it to these, uh, retail merchants, right? And so he's going into cold calling, right?
- SPShaan Puri
Right.
- MPMohnish Pabrai
And, uh, and I'm, I'm observing him going into a jewelry store. He doesn't know them.
- SPShaan Puri
Were you a silent shadow, or did you have a role in, in this?
- MPMohnish Pabrai
No, no, I was, I was very silent.
- SPShaan Puri
Okay.
- MPMohnish Pabrai
But I was, I was soaking it in. And sometimes when he was traveling, my brother and I would run the business.
- SPShaan Puri
Hmm.
- MPMohnish Pabrai
So there were, like, all these goldsmiths and all that.
- SPShaan Puri
Right.
- MPMohnish Pabrai
And we'd manage giving them the gold and taking the jewelry and all that. So basically- I didn't, I didn't realize it then, but when, when I went to college I, I studied engineering, and then I joined a, a telecom networking company as an, as a R&D engineer. And when we were working on these products, I'd ask my boss, "So what are we gonna sell this for, and who's the customer?"
- SPShaan Puri
[laughs]
- MPMohnish Pabrai
"And what kind of... Like, what are you gonna make on it?" And my boss would tell me, "Those are all questions for marketing and sales. We don't, we don't need to care about that. Just design the product."
- SPShaan Puri
Right.
- 26:12 – 28:49
The 3 tells of a future millionaire
- SPShaan Puri
Right.
- MPMohnish Pabrai
But one of the things that's really important is that, uh, when I look at a CEO, I always try to find out, did they run a lemonade stand when they were 12?
- SPShaan Puri
Right.
- MPMohnish Pabrai
Because if they didn't run the lem- lemonade stand, they were... when they were 12, they're not gonna be that great at business at 30.
- SPShaan Puri
[laughs]
- MPMohnish Pabrai
Okay? The, the little itty-bitty lemonade stand has a lot of lessons.
- SPShaan Puri
Right.
- MPMohnish Pabrai
And, and so I think, uh, when, uh, when we have kids, I think it's really important in that window, they don't need to run lemonade stands, but they really need to, uh, be doing what's going to be their calling.
- SPShaan Puri
Right.
- MPMohnish Pabrai
And, uh, and I think that's what the biggest responsibility of parents is. They need to expose them to more of what they think their passion is.
- SPShaan Puri
You know, I've done, like, maybe 500-plus episodes now of this, and the podcast is named My First Million because when we first started, I would just say, I was fascinated by the many different ways people became millionaires. I thought that's as, as... cool to, uh, hear the stories. So that's how the podcast started, and along the way I noticed three common things of what you were doing in your teens. 'Cause I used to ask this question. I was like, "You know, you're amazing now. If I met you when you were 14, what were you doing, and would I have known that you were gonna go on to do re- interesting things?" And most people are very humble. They're like, "Oh, you wouldn't have known." But then when I say, "What were you doing?"
- MPMohnish Pabrai
[laughs]
- SPShaan Puri
It's always something that no other 13 or 14-year-old is doing. [laughs]
- MPMohnish Pabrai
[laughs]
- SPShaan Puri
It's like, "Oh, yeah, I used to go to the shop and I found these, uh, you know, these CDs of Rosetta Stone that I could go sell for 3X on eBay, and I made a eBay account," or I, you know, "I started buying shoes and flipping 'em." So it was always, like, eBay flipping or sneaker flipping is, like, a, a super common one. Another one was, uh, competitive video games, because a lot of the strategy t- you know, communication, collaboration, um, you know, just e- extreme competitiveness gets built in there. And, um, and there's a couple others, but another one is, like, a Mormon mission. So, uh, Mormons who go and have to sell, you know, Jesus to-
- MPMohnish Pabrai
Yeah
- SPShaan Puri
... to a bunch of people, get rejected 1,000 times in two years, they become incredible salespeople. And so you, you, you see these backgrounds where, oh, you were kind of forged at an early age to, to do this.
- MPMohnish Pabrai
Well, we have a common friend, you know, Saeed Balkhi, right?
- SPShaan Puri
Yep.
- MPMohnish Pabrai
And you, you interviewed him for your podcast.
- SPShaan Puri
Yeah.
- MPMohnish Pabrai
And Saeed, uh, was an entrepreneur at the age of eight or nine. You know, um, even m- maybe even earlier than that.
- SPShaan Puri
Right.
- MPMohnish Pabrai
Uh, he was selling, uh, greeting cards.
- SPShaan Puri
Right.
- MPMohnish Pabrai
He was making and selling gre- on street corners.
- SPShaan Puri
Right. [laughs]
- MPMohnish Pabrai
You know? And, uh, and then by the time he was 11 or 12, I think he was, uh, writing code and-
- SPShaan Puri
Making websites, yeah
- MPMohnish Pabrai
... you know, and, uh, went from there.
- 28:49 – 31:21
Mohnish builds his first product with maxed out credit cards at 24
- SPShaan Puri
How did you make your money? Give me the highlights of your progression in terms of your own ability to, to generate money and then start to invest it.
- MPMohnish Pabrai
I actually never, ever wanted to be an entrepreneur. I never wanted to start a business, because I had seen so much turmoil-
- SPShaan Puri
Trauma. [laughs]
- MPMohnish Pabrai
... in, in my, in my childhood, right? And I remember I was, like, um, uh, 24 or 25 years old, and my dad was visiting me. I was, uh, living in Chicago. And he tells me, "It's time to quit, and start your own business." And, uh, so I said, "You know, have you forgotten?"
- SPShaan Puri
[laughs]
- MPMohnish Pabrai
"Have you forgotten my childhood, and, uh, you know, all the ups and downs?" He... So my dad just said, "Oh, that's what makes life great."
- SPShaan Puri
Right.
- MPMohnish Pabrai
But he said, "Look, the company you're, you're in," my... You know, the business I worked for had 2,000 people. He said, "You're such a tiny co- cog in a such a big wheel. You could drop dead tomorrow. They won't even miss you."
- SPShaan Puri
[laughs]
- MPMohnish Pabrai
"Okay? You don't matter. And what you really want to d- to be doing is figure out something where there's an offering gap, and, um, go for it," right? And, and I was actually, uh, getting a little bit frustrated at work because the company had been growing, it was getting more and more bureaucratic. And, um, so I actually, uh, started to think about, um, what might be possible. And I didn't have any money. You know, basically I was 24, 25. So what I did is I came, I came up with some- ... uh, uh, IT services offerings that I thought would be pretty unique because at that time client-server computing was, uh, just getting going, early '90s. And, uh, so I had about, uh, $30,000 in my 401 [k] , and I said, "Okay, we'll worry about retirement later-
- SPShaan Puri
[laughs]
- MPMohnish Pabrai
... and we pay the penalty." I pulled that out.
- SPShaan Puri
Nice. [laughs]
- MPMohnish Pabrai
And I, I, I applied for every credit card I could get my hands on. And, uh, so I had 70,000 available to me in different, uh, credit limits in credit cards. And so I said, "Okay, we've got up to 100,000 that we can play with." And the third thing that I did is I basically did both. I, uh, was going to my, my job, and I had started my company at the same time because basically what I would do is, like, from, like, 6:00 to
- 31:21 – 33:56
The 168 hour framework
- MPMohnish Pabrai
9:00 in the morning I'd work on my business.
- SPShaan Puri
Right.
- MPMohnish Pabrai
And then from 6:00 PM till midnight I worked on my business again, and weekends.
- SPShaan Puri
Right.
- MPMohnish Pabrai
But somebody was paying the rent. I still had a paycheck and all that, and I said, "Okay, once we have enough revenue, clients, profit, I can quit," right? And, and I always tell, uh, tell people that basically, um, if you think about it, there's 168 hours in a week. Your employer needs you for 40, right? And if you live close to work or work remote, the commute time is not that much, and even if you take out time for eating, sleeping, everything else, you have at least another 40, 50 hours that you can engage on something other than work.
- SPShaan Puri
Right.
- MPMohnish Pabrai
And I used to always get great reviews. When I was starting my business I said, "Okay, look, the plan is to not get fired. The plan is not to be employee of the year, okay?"
- SPShaan Puri
[laughs] Right. I don't need to overshoot. [laughs]
- MPMohnish Pabrai
So I said, "I'm going to give them just enough so I'm just above firing level."
- SPShaan Puri
Right. [laughs]
- MPMohnish Pabrai
You know? Where it's not so bad that they call me in and terminate me. I need to be above that, okay? And I did this over nine months, and then I had clients, revenue, and all that, and I went in to my boss and his boss and I resigned, right? And, uh, they, they said, "You know, Mohnish, uh, we really couldn't figure out the last nine months. Like, you checked out." I said, "Exactly."
- SPShaan Puri
[laughs]
- MPMohnish Pabrai
I said, "My, my goal was to just do enough so I didn't get fired." But he said, he said, "Yeah, we saw a big drop in the old Mohnish and the new Mohnish, and we talked about it, and we actually said it's not so bad that we would fire him-
- SPShaan Puri
[laughs]
- MPMohnish Pabrai
... but there's something off."
- SPShaan Puri
Right. Nailed it. [laughs]
- MPMohnish Pabrai
"And we couldn't, we couldn't figure it out," right? And then, uh, so I explained to them I was going into a business, my own business, was not competitive with theirs.
- SPShaan Puri
Yeah.
- MPMohnish Pabrai
And so they said, "Look, when your business fails," not if your business fails.
- SPShaan Puri
[laughs]
- MPMohnish Pabrai
"When your business fails, you can come back. We're gonna give you more money, we're gonna promote you, and you're gonna do great." So I said, "You know, my, my plan was that if I failed when I was going to my business, if I failed," I said, "Look, I got my degree. I can look for a job. I can apply for personal bankruptcy, clean everything off, and start over," right? I said, "This is even better. I don't have to look for a job."
- SPShaan Puri
Right. [laughs]
- MPMohnish Pabrai
I get more money, right? And so I actually felt like the... You know, people think there's a... People have a, a, a false mental model.
- 33:56 – 36:10
“Entrepreneurs do not take risks”
- MPMohnish Pabrai
People think entrepreneurs take risk. Entrepreneurs do not take risk. They do everything in their power to minimize risk. If you think about Buffett's pinball machine business, what was the risk those two 14-year-olds, scrawny 14-year-olds took? Nothing. Okay? It's $15 and a pinball machine which they could use themselves.
- SPShaan Puri
Right. [laughs] Worst case scenario.
- MPMohnish Pabrai
$3, $3, $3 in parts. So the second pinball machine will only get bought when the first one's already producing cash.
- SPShaan Puri
Right.
- MPMohnish Pabrai
Right? And the third one after the second one. So basically there's no risk, right? If it fails, they sell those machines for more than they bought them for.
- SPShaan Puri
Right. Entrepreneurs are actually great risk reducers.
- MPMohnish Pabrai
They-
- SPShaan Puri
They start with something-
- MPMohnish Pabrai
Yeah, so-
- SPShaan Puri
... that seems risky, but may not be
- MPMohnish Pabrai
... so that's the other thing that is a commonality between entrepreneurs and value investors, uh, which is why the same brain cells get used. Both are trying to minimize risk. You know, we as value investors wanna go low risk, high return, and great entrepreneurs, that's exactly what they're doing. They're going low risk, high return.
- SPShaan Puri
Right.
- MPMohnish Pabrai
Nobody is doing high risk, high return. The only, only... So if you look at the United States, probably around a million businesses, more than a million businesses a year get formed in the United States. Venture-backed businesses, um, are less than, much less than even 1% of that pie. Might be in most years less than 1/10th of 1%, right? So if there was no venture capital and no venture-backed businesses, it would make no difference to the landscape, okay? We'd still have the million businesses being formed. Venture-backed businesses are a different animal because they are high risk, high return, right? The, what the VC wants you to do, the VC's got 10 bets. He doesn't care whether your bet works or not. He just wants 1 of those 10 to work.
- SPShaan Puri
Yeah.
- MPMohnish Pabrai
So he wants you to step on the gas as aggressively as possible. If you blow up, you blow up, right? Uh, when you're an entrepreneur who's not venture-backed, that is not how you go. You don't put just, you know, foot on the gas.
- SPShaan Puri
Right.
- MPMohnish Pabrai
You're very careful about downside protection.
- 36:10 – 39:09
How Richard Branson launches Virgin Atlantic with no money
- MPMohnish Pabrai
So what happened-
- SPShaan Puri
Even some of the big in- uh, big entrepreneurs who, Richard Branson-
- MPMohnish Pabrai
Oh, yeah
- SPShaan Puri
... I think is the... People see him as this free, you know, re- risk taker, reckless sort of guy, but you, you've pointed out that that's not true about Richard Branson in this case.
- MPMohnish Pabrai
One of the stories I love about Branson is when he had the idea to start- Uh, Virgin Atlantic A- A- Airline, right? The minimum that you need to start transatlantic service is a Boeing 747.
- SPShaan Puri
[laughs]
- MPMohnish Pabrai
Okay? A couple hundred million dollars, right? And, uh, Branson got Virgin Atlantic off the ground with no money. So what he did is he calls, um, directory assistance in the United States, 555-1212.
- SPShaan Puri
[laughs]
- MPMohnish Pabrai
In Seattle, 206-555-1212. Asks for the number for Boeing. Okay. Gets the number for Boeing, calls the main switchboard, and says, um, "I'd like to lease a 747 that you guys might have hanging around that you're not using."
- SPShaan Puri
[laughs]
- MPMohnish Pabrai
They hang up on him.
- SPShaan Puri
Right. [laughs]
- MPMohnish Pabrai
Okay. Keeps calling them, and finally the lady at switchboard says, uh, "Let me transfer you to someone who can get rid of you properly."
- SPShaan Puri
[laughs]
- MPMohnish Pabrai
Right? So she transfers him to someone who's head of, like, commercial sales. And so this guy tells him, "Listen, Mr. Branson, in every country we have one customer, and you are not the customer in the UK. It's British Airways. And so therefore there's nothing to talk about." So Richard tells him, "Listen, I, I, I agree with you, that's fine, but just humor me for a second. Do you have a old Boeing 747 lying around that you're not using?" And he says, "Yeah, actually we do." "And if one of your customers, like the one in the UK called you, like British Airways called you, and they wanted a plane, what would you lease it for?" So he says, "Well, I really don't need to have this conversation, but we would lease it for about 200,000 a month. Okay, 2 or 300,000 a month." And Branson was able to convince Boeing to lease him that 747 because it was sitting and doing nothing.
- SPShaan Puri
Right.
- MPMohnish Pabrai
Then when he set up, uh, Virgin Atlantic, he said, "You get paid for all the future flights in advance because people buy tickets. So the plane's gonna fly in April, people already bought tickets in February."
- SPShaan Puri
Right.
- MPMohnish Pabrai
So you say, I got cash coming in two months, three months before the pl- plane's gonna fly. And I'm gonna pay for the fuel 30 days after that plane lands.
- SPShaan Puri
[laughs]
- MPMohnish Pabrai
Okay? So h- he had negative working capital, and the lease payment is also in arrears, right? He's-
- SPShaan Puri
Right
- MPMohnish Pabrai
... so basically he's, he was able to get Virgin Atlantic off the ground with zero equity, right? Now, the way I look
- 39:09 – 43:45
How 0.1 percent of the population owns 70 percent of all the motels in America
- MPMohnish Pabrai
at it is that if, if you can start an airline with no money, you can start any business with no money.
- SPShaan Puri
Right. [laughs]
- MPMohnish Pabrai
Okay? You just have to replace capital with creative thinking, right?
- SPShaan Puri
How is it possible that 0.1 percent of the population owns almost 70 percent of all the motels in America?
- MPMohnish Pabrai
That's right.
- SPShaan Puri
I think this is an incredible story. Can you explain, how is that possible?
- MPMohnish Pabrai
In the early '70s, a dictator came to power in Uganda, Idi Amin. And Idi Amin noticed that in Uganda most of the businesses were controlled by East Asians, Indians, Patels. Uh, they controlled like 80 percent of the economy. And these Patels had come to Ugand- Uganda. They were brought to Uganda about 100 years ago to work on the railroad almost as slaves, right? And but because they're natural entrepreneurs, they, they went from railroad builders to eventually owning and controlling-
- SPShaan Puri
[laughs]
- MPMohnish Pabrai
... his whole economy.
- SPShaan Puri
Right.
- MPMohnish Pabrai
And he was pissed.
- SPShaan Puri
[laughs]
- MPMohnish Pabrai
So, so Idi Amin said, "Africa is for Africans, and you guys are not Africans." And these Patels had been in Uganda for three or four generations. That was their home. They were Ugandan citizens, you know, born and raised, right? And what he did is he nationalized all their businesses, and he threw, threw them out of the country.
- SPShaan Puri
Which just means took their businesses, right? [laughs]
- MPMohnish Pabrai
He just took them. Yeah, yeah. He basically confiscated all... Not their businesses, homes, everything. Confiscated all their assets, and he told them, "You got 90 days to leave the country."
- SPShaan Puri
Wow.
- MPMohnish Pabrai
So these, these Patels in Uganda were stateless, okay? You're, you're being thrown out. You know [laughs] you're a citizen of a country. The country's throwing you out, right? And, uh, and they lost all their money. So they, they were able to convert a very little, small sliver of their assets into gold, and, uh, the United States took some Patels as refugees. The UK took them. Uh, Canada took them. India surprisingly refused-
- SPShaan Puri
[laughs]
- MPMohnish Pabrai
... to take the Patels, refused to recognize the Patels had any right to return to India because they said, "You haven't been here for 100 years." And, uh, and India was at that time dealing with the Bangladesh refugee crisis, so it couldn't deal with anything more. But a small number of Patels, a few thousand of them, uh, came into the United States in the early '70, the refugees. Um, they didn't have skills there where they could get great jobs. Um, they didn't have... They spoke English with a funny accent. And, um, they, they realized that, look, if we, um, buy a really small motel, 10, 12, 14-room motel, the family can live in one or two rooms. Motels are labor-intensive.
- SPShaan Puri
Right.
- MPMohnish Pabrai
Um, the family can do all the work, you know?
- SPShaan Puri
It's a job and a house together. [laughs]
- MPMohnish Pabrai
Yeah, so basically cooking, cleaning, front desk, laundry. And so what, what they started doing is they would buy these motels and, uh, basically fire all the staff and move in, into two of the rooms. And because they had no costs- ... uh, they were able to charge nightly rates that were lower than all the neighboring motels. So what would happen is that the Patel-owned motel would be running 100% occupancy. The other motels couldn't match that rate because they'd lose money.
- SPShaan Puri
Right.
- MPMohnish Pabrai
Right? Because they, they had-
- SPShaan Puri
Staff and-
- MPMohnish Pabrai
... workers' comp and staff-
- SPShaan Puri
[laughs]
- MPMohnish Pabrai
... and all that stuff, right? And what the Patels started to do, and they... Patels are very frugal. They basically were vegetarians. Uh, at that time in the US, if you were vegetarian, you were really hosed.
- SPShaan Puri
Mm-hmm.
- 43:45 – 44:49
The unfair advantage of being a low-cost producer
- MPMohnish Pabrai
So a lot of the Hiltons, Marriotts, Westons, if you really look, you'll find it's under Patel ownership, right? Same, same math. They always are very good operators. And then they went into 7-Eleven, laundromats, Dunkin' Donuts, all of it, you name it.
- SPShaan Puri
Right.
- MPMohnish Pabrai
And, um, but bos- bottom line was that these were entrepreneurs that were low-cost producers, right? Low-cost produc- producers have an inherent advantage. And I remember when I first, uh, when I first met Charlie, uh, he had, he had read my book, and, uh, and we were discussing the Patels. He says, "Yeah, you know, I got some friends in the motel business. I just tell them, 'Don't ever, ever try to compete with a Patel. A Patel.' "
- SPShaan Puri
[laughs]
- MPMohnish Pabrai
"If you ever find yourself in competition with a Patel, just find another game to play. Just move on. It's not worth it."
- SPShaan Puri
[laughs] So you said you met Charlie. Um, that's gotta be kind of a surreal thing for you, uh, to have met and become friends with Charlie Munger and Warren Buffett.
- 44:49 – 48:18
How Mohnish turned his first million into $13M in 5 years
- SPShaan Puri
Uh, how does that happen? How does that come about?
- MPMohnish Pabrai
It shouldn't happen.
- SPShaan Puri
Okay.
- MPMohnish Pabrai
You know, I was this scrawny kid who grew up in the suburbs of Mumbai, and, um, I accidentally heard of Warren Buffett in the mid-'90s, and it was a big aha moment for me. At that time, I was lucky. The first couple of biographies on him had come out. Uh, and what I realized is when I read about how Warren was investing, I said, "All these, uh, all these models are the same models that an entrepreneur uses." It's the same. The, exactly what I was saying that, you know, uh, better businessman because I'm an entrepreneur and vice versa. So I said, you know, but the big advantage he seems to have is that 4% of time of strategy is 80% time for him. And even in the business I had created, the IT business, uh, which had grown and scaled, I always enjoyed the 4% more. I j- I, I, I was-
- SPShaan Puri
The strategy, the figuring out
- MPMohnish Pabrai
... I was happy doing sales calls and, uh, you know, building teams and all that. That was, that was great. Uh, do it once. [laughs] I said, "Wow, if I go into investing, it would be 80% of my time because there's no blocking and tackling. Someone else is doing that." And so me, that, for me, that was a big aha moment that I should switch. I was lucky in, uh, in the mid-'90s. Someone bought a small portion of my business. After taxes, after everything, I got a million dollars, and I, for the first time, had money in the bank.
- SPShaan Puri
Right.
- MPMohnish Pabrai
And I didn't really need the million, right? So I said, "Okay, what we're gonna do is we're gonna take this million, we're gonna invest in the public markets, and we're gonna find out if we can actually do this," you know? This, you know, um, an idea is like an asshole. Everyone has one.
- SPShaan Puri
[laughs]
- MPMohnish Pabrai
Okay? Ideas don't mean anything, right? So you really have to execute. It's really execution on the idea that has value. You know, uh, entrepreneurs get kinda hung up on, "Oh, I need to get a patent," and all that. One of the things you have to understand is you can go to your most direct competitors. You can tell them all your trade secrets. They will listen to you really carefully, and they will not change behavior.
- SPShaan Puri
[laughs]
- MPMohnish Pabrai
Okay? So you don't need patents for anything. You don't... The ideas don't mean anything. It's really the execution. And, um, so basically, I, I said, "Okay, let's take the million. Let's start investing it. Let's figure out what happens." And I was surprised. We did really well. I think that from, like, '95 to 2000, a five-year period, that million became, what, 13 million. And, uh, I said, "Wow, well done, Mohnish." And, uh, so I got 70% a year compounded, yeah. And, um, so I was getting... I was doing investing part-time while I was running my IT business. I was much more interested in the investing side, losing interest on the business side till, till that point when in 1999, I didn't even feel like going into work. I, I said, "This is... I j- I just wanna just focus on investing." And, uh, so I made, I made a couple of big changes then. I, uh, looked for and found a CEO to run my company, and basically, uh, 13, 14 million, I felt, was enough to retire, do nothing.
- SPShaan Puri
Mm.
- MPMohnish Pabrai
You know? I could do investing full-time, right?
- 48:18 – 49:42
Pabrai Funds grows to $600M in assets in less than 10 years
- MPMohnish Pabrai
And so my plan was, okay, someone can run the business. Whatever value is there is, is there. It doesn't matter. I can go off and just now do investing full-time. And, um, I had a few friends who had, uh, basically Uh, I used to just give them stock tips, you know, in the mid '90s. I'd find some company and make the investment. After that, I didn't care who bought the stock.
- SPShaan Puri
Right.
- MPMohnish Pabrai
I mean, I, I already bought it, right? And so I'd tell my friends, "Hey, you know, I found this company. You ought to, uh, see if you wanna take a, take a flyer on it and buy it," and so on. And they did really well on the stock tips, right? But, you know, some guy's worth, like, 5 million, they would put 10,000 to what I told them.
- SPShaan Puri
Right.
- MPMohnish Pabrai
And they would triple their money. Wouldn't make any difference, right? So a bunch of these friends came to me and said, "Look, we don't like this randomness of these stock tips. We don't see you sometimes, and you may have sold. We don't know."
- SPShaan Puri
Yeah. [laughs]
- MPMohnish Pabrai
"We want you to manage some money for us." And, uh, so they were proposing giving me $100,000 each, and it would be a million dollars in all, right? And I said, "Okay, I'll do it." I thought of it as a hobby. I didn't even think of it as a fund. But I wanna do it in a format that works for me. So I loved the Buffett partnerships where he didn't charge management fees. He only charged performance fees. So-
- 49:42 – 55:46
What Mohnish knows about fundraising that we don’t
- SPShaan Puri
So what's a normal structure, and then what did Warren do?
- MPMohnish Pabrai
So a normal hedge fund would be a two and 20 structure. They would take 2% of assets as a management fee for breathing.
- SPShaan Puri
Every year.
- MPMohnish Pabrai
Every year.
- SPShaan Puri
Yeah.
- MPMohnish Pabrai
And then, uh, 20% of the profits, right? So if a, if a hedge fund, for example, let's say, has a billion, billion dollars under management, right? The general partners would take $20 million a year-
- SPShaan Puri
For breathing
- MPMohnish Pabrai
... for breathing.
- SPShaan Puri
[laughs]
- MPMohnish Pabrai
And then if, if it went up 10%, so they would make 100 million, for example, on the billion, they'd take another 20 million on that.
- SPShaan Puri
Right.
- MPMohnish Pabrai
Uh, so basically what would happen is the investor who put up the money on a 10% return gets a 6% return.
- SPShaan Puri
[laughs]
- MPMohnish Pabrai
Right? Below the S&P.
- SPShaan Puri
Right.
- MPMohnish Pabrai
Right? Because of all these frictional costs. So Buffett had run his partnership by saying that, uh, there's no management fee. Um, the first 6% returns go to you, and above that, I'll take one-fourth and you take three-fourth. So in the same situation, if, uh, if the fund is up 10%, in Buffett's case, the first 60 million goes to the investors, and the remaining 40 million is split. So it becomes 10 million to him and 30 million to the investors, right? So it's a, it's a better... It's half the fee, basically.
- SPShaan Puri
Right.
- MPMohnish Pabrai
And you're, you're paying for performance.
- SPShaan Puri
Right.
- MPMohnish Pabrai
If he's not up that much, you don't pay anything. So I liked that structure. And so I told them, "I wanna set up a, a fund, uh, so it's all legal, and we will do it with that structure." They s- they really didn't care what structure it was. And, uh, so Pabrai Funds really started in '99 as a hobby, uh, with me and my buddies. And I had 13 million on the side, which was my main focus, and I said, "Yeah, the, there's another million here. It's okay if I find something I can buy for both."
- SPShaan Puri
Right.
- MPMohnish Pabrai
It makes no difference, right? And, um, about a year, a year after that, there was about two and a half million. We were up, like, 70% the first year. And, uh, some more money had come in, and I said, "You know, why do I treat the fund like a stepchild? Why don't I think of it like a real business? And why don't I basically grow and scale it like a real business?" And, uh, and so I d- I started to do that, and Pabrai Funds, uh, we had a very good run, uh, for the first eight or nine years. I think we were doing, like, mid-30s a year on average, no down years. And the assets grew. We were at about, I think in 2007, we were at about 600 million in assets under management. And I had made a lot of money, uh, you know, the fees and, uh, the compounding-
- SPShaan Puri
Right
- MPMohnish Pabrai
... and all of that.
- SPShaan Puri
So in, like, a 10-year period, you turned the million dollars of managed money into about 600 million of assets of management, including new money coming in.
- MPMohnish Pabrai
Yeah, yeah. It wasn't all, it wasn't just organic. But, but, but the original money had almost tripled.
- SPShaan Puri
Right.
- MPMohnish Pabrai
You know, tripled or quadrupled in that period.
- SPShaan Puri
I had asked you, uh, yesterday when we were hanging out, I said, uh, you know, there's really two questions when you hear this story. Number one, how the hell were you getting these returns?
- MPMohnish Pabrai
[laughs]
- 55:46 – 58:50
Pivoting from tech investments in 1999 to value investments
- MPMohnish Pabrai
Now, the other thing that was happening is that, uh, when I started the fund in 1999, we were nine months away from the biggest bubble about to burst that had happened in decades, the dot-com bubble, right? And I, I was able to see the bubble not very much in advance of the rest of the world, maybe just two or three months ahead. I, I knew the internet was transformational, but I also knew that the euphoria was too much. You know, we had Pets.com trading at multi-billion dollar valuations with no revenues.
- SPShaan Puri
Mm-hmm.
- MPMohnish Pabrai
Right? I mean, it was just common to have a lot of companies... The people were counting eyeballs. They're not counting dollars, and the- they're not looking at net income. Uh, they're not even looking at revenue. They're just looking at eyeballs, right? And so, so I said, "Okay, this, this is bad news. Um, it will blow. At some point, it's gonna, the bubble's gonna burst." I didn't know when. Uh, so I had always been a tech investor from, like, the mid-'90s, and I'd done really well. Uh, tech had had a great run from '95 to 2000. It had just done really well, and I'd ridden that coattail. But what I did in '99 when the fund started, and also with my own capital, is I did a 180. I switched completely to classic Ben Graham deep value, you know, what Buffett had started doing in the '50s. And one of the things that was happening in the equity markets at that time was the day the NASDAQ peaked, I think March 8 or March 9, 2000, was the day that Berkshire hit a multi-year low. And literally, people were pulling money out of their Berkshire stock and buying Pets.com, right? I mean, and then, then that goes to zero eventually. And so I said, "Okay, basically, there's a lot of basic businesses that had become really cheap because nobody was interested." So I was buying funeral homes at two times earnings, and buying steel companies at three times earnings. And so a lot of basic businesses which are very predictable and doing well, trading really cheap.
- SPShaan Puri
Right.
- MPMohnish Pabrai
And, uh, and so Pabrai Funds did really well. In fact, uh, the NASDAQ imploded. Basically, it hit 5,000 in March 2000. By the time it bottomed out the next two or three years, it was at 1,200. A 70% drop, you know?
- SPShaan Puri
Right.
- MPMohnish Pabrai
And, uh, the Dow and the S&P didn't go down as much, but they also went down a lot. And, uh, so it was, it was a traumatic period for investors. It was a great period for me. And, and so it was very easy for me to talk to my investors because I was the only guy making money for them.
- SPShaan Puri
[laughs]
- MPMohnish Pabrai
Okay? If they had, like, five accounts, they just moved it all to me because everything else was going down.
- SPShaan Puri
Everything else was red. [laughs]
- MPMohnish Pabrai
Right. Yeah. And, uh, so that's how we, we got
- 58:50 – 1:04:15
$2M lunch with Warren Buffett
- MPMohnish Pabrai
going. So in 2007, um, I, I think my net worth at that time was, like, 84 million, and, uh, Warren had been running, uh, these, uh, uh, charity lunch auctions, where once a year you could bid on eBay to have lunch with Warren Buffett, and the money would go to the GLIDE Foundation, which was doing, you know, feeding the homeless and all that in San Francisco. So I said, "You know, I am using this guy's intellectual property. I'm making all this money off him."
- SPShaan Puri
Mm-hmm.
- MPMohnish Pabrai
"Um, I really have a big tuition bill I need to pay."
- SPShaan Puri
Mm-hmm.
- MPMohnish Pabrai
So I said, "The lunch is a great way to do that." I said, "I can, uh, bid for the lunch, and I'll meet Warren. I'll be able to thank him in person, and it goes to a cause that he supports." So I thought about it. I said, "Okay, 84 million. What's an appropriate tuition bill?" I said, "Two million is e- is good." I think if, if I, if I gave him two million, I'd feel good about that.
- SPShaan Puri
Right.
- MPMohnish Pabrai
Right? So I said, okay. I, I decided in, uh, 2007 I was gonna bid for that lunch, and I, I decided I would go up to $2 million. And you can bring up to seven other people to that lunch. So I was gonna take my family, but there still were a couple of seats empty, so I contacted my friend Ri- Guy Spier. He lived in Zurich. I said, "Hey, Guy, I'm gonna bid on this lunch," blah, blah, blah. And I said, uh, "Do you wanna come in with me?" Uh, and I said, "If you and your wife wanna join us, uh, because there'll be four of us and two of you, you can pay one-third, and, uh, and I'm willing to go up to two million." So Guy says, "Well, that's too rich for me. I can't pay one-third of two million."
- SPShaan Puri
Right.
- MPMohnish Pabrai
He says, uh, "I'm good for a quarter million." So I said, "Okay. Whatever the bid ends up at, you're capped at a quarter million."
- SPShaan Puri
Right.
- MPMohnish Pabrai
Right? And, uh, so I bid for it. Uh, it- Settled at, uh, 650,000, uh, much less than what-
- SPShaan Puri
Right
- MPMohnish Pabrai
... I was willing to pay. And then one-third of that got paid by Guy. And, uh, so my only agenda in meeting Warren was to just say, "Thank you, Warren."
- SPShaan Puri
Right.
- MPMohnish Pabrai
Right? I didn't have... And I, of course, was a big fanboy.
- SPShaan Puri
Yeah.
- MPMohnish Pabrai
And, you know, meeting him and all that. Warren's agenda when he has these lunches is really different. His, his agenda is he wants the people who want that lunch to feel like they got a great bargain.
- SPShaan Puri
Mm.
- MPMohnish Pabrai
So he would take all our, what I would call our lemonade... uh, lemon questions, and can turn them into lemonade.
- SPShaan Puri
[laughs]
- MPMohnish Pabrai
So he's always d- ex- exactly what he does in the Berkshire meetings is he's a great teacher. And so he was trying to, uh, give as much value as he could in that lunch. And like he told us when we met him, he said, "Look, I got nothing going on all afternoon, right? So when you guys are sick and tired of me, you just let me know-
- SPShaan Puri
[laughs]
- MPMohnish Pabrai
... and I'll leave." Right? We kept asking him questions for three hours, and then we were exhausted.
- SPShaan Puri
[laughs]
- MPMohnish Pabrai
And so we said, "Warren, we just don't have anything else to ask you." You know? He said, "Okay, I'll, I'll, I'll take off. No problem." And, uh, in that lunch, um, I told him, I said, "Look, Warren, um, my, my wife," then Harina, I said, "She's, uh, a huge fan of yours, but her true love in life is Charlie." Okay? And Warren got competitive. He said, "Charlie is a very boring guy. He's a very kind of pessimistic, always says no to everything. I'm the guy who's really interesting."
- SPShaan Puri
[laughs]
- MPMohnish Pabrai
So he said, "What I'm gonna do is, you guys live in California, in LA. I'm gonna set you guys up to meet Charlie for lunch. And then when you meet him for lunch, you're gonna find that he's useless, and I'm the guy." So I thought he was joking about that, right? And two days later, I get an email from his assistant to Charlie's assistant copying us, uh, basically saying, "Hey, I met this wonderful couple in California, and they seem to think you're more interesting. I think they just don't understand."
- SPShaan Puri
[laughs]
- MPMohnish Pabrai
"So I want them to meet you so we can set the record straight." Right? And so-
- SPShaan Puri
This is really what he was saying?
- 1:04:15 – 1:08:09
Be a harsh grader of people
- MPMohnish Pabrai
never expected that.
- SPShaan Puri
So let's go back to the lunch. You ask him questions for three hours.
- MPMohnish Pabrai
Yeah.
- SPShaan Puri
Uh, what were the interesting, uh, questions and answers? I know you've said one that I wanna hear you, you explain, 'cause I didn't fully... I, I, I've heard the tidbit, but I wanna hear the full story, which was he said something about being a harsh grader of people.
- MPMohnish Pabrai
Yes.
- SPShaan Puri
What does that mean?
- MPMohnish Pabrai
Well, I, I told, I told Warren, I said, "Warren, um, you know, you are... Both you and Charlie are such good judges of humans and human nature. Were you always that good at figuring people out?" So he says to me, "Mohnish, you're mistaken. I am useless at figuring people out." He said, "If you put me in a cocktail party with 100 people, and you gave me 5 or 10 minutes to meet each person, uh, I could tell you three or four people are exceptional, and I could tell you three or four people you want nothing to do with. And the remaining 92 I would have no opinion on, because not enough time to figure them out." So... But he's... But he also said that, "Look, what you do in life is those three or four people who are exceptional, you bring them into your inner, inner circle. And obviously, the three or four people who are, you know, not, not the great humans, you're not gonna have anything to do with them. But the third thing you do is you treat the 92 just like the useless humans."
- SPShaan Puri
[laughs]
- MPMohnish Pabrai
"And you exclude..." So he says, "Be a harsh grader." So he says that when you have friendships and when you have people you work with, your peers and all that, he says there's a gravitational pull. If you hang out with people better than you, you're gonna get better. If you hang out with people worse than you, you're gonna get worse. So he said that one of the things that most humans are not willing to do is loyalties get in the way for them, right? So they may have a friend who's kind of weird or quirky or has ethical issues, but they've had a long friendship, so they'll keep that person going with them. Uh, that has detrimental impacts. So basically, um, I really took that to heart, and I said that, uh, I'm really gonna try to see if I can, uh, ki- ... focus on the great relationships, you know, the great people. And that's actually been, um, a journey I've been on now for, like, you know, 16, 17 years. It's been tremendous. It's g- it's great. Now, it's, it's unfair, right? Because you're treating the unknown the same as the useless people.
- SPShaan Puri
Right.
- MPMohnish Pabrai
But, but that's the way life is. I think that sometimes you have to make these difficult choices, uh, because if you don't do that, then, uh, the impact of that is significantly negative. And one of the things I realized when I started to, uh, get to know Charlie, I got to meet Charlie's friends. So I would play bridge with his friends. I'd meet his friends. And what I realized is his friends were so off the charts. They were so exceptional. I said, "Wow, this is, like, a different world," right? And I said, "I'm going to take a shortcut. I'm gonna make Charlie's friends my friends."
- SPShaan Puri
Right. [laughs]
- MPMohnish Pabrai
Because he's already done all the work. [laughs]
- SPShaan Puri
He did the filtering.
- MPMohnish Pabrai
Is, you know, can't get a better filter than Charlie Munger.
- SPShaan Puri
Right.
- MPMohnish Pabrai
Right? And, and so I, I worked on building relationships with Charlie's friends and some of his family, and that's been beautiful. I mean, some just great friendships. Uh, and you know,
- 1:08:09 – 1:11:30
The Givers, The Takers, and The Matchers
- MPMohnish Pabrai
uh, I realized that there's such a huge delta in off-the-charts, top .1 percent, top 1 percent of humans, and the rest. And, you know, we, we talked about this. Adam Grant, uh, wrote this wonderful book, Give and Take, right? And he categorizes people, uh, in three buckets, right? The givers, the takers, and the matchers, right? Now, the takers you don't want anything to do with.
- SPShaan Puri
Right.
- MPMohnish Pabrai
They're, you know, they're just gonna, like, want to extract whatever they can from you, so they're just not people you wanna, uh, have in your life. The givers are people who are selflessly trying to help the planet, not really concerned about what comes back to them, right? Those are the ones you wanna be with. And then the matchers, they're kinda doing math in their heads. "Oh, you know, Shaan did this for me, so I'm gonna do something-
- SPShaan Puri
Right
- MPMohnish Pabrai
... similar for him." They're kinda... And-
- SPShaan Puri
Right
- MPMohnish Pabrai
... so even the matchers aren't that great. So what you really wanna do is you wanna seek out the givers, and more important than that is you wanna be a giver.
- SPShaan Puri
Right.
- MPMohnish Pabrai
And, uh, and so the, the interesting thing that he pointed out in that book is that when you're a giver, the universe conspires to help you, and I found it magical how... And Warren and Charlie are great examples of givers. Everyone's trying to help them in any way they can. And so that's the, uh, the funny thing, is that the matchers who are trying to do this, you know, equalization, they end up losing.
- SPShaan Puri
Right.
- MPMohnish Pabrai
The best way to get the most is not ask for anything. It'll all come to you.
- SPShaan Puri
Right.
- MPMohnish Pabrai
You know? And so, so these are wonderful models to incorporate.
- SPShaan Puri
Yeah, there's even some game theory with that, which is the cost of excluding somebody who might be good or might be great is quite, uh, is actually quite low to you, but the cost of accidentally including somebody who might be, have some toxicity-
- MPMohnish Pabrai
Yes
- SPShaan Puri
... or a- it's quite costly to you.
- MPMohnish Pabrai
Yes.
- SPShaan Puri
And so, uh, you know, I think even in investments, he has the, the good pile and then the, the too hard pile.
- MPMohnish Pabrai
Warren has a lot of baseball analogies. He says that in investing, there are no called strikes, right? So in baseball, uh, you're at the pitch, three strikes you're out, right? He says, "I can let 1,000 balls go by, 1,000 stocks go by and not swing."
- SPShaan Puri
Right.
- MPMohnish Pabrai
Right? I c- I only need to swing when eight moons line up, right? And so-
- SPShaan Puri
The fat pitch, right?
- MPMohnish Pabrai
The fat pitch, right. And so the thing is that we live in a world with infinite humans. If there are infinite humans, it also implies that there are infinite number of good humans. So basically, uh, making a, uh, excluding a good j- human from your circle because you can't figure them out, there's no penalty for that.
- SPShaan Puri
Right.
- MPMohnish Pabrai
Because there's an infinite supply.
- SPShaan Puri
Right.
- MPMohnish Pabrai
Just to put a-
- SPShaan Puri
Just wait for the, wait for the fat pitches
- MPMohnish Pabrai
... mathematical way.
- SPShaan Puri
Right. [laughs]
- 1:11:30 – 1:16:41
“Heads I win, tails I don’t lose much”
- SPShaan Puri
I win, tails I don't lose much.
- MPMohnish Pabrai
Well, I mean, I think this is classically, uh, comes from the Patels, right? The, it's, uh, the, the Dhandho philosophy.
- SPShaan Puri
Yeah.
- MPMohnish Pabrai
Uh, but, but this is, this is how we want to, uh, do all our bets, with people, with stocks, uh, with everything. And-
- SPShaan Puri
Asymmetric upside.
- MPMohnish Pabrai
Yeah, yeah. Basically where, uh, we always want to look for things where the, the odds are so heavily in our favor. And, uh, so in investing, uh, we do get these anomalies where you, you take low risk-
- SPShaan Puri
What, what's one that you've benefited from, or w- what's an example in your portfolio or your career investing where you felt like you, you, you recognize asymmetric upside, your, your downside was capped, but your upside was high?
- MPMohnish Pabrai
Well, I mean, I think that if I look at my first business, for example, right? I mean, I, I'm taking 30,000 from my 401 [k] , which I can make up, and at that time, the, uh, credit card laws were very different, where if you, uh, declared personal bankruptcy, you got a clean slate.
- SPShaan Puri
Mm.
- MPMohnish Pabrai
And actually, it didn't affect your credit because you couldn't file again for seven more years. So everyone would give you money after you filed.
- SPShaan Puri
[laughs]
- MPMohnish Pabrai
Okay? So actually, they've changed the laws now. But at that time, uh, what I had, uh, I realized that starting a business has high rates of failure, right? And so I said, "How do I-" ... um, minimize the risk on that. And, and this is what all entrepreneurs do. And I said, "Okay, so basically if this thing blows up," which there's some probability that could happen, um, I got my job already. They, they want to take me back, and I, I clean up the slate. And, and I'd also de-risked it because the company was already cash flow positive by the time I quit my job, right? And so there was already a pipeline and such. And so repeatedly what I've, what I've found is, uh, even, even in investing, um... I mean, I'll give you an example. Like, for example, I think in 2003 or 2004, there was a steel company, uh, in Canada, uh, IPSCO, and, um, I noticed that they were trading, uh, for three times earnings, right? And they, the, the stock was at $45. They had $15 a share of cash on their balance sheet. They had no debt. And they had contracts, uh, over the next couple of years where they had said, "Our earnings for the next two years are going to be $15 a share each year." Um, given... Because these were, these were, these were not forecasts. These were hard contracts, right?
- SPShaan Puri
Yeah.
- MPMohnish Pabrai
So I said, "Okay, so the stock's at 45. If I just buy the stock and hold it for two years, I got $45 cash in the company." Now, it was cyclical business. Third year could be zero, could be negative. But I said I, I own all the plant, equipment, everything for free, right? So my, my... I made the investment. I put 10% of assets into IPSCO, and I said, "All I wanna do is I wanna see what Mr. Market does with this stock in two years. I'm just gonna hang out and see what happens." So we make the investment, and then a year later, the company announces that we're gonna have one more year of $15, okay? So now you're-
- SPShaan Puri
Mm
- MPMohnish Pabrai
... gonna have 60 versus 45, right? And by now the stock has kind of gone up and it's sitting at about $90, double in one year. So I said, "Okay, uh, it's still a very cyclical business. Maybe we should take our chips off the table." And while I'm thinking about all that, one day I wake up and the stock's at 155.
- SPShaan Puri
[laughs]
- MPMohnish Pabrai
Some Swedish company came and offered 160 to buy them. Five minutes later I sold the company-
- SPShaan Puri
Yeah
- MPMohnish Pabrai
... and moved on, right? So what I, what I'm saying is that that's what we're looking for, right? We... And in the equity markets, because these are auction-driven markets, when you look in areas which are hated and unloved, you will find these anomalies.
- SPShaan Puri
Mm.
- MPMohnish Pabrai
Um, last year, for example, I spent about seven or eight months, uh, studying the coal industry. Four-letter word, hated and unloved more than anything else.
- SPShaan Puri
And coal.
- MPMohnish Pabrai
[laughs] I mean, uh, a lot of endowments and funds are not even allowed to invest in the coal industry. There's so much hatred for it. So-
- SPShaan Puri
So you got excited. [laughs]
- MPMohnish Pabrai
The math, the math was like this. If there's a business that is going to exist for 50 years, on average that's gonna produce a billion a year in cash flow that's gonna be distributed to shareholders, available to buy for less than two billion, where do I sign?
- SPShaan Puri
Mm-hmm.
- MPMohnish Pabrai
Okay? That was the coal industry, okay? And so it's like you, you, in auction-driven markets, you repeated- repeatedly run into these things where things, you know, there's companies emerging from bankruptcy. There's things that people just don't like. Uh, there's, uh, different reasons why things get mispriced.
- 1:16:41 – 1:21:15
Private markets v public auctions
- SPShaan Puri
Right. You talked about, like, um, private markets versus public auctions, and why you think public auctions present more of these dislocations, more of these opportunities for you.
- MPMohnish Pabrai
Well, I think, I think that, uh... Let me put it this way. Um, let's say this home of mine was a publicly traded company, okay? Listed on the NYSE, right? Every day its price would change, right? It would be wiggling here and there. And if I look at the average, uh, public company on the New York Stock Exchange, the 12-month range of the stock might be 70 to 140 in 12 months. If I just throw a dart at any company in the New York Stock Exchange and I just look at the 52-week range on that stock price, it's going to be 60 to 100, 70 to 130, you know?
- SPShaan Puri
So like a 50% swing.
- MPMohnish Pabrai
It's a big swing, right?
- SPShaan Puri
Yeah.
- MPMohnish Pabrai
My home, which maybe might go up 4% in a year or, in a good year maybe 3, 3%, would be vacillating in value. It would be sometimes trading 20, 30% more than it's worth, and sometimes trading 20, 30% less than it's worth. And if I had a realtor friend and I said to him, "Listen, um, can I call you every day and just tell me what my house is worth?" The guy would think I was stupid.
- SPShaan Puri
[laughs]
- MPMohnish Pabrai
But I would call him on Monday and say, "Hey, what's my house worth?" He'd say, "Oh, it's worth two million." I'd say, "Oh, thank you." I call him the next day. He'd say, "Still worth two million." Okay. Third day he's like, "Listen, idiot."
- SPShaan Puri
[laughs]
- MPMohnish Pabrai
"It's two million." Okay. And then after a month he would tell me, "Oh, it's moved to 2,030,000." Okay. And then again, he would be at 2,030,000 for a while, okay? It wouldn't move because it's an intelligent buyer facing an intelligent seller. And so y- you're not typically going to get, um, a company like IPSCO available as the whole company for the price you can buy some shares.
- SPShaan Puri
Right.
- MPMohnish Pabrai
Because the whole company, there's an intelligent guy. The Swedish company paid four times that price. ... to, to buy the company, right? And so that's just the nature of... So, a w- reason I like the-- I've always liked public markets is because there is so much irrationality. And if you're just willing to be patient, uh, you know, in a year, in a year if I can make two good investments, it's a good year. Okay, so we don't need a lot of activity.
- SPShaan Puri
Right.
- MPMohnish Pabrai
We just need to be patient and wait for the times when, uh, something weird is causing a mispricing.
- SPShaan Puri
Right. So, uh, let me ask you a few questions. So, number one, should... In your opinion, should somebody just buy the index, uh, low-cost index fund, or actively invest?
- MPMohnish Pabrai
Uh, the index is a really good way to go. Uh, the index is too dumb to know that it owns Nvidia.
- SPShaan Puri
[chuckles]
- MPMohnish Pabrai
And it's even more dumb, it's even more dumb that it won't, it'll never sell Nvidia.
- SPShaan Puri
[chuckles]
- MPMohnish Pabrai
Okay? Or it's owned Apple the last 10 years and never sold it, for example. So I would say for the overwhelming majority of humans, probably more than 99% of humans, you're best off just buying an index. And I think that the, uh, the US equity markets and the US financial, uh, services industry is so efficient that the frictional costs for honing, owning an index through an ETF is, you know, single-digit basis points, you know, less than, uh, one-tenth of 1%, uh, less than 0.05% or 1% or so on. So it's very, it's very small. And so I think it's very smart to, uh, go with indexing.
- SPShaan Puri
Mm-hmm.
- MPMohnish Pabrai
Absolutely.
- SPShaan Puri
Yeah, for, for the vast majority of people.
- MPMohnish Pabrai
Yeah, for almost everyone.
- SPShaan Puri
And for whom... Who shouldn't do that?
- MPMohnish Pabrai
Well, if you are, if you have the talent and the patience to figure out what a business is worth, and then, um, you know, have the ability to buy those businesses well below what they're worth and patiently hold them, uh, those sliver of humans that can do that-
- SPShaan Puri
Mm-hmm
- MPMohnish Pabrai
... uh, would be better off just doing it that way.
- SPShaan Puri
Right.
- 1:21:15 – 1:22:50
The #1 trait that makes a great investor
- SPShaan Puri
If I said, "What's the number one trait that makes a great investor?" what comes to mind?
- MPMohnish Pabrai
Patience. If you are a guy who loves to watch paint dry, you know, you paint a wall and just sit there and watch it dry, you will do very well. Uh, did you ever watch "Seinfeld"?
- SPShaan Puri
Uh, some episodes.
- MPMohnish Pabrai
Some-
- SPShaan Puri
Not, not, not religiously.
- MPMohnish Pabrai
So the thing is that, uh, Elaine, Elaine is on a flight, uh, with her boyfriend, okay? I forget the name of the boyfriend. And the bo- And I think if you pull up G- Google, you can probably find this clip. The boyfriend is just staring at the seat back in front of him, okay? And so Elaine says to him, um, "Would you like something to read?" He keeps looking at the seat back and says, "No." Um, "Do you wanna talk about something?" And he says, "No." He just, he's just doing nothing. He's just looking at the seat back in front of him, right? By the end of the flight, she's broken up with him.
- SPShaan Puri
Yeah. [laughs]
- MPMohnish Pabrai
[laughs] He would've made a great investor.
- SPShaan Puri
[laughs]
- MPMohnish Pabrai
[laughs]
- SPShaan Puri
That's what you need. [laughs]
- MPMohnish Pabrai
You can be... If you can be happy... Uh, or like, you know, Pascal, uh, Pascal had a great quote. He says that, "All man's miseries stem from his inability to sit quietly in a ho- in a room alone and do nothing."
- SPShaan Puri
Right.
- MPMohnish Pabrai
Right? And so if you have this ability to watch paint dry, watch the back of an airplane seat for a few hours, and just be in a nirvana sta- state, this is the, this is the work you
- 1:22:50 – 1:24:26
What people of Reddit think of Mohnish Pabrai
- MPMohnish Pabrai
need to be doing.
- SPShaan Puri
I don't know if you know this, but you have, uh, fans in a subreddit on Reddit. I don't know if you've ever... Have you ever been on-
- MPMohnish Pabrai
I haven't done m- done much on Reddit, no.
- SPShaan Puri
So I went... When I was doing my research for this-
- MPMohnish Pabrai
[laughs]
- SPShaan Puri
... I'm seeing what do people think about, about you, and what questions do people have. And I go, and one of the best comments that I thought was such a great compliment, they go, "The day I knew that this is my guy I wanna follow, he's on CNBC, he's on a TV show, and they're asking for stock picks. So give me a stock pick." And they go around the horn, everybody gives their stock, "It's gonna be this. It's gonna be this. This is gonna go up." And they go to you, and you go, "I don't really give public stock tips like this." Um, and they're like, "Well, you got... You're on TV. You gotta do something." And they're like... The comment was, "He refused to just, like, randomly name a pick or tell people to go buy something." And the TV hosts were like, "Why are you on TV?" And he was like, [laughs] "That's not what I do." And then he just stayed steadfast, and I thought it was such a great compliment, but also so c- uh, so big of a contrast from you go watch Cramer or these guys, and it's like you go on and it's like overstimulation telling you you've gotta do something right now. The opposite of patience, basically.
- MPMohnish Pabrai
Yeah.
- SPShaan Puri
Uh, is that... Should people avoid that?
- MPMohnish Pabrai
Yeah, I mean, I, I think that it's a big red flag if you're taking stock tips from some guy on TV.
- SPShaan Puri
[laughs]
- MPMohnish Pabrai
I think that's just not gonna end well. You know, the guy on TV is not gonna be there when it's down 30%.
- SPShaan Puri
Right. [laughs]
- MPMohnish Pabrai
He's, he's off somewhere. Not available.
- SPShaan Puri
Have you seen the reverse Cramer index? Uh, it's not just him-
- MPMohnish Pabrai
Yeah, yeah, yeah
- SPShaan Puri
... but people just... Whatever he said, do the exact opposite, and you're up. Like, you're crushing the market-
- MPMohnish Pabrai
[laughs]
- SPShaan Puri
... if you just did the exact opposite of this guy. [laughs]
- MPMohnish Pabrai
Yeah, so I mean, I think, I think that, like I said, I think indexing is a great
- 1:24:26 – 1:25:04
Starting capital, annual rate of return, length of runway
- MPMohnish Pabrai
way to go for most people. I mean, uh, so you know, uh, I wish, I wish, um, in high school or even middle school, uh, compounding was part of the curriculum from an investing point of view. And, and you know, just, uh, it's really simple, but, but you know, the people, people don't pay attention to the math. You know, there are three variables that, uh, matter with compounding, right? I mean, one is the starting capital you have. The second is the, um, the annualized rate of return you get. And the third is the length of the runway,
- 1:25:04 – 1:26:03
The rule of 72
- MPMohnish Pabrai
right? Now, there's something known as the rule of 72, which is a kind of mathematical just-
- SPShaan Puri
A very helpful rule, but explain it. It's, uh-
- MPMohnish Pabrai
It's a beautiful rule
- SPShaan Puri
... I learned this luckily one teacher in college She used to be a student. She came back to teach se- because she's like, "I wish we actually taught things that were relevant in the real world." So she took it on herself, became a teacher to come back and teach personal finance, and the one thing she did was she's like, you know, "Compounding is the eighth wonder of the world, and let me just tell you the rule of 72." Very simple math. But explain it.
- MPMohnish Pabrai
So the rule of 72 is just a mathematical quirk that happens to work. So for example, if I'm getting a 7% return a year and I wanna know how long is it gonna take for this money to double, I can take 72 divide by 7. It's approximately 10.
- SPShaan Puri
10 years to double.
- MPMohnish Pabrai
It's gonna take 10 years, right? Now, if I have a 10% interest rate that I'm getting, and again, if I do 72 divide by 10, it's 7 years. So you can, you can switch between the years or the interest rate, and it tells you the other one.
- SPShaan Puri
Right.
- MPMohnish Pabrai
And, and this is,
- 1:26:03 – 1:30:21
“The most important rule in life is how long something takes to double”
- MPMohnish Pabrai
um, the most important thing in life is how long does something take to double, okay? Because that basically leads to everything else. So for example, if you look at someone like Warren Buffett, right? He started, he started his compounding journey when he was like 10 or 11 years old. I think he's-- he would say it's when he was 7 years old. He's going to be 94 this year, okay? That's a 87-year runway so far, right? Uh, now, the thing is that if you have a really long runway, then a low rate of compounding would still get you a big number. Or if you have a shorter runway and a higher rate would again get you the same result. So it's very important in life, uh, and that's why I think that I wish they do this in high school, is to start that engine early. So for example, let's, let's take a situation of someone who's just finished college, right? At 22 years old, they got some job maybe like making, you know, 70, 80,000 a year or something, and they, they put away $10,000 in their 401 (k) , right? They're 22 years old. In an index, right? The index has done 10% a year. Now, what that means is the 10% a year means that that 10,000 will double every 7 years. So let's take a situation where the person is now 64 years old, right? Now, they started at 22. It's 64, so it's 42 years. 42 years is 6 doubles, right? I do this to make it easy.
- SPShaan Puri
Right.
- MPMohnish Pabrai
Okay, [chuckles] so 6 doubles, right? That's 2 to the power of 6. 2 to the power of 6 is 64. So that 10,000 that the person saved at 22 is 640,000 at 64. But that's not all they have. At 23, they save 11,000. That's again sitting at some big number.
- SPShaan Puri
Right.
- MPMohnish Pabrai
And you keep going. And you know, sometimes we see these news articles. There's some guy who's a janitor-
- SPShaan Puri
Janitor
- MPMohnish Pabrai
... of some college, and he gives 4 million to the college and lived in a one-bedroom apartment, whatever, right? Why are we surprised? Okay, if you actually run the math, he actually didn't even save that much, and he didn't even have that, uh, such a great compounding engine. It's not like he found Apple 20 years ago or something. That's not what happened. What, what happened was that there was a consistency. And so actually my, uh, my pushback to my dad when he was telling me to start a business is I was telling him at that time, I said, "Look, I got a 401 (k) . I got 30,000 in the 401 (k) ."
- SPShaan Puri
Right.
- MPMohnish Pabrai
Right? I'm gonna... I'm counting with 15% a year. My employer at that time was matching the first 2%. So it was becoming 17% tax-free, basically. It's tax deferred. And my income's going up over time. So I was-- When I first started working, my salary was 31,000, right? So I'm saving 4,500 a year, right? But if I was still working, my, my, my pay would've been hundreds of thousands-
- SPShaan Puri
Mm-hmm
- MPMohnish Pabrai
... or more, and I'm putting away a lot of money. So by the time I get to retirement, it's like it's game over.
- SPShaan Puri
Right.
- MPMohnish Pabrai
You know? Uh, lots of extra cash available, no problem. And I never missed the money because it was pre-tax-
- SPShaan Puri
Right
- MPMohnish Pabrai
... taken out, so it's just great. So I think, I think I, I, I wish that, uh, young people understand that, yeah, listen, you can pursue lottery tickets. You can pursue entrepreneurial dreams. You can do all of that. That's fine. But on the side, keep this going. And just-
- SPShaan Puri
And start it early
- MPMohnish Pabrai
... let it be boring. Let it be a stupid index fund, Vanguard, and whatever. And, uh, and that's it. The, uh, the tortoise is gonna win the race.
- SPShaan Puri
Right.
- 1:30:21 – 1:32:14
Circle the Wagons Philosophy
- MPMohnish Pabrai
You know?
- SPShaan Puri
What's the, uh, Circle the Wagons philosophy?
- MPMohnish Pabrai
Well, the Circle the Wagons philosophy actually came out of, uh, when I was thinking about Buffett's letter last year to shareholders, the, uh, 2023 letter. He, he pointed out that in 58 years of running Berkshire, uh, there were only 12 decisions that he had made that had moved the needle for Berkshire. Now, Berkshire's had a tremendous run. They've compounded, um, I mean, till recently were compounding at 20-plus percent a year for 58 years. That's, you know, if you're doing com- uh, if you're 20% a year, you are doubling every three and a half years, okay? And that means after 35 years, it's, uh, 10 doubles, and, uh, 58 is another 23 years. So you've got another, uh, what? One six, six double, so 16 doubles. Uh, 2 to the power of 16. Now, the way to do 2 to the power of 16 is 2 to the power of 10 times 2 to the power of 6. 2 to the power of 10, round number's 1,000. It's 1,000x, right? And 2 to the power of 6 is 64. It's 64,000 times ... what you started with, okay? If you started with $100, it's 6.4 million, okay? $100 to 6.4 million. Okay, so he, he's saying, I would calculate in the last 50 years, 58 years, Buffett's made 300 or 400, at least 400 different investment decisions. He's saying 12 are the ones that mattered, right? The god of investing has a 4% hit rate. That's the god of investing. That's why we should index.
- SPShaan Puri
Right.
- MPMohnish Pabrai
Okay.
- SPShaan Puri
What are the rest of us mere mortals supposed to do?
- 1:32:14 – 1:37:34
Losing $3B in one unfortunate event
- MPMohnish Pabrai
So now the thing is that the... I was thinking about his 12 bets, right? And I, I, I thought about, okay, which were the 12? And I think he never mentioned that, but you could guess which one. See's would be one of them. Coke would be another one. Amex, uh, Gillette, Cap Cities, Washington Post. You know, you can come up with the names, you know, uh, uh, Berkshire Hathaway Energy. Ajit Jain, hiring Ajit Jain probably was the biggest bet for them. It paid off huge for them. Um-
- SPShaan Puri
Yeah, what, what's the story with Ajit? The, uh, the, there's something about the recruiter for him.
- MPMohnish Pabrai
Uh, so what I realized when I thought about these 12 bets was it wasn't the buy decision. The buy decision is important. The important thing was they never sold. See's stayed in the stable for 50 years. Coke has been in the stable for 40-plus years, right? So it wasn't the buy decision. It was the paint drying decision.
- SPShaan Puri
[laughs]
- MPMohnish Pabrai
Okay? That was the important thing. So when you find yourself in the happy position of a small ownership in a great business, just find something else to do with your time.
- SPShaan Puri
[laughs]
- MPMohnish Pabrai
Uh, play bridge or whatever.
- SPShaan Puri
Right. Have you, have you considered golf? [laughs]
- MPMohnish Pabrai
Uh, I have.
- SPShaan Puri
Yeah. [laughs]
- MPMohnish Pabrai
Golf is great. And, and so if you ask Charlie, he would say the single best decision, best investment Berkshire Hathaway ever made was the search fee they paid to hire Ajit Jain, okay? Now, Ajit Jain walks into their offices in 1986, 1985 actually, never having worked in the insurance business, right? Um, from scratch, without them putting up venture capital or anything, the business he's created for them today probably has a value north of 100 billion, okay? I mean, it just gets lost in Berkshire because Berkshire's so big. But I'll give you, I'll give you an example of, um, of a, a, a discussion I had with Charlie. I think this maybe two, three months before he passed away. So he was telling me that, um, uh, Aj- you know, Berkshire, Ber- Berkshire Hathaway writes, uh, super catastrophe insurance, like, you know, uh, insurance against hurricanes, uh, earthquakes, and so on, right? And, um, many, many years, uh, they... when people are looking for earthquake insurance in Florida, or for hurricane insurance in Florida, uh, Ajit would look at the rates being offered and just take a pass, okay? Ba- basically, he would find it's too competitive, whatever else, people not giving enough, okay? Uh, what he did in 2023, uh, and they mentioned it at the, at the meeting actually, is that, um, he wrote, um, hurricane insurance, uh, on Berkshire's behalf, uh, reinsurance, with a maximum payout of $15 billion. So if, if these hurricanes had hit... Now, uh, basically the math is like this. I just wanna explain how, how Ajit's mind works. Uh, Berkshire would pay out on a big catastrophe, like ins- uh, earthquake, uh, hurricanes, 3% to 5% of the total insured loss incurred. So for them to have a 15 billion payout, you would have to have had an event with insured losses in Florida of 300 billion. It's beyond H- Andrew and beyond Katrina.
- SPShaan Puri
Right.
- MPMohnish Pabrai
It's beyond all of those, right? So it's, it'll be, need to be a really big event to, for them to have a 15 billion payout. The premium he collected, uh, to write that 15 billion policy, take a guess.
- SPShaan Puri
[laughs]
- MPMohnish Pabrai
Take a guess.
- SPShaan Puri
5 billion.
- MPMohnish Pabrai
He collected 5 billion.
- SPShaan Puri
Oh. [laughs]
- MPMohnish Pabrai
Okay? And, and-
- SPShaan Puri
I was sweating that guess. [laughs]
- MPMohnish Pabrai
No, no. But, but, but he collected... That's exactly what he collected. How much did he pay out in '23?
- SPShaan Puri
Zero. [laughs]
- MPMohnish Pabrai
There was one that came through. My guess would be they might have paid out 3, 400 million.
- SPShaan Puri
Okay.
- MPMohnish Pabrai
You know, some 300 million.
- SPShaan Puri
Collect 5 billion.
- MPMohnish Pabrai
And, and what Charlie said to me is, Ajit's done this about six times, okay? Where he's picked the years that he's written these policy, because what was happening in most years is the premium offered was 2 billion. He just took a pass.
- SPShaan Puri
Right.
- MPMohnish Pabrai
Right? A lot of... All the other insurers wrote that policy. Berkshire took a pass.
- SPShaan Puri
Right. No-call strikes.
- 1:37:34 – 1:38:34
Be fearful when the world is greedy; Be greedy when the world is fearful
- MPMohnish Pabrai
again.
- SPShaan Puri
Right.
- MPMohnish Pabrai
You know?
- SPShaan Puri
You have a thing over there I saw in your office that says, it's like a placard. It says, "Trouble is opportunity."
- MPMohnish Pabrai
Absolutely. That's a, that's a quote-
- SPShaan Puri
What's the story of that?
- MPMohnish Pabrai
It's a quote by John Templeton. Uh, and I actually, uh... There's a good friend of mine, Prem Watsa, in Canada, as they call him, uh, Berkshire Hathaway of Canada, Warren Buffett of Canada. And, uh, I had seen that, uh, that plaque on-
- SPShaan Puri
[laughs]
- MPMohnish Pabrai
... in his, on his desk, and somebody sent it to me. And so it's a great quote. I mean, I think that that's what, what we're trying to do as investors is we, uh, want-- We, we need to be fearful when the world is greedy, and we need to be greedy when the world is fearful. And so basically, when the world is running away from coal, we need to run towards coal.
- SPShaan Puri
Right.
- MPMohnish Pabrai
So I- I'm always looking at what is hated and unloved, right? And usually you will get a lot of mispricing when something is hated and, and unloved.
- SPShaan Puri
Right.
- 1:38:34 – 1:39:50
What a value investor thinks of bitcoin
- SPShaan Puri
Uh, tell me about Bitcoin. Are you a fan of, uh, crypto, Bitcoin? Are you a believer?
- MPMohnish Pabrai
Outside my circle of competence, and I would say that if you put a gun to my head, I would say it's gonna end badly.
- SPShaan Puri
Hmm. And why is that?
- MPMohnish Pabrai
It's in the eye of the beholder. There is no intrinsic value, as I understand it, to Bitcoin. Now, you can argue that there isn't an intrinsic value to the dollar. Uh, but it has the full faith and credit, uh, of the US government, which is then backed by the, uh, hardworking American people. So basically, I think that, uh, I think that it's, um... For me, it's in the too hard pile, but I think for most people, I would just say take a pass.
- SPShaan Puri
Right.
- MPMohnish Pabrai
Most people who have invested in Bitcoin couldn't really tell you, um, why it's or what it's gonna be worth and why it should be worth that.
- SPShaan Puri
Hmm. Okay. Uh, fair enough. So one of the reasons I wanted to fly here is because it's fun to meet these kind of outlier investors or even just hear the stories, and I've heard you tell a couple stories about guys I've never heard of that, um, I would love for you to, to tell the story, because I think most people
- 1:39:50 – 1:52:49
Nick Sleep bets
- SPShaan Puri
have never heard of these people. So tell me about, um, Nick Sleep. Who's Nick Sleep? Or, uh, Junjun Walla, whichever is your favorite. Give me, give me one of the, the stories that, that you love.
- MPMohnish Pabrai
Well, I think Nick is, uh, Nick is a wonderful guy, and there's a book called, uh, uh, Richard- Richer, Wiser, Happier that came out, uh, maybe two, three years ago, and there's a chapter on him. Nick is very, uh... He's a recluse. He doesn't do, uh, interviews and such. I was actually surprised he even talked to the author. But-
- SPShaan Puri
Right
- MPMohnish Pabrai
... it's worth reading the, the book. And, uh, you know him, he, he and his partner, Zach, uh, they would, uh, come into their office and basically just sit and read annual report after annual report till they were blue in the face.
- SPShaan Puri
[laughs]
- MPMohnish Pabrai
You know? I mean, they were just... And, um, and, and they would, uh, want to see if they could understand, uh, different businesses. And that exercise of reading those annual reports led them to the annual report of Amazon, right? And, uh, for example, I, I've been a customer of Amazon, known Amazon for a long time, et cetera, familiar with the business. But every time I would, uh, take a cursory glance at Amazon, it looked very expensive. On a earnings basis, a PE basis, it looked really expensive. And the reason it looked expensive is they were investing so far ahead of the curve on the growth that, uh, what, what should have been categorized as CapEx wasn't-- was just categorized as expenses. So the US government was really funding their growth because there were no taxes-
- SPShaan Puri
Mm-hmm
- MPMohnish Pabrai
... uh, being collected. Now, what, what, uh, Nick and Zach were able to do, because they were just sitting in their, uh, office with no distractions, reading year after year of Buffett's, uh, of, uh, Bezos' letters. And the Bezos letters are worth reading.
- SPShaan Puri
Mm-hmm.
- MPMohnish Pabrai
I mean, I think they're, they're very, uh, clear. He clearly laid out in those letters what he was up to, right? And that he's basically... That, that he wasn't, he wasn't, uh, completely candid, but he was basic- You could tell that the business had very high returns on capital, and he was investing, uh... He was throwing a lot of things against the wall, but basically they were very low-risk bets. If any single bet didn't work, it didn't, wouldn't sink the company. And, um, so for example, one of the bets they made was AWS, right? Which became a huge... And they didn't know it was gonna become as big as it did.
- SPShaan Puri
Right.
- MPMohnish Pabrai
But, but basically, um, they also made a bet on Fire, Amazon Fire, which didn't work. But basically, I think what, uh, what Nick and Zach realized is that here was a very gifted capital allocator who understood all the different facets of building a team, going after different markets. He actually disrupted multiple industries. And so they had placed, um, a bet on Amazon. And, uh, and because Amazon was doing so well, it was becoming a larger and larger portion of their fund. And in the UK, there are more regulations on hedge funds than we have in the US. The UK regulator was telling them that, "We see this position as very high risk, um, and you guys need to diversify." So they were getting pressure, and they felt that they understood the business so well. So they looked at each other. They were, they were managing, I think, 2 or 3 billion. Uh, they had made hundreds of millions in, for each of them. And, uh, they said, "Look, uh, we are independently wealthy. We never thought we'd be here. We're young Uh, why do we have to listen to some regulator, right? We could return all the capital to all our investors. And, uh, what, what Nick said is if I return the capital, I'm gonna put everything into three stocks, and these are three stocks... He owned maybe a dozen stocks, but he was gonna go into three stocks. The three stocks he was gonna put one-third each into was, uh, one-third Berkshire, one-third Amazon, one-third Costco, right? And so he said, "I'm very comfortable with these three stocks. They're very built-to-last businesses." And he did that. And what, what happened, uh, a few years after they hung up their boots is, um... It's really funny. The, uh, Amazon still kept... You know, it's a juggernaut.
- SPSpeaker
Right.
- MPMohnish Pabrai
It still kept going. And so it became 70, 80% of the pie. So instead of them being one-third each-
- SPSpeaker
[chuckles]
- MPMohnish Pabrai
... it was 80, 10, 10, for example, right? And, um, uh, Nick decided that, "Oh, maybe I should take some chips off the table here." And so he cut the Amazon position in half and bought, uh, another business, which has not done well. It went sideways. And that goes b- back to Buffett's point of 12 that worked in 58 years, is we are not going to... If Warren Buffett has a 4% hit rate, the rest of us are gonna have a 2% hit rate, okay? So, uh, but you also need to get rich just once. So I think that what worked really well for Nick and Zak was they took the Buffett lesson, which is that once you have a great business, just leave it alone. Now, even after he was sloppy and he took chips off the table from 80% or whatever, he's still done very well.
- SPSpeaker
Right.
- MPMohnish Pabrai
And, and I think one of the things that, uh, investors forget is that, um, if you look at the, the Walton family, um, none of them are running Walmart. Sam Walton passed away a long time ago. It's been several decades since Sam Walton passed away. The Waltons have, for the most part, kept the Walmart stock, and for most of them, it's almost their entire net worth in a single stock, right? So more concentrated than even Nick Sleep is, right? And, um, it's not a business that they control. It's not a business that they run. It's not a business that they're on the board of. Um, none of them gives them sleepless nights, right? And, uh, so for example, in 2018, I started visiting Turkey, and I was just looking at things hated and unloved at that time, and I saw that the Turkish markets were screening really cheap. Everyone and their brother was just exiting Turkey. And I have a really good friend of mine in Istanbul, very good investor, kind of classic Ben Graham investor. And I told him, "Hey, uh, Haydar, I'd, I'd love to visit Istanbul, and I'd love to, if we could visit all the companies in your portfolio, starting with the company with the, your strongest conviction, biggest position, to the smallest position." And I said, "Don't take me to see any companies where you don't have money in."
- SPSpeaker
[chuckles]
- MPMohnish Pabrai
"Okay?" He said, "Mohnish, it'd be a blast." So I went in 2018, first time to Istanbul. The blue fish on the Bosphorus was great, and all these different businesses we saw were great, you know. And I didn't really do much work. He told me which w- places we were going to, but I just said, "Let me meet the companies first." I went back in 2019, and we're driving to this company, and I... Like I said, all these Turkish names and companies. I said, "I will do the work on the back end. I'm, I'm not gonna spend time." So as we're driving over, I said, "Haydar, remind me what company are we going to? What's the, what's the CliffsNotes version?" He said, "Okay." He says, "Uh, this company we're gonna visit, uh, Rejas, has a 16 million market cap, $16 million market cap." And he says, "Uh, liquidation value of the business if you sold it today is 800 million."
- SPSpeaker
[chuckles]
- MPMohnish Pabrai
So I said, um, "Is it a fraud?" He said, he said, "No, I'm, I'm invested in the company." And so I said, "You're telling me the company is trading for two, 2% of liquidation value?" He said, "Yeah." I said, "Why?" He said, "It's Turkey, you know. Everything's cheap." I said, "Well, this is the outlier cheap." Okay. And Rejas basically is a very simple business. They are the largest warehouse operator in Turkey. They rent out all these warehouses. These are 99% leased, inflation indexed, and, um, they lease to Amazon, IKEA, Carrefour, Mercedes, Toyota, like blue chip clients and all of that, right? So I went and, uh, met the father and son who run the company, and the founders. And, um, and then after that, I went and visited a bunch of the warehouses, and I couldn't find anything wrong with it. Basically, uh... And he was absolutely right. If you just went to any realtor in Turkey and said, "This is their 80 warehouses. Uh, give me a value on each one," he would just look at the rent, and he would tell you, "Okay, you know, you're looking at about $70, $80 a square foot for each warehouse." They had 12 million square feet. It was about a billion dollars. And there was 200 million of debt. So 800 million liquidation value and 16 million market cap. Okay. And so then I thought, "Okay, this thing probably Um, trades by appointment, and maybe can't buy the stock. But Turkey has very high trading volume because they're all gamblers.
- SPShaan Puri
[laughs]
- MPMohnish Pabrai
And, um, so I found that when I, when I started buying the stock, that huge volumes are available, and I, I spent $8 million to get a third of the company. Okay? Now, the way I look at it is that, you know, when you look at, you know, Buffett's letter with the 12 positions, or you look at Nick Sleep with Amazon, right? Um, the family that runs the business, they have maybe 40, 45% ownership, right? Uh, I'm an outside investor at 33%. I've no board seat. But the way I look at Reza is the way the Walton family looks at the Walmart stock, right? Uh, I said, uh... And what, what I've noticed since then, since 2019, is they have increased the value of that business. So I would say that probably today the business might be worth one and a half to two billion, somewhere in that range. And I think they'll cont- Because I've never seen them make any decisions that were stupid. They're very smart about the decisions. It's very well run. So I say, "Okay, basically, uh, we are done. Uh, we will keep that business. I don't care about the stock price." So the 16 million market cap now is about 500 million, you know, in four years. And, you know, the Turkish lira, which when we were investing, it was five lira to the dollar. Today, it's approaching 33 lira to the dollar. Turkish lira's collapsed. Um, in dollars, we're up almost 30X.
- SPShaan Puri
Right.
- MPMohnish Pabrai
Right? But, uh, the business is worth more, right?
- SPShaan Puri
Mm-hmm.
- MPMohnish Pabrai
And so the thing is that it's exactly what, what Buffett says, is that basically, uh, just leave it alone. And, uh, as long as that family and that father and son are running the business, we will just, uh, keep our stake and, uh, and, uh, let it keep running. So basically, the idea is that, uh, I'm also going to, when I look back, gonna find there were a few things that moved the needle big time, and the rest didn't.
- SPShaan Puri
Right.
- MPMohnish Pabrai
And, and the key to moving the needle is inactivity. And so that's what you, you gotta be just, you gotta be very patient and be very inactive.
- 1:52:49 – 2:01:15
The Best Of: Capital Allocators
- SPShaan Puri
well they allocate capital. 'Cause we know how, maybe how good their brand is or their product is, but, uh, we were talking about this yesterday. There's a transition from you're a product manager, where your focus is building product, then you're a people manager, where you're building an organization, and then you're a money manager, and you're now s- you know, you're s- sitting on $100 billion, and you have to figure out some way to invest it. This is like, you know... So, so tell me, uh, Meta or Facebook, what do you think... How do you think they've done with, uh, capital allocation?
- MPMohnish Pabrai
Well, I think, I think it was really surprising to see how, um, he did a 180. I mean, uh, I think, uh, Mark basically moved from being a spendthrift to being a Patel, you know? Uh, he... I, I mean, l- literally, I, I just can't, uh, uh... I think it was remarkable to see, uh, an entrepreneur pivot that way.
- SPShaan Puri
Right.
- MPMohnish Pabrai
So, uh, you know, Meta was a country club. You know, they had all this spending going on in all these areas, and he really tightened it up. I mean, I was really... I mean, and it showed up in the numbers.
- SPShaan Puri
Mm-hmm.
- MPMohnish Pabrai
Uh, they... I mean, Facebook is a great business. You know, all the different, uh, brands they have and different properties they have are tremendous. Um, it is the norm in capitalism that great businesses will be sloppy with how they execute. I think normally it's very rare to find a great business which is also tight-fisted, and Meta wasn't tight-fisted, but it is now.
- SPShaan Puri
Mm.
- MPMohnish Pabrai
And, uh, so that was just wonderful to see.
- SPShaan Puri
Right.
- MPMohnish Pabrai
So I think, yeah, I think their capital allocation there is excellent now.
- SPShaan Puri
Right. What do you think about, uh, Elon Musk, fellow, uh, fellow, uh, Texas resident?
- MPMohnish Pabrai
Um, the United States, this is one of the just beaut- most beautiful things about the United States, is Elon wasn't born here, okay? And he wasn't educated in his first 20 years of life over here. We, the United States, got a finished product, basically.
- SPShaan Puri
Mm-hmm.
- MPMohnish Pabrai
And, uh, he's created tremendous value, tremendous jobs, and disrupted multiple industries. Um, I think, I think Elon is a exceptional allocator of capital. Yeah, it's, uh, terrific actually.
- SPShaan Puri
And Tesla gets a lot of... There's a lot of conversation. Is Tesla overvalued? Is it undervalued? Is it, uh, you know, too frothy? I guess, what's your take on, uh, when you look at a business like Tesla, how does your mind analyze a business like Tesla?
- MPMohnish Pabrai
It would, it goes into the too hard pile.
- SPShaan Puri
Mm.
- MPMohnish Pabrai
I, I would, I would, I would, I would say this. I would say that Elon is not human, okay? He's beyond human. Um, if you just think about all the things he's done, I mean, now the neural net, uh, and, uh, and, um, you know, Boring Company and, uh, you know, what he's doing with SpaceX and all that. It's, uh, it's just really very remarkable Uh, the execution is off the charts. Um, and, uh, I think, I think, like I said, I think he's just, uh, uh, unbelievable in terms of what he's been able to accomplish. So I have a lot of respect. I think, I think Elon understands capital allocation really well. A- and I think, uh, all the businesses that he, uh, he gets involved with or he founds, they do so well because he gets so much out of the people, which basically means he gets so much out of the capital, right? I mean, he's-- his hiring is so good. Uh, the teams that he's building are so exceptional that, uh... I mean, when you're hiring a software engineer, uh, there could be an engineer who's worth 10 bill- 10 million a year, and there could be another guy worth 100,000 a year, and he can tell the difference.
- SPShaan Puri
Right. [chuckles]
- MPMohnish Pabrai
And so he's, uh, that's-
- SPShaan Puri
[laughs]
- MPMohnish Pabrai
... that's a great skill to have.
- SPShaan Puri
[laughs] I love that. Uh, we'll end with this. We have Charlie, uh, you know, here, and he passed away, and you were f- friends with him. What's, uh, maybe your, your favorite story or lesson from, uh, from Charlie Munger?
- MPMohnish Pabrai
Yeah, I mean, I, I, obviously, I miss Charlie. I think, uh, he, he was one of a kind. I think he was just a... And, and I, I've been thinking last several weeks, several months about so many of the lessons and things. But one of the things Charlie said in one of the last interviews, uh, he gave, um, uh, someone asked him, I think, uh, "What would you like on your gravestone?" And he said, uh, "I tried to be useful." And I think those, those words, "I tried to be useful," um, encapsulate Charlie really well. Uh, if you look at Warren Buffett's tribute to him that he did this year in the letter, um, Charlie selflessly helped Warren, uh, a lot. I mean, without Charlie Munger, there's no Berkshire Hathaway, um, even though you had a Warren Buffett there. And I... Twice I went to Charlie when I was facing, um, difficult personal situations, nothing related to investing, right? Extremely helpful to me. On point. I just did exactly what he told me to do, and those issues disappeared, right? And so, uh, uh, Charlie always was trying to see, how can I help the world, uh, in all the institutions that he touched. Uh, you know, his memorial was at the Harvard Westlake school in California, in LA, um, transformed that institution. He was at the board of the Good Sam Dos Hospital, transformed the hospital. Berkshire Hathaway transformed. I met so many partners he had in different businesses. Always gave them the better deal. And, uh, y- I think in every way possible, he... I think that was just absolutely correct. He selflessly tried to be useful. And, you know, Charlie, I don't think Charlie believed in God. I don't think he believed in religion, right? And I think he didn't believe in legacy. He-- I think he believed that when we're gone, we're gone. It's ashes and dust, right? Till one day before he passed away, he was in the hospital. He knew he was dying. He was trying to get one last grant done to a nonprofit.
- SPShaan Puri
Mm.
- MPMohnish Pabrai
No upside to him. He's dying.
- SPShaan Puri
Right.
- MPMohnish Pabrai
Right? Um, six days, uh, six days before he passed away, he was buying a stock.
- SPShaan Puri
[laughs]
- MPMohnish Pabrai
Okay? You know, a stock we discussed.
Episode duration: 2:01:15
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Transcript of episode XikIr0kedY8
