My guest in this episode is Mohnish Pabrai, who I first met at the Berkshire Hathaway AGM in 2014 in Omaha, Nebraska. Mohnish is the Founder and Managing Partner of Pabrai Investment Funds and the author of “The Dhandho Investor,” which is just as useful if you’re interested in learning about investing as it is for entrepreneurs. He was featured in William Green’s recent book “Richer, Wiser, Happier,” which William discussed in one of the previous episodes of this podcast.
Mohnish plays bridge with Charlie Munger, and he’s a shameless cloner. He describes what being a cloner means and how he thinks about investing, how he learns from others and how he changed his mind about business, investing, COVID and many other things.
Mark Bidwell 0:38
Hello, this is Mark Bidwell, welcome back, or welcome to the OutsideVoices Podcast. I’m very pleased to welcome onto the show Mohnish Pabrai, who I first met at the Berkshire Hathaway AGM in 2014. in Omaha, Nebraska. Mohnish is the Founder and Managing Partner of Pabrai Investment Funds and the author of a very nice book called “The Dhandho Investor,” which is just as useful if you’re interested in learning about investing as it is for entrepreneurs. He was featured in William Green’s recent book “Richer, Wiser, Happier,” which William discussed on this podcast a few months ago. He plays bridge with Charlie Munger, and he’s a shameless cloner. He describes what this means and how he thinks about investing, how he learns from others, how he changed his mind, and lots more in his wide-ranging conversation. Let me welcome Mohnish Pabrai.
Mark Bidwell 1:37
So Mohnish, it’s a great honor to have you on the podcast, thanks very much for your time today. We were first introduced to one another by Guy Spier back in 2014, at the Berkshire Hathaway AGM, at five o’clock in the morning, we were queuing to get in to get some good seats. Subsequently I read and really enjoyed your book, “The Dhandho Investor,” and then more recently, the chapter that William Green wrote on you in his last book “Richer, Wiser and Happier.” So I’m very pleased we managed to find time for you to come on the podcast.
Mohnish Pabrai 2:08
Well, it’s a pleasure to be with you, Mark, looking forward to it.
Mark Bidwell 2:12
So let’s start with your background. You are an entrepreneur, you set up your own business which was successful, but maybe you can just talk about how you found yourself in that business, and how did you transition out and into investing?
Mohnish Pabrai 2:26
I think that’s a good question, but it can have a long answer. I’ll try to keep it as brief as I can. When I was growing up in my childhood and my teen years, my father was an entrepreneur. He had started many companies, and some of them had scaled pretty well, and pretty much all of them eventually went bankrupt. He was really good at identifying these, what I would call, offering gaps where there was a need in the market. He was extremely good at that, and he was extremely good at going into brand new industries and such. But then he was always very aggressive on growing the business and always was short of capital. They never really had an ability to withstand headwinds, and the moment the headwind showed up, he was in trouble. India did not have much of an ecosystem to help entrepreneurs with venture capital and those sorts of things. I saw a lot of gyrations when I was growing up. Actually, when I finished my engineering degree, my plan was to never ever be an entrepreneur.
Mark Bidwell 3:45
And mostly because of the pain you saw going through the peaks and troughs of your parents’ business.
Mohnish Pabrai 3:51
I have excellent parents from my point of view, but they were extremely poor financial planners. So there was really no difference between the health of the business and the health of our personal finances. When the business went kaput, there was no money for groceries, there was no money for rent. Literally it was zero on all fronts, and that used to happen every two or three years. But somehow, my dad would pick himself up again and start over in a new industry, and he would again make it work, but I just felt like, okay, I’ve got a good job. I know I’m well qualified, I know that I can have a good career path. I can put 15% of my 401k in and I’m going to have a very comfortable life, and I don’t need to relive those gyrations. My dad was visiting me when I’d been working for about four or five years. He said to me when I was going to work one day that it’s time to quit. A couple of years before that, he helped me move from engineering to sales and marketing, which was something I really enjoyed. And I said, no, I’m really enjoying my career, and have you forgotten our history and all the ups and downs and all of that? His perspective was, well, that makes life exciting. He just brushed it off, but he said, you can’t really go on this way. One of the things that was bothering me then was that the company I was with, I could see that things were getting bureaucratic.
Mark Bidwell 5:38
This was Tellabs, right?
Mohnish Pabrai 5:40
Yeah. I had moved about two and a half years before that to their international marketing group, their international subsidiary, and there were only six or seven people in the US in that division. About two and a half years later, globally we had close to 300 people, and a lot more people in the US in the advanced acquisitions and so on. So what was a very wild west, open job description was getting more and more buttoned down, and you should only work on this, and I actually liked the wild west better. I was seeing that it was getting bureaucratic, so my dad was saying, look, you are doing well, you understand how to sell and market and all of that, but somebody else is going to reap the rewards of that. It’s not going to be you, you’re just one small cog in a very big wheel. You’re better off going down and figuring out something that will work. It just happened to be at a time when I was myself not very happy with the job I had. I felt it was too constraining. I knew really well, but I didn’t realize this until later, but watching my dad in my childhood and my teen years, it was relatively easy for me to see the gaps, because I’d just seen so much of that. Also, I didn’t realize that other people didn’t have the skill, but I also knew how to get a business off the ground. I also knew how to get a business off the ground on fresh air and water with no money. It was fun, because I’d seen him do it so many times. Later, I realized that most people don’t have those skills. I’m very grateful that it was just dumb luck that I was in a home where I had all these business school lessons going on before I was 14 or 15. I felt like, when I finished high school, I had finished many MBAs. I used to go on sales calls with my dad and stuff. The piece that I picked up, which I watched, what had led to his downfall in terms of the leverage, so I was very careful, because I had seen about 15 or 20 years of that. So I was very careful on that piece where I didn’t follow that same path. Things worked out, the company scaled and grew, and it was great.
Mark Bidwell 8:17
Now, I think you said in your book that the risky thing was for you to stay with Tellabs, and that all you were risking by leaving was $30,000 in your 401k and some credit card debt. This was I think a classic example of a “heads I win tails you lose” very literal scenario.
Mohnish Pabrai 8:36
Yeah. I was 25 years old, I had $30,000 in my retirement account, it didn’t matter if it went to zero because I could get a job. In fact, my employer, when I quit, they said listen, you can come back when your business fails. They didn’t say if your business fails, they said when your business fails, we will give you a promotion, and we will pay you more and all of that. So it was awesome, because I don’t even have to spend a day looking for a job. I can just go straight back and I get a raise. And the other thing was, I had researched US bankruptcy law, personal bankruptcy law. And they’ve changed those laws since then, but it was very favorable. I was planning to take a lot of credit card debt to get the business going, and if I was not able to pay those bills, and I declared personal bankruptcy, they basically cleansed your record, they cleansed all the debts, and you became a really good credit because you couldn’t do that again for seven years. So actually, people are much more willing to lend to you after a bankruptcy than before, because they knew that for seven years, this thing can’t happen again, right? So I knew that basically my worst case scenario was that I would be at zero, and I would be back at a job at a little higher pay. I really didn’t see any downside. It was exactly the heads I win tails I don’t lose much.
Mark Bidwell 10:11
And then I think, moving the story forward, you discovered a book in 1994, which shifted things a little bit. And then you had some coaching, and personal assessment done on you which changed things forever. Can you say a little bit more about that?
Mohnish Pabrai 10:27
I had never heard of Warren Buffett till I was 30 years old in 1994, and I actually heard about him by accident. I just randomly was reading one of Peter Lynch’s books, and then in that book, he mentioned Buffett, and that was the first time I ever heard of him. He was talking about Buffett in very reverential terms. I was just very intrigued by what Lynch had written in general. I had never really invested or knew anything about investing, but I thought Peter Lynch’s approach seemed to make a lot of sense. I read both his books. I wanted to read more Peter Lynch books, but I was out of Peter Lynch books, there were only two of them. And so I said, okay, he’s talking about this guy Buffett, let me find out who this guy Buffett is. That actually opened up a brand new world, because then I was able to get to the letters, the Berkshire Hathaway letters, and the first couple of biographies on him had come out. It was a huge ocean of knowledge that it opened up, it wasn’t just a couple of books or something. I was just devouring it because it was so interesting, even though I was not trained in that area, I just enjoyed it. I realized that it was probably going to be better suited to the way I was to try to clone Warren Buffett. One of the things when you’re running a business, you will spend maybe 2% or 3% of your time figuring out a strategy and the direction and all of that. And 95-97% of time is blocking and tackling all the heavy lifting to get things going. I always enjoyed the 2-3% a lot more than the 95-97%. It was fun to actually see the execution, but the 2-3% was always more interesting to me. What I realized when I read about Buffett is that he had converted a 2-3% to 80%, because he wasn’t running the businesses. He was just figuring out, just like I would figure out the opportunity gap, he would figure out something is a great bet, and something is a great business, and it’s undervalued, and he would just make a bet. So I said, making bets is really similar to figuring out a business model or starting new businesses, I think it uses the same part of the brain in the same way. And so for me, that was appealing to the lazy end of me saying that, hey, why don’t why don’t we make 3% 80% and see how that goes. I wanted to experiment with how it would be if I try to use my brain power on figuring out which companies have the right direction, and are likely to give good returns and all of that. That actually worked, it worked really well, I think from 1994 to 1999 it went up 13x, a million became 13 million. The funny thing was some years, me alone, working part-time on my portfolio would make more money than my firm with more than 100 people. So I was going to work all day, and then I’d be doing this stuff at night alone, and the night stuff is doing better. So I was like, I’m enjoying it more, and it became pretty obvious, especially when I met those industrial psychologists. They actually looked at my template of who I was, and they said, you are so mismatched, and so off-center with the company you’re running. I was actually not liking my own business at that point because the job had been converted to human resources. I was just constantly dealing with people’s issues. What I really liked to deal with is the early stages of a business, when there were actually no people, just figuring out a direction and all that. I saw that my investing side was fun, and I saw the early stage, and what they said to me, because I was just about to start Pabrai Funds and I discussed that with them, and they said, yeah, that endeavor sounds perfect for you. It was useful and so then I made the switch and went from there.
Mark Bidwell 15:00
And you used a very interesting word a few minutes ago, cloning. I’d be fascinated to learn a little bit more about what this means, and why you chose this almost as a methodology and a philosophy. Can you say a little bit more about cloning and how it’s impacted you?
Mohnish Pabrai 15:16
Yeah. I’ve been a student of cloning, I think now probably for more than 30 years, maybe 30 to 33 years. The peculiar thing, and I still don’t understand why this is the case, I just know that it is the case – most humans have an aversion to cloning. Somehow they either consider it beneath themselves, or they seem to have the perspective that, well, someone’s already done this, I can’t do this. It’s almost like the efficient market theory, where two economists are walking and see a $100 bill on the ground. One guy says, look, there’s a $100 bill, and the other guy says, no, there’s no $100 bill, because if there’s a $100 bill, someone would have picked it up, and it wouldn’t be there. A lot of people, when they identify something interesting that someone is doing, they believe that that opportunity is over. It’s kind of like, if you go into a Starbucks, and you say, oh, this is a great business, you think, oh, it’s a great business, but it’s already been done. But the reality is, the world could actually accommodate two or three different kinds of coffee chains, and shops, and all of that. What I noticed when I started studying cloning, my first experience with that was when I read one of Tom Peters’ books, he was a big management guru in the 80s, where he talked about these two gas stations in California. At that time, they had no credit card machines at the gas station, you pretty much pumped your gas, and then you went in and paid and so on. What one of the gas station owners would do is, every so often, he’d come out and tell the driver to sit in the car, he pumped his gas for him, clean the windshield, let’s give a little bit of service, and the guy diagonally across the street could see this happen, he could see that this guy’s providing extra service. And he was dismissive, he said, he can’t do this for everyone, so why do it for anyone, because it’s just so random. And after some time, the guy who was providing this random service started getting more business, and the other guy noticed his business going down. Even after his business was going down, there was no behavior change. So Tom Peters made a comment, he said that you can go to your most direct competitor and explain all your competitive advantages, all your strategies, everything to them, just lay it out, and they would listen to you quite carefully, but they will not change anything about the way they function. When I read that, I was 24 years old, I said, this is ridiculous. Okay, what this guy is saying cannot be true. You’re going out of business, the guy is taking your business, you know why you’re going out of business, and you’re still doing it. What I started doing after that was I started doing different experiments with cloning. One of the things that used to happen with my IT company, it was such a rapidly growing industry then that we had a lot of employee turnover, because people were constantly trying to hire our people. A lot of our consultants would set up their own businesses, they’d go independent snf do their own thing. These guys would walk into my office looking sheepish and hand in a resignation. I would look at them and say, okay, I wish you all the best, I hope you do well, whatever. Listen, if I can be of any help to you in any way, I’d be more than happy. They would look at me like, this guy is completely bullshitting me. Why would he help when I’m in fact going to compete with him? So a couple of them actually took me up. They said, well, I’m going to go into this market and do this. I said, look, this is what I did, and this is what worked, and this is how I generated leads and sales. I explained a whole bunch of things, which would take them a long time to figure out, right? Then I just sat back and observed how they ran their business. And they never did anything. These were crown jewels I was giving them and they were completely ignored. I said, wow, this is really amazing. As I repeatedly kept looking at cloning, what I discovered is that there is a small sliver of humans, maybe 2-3%, who have quirky wiring, who are aggressive about cloning, and probably 95-97% don’t care about it. One of the things I forced myself to do when I realized this, I said, when I see someone doing something smart, even if it is not in my industry, but it applies to what I’m doing, I’m going to force myself to copy. What I had been doing in my IT firm is, I remember one time, I got a piece of mail from a law firm. I love the way their envelope for this really nice thick envelope, and the label was really large, it all looked really nice, okay. And I cloned it, and from then till now, always, all my stuff has been like that. It came from a different industry, it was a very small thing. But anytime I noticed someone doing something, one time I spoke at a conference in Canada, and they sent me a really nice cross pen as a thank you. I really liked the pen, and I liked the way the logo was done. I cloned the pen, I put my logo on it, I gave it to all my investors and all of that. What I realized is that with cloning, you pick up these small things, and sometimes you pick up big things, and it works. The big epiphany I had was in 1999 when I was looking at setting up the Pabrai Funds. The Buffett Partnerships ended in 1969-1970. From then till 1999, 30 years, I could not find a single fund that had cloned what Buffett had done. I said there’s 1000s of funds, okay, why can’t I find one that operates with those rules? And there was none. I said, I know why. Because humans are bad at cloning. So I said, Buffett’s rules and Buffett’s approach to investing should just be intensely cloned. I felt like if I cloned his fund and his approach, it would by definition make me unique, because there’s nobody else who has an offering. Later, when I got to know Warren and Charlie, I discussed this with them. I told Charlie, for 30 years I couldn’t find anyone. So Charlie told me, well, there were a few. I said, but Charlie, I couldn’t find them. He said yes, you would never find them. He said they’re so obscure, you’re absolutely right, that is a very, very small group that would have followed that. I found that repeatedly, and I looked at companies like Microsoft, and everything Microsoft has been successful at has been closed. They have spent billions and billions of dollars on initiatives, which they’ve come up with in Microsoft Research Labs, and all of that, and almost all of that has failed. But they copied Lotus 123 and made Excel, they copied WordPerfect and made Word, they copied Netscape and made Explorer and all that. Sometimes they would fail. Microsoft’s money never got traction versus Quicken. But in cloning, in that kind of business, even if you have a 70% failure rate, it didn’t matter. Even more recently, with the cloud, once Amazon opened the Kimono, and showed what was going on in the cloud, Microsoft went very aggressively after it, much more aggressively than even Google or anyone else. So they’re the number two player. In that game, Google is a distant third, but there are really two players. The same thing with Walmart. I think that Sam Walton pretty much said that he has no original ideas. Walmart, I think, for the first at least 15 or 20 years, there was nothing that Walmart did that hadn’t been done before. Sam Walton spent more time in his competitor stores than anyone else I know in retail. In fact, any time he’d go to any store, to visit any Walmart, he’d scout and see one of the other stores. I’ll just give you a quick story of what Sam Walton did. He was visiting some Walmart in some little nowhere town in USA, some small place, and he takes his two or three VPS who are with him into another store, just to look at the operation. And these VPS come out and say, what a terribly run place, all their merchandising is off. And Sam Walton says to them yes, but did you see the candle display? He said the candle display was incredible. What he was really good at is, even when he saw crappy operations, he wanted to see what he can take from those operations. Walmart basically is an amalgamation of the best practices of a gazillion people before it. He became just so good at everything, because he just kept learning from different people. Even now, I find that cloning, like I use 13f filings for example, because I know that most investors look down on them. They think it’s beneath themselves to buy something that someone else has bought, or even research something that someone has bought. And so I know that’s not going to change, qnd that’s a great advantage, and so we’ll go through life that way, no problem.
Mark Bidwell 25:38
And of course, within that is the need for a complete lack of ego, right?
Mohnish Pabrai 25:42
Yeah, I think you have to check your ego at the door in order to be a cloner. If you look at the persona of someone like Bill Gates, for example, I think the persona was someone who ruthlessly wanted to win and become a large scale business. And he understood that that was the path, that there was no other path by which Microsoft could have really gotten to where they needed to get to. He understood that, and in many ways, Microsoft played below the belt. The biggest thing that they use against Amazon on cloud is they use bundling. When you’re going up against Lotus 123, you offer Microsoft Office, and you say, oh, the Excel is just for free. I’ll give the whole bundle for the price of just Lotus 123, so why would you buy that right? Even now, what happens in the cloud business is they know that they have an advantage in things like teams and offices and their core, so when they go to a large company, and they’re competing with Amazon, they’ll bundle. They’ll say, oh, I’ll throw in this which Amazon doesn’t have. They know how to play in a manner that is going to make it really hard for the competitors. This is 50 years of history that they have been doing this, and it works very well.
Mark Bidwell 27:15
And of course, within that is the need for a complete lack of ego. And what about Amazon, another Seattle based company? Is Amazon Prime cloned for instance, from Costco’s membership model?
Mohnish Pabrai 27:28
I think Amazon is a very different animal than Microsoft. Actually, Amazon is not a cloner. If you study, for example, Amazon Prime, there were two different ideas. There was an idea to have a membership fee, and there was another idea to somehow make shipping a fixed fee or no fee. Bezos actually talks about the fact that, if you offer an all-you-can-eat buffet at a restaurant, and you put a sign up “all you can eat,” he said, what’s gonna happen is the fat people are going to show up first to bankrupt you. The all-you-can-eat buffet is really attractive to people with huge appetites. He knew that when he started Prime, that the people who were most likely to sign up for Prime were these mega users of buying a gazillion products which were $4 each. If I buy a $4, Band Aid packet or something from Amazon, their margins are about 25%, it’s $1. They make $1 on that, and then on top of that, you add free shipping. The logistics to warehouse is to have a guy come to your door, it’s north of 10 bucks, 15 bucks, just look at what it costs for FedEx or UPS to deliver a packet. That’s the cost, they’re gonna have like a 5% margin on that. So on the $4 purchase, you’re gonna have a $15 or $20 cost, how do you make money on that? And the answer is, they have a lot of losses on many of the purchases, but what he was counting on, and it was a hunch, he didn’t have the data; what he was counting on was that there would be enough people showing up. And there would also be skinny people showing up to the buffet, who will be on a diet and just want to eat sparingly. And so he said, it wouldn’t be all fat people. there’d be some skinny people, and eventually it’ll all work out. Even now I find it amazing that they made it work, but basically, Bezos is not a cloner. I think what his specialty is, that he throws a lot of stuff against the wall, and most of the stuff he throws against the wall he knows is not going to work. He knows that it’s going to fail. I think the bet on the Fire Phone and all of that was a $200 million bet. And they knew that it could go to zero and they were willing to deal with that. I think what happened with Prime is, they were like a blind man stumbling in the dark. They’re saying, yeah, we think this is a good idea, we think it would resonate. they could see Costco. I think when they married the two ideas, which is the membership and the free shipping, and then they probably were surprised themselves. Even the cloud was, there were rumblings and talks about, well, let’s set up some tech that we can offer via API’s to our customers, and it actually started with them wanting to provide the logistics services for e-commerce to the most direct competitors. So they said, we want to be such that Barnes & Noble would be comfortable coming to us to give them the technology layer. There was a whole group of people in Amazon who said you got to be mad. We’ve got this technology edge, why would we give this to others? They could sell stuff cheaper than us, and Bezos’s answer was, well, if they can sell a book cheaper than us, they should. That means the book should be sold by them because they’re better than us. So he says that, then that means that we are not efficient, and we need to find something else. He opened up all those things to all these competitors, and then it started opening up to other retailers, then it went from there. As they started opening the platform up, they had to redo all that code, set up all the API’s and then that led to cloud. It was a very sequential journey, which eventually led to a business which is very profitable now. But I think Amazon and Microsoft could not be more different in terms of the way they operate. Amazon is completely throwing stuff against the wall, they usually have no treadmarks, they’re usually not following somebody else, and they’re just going down that path. Google actually is also an innovator. The core innovation was something they came up with, and they’ve also been good at identifying good pieces to buy, which might be disruptors inside. The Chinese tech players are extremely good cloners. The Chinese have been cloners forever. They’d see a TV made in Japan, and they’d make it cheaper. I think that was really well understood by the Chinese. What I think the interesting thing that’s happened with Chinese tech is the cloners have now become better than the companies they cloned. So now what’s happened is Facebook is trying to clone Tencent. So it started off by Tencent cloning Facebook, and the tables have turned, so it’s interesting.
Mark Bidwell 33:11
So you mentioned China. Charlie Munger is very bullish on China, Li Liu runs a lot of his private money. What do you think about China? I think for instance, you might have an interest in Pinduoduo, for example.
Mohnish Pabrai 33:24
Well, I don’t have any position in PDD, so I haven’t ever invested in them. I think most of what goes on in China is outside my circle of competence. You’re seeing so many things on data, Mark, that you have confused yourself.
Mark Bidwell 33:46
Okay. I must have got that wrong.
Mohnish Pabrai 33:52
I mean, it’s a fascinating company. I’ve spent some time looking at it, but I don’t understand it well enough to do anything with it. But basically, and that’s the case with almost all Chinese companies, even just outside my circle of competence; a couple of them that you can get your arms around, if you look at companies like Tencent, or you look at Alibaba, the thing is, these companies, when they were embryonic, they almost had only foreign investors. In fact, very early in the journey, they were really non-Chinese players who backed these companies. In both cases, at the senior management level and the board level, there’s a lot of non-Chinese nationals. They’re very key people in different positions who were not born in China. So I think their DNA is a little bit different than a lot of other Chinese companies because they just grew up with this multinational perspective from day one, so I think they just look different. These are a little bit easier to get your arms around, they’ve been around for a while, they’ve got a lot of history you can look at, and you can see the trajectories of what’s going on, so there’s a chance you can figure it out.
Mark Bidwell 35:15
So let’s move on to what happened when you read through Nick Sleep’s Investment Letters, how that shifted how you think about investing or seeking out the so called 100 baggers, which I guess was quite a big change in terms of philosophy. Can you explain how that came about? I think you’d been following it for some time, but something shifted, right?
Mohnish Pabrai 35:38
Yeah. So actually, when I first started investing in 1994, I was very interested in businesses that had high growth, and high returns of equity. That was a deep interest to me, because that was the nature of the business I was running. I was in an IT services business that was growing really fast, and it took almost no capital. The growth was, our return on equity would have been off the charts in terms of what we were putting in, and what we were getting out. I liked that, and so when I understood Buffett, I said, well, I understand technology, and I can look at that. My investments at that time were very heavily in the tech software space. It did quite well in that period, I had 200 baggers that I’d captured, and there were even more that I sold way too early. I was smart enough to buy them, not smart enough to hold them. But then in 1999, and 2000, I could see the bubble coming, the internet bubble. It was becoming pretty clear to me that there’s a lot of froth, and it was quite ridiculous in terms of the valuations and such. When Pabrai Funds started in 1999, I basically shifted to Graham, because I found that if I looked at non-tech businesses, they were being given away at very cheap prices, because everyone was putting all their money into these crazy pets.com. In fact, the day the NASDAQ peaked on March 9, 2000, I think, was the day that Berkshire Hathaway hit a multi-year low. Literally people were pulling money out of Berkshire and putting it into pets.com, or toys or whatever else. And so I was able to sidestep the entire dotcom boom and bust. The first year of Pabrai Funds, before fees we were up 70%. In that period, which was from July 1999, to June 2000, the NASDAQ had already started crashing. And we didn’t feel it, for the next few years, NASDAQ kept going down and didn’t matter to us, because we weren’t in that area. What I forgot to do, because it became so comfortable, I forgot to switch back. So I thought it was very euphoric, the pricing was very high, and that it would take a long time for this bubble to fully burst. Probably what I should have done is in the 2009 timeframe, I should have switched back to compounders, and I completely missed that left turn, so I just kept going down a path that I was very comfortable with. Last year, William Greene sent me a galley copy of his book, and when I was reading the Nick Sleep chapter, I’ve known Nick for probably more than two decades. We would meet once in a while in California, or in Omaha, and a wonderful guy, he’s very close friends with Guy Spier, and I was really surprised when I read William Green’s chapter on him. That prompted me to reach out to him, and then he sent me the complete PDF of all his letters.
Mark Bidwell 39:02
When you say surprised, what was it that surprised you?
Mohnish Pabrai 39:06
What surprised me was that Nick was also very much a Ben Graham investor. In fact, you can see it in Zimbabwe Cement. Who the hell buys Zimbabwe cement? And he talks about it like his big lesson, and the states have already taken over all these things, and you have no way to get your money out. It is the heir to the power of heir or something like that, but he was going into many situations like that in very obscure geographies. What happened is he went through a shift, and actually I hadn’t met him in a while. I saw in William’s writing, his writing is so awesome, I saw that oh, wow, Nick actually went through a whole metamorphosis, where he basically understood, he was looking at what was working, what was not working, and I think there was this company Stagecoach he invested in, and then they looked at the dumbness of selling it when they saw it kept going up. And then when I looked at what he had accomplished with Amazon, and the insight he had, actually, most of the return they generated on Amazon was not because of the insight they had. Their insights were focused on e-commerce, and on online shopping, and all of that, and how big that would be. Most of the value came because Jeff is continuously throwing stuff against the wall, right, and he’s still coming through that. The value creation came from somewhere else, but it didn’t matter, because once he was pregnant he was studying it more and more, and he understood it extremely well. He said, it’s a no brainer, we just keep this round and it’s fine. I realized that basically, the Holy Grail was not to be on this treadmill of buying 40-cent, 50-cent dollars and selling at 90 cents and finding the next 40 cents. The Holy Grail was really to own a business with favorable economics, bought at a reasonable price for a very long time, which had some good growth engines. There is a saying, there’s these Hindu spiritual texts, the Upanishads, they say that your deepest desire is your destiny. If I were to say that I want to find businesses that are available for 50% off, there’s 50,000 stocks in the world. If I just put that as a benchmark, I will find it, as long as I’m willing to just dig through the work. If I set that benchmark and 25 cents, that I only want to buy dollars that are 25 cents, I will find those as well. If I set it at 10 cents, those will probably be Zimbabwe cement, but I will still find those. So you can set the benchmark wherever you want. It will become harder, but you can find it. And if you set a benchmark which says, I want high return on equity businesses, that have very long runways, and that are available at a reasonable price, you will find those as well. So in an auction-driven market with 50,000 stocks, there’s always stuff going on. This guy on CNBC, Jim Cramer says there’s a bull market somewhere all the time. Bottom line is, I think there’s always companies going through distress for temporary reasons, or there’s companies which are misunderstood, or whatever else is going on. If you are just a hunter, willing to do the work, you will find what is your deepest desire. And then I read this other book by Thomas Phelps.
Mark Bidwell 43:06
Yeah, the book “100 Baggers.”
Mohnish Pabrai 43:08
He is such an awesome writer. I can’t recommend that book enough. He was a brilliant writer, and I think he had great insights. I looked at what Nick had done, and then I read his letters, and then we talked on the phone, and we exchanged some notes. I actually told him post-pandemic the first line I want to be on is to sit down and have a meal with him. And he said, oh, that would be such a pleasure. So I’m looking forward to that once we can get some more normalcy in our world. It became obvious, if you look at the range of opportunities, even better than a 10 cent dollar. And the other thing is the great compounders. If I were to make 10 bets on 10 businesses, and I ended up being wrong on five, in any case, I’ll probably be wrong on four or five of them, because I think it’s hard to get a batting average better than that, it doesn’t matter. At the end of the day, what matters is that you got one right. As long as you don’t lose your shirt on the others, even if they’re flatline or they’re triple and then they die out or whatever else happens, or you were wrong about some aspect of it, whatever. Some of them will work out. If you’ve done the work and you understand what they like and what’s going on, it’s likely to work out. I found it interesting that, when Nick hung up his boots, there were a few reasons that he did that. One of the reasons I think he didn’t explicitly come out and say this, I think one of the reasons was at that time that regulators were giving them grief about the high risk and high volatility in their fund, and they actually thought it was very low risk.
Mark Bidwell 44:57
Free stocks at the end, right?
Mohnish Pabrai 44:59
Yeah. He had a large portion, a large bold bet on Amazon, he had no desire to lighten it up, and he was getting this regulatory pressure. At the same time, they had made more money than they ever thought they would. I think him and Zack looked at each other, and they said, okay, if we just run our own money, no one’s going to tell us how much Amazon we can own, and we don’t need to care about that. So it was interesting, Nick basically picked, I would say, three bulletproof businesses, two of them extremely bulletproof. And the third one, my take, would probably not be as bulletproof at that time as Berkshire Hathaway, but it had a moonshot. There was so much runway, which the other two didn’t have. It was fine, his downside was it was very protected, and his upside was great. I actually thought it was a wonderful way to hang up his boots and move on. The interesting thing is since Nick “retired”, he’s beaten all the active managers, without really spending time in the office or doing anything.
Mark Bidwell 46:14
So I’m just curious, has this become part of your new philosophy, or have you shifted everything towards your search for the 100 baggers?
Mohnish Pabrai 46:26
I think the 100 baggers are few and far between, it’s not that easy to find them. But I’m focused on them. In some cases, we have a little investment in Alibaba, for example. I have no illusions that it’s going to be the 100 bagger. So 600 billion, 500 billion market cap, you’re not getting to 50 trillion. I don’t think that’s in the cart, but it can be a very nice business to have for a while. My focus is on finding the 100 baggers, I think we’ve found a few that I think have the possibilities of doing that. When I look at it, there was a company I found a year before this whole epiphany, it’s a company in Turkey called RYSAS. At that time, RYSAS had like 20 million market cap, probably had like $500-$600 million liquidation value, but I could see it had very good capital allocators, and a really good business. And that $500 million was going to probably become bigger. In the last two years, that $500-$600 million moved probably closer to $800, whereas the market cap has moved from $20 to $120M. When I overlaid that with the Nick Sleep framework, RYSAS, which was a $20 million market cap, could be a $2 billion market cap maybe in 10 years or something, it’s possible, maybe less than that. All I got to do there is do nothing, just sit on. The unfortunate thing about RYSAS is that we couldn’t put a lot of capital, maybe a little more than 1% of what we managed, but that’s not a tragedy, I’m happy to have the 1%, it was the deal, so it’s okay. But I think there are some other bets that could get there, which we have more money, so that could work out. And the hunt is on, now that I have that target, I can run things through that lens relatively quickly. Most things aren’t going to get through that lens, but once in a while you will find anomalies, and that’s fine.
Mark Bidwell 48:52
So your work architecture, how you spend your day, has that changed in any way?
Mohnish Pabrai 48:58
I think the process is the same. I can figure out businesses and business models relatively quickly. The good news in this business is that there are no cold strikes. Recently I got an email from a guy. There was this company in Australia, I think called Payday, I think that one of the US players acquired them for some ungodly sum. And he sent me an email, which had a copy of an email he’d sent me about two and a half years ago, to invest in Payday. I looked at it probably for 10 seconds or maybe 30 seconds, and I took a bath. There was nothing there that actually I could grasp, and that’s perfectly fine. Because just like in baseball, there are no cold strikes. So we can miss a lot of things, I probably do miss a lot of things. Pretty much every day when I come into work, I probably have at least five or seven investment ideas that people have sent to me. Usually, there’s not from my point of view much meat on the bone on any of them. But in a year, there might be more than a 1000 ideas that come in, and we just need, even if you get one. An interesting thing to show off, I got something today where I spent about 20 minutes looking at it, and then I said, okay, it’s not quite what we’re looking for, but when there’s all these smart people who are wonderful, unpaid analysts at Pabrai Funds, life is great.
Mark Bidwell 50:41
And is there anyone you can clone in this space as you search for your 100 baggers?
Mohnish Pabrai 50:46
I haven’t found people who are very explicitly running funds with all 100 baggers. If they had any success and they scaled, they would be on the Forbes 400 pretty quickly. But there are many, many people who are focused on compounding, and there are lots of smart emerging managers who are like that. I can look at what they’re doing, now, the issue is that many things are outside my circle of competence, many things will look optically expensive. That’s usually the biggest problem, it’s optically expensive. And what I found is that, for things to work for me, for any investor to make an investment, the important thing is extremely high conviction. So when you have noise coming at you after that, you have clarity on exactly why you invested, and so on. So, when I look at businesses like RYSAS for example, where we bought at a huge discount to the underlying value, we can ignore a lot of noise. What I have to do is I have to really focus on things that are no-brainers, but things where the world is not interested. I think Turkey is a market where everyone and their brother has exited, the government has a lot of issues, so there’s nobody left. It was a mass exodus that took place in the last few years, especially amongst foreign institutional investors and such. And that’s a great hunting ground, because people have left in an auction-driven market, it’s wonderful.
Mark Bidwell 52:39
Maybe there’s a Turkish cement company out there.
Mohnish Pabrai 52:42
Actually, the funny thing is Turkey has an interesting competitive advantage in cement. They actually have some really top end Turkish cement companies, not that I met local Zimbabwe Cement, but some of them have competitive advantages, and some of them are JVs with Heidelberg Cement, with German management, and so on, so forth, it’s really good, very high quality businesses. I think we will probably do well with some of them, but we will not do as well as we would like to do. So far we haven’t pulled the trigger on those, but I enjoyed those meetings, it was a lot of fun to meet those companies. And some of them are exporting, it’s interesting. Cement is a business which is very local, because it’s very expensive to transport, but ocean transport is really cheap. Actually, Turkey has companies which have operations close to the port, and they own port infrastructure, and they are shipping into the East Coast of the US. And they are cost competitive, so it’s interesting how they can do that. Very few cement companies in the world can do that.
Mark Bidwell 54:02
Interesting. This has been really fascinating. If I can just start to wrap up, so I know we’re a little bit tight on time, with a couple of questions. Maybe this question is redundant, but I’ll ask it anyway. What else have you changed your mind about recently?
Mohnish Pabrai 54:16
Well, Buffett and Munger would say that a year in which you didn’t destroy your best loved idea is a wasted year. I definitely felt 2020 was not a wasted year, and I think even in 2021 I feel that one of the most remarkable things I think that happened to all of us is COVID. Every single thing I’d heard about COVID when it first happened has proven completely wrong. When I look back at every single thing I thought, I owned a lot of stock in Fiat Chrysler when COVID hit and their plants shut down. In the auto business, your plant shuts down, every day you’re going to hemorrhage, the operating leverage cuts both ways. I sold every share of FIAT I could. It’s sitting two and a half times where I sold it today. The shutdowns had no impact. This is mind blowing, I would have never guessed. And the other thing, COVID has had so many things that has turned things on its head. Productivity went down, we couldn’t go anywhere and productivity went down, and nobody would have guessed, I would have never guessed that productivity went down. So the interesting thing is, business travel is not coming back, it’s not going to come back. I think the Marriotts of the world and all that, are in the world of hurt for a while, because that whole infrastructure was built for business travel, and it’s going to be a fraction of what it was. The other thing was, I read the other day, new business formation in the United States hit an all time high. And so these people who got dislocated from jobs, a lot of them basically found different things and different companies to start and whatever else, they move to different places, and the economy has become more efficient. They’re having difficulty filling 10 million jobs in the US. I think a lot of that may be because of this huge new wave of entrepreneurs. A lot of them will fail, that’s just the nature of capitalism, but enough of them, you have 4.6 million new businesses formed. It’s a huge number, it’s a bigger number that’s been happening in the US ever, maybe during the dotcom boom, it might have been more than that, but that’s about it. I think that there’s so many things which are permanent changes from COVID. It accelerated Amazon’s business, food delivery, all this digitization we are seeing across the board. So another thing that has been changing in my head, is the housing requirements, office space requirements, retail requirements, the way humans interact, it’s stunning and permanent secular changes. Like I said, I am still trying to figure out and get my hands around all these changes, it’s a lot, and what it means in terms of economy and business, and the globe and all of that. That’s still a work in progress. I’m still getting my arms around it.
Mark Bidwell 57:37
So second question, where do you go to get fresh perspectives, especially when you’re facing really tough decisions?
Mohnish Pabrai 57:46
I think that a long time back, I think this was right when I met Charlie for the first time. I think in 2009, when I first met him, and he told me at that time, that it’s very important to have someone to talk to about your investments. And he said, I always had someone to talk to, he said, when I was investing. So I said, you mean like Warren Buffett, right? He said no, it wasn’t always Warren, he said, but I always talk to someone. Basically, I think what happens in investing is, when we look at a business, our brains have so much quirky and poor wiring, that we can go down rabbit holes that are dead ends, and we don’t see that they’re dead ends, and sometimes a conversation, five minute conversation with somebody else about it, who’s a thoughtful person, we might say, hey, did you think about this, orr do you think about that? If I, which I already did, I talked to Guy about RYSAS for example. And his answer to me was that there is no way I’m ever putting $1 into Turkey and the stock. And I tried to explain the economics of the business, I could get nowhere with it. But it’s a great perspective to have. Guy loves Nestle. If you are in Zurich, why would you not love Nestle? It’s so warm and fuzzy and comforting to own Nestle. That’s what he likes, and this is as far removed from that as you can imagine. What is warm and fuzzy about some Turkish operations, there’s so many foreign things you’re dealing with currency and freefall and all that. So Charlie encouraged me to find people, and he said it was very important that the relationship be a peer relationship. So it couldn’t be like me hiring an analyst, that’s not a relationship which is the peer relationship. Since then, I’ve tried to have conversations with a few different people, sometimes Guy, sometimes some others, and I found those to be very useful. That was a good thing to clone from Munger stuff, but that’s fine.
Mark Bidwell 1:00:19
And final question Mohnish. How does a failure set you up for a future success?
Mohnish Pabrai 1:00:27
I think that we really only learn from failures. Success, we think we’re God’s gift to the planet, we are so smart. But I’ll give you an example, in the late 1990s, I had set up a digital incubator called Digital Disruptors. We were trying to help online businesses create digital business. I would go talk to a bank and say, separately, new charter, let’s form a digital bank. And we wouldn’t want to do consulting for it, we want to take equity, and we would help them set that up. So that was the point, to create all those businesses, but have a strong domain partner, which we didn’t have. And that business eventually blew up. When the crash came, even before the crash it was gone, and I lost about $2.3 million, and outside investors lost a couple of million 2.2 or something million. Good amount of that was venture capital that came in. It was terrible, but I learned so much, and one of the biggest things it taught me was that it gave me about a three month head start of looking around the bend on dotcom businesses, because I had been a private one. And so I could actually see the crash coming a few months before it hit because of that experience. What would have happened if I hadn’t had the experience with my tech background is I would lose Pabrai Funds. Yeah, Pabrai Funds would have gone all in on tech, and we would have had a terrible start. And it would take a while to recover from that. So we lost $4 or $5 million, but there was a huge multiple of that made from the other venture. It’s repeatedly this, every time you stumble you learn so much, and each stumble is going to make you better. It’s important to pay attention to the stumbles. One thing Charlie taught me, he said that you want to learn from your mistakes, but you don’t want to learn too much. One thing to keep in mind, especially in the investing game, John Templeton says, even the best investor will be wrong one out of three times. So 40% error rate doesn’t mean you’re losing capital, you might have thought it was going to double but it just flatlines or goes down 10% or something. The error rate we have in our business is very high. It’s not like being a brain surgeon, or a heart surgeon, we’re gonna have a very high error rate. If each time something goes against us, if we zoom in to get lessons, we many times are going down rabbit holes that are not productive, so we need to learn from when we stumble, but not learn too much.
Mark Bidwell 1:03:42
Wonderful. Yeah, I’m just thinking of some of my stumbles, and how far down I’ve gone into the rabbit holes. This has been fantastic. I really appreciate your time, and it’s not just for me, I’m sure my audience will find it fascinating as well. I’m hoping to come to the next Berkshire Hathaway AGM, I’m hoping it’ll be live, so perhaps we’ll have a chance to meet again in person. And if you ever come in to see Guy, it’d be wonderful. I think I mentioned to you I mean, Guy has been hugely influential to me on a number of fronts. He’s helped me get the podcast going, I’ve been investing with him and he’s become a very, very good friend. So if you’re coming across to Switzerland, it would be great to meet you in person again, and many, many thanks for your time.
Mohnish Pabrai 1:04:28
I told Guy I’m going to come to Zurich, and then I’m going to drag him kicking and screaming to Istanbul. And he said he might join me on the trip just for the seafood.
Mark Bidwell 1:04:43
Yeah, it would be lovely to see you in Zurich. Thanks very much Mohnish for your time.