← My First Million
My First Million
Asking a Billionaire Investor How to Turn $10,000 into $1M ft. Mohnish Pabrai
01:21:35
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- [00:00]
Anish
How would I take 10k and turn it into a million?
- [00:03]
Mohnish Pabrai
What we're looking for is something that hits you in the head with like a two by four. We don't need to know many things about many things. We need to know a lot about a little.
- [00:14]
Anish
Why do you think most people don't do that?
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Mohnish Pabrai
Buffett always says the most important question to ask is, and then what does he use?
- [00:22]
Anish
Excel.
- [00:23]
Mohnish Pabrai
Warren wouldn't be caught dead using Excel. Okay. Usually the best ideas, when you finally figure them out, they're very simple. You should be able to explain your thesis of a stock in about four or five sentences to a 10 year old.
- [00:36]
Anish
Where do you even know where to look?
- [00:38]
Mohnish Pabrai
I'm going to lay it out for you. It's going to be so easy. All someone has to do is, I feel like I can rule the world. I know I could be what I want to. I put my all in it. Like my days off on a road, let's travel, never looking back.
- [00:55]
Anish
Okay, here we go. Anish, welcome back. Round two.
- [00:58]
Mohnish Pabrai
Sean, it's always a pleasure.
- [01:00]
Anish
So let's play a game. You're my coach, you're my investing coach, let's say, and I have $10,000 and I want to turn it into a million, right? Podcast called My First Million. I want to go from 10k to a million. So that's 100x. How would I take 10k and turn it into a million?
- [01:15]
Mohnish Pabrai
The thing about investing is that opportunities are not going to show up just because you have the cash. So I would make some tweaks to your thinking first about the 10K. So I would say, okay, the 10K is a good starting point. But what I also want you to do separately from that is have a day job. Yeah, okay. And I want you to spend less than you're earning and I want you to take the 10k. And I also want you to take your annual savings, maybe that's 5, 10,000 a year or whatever it is. And normally I would say put it into an index. Right? The index, like the S and P is overheated. We can't go there right now circa 2025. We cannot go into the S and P. Okay, okay, maybe 2035 we can, but not 2025. So what I would do is I would treat Berkshire Hathaway as the index. So I would just say the default currently is, you put it, you know, dollar cost average into the, into Berkshire Class B shares. Right? And you keep doing that day in, day out. And if we did that, you know, the Math is really simple. Even if we were doing 10% a year, right? I mean, which I think is pretty reasonable for Berkshire Rule of 72, we would double every seven years. Life is all about doubles. Okay, let's say we are a 20 something guy with 10,000 and you go for 50 years or 49 years, it's seven doubles, right? Okay, seven doubles is 128. Okay? It's 128 times your money. I gave you more than 100x, right? I gave you 128x in 49 years.
- [02:57]
Anish
Without having to be genius, without doing anything right.
- [03:01]
Mohnish Pabrai
So this is just plan B, where we put the 10,000 in. It becomes more than a million. 1.33 million with no taxes paid, right? There's no dividend, there's no taxes, there's nothing. And we haven't even gotten to plan A yet, right? This is just sitting there. Now the other thing is that every once in a while there'll be opportunities that show up. And what we're looking for is something that hits you in the head with like a two by four. So the best investments are ones that make no sense. You cannot make sense of the numbers. It's too good to be true. It's just weird and all of those things. So when these kind of unusual things come together where things don't make sense, that's when we want to dive in.
- [03:49]
Anish
Give me an example of a great investment is one that doesn't make any sense. The numbers just seem wrong to you in the moment.
- [03:55]
Mohnish Pabrai
Well, I'll give you one example where it was a money maker for me, but I didn't make even 3% of the money. I should have.
- [04:07]
Anish
Okay.
- [04:08]
Mohnish Pabrai
You know, I mean, it was like it was given to me on a platter and I blew it. I still made money. But you know, usually the best ideas when you finally figure it out, they're very simple. So in the year I think this was like around 2001 or 2002, I had encountered this shipping company called Frontline. And Frontline was a company that owned a fleet of about 75 VLCCs, Very Large Crude carriers. These are giant ships that transport crude from Saudi Arabia to the US and they're just huge. The entire global fleet at that time was 300 ships. 300 VLCCs, 75 of them were owned by Frontline, 25% of the market. The guy who ran and was the founder of Frontline, John Frederickson, had put the entire fleet on the spot market. So there are two ways he could have Dealt with his fleet, he could have done time charters, kind of one year, three year deals where he's guaranteed cash flows per day and all that. Or be a gambler, put it on the spot market and play it whatever.
- [05:23]
Anish
The price today is.
- [05:24]
Mohnish Pabrai
Right.
- [05:25]
Anish
I'll take it.
- [05:26]
Mohnish Pabrai
So he had put it on the spot market, the entire fleet. Now these VLCCs, they have a cost with the crews and all of that of around $15,000 per day to break even. And at that time we had like the Iraq war and different things going on. So oil demand fell a lot and there wasn't enough need for VLCCs. So the shipping rates collapsed to the point they went to 7,000 per day. Okay. So now you have Frontline losing 8,000 per day times 75 shifts.
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Anish
Right?
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Mohnish Pabrai
Okay. And they're levered. Okay. And so basically the stock got taken out back and shot like a 90% drop. Okay. And most of it was valid because basically when we are making investments or when the equity markets look at a company, they want to see consistency of cash flows, they reward consistency of cash flows. Here what we were seeing is consistency of losses. No one could tell you when these losses will abate. So the dynamics were the stock, I think was down to like $3 per share. And when I looked at it, I noticed two things. Okay. The first thing I noticed is all that debt was non recourse. That debt was tied to individual ships. There was no debt at the parent.
- [07:01]
Anish
Right.
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Mohnish Pabrai
So basically if they defaulted on the debt of a ship, the bank would just take the ship they couldn't really take. The company could just take that ship. They take a car loan. Right, Right. And the second thing I noticed was that there's a very somewhat liquid market to buy and sell these ships. So even when the rates went to 7,000 per day, the ships had dropped in price by something like maybe a third, 25, 30% drop from where they used to be.
- [07:32]
Anish
Right.
- [07:33]
Mohnish Pabrai
So what I realized is that if Frontline got into a crunch where they were having cash problems, they could just sell three ships. If they sold three ships, paid off the debt, they'd have enough cash left over to keep sustaining operations for six to nine months. They could sell three more ships after that. So I felt like there was really no way the company was a candidate for bankruptcy and there was really no way. And the other thing is, I could look at the entire company and say, okay, what if they sold all the ships? If they sold all the ships, paid off all the debt, you would end up with like nine or $10 a share, you're at three bucks.
- [08:14]
Anish
Right?
- [08:15]
Mohnish Pabrai
Okay. So you'd make three times your money if they just liquidated the whole business. So there was a arbitrage between the price of the stock and the net price of the assets in a distress scenario. Right. And so I said, okay, we really can't lose money here. So I put 10% of my fund into frontline. Right? Because I just couldn't see a way that we could lose money. After a few months, the rates start improving, the oil demand starts coming back up. The rates go to 15,000, then they go to 20,000. The stocks at 10 bucks. Okay. I sell my shares. Well done, Mohnish. Okay.
- [08:54]
Anish
Tripled my money.
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Mohnish Pabrai
Yeah. In. In like eight months or something. Okay. And I said, okay, this was exactly what I thought. Right. Rates then go to 300,000 a day. Okay. At 300,000 a day, they're making something like 285,000 a day times 75 shifts. Okay. That number is like infinity.
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Anish
Yeah, I was trying to do the math.
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Mohnish Pabrai
Just assume it's infinity. The stock goes up in the next three years, 80x.
- [09:27]
Anish
Oh, wow.
- [09:28]
Mohnish Pabrai
Okay, here's stupid Mohnish, okay, patting himself on the back with the double. And I didn't even get a double. I got like 80% return on my money. And that was that. And so that was an example of where I did first order thinking, but I did not do second order thinking. So the second order thinking was, Buffett always says that the most important question to ask in investing is, and then what if I had been so smart as to ask the question? And then what? So you see that rates are terrible, you see the scrapping, you see that that fleet's going to shrink. So even if oil demand doesn't come back the way it was, it's going to come into balance eventually those losses are going to go away. And then you do the next thing on 10 watt, which is that when oil demand comes back, it takes three to four years to build one of these things. So when the rates went to 30,000 or 50,000, and all these guys can see this is a great business now. Well, when you go to the Korean shipyards, who are now inundated with orders, they're going to say, go to the back of the queue. I'll give you a ship in five years. And by the way, the ship is no longer 70 million. The new price is 120, because I got more orders than I can handle. We had this dynamic, if I had thought about it, that once the demand became Tight. You really couldn't increase supply for at least three or four years. So what's 285,000 times 75 times 1,000 days? That's the minimum number of time when that price is not going to come down. It's only after three or four years more ships start getting delivered and you start getting more balance and all of that. But that's an insane amount of cash flow. Right? So the thing is that there are always, like our friend Jim Cramer says, there's always a bull market somewhere. Okay? So basically if we are plan A, Berkshire Hathaway, plan B, looking for anomalies, right? Every so often, not very often, every so often you will find something weird. And we've got all the time in the world. We can research something for three months. It turns out it's not that great. Let it go. We've got Berkshire still cranking. Okay? So if you look at Warren Buffett, in his 2022 letter, he said that in 58 years of running Berkshire, there have been 12 decisions that have moved the needle for Berkshire stock. Now, in 58 years, he made more than three or 400 purchase decisions for stocks and businesses. Okay? Out of 300, if I take a conservative number, it's actually more than that. Only 12 were exceptional. And he said there was one good idea on average every five years. Okay? This is Warren Buffett with a 4% hit rate. So basically, great investment ideas are rare. We're not going to run into them every week or every month or every year. So plan A, stick it in the index. Plan B, keep running a Geiger counter over everything, looking at different things. And when something doesn't make sense, drill down. And every so often, you're going to hit a mother load. And when you find something that's a mother load, you peel off 10, 15% of what you have in Berkshire, put it into that, let it play out, then put it back into Berkshire.
- [13:22]
Anish
Right?
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Mohnish Pabrai
Right. And just you keep doing that, and now your 100x is going to show up in half the time or less.
- [13:30]
Anish
All right, let's take a quick break because I got a little freebie for you. So if you're listening to this episode and you like what Manish is talking about, you might be like me. You're trying to take notes, you're trying to remember these principles that he's talking about, because the dude is just a wealth of knowledge when it comes to investing. Well defined folks at HubSpot. Listen to this episode. They took the transcript, they put down the nine principles that he talks about as well as the examples that he have. And, and they put it all in a PDF for you so you don't need to take notes. They did it all for you. You could read that, learn from it. That's much better way to get more value out of these episodes. It's in the show notes below. Just go download that and enjoy. So you tell me the story about these ships, and when you explain it, I can see it just like you see it. Oh, that's the opportunity. But the thing I don't get is why are you looking at crude oil ships? How do I get to, like, how do I even know where to look? And so what is that process for you? Do you. Do you pick one industry and look at a hundred companies in it? Do you read books on 50 industries? Do you look at what other investors are doing and try to reverse engineer? Like, where do you even know where to look?
- [14:27]
Mohnish Pabrai
I'm going to lay it out for you. It's going to be so easy. But it takes a certain temperament. So first I want to talk about the temperament. Okay, so if we go back to Warren Buffett, when he was a teenager, he used to go to the racetrack in Omaha. And one of the things he did at the racetrack, he was like 14 years old or something, is after all the races had been done, he'd pick up all the tickets that people had left thrown on the ground, Right? These are mostly losing tickets. They just kind of toss them from the garbage cans. He'd pull them all out, then he'd go home, and one by one, look at every ticket he would find. Now, sometimes a horse would come in second and the ticket was for win or place. It was actually a winning ticket, but they didn't understand. They were drunk or whatever, right? So he'd always find a bunch of tickets which were actually in the money, but they had been discarded. So now he was underage. He couldn't go to the counter to collect the money, so he gave it all to his Aunt Alice, his favorite aunt. She used to go to the counter, collect the money, and give it to him. Okay, so when Warren, when Warren became owner, older, let's say, when he was, let's say 24 or 25 years old, he went through the Moody's Manual and what he was doing with the Moody's Manual. And, you know, for nostalgia, I bought these on ebay. And I want you to see the Moody's Manual. Okay, so, so this is. Buffett was 23 years old.
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Anish
This was his nighttime casual reading.
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Mohnish Pabrai
This was his. So what he did now with the Moody's Manual, there were a number of these that came out. So, like in the year 1953, this is just railroads, airlines, shipping, traction, brass and truckland.
- [16:13]
Anish
I don't even know what this is. Is this the earnings reports of.
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Mohnish Pabrai
So this is the value line of that day.
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Anish
Okay.
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Mohnish Pabrai
Okay. So if I open the Moody's Manual to any random page, okay, what it's doing is it's got like two or three companies per page. You can see how fine the print is.
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Anish
Yeah.
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Mohnish Pabrai
Okay. All right.
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Anish
You need like a magnifying glass, and.
- [16:35]
Mohnish Pabrai
It'S basically giving you a summary of every company. Right? Now, Buffett went through. Now this is just one of them in 1953. For 1953, they were probably about seven or eight of these books that came out in 53, similar number in 54, 55, so on. So you're talking about a big stack of these, right? He went through these books two or three times. He went through. What he did is he read each one page by page, right? And he was looking what he was looking for. He was looking for anomalies. So he used to host these MBA students and actually he brought for them printouts from the Moody's Manual to the ones that he made an investment in. So he would find something like Western Insurance, for example, where the stock price was 15 and the earnings last year were 25. Okay. The stock is $15 a share, earnings are $25 a share. Book value is $80 a share.
- [17:42]
Anish
Right.
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Mohnish Pabrai
Okay. That's what we call an anomaly. Right. Hitting you by a head. Head with a two by four. Makes no sense. Right. He would make a list of all these companies that made no sense in the positive direction. Okay. And then he'd study them and then he would make investments. Right? Now, in order for Warren to find Western Insurance, he would. He might have had to spend 14 hours a day. Okay, non stop reading these for three months before he finds one or two of them. But he only needs very few of them. And Warren's mind, you know, he's a prodigy. So his mind was programmed to have this intense. The work never bothered him, just like no other teenagers were going and collecting all those tickets on the floor and then going through each one with the optimism that I am going to find something that is basically a free lunch. Right? And so he went through the Moody's Manual and basically started finding these anomalies and then started making investments in them and did well, et cetera. Now we have a shortcut Because I know that your listeners are not going to do what Buffett did. Okay? I cannot do what Buffett did. I do not have the wherewithal and the ferocious intensity that Warren does. Almost no one does. I think that he's just extreme anomaly on that front. So, for example, there's a website called Value Investors Club, okay? Now if you go to Value Investors Club, it's free, you don't have to pay anything, whatever. If you give them your email, you can see all ideas that are 60 days or older, okay? And if you don't give them your email, you can see all ideas that are 120 days and old. It actually doesn't matter because there's ideas on Values Investors clubs that are 10 years old, 15 years old. It's very difficult to become a member of Value Investors Club posting ideas. So it's like a curated website, right? Okay. The members have to submit two ideas a year which get a decent rating in order to keep their membership. So you have. What I have found is the Value Investors Club has a lot of brain power. It has brain power coming out of the ears, okay? It's all free. So all someone has to do is sit down and read the write ups on Value Investors Club. So there may be, I don't know, 6 or 700, 800 write ups, maybe 500 write ups in a year each write up maybe around 10, 15 pages max. Then there's comments and whatever. But what I'm saying is that it's much easier than the Moody's manual, right? Because someone is actually digesting the information for you and you could do one.
- [20:44]
Anish
Of those a day.
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Mohnish Pabrai
You could easily do one. Well, one to one of those a day is pathetic.
- [20:47]
Anish
I'm saying even. But even you said if there's 300 total, but I'm just saying less than.
- [20:51]
Mohnish Pabrai
A year, it would be easy for someone, without getting putting too much work into it to read four or five ideas a day, right? I mean, they could have a full time job and easily do that. That's not a difficult thing to do. And you don't need to read the whole idea. What I would is you read the first few paragraphs and see if this is something that's interesting you or not, or something that's grabbing you or not, right? And what I do is I look at every idea that's posted, right? And I don't care to really look at them right when they're posted because they actually, those ideas will work even five years from now. Like recently I started investing in a In a company where the original write up was in 2021. Okay. It's 2025. Still valid. Okay. Now, what you still have to do is you should use it only as an input to ideas. Just like the Moody's Manual is not telling you what to buy and sell. Once you see the idea, you do all your own work, do your research, do everything. Make sure it's something you understand well, make sure it's within your circle of competence whether you buy into the idea or not, et cetera. And Buffett is still doing this. So his Japanese bets. So there's another book called the Japan Company Handbook.
- [22:14]
Anish
Okay.
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Mohnish Pabrai
And I'm gonna bring the Japan Company Handbook.
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Anish
Okay?
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Mohnish Pabrai
Okay.
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Anish
All right, here we have it. And I'm excited about this because you hear a lot about Buffett's, you know, See's, Candy, Coke, Geico, like those kind of well known Buffett's best bets. But as I understand it, Buffett made some incredible investments in Japan.
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Mohnish Pabrai
So let me explain how. No brainer. The total no brainer nature of that bet.
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Anish
Right?
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Mohnish Pabrai
Okay. So these five Japanese trading companies had a 8% dividend yield. Okay? So they were paying a 8% dividend. It was very cheap. Japan has. The index has not gone anywhere for like 30 years. And Warren actually got a insane return on these. So what he did is he borrowed the entire amount in yen at half a percent a year.
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Anish
And it was not a small amount. It was like 5 billion.
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Mohnish Pabrai
Yeah, yeah, he put 5 billion, but he borrowed the 5 billion at half a percent, the whole thing in yen in Japan. Right? So now he's bought a Japanese company paying dividends in yen, which he's bought in yen. Right. The dividend coverage is 16 times his interest payment. So he put no equity. Right? And he's instantly making 7.5% on 5 billion, which is like, you know, what about 350, 400 million out of nothing, right? It's just coming to him now. What happens is, because these companies are so cheap, in about three or four years, they all doubled in price. So now the 5 billion has become 10 billion. Okay? The equity that went in is nothing. So it's infinite return. They all raised the dividend. The dividend based on the original purchase price is about 15%. Okay? So basically, and then after that, what he did is he increased the bet so he was under 5% of all of them. He's now approaching 10% on all of them. And anyone could have looked at the Japan Company Handbook. Basically, I think it's a matter of how Hungry, are you? It's the same as any entrepreneur, right? I mean, basically anyone who starts a business or whatever, they got to go all in intense passion, 18 hours a day, all in very strong belief. It's the same thing here. If you truly are focused on it, you can do very well. I mean, the universe is going to conspire to help you with whatever your passion is and it's just a matter of whether you want it.
- [24:53]
Anish
By the way, does he use Excel?
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Mohnish Pabrai
Well, no, he does not use Excel for sure. Okay? He uses his computer now. He uses Google and all that, but he uses his computer mainly to play bridge. I mean, Warren wouldn't be caught dead using Excel. Okay? Because the thing is that he's looking for things that hit you in the head with a two by four, right? So when he's going through a Japan company handbook or a Moody's manual, there is no Excel needed. What will Excel help you with? When the earnings are $25 a share and the stock is $15, you don't need Excel, right? Okay. When the dividend deal is 8% and you're borrowing at half percent, you don't need Excel, right? Okay. In fact, if you need Excel, it's an automatic pass because it means that there's something complicated there which is not fitting in. Did I need Excel for Frontline? No, I didn't need Excel for frontline. I mean, I look up the liquidation price of the ships, I look up where the ships are at, I look at all. I mean, the thing is, all these things are very basic numbers. You don't need Excel for it.
- [25:58]
Anish
Right.
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Mohnish Pabrai
You know, recently I was talking to a friend of mine, looking, he's looking at some international stock exchange, okay? This international stock exchange trades at a trailing PE of like 30, okay? It's growing at 15, 20% a year. Very rapid growth, okay? 60% of revenue is profit, okay? And as they grow, that 60% might become 70% because they got operating leverage. So if you just forward two or three years, the PE becomes less than 10. Okay? There is no need for Excel, right? You can just do it all in your head, okay? It's got $10 of earnings today. It's going to have $12 a year from now, 14, $15 two years from now, maybe 17 or $18 three years from now. Stocks at 300 now. When you're at 18, you're already at a 15 multiple, right? You already cut it in half, but it's growing. By that time it may be trading, it should be trading at even more than 30 times earnings. So the stock may be at like, you know, six or 700 by then. Right. It's just the math of all of that. So what I'm saying is that if you can't do the math in your head, it's an automatic pass because that means there's something complicated. So another important thing is you should be able to explain your thesis of a stock in about four or five sentences to a ten year old. Okay. And if you can't do that, it's a pass. You can't sit down with a 10 year old with an Excel spreadsheet. Okay? They're not going to like you and they're not going to be interested.
- [27:39]
Anish
Right.
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Mohnish Pabrai
Einstein used to say there's like four levels of intelligence. Smart, intelligent, genius, simple. Okay? The highest level of intellect is simplicity.
- [27:53]
Anish
Right.
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Mohnish Pabrai
And the other thing about investing is that you have to have conviction. It's very difficult to have conviction if you keep needing to go back and look at your Excel model.
- [28:03]
Anish
Right.
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Mohnish Pabrai
You need it in your head. So Buffett never needs to go anywhere. It's in his head. He knows what the dividend yield is, he knows what he paid, he knows what the yen is, he knows all of that. It's pre programmed.
- [28:16]
Anish
Right. So we have don't use Excel, don't overcomplicate it is really what that means. And the second is leverage. So don't over leverage. And I think the story here that I like is there should be a third bust on this, on this table next to us. Somebody's missing. That was an original partner with them.
- [28:36]
Mohnish Pabrai
Yeah.
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Anish
Can you tell that story? I think his name's Rick.
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Mohnish Pabrai
So actually Warren, Charlie and Rick Gurin used to do deals together and they were all independent, doing their thing, but they used to share ideas and sometimes they'd go in together. Rick found blue chip stamps for them. And I think he also might have been the guy sees Candy contacted and so on. After the early 70s, we never heard about Rick. He kind of fell off the radar. So when I met Warren for lunch, I asked him just a very innocent question. I said, warren, what happened to Rick? You know, used to be three of you. And then we never heard from him after that. And Warren said that Charlie and I knew that we would get very rich and we were not in a hurry. And he said Rick was in a hurry. And so Rick was always using some leverage. And then when the 73, 74 downturn came, that was a very intense, that was a crash in slow motion basically over a two year period. The stocks went down like more than 40, 50%. It was a big drawdown. And Rick got margin calls. And Warren said that when he got the margin calls, I bought his Berkshire Hathaway for $40 a share. The stock that's now 700,000. Right. So Rick was forced to sell it at a time when it was probably the worst time to sell. And so then Warren actually went one step further because he's always trying to add value of these lunches and all that. So he says, he says to me and Guy, he said, if you're even a slightly above average investor and you spend less than you earn and you use no leverage, you cannot help but get rich in a lifetime.
- [30:26]
Anish
Tell me about the difference between risk and uncertainty.
- [30:29]
Mohnish Pabrai
Yeah, well, that's an important concept to understand because Wall street gets confused between the two. And in fact, when Wall street gets confused between the two is where the greatest opportunities rise. Okay, so we talked about Frontline. Frontline was an example of a situation where uncertainty was extremely high and risk was very low. Right. What Wall street is looking for is certainty. Okay. So if we look at a company like adp, their process, payroll, Right. I don't know, they've had some like 50 years of non stop growth because you know, your payroll, you're running payrolls is going to keep going up, your cash flow is going to go up. It's all in a straight line. That's beautiful. And Wall street will reward you extremely well for that.
- [31:23]
Anish
Right. And it's priced accurately, it'll be priced.
- [31:27]
Mohnish Pabrai
For euphoria, it'll be overpriced because they love that. That's what they're looking for. On the other hand, that's their type. Yeah. I mean, that's music to the ears. On the other hand, if a company exhibits high uncertainty, it will be taken out back in short. Right. And those are where the opportunity. So one of the cues to look for is, is this a business with low risk and high uncertainty, combination of the two. And, and when you get to the combination of the two, low risk plus high uncertainty equals high rewards.
- [32:06]
Anish
I was looking at your portfolio and you have this company invested in Turkey that's like a Coke bottling company. Would you say that's a good example of kind of the risk and uncertainty mismatch?
- [32:17]
Mohnish Pabrai
Yeah, we actually made money on it, but we exited.
- [32:21]
Anish
Okay.
- [32:22]
Mohnish Pabrai
And the reason I exited is that. So the Coke bottler basically had a parent company which was the dominant beer bottler in Turkey and several other countries. Their largest operations were in Russia where they had their number one market share, 50:50 joint venture with Ambev and Russia has effectively nationalized that business.
- [32:47]
Anish
I see.
- [32:47]
Mohnish Pabrai
And I think they did it because they were somewhat upset with Erdogan about something. So they went and did that. What, his support for Ukraine or something. And when that happened, it became. Went in the too hard pile for us.
- [33:01]
Anish
Explain the too hard pile. That's something I stole from you last time. I was.
- [33:05]
Mohnish Pabrai
It's a. It's a warrant thing. We'll get to that in a second. But basically it was something I couldn't handicap. Sure. So we were sitting at a gain. And we have this event take place. I get to get my bet back with some added return, and we close it. I said, where do I sign? Right, right. I can go find something else to play with. But the two heart pile is actually a physical box on Warren's desk. Okay. And so actually, if you Google it, if you just Google Warren Buffett too hard, that image will probably pop up. Okay. So he has a box on his desk which he calls too hard. And he says that 99% or more of investment ideas that you encounter should go into that box because we're not going to be able to figure it out. So one of the things to understand is that if there's 50,000 stocks in the world, we are not really going to understand more than a few hundred of them at the most, after quite a while of studying them. So most companies that we would encounter should go into that box. Okay. So one of the important things in investing is humility. Humility to understand. I mean, Warren has no issues with the humility to know that he doesn't know most things. Right. That most things are not going to be able to be figured out or handicapped or any of that. And we don't need to, if you can understand a very small sliver of things. And you know, when those things get overpriced and underpriced, that's all you need.
- [34:43]
Anish
Right.
- [34:43]
Mohnish Pabrai
You don't need anything else.
- [34:44]
Anish
There's a guy who owns a bunch of real estate, but, like in a very small area.
- [34:48]
Mohnish Pabrai
Yeah, that's John Arriega.
- [34:49]
Anish
Yeah. What's his story? Because it sounds like it's a good example of this, a very thin kind of circle of competence. But he knew the pricing and was able to.
- [34:57]
Mohnish Pabrai
So John Arriega was a billionaire. He passed away maybe like two, three years ago, pretty recent. And his daughters married to Mark Andreessa.
- [35:06]
Anish
That's right. Yeah.
- [35:06]
Mohnish Pabrai
You know, so it's billionaire to the power of Billionaire. Okay. So anyway, John Ariega basically had a very narrow circle of competence. He didn't understand most things, but he only invested in real estate within two miles of the Stanford campus. Okay. That's all usually just right around the campus. And if you walked with him around the campus, every single building, he could tell you the full history of the building, when it was built, what the current value was, what the rents were, who the owners were and what the history was.
- [35:40]
Anish
Right.
- [35:41]
Mohnish Pabrai
He knew that about every building. And, you know, so he was a, he was an inch wide and a mile deep. And that is a really good trait for an investor, is to be very narrowly focused.
- [35:52]
Anish
Right.
- [35:53]
Mohnish Pabrai
Right. Now what John Ariega did is he ran, generally speaking, a very underlevered portfolio. His portfolio always not much debt. When the downturns came, he aggressively bought because all these distressed properties around, I mean, this is the most prime real estate you can think of other than Park Avenue or something. Okay. And so he would just buy these things up and everyone was getting foreclosed and bankrupt and go to the banks and buy it from them and all of that and then, you know, get them all leased and fair value and all of that again, take the leverage down and again, next down cycle, again, the same thing. And he, he stuck to that. So the thing is, he didn't wander into, oh, let me go to Mountain View and do it.
- [36:42]
Anish
Right?
- [36:42]
Mohnish Pabrai
Okay, let me go to Irwin, California and do it. He didn't do all that. I mean, he's basically, oh, let me invest in tech or something. He didn't do any of that. He stuck to real estate. That's all he did. And he did it extremely well. And he died a billionaire. We don't need to know many things about many things. We need to know a lot about a little. That's the important thing. Know a lot about a little, right? So like, for example, if I'm looking at Frontline, I should learn everything I can about shipping. I should learn everything I can about oil shipping, about tankers, about the history of who makes them, and every nuance about him. Right. The deeper I go, the better it's going to be for me.
- [37:26]
Anish
Right?
- [37:26]
Mohnish Pabrai
Okay. I shouldn't be spending time next week on airplanes. Okay? Just leave it alone like one by one by one, right?
- [37:33]
Anish
Why do you think most people don't do that? Because when I hear that, I think, ah, there's a blueprint to just say I'm going to go deep and in this two mile radius I need to become super knowledgeable and I don't need to get distracted by everything else and I'll hold forever.
- [37:47]
Mohnish Pabrai
Right?
- [37:47]
Anish
Like that's a blueprint.
- [37:49]
Mohnish Pabrai
If you think about it, I think it was Nick Sleep who has this, this quote. He said, the best investors are entrepreneurs who never sold. So if you think about entrepreneurs, that's what they are. They are John Ariega. Right. So if I look at Sam Walton. Sam Walton is John Ariega. All he did was retail. All he did was visit competitive stores. He never bothered anything else.
- [38:14]
Anish
So Sam Walton, founder of Walmart.
- [38:16]
Mohnish Pabrai
Yeah.
- [38:18]
Anish
What do you mean? Tell me more about him.
- [38:19]
Mohnish Pabrai
We can. Well, so Sam Walton, I mean, he said that there is no human who has ever lived or ever will live who has spent more time in competitor stores than me. Okay? Whenever he'd go on vacation with his family and they were passing a retail store, he said, I'd be back in 20 minutes.
- [38:39]
Anish
And he'd go, and what is he doing in there? What did he do?
- [38:42]
Mohnish Pabrai
So I'll give you an example. One time he went into the store and his manager says to him, that was such a badly run operation. And Sam says to him, yes, but did you see the candle display? Did you see how fantastic that candle display was? So his perspective was, I can learn from losers, okay? I wanna learn the spark that's there in something. That's a total loser. Right? So he was going in. Now, one time in Brazil, in this retail store, they find this older guy flat on the ground. They call the paramedics. It turns out it's Sam Walton. And what he was doing is he was measuring the space between the aisles. And he didn't have a tape measure with his body, so he laid down. And the space between the aisles is a very important data point for a retailer because you're going to either waste square footage or be too narrow. And the people want to enjoy the experience, so you have to get that right. Right? And so he was in Brazil saying, how are they doing it? Am I 3 inches too wide in Walmart? Am I 3 inches too narrow? What am I? What's going on here? Right? So that was. This was a game of inches. That's who Sam Walton was. And in fact, Walmart has not innovated at all, at least for the first 20, 25 years that Walmart ran. Everything came from somebody else who was already a competitor. They took a lot from Sears, they took a lot from Kmart, and then they killed them. And they kept learning from one competitor after another. Sam Walton actually used to say, I'm not the smartest tool in the toolbox. I'm not a smart guy, but I, I'm a learning machine. I'm going to keep at this and what others have become. So, you know, it's very funny. He goes and visits Soul Price, the founder of Price Club, which eventually leads to Costco. Right. And he looks at Price Club and he says, this is fantastic. And he creates, creates Sam's Club. Right. And Costco was also taken from Price Club. So both Sam's Club and Costco, they would not have existed.
- [40:58]
Anish
So Sam's Club is Sam Walton.
- [41:00]
Mohnish Pabrai
I didn't even know that it's part of Walmart.
- [41:02]
Anish
Oh, I didn't even know that.
- [41:02]
Mohnish Pabrai
Oh, yeah, it's part of Walmart. And it was completely cloned from Price Price Club, which was a predecessor to Costco. Right. So Sol Price was an incredible entrepreneur. Someone goes to him and says, you know, no one has had more impact on retailing than Sol Price because Sol Price influenced Sam Walton in a major way. And he influenced Jim Sinegal, the founder of Costco in a major way. I mean, these are the pillars. And then these two companies influenced Amazon.
- [41:31]
Anish
Right?
- [41:32]
Mohnish Pabrai
Right. So it's all coming from Sol Price. So someone told Sol Price, you know, you are like the father of retailing in the US and actually globally. What do you think of that? He said, I wish I'd worn a condom too.
- [41:52]
Anish
Good. That's amaz. So Sam Walton is.
- [41:56]
Mohnish Pabrai
Yeah, but I just want to say that, for example, some of the things that Costco does. Costco pays 50% more than Walmart pays its employees. So the entry level people are making 50% more. Okay. Hasn't hurt their profitability. In fact, Sol Price's view was similar to Henry Ford's view that I want the people who work in my stores to be able to shop in my stores. Just like Henry Ford said, I want my workers to be able to buy my cars. You know, at that time there were. Cars were automobiles were for the rich.
- [42:28]
Anish
Right.
- [42:28]
Mohnish Pabrai
And Henry Ford said, no, I want them for everyone. Right. So he wanted to drop the Price. And, and so I think at, at Costco, the lowest wage is like 20 bucks an hour. You know, like when you're starting out, whatever. And then they have tuition reimbursement and all kinds of other things, and they get a lot of productivity out of their people.
- [42:47]
Anish
Yeah. Because of that, you've got these books here, and we're sitting in your. We're at your house, we're in your library. You've got how many books you think you have in here? This is a thousand books.
- [42:57]
Mohnish Pabrai
A few thousand.
- [42:58]
Anish
A few thousand books. I mean, just to set the scene so that your office, your computers over there were surrounded by a cave of books on every topic. So I see some business books over here. I see investing books. You just brought a retail. A book about Sol Price, the founder of Price Club, from over there. There's science, I think, on that wall. This. What does this door go to? What is this?
- [43:20]
Mohnish Pabrai
That's my bedroom.
- [43:21]
Anish
That's a bedroom. Okay, so you live in the library, essentially, and you nap every day, I think.
- [43:26]
Mohnish Pabrai
Absolutely.
- [43:27]
Anish
Yeah. So we're both nappers.
- [43:29]
Mohnish Pabrai
I've been so used to napping that if I don't nap, my productivity goes down. And so I actually don't like to work if I'm not productive. And what I find is that even if I, you know, lay down for half an hour, 45 minutes, it's. I'm re. Energized.
- [43:47]
Anish
Right.
- [43:47]
Mohnish Pabrai
And I think for the work I do, I need to be all in.
- [43:50]
Anish
Yeah.
- [43:50]
Mohnish Pabrai
So I can't. I actually can't do this work if I'm tired, you know? Yeah.
- [43:54]
Anish
There's a. This athlete, Conor McGregor, and they asked him about his training schedule, and he said, you know, one of the big mistakes I made is that I was always trying to train all the time. I wanted to come to the gym three times, four times a day. I thought that's how you win. And the. His coach was basically, you're like a light that's always just dimly flickering because you never turn off, and therefore, you can never turn on and be as bright and as effective as you could be. And this flickering dim light, it's not doing you any justice. And so I've used that in my own model of like, where's my light right now? And if I need to just shut it down briefly, 30 minutes, an hour, whatever it is, to come back full brightness. That's.
- [44:30]
Mohnish Pabrai
That's the way. Well, Jeff Bezos, you know, he said all decisions, important decisions in the morning, and he's very particular. He needs a solid eight hours at night.
- [44:40]
Anish
Right.
- [44:41]
Mohnish Pabrai
And he leaves work at a normal time. Right. But he says that they don't do these important decisions in the afternoon.
- [44:49]
Anish
Right.
- [44:50]
Mohnish Pabrai
It's the first thing in the morning because he wants the highest energy levels. And in fact, what I also try, I find my best work is in the morning.
- [44:57]
Anish
I'm curious about your style, because I came over to your house once, and you were. You're very calm. You weren't like. It didn't seem like you were on the clock. You're moving from one meeting to the next. Didn't. There was not a big bustling team of analysts and junior people. And it didn't seem, you seem like you keep a pretty clear calendar. Is that intentional? Do you think that's. Is that just what you like or is that effective?
- [45:17]
Mohnish Pabrai
Well, in the business I'm in, if I can find a couple of things to buy in a year, in the case of Buffett, one thing to buy every five years. Right. I'm doing well. And so this is not a situation where having some packed schedule or whatever. I think the thing is that this is a case where you're taking in a lot of information, but there's not much action. Right. And so you're basically trying to improve your metal models. You're trying to understand more about the businesses that you already own. And I'm going through like, you know, value Investors Club and sum zero and that sort of thing and just looking at what else is there.
- [45:54]
Anish
Right.
- [45:55]
Mohnish Pabrai
And. And sometimes I find a amazing idea, whatever. And then now then there's a deep dive. Right, right. And then that might take a while.
- [46:03]
Anish
I was reading something interesting. So in our first episode, we talked about your, how you got started. You were actually an entrepreneur first. And then basically you said this great thing. You go, I realized that as an entrepreneur, maybe 3 to 5% of my brain power was on strategic decisions, really clear thinking, coming up with the right answer. And then 95% of my time was blocking and tackling. And you're like, as an investor, it's great because that 3% becomes 95%. Yeah, it's just about clear thinking and making the right strategic move. And not, I don't have to busy myself. But one thing I thought was cool was I read that you took some personality test or you got some analysis done on you that basically helped you. They sort of told you your temperament is for single player games. What is this? I didn't understand what, what you did.
- [46:49]
Mohnish Pabrai
Yeah. So this was kind of accidental that happened. And I think it turned out to be one of those great things that happened in my life is that in, in 1999, actually, I was at a crossroads where it was very clear to me that the business that I had built, my IT business, I had lost interest in it and I had become a lot more interested in investing. And it was a difficult time because I had like 170 people in the company who thought I'm motivated and I can't fake it, you know, and so very Accidentally, I was with these two industrial psychologists, and they basically did 360 on me. So they had me take a bunch of tests. They talked to my direct reports, they talked to my friends, family, spouse, so on, and they built a kind of 360 view of who I was.
- [47:43]
Anish
And.
- [47:44]
Mohnish Pabrai
And then they gave me what I call my owner's manual. And I think everyone should have their owner's manual.
- [47:50]
Anish
Like it comes with appliance you bought.
- [47:52]
Mohnish Pabrai
Yeah, I mean, we show up, we don't have a owner's manual, and each one of us is programmed differently. So what they said is, look the way a human is, his traits, likes, dislikes, and what passions they are. That is hard coded at the age of five. And that is not gonna change from the age of 5 to the age of 95. Okay? You might try to. So you cannot change traits. You can try to change behaviors, but you cannot change traits. Traits are between your genetics in the first five years of life, hard coded. Now, the problem most humans have, which I had, is we don't know what those traits are. What most of us try to do is we do what they call mirroring. We look at what the world considers acceptable, and we adapt our behaviors so that we kind of fit in. But that can be a big disservice. Okay, so basically what they were able to tell me is they said, look, you are a person. They said, when we look at the company you're running and we look at who you are, we don't even know how you can go to work, how you're functioning. Yeah, we don't know. And actually, I was in pain. I was in a lot of pain. And the thing was that I loved that business when it was just me. And I loved the business as was growing until we got to the first 10, 15 people. And then as I started growing beyond that, my life became. And my job description became hr. I'm just herding cats. I'm not a cat herder. Okay? That's not who I am. Okay. So what they said is that that business that you have, you need to get rid of it in some way as soon as you can. And I was just thinking at that time, this was in March or April of 1999, I was just thinking of starting Pabrai funds, right? They looked at it and they said, this is perfect for you. This is going to work extremely well for you. In fact, one of them invested. He's one of the first investors who came in.
- [50:00]
Anish
He was so. And keep it a skin in the game. He was Like I believe.
- [50:02]
Mohnish Pabrai
And I told him, listen, you know, I'm paying you guys 2,000 to do this. You're giving me 100,000. I really don't want to lose your money. They said, I don't have any doubts, Mohnish, you're going to do very well. So I don't see any risk here. Right? And he did extremely well. And so they were actually right because now it's been 26 years since I've been running it and haven't gotten bored.
- [50:26]
Anish
So what did your owner's manual say? So I said, don't like that.
- [50:30]
Mohnish Pabrai
My owner's manual basically said that. Well, first of all, they said that I had very high horsepower, right? And they said that I was one of the smartest guys they had come across, et cetera, which was great. But they said that you are a guy who likes to play single player games. You are not the kind of guy who would be happy being in a soccer team, for example, where you're one of the forwards or whatever and your performance depends on the team. They say you seek out games which are single player games where you think you have some edge. And when you think you have some edge and it's that sort of game, you will kill it. And actually what I've noticed is like. So for example, I got banned in Vegas playing blackjack, right?
- [51:16]
Anish
Okay, I gotta know this story.
- [51:18]
Mohnish Pabrai
I figured out a system which basically beat them, okay?
- [51:24]
Anish
Counting cards. What were you doing?
- [51:26]
Mohnish Pabrai
And actually did it without counting cards, right? And in fact, it took the casino almost a year of watching me. So I used to go every like six weeks or something, and they played those tapes over and over because the markers that they look for were not there. But we'll talk about that in a second.
- [51:46]
Anish
Okay?
- [51:46]
Mohnish Pabrai
So what I'm saying is that. So what are the games? I like? I. I like blackjack, I like bridge, I like investing. And even Dakshina, for example, Dakshana foundation, that's also a game, right? These are.
- [52:01]
Anish
That's your philanthropy.
- [52:02]
Mohnish Pabrai
Yeah, but they're all mathematical games. Even Dakshina is a mathematical game. Because what I'm looking at is input, output ratios. People think, people think I'm doing all this good in the world and all that. What they don't understand is I'm a game player, okay? And what I'm trying to do with Dakshina is how much money is going in and what's coming out. Right? And that's the only thing I'm focused on is what's going in and what, what Ended up happening with a entity like Dakshina is, you know, Warren Buffett wrote me a letter saying that this is the best, right? I mean, like, he took the time to write the letter like, this is the best. Okay? Never done that for any philanthropy that he's looked at. And the reason is because there's a game player who's not focused on, you know, name and lights or a bunch of fancy pictures in the annual report. We have no pictures in the annual report, just like the Berkshire report. Right. But it's about an honest input to output, singular. So what I did is every year that we ran Dakshana.
- [52:59]
Anish
Well, explain what it is.
- [53:00]
Mohnish Pabrai
I don't even know if you take a step back and say, okay, I want to give money away to make the world a better place. So the natural second step you would get to with that is I want very high returns on the money I'm putting out. So social return on invested capital should be extremely high. Now, most nonprofits don't even think this way. They all heart. There's a homeless guy. Let me help the guy. They don't really do an analysis of, okay, what is going in and what is coming out. So I ran into this model. This guy was running in, I think, in 2006. I ran into it where he was taking 30 kids who were very, very poor in India, in Bihar. And most of these kids were coming from illiterate parents, et cetera, but they have very high IQs. And he prepped them for about 10 months, and he had them take the IIT entrance exam. The IITs are the best technical institutes in the world. And now the thing about the IITs is that there's about 1.3 million kids applying for 16,000 seats. It's about a 1.3% admit rate. Princeton is about a 5% admit rate. Harvard is about 5 or 6%. This is 1.3%. And if you get into the IITs, it's basically free to 10. The government subsidizes it. So if you're a very poor person and you get into the IITs, well, now Microsoft will hire you, Google will hire you. Anyone will hire you. Right? But getting in is expensive because the coaching is expensive. So what this guy had done is he had made the coaching free for these very poor kids. And now what was happening is you had a family that was making $60 a month, let's say, and the kid graduates and Google hires him for 120,000 a year. Okay? I mean, you know, the transformation in five years, the guy is making 300,000 a year. Right. And so they're just at that. And he was spending $800 per kid.
- [55:16]
Anish
On the training, the press.
- [55:18]
Mohnish Pabrai
So you spend $800, and you take a family from $60 a month to $10,000 a month.
- [55:25]
Anish
Right.
- [55:26]
Mohnish Pabrai
Okay. I mean, what's the ROI on that? And you're going to do that for this whole lifetime, and you're going to reset the extended family and all of that. It's a. The ROI is off the charts. Right, Right. So when I saw that, I said, wow, this is the Holy grail. So I went to the guy and I said, I'd like to fund you. Right. He said, I don't want to scale. I do 30 kids. I don't want even 31 kids. I don't want to take outside money. None of that. So I'm the shameless cloner. So I told him, you mind if I clone your model? He said, no, this is a very good thing. I think you should clone it. It'd be great. I'll help you in any way I can. So I took his model, and that's what Dakshana is. So we. We are spending. Dakshana spends about three or four million dollars a year. Just imagine what the output of that is.
- [56:11]
Anish
Right.
- [56:12]
Mohnish Pabrai
You know, when. When you look at it from each family and then you. And we're doing 3, 4 million. We've been doing it for 17 years. So basically, what we get out of $3 million a year, a lot of other nonprofits would not get out of 100 million a year. So we actually have a footprint that is much larger than what it should be in terms of impact. And to take it back, it's a math game. So basically, we had two or three things that were important, and that's how I looked at this. The first was the Yield. So the IITs accept 1.3% of the kids who apply. They accept 70% of our kids.
- [57:01]
Anish
That's amazing.
- [57:02]
Mohnish Pabrai
So now what I'm doing is I have a game which puts two models together. So one day before I die, I want to have $10,000 left. Okay. So basically, inheritances just don't do much. Right? I mean, my kids already have. They're doing well. Yeah.
- [57:21]
Anish
What is your philosophy on that?
- [57:23]
Mohnish Pabrai
Well, in general, large inheritances are going to do more harm than good. And, you know, basically, you don't want a person to be on an IV drip for their whole life. I mean, that's just the worst thing you can do somewhere. And so Buffett has A great quote. He says, I want to give my kids enough money for them to do anything they want, but not enough to do nothing. Okay. Okay.
- [57:50]
Sean
New York City founders. If you've listened to my first million before, you know I've got this company called Hampton and Hampton is a community for founders and CEOs. A lot of the stories and ideas that I get for this podcast, I actually got it from people who I met in Hampton. We have this big community of a thousand plus people and it's amazing. But the main part is, is this eight person core group that becomes your board of advisors for your life and for your business. And it's life changing. Now to the folks in New York City, I'm building a in real life core group in New York City. And so if you meet one of the following criteria, your business either does 3 million in revenue or you've raised 3 million in funding, or you've started and sold the company for at least $10 million, then you are eligible to apply. So go to join Hampton.com and apply. I'm going to be reviewing all of the applications myself, so put that you heard about this on mfm, so I know to give you a little extra love. Now back to the show.
- [58:44]
Mohnish Pabrai
So because I am investing for a living and we have this kind of compounding going, I'm going to end up with more than I need. I mean, basically I don't need to spend any more than I'm spending. I could not increase happiness by spending more. So there's no point to spending more. I mean, I'm very happy with the lifestyle and everything else. Right. So everything else basically needs to get recycled, but it needs to get recycled at high returns. So on one hand I have a compounding engine and a net worth that's growing. On the other hand, I have to give it away. So, God, Google told me that on June 11, 2054, I'll be leaving planet Earth.
- [59:28]
Anish
Okay, so you asked AI, what did you do? Average life expectancy.
- [59:34]
Mohnish Pabrai
If you go to God Google and just say, hey, I'm 52 years old and tell me when I'm going to die, he will tell you. Okay, and now that we have the date, so my birthday is June 12th. Just to make it poetic, I made it June 11th. So we have an exact number. So basically 2054 means I've got 29 years and change left, Right. And at any kind of compounding rate, it's a ridiculous amount of, you know, assets that get built over time. But I want to end on June 10th with $10,000. Okay, so there's one game which is to give it away, and the other game is to make it. And we need the two curves to be where the giving away becomes probably in the next few years, needs to become very much more dominant. So, like, the 3 million a year needs to go to 5, 10, 15, eventually, and so on. And so for me, you know, it's the same as playing blackjack. It's just a math game. These are both math games, right? And yeah, there are a lot of families getting helped, and my investors are happy. And so then that's fine.
- [60:43]
Anish
Okay, so what was your blackjack system? I'm skeptical.
- [60:47]
Mohnish Pabrai
So the blackjack system, it would destroy the casino. They would have to either change the game or something. But basically, I'll give you some pointers of kind of what's going on here. There's a publication called bj21bj21.com. Okay. If you go to bj21.com and you give them a hundred bucks, they're going to give you a PDF. It gives you the odds of every blackjack table in North America. Okay. So, for example, if I go to the Win Las Vegas, right? The Win Las Vegas has a bunch of different blackjack games. Single deck, double deck, six decks, whatever else. Every single one of those, it gives you the odds if you play perfect blackjack. And these odds vary depending on how competitive. So if I'm going to some riverboat in Indiana, I'm not going to get the same odds as Vegas. Vegas Strip is going to be more. More efficient because it's more comparative. So usually the house will end up with something like a 0.3, 0.4% all the way to, like 2% edge. Edge over the better. Which means every bet you're making, if you make a $100 bet, every bet you're making, you're losing your 50 cents or whatever. So there's a casino in Vegas called the El Cortez, and the El Cortez is a small casino. So in order to kind of induce people to come, they kind of improve the odds. Okay. Still in their favor. But the single deck game at the El Cortez has the thinnest house edge of any blackjack table on the planet.
- [62:33]
Anish
Okay.
- [62:34]
Mohnish Pabrai
The house edge is 0.18%. Okay. So if you look at that BJ21, all of the. They have the edges of every table. This one is the lowest, right? So this is a very thin. And I have a system which took them a long time to Figure out they play single deck blackjack. Right? But they only deal half the deck.
- [62:58]
Anish
Right?
- [62:58]
Mohnish Pabrai
And they shuffle. So the reason they deal half the deck is so they can just make it difficult for the counters because you may be counting cards, the deck becomes very favorable, but then they shuffle, right? So the high cards at the back, but they never get dealt, so the counters get screwed. Right? So I had a system where it basically relied on the fact that blackjack occasionally has streaks. It has streaks where you may win six or seven or eight hands in a row, or you may lose six, seven or eight hands in a row. And what I did in the betting was that usually when I was losing, it was always the minimum bet. And when I was winning, the bets were increasing. So with the variance of that, what happened is I was able to overcome the 0.18. 0.18. Right, right. So I don't want to give more than that.
- [63:54]
Anish
Sure, sure.
- [63:54]
Mohnish Pabrai
That gives it, you know, and what I'm going to do is when the cameras turn off, I'll explain it to you.
- [63:58]
Anish
Okay, great.
- [63:59]
Mohnish Pabrai
So when you go to the next time and you go to the All Cortez, but now what happens is. So what, what happened with them? What, what really confused them, which they had never dealt with before, is normally what the counters do is on a brand new shoe, it's a low bet, minimum bet.
- [64:15]
Anish
Yeah.
- [64:16]
Mohnish Pabrai
In my case, there was a brand new shoe. There's a high bet. So they said, we just shuffled, right? The whole deck is there. There's no odds edge he has on that deck because the entire deck is there, right? He has a high bet.
- [64:31]
Anish
Did they ever figure it out or did they figure it out?
- [64:33]
Mohnish Pabrai
It took them. So what happened is I'm playing blackjack. The general manager, who was very friendly to me, comes and sits around next to me and tells the dealer, stop dealing. Okay? So she's in the middle of a hand. She just continued dealing. He says he screams at her, stop dealing. Now, she never heard that before, okay? Like, literally middle of the day, she said, shuffle, we're done. We're not dealing anymore. Then he tells me that, Mr. Pabrai, I like you, okay? I read your book, I watched your videos, and you have a system that we cannot beat, right? So I said, I told him, I said, you know, you know, I'm not counting cards. He said, that's what threw us off. He said, we know you're not counting cards and we know you'll beat us. And so you can come to this casino anytime you want, but you Cannot sit down at a blackjack table. Then I'm thinking, why would I come here? Okay. And so that was. But, you know, whenever I like, I go someplace to talk or something, and you know, they're introducing me, I always tell them, listen, just say that I have a lifetime ban in Vegas.
- [65:47]
Anish
Yeah. I mean, street cred through the roof.
- [65:49]
Mohnish Pabrai
Because I really don't care about everything else on my cv that's really irrelevant. And that's what's relevant.
- [65:57]
Anish
It's just like if you, you get into Harvard. Wow, that's impressive.
- [66:01]
Mohnish Pabrai
Yeah.
- [66:01]
Anish
You're a Harvard dropout. That's the higher status signal. And so you're good at blackjack. Made money in blackjack. I was banned from a casino. That is the highest status. Yeah.
- [66:10]
Mohnish Pabrai
So I mean, I took them for like about 150,000 or something. And, you know, this was a very low table limit, right? The table limit was only 2,000, but at 2,000, I took them. So they said, okay, we're done. You know, I love it.
- [66:25]
Anish
You've run into all these characters. So we've talked about Warren, we've talked about Charlie, but I want to know about some of the other characters. Your stories are amazing. I could listen to your stories all day. So Michael Burry, one of my favorite movies is the Big Short. And Michael Burry is this kind of mysterious character. Did you ever meet Michael Burry?
- [66:43]
Mohnish Pabrai
Well, what you're gonna end up when we finish this conversation is you're gonna know that my middle name is Forrest Gump. Okay. That's really where we're going to end up. So, you know, I always tell people that God loves me. He loves me more than other people. And I'll explain why. Right. In 2008. Okay, so the financial crisis is not yet happened. It's like March or April of 2008. Right. So things are getting topsy turvy. Right. And I was visiting San Jose for some something. I was going to San Jose and I knew Michael Burry headed office in San Jose. And I didn't know him, but I sent my email saying, you know, Mr. Burry, I like you, admire you, etc, and would love to visit you.
- [67:29]
Anish
So he was kind of well known.
- [67:31]
Mohnish Pabrai
He was not very well known, but he was. He was like posting on Value Investors Club and things like that. He was like. He was there a little bit and I liked the way he thought, you know, and he said, oh, yeah, stop by. Okay. So I go to his office in San Jose and there's a few kind of analysts sitting outside. It's A very. Kind of a. Seems like a very depressing place, okay? Because a few is kind of a little dark, and there's a few analysts there. And then I go into the office, there's huge piles of paper everywhere. And he immediately launches into cdss, okay? And he says, look, Mohnish, I want to tell you something about something that's going to make you extremely wealthy, okay? And he then downloads to me at 1 million miles an hour. I've never heard of a CDS, okay? And he's talking about housing crash and the coming implosion and all this stuff, you know, and housing's never crashed, okay? In the U.S. none of that. And 80%, 90%. What he said went straight over my head, okay? Like, he was just. He just gave me a full core dump in half an hour. My subhuman intelligence couldn't handle it, okay? I couldn't. And, you know, so I come out of the meeting, my head is spinning, and I say, okay, well, that was interesting, okay? And then, you know, of course, he rides off into the sunset, right? And then the movie comes out, right? And then it's exactly like they show in the movie, right? That's how he is, right? So I felt like, okay, you know, God, who loves me so much, takes me to the epicenter of. The epicenter of what would have been the best place to be, right? The best teacher to have. And the idiot Mohnish blew it, okay? But that's the way it is.
- [69:24]
Anish
You know, that's. I mean, what. Where does that rank in terms of, like, you know, sort of the. The best calls or. Or, you know, foresight in terms of that you've seen in your career was.
- [69:38]
Mohnish Pabrai
Well, I mean, I think this has happened to me a lot. I mean, in the sense that, like I said, you know, we put 98, 99% are too hard pile, right? Even now, I think it was right of me to not do anything with it because I couldn't understand it, right? Even after the financial crisis, it took me a while to understand the CDSs, right? And all these tranches and how they were, like, doing all this stuff and all that. I mean, that took me a while to, like, really get my arms around it. And even after knowing all that, I would have been skeptical about making that bet. So hats off to him, right? I mean, he figured it out. A few people figured it out, but it was a very small number of people who figured it out, right?
- [70:13]
Anish
Tell me about the greatest investor from India. Who is the greatest investor from India?
- [70:19]
Mohnish Pabrai
Well, the greatest Investor for India would be Rakesh Jwala. I never met Rakesh. I mean I know his friends quite well. Guy actually met him. Guy actually went to his office and met him. Wonderful guy. Died relatively young a few years back. But Rakesh was a very interesting kind of split brain in the sense that he'd have like three or four Bloomberg screens in front of him and he had all these charts and everything going on, rapid fire trading going on. But on the other hand he had these two or three stocks that he never touched. So he had, I mean, I don't know anyone like that and he was great at both. But the ones that he never touched, I mean they just went through the roof. Like there's a company in India called Titan Industries and Titan Industries does branded jewelry. Branded jewelry basically didn't exist in India. You know, it was all mom and pop and there was a trust deficit, right? So you go to a jeweler in India and in India they have like 22 karat gold, right? And you're buying the gold. You don't know whether it's half gold, 80% gold or what the hell is going on. Right. The jeweler knows but you don't. Right. That Titan brand is owned by the Tatas who have very high integrity. So basically they were able to take a sector which had a huge trust efficient deficiency. And, and I mean they've, I think Titan is still in its infancy, right? And I think Rakesh made a huge, huge, I mean Rakesh I think compounded at north of 40% a year for several decades. It's unbelievable. And you know he started with like $10,000 borrowed, you know, didn't, didn't even have that on his own. Someone lent him the money.
- [72:04]
Anish
What made him great? Was he a brilliant mathematical mind? Was he, you know, because what was the trait that really helped him?
- [72:10]
Mohnish Pabrai
I think what, so he was a trained CPA India chartered accountant. So he obviously understood numbers well. And just before he died, so he had figured out that Indigo, which is a low cost carrier in India, they have like something like 70% market share growing really rapidly. It might become the largest airline in the world. I mean they've got thousand planes on order or something, okay. So they're growing very fast. He had done well as an investor in Indigo, but then he took the next step and he set up a clone of Indigo. I mean just think about the guts you need to set up bloody airlines, okay, from being a passive investor. And while he was dying, you know, he was like in bad shape, in hospital and all of that, and that airline's up and running and cranking and all of that and doing great. So if he had lived longer, I think he would have gone not just as an investor, but also shown that he could be an operator.
- [73:15]
Anish
You said something like, if he had lived longer, this idea of, like, Runway and how early you start.
- [73:20]
Mohnish Pabrai
Yes.
- [73:21]
Anish
Matters a ton. Even Buffett, I think you've said that if had he not been giving away so much money along the way, he'd.
- [73:28]
Mohnish Pabrai
Be the wealthiest guy.
- [73:29]
Anish
Yeah, he'd be the wealthiest guy in the world right now.
- [73:32]
Mohnish Pabrai
Yeah.
- [73:32]
Anish
And I guess when you go talk to people, are you just sort of like, you know, you should have started 30 years ago?
- [73:39]
Mohnish Pabrai
Is that the number one method, what we started our conversation with? Right. I think the important thing is that if there's a young person listening. The funny thing is that if you look at the rules for a IRA or a Roth ira, there's no minimum age. You could be six months old and have an ira. The only rule is that you can only put in wages that you earn. And I was just reading in the Wall Street Journal, there's some entrepreneur who's hired his kids who are like 4 years old and 6 years old, to do different things in the business because he's putting 6,000, 7,000 into their Roth IRAs, which is equal to their W2 earnings. Right. Probably stretching the limits of what he can get away with with the irs. That's beautiful. I mean, the thing is that. But even if you're not doing that, if you start at 22, I mean, that's the important thing is that when you start earning at 22, a small amount saved at 22 is more important than a larger amount saved at 32. Right. Because you get started earlier. So it's really important to have the whole. Spend less than you earn and put it into Berkshire, set it and forget it.
- [75:03]
Anish
Right.
- [75:03]
Mohnish Pabrai
Yeah. Because then if you start at 22 and you're 22 today, you're going to live over 100.
- [75:10]
Anish
Right.
- [75:10]
Mohnish Pabrai
You know, you're going to go to 100, 110 by the time, you know, got all the advances taking place. That's a 90 year Runway. I mean, a 90 year Runway is something. I mean, if you're talking about even a 10% return, we are only going to look at doubles. Right. So every seven years, that's two to the power of 13. Two to the power of 10 is a thousand. That's 2002. That's 8000X. Okay. The first 10,000 you invested is at 8 million.
- [75:41]
Anish
Right.
- [75:42]
Mohnish Pabrai
The second 10,000 is another 8 million. You know, so the thing is, it's a mind blowing amount of money if you start early. So the length of the Runway is really important.
- [75:53]
Anish
Do you pay attention to the macro? Because my head starts to spin interest rates and then there's wars and there's all these different factors that you could pay attention to. And there are some people who really pay attention to that. Do you pay attention to the macro?
- [76:07]
Mohnish Pabrai
No, because I can't handicap and I wouldn't know what to do with the information. So I always try to keep the bet simple. I need to be able to explain to a 10 year old in five sentences, I'm not going to be able to figure out the macro. That's why I couldn't make that CDS bet.
- [76:21]
Anish
Right.
- [76:21]
Mohnish Pabrai
You know, it was like so much stuff going on about housing going to crash. This is going to happen. That's going to happen. I mean, I just couldn't get my arms around it.
- [76:28]
Anish
You know, in my world, everybody's talking about AI. Do you think about AI at all?
- [76:32]
Mohnish Pabrai
The problem is I bring nothing to that party and I'm probably going to get my head handed to me if I try to participate. It's not in the no brainer category. It's not something where I have an edge. Of course I do believe that it's transformational, but you know, I knew the Internet was transformational. We've known electricity is transformational. We've known the App Store is transformational. But in investing you can do extremely well without understanding all these things. You go back to John Ariega, you know, don't understand any of these things or even Warren Buffett. And, and you know, Apple, Apple is in the rear view. They sold most of it. Yeah, they might have sold all of it by now, but. But basically that was a one and done. But basically, yeah, I think that we don't need to understand flavor of the day, we don't need to understand Nvidia, we don't need to understand AI. If you understand it, more power to you. That's awesome. And if you know how to leverage that understanding into dollars, you can make that's even better. But that's not me. So we all have to play to our strengths. Yeah.
- [77:42]
Anish
Okay. Well, Manish, this has been incredible. Part two, I'm happy with it. I asked you at the beginning, I said, is this like one of those Hollywood sequels where the first one was incredible and the second one they just did it? But no, I think we did a good job. I think the sequel was, if not better, at least as good.
- [77:58]
Mohnish Pabrai
No, it was fun. I enjoyed it. It was awesome.
- [78:00]
Anish
Awesome. Thanks for doing it.
- [78:02]
Mohnish Pabrai
Okay. Thank you. I feel like I could rule the world I know I could be what I want to I put my love in it like no days off on the road let's travel Never looking back.
- [78:19]
Sean
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