So in some ways, kind of fate took me to a fork in the road when I was 20. I blew it and I took the wrong fork, if you will. Then it again introduced a fork in the road when I was 30. This time, I was a little bit more sensible. I think I took the right fork, the road less traveled. 

I remember a few years after that, when I was about 35 and I was selling my IT company, I was talking to some of my senior employees and I was telling them that I was going to be starting an investment partnership and so on. They couldn’t understand why I would step down into the world. Why would you go from technology to lowly finance? They couldn’t understand it. 

I told them that the reason I was doing that wasn’t driven by money, or anything, it was just driven by what I enjoyed doing. I said, “Look, I don’t really look at it that way, that one thing is a pedestal, you know, higher or lower than the other like I did when I was 20.” When I was 20, I did those, high life, low life kind of comparisons. However, I think when I was 35, I had a little bit more sense in me. Actually, that was the absolutely right thing to do. 

So life is a very random journey. I am here talking to you because I picked up a book at Heathrow Airport, and it could have been a book or a number of different subjects.  I think the the lesson I’ve learned is that many times in life, we are intrigued or fascinated, or kind of very obsessed with something new that shows up.  

Swami Vivekananda who’s a fantastic and bright guy. He has a quote, he says, “Take a simple idea and take it very seriously.” What I have noticed in my 30 year career is that it is always surprising to me that most humans when they encounter simple ideas that are very compelling, do not take the left turn that they should. Life is a journey where there are times where you have to take the bull by the horn, and you have to be willing to say no glove fits better if I take this left turn. Yeah, there are some uncertainties involved but if you’re not willing to be a little adventurous and explore the unknown, and it’s going to be an unexamined life, it actually would be a life poorly lived, if you will. 

So I think that it’s one of the lessons I’ve learned from that random book. The professor having the talk with me and so on and so forth is that I pay attention to things that intrigued me. It’s very important for us to pay especially close attention when they are kind of off the beaten path that we might normally take. 

I can see that, for example, even our family foundation, Dakshana, which is somewhat unusual, came about because of the willingness to step off the beaten path. So I think embedded in that question is a great insight that we will nearly all of us will have times in our lives when forks are presented. No one’s going to put up a headline saying, “Hey, here’s a fork and take the left fork.” That’s not going to happen. But you will clearly see that there is something out there, which is intriguing. You take the plunge, you can always come back, but take the plunge.

Preston Pysh  9:18  

When I look at your background, I would think that as a stock investor, because you had these years of experience in tech, running your own business, that and I think you see this mistake all the time on Wall Street, where guys, they get the finance degree, they then go and work on Wall Street, and they they’re making selections in the equity market or fixed income market. They never have that firsthand experience of running a real business themselves. When you’ve had that vantage point of what’s behind the curtain of a real business and running it and all the operations, the marketing all that stuff, how can’t you be a better stock investor after you’ve had that experience? I guess when I’m looking at you from an outsider’s point of view, I would think that that had such a profound impact on your ability to be a better stock investor, when that time kind of arrived in your life.

Mohnish Pabrai  10:08  

That’s right. Buffett has a quote, “I’m a better investor, because I’m a businessman, and I’m a better businessman, because I’m an investor.” I never realized it when I was taking those finance classes as an undergrad, but the reason I found them simple wasn’t because I had a higher IQ than my classmates, or I was smarter than my classmates. I had had a very different life experience related to business between the age of 10 or 11, all the way until I entered the classroom. 

My father was a serial entrepreneur. He had many bankruptcies. After my brother and I were, I think 11 or 12 years old, we were like his board of directors because he didn’t really have a board. It was these small businesses. Many times when I’d sit down my father when I was 12 years old in the evening, we had to figure out how to make the business run for one more day with whatever cash there was. Then we would make it run for one more day. Then again, the next day, we’d sit down and say, “Jow do we make it run for one more day?”

So by the time I was 19, I think I finished several MBAs. What they still don’t teach you at Harvard Business School… So it was great. I never realized that because it was really much later in life when I became an investor. I found that these things came really easily to me. I realized they didn’t come so easily to a lot of other people who are really smart. 

Tthe reason is the human brain is set up… I mean, first of all, the brain, because of the narrowness of the birth canal is one of the most underdeveloped organs when we are born, because you just can’t have childbirth otherwise. So the brain is an organ that goes to the most growth of any organ in the first five years of life. You have just tremendous growth going on because it is just bursting to get to where it needs to. 

When you see a human child, just the exponential cognitive abilities growing over the period but once we become about 12 years old or 11 years old, fom the age of 11 or 12, to about 19 or 20, during that window, the brain actually cuts connections. So the synapse connections go up a lot in the first five years, and from about 11 or 12 to 19 or 20, they go down and not only do they go down, but the brain is optimally set up to specialize at that time. 

What needs to happen for humans is from the age of 11 or 12, if they have figured out their calling, they need to be going all in. Time spent from you know, 13 to 18, in what is going to be your calling in life is going to give you significantly more advantage than 20 years later. We see this with Michelangelo, we see this with Bill Gates. We see this with Warren Buffett, on and on. I mean, you look at these… when people start lemonade stands when they are 13 years old, the experience of the lemonade stand at 13 is very critical for having the skills to run IBM when you’re 50. If you didn’t run the lemonade stand at 13 you’re going to have a much more difficult time. 

So when you study great business leaders and you study their histories, you’re going find that there was stuff going on in their lives. Even if you look at Steve Jobs and all his interaction with his dad, and all the intense focus on perfection, even on areas that people would never see.All those things that Jobs went through. Those things happen in his teen years. 

I think my middle name should be Forrest Gump. I basically, accidentally, because of my dad, he wasn’t aware of any of this, neither was I. I very accidentally got a very intense intro to business during a period of time when my brain would optimize to pick it up. So what a beautiful thing and what a random thing. 

One of the unfortunate things about the way our society is set up, is we do not allow high schoolers to specialize. We expect high schoolers to be a jack of all trades, like ake your humanity class, then take your science, then take your math and take everything else.

The one country that’s actually taking a different path is Germany. Germany starts segmenting out the kids when they’re 11 or 12 into whether they’re going to go to college or whether they’re going to be factory workers than such. What you have in Germany is that one of the highest wage countries in the world is a manufacturing powerhouse because German manufacturing workers started on those factory floors when they were 13 years old. No US workers start at the factory floor at 13 years old. So it is a tremendous advantage. I think that one of the things if there are parents listening to this, try to optimize those years.

What Bill Gates used to do. So he was a high school student in the US, forced to do all kinds of things that all of the high school students are forced to do but every night, after his parents *inuadible, he snuck out of the window, snuck into his computing lab at the high school, spent all night coding. Then at 5:30 in the morning, he would come back home and go back to sleep. He did that for several years. By the time Bill Gates was 19, he had more experience on a computer than probably 99.999% of the people in the country at that time. 

So even with Buffett, he jokes that he bought his first stock when he’s 11 years old and that he was wasting his time until then. So at the age of five or six, Buffett was buying a six pack of coke for a quarter from his tight-fisted grandfather Ernest. Then, he was selling it for a nickel apiece. I mean, he started getting lessons in business when he was six. By the time Warren was about 18 or 19, he had run several very significant sized businesses. We would not have the Warren Buffett that we have, if he did not have that experience from the age of 6 to 19.

Preston Pysh  16:34  

I love that conversation. As a parent myself, that’s something that I can really think about a lot as I raise my two youngest who aren’t even close to that age right now. As they get older, I’m going to remember this conversation. So thank you for sharing that.

Mohnish Pabrai  16:47  

If they say that at 14, they want to drop out, please encourage them.

Stig Brodersen  16:54  

Mohnish, this would be the next question. I saw an interview with you where you said that having an analyst employed really didn’t work out for you. I suspect that one reason might be because unconsciously one would feel pressure to continuously invest in something for the sake of investing, and not because it’s necessarily the right decision. 

The reason I come to think of this, because when we talked to your friend Guy Spier, he mentions what he calls his New York vortex, which was his way of explaining how one is influenced by the environment and the situation in a negative way. 

So my question would be, how do you build a life where you can keep your head straight, but at the same time be influenced by the right environment and the wrong environment? 

Mohnish Pabrai  17:40  

That’s a great question. I lucked out quite significantly because, number one, I never worked in the investment business for anyone. I never worked in any company, and the only models that I was familiar with before starting my own investment fund and such was Warren and Charlie. Those were the ones that I spent the most time studying and everything that they were doing, or had done had made all the sense in the world to me. 

So when I was going to set up a partnership, I looked very carefully at how Warren and Charlie had done it. In fact, what I did was, I took certain pages of Lowenstein’s book, and I photocopied them and gave them to the lawyer. I said, “Look, here are the partnership rules. Page 37, whatever it is, and put that in  legal language. That’s what we’re going to do.” 

Literally just two pages from the book to set up the partnership. So there were several aspects to the way Warren and Charlie ran their operations and ran their lives when they were running investment partnerships. Some of these things I understood when I was starting my own partnership. Others I did not understand the reason but I still just cloned it because there was no other model available to me. 

What I discovered several years later is every single one of the rules that they followed were rules that had been very intensely thought through by these two really smart guys. They weren’t random chance that those rules were there. 

So one of the rules both of them had was they had no analysts. Even today, Buffett has no analysts. If you think about it, he’s got 90 CEOs reporting to him. He’s got more than $400 billion of capital and he’s playing, I don’t know, 15 hours a week of bridge. One would think that he’s got all these billions and he could pretty much ask anyone to come work for him and they would come work for him, right? And they’d come work for him for pennies or nothing, even if that were the case. 

But even with all of those conditions, he still does not have an analyst and neither does Charlie Munger. I didn’t really understand if they started the partnership I just said, “Okay, the model is to go zero fee and performance-based fee structures.” The other part of model seems to be that you work alone, you don’t have partners or analysts or staff. 

It’s only later that I discovered when I thought about this, and I’ve been running the funds that it is a huge advantage not to have an investment team, in many ways is an oxymoron, even though we accept it as common wisdom that you set up a partnership or investment operation, that you’re going to have analysts and managing partners and all this sort of thing. That is all hogwash. I mean, the bottom line is that investing is not a team sport. It should never be a team sport. 

Buffett says that no part of the investment analysis process ought to be outsourced. So if you have analysts, then what’s going to happen is basically you are not going to know the businesses that you’re investing as well as your analyst does. I mean, you’re going to have the cliff notes version of those businesses in your head. Quite frankly, that’s not enough. You need to know the business. 

The second is there are bound to be circle of competence differences between any two humans. So if you have an analyst, by definition, their circle of competence is different from yours.  They could actually come up with a great idea, which is within the circle of competence. You’re too dumb to understand it because it’s not in yours. Then you reject it, which is a disservice to that person because they did the right thing. They came up with the right idea, you were just an idiot, you couldn’t understand it.

The third thing is that many times when I talk to analysts at different firms, like the other day, a young man came in my office, and he was telling me how he’s been assigned railroad, a very large one house I think, more than 100 billion in assets. He’s been assigned railroads and one or two other kind of things to study. That’s his kind of focus. He was telling me… He was assigned US railroads. So he monitors US railroads and one of them is private, which is Berkshire Hathaway’s Burlington Northern. So he’s got three railroads to study. 

He said, “I try to tell these guys, I’ve studied them all, and they’re not not the best things I would invest in.” But what he’s asked to do in his job is tell us which railroad has the best railroad? Well, that’s the wrong question. The question should be, tell us where we should put our money out of the entire universe of possibilities. If railroads are useless, we’ll forget about railroads. Let’s go study something else. 

But every day when he goes to work, he has to think about railroads and what a miserable existence. So I think that’s the other thing is that when we set up investment teams, we are taking away human potential. If I were to have analysts what would end up happening is that those analysts would not be able to have the freedom to do anything they wanted, if the structure was anything like any of the other firms. So one shouldn’t have an investment team. I’ve never had an analyst or an associate. I hope I never do. 

Stig Brodersen  23:15  

Very, very interesting discussion. Some of the inspiration that you’re getting that from the 13Fs filing from other fund managers, butt even when you have those, and you’re looking at, for instance, what Warren Buffett has bought or Carl Icahn, whatever it might be, it doesn’t mean you don’t call up Guy or any of your other friends and ask them so what do you think about this pick? Is it just between you and the screen so to speak? 

Mohnish Pabrai  23:39  

Yeah, that’s a great question. In fact, I did not talk much to anyone about my investments. I was just kind of doing it on my own. I remember I met Charlie Munger, I think when I met him the first time was in 2009. Right in the first meeting, Charlie had asked me a bunch of questions. He told me that it’s very important for an investor to have people to talk to. Then he said, “You know, I’ve always had people to talk to about my investments.” So I said, “Oh, you mean like Warren?” And he said, “No, it wasn’t always Warren. For several years, it was Warren and, and such, but there’s already been someone.”

Then he said, “It was a very important thing for me to change in my modus operandi.” Of course, when God tells you to do something, you do it. So I came back from that lunch, as you know, we’re going to make a tweak, which is, we’re not going to have a staff, because that’s not what he’s telling me to do is hire analysts and such. 

One of the things about talking to people who are not on your payroll, is that you get rid of kind of vested interests and conflicts and those sorts of things. So if you can identify it, it’s important to identify the right person. If you can identify the right person or people that you can bounce ideas off of, and talk about different things, and what’s going to end up happening is that all of us have blind spots. Ither people process things just kind of differently. It just so turned out that around that time I had actually the Warren Buffett lunch and it brought Guy and me together. It made us friends. We were just acquaintances before that. I decided that he sounds like he might be a good person to bounce things off of. So I tested it and it seemed to work really well because every time I talked to him about something, he would mumble some things, but those would be really things that was spectacular, which I had not thought about. 

So I found that these conversations are really good and these conversations are actually bringing up things that were truly blind spots for me. I started seeing value in those conversations, and I’ve continued them since 2009. It’s been extremely useful and beneficial. It’s a very good addition to my mental models to have that. So the thing is, I think that an investment team is a bad idea but having people that you can bounce things off of, especially people who do not have any kind of biases or vested interests, that can be really good.

Preston Pysh  26:23  

Mohnish, I know you’ve had different engagements with Charlie and Warren, since your initial meeting that you had with Guy. Through all those different engagements that you had with these two, what would you say is the best question that they’ve ever asked you or maybe something that really sticks out in your mind that just really made you say, “Wow, I never even considered that,” or just one of those experiences be so profound for our audience to hear?

Mohnish Pabrai  27:52  

The thing that I found really intriguing… So let me take a step back and let me take you all the way back to when I was in third grade. Before I answer your question, so when I was in third grade, I had extremely low self esteem. I remember in my third grade class, they were like 70 or 75 kids, it was a very big classroom. I remember I was seated way at the back, kind of 15 rows back or something. I also remember that I basically had no clue what was going on in the class. There’s someone would come and mumbo jumbo talk about something or put something but I had no clue. When I used to take tests and such, I had no idea what to do. I remember my report card in third grade was that I was 67 out of 70 kids in my class. I’m surprised I wasn’t 70 because there must have been like three characters in the class or something because I had absolutely no idea what I was doing. 

So I always figured that I had gotten the kind of the the short straw in terms of intellect and such and that I was a significantly below average person. My grades reflected that all the way until I think I got to ninth grade. I was always a below average student and I got to ninth grade. In ninth grade, I was in a really good school. It was like a very competitive school. I mean, I switched a lot of schools when I was a kid. This particular school, the Air Force school in Delhi, was a school which had the highest quality students that I had ever been. It was very challenging and a very good school. 

They brought in some outside people, and they did some testing. They basically did an IQ test on our class and they were like 40 odd kids in the classroom or 45 kids, and this guy, kind of like one of those you know, Mensa type IQ test. When I took the test, I ranked number one in the class, not only did tI ranked number one in the class they told me, I didn’t miss a single question. So they told me that my IQ was about 180. Okay. For the first time in my life that I’ve ever taken any kind of test, where I wasn’t in the bottom half, okay? Not even in the top half, I was number one and there was a lot of smart kids in the class. 

So I went to the two guys who had come to conduct the test quietly, I was like this 14 year old kid, and I said, “Hey, you know, sir, can I just ask you some questions about this test?” He said, “Yeah, you did really well.” And I said, “What does it mean?” He said, “Oh, you’re super smart. Okay?”  So I said, “Yeah, but you know, my grades in my classes, I do horribly. I don’t my grades are useless.” They spent less than two minutes with *inaudible because you’re not applying yourself. He says, “Clearly, if you work hard and you apply yourself, you will do well. “

I don’t know if you guys saw the movie Seabiscuit? You’re missing out both of you got to see the movie. So anyways, this kid has an amazing horse and in order for him to win the race, he had to come head to head with another horse. It could be a loser horse. But he had to spend some time with this other horse going head to head, and then he would just take off, and then he blew all the horses out of the field. 

I felt like after that two minute conversation in ninth grade, I was like Seabiscuit. I just took off. What I found is, every few months, my rankings in the class started improving. So from being 30th rank, I came to 25th rank. Then I came to 20th rank, and I saw every few months, I was moving up. By the time I finished 10th grade, I was in the top half, which was amazing. By the time I finished 12th grade I finished high school, I was third in my class in the school, and third of the entire school. Then by the time I finished college, I was number one, summa cum laude and all that. 

It’s almost like someone just tells you something, right? But the low self esteem takes a long time to go away because you know, it’s so deeply built in. When I met Warren and Charlie, one of the things that stood out for me the most is they told me, Charlie has repeatedly told me that you’re off the charts bright Mohnish. You’re phenomenal at this investing stuff. Okay? And when he says that has to me, when God is saying something like this to you, U am in disbelief. 

Part of the reason I’m in disbelief becayse I have this long history of being a low self esteem person. I remember somewhere I think I read a quote or a book somewhere. The way I feel about Warren and Charlie is, I don’t believe what they tell me but I have a belief in their belief. So what I mean by that is that I know that they can be wrong, but because I am kind of screwed up mentally because of all the low self esteem, if someone just tells me, “Hey, you’re great,” that doesn’t sink in. But if I respect a person, then I have a respect for their viewpoint. 

So one of the things that has been the most beneficial aspect of the interaction with Warren and Charlie has been that they have helped put a mirror in front of me, whether that mirror is a real mirror or a funny mirror. I don’t know which way it is. But clearly, what it has done for me is it has given me a little kind of wind on my back, if you will, where I say, “Okay, I’m actually pretty good at this.” Then we have these guys who are the patron saints, and it’s not so much a Warren. I think Warren is a little bit more reserved about what he says and doesn’t say, I think it’s been more Charlie than Warren. Of course, I’ve had a lot more interaction with Charlie than with Warren. One of the reasons is because he is in California and as I am. 

The one thing that has stood out for me is that they’ve talked to this *inaudible kid from Mumbai and given this kid all kinds of great perspectives, which have been tremendous for the kid to hear, it has been great. I think that’s one thing that I will always cherish and remember.

The second thing that stands out for me for both of them is how beautifully and carefully they’ve laid out their life. I mean, the thing is that what Warren and Charlie have done is they’ve looked at this kind of playing field, that they’re playing this game in, and they figured out a way to play it in a very unorthodox manner, but they’re playing it in a manner that plays to exactly what their strengths are and the execution… Many, many times that I talk to Charlie, he will tell me things like that’s not our system. This is not our system. This is our system. And I don’t hear him talk about the system so much in public, you know, it’s come up in the private conversations. 

What I gleaned from that is that they have spent a lot of time thinking about how they go about it. So for example, Warren believes that the real control he has is in the selection of the CEO or the manager of a business. He has no control beyond that selection, because the only other thing you can do is you can let the person go. He does not believe that he can tell the person what to do. All he can do is pick the person and this is a tremendous insight. What this does is it gives them infinite bandwidth to have 200 managers reporting to him, because none of them are looking to him to figure out what they ought to be doing. They’ve been told very clearly send the excess cash to Omaha and beyond that, run your affairs and run your friends and your family who will own this business the next hundred years. Just use that.

There’s a beautiful Ben Franklin saying which only four words, “When in doubt, don’t.” Warren sends a letter to his manager saying that we can lose a lot of money and we don’t care. But if you do the *inaudible reputation, we care a lot about that. So always remember that. Though he also says that if you’re ever confused about whether a particular course of action is correct or not, just call me. But he also says in the letter, but when you have that doubt in your head, you already know the answer, that you don’t need to go there. 

So what I’m saying is that they have optimized the time they spend on what they are able to accomplish and the efficiency of that. I mean, two guys talking periodically on the phone, built one of the greatest businesses on the planet. It’s incredible. It’s incredible what they build. I do believe that this is true because having having interacted especially with Charlie. Charlie repeatedly says that we do fewer dumb things than the others rather than a bunch of brilliant things. I have to agree with that, because most of the things that they do are basically common sense wise things to do, if you think about it. 

During the lunch with Warren Buffett, I’d asked him a question. I asked him, “Mr. Buffett, if you could have lunch with anyone living or dead, who would you want to have lunch with?” And he said, “Well, I’d love to have lunch with Sophia Loren.” And then he said, “Okay, you don’t like scratch that answer. I’d really like to have lunch with Isaac Newton.” And I probed them a little bit. I said, “Why Isaac Newton out of all the humans? Why do you want to have lunch with Isaac Newton?” He said he believes that Newton is probably the smartest guy who ever walked this earth. And so he said, “It would just be fascinating for me to be able to sit down with a person like that and talk to them.”

And then, immediately in the next sentence, he says, “Newton was the smartest. But Franklin was the wisest.” And that is the difference, I think the thing is that neither Warren or Charlie, they’re very smart people. But what they’ve relied on what their success is not that smart, they’ve relied on their wisdom, and most of the wisdom, if you look at the wisdom of Ben Franklin, it’s common sense after you read it. But it’s not obviously common sense before you encounter it. 

So that’s been the other thing that you know, many of the things that Warren and Charlie say, we cannot say, okay, you know, that makes sense, but one of the meetings have helped me calibrate is what is really important, and what I’ve been able to calibrate is that, yes, these guys are smart. But there are lots of people who are very smart and it’s not about IQ. This is not a game about IQ. This is a game what wisdom and this is a game about making less mistakes than the others. If you take the mistake *inaudible down, then it works out very well.

Preston Pysh  39:06  

All right, Mohnish, this is all the time we have for the first part of the interview. For anybody if you’re enjoying this interview, it even gets better in the second week. So make sure you guys tune in next week to hear the rest of the interview. I want to throw it over to Mohnish really fast so that he can give you a hand off to some of his websites and places where you can go and find out more about him. So Mohnish tell people where they can find out more information about you.

Mohnish Pabrai  39:28  

Yeah, one great resource that I really like a lot is YouTube.  I have a YouTube channel. It’s called Mohnish Pabrai. One of the things I really enjoy is speaking to students and what I’ve always tried to do when we have these conversations with students is we try to record them and we try to put them on YouTube. It has been a lot of fun. So I’ve been doing Boston College for several years. I just did UC Irvine. For the first time I spoke to students in China at Peking University, and so those are all on the YouTube channel and I think you’ll enjoy those as well. So thank you. 

Stig Brodersen  40:03  

That was all that Preston and I had for this week’s episode of The Investor’s Podcast. We will see each other again next week.

Outro  40:11  

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