Stig Brodersen  01:43

Thank you so much for saying that, Mohnish. It really warms my heart for you to say that. Today we’ll be talking, of course, about investing and we will be doing that in the first part of the interview. In the second part of the interview, we’ll also be talking about the Dakshana Foundation where Mohnish is the founder and chairman. But let’s jump right into talking about investing.

The last time you were on the podcast, you recommended to our community to read Poor Charlie’s Almanack, and I would highly recommend everyone out there to do the same thing. Especially, you talked about the last talk included in the book, called The Psychology of Human Misjudgement, where Charlie Munger outlines 25 psychological biased tendencies. They are useful to understand in our personal lives, but also as investors. Which bias do you have the hardest time dealing with whether or not it’s mentioned in the talk?

Mohnish Pabrai  02:35

These biases that Munger brings up are very, very deeply embedded in our psyche, and as humans, we have to work pretty hard. So I am pretty sure things like association tendency, where Coke advertises in the Olympics, and the Olympics is a happy place, and we like Coke. And so, those association tendencies work at such a deep level in our brains that affects us significantly. I’m not sure if that’s the one that is the hardest, if you will. I’m generally a very rational person.

03:13

Another one of the very, very important misjudgments of humans is the tendency for self-pity. When we encounter adversity, it is a very natural reaction for humans to have self-pity and say, “Oh! Poor me! Look what happened to me! “Charlie himself struggled with that. It’s documented, I think, in Poor Charlie’s Almanack, that when he lost his 11-year old first son to leukemia in his 30s, he used to be walking the streets of Pasadena just crying.

I know that the Charlie Munger that I see today is not like that. I think recently, he mentioned to me, “Mohnish, you know, 99% of my friends are dead.” He was saying it like it was just a matter of fact. There was a little bit of the sadness in that statement, but I told him, “Yeah, but Charlie, you have new ones like me, so you keep adding new friends, and they’re younger.” And he said, “Yeah, life is great. No problem.” I think self-pity is a very important one to avoid.

I think just being rational, especially in times like this, just in the context of, we’re in the midst of the virus, and it’s spreading, and there’s a lot of gloom and doom around. Something I saying from my childhood, and I’m not even sure who the author was, is, “If wealth is lost, nothing is lost. If health is lost, something is lost. And if the character is lost, everything is lost.”

For listeners of The Investor’s Podcast, investors are concerned about their very-quickly vanishing wealth, but I think you can consider that irrelevant. As long as you have food on the table, and you’re not homeless, you are okay. Even in the 2009 crisis, when I saw my network decline by 65-70%. Basically, I didn’t think there was a calamity because I always went back to that saying, and that saying helps center you. And clearly, health is important, while the character’s most important.

Stig Brodersen  05:20

Very insightful, Mohnish, and I just want to say, we are recording this on March 24th, so please keep that in mind when you’re listening to this. We wanted to publish this in the first week of May, and it’s not by coincidence. We also did that last year, and perhaps some of the audience know that it’s because that is the weekend of Berkshire Hathaway Annual Shareholders’ Meeting that, unfortunately, we won’t be going to this year, but we hope to go next year.

Going back to the talk, Mohnish. As I was rereading it, the bias that really stood out to me, and perhaps it was just due to where I was in my life at the time, but it was really the liking and disliking tendencies, and how I, unfortunately, filter facts through different lenses instead of focusing on the actual facts.

Now, you are in the privileged situation that you often have a chance to meet up with the management in the companies you’re considering investing in, so how do you combat that liking bias? For instance, when you meet up with the management in Rain Industries or Motherson Sumi, managements that you really admire?

Mohnish Pabrai  06:22

I think for most of my investment career, I took the approach of never meeting management. And that approach is fine in the United States because the odds that I’m going to lose money because of outright fraud has not happened in a quarter-century in the US. But when I’m investing outside the US, I think that the risk factors are higher. I think looking back now, given that I met a large number of management teams, mostly outside the US, I think it was a mistake for me not to meet them in the US. It would have been helpful.

Mohnish Pabrai  06:58

The main concern is not the bias of liking them. I think the issue is that all these CEOs of these very significant companies, or founders who build these big businesses, by definition, they’ve got tremendous sales skills. Sales skills mean they’ve got tremendous charisma, and you’re being mesmerized by that charisma. Of course, you’ll be talking about subjects with them, where they know everything, and you know nothing, and the combination of great charisma and them coming across as somewhat Guru-like in those sectors can lead to serious biases.

I think then, the only way you can combat that is to go back to what Buffett and Munger say, which is to look at the track record. I think that one of the advantages we have when we look at public companies is we do have a track record that we can look at. If you look at the guy from Motherson Sumi, who I think of as perhaps one of the best business leaders anywhere in the world. He’s exceptional. He’s in a really, really tough industry, and in that tough industry, he’s bagged up more than 25% a year for kits. It’s just an incredible record.

I think that the record should dominate your thoughts. The facts about the business should dominate your thoughts a lot more than the persona of the individual. We had someone as good as Jack Welch make serious mistakes with his successors at GE. In fact, out of the three managers he had shortlisted to succeed him, only one of the three of them, ended up doing an exceptional job long-term when he left GE. The other two, one of whom stayed at GE, and one of whom went to another business like Home Depot, etc., didn’t do so well. This is after someone has watched a person for years and years, has had access to the track record, and has had access to everything. So human judgment for lead management, and especially how leaders act in the future, is a very complex area. it’s not that easy to figure out.

09:14

Another thing that becomes an issue for me, especially when I’m looking at a business in India, is many times, I meet founders that owns 60-70% of the business, and already their net worth is $500 million or $700 million, which in India, is a huge amount of money. Concerning them, the question for me is not so much about competence, because I can see the track record, and I can see what they’ve done. My question becomes more about hunger. In some cases, when I’ve asked the question very directly, I’ve gotten a very direct answer in which an increase in the stock price or shareholder returns in the future is not the number one factor for them. They have switched to preservation mode. They’re not in growth mode. Preservation mode is great for them because they are already in the promised land, but may not be so good for the capital allocation decisions that are going on. These may be extremely conservative, but it’s not a good place to put capital. I’d probably just be careful. I think this is not an easy area.

Preston Pysh  10:24

So Mohnish, I’m sure, like Stig and I, one of your favorite reads is The essays of Warren Buffett. What’s really fascinating about the book is how much Warren Buffett has evolved as an investor, whether it’s his thoughts on investing, governance, acquisitions, or whatever it might be. Continuing on that train of thought, one of the things that Warren Buffett and Charlie Munger preach so often is about the difficulty lies in not so much developing new ideas, but maybe escaping the old ideas. Which ideas for you, personally, have been the hardest to escape as an investor?

Mohnish Pabrai  11:03

The idea that did the most damage to me in the past was not appreciating the ill-effects of leverage as much as I should. As you know, after the financial crisis in ’08-’09, I created the pre-investment checklist, and it was created based on actual losses very good value investors had in real investments they made, and the question was, “Was there data available before these people made these investments that should have been a red flag to them, but they somehow missed it?”

11:42

And so, the number one reason that investments don’t work out, and the number one reason that things go the wrong direction in investing, is leverage until everything is fatal. In fact, during the financial crisis, I had one business that went to zero, and I had another one that lost more than 90%. Those caused serious damage to the portfolio. We recovered from there, and we came back. This time, when we are hitting what will be unemployment numbers, of which, the current run rate is higher than the financial crisis, I look at the portfolio, and I don’t have those concerns because all the lessons learned then have taught me that.

12:24

The other thing that Charlie Munger taught me, which I think is a very important lesson, is to learn from your mistakes, but don’t learn too much. We should not kick ourselves too much when we make mistakes or when we lose money because investing is not an easy game as we are trying to forecast the future of many businesses. I mean, just look at what’s happening right now. Who could have forecasted that this is where we would be? And so, mistakes are par for the course. You’re going to make mistakes. We want to learn from them, but you don’t want to go overboard in the learning. If you go overboard in the learning, like everyone goes buy T-bills, that’s probably not the right answer. But killing your past ideas, those are really good things to do.

13:15

Something that I am implementing more recently is a recent insight I picked up Kahneman’s book, Thinking Fast and Slow, which is a great book. I am really good at thinking fast. If I can pat myself on the back, I’m exceptional at that. I can crack business models pretty quickly. I can get to the essence of what makes a business run pretty fast. All those things are very valuable in investing, but that is not the be-all and end-all of investing.

To be a great investor, one has to be good at thinking fast, and one also has to be very good at thinking slow. I’m not so good at thinking slow. I tend to reach conclusions relatively quickly. Pretty much, my conclusions would be better than most other humans if all of us were given the same amount of limited time to look at a certain set of facts. But that’s not how investing works. There is not a limited amount of time to look at a set of facts. One can take six months to look at an investment. No rule says that half an hour after you know of a company, you have to decide whether to buy or not buy, or one day after, one week after, or one year after. There’s no such rule.

Another thing I’ve learned is that if I slow down, and if I let these facts permeate a little bit more, and ruminate my brain a little bit more, my results get a lot better. Over time, thinking slow will bring in data that doesn’t happen when you think fast. And so, one of the more deliberate actions I decided to take recently was not to go all-in on investment right after I’ve decided it’s a great investment. I’ve decided to take a small position, and then study it some more, and maybe after three months, I can increase the position a bit if I’m still feeling the same way. And maybe, six months later, I could go to a full position.

So, these are some of the ways I’m trying to improve the way the brain operates.

Stig Brodersen  15:22

It’s interesting that you mentioned the third point there because it kind of takes me to the next question. In investing, we seem to focus a lot on the research process before we invest, and I think that all experienced investors recognize that we don’t really start to learn about a company before we are invested in that company. We just seem to digest the information differently. But how about after you exit your position? How much do you follow companies that you have been invested in? And how do you find yourself processing perhaps that information differently?

Mohnish Pabrai  15:56

I think that’s correct, that we really learn about a business after we own it. Otherwise, you really don’t know much about it. That’s why people who run paper portfolios are not going to get you to the promised land. You have to put real money to work. You have to lose real money, and when you lose real money, that’s when you pay the tuition bill, and so on.

In terms of the companies I have exited, yeah, I see a big advantage. Right now, I’m looking at a bunch of companies that I’ve exited in the past, and because I’m familiar with the names, even if some of those names have fallen a lot now, it will not take me as much time to get up to speed on what is going on because I have a quite a rich repository of data already about it.

Definitely, one of the things about investing is that if you’re a student of business, and you love studying businesses, then, of course, you’ll be very curious about all kinds of businesses; the ones you’ve exited, the ones you’ve invested in, and the ones that are sitting on the sidelines, and you’re looking at them, and either admiring them or thinking they’re useless. I think the nature of the game is that we want to keep improving our knowledge about the way business works, the way the world works absolutely.

Preston Pysh  17:15

So Mohnish, in 1965, the average tenure of companies in the S&P 500 was 33 years. By 1990, it was 20 years, and if we run some of the newer numbers, it might be as low as 14 years by the year 2026. We all know that the mighty fall, but as the tenure has become ever so shorter, has it made you rethink how you identify and invest in compounders?

Mohnish Pabrai  17:42

I think that’s a fantastic question. I think that one of the big mistakes that I’ve made over the last 25 years was have a serious under-appreciation of compounders.

For most of my investing career, I’ve focused on finding 50-cent dollar bills. Basically, the idea was I invest at 50 cents, and sell at 90 cents. Hopefully the transition from 50 cents to 90 cents happens in two or three years, and that’s a great and measured return. But well, there are two problems with that. Number one is taxes because you end up with a significant tax bill. The second is that you have to continue to be right, so if I invest in a company for three years, and I double my money, I now have to find a second investment for three years, and I have to keep finding these two-three year bets, and I have to always keep being right. It’s not that easy to continuously be right like that.

18:40

On the other side, when you go to the compounders, the issue is that businesses are actually extremely fragile. People think they’re not fragile, but they’re very fragile. The kind of competitive forces that work on businesses is just so intense that there’s just a sliver of companies that can withstand that. And even the sliver of companies that can withstand may have issues after 10 or 20 years.

If you look at a company like American Express, which almost has a 200-year history, like 180 years or so, but they’ve had to reinvent their business so many times. Amex used to only issue traveler’s checks, and then had to make that transition. They were a late arrival on that scene, but they still were able to make it work. So I think it’s not easy to make assumptions.

Let’s take a business like Costco as an example. Costco is such a high-quality business and we are seeing even at this time of the Coronavirus how wonderfully well they’re doing. The question is: What does Costco look like 25 years from now? That’s a really, really hard question to answer. Is there a Costco in 25 years? Is the market cap more than today? Would it, between now and the next 25 years, deliver shareholder returns in the double digits? I don’t know the answer to these questions.

20:20

So, my answer to the dilemma you pose is buying and selling doesn’t get you to the promised land. Buying and holding also have issues because of finite runways, and when do businesses falter, and all this stuff? My answer is: I found a path, and that is the path that I think works for Mohnish.

20:47

There are three kinds of businesses. First, businesses that are cheap, but are not necessarily great compounders. They are just cheap on current earnings and what they make in the future, but who knows where they’ll be  10 years from now. Then the second is that there are compounders, which are well-known, like Visa, MasterCard, Coke, Amex, and Costco, and so on, and they’ve got huge runways ahead of them. Those businesses, which are known compounders, probably rightfully traded high multiples. Then there’s the third class of businesses, which I would say, are the hidden compounders. The hidden compounders are where I have put all my efforts now because that’s the holy grail for me. It may not be for other investors.

The thing is that, if you get a chance to invest in American Express at normalized 5x earnings, you should do that all day long. We don’t need to know whether Amex is around 25 years from now. We will make money on that bet. We can look enough out into the future to know that the odds that we lose money is close to zero. Amex would be a great example because, recently, it got down to 7x or 8x normalized earnings. Their earnings are going to get hammered pretty heavily in the next year or two or three, but when you get to normalized earnings… By the way, this is not a stock tip. I’m not investing in Amex, etc. But I did spend time looking at it. It didn’t quite get to the point that I was drooling, and so I had to let it go. But if it got 5x normalized earnings, I’d go all in.

If, for some reason, Costco got to single-digit earnings, 5x or 7x earnings, oh, you will make that bet all day long. And so, now in distressing times like this, once in a while, you might be able to find a compounder that’s being tossed out. Amex is almost being tossed out. Visa and MasterCard are not being tossed out as much because Amex does have a credit risk that Visa and MasterCard don’t have, but there are hidden compounders, and they are ones that have the runways, have the growth, and have all these things going on, but people haven’t figured it out yet. Sorry to disappoint you, Stig, and your listeners. They shall go nameless, okay? But the key is to focus on the hidden compounders.

23:20

I’ll give you an example. I invested in Fiat Chrysler. I think this was in 2012. The entire market cap of the company at that time was $5 billion. 80% or 90%, probably, was inside Fiat Chrysler. Ferrari, even in a time like this, where no one can go to the dealership, is trading at a market cap of like, north of $25 billion, probably. That $25 billion was embedded inside that $5 billion. That’s, classically, the hidden compounder. So, even if you didn’t care about the Fiat business, and Fiat itself, actually I didn’t even understand. In 2012, when I looked at Fiat, I didn’t even care about Ferrari. I looked at Ferrari earnings and I discounted how great a business it was. At that time, Ferrari earnings were also not that high. They’ve actually done a really good job. I said, “Okay, no, Ferrari’s $2 billion or $3 billion, $4 billion. That’s what it’s worth. We don’t do much about it. It gives us some floor.” I was really focused on the company having $130 billion in sales and a $5 billion market cap, and I said, “That’s not going to last because the UAW contract got redone. All these different things are going in. Sergio had come in. And so, I was focused on the core business, and the core business has come down now, but it actually went up four or five times over the course of the holding NFO. Ferrari’s doing better.

Fiat wasn’t a hidden moat. It was just one of my classic undervalued deep value plays. But, once in a while, what happens is dumb luck, and we end up with a compounder inside. Of course, I was too stupid to hold Ferrari. Now, I’ve learned that when you have these compounders in your portfolio, just hang on to them. And you don’t need many of these. 2019 it was a tremendous year for me, and even 2018 was pretty good. In 2018, I definitely found one incredible hidden compounder. In 2019, I found three. If I find three in a year, that is an orgasmic experience, so we don’t need many of them. If in a year, I can find a couple of them, that’s pretty good. And now, in the time of Corona, I found one, so life is great.

Stig Brodersen  25:57

Life is great.

Mohnish, for the second part of the interview, I’m very excited to talk to you about philanthropy. I think it’s even more important these days in times of the Coronavirus. Like you mentioned before, if we sit home and we feel sorry about ourselves for looking at our portfolio, we should probably, in the first place, be happy about having a portfolio. Specifically, I’m very interested to talk to you about the Dakshana Foundation that you founded with your wife, Harina, back in 2005. Your daughter, Monsoon, today is vice president. It’s just an amazing organization. And, as a true cloner, instead of reinventing the wheel, you adopted Anand Kumar’s model for the foundation. For those of us who are not familiar with, Anand Kumar and Super 30, could you please talk to us about how you met him and what you learned from him?

Mohnish Pabrai  26:55

Oh, sure. Yeah, Anand is a wonderful human being. In fact, there was a big Bollywood movie made on his life story last year, which was a big hit called Super 30. Hopefully that will get translated and subtitled so that people can watch it all over the world. Yeah, I think that he’s a wonderful guy. He’s a great teacher.

I heard about Anand Kumar for the first time in 2006, in an article in Businessweek, and when I read that article, I said, “Wow, this sounds quite amazing.” He was identifying 30 very poor 17 or 18-year-old kids who were extremely bright. Most of these kids had illiterate parents, apparently farmers or laborers, probably, typically, making less than $40 or $50 a month. He provided room and board, and tutoring and coaching for them for a year to prepare for the IIT entrance exam.

28:02

The IITs in India are the MIT of India. It’s very, very difficult to get in, but because these are government-owned and government-subsidized, once you get in, it’s almost free to get educated. So, you do not need to come from a wealthy family or even a middle-class family to attend IIT. You just need to be very bright. But the problem is that without proper training and coaching, no matter how bright you are, you will not be able to do well on the entrance exam. And so, it had become a gating factor where only the middle class or higher in India could go to the IITs because coaching was so expensive. What Anand did was he offered that coaching for free to the extremely poor and extremely bright, and he got incredible results.

More than a million kids a year trying to get into it, and there are about 12,000 seats, so it’s a 1% admit rate. In the case of Anand Kumar, for many years, all 30 of his 30 kids go to IIT. Even in the worst year, he’s had, I think, 22 out of 30 admitted. So, he’s always had very high success numbers. When I looked at that model, I said, “Wow, how much does he spend in a year on those kids.” And I asked him.

29:25

At that time, in 2006, he was spending about maybe $600 or $700 a year per kid to get them into IIT. His mother used to cook the food for them. All the coaching, everything, took place inside a slum in Bihar, India. It was a very low-cost operation. The classrooms are open air. There was no roof, etc. It gets really hot in the summer, really cold in the winter, but they had almost no cost. And so I said, “Wow! He’s spending $500 or $600 per student. Once they go to IIT and finish, there is no difference between that kid and a kid from Stanford or MIT, in terms of being attractive for a number of global companies to hire them.” These kids, in effect, get connected to the global economy, and they go straight from zero to hero. And so I said, “Wow, you cannot think of a higher return on equity or higher social return on capital versus spending.”

30:30

In Dakshana, now, we spend close to $3,000 per student. We do have a roof over their heads, and we do have air conditioning, so the cost’s a little higher. And my mom, she passed away, so no family members cooking for them. We had professional chefs and so on in the picture, and we’ve got a professional team of tutors and faculty.

I found that you could spend $3,000, and the person can get really far, like in the case of one of our kids, Alaam. Alaam is at Google, and I think he’s making well over a quarter million a year. He’s only 26 years old or 27 years old or so. He is pretty young, and most recently, I think two years back or last year, in the Google IO, their annual conference, he worked on a piece of the presentation that Sundar Pichai gave. He’s almost directly working with the CEO, and he’s moving up the ranks really fast. And he’s not the only one. We’ve got several people at Google, Microsoft, Amazon, and all over the place. All the major tech; US tech companies, Indian tech companies. We’ve got people in Korea, at Samsung, in China, Singapore, France, and all over the world now, and, of course, a huge number in the top companies in India.

Stig Brodersen  31:47

Thank you for sharing that story. I think it’s very important for the listeners to understand IIT more. If you allow me, I would not say they’re just MIT. There’s this story that Charlie Munger asked Bill Gates which school would be his number one choice to recruit from for Microsoft, and he said IIT would be his first choice, and the next choice would be a distant second. I mean, it produces the best of the best students.

Mohnish Pabrai  32:11

That’s right. Yeah. I think that it is the hardest school to get into. The IIT entrance exam is the hardest exam in the world. It’s really, really tough. We know what we put our kids through to prepare for that exam. It’s pretty intense. Yeah.

Preston Pysh  32:27

So, Mohnish, one of the things that I want to ask you about relates to Warren Buffett’s quote saying that it’s actually harder to give the money away than to make the money. People that hear that might roll their eyes, and say, “Oh, my God, this is obnoxious,” but he’s talking about the metrics, and to not just give money to a company that then employs a whole executive suite of people that nothing actually goes to the mission of the organization. What he’s really talking about is how can you have metrics on the mission?

A good example that my wife recently told me, as she’s involved in the nonprofit space, is Habitat for Humanity. They don’t just give people a house. These people have to go through and pass these financial tests. They have to go meet all these different criteria before they’re eligible to receive the house, and they’re doing this in a manner to ensure that the mission is met, which is taking care of people, that they have a good home to live in, and that they’re going to be able to sustain themselves after they receive it.

So, I’m kind of curious. For you, in the world of philanthropy, what are your metrics? And how do you look at that difficulty of making sure that every dollar you receive goes towards the mission?

Mohnish Pabrai  33:48

Some of these things I discussed with Warren because he brought it up at the lunch I had with him in 2008. So, the foundation had just started. I had just published my first annual report. Before Buffett came to the lunch, he had read the entire report. Not only had he read the entire report, he knew what was on what page by memory. He told me, “You know, on page seven, that quote you have from Bill Gates saying something to Charlie Munger, he didn’t say to Charlie Munger, he said it to me.” I said, “No, Charlie told me he said it to him.” So he said, “Well, then he said it to both of us.” I said, “Yeah, well, that’s fine.” I’m just saying he had a photographic memory of everything in that annual report. That really remarkable.

I always say that in my grave, they should say, “He was a shameless cloner.” Everything in my life is cloned. It’s one of the most powerful models one can adopt to make your life great. If the only thing you learned from this podcast is to be a shameless cloner, that’s it. That would make your life really good.

34:47

I created my wealth by cloning Buffett. When I was about 40-43 years old, Buffett had just given a pledge to the Gates Foundation and the foundations of his three kids, where he would give away 5% of his Berkshire shares every year. I think this was starting 2006 or so. I found that a 5% number very interesting because Buffett always wanted to compound till the end, and then give it away at the end. He’d always pushed it off, and when he did that 5%, he was 76 years old. I brought up in my annual report that 5% formula. I said, “Look, Berkshire is going to compound at more than 5%. We know that for sure. Therefore when he gives away 5% a year, his wealth is going to still keep increasing. That formula is not going to end up Buffett with zero.”

The second thing is that the number of shares given away every year goes down. If you have a million shares, you give it at 5%. Next year’s 950,000, you’re going to give $47,500, and so on. So, the number of shares keep going down, but the amount given keeps going up.

35:59

What I had done is that I cloned that with Buffett, where, once our net worth crossed $50 million, I said, “You know what I’ll do? I’ll start giving away 2% a year.” I was 42 or 43 years old, and I said, “Okay, 2% a year means a million dollars a year will go to charity. It’s not going to impact the compounding engine because highly likely, I’m going to make more than 2%. My network’s not going to go to zero, or any of that because I still have almost 40 years of life left ahead of me.”

So, I adopted the 2% formula, and Warren brought it up in the lunch. He said, “Mohnish, you know, I read that 2%.” I said, “Warren, I also talked there about your 5%, and that’s where it comes off.” He says, “Yeah, it’s beautiful. It is awesome.” And so, this was blessed by the messiah. It’s great.

The reason I picked the 2% and the reason I picked a million dollars is that giving money away is really hard. You will have to have two or three principles that are different from investing when you’re giving our money away. The number one principle is expect to fail. Okay? When we invest, we do everything to avoid failure. In Buffett’s terms, what he told Bill Gates at the Gates Foundation, “Swing for the fences.”

The Gates Foundation, for example, puts money into finding vaccines for 20 years. They haven’t found a vaccine yet on anything, but the thing is, the payoffs are so huge and so important. It’s worth it, and humanity needs that. We need a universal virus vaccine. Right? How do you get that? It may not be the private sector to invest in that. It makes absolute sense for the Gates Foundation to dump billions into that because look at what’s happening now. So, the thing is that you swing for the fences.

37:56

The problems we are trying to address in philanthropy are education, healthcare, environment, and poverty. These are very, very tough problems. These are problems that governments for hundreds of years have spent trillions of dollars on, and they have not solved these problems. That’s not because the governments are corrupt or bad, but these are tough problems to solve. So, in philanthropy, you’re forced to confront tough problems. They are tough problems. They are not easy to solve. Swing for the fences, and don’t be afraid to lose money, and don’t be afraid to fail.

Mohnish Pabrai  38:37

When I started Dakshana in 2007, I said, “Okay, the million dollars a year is going in. I assume the million would just go down the tubes.” People in India would rip me off, and the model wouldn’t work. We wouldn’t get the desired results, but I said, “All that is fine. Let that happen because after paying a tuition bill for 10 years, I will finally know what to do.” So, I was willing to go for 10 years giving the 2% a year, assuming it all generated no return, and then, hoping after 10 or 15 years, we would get somewhere. I felt that if it happened after 15 years, I would be 57 years old, and I would still have a runway ahead of me to do things. As it turned out, because cloning is so powerful, we picked a phenomenal model with Anand Kumar and Super 30. I also lucked out that I got a phenomenal team. The combination of the great model and the great team just made the model work extremely well.

One of the things about our model is that when we take these kids who are so poor and have had such a tough life, with some of them almost homeless, they are extremely motivated to succeed. So, even if I don’t have the best faculty or I have shortcomings in how Dakshana is doing, the kid is very motivated, and the kid is pushing you. So, the model is really powerful because the recipient of our aid is very determined to try to make the best use of it. This doesn’t apply to everyone, but most of the kids we have are like that.

I think the 2% model of Dakshana made it very easy every year. I didn’t have to think much about it. Every January, I would figure out what my net worth was and figure out what the 2% is. I did change that model where, once we hit $100 million, I made it 3%, and so on. Of course, in the land of Corona, we are no longer hitting $100 million, but there are worse problems in life than that. No problem.

The key is to be willing to swing for the fences, to be willing to fail. You don’t need to be a rich guy. You can do this experimentation with $2,000 or $5,000 a year or so because the problem is the same. What you want to address is how to get the best use out of the $5,000, right? There are a zillion charities around. You could give it to any of them, and then you can study them and analyze them, and such. Or you could do it in retail. You could do it in your community, your school, or your homeless shelter. There are 100 different options, so I don’t think it is about having millions of billions. I think it’s about getting started somewhere, and, most importantly, learning from those experiences, and getting better every day.

Stig Brodersen  41:33

Speaking of that 2007 report, it’s actually quite beautiful. You have two quotes by Warren Buffett, and then you also have a quote by Gandhi just below. You hardly see them compressed like that, but it’s amazing, and you talked about this dilemma just like Buffett has talked about it. Would it be better for humanity if you compounded because, if I could say, that might be your forte, and then give back? Or should you give back sooner, learn more as you go along, so that you can give back more efficiently? It is a very fascinating discussion in itself.

Mohnish Pabrai  42:04

I think Buffett’s idea originally was that his first wife would outlive him, and he really didn’t have much interest in giving money. He didn’t want to get involved in that whole area, so he just thought, “Okay, the estate will pass to her, and then she’ll figure it out.” That was his original plan. I think when she passed away, then he started thinking about it, and he said, “No, I need to put something with more form in place.” I think if we went and talked to Warren Buffett today, I think he would say that he would have been better off if he had started sooner. I think now his perspective would be that probably where he had come out on it, which is let things compound and then give it away, he’d probably say, “Maybe 5-10 years before that, I would’ve started giving away some smaller amounts.”

Preston Pysh  42:51

So Mohnish, I’m just going to give you some huge kudos here for your writing style, and the way that you write not only the report that goes out to some of your investors, but to your foundation. I guess there’s a quote where Buffett has given you high praise, saying it’s one of the best annual reports for a foundation that he’s ever read. But with all that said, I guess I’m hinting that you’ve had to make hard decisions with your nonprofit. What would you say has been the hardest decision for you since establishing it?

Mohnish Pabrai  43:28

Well, we are making some hard decisions right now. We just shut down our coaching at all our locations, because the Government of India issued a mandate that all schools have to shut down. Our campus in Dakshana Valley is technically not a school, but we want to follow the spirit of that order, and so we’re going through that right now. We don’t know how long this is going to last, or how it impacts everything, but for us, I think the thing is that there are bigger concerns than maximizing our IIT admit rate, and so on, so it’s unfortunate for the kids that we’re going through that right now.

44:08

There have been a number of times when core principles we’ve had, have been tested, and they’ve been tested pretty hard. For example, one of the principles that I laid out for Dakshana when we’re operating in India is, no matter what, we would never pay anyone a bribe of even $1. We would rather shut down than pay a bribe, and India is a country where bribery is rampant. I’ll just give you an example. I think this was in 2009. We were running our own hostel in North India, and we had rented this place. We were housing the kids there. We had our classrooms there and everything, and we needed more power to be available at that place because we were running these air conditioners and such.

We needed the local utility to increase the power coming to us, so we approached them, and said that we needed more power bla bla, and of course we’ll pay the higher bills and all that. The guy produced like a tariff card for us, and the tariff card was actually a tariff card of bribes. He said, “Look, what we have done in our department is we have standardized the bribes, and we published this card which has the bribe. So, if you need so much power, you pay so much bribe; if you need so much power, you pay so much bribe.” And it was an officially-printed document.

Stig Brodersen  45:39

Wow.

Preston Pysh  45:40

Wow, really.

Mohnish Pabrai  45:41

Okay, so we told the person, “Look. We are a nonprofit organization. We are taking care of these poor kids, blah, blah, blah, and we cannot pay any bribe. Please do this for us. You can have your bribing from all the other people you’re dealing with.” He said, “No, sir. We don’t work like that. We made it universal, and there are no exceptions. We cannot give you the power.” And the bribe was very little. The bribe was less than $300, okay. But Dakshana, of course, is not going to pay the bribe. What we did is we installed these massive diesel generators. The diesel generators cost us thousands of dollars. I think we spent more than $10,000 or $15,000 on those generators, and then we were spending about $600-$700 a month on the fuel for the generators. But it never crossed our mind to do a cost-benefit analysis. That was out of the question.

I hated the generators because they produce so much pollution, and it smelled so bad because we had to install it in the front yard. It was just a mess, but none of that mattered versus paying the bribe. We could have paid the bribe. No one would have known about it. Things would have been much better off. We would have more money for poor kids, and all of that, but we didn’t do that. And we’ve repeatedly not done that.

We bought a large property, and these property transfers took years for us to get our paperwork done because we were not willing to bribe even if the bribes were insignificant. They were less than $100 here or $200 there. Whatever. We were buying a property for $10 million, right? We never paid $1, okay, and that’s the principle we live by. And so far, we have not had to shut operations because of this, but we were very willing to.

47:43

We found a workaround with the diesel generators. We’ll always try to find a workaround, and most of the time, I’ve used a stick approach, where usually, when someone’s asking for a bribe, I would go high up in the government, the people I know, and they come and hammer the person, and then the bribe request disappears. In the case of the power, we couldn’t do that.

So, I think core principles like that are what make companies do well. I think you really want, even in investing, to look at businesses, which are very honed-in on core principles.

48:17

You know Southwest Airlines, their culture. I have an ex-employee who was a consultant for them for a while, so he used to go into their headquarters. He was a senior IT guy. He said, “Every time I’d go in to meet them for a meeting, the first thing they’d all do was hug me, okay.” He said, “I’ve worked with United Airlines. I’ve worked with Delta. I’ve worked with all these airlines. Nobody ever hugged me even once.” He said the entire team would hug me before the meeting started, and he said, “I went to the Southwest Airlines headquarters. They have no art. They only have employee family pictures.”

So, the culture of a place is really important, and the principles of a place are really important. Profit or nonprofit, it doesn’t matter.

Stig Brodersen  49:06

Thank you for sharing. I just want to say that both my wife and I are teachers, and I kid you not when I say that we both have this dream of starting our own school that empowers intelligent students one day. I actually ran to my wife after I read through some of your annual reports, and she just looked at me, asking, “What’s going on, Stig?” And I said, “I feel the same way about this charity as to how whenever I read Buffett’s letters, like, ‘This is who I need to clone.’ ” And I know that’s the best flattery. I told my wife, and she can testify to this: “This is how we need to do it. It’s like someone already did the hard work. We need to work harder. We need to fund this, but this is the model in our area where we can make an impact.”

Mohnish Pabrai  49:51

Stig, that warms my heart a lot.

One of the side effects I was hoping for with Dakshana was that I was hoping I’m not the only guy reading my reports. It was very heartwarming with the comments Buffett made, but I think after that many, many times that I sent him reports, I would get a request, “Send 20 copies.” And he would give it to his board. He’d give it to all his kids and grandkids, and so that was very flattering. And, of course, Charlie Munger reads the reports as well.

So, yeah, I mean, I think that the reports are good because they’re cloned, okay. I couldn’t come up with those reports on my own. Also, I think Buffett appreciates the fact that there are no pictures. He’s gone to pictures, but I still haven’t gotten to pictures yet, even though we have tremendous pictures to share. We leave them for our website.

Preston Pysh  50:44

Mohnish, we cannot thank you enough for coming on. You always just have so much wisdom and just set the example for everybody out there. We’re going to have links in the show notes to the Dakshana Foundation if anybody wants to check that out. If you want to donate, we highly encourage you to donate there. But man, thank you. Thank you. Thank you, Mohnish.

Mohnish Pabrai  51:06

Thank you. It’s a pleasure, actually. It’s enriched my life, and made my life a lot more interesting. I wrote about this in my last annual report that, probably, the biggest beneficiary of my foundation is myself. I mean, I wrote that the giver has actually become a big receiver, so what I have gotten back from Dakshana, has blown away anything I’ve given. I think that all of you will find that when you go down that path, it such a beautiful path.

Stig Brodersen  51:40

I think you’re so right. We’ll also make sure to link to the latest annual report, and from 2018, where you talk about a very personal story at the end of your letter. I think the audience will find that heartwarming. Thank you so much for inspiring us with what you do.

Mohnish Pabrai  51:55

Thanks a lot, Stig! It was fantastic.

Outro  51:58

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