[00:02:23] Shawn O’Malley: Over the years, Pabrai got to know Buffett after spending 650,000 to have a charity launch with him, which he later said was worth every penny. He actually felt the two and a half hour meal with Buffett was underpriced, given what he got out of it. And from there, he became even closer with Charlie Munger before he passed.

[00:02:40] Shawn O’Malley: On Fridays, they would play bridge together, which was Munger’s favorite game. Pabrai has truly had a rare chance to study the best investors to ever live, up close and personal, and that has surely rubbed off on him. But I want to clone the master cloner and soak up as much knowledge from him as possible.

[00:02:57] Shawn O’Malley: Having said that let’s begin with the prize 2023 presentation during Berkshire weekend, where he gave an hour long talk at the university of Nebraska, which became an instant hit throughout value investing circles. One simple metaphor dominates the talk. That is, Circling the Wagons. If you ever watched the TV series Yellowstone, you might know the reference.

[00:03:17] Shawn O’Malley: Imagine yourself as a 19th century pioneer trailblazing across the Wild West. A world with unknown threats lurking around every corner, where something as trivial as getting the wheels of your stagecoach stuck in the mud could be life or death. Circling the Wagons, then, is a defensive maneuver. It’s a last ditch effort to make a stand and fend off attacks from Native American tribes.

[00:03:37] Shawn O’Malley: On this new frontier, cautious thinking and deliberate action are critical. There was very little room for error and any catastrophically wrong decision could mark the end of your journey. Investing is less dire, but it’s similar in that you’re operating in an uncertain arena where you can never take safety for granted and a single big mistake can be both easy to make and devastating.

[00:03:59] Shawn O’Malley: Yet, as Pabrai points out, while investors make so many decisions across their careers, only a small handful of them, about 4%, end up being of any lasting consequence. As Warren Buffett writes in his 2022 letter to Berkshire shareholders. Quote, Over the years, I have made many mistakes. Consequently, our extensive collection of businesses currently consists of few enterprises that have truly extraordinary economics.

[00:04:25] Shawn O’Malley: Many that enjoy very good economic characteristics and a large group that are marginal. Let me go ahead and say that again. Warren Buffett believes Berkshire’s vast investment portfolio has a cohort of companies that are just marginal at best. That isn’t modesty or self-effacement. It’s just economic reality.

[00:04:42] Shawn O’Malley: Over a lifetime, a few big winners and key decisions end up making all the difference. As Pabrai breaks it down, over six decades, Buffett has made 300 plus important decisions as Berkshire’s CEO, including 80 plus business acquisitions, over 200 common stock investments, and 10 plus key personnel hires.

[00:05:01] Shawn O’Malley: Yet Buffett says the following, in 58 years of Berkshire management, most of my capital allocation decisions have been no better than so. Our satisfactory results have been the product of about a dozen truly good decisions. Some of these truly great decisions stem from investments in companies like Geico, Coca Cola, American Express, Apple, and National Indemnity, as well as in people like Ajit Jain, who runs Berkshire’s insurance operations.

[00:05:27] Shawn O’Malley: Pabrai explains that with these truly great and impactful decisions, it wasn’t the initial choice to buy that mattered most, it was the decision to continue holding those investments. By luck or skill, anyone can recognize attractive businesses to own. One of the differentiating factors for investors like Pabrai and Buffett is not to lose sight of what matters most, though.

[00:05:47] Shawn O’Malley: As in, many people have made these same investment decisions along the way, but few have held them as long as Berkshire and reaped the full benefits of the decision to invest in companies with lasting competitive advantages. Across more than 300 important decisions, Berkshire kept plenty of poor and mediocre businesses, but they also held onto their biggest winners too, which more than made up for the average performance from the rest of the portfolio.

[00:06:11] Shawn O’Malley: The metaphor Pabrai makes is to say that investing is a very forgiving business, so long as you don’t cut the flowers and water the weeds. Too many people make the mistake of doing all the work to understand and identify a great business, and then after a few years, despite no real change in the business, they decide to sell.

[00:06:28] Shawn O’Malley: Maybe they feel as though they already earned a decent profit that they want to lock in, or maybe they simply get bored and are looking for action. Whatever it is, they rebalance over time away from their biggest winners and, correspondingly, their best decisions, hence cutting the flowers while watering the weeds.

[00:06:44] Shawn O’Malley: By making just a handful of great decisions across almost 6 decades and holding on to those winners, Berkshire was compounded returns at 20 percent per year, trouncing the S&P 500’s 9. 9 percent annual returns from 1965 through 2022. That difference in compounding of 10 percentage points a year over that full time period results in almost 3.8 million percent of cumulative gains versus 24, 000 percent of cumulative gains for the broader market. So a dozen or so great bets over a very long period of time drove a difference of over three million percent of cumulative returns. To go back to the circling the wagons metaphor, these big winners for Berkshire and any long term investor’s portfolio make up the stagecoaches that defend the rest of the portfolio.

[00:07:28] Shawn O’Malley: A few excellent investments will defend your portfolio from recessions, stock market panics, and whatever other risks await you in this uncertain world. To really make the point, Pabrai uses the South African publishing company NASPERS as an example. Back in 2001, NASPERS purchased a 46. 5 percent stake in the Chinese company Tencent for only 32 million, while NASPERS itself was a 500 million company.

[00:07:52] Shawn O’Malley: After Tencent’s IPO in 2004, that stake in Tencent was diluted down to just 36%. But over the next 14 years, NASPERS didn’t sell a single share of Tencent, while Tencent’s stock grew at 50 percent per year. With that incredible growth, by 2018, Tencent was a 530 billion company, and Nasper’s own shares in it were some 170 billion.

[00:08:15] Shawn O’Malley: In less than two decades, Tencent went from representing about 6 percent of NASPR’s market value to more than 100 percent of it, since NASPR’s own market valuation was actually less than the value of its stake in Tencent. What made the difference for NASPRs was not just their decision to invest in Tencent, but their decision to continue holding it.

[00:08:32] Shawn O’Malley: You could easily see how after a decade of 50 percent plus returns per year from Tencent, elevating NASPR’s market value from the hundreds of millions to the hundreds of billions, they might have wanted to take some money off the table and trim their position in Tencent. Instead, NASPR circled the wagons around Tencent.

[00:08:47] Shawn O’Malley: And that is what has generated some of their incredible, incredible returns over that period. Another great example of not cutting the flowers and watering the weeds or circling the wagons to use both metaphors comes from investor Nick Sleep. Between 2001 and 2013, Nick Sleep’s Nomad Fund earned returns of 18.4 percent per year, almost triple what the MSCI World Stock Index earned over that same period. With 3 billion in assets under management sleep dissolved the fund in 2014. Yet his simple recommendation to his investors was to simply continue holding Amazon, Costco, and Berkshire for the next 10 years and equal concentrations.

[00:09:22] Shawn O’Malley: His investors could effectively recreate the portfolio without the fees so long as they had the same conviction to hold on to those companies for an extended period. It may be of little surprise, but many of the fund’s investors could not stomach doing that, even at Sleep’s explicit advice, and they diversified to their own detriment.

[00:09:40] Shawn O’Malley: Sleep’s concentrated portfolio, despite paying off hugely, was too much for many of his fund’s investors to swallow. While Costco and Berkshire have been great bets, Amazon was the key investment to circle the wagons around and continue holding. Even if everything else in Sleep’s portfolio had gone to zero, with a 20 percent stake in Amazon, the portfolio would have outperformed the S&P 500 by 6 percentage points from 2004 through 2023.

[00:10:03] Shawn O’Malley: So the many mistakes they made along the way simply didn’t matter that much when they were right in such a big way about buying and holding Amazon forever. Even with Ben Graham, who was Warren Buffett’s mentor and the father of value investing, his best investment ever was in Geico, a high quality company that he held for more than a decade.

[00:10:20] Shawn O’Malley: Yet, at least in part, it stood at odds with the investment method he had preached of buying overly cheap stocks at a discount to their intrinsic value and then selling them within a few months or years once they reached their full value. Geico was such a good investment to hold indefinitely that Graham violated some of his personal rules around portfolio sizing and invested 25 percent of his partnership’s assets into the company, despite normally having a limit of investing no more than 5 percent in a single investment.

[00:10:46] Shawn O’Malley: As Graham wrote decades ago, quote, Ironically enough, the aggregate profits accruing from this single investment decision far exceeded the sum of all the others realized through 20 years of wide ranging operations and specialized fields. Involving much investigation, endless pondering, and countless individual decisions.

[00:11:05] Shawn O’Malley: He adds quote, One lucky break, or one supremely shrewd decision, can we tell them apart, this may count for more than a lifetime of journeyman efforts. In 25 years, Geico was, in the parlance of Peter Lynch, a 500 bagger. Again, I love how Ben Graham frames it. It’s not just a question of luck. He says, behind the luck or the crucial decision, there must usually exist a background of preparation and discipline.

[00:11:30] Shawn O’Malley: One needs to be sufficiently established and recognized so that these opportunities will knock at his particular door. One must have the means, the judgment, and the courage to take advantage of them. One big, correct investment held for a long time can make or break a career. In 1976, Graham is recorded as saying that after having made an investment in GEICO in 1948, From then on, he and his investment partners seemed to be brilliant people.

[00:11:57] Shawn O’Malley: If Graham had sold Geico in 1950, as opposed to holding it for more than another two decades, he would have shortchanged himself and may not be remembered with the same reverence as he is today, which stems from both his wonderful teachings and his track record of success. While long term investing with concentrated bets on single great companies was not really at the core of Graham’s philosophy, it worked out fantastically well for him with Geico, And that is what, in part, inspired Buffett to acquire Geico and Fool through Berkshire and shift his perspective toward buying wonderful companies at fair prices over fair companies at wonderful prices.

[00:12:32] Shawn O’Malley: Continuing on with Pabrai’s talk on circling the wagons, he explains that in the 1960s and 1970s, it became quite fashionable to invest in the 50 largest and best known U. S. stocks, which was an approach known as a nifty 50, where many thought that you would do well by purchasing these companies regardless of the price.

[00:12:49] Shawn O’Malley: While this episode of market history was essentially a bubble that burned investors, over a long enough time, the strategy didn’t work out as poorly as you might think. It’s controversial, but if we include Walmart in the nifty 50, that ends up being the stock to circle the wagons around. With a portfolio of nifty fifty stocks in 1970 and just a 2 percent stake in Walmart, over the next 52 years, even if every other company in your portfolio went bankrupt, your small stake in Walmart alone would have been enough to deliver a market beating average annual return of 13 percent per year for your entire portfolio’s value.

[00:13:24] Shawn O’Malley: Obviously you would have done considerably better by just owning Walmart, but even a small position that you hold onto in a company that becomes one of the biggest winners in markets is more than enough to redeem and otherwise failing portfolio. The hardest part is holding onto Walmart for 50 years or holding onto Amazon and Tencent for 20 years.

[00:13:42] Shawn O’Malley: In the last century, a small percentage of stocks have been such big winners that they drive the majority of the market’s returns, while most others fail or underperform. By investing in an index fund, you’re ensuring that you always have some exposure to these big winners, which will deliver you average stock market returns.

[00:13:59] Shawn O’Malley: But to really separate yourself as a stock investor to the extent that Buffett, Sleep, and Pabrai have, you need to correctly identify these companies that have the potential to be big winners, bet big on them, and hold them indefinitely while knowing that many of them will not work out, but the few that do will fully make up for it.

[00:14:16] Shawn O’Malley: Even without Walmart, the nifty fifty returned 10.2 percent per year between 1972 and 2023, yet almost no one would have held onto that portfolio of stocks for long enough to earn those returns. Because the nifty fifty stocks like Disney, McDonald’s, and Coca Cola collectively lost half of their value in the bear market of 1973 and 1974.

[00:14:35] Shawn O’Malley: Even at ridiculously expensive valuations and a subsequent major bear market, holding onto the top 50 U. S. companies would have worked out well for you. It’s just that few people could have stomached that sort of volatility along the way. Without question, I’m sure most nifty 50 investors bailed on the strategy, either in the 1973 to 74 bear market, or sometime, not that long after.

[00:14:56] Shawn O’Malley: Pabrai’s key lessons are that firstly, a very large error rate is par for the course with investing. Secondly, don’t cut the flowers to water the weeds. Hold on to great businesses for dear life. And thirdly, avoid paying ludicrous prices for great businesses. When Berkshire bought Coca Cola, American Express, and Geico, they did so at modest valuations relative to their business quality, and that complemented the returns these businesses were able to compound over time.

[00:15:23] Shawn O’Malley: Additionally, Pabrai invokes another great investor, Chuck Akre, and suggests we should embrace his three legged stool approach to investing, which entails focusing on buying great businesses run by great people with long runways for future growth. He reminds us that when even great businesses appear fully priced or even significantly overpriced based on what we’ve gone over here today, you would still not want to sell the stock of a big winner unless it truly reaches a point of being very, very clearly and egregiously overpriced.

[00:15:51] Shawn O’Malley: Relatedly, a single great stock like Walmart or Amazon can grow over time to become more than 60%, 70%, or even 99 percent of your portfolio. But that concentration unto itself is not necessarily a reason to trim the flowers. Buffett has never trimmed his stake in Berkshire, even though it is over 99 percent of his net worth.

[00:16:10] Shawn O’Malley: It was the same with NASPERS and Tencent, where NASPERS went many years without trimming, despite its Tencent stake ballooning to consume its entire market valuation. So Pabrai has taken this to heart and his portfolio, at least as of 2023, is extremely concentrated with 70 percent and just three bets.

[00:16:28] Shawn O’Malley: And one bet on a Turkish company called racist made up more than 40 percent of that pie. He tells the audience that the risk is not in getting stuck holding companies like IBM or Intel that are supplanted by competition, but in being too trigger happy to let go of the great companies in your portfolio.

[00:16:45] Shawn O’Malley: For instance, the opportunity costs of selling Nvidia and 2020 are just massive. The company has added 3. 3 trillion in market value in five years, up from a market cap of 144 billion. 144 billion. I’m sure there are people who believed in NVIDIA from 2015 through 2020, who sold the company during the pandemic crash, never got back in and missed out on all that upside.

[00:17:06] Shawn O’Malley: The gains from an NVIDIA more than make up for the IBM’s and Intel’s of your portfolio. And that’s the whole point for every big winner. You can have a dozen mediocre companies and still do incredibly well over a multi decade time horizon. Before we go any further in studying Pabrai, I want to revisit the lunch he had with Buffett that I mentioned at the top of the show.

[00:17:26] Shawn O’Malley: He actually did it jointly with another famed value investor, Guy Spier. Both of them walked away in awe of Buffett, unsurprisingly, and particularly in how he and Charlie Munger approached everything they did with honesty and integrity. Pabrai has said that the two use an internal yardstick to measure integrity, and in doing so, they would ask a rather unconventional question.

[00:17:47] Shawn O’Malley: And That is, would you rather be the greatest lover in the world, yet be known as the worst, or would you rather be the worst lover and known as the greatest? Buffett reportedly told Pabrai that if you know how to answer that question correctly, then you have the right internal yardstick. This also plays into the old Buffett aphorism that you should never do anything in life if you would be ashamed of seeing it printed on the front page of your hometown newspaper for your friends and family to see.

[00:18:13] Shawn O’Malley: Another takeaway that Pabrai has cloned from Buffett is in getting comfortable saying no. Buffett has relayed before that quote, The difference between successful people and really successful people is that really successful people say no to almost everything. During their lunch, Pabrai got to peek at Buffett’s planner and saw that it was almost completely bare.

[00:18:33] Shawn O’Malley: As Guy Spier put it to CNBC, Buffett likes to leave his time unstructured and to leave plenty of room for spontaneity. It’s very tempting to say yes to every meeting that your colleagues or business contacts propose, but you’ll end up filling your calendar with a bunch of events that, at a minimum, distract you from working deeply.

[00:18:50] Shawn O’Malley: That isn’t to say Warren Buffett doesn’t do anything all day, he just doesn’t formally schedule many things. Instead, he leaves the slate open so he can brainstorm, read deeply, or call people as he sees fit. This is something that Bill Gates has actually validated too. After meeting Buffett in 1991, he said that Buffett’s calendar was largely empty.

[00:19:08] Shawn O’Malley: Having a packed calendar doesn’t make you a more serious person. The discipline to control and strictly value your time by saying no to lots of things is an important skill. For Pabrai, he told an audience back in 2019 that he has over 400 investors in his fund globally. I’m going to call or exchange emails with any of them.

[00:19:28] Shawn O’Malley: He’s defined the expectations and those relationships and also selected to work with investors who are like minded, so they don’t feel like they have to call them up every quarter and ask what’s going on in the portfolio. There’s just a level of trust there that makes it very easy to work together.

[00:19:41] Shawn O’Malley: Buffett, for his part, tells Berkshire shareholders that once a year, he will make himself fully available to them, and for the rest of that year, he’s working and not available. And that one day is, of course, the Berkshire shareholder meeting, where he sits on stage alongside Charlie for many decades and answered questions for six hours plus.

[00:19:57] Shawn O’Malley: The way Pabrai thinks about it is that, like Warren, he wants to configure his work in a way such that he would be happy to do it even if it weren’t his job. He had to answer a ton of calls and emails from anxious investors every day. That would very much feel like work, and he certainly wouldn’t do it once reaching some independently wealthy status that he’s already achieved.

[00:20:16] Shawn O’Malley: So Pabrai has rolled his ethos into his personal life as he tries to live true to his inner scorecard. In part, this is about being highly selective about the people he allows into his life. In being so selective, Pabrai finds comfort in knowing there are billions of people on the planet. So the opportunity cost of missing out on a great personal connection is pretty low.

[00:20:35] Shawn O’Malley: He also always has the chance to meet new, potentially great people. But the cost of introducing the wrong people into his life is a price he’s unwilling to pay. As he told Stig Brodersen in a We Study Billionaires interview, Basically, it’s an unfair system. It’s a bad system but it is a system that Warren uses.

[00:20:52] Shawn O’Malley: And who am I to try to improve on that? So he has multiple layers of filtering where he tries to ensure he only meets the right people, and from there, he invites them over to have chai. He does like to meet new people, but life is too short to pretend to be everyone’s friend, in his words. Let me just play you some more of that conversation.

[00:21:11] Mohnish Pabrai: And so basically what I look for is when I meet somebody, I reflect back after the tea, I say, okay, what do I think? And what’s going on? The most recent chai with Pabrai I had, that person asked me to come to his place. He lives very close to my home. And he said, I was happy with the Assam tea, but I’m really a fan of Darjeeling tea.

[00:21:39] Mohnish Pabrai: And so he says, I make a great cup of Darjeeling tea. And would you come to my home so that we can have Darjeeling tea? And I like the guy. So it’s not just one stick. It’s more than one. I like the guy. And I said, yeah, so there will be a Darjeeling tea happening, even though I didn’t tell him this, but you know, Darjeeling is not my favorite. But you know, it’s okay. If the company is good, we can deal with mediocre tea.

[00:22:07] Stig Brodersen: And can I go back and then ask, whenever you say that you are a harsh grader and whenever you say you want to be direct, of course you also want to be kind, but like, do you literally say it was great meeting you? Or don’t you even say it was great meeting you if it wasn’t great meeting and then just saying. [Crosstalk]

[00:22:22] Well,

[00:22:22] Mohnish Pabrai: I’ve enjoyed these meetings. I’m not lying when I’m telling them. I’m not, I’ve not enjoyed meeting these people because it’s been, they go through a lot of filtering process before they show up and I learned from everyone. So they’re wonderful people, but so I’m very direct with them. Like there was a person who came up a few days back and they were interested in going to dinner with my girlfriend and his wife, like the four of us together.

[00:22:50] Mohnish Pabrai: Now that adds. More layers of complexity. Okay. Because she’s going to ask me a bunch of questions. Who, what, where, what are we doing here? What’s going on? Right. And to me, it was obvious. I didn’t even, I didn’t even ask her. It was obvious to me, that’s not going to be in the cards. And so I just told the person, I’m sorry, things are too busy.

[00:23:13] Mohnish Pabrai: We can’t do it all the best. And then he had a very gracious response. So it was fine. I think what you find is that when you’re direct with people, it’s not like they’re sad. I think they appreciate the candor.

[00:23:28] Shawn O’Malley: That was sort of a tangent, but I wanted to make the point that Mohnish very much blends lessons learned from investing into the way he lives his life.

[00:23:36] Shawn O’Malley: While there’s probably a good business case for being selective with your time, for better or worse, Pabrai extends that to his personal relationships too. I have difficulty being as direct with people and protective of my time as Pabrai is, but I can certainly appreciate the approach to life that he takes, especially since in some ways it’s molded after Warren Buffett.

[00:23:55] Shawn O’Malley: Pivoting back toward investing, Pabrai’s approach has evolved over time, though I think this description from Forbes sounds about right. They write that he, quote, has no interest in a company that looks 10 percent undervalued. He’s angling to make five times his money in a few years. If he doesn’t think the opportunity is blindingly obvious, he passes.

[00:24:14] Shawn O’Malley: So that’s, again, that’s a pretty good way to put it. To understand Pabrai and his approach more, I want to turn to William Green’s excellent book, Richer, Wiser, Happier, and its full profile of Pabrai. As Green outlines, in 1994, Pabrai had reached 1 million in savings, And as he sat waiting in the airport, he began to read about Warren Buffett and was astonished at how well he had racked up investment returns, earning 31 percent annually for 44 years.

[00:24:39] Shawn O’Malley: Up until that point, Buffett would have turned 1 invested with him in 1950 into 144, 523 by 1994. In awe of both Buffett and the power of compounding Green explains that. Pry wondered whether he could mimic Buffett’s winning approach and play a 30 year game of trying to turn his $1 million into a billion dollars.

[00:25:00] Shawn O’Malley: Investing as with so many things in life is one big game that we can seek to win at. And pry loves to play games, particularly games. He knows that he has an advantage in. The question then is how do you win the game? As Pabrai phrases it, you’ve got to play according to the rules. And the good news is, I’m playing against players who don’t even know the rules.

[00:25:20] Shawn O’Malley: The lesson for all of us here is that rather than trying to devise some complex way of beating the markets, Pabrai instead opted to identify the most skilled players at this game of investing, analyze what had made them so successful, and then mimic their approach with scrupulous detail. Pabrai told Green that he is actually a shameless copycat and that everything in my life is cloned.

[00:25:41] Shawn O’Malley: I have no original ideas, he says. You might say that in some sense, Pabrai is a testament to originality being overrated. On the other hand though, there’s something especially original about his devotion to cloning. As William Green puts it in Richer Wiser Happier, he and Pabrai have spent a lot of time together, from annual visits to Omaha for Berkshire meetings, to sharing a bunk bed on an all night train ride across India.

[00:26:04] Shawn O’Malley: Along the way, he quote, came to appreciate the tremendous power of Pabrai’s method of reverse engineering, Pabrai, the most relentless cloner I’ve ever encountered, has taken the art of appropriation to such an extreme that, paradoxically, it seems oddly original. Pabrai’s approach is as simple as consistently observing the world inside and outside of his industry, and whenever he would see someone doing something that he thought was smart, he forced himself to adopt it in whatever way he could.

[00:26:31] Shawn O’Malley: And after having studied Buffett and Munger so closely and embracing their outlook so dearly, he was surprised to study other investors and learn that many of them followed completely different sets of guiding rules. Pabrai’s conclusion was that most money managers own too many stocks, paid too much money for them and traded them too often.

[00:26:49] Shawn O’Malley: In his words, Pabrai expressed concerns that mutual funds are sitting there with 200 positions. How can you find 200 companies that will all double? Then I look at what they own and they own things that are trading at 30 times earnings. Here’s what’s next! And I saw that they were all hosed. There are no prizes for frenetic activity in markets.

[00:27:07] Shawn O’Malley: Instead, investing is mostly a game of waiting for those rare moments when the odds of making money vastly outweigh the odds of losing it, at least in Pabrai’s view. As Green continues in his book, this is a skill that Pabrai learned from Buffett, who has been sublimely indifferent to the cries of the crowd and who can idly twiddle his thumbs for many years, such as during the 1970 1972 market euphoria where he felt almost everything was trading at a crazy valuation.

[00:27:33] Shawn O’Malley: When markets naturally returned to earth in 1973, Buffett promptly bought a major stake in the Washington Post company, which he held for four decades. Pabrai compares the approach to being like a spearman standing next to a stream, Most of the time you’re doing nothing until suddenly a fat juicy salmon swims by and then you spring into action to spear it and then it may be six months again before that next salmon goes by.

[00:27:56] Shawn O’Malley: Contrast that approach with the more typical money manager who takes many small and frequent bets to quote unquote diversify. From Pabrai’s perspective, the odds just aren’t in your favor enough to rationalize all that activity. In this vein, he’s known for saying that the number one skill in investing is patience, specifically extreme patience.

[00:28:15] Shawn O’Malley: For example, in the 2008 crash, Pabrai made 10 investments in short succession over about 2 months, whereas in more normal times, he bought only 3 stocks across all of 2012 and none in 2013. Given his supreme patience, you won’t be surprised to learn that his favorite quote is from the philosopher Blaise Pascal who says that all of humanity’s problems stem from man’s inability to sit quietly in a room alone.

[00:28:39] Shawn O’Malley: Similarly, you might say that Berkshire shareholders have profited hugely from Buffett’s inclination toward financial tranquility by distracting himself with playing on my bridge, which helps counteract the natural bias for action in investing. All in all, after first setting out to turn his 1 million into 1 billion, Pabrai surpassed that mark years sooner than expected.

[00:29:01] Shawn O’Malley: After 10Xing his nest egg in less than five years, he had enough friends and family interested in financial help to launch a fund to manage their money. William Green continues to explain that for Pabrai, one of the secrets of successful investing is to avoid anything that’s too hard. He automatically passes on investments in countries like Russia and Zimbabwe, given their lack of respect for shareholders rights.

[00:29:23] Shawn O’Malley: And he avoids all startups and IPOs since they’re unlikely to be available for investment at bargain prices. Relatedly, he’s never shorted a stock because the maximum possible return is 100 percent if the stock falls to zero, whereas the losses have no cap if the stock keeps rising and rising. And that’s not the sort of risk return profile he finds attractive.

[00:29:43] Shawn O’Malley: In short, simplicity rules for Pabrai. When asked by Green why more people don’t embrace his systematic method for cloning, he told him, quote, They’re not as shameless as me. They have more ego. To be a great cloner, you have to check your ego at the door. So, those are the highlights from William Green’s delightful book, Ritualize Your Happier, and the profile specifically on Mohnish Pabrai.

[00:30:05] Shawn O’Malley: I would of course recommend that you read the whole thing for yourself, but hopefully that helps paint a more complete picture of who Pabrai is. As we continue on and learning from the Master Cloner, I want to turn to his 2019 lecture to students from Peking University. It’s about an hour and a half long and an absolute joy to listen to, because Pabrai, again, is such a gifted storyteller.

[00:30:26] Shawn O’Malley: He shares with the students that while it’s tempting to think otherwise, not every great business is a great investment. That is not to say you won’t earn a decent rate of return by investing in great businesses, which is something we’ve talked a lot about in recent episodes. But at least with mega caps, the room for upside isn’t enough for those investments to generate these sort of outsized performance that’s going to enable you to compound your wealth at more than 20 or 30 percent per year.

[00:30:51] Shawn O’Malley: If as a game investing was simply about investing in the companies with the best business models, it would be an easy game to play, but it’s not so simple because almost everyone else will see high quality businesses for what they are to with a massive payments company like MasterCard. That is an incredible business, high barriers to entry, oligopoly and high returns on invested capital.

[00:31:11] Shawn O’Malley: But of course, it trades at a price earnings ratio of 40, which is more than twice the historic market average. So not only is the company already very large, limiting its ability to massively grow its market value, but also investors are already paying a rich price for that quality. Part of what distinguishes per bride is that he has such ambitious goals for his investment returns.

[00:31:30] Shawn O’Malley: He’s not happy with simply beating the market by a few percentage points over time. He wants to absolutely crush it. And to do that, you have to be extremely aggressive. And what we talked earlier about how a single high quality investment held for long enough, like holding Walmart since the seventies can be a game changer.

[00:31:46] Shawn O’Malley: The wrinkle here is that buying into Walmart then was when the company was still at an early stage in its life cycle. From October 1984 through 2000, Walmart increased its market value by 30 X. For Walmart to do that again from 2024 through 2040, its market capitalization would be over 19. 5 trillion, which is roughly the size of China’s entire economy today.

[00:32:09] Shawn O’Malley: So obviously you just can’t expect Walmart to be a 30 bagger at this point in its life cycle, which is okay. And shareholders may continue to do quite well with it, but it’s not going to have the massive outperformance that it once did either. Even though Walmart continues to have an incredible business, it’s not as simple as recognizing that and buying the company stock and then becoming vastly wealthy.

[00:32:29] Shawn O’Malley: This is a conversation per bride tells the Peking university students that he’s had at length with his friend Guy Spier, who happens to love owning high quality blue chip companies like MasterCard after guy had already made a 12 X return a MasterCard. Her bride sought to convince him that he wouldn’t be able to earn those same returns again with the company due to its size.

[00:32:47] Shawn O’Malley: So he should sell and look for opportunities with bigger payoffs. While MasterCard was and is still a great company, Pabrai doesn’t think it’s a great investment. On the other hand, with the small Indian company SunTech Realty, he doesn’t think it’s that great of a business yet, but he loves it as an investment.

[00:33:03] Shawn O’Malley: That is to say, good companies can make for great investments, and great companies may only make for good investments. With that idea in mind, he challenged Guy to a bet in 2018 to see which stock would do the best over the next 12 years through 2030. The case for Suntec Realty is that it’s a property developer in Mumbai.

[00:33:20] Shawn O’Malley: And after getting to know the management of the company, not only does Pabrai think they have a great grasp on capital allocation, but he knows they have this long term tailwind that other investors may not be patient enough to wait for. And that tailwind comes from the fact that over the next few decades, as India continues to industrialize, Mumbai is going to get torn down and rebuilt in the same way that happened in many Chinese cities as they modernize.

[00:33:43] Shawn O’Malley: And as Mumbai gets redeveloped and grows into one of the biggest cities in the world, if not the biggest, then SunTech will be a major beneficiary of that. But in the meantime, there’s this cloud of uncertainty hanging over whether this will really happen and on what timeline, and that makes for a great opportunity in a company that, at least based on its track record, isn’t clearly exceptional in the same way that Mastercard is.

[00:34:05] Shawn O’Malley: Yet Pabrai argues as investors, it’s our duty to peel back the onion behind the facade of an obscure, historically average real estate company in Mumbai. He sees a company that’s poised to grow explosively in the coming years, boosted by India’s inevitable advance and a sound management team. And Pabrai is more than happy to hold Suntech for a decade or longer and see if that comes to fruition.

[00:34:26] Shawn O’Malley: Funny enough, around halfway through that bet with Guy Spier, it actually seems that Guy is winning with MasterCard up around 90 percent in the past five years. Whereas Suntech is up about half as much at 48%. And that 48 percent is for the price in rupees, which has depreciated by 18 percent against the US dollar in the past few years.

[00:34:44] Shawn O’Malley: So Suntech’s performance in US dollar terms is actually lower. But still we will see who ultimately wins in a few years. And I think the rise point remains regardless of whether he wins the bet. Great companies, especially if they reach a certain size are not necessarily great investments and more average companies with undervalued shares or a large runway for growth can in fact be great investments.

[00:35:06] Shawn O’Malley: I’d add to this to say that market prices for stocks are fundamentally about expectations since companies are valued based on the earnings they will create in the future. The challenge with investing in large, well known great businesses is that expectations are going to be high. Great companies have high expectations for their performance.

[00:35:23] Shawn O’Malley: And if they do stumble, they’ll pay dearly for it, as famously happened to Coca Cola when it experimented with changing its signature formula for its drinks called New Coke. That did not go over well, to say the least. But if you can find a company that the market thinks is just good, but actually has hidden moats that make it a great business, like Pabrai thinks is the case with Suntec, then you can benefit from not only owning a company that can compound returns at high rates, We will also have the tail end of the price to earnings ratio rising in your favor as the market eventually realizes how good the company is.

[00:35:54] Shawn O’Malley: There are over 50, 000 stocks that trade publicly around the world and by Pabrai’s estimate, around 3000 of them are severely undervalued. While he probably can’t understand most of those 3000 companies, all he needs to do is to be able to understand three or four of them well enough. And he thinks he’ll do just fine.

[00:36:11] Shawn O’Malley: My takeaway is that to beat the market, you need to look where the market isn’t looking. While MasterCard probably has 30 different analysts tracking it on Wall Street, some smaller and more obscure company may be structurally underfollowed, which makes its pricing less efficient and creates more opportunities to buy in at a discounted valuation.

[00:36:28] Shawn O’Malley: Either way though, I really like how Pabrai tells the Peking University students that you’ll only ever completely understand a business once you own it. And I think that’s so true. When you have skin in the game, there’s just a different mindset. Subconsciously, you have more reason to care about whether you actually understand the details behind the business in a way that’s not really possible when you only own it on paper.

[00:36:48] Shawn O’Malley: In my personal investing, I’ve taken a similar approach where I’ll sometimes begin with a small position in something. And that will either drive me to become more interested and dive more deeply in understanding it, or I’ll lose interest and just drop it. I don’t do it all that often, but when I do, it’s when I’m on the fence about the opportunity and I want to give myself a little extra boost to look at it more seriously.

[00:37:09] Shawn O’Malley: And once I have money on the line, even if it’s a very small amount, it’s much easier for me to get excited about digging into the weeds of it. I would be remiss to talk about Pabrai today without at least touching on his wonderful book, The Dhando Investor. The natural question here, obviously, is what is Dhando?

[00:37:25] Shawn O’Malley: As Pabrai defines it, Dhando is a Gujarati word. Dhan comes from the Sanskrit word Dāna, meaning wealth. Dhando literally translated means endeavors that create wealth. The street translation of Dhando is simply business. And what is business if not an endeavor to create wealth? More tangibly speaking, you might say that to make Dhando investments is to find nearly risk free bets with massive upside.

[00:37:50] Shawn O’Malley: The classic heads I win, tails I don’t lose much type of investment. To show Dhando in action, Pabrai recounts the story of the Patels, an Indian family that in just over 30 years owned over half of the motels in America. With no money and little formal education, the Patels immigrated to Southern California in the 1970s and began doing blue collar work in the motel business.

[00:38:14] Shawn O’Malley: At this same time, the U. S. was entering a deep recession and gas prices were astronomically high, so many families were skipping vacations to cut costs. Hotel and motel occupancy rates fell very low, and as banks foreclosed on properties, a number of motels went to market in distress at fire sale prices.

[00:38:31] Shawn O’Malley: Seeing the opportunity to buy these assets from motivated sellers, Papa Patel realized they could purchase a motel business with 80 percent or 90 percent bank financing. Even better is that he could house his entire family in the motel for free while they work to run the business. And if the business flopped, Papa Patel knew that he and his wife could always go back to working overtime to save up enough money and just try again.

[00:38:53] Shawn O’Malley: This was a classic Dhando bet with a low risk and a very high reward. With just a few thousand dollar down payment, the Patels bought the motel and saved on all their expenses since they didn’t need to hire anyone outside of the family. That combined with their frugal lifestyle enabled the motels to become quickly profitable.

[00:39:09] Shawn O’Malley: As you can imagine, the Patels never lost their work ethic or caution and oversaw a disciplined expansion across the country as they snapped up everything from motels to gas stations, convenience stores, and even luxury hotels. Patels. The Patels were a low cost producer, and they undercut competitors with prices that more commercial operations could hardly fathom charging.

[00:39:28] Shawn O’Malley: Work ethic, business savviness, and a bias toward dramatic action when the odds are massively in your favor is the epitome of Dhando. Pabrai’s own Dhando story came from launching TransTech, a software business when he was 25 years old, with just 30, 000 in retirement savings and 70, 000 in max credit card limits that he could tap into as needed.

[00:39:48] Shawn O’Malley: Pabrai dug into bankruptcy law in the U. S. and realized that if his business fails, he could just declare bankruptcy and essentially start from scratch again. So he felt like he didn’t have much to lose, while the upside was that he could become independently wealthy. While Pabrai worked his job during the day, before and afterwards he worked on building his company and put his paycheck toward overhead expenses.

[00:40:09] Shawn O’Malley: Once his startup reached 200, 000 per year in revenue, he quit his day job. The worst case, in his view, was that he might lose 30, 000 in savings in a job he didn’t really care about. But that was all, since he had no wife or family to support. In the best case scenario, the idea might make him a millionaire, which it did.

[00:40:27] Shawn O’Malley: Pabrai’s model for making Dhando bets distills down to investing in simple, existing businesses where there’s low risk, but high uncertainty. For example, with the motels, they were low risk in that the Patels personally had little to lose, but also because motels were not likely to be phased out of existence.

[00:40:43] Shawn O’Malley: There was just a recession that created a cloud of uncertainty over the business, which if anything, created an opportunity for patient investors like the Patels. Even better, if you can snap up distressed assets where the seller is being forced to sell because of a bank foreclosing on them. To be Dhando is to always have an eye open for Dhando investment opportunities and betting heavily when the upside significantly outweighs the downside.

[00:41:06] Shawn O’Malley: In his own way, Papa Patel was a cloner like Pabrai. Rather than try and launch the next hot tech company and create some disruptive innovation, Papa Patel embraced a business model that he knew was proven to work, did so at distressed prices, and then built a low cost moat by being able to profitably afford rates that none of his competitors could.

[00:41:26] Shawn O’Malley: While no one knew when the recession would end that was hurting Patel businesses, Papa Patel knew it was a question of when, not if, and that uncertainty gave him the cover to buy and build a business at a cost that he would otherwise never be able to do so at. The example with the Patels really resonates with me because I know I personally spend a lot of time looking at businesses to own in public markets when there are probably so many wonderful privately owned businesses that I could acquire and operate myself or hire someone else to operate.

[00:41:53] Shawn O’Malley: I also appreciate the personal elements being factored into Dhando risk taking here. As in, Pabrai felt he had nothing to lose with TransTech because he was young, didn’t have that much money, and had no one depending on him. So of course he could afford to take what looks like a big risk because it wasn’t really that big of a risk.

[00:42:08] Shawn O’Malley: Same with the Patels. While Papa Patel did have dependents, they were already very poor and they were accustomed to living that way. So losing all their savings and a failed motel business wasn’t really as big of a risk as it might seem on paper. But obviously the upside has been higher than I’m sure they could have ever dreamed.

[00:42:24] Shawn O’Malley: A Dhando mindset, in my opinion, is about not only pursuing high reward bets, but also bringing a financial and personal perspective to your risk tolerance. If the Patels lived stable middle class lives, they probably wouldn’t have jumped on the opportunity to buy a motel business. And if Pabrai had a wife and kids, depending on him, he might have just kept his day job.

[00:42:44] Shawn O’Malley: It’s not that you can’t chase big opportunities if you have a family, it’s just that you have more at stake and that needs to be factored into your risk reward calculations. The Dhando Investor is a pretty easy to read book, but it touches on the nuances of risk and reward in a way that few other books capture.

[00:43:00] Shawn O’Malley: With that said, I want to begin wrapping up today’s episode. Mohnish Pabrai is a uniquely eccentric, independent thinker devoted to being as pragmatic as possible. His commonsense approach to investing takes cloning to the extreme, yet that cloning has worked out wonderfully for him and enabled him to build relationships with the very people he cloned, like Warren Buffett and Charlie Munger.

[00:43:20] Shawn O’Malley: Pabrai is one of my favorite investors to listen to because he really does tell the best stories. Someone who has spent so much time hanging out with Charlie Munger naturally has some interesting things to say. We haven’t really touched on it today, but what’s also great about Pabrai is not only his devotion to teaching others, but also his devotion to charitable work.

[00:43:37] Shawn O’Malley: His charity in India is called Dakshana and it has changed many lives for the better. If you’re curious to learn more about it, I’ll link to it in the show notes. He reminds me that investing is a game and to win at it, we should learn as much as possible from the best players of that game. And after spending many years carefully studying others, he too became one of the best players at the game of investing, who ironically, I am now studying.

[00:44:00] Shawn O’Malley: He also reminds me that investing should be fun. As I said, it’s a game and one we choose to play. If picking individual stocks is stressful or overwhelming for you, then don’t do it. Just go buy an index fund. Pabrai and others like him get immense joy from trying to stack the odds in their favor and win more than anyone else in investing, and that’s why he’d be happy to do it even if it wasn’t for money.

[00:44:22] Shawn O’Malley: Whether it’s in investing or something else, Pabrai’s most important lesson for us all is to go and find that thing we’re so passionate about, we’d continue doing it even if we won the lottery tomorrow, because again, it’s not about the money. To put a bow on this conversation about Mohnish Pabrai today, let me leave you with one of my favorite quotes from him.

[00:44:40] Shawn O’Malley: He says the following, You don’t make money when you buy stocks, and you don’t make money when you sell stocks. You make money by waiting. That’s all for today, folks. I hope you have the patience to embrace your inner Dhando Investor. I’ll see you again next week.

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