Mohnish Pabrai (04:52):
In one of his last emails to me, he said to me, “That the best investors in the world, are not investors at all. They are entrepreneurs who never sold.” Okay. So the framework, the framework that Nick Sleep was using was a very different framework than what I was using, which is the Compound 26, the 50 cent dollars. Nick’s approach was that, if you own a business like Walmart, don’t fixate on the multiple, don’t fixate that this is trading at 25 times earnings, or 20 times earnings or whatever else. Ask yourself a simple question. “Is the business getting better? Is the mode getting deeper? Is the mode getting wider? Is the business intact?”

Mohnish Pabrai (05:40):
If the business is intact, unless the pricing is egregious, it’s gone crazy, it becomes like GameStop or something, just keep the stock. So basically, what he’s saying is, use the same framework that the founders and the entrepreneurs who started businesses use. And so he used that framework with Amazon. So Nick Sleep shut down his fund in early 2014. And when he got cashed out, he put all his money in three stocks, Berkshire Hathaway, Costco, and Amazon.

Mohnish Pabrai (06:19):
And he told his investors when he returned the money in 2014, “Listen, just take the money we’re giving back to you, put it in these three stocks, and you don’t have to pay us ridiculous fees, and you don’t have to read our letters. Life is great.” And if those institutional investors had taken his advice at that time in 2014, Amazon was at $300 a share.

Mohnish Pabrai (06:45):
So you would have a 10X on Amazon in the last seven or eight years. Would you pretty much blow out almost any institutional investor and on the returns. And Costco and Berkshire haven’t done as well. Berkshire is actually lagged the S&P, but it didn’t matter, it wouldn’t have mattered. If you had put one third of your portfolio in Amazon, the overall portfolio results will be exception.

Mohnish Pabrai (07:10):
So I had been an entrepreneur for all these decades, and I recognize that, so for example, if I look at the GP interest of Pabrai Funds, which I own 100%, it’s a fantastic business, it’s an unbelievably great business. And it’s a business that has extreme volatility because I don’t charge management fees. So I went 10 years from 2007 to 2017 with no fees. But even with that volatility, if you offered me $50 million or $100 million for that GP interest, it would not even take me a second to say, “I’m not interested.” In fact, I’m almost not interested at any price because I enjoy it so much, but I also recognize that it’s a great business.

Mohnish Pabrai (08:00):
So I recognize it’s a great business because I’m a founder and so on, but I can have that same framework on portfolio companies. So for example, two years ago, I made an investment in a company in Turkey. And this Turkish company was, it was a ridiculously undervalued company with a $19 billion market cap, 19. And liquidation value was somewhere between, let’s say three or 400 million to a billion dollars. It was pretty widely mispriced.

Mohnish Pabrai (08:33):
And it wasn’t just a cigar butt like something creating cheap, great capital allocators and great assets. And almost for sure the intrinsic value was going to keep increasing. So if you bought it, it wasn’t that the 19 million would become 300 million at some point. It was possible that if you held it long enough, the 19 million might become several billion. Okay. So I was surprised because Turkey has such high trading volumes, that we were able to get a 33% stake in the business for about $7 million. Well done. Mohnish, well done. Even if I pat myself on the back, still it is okay.

Mohnish Pabrai (09:18):
And now when I bought this company in Turkey in 2019, I did not have the Nick Sleep framework. But what I understood is, I’m going to hold this company for a while, and then I’m going to wait for this convergence to happen. And then when it converges, I’ll look at selling it. And if its intrinsic value is a billion and it gets to a billion-market cap, that’s a good time to sell it. That framework has been thrown out the window.

Mohnish Pabrai (09:46):
There’s a new framework, and the new framework is really simple. Is the business getting better? And if it’s getting better, I now think of myself as a owner of the business. I’m not a founder, but I think of it like the founder thinks of it. So the family that runs the business, they own 44%. I told them, I’m your junior partner. I own 33%. You’ll never hear from me how you guys should run your show, because you guys know how to do that really well. My job is just cheer you on from the sidelines. That’s all.

Mohnish Pabrai (10:26):
And so my framework with that company is, as long as the business is getting better and as long as the mode is at least staying as good as it was, if not getting better, we have no plans to sell that business. We have no plans to sell a single share for five years, 10 years, 20 years, as long as it takes. Okay. And now my framework is, that I want to find more of these now. I’m not going to get lucky to find $19 million market caps worth 500 million. The gods love me, but they don’t love me so much. If they give me one of these every 10 years, that’s very generous.

Mohnish Pabrai (11:10):
So even if I don’t get it at a discount, so Nick Sleep pointed out, that you could have bought Walmart in the 1970s at a fee of 100 or a fee of 150, and you would have still made like 13, 14% a year for the next 50 years. So you could have almost paid any price Walmart was trading at in the ’70s or the ’80s, and you would have still had a double digit return over a very long period with no capital gains tax, and just pure compounding.

Mohnish Pabrai (11:49):
So my framework now, is to find long-term compounders which even if we don’t get them at big discounts to what they’re worth, and in the end the compounding engine will take care of that. So I used to think Nick Sleep was a rock star. I just described a rock star Nick Sleep. But then I heard of Naspers in South Africa. Are you familiar with Naspers?

Stig Brodersen (12:16):
Yes.

Mohnish Pabrai (12:17):
Okay. So Naspers put 32 million into 10 cent in, I think 2001 is when they made the 10 cent investment, about 20 years ago. And until now they’ve never sold. And basically that 31 million that stake in 10 cent is over 250 billion now. And so Naspers took the same point of view, which is that we are an owner of this business. And they don’t run the business, but hats off to them. So they’ve had something like an 8000% return on their investment just for sitting on their butt and doing nothing.

Mohnish Pabrai (13:00):
And so what I realized is that, if I can eventually get a portfolio of eight or 10 of these, which have these types of characteristics, good business, good mode, long runways, you’re done. And I mean, even if I can find one of those a year, that’s great. Set it and forget it. So that’s the new framework I’m excited about.

Stig Brodersen (13:28):
The new and improved Mohnish, that’s what we’re witnessing now.

Mohnish Pabrai (13:34):
I have to come up with new stuff for you Stig, otherwise, who’s going to listen to you.

Stig Brodersen (13:40):
That’s true. That’s true. You said it well. Mohnish, it’s interesting that you would lead off by talking about it, knowing that 2020 has been such a, it’s a year of learning for you. One thing I heard you said there back in the fall was that you talked about spawners, and you talked about how you at the time, just bought your fourth spawners in a Japanese company, and you would like to build a portfolio of spawners if possible. Could you please share your framework with the audience about spawners and pipes? Also talk about a few cuts [inaudible 00:14:12], how to identify them.

Mohnish Pabrai (14:14):
I mean, I think when I ran an IT services business, I was running this IT sales in the 1990s. Basically, I had to reinvent the business about three or four times in about 10 years, because what would happen is, we would identify a niche, which was not very competitive. We would have supernormal profits, then everyone would figure it out. And they would come into the business and those profits would go down. And then I’d have to come up with another one and so on.

Mohnish Pabrai (14:48):
So what we were doing on a very small scale at that time, is we were spawning these new micro businesses inside this small business. And eventually these micro businesses would get healthy and grow, and their cash flows would actually be better than the mothership. Companies that have the ability to create new businesses within from the mothership, is a very rare and unusual type of DNA. Most companies have no ability to do that.

Mohnish Pabrai (15:22):
Capitalism is very brutal. And when you finally figure out and have a mousetrap that makes money and that people are willing to come to you and give you money and be customers and all of that, it’s really difficult to come up with another mousetrap, because it’s just so competitive. And many kind of luck factors may have contributed to even the first mouse trap being successful.

Mohnish Pabrai (15:45):
And so generally speaking, creating new businesses from an existing business, is a very rare and unusual talent and unusual DNA. But there are some companies that are set up in such a way and they have such DNA, and origin and founders, that they are able to do this really well. So a good example of what I would call a apex spawner is Amazon, right? So Amazon first started as a bookstore, then they went to many retail categories. And then after that, they just kept innovating and they would keep throwing things against the wall.

Mohnish Pabrai (16:24):
So you remember the fire phone? So they came up with the fire phone. They offered it for 99 cents, okay, to try to disrupt the phone business. Even at 99 cents, they failed. But Jeff’s perspective was, I’ll through a lot of stuff up against the wall, 90% of it will fail, but 90% of it will also not cost as much. And a few things will stick, and we’ll scale that. So a lot of things that Amazon did, did not work, but several things did work. Kindle worked, Prime worked.

Mohnish Pabrai (16:56):
And then what he did is, he started looking at his cost of goods sold. Like for example, shipping was a cost of goods sold. And he went into the shipping business, or these aircraft that are flying around with Amazon packages, he bought the company that has those aircraft and so on. And he bought the robotics company that provides the robot for his warehouses. And then the biggest one for him was, he was using cloud infrastructure all built for his retail business. And then he offered that as the service to others.

Mohnish Pabrai (17:29):
And of course now the Cloud business is bigger in value than everything else at Amazon. So what was the cost center has become a tremendous revenue center. So similarly, Alphabet has either bought or innovated. They bought YouTube one of the best acquisitions ever, they bought Android, which is another great acquisition. And they’re working on things like self-driving and so on.

Mohnish Pabrai (17:56):
Alibaba is another great spawner. It has spawned in so many areas, the Cloud, Alipay, and then so many other logistics businesses and other business that they’ve set up. So if you can find a company that is good at spawning, the big advantage you get, is a couple of things. One is, if I’m a business that’s going to report $100 million in net income, Uncle Sam will take 25 million of that. But if I could take 100 million and use 50 million of it on these new innovative spawners, my tax bill is now 12 and a half million. My tax bill got cut in half.

Mohnish Pabrai (18:36):
So Uncle Sam becomes a very benevolent we see in this game where he says, “Yeah, it’s okay, take my money. And I don’t care if you take 20 years to bring it back. No problem. Or if it never comes back, it’s okay. No problem.” The best we see is Uncle Sam. So Amazon through most of its history, hardly paid any taxes because what they did is whatever money the core business was producing, they dumped it into spawners, which pretty much wiped out net income.

Mohnish Pabrai (19:08):
So this is much better than buying back stock. If you buy back stock, you actually have to make net income, pay Uncle Sam, and then use the words leftover to buy back stock. Spawning is kind of like on steroids compared to buying back stock. So spawning is very advantageous. Secondly, if you have digital spawners like Amazon or Alphabet or Alibaba, by definition these are high ROE businesses. They just generate high returns because of their digital nature. You don’t have land and warehouses and facilities, so you just make a lot of money.

Mohnish Pabrai (19:45):
So the return characteristics of these businesses is really good. So for example, the going back to the business I invested in Turkey, their core business is warehouses and the warehouse that leads to Alibaba, Amazon, Carrefour, Ikea, et cetera. They have spawned many, many other businesses. And in their case, the spawning is not digital, it’s analog spawning. But the founders of the business really understand capital allocation well. If they don’t generate a high return or they can’t see a high return, they will not put their money here.

Mohnish Pabrai (20:21):
So they need to see the money come back at the most in three or four years. And so what I realized later, it took me a couple of years to realize that, that this company wasn’t just undervalue. It actually had spawning DNA because they had already gone into a number of businesses, and their failure rate was really low. They were very careful in what businesses they went into. So spawning is awesome.

Stig Brodersen (20:47):
Last time we spoke, we talked about creative destruction and how the tenure in the S&P 500 is just getting shorter and shorter. Blackberry would just be one example of 2009, almost 50% market share. Then the iPhone came 2014, 1%. That’s how fast it can go. Was that sort of what sparked you to look at spawning? Was it more Nick Sleep?

Mohnish Pabrai (21:07):
I think spawning came about because of COVID, because I didn’t spend my time on airplanes and hotel rooms. I had a lot of time to contemplate my navel, and it is a very good idea to contemplate your navel from time to time. I think the spawning, actually the framework came up when I was drooling on my pillow. So I was kind of sleeping or half sleeping, and I was thinking about different things and different companies.

Mohnish Pabrai (21:35):
And I realized, especially when I looked at, because I was looking at Nick Sleep’s Amazon bet. And Nick had focused very heavily on Amazon’s retail business. When he first invested in Amazon, he asked himself, “What percentage of retail could be online in 10 or 20 years? And then what percentage of that online could be Amazon?” These were the types of questions he was asking himself. But I realized that Amazon’s real success did not come from retail, it came from spawning.

Mohnish Pabrai (22:10):
And so I realized, no, it’s not really retail it’s Cloud, but then where is Cloud coming from? And I realize it’s coming from the innovative DNA embedded deep in Amazon. So even now, Jeff Bezos has retired, “retired” but he’s not retired. All he’s done, is he’s given away all the boring CEO responsibilities and he’s definitely going to be very engaged, and he’s probably going to spend even more time on invention and innovation. That’s where he wants to spend his time.

Mohnish Pabrai (22:43):
And so these spawning DNA of Amazon actually is getting a boost because Jeff has got less distractions, because running a public company, you’ve got lots and lots of obligations and pressures to deal with. So I’m surprised he waited this long to do what he did. So I think that this came about really from just trying to understand Amazon better and then trying to understand Nick Sleep’s model.

Mohnish Pabrai (23:11):
And I think Nick himself went through a journey where he realized that it wasn’t just the retail, that it was all these other things that Amazon was doing, that were creating tremendous value, but I don’t think he had figured out that it was a kind of spawning framework. So that came about probably just when I was drooling on that pillow.

Stig Brodersen (23:33):
Mohnish I’d like to talk a bit about circle of competence, because it is time consuming. We don’t always have a COVID to have to just sit down and learn. So let me ask you this hypothetical question, because there’s always opportunity cost and you spending time on something else. If you could choose to expand your circle of competence and be an expert in a split-second into given a sector technology country, whatever it might be, where would you add to your circle of competence? It will come at no time cost.

Mohnish Pabrai (24:02):
Well, if there was no time costs, I’d really like to get on top of AI and machine learning and that area. I think that we are in a very embryonic phase there. But there’s going to be a lot of growth and development there. So I’d like to get better at that area. The other thing I’d like to get better at if there was no time, is I like to understand, I would love to spend a year or two at Andreessen Horowitz Sequoia fund and so on. I’d really like to be a fly on the wall in those places. And because they’ve got such high hit rates. So just what is the DNA that those places have and how can I get some of that lightning in a bottle?

Stig Brodersen (24:51):
Just see what’s going on with Sequoia China right now and their hit rate. It’s absolutely amazing. Mohnish, we previously talked about your grown pies and discounted pies, that’s how you refer to it. And of course, the students of Warren Buffet and Charlie Munger, that’s something that we know of. And typically, investors choose to take one or the other approach.

Stig Brodersen (25:11):
One thing I heard you talk about is that we could also consider if we should include the “17-year cycles” into this. And even though the numbers are not exact 17 years necessarily, that’s sort of how they’re typically referred to. Could you please explain to audience perhaps a bit more about what the 17-year cycles are, and if that still ties into your investing approach right now, giving the framework you talked about before?

Mohnish Pabrai (25:37):
Yeah. I mean, I think it helps you fish where the fish are. So if you go to the last 100 years, maybe 125 years in the S&P 500 or the Dow, it’s down about 9% a year. But the 9% a year is really fiction, because it didn’t go up 9% every year. They were long periods, sometimes periods as long as 25 years, 27 years when the returns were zero, just flat, it was the same as what it was 25 years ago. And there were periods when they are 15 or 17-year periods, where it’s advanced at 17, 18% a year for the whole market.

Mohnish Pabrai (26:13):
So we’ve had long periods of flat line or declining markets. And we’ve also had equally long periods of very robust markets. So basically what happens in stock market because they’re auction driven, they overshoot and undershoot all the time. So for example, in 1982, US stocks were very undervalued. You could have picked up companies like Coke or American Express at single digit multiple, seven, eight times earnings, six times earnings, that sort of thing. Disney was at a single digit multiple.

Mohnish Pabrai (26:51):
And if you went back to 1965, for example, stocks are very overheated, very high multiples. And if you look at 1999, 17 years after ’82, very high multiples. Coke was no longer at six times earnings, it was more than 40 times earnings. American Express, more than 40 times earnings. All these high-flyers, GE, which we subsequently discovered was not such a great business, was at peak market valuation. I think 600 billion market cap, never saw that market cap again.

Mohnish Pabrai (27:25):
So businesses overshoot and undershoot quite frequently. And in the US we’ve seen these 17 year cycles, ’65, ’82, ’99. And now from ’99 onwards, till almost 2013, 2014, it was again flat. We didn’t go through 17 years, we went to at least 13, 14 years of flat markets. And the reason markets do this overshooting and undershooting is because humans get euphoric or pessimistic. So we know that in early ’80s, Japan had the most mega bubble. The real estate went crazy. And then with that, the stock market went crazy and everything got ridiculously overpriced.

Mohnish Pabrai (28:11):
The Nikkei after 40 years, is still not back to where it was. So if you look at Japan today, it’s very cheap, if you look at Korea, it’s pretty cheap, if you look at Turkey, it’s very cheap. So in terms of fishing where the fish are, there are parts of the US market that I believe are clearly in bubble territory. It’s not a very large number of stocks. So relatively small number of stocks, very overvalued. So it’s like this vacuum cleaner sucking up cash and putting it into a few names.

Mohnish Pabrai (28:46):
Then we’ve got a little larger set of names, tech names, which either are fully priced, or maybe overpriced, just depending on how their future business unfolds. So we’ve got one end of the market, which is very overheated, kind of like the GameStops in Teslas of the world. We’ve got another end of the market, which is either fully priced or overpriced, kind of like the sales forces and maybe the Microsofts, and so on of the world. Great businesses are doing really well, but nowhere near value territory and could be overpriced.

Mohnish Pabrai (29:22):
And then we have a bunch of non-sexy businesses, which maybe fairly priced or even under priced. So that’s kind of what how I think about the US market, but very few bargains, even amongst the non-sexy businesses, very few bargains. So there’s a lot of money chasing very few names. If you look at other countries, the cycles they’re in different parts of the cycle. So I think Japan, Korea, Turkey, these are markets that are just deeply undervalued.

Mohnish Pabrai (29:56):
So generally speaking, I think that if investors paid attention to these markets, and then within these markets, they look for great compounders. Don’t look for cigar butts, look for great compounders, look for the spawners, look for the growing pies. One will do really well.

Stig Brodersen (30:14):
So whenever you mention that Mohnish, and you talked about finding these spawners, finding these stocks with long runways and not too long ago, saw you take a position in such as real properties. And I know we are specifically going to talk about that one, and there’s confirmation bias and all that, but it’s more to understand your mindset. Yes, and it was trading at ridiculous low prices. It’s definitely not a spawner, that’s not what it is.

Stig Brodersen (30:39):
But how do you think about allocating part of your portfolio in companies you really want, and then what do you do with the rest? I wouldn’t call their place overcast because that would probably be stretching it. But it seems like it’s a bit of a discounted pie type of play. And you don’t have to specifically talk about that stock, but just more how to think about those two different piles of money in your portfolio?

Mohnish Pabrai (31:01):
Yeah. So Seritage actually may not have been a store that if it showed up today on my radar, I might have been interested in. If possible I still would be, but the Seritage came up on the radar in the pre-Nick Sleep era, it came up in the pre-spawner era so these frameworks were not in place. And it came up right to when, in kind of March 2020, when the world was crashing and burning, that’s when it came up.

Mohnish Pabrai (31:28):
And at that time, I was looking at a lot of stocks were falling, and I was trying to figure out what would be a great play and what might be a good way to play this. So I noticed that Seritage went from 35 to $40 a share that was trading, to six to $9 a share. It went through a pretty dramatic, and they actually were facing significant headwinds.

Mohnish Pabrai (31:52):
They were in many ways you can say, in the eye of the storm, because retail was shut down in the country, they were in this process of morphing the sale stores into other things, and increasing the rents and all of that. And all of that was basically going to be a difficult business to be in. I think the way I looked at it then and that’s why I think even today I might’ve been interested to buy-in is that, if you take a 10 or 20 year view off a company like Seritage, and if they can get past this hump, there are some challenges they have in this hump, if I fast forward 10 or 20 years, I believe Seritage which today has 180 odd properties, may not have more than 30 or 40 properties.

Mohnish Pabrai (32:38):
But those 30 or 40 properties would be ultra-prime and they would have gone through some very significant densification. So for example, they have one property in Dallas, which was a former Sears, which was two or 300,000 square feet. Eventually that footprint is going to have 3 million or 4 million square feet. It’s going to be more 10X, maybe 15X, what the original footprint was. That’s significant. And they have many properties which will do that eventually, because they are sitting in such perfect prime locations.

Mohnish Pabrai (33:15):
So I think if I fast forward 10 or 20 years, and if Seritage is able to navigate the landscape and get to the point where they have these 30 or 40 ultra-prime properties, it becomes a tremendous asset. It becomes a blue-chip asset. And so now that I have the framework of Sam Walton and an owner embedded, my approach to Seritage is very different than what I had taken when I made the investment.

Mohnish Pabrai (33:50):
My approach right now is, let’s watch this movie for 20 years see what happens. And one of the things that’s possible about Seritage, because they are building a competence in taking these beat up kind of dead businesses, the Sears, and transforming them and that’s a very different skill that a lot of REITs don’t have. So one can think that it’s possible at some point, that Seritage could do this for real estate that they don’t own today. They could do this all JC Penneys and all Macy’s.

Mohnish Pabrai (34:21):
So they could be the engine that does the recycling. And if that becomes the eventual business they go into, I’m not saying that that’s what’s going to happen, it’s no probability. It becomes an even better business. So my take on Seritage is, there’s kind of a range of outcomes. There are at least some outcomes in that range that look exceptional. And of course, there are some outcomes that may not be so good because capitalism is so brutal. And my take is, let’s watch the story.

Stig Brodersen (34:52):
I just want to give a handoff to our listeners. Guy Spier also a good friend of Mohnish, he’s talking with John [inaudible 00:34:59] about Seritage Growth Properties. I will just make sure to troll into that. And just like two short things here. I think the first one is that, there’s a lot of things I admire when it comes to Guy, but like he’s very good at not selling. He’s very good at just staying put, which is just amazing. And Guy has been known to stock business for a long time, since 15 or 16 and whatnot.

Stig Brodersen (35:18):
It’s really hard at least for me, I don’t have Guy’s patience, I don’t think I have your patience Mohnish, to stick with your strategy whenever you see something like this, that might be a discounted pie. That’s not what you want to do because you’ll learn from Charlie Munger and you want that growing pie. But then you see it and you’re like, I can see the arguments why Seritage would still be a growing pie. And you’re like, “Shouldn’t I just be doing that just because of the NAV? It’s super attractive already at that price point.” It must be very challenging for you also, regardless if you have the spawn mindset or not.

Mohnish Pabrai (35:49):
I think that’s correct. I think it’s one of the attributes of Guy that I did not appreciate as much as I should have. So he’s been exceptional at buy and hold. It’s his normal way of doing things. He’s really happy to go through a year where he has no activity. That to him is a perfectly good year. This guy, Thomas Phelps, who wrote this book 1100 to 1 in the Stock Market, he said that “Every sale is an admission of a mistake.” If you really think about it, every stock sale that you make, is an admission of a mistake.

Mohnish Pabrai (36:24):
Because if you bought correctly, according to Phelps, he would just buy and hold. And you bought a great business and it’s increasing in value, there’s no need to mess with it. And so I am trying to be more like Guy. And the number one skill to be a great investor is extreme patience. Stig, if you can derive tremendous pleasure from watching paint dry, you will be a very wealthy man. Just be in this meditative state watching that white wall. And once you can do that, then you’re ready to hold Seritage for 20 years.

Stig Brodersen (37:04):
I love that. It reminds me of, whenever Guy said that, one of the disciplines he is trying right now is not to look at the stock market. That’s one of his big passions.

Mohnish Pabrai (37:14):
Do you remember the movie The Karate Kid?

Stig Brodersen (37:16):
Right. Yes.

Mohnish Pabrai (37:17):
Well, you know how he tells him to paint the wall or whatever, right? And this guy is all pissed off. So I’m just thinking that if I’m going to train someone to be a great investor, plus, I’m going to take them someplace and say, paint this wall white. Now, sit here in a chair and watch it for a week. Don’t look at your phone and don’t look at anything. Then they’re going to come back at me and say, “This has nothing to do with investing.” And I’m going to be like the guy in the Karate Kid saying, “It has everything to do with investing. Go back to watching the wall.”

Stig Brodersen (37:47):
Right. I love that. It’s like the sushi restaurant where you have to spend five years learning how to cook rice. So the Mohnish’s training program is, spend five years looking at the wall and then you’re ready to buy your first stock.

Mohnish Pabrai (38:01):
Did you see that movie Jiro Dreams of Sushi?

Stig Brodersen (38:05):
No, I didn’t.

Mohnish Pabrai (38:06):
Okay. So this is a phenomenal movie. And so, if you haven’t seen it, I think it’s on Netflix you can see it, Jiro Dreams of Sushi. It won a lot of awards. It’s actually a documentary. It’s a real sushi restaurant in Tokyo. I saw the movie, I loved it so much. I went to Tokyo for 11 hours just to eat there, and then I left. And it was awesome. I knocked one thing off of my bucket list. If you didn’t get anything else out of this podcast, it’s Jiro Dream of Sushi on Netflix.

Stig Brodersen (38:43):
All right. That’ll be the next episode. Mohnish and I are going to talk about an hour just about that documentary. So going back to Warren Buffet also, because this is being featured here in the Berkshire Weekend. Whenever I heard you being asked about Warren Buffet, I often hear you talk about how you learned as much from Buffet whenever it comes to life, as it comes to investing.

Stig Brodersen (39:06):
And I kind of feel the same way about you, in the sense that I came for the investing advice in the stage for the life advice. And as much as I’m grateful learning a lot from you, even cloning your investments perhaps, whenever I talk to my friends about you, I don’t so much talk about the investments you make, but we talk about Dakshana, we talked about being aligned on the inside and on the outside called the inner scorecard, I think that’s how Buffet refers to it.

Stig Brodersen (39:31):
And I kind of feel that you have, whenever I studied you, you’ve sort of taken to another level. So, if I can paint a bit of color around it. So in 1990, you founded TransTech, a tech consulting company. And TransTech become very successful, ultimately employing 160 employees. And so to some people, it might be a bit surprising that 1990, you teamed up with two industrial psychologists and their company. And I love the name of the company is called, [inaudible 00:39:58], not conquest but [inaudible 00:40:00] like Genghis Khan.

Stig Brodersen (40:01):
And so what they did, was they did interviews with your family, employees, friends, and you received a 20 page document with the conclusion of that document. What did the document say, and which changes did you make in your life after you read it?

Mohnish Pabrai (40:17):
That’s a wonderful segue, Stig. So all of us, when we are born, God screwed up because what should have happened is after we are born, we should also come with an owner’s manual. Attached to us should be a owner’s manual because each one of us is different. But we don’t come with the owner’s manual. And so what happens is that, we don’t know who we are. And what we do is as we grow up in this world, we have a need to conform, to fit into society.

Mohnish Pabrai (40:48):
So we emulate what other people do to appear to be nice productive members of society. But that may not be who we are. And for example, when I was going to college, I had no clue what to study. Everyone said, computers are hard. So I went into computer science, and then I switched to computer engineering. That’s not a great way to really kind of pick what you ought to be doing. The correct way to pick what you ought to be doing, is you should know what you really enjoy and go after that. That never happened.

Mohnish Pabrai (41:21):
So who we are as people, is buried under so many layers of gunk, that when we are adults, we really don’t know who we are. And so these two industrial psychologists, they gave me effectively what I would call my owner’s manual. So they had me take a bunch of tests, they talked to my employees, they talked to my friends, they talked to my family. My kids were too small, they couldn’t talk my kids. Through all of that, they built a map of who I was.

Mohnish Pabrai (41:54):
And they said basically, “Look, you are a certain way on the inside. This is who you are on the inside. And then kind of an incongruence is how you act on the outside.” So if the inside you and the outside you are not perfectly aligned, you will not go very far in life. If you can get very close to perfect alignment, that’s when you get to people like Nelson Mandela, and Martin Luther King, and Gandhi and our great leaders and so on.

Mohnish Pabrai (42:23):
The problem is we don’t know who we are on the inside, because nobody gave us owner’s manual. Well, I got my owner’s manual when I was 35 years old. And it was a fascinating read and I try to read it every year. So they pointed out that this business I was running with the 160 people, I actually at that time, when I did this testing with them, I hated the company. Company I had founded that I was the CEO of, I hated that company.

Mohnish Pabrai (42:50):
And I didn’t feel like going to work because what had happened is, it was all politics, a bunch of VPs, positioning and all this stuff. And I really enjoyed the very early days of the business when it was embryonic, and we were trying to figure different things out and scale it and grow it. It was a game, I really enjoyed the game. When it actually became a large business what happened is, my job changed to human resources. Me just herding a bunch of cats, that’s what my job description was. I am not a cat herder. I can tell you that for sure.

Mohnish Pabrai (43:23):
But every day I’d go in and I had to herd a bunch of cats. So they said to me, “Mohnish, we don’t even know how you go through the day with the place you’re at.” So they said, “You have to get out of that business as soon as possible. That’s not you.” And then I asked these people, this was about three months before I started Pabrai Funds. I was saying, “Look, I’m thinking of starting this fund.” And they asked me a bunch of questions about the fund. And they said, “The fund is perfect. The fund is what you should do, and the fund will do extremely well.”

Mohnish Pabrai (43:54):
And one of them became one of the original investors in the fund. So I gave him $2,000 for my testing. He gave me $100,000 to invest in the fund. I like the 50:1 ratio. And I phoned him, “Listen, Jim, I don’t want to lose your money. And I don’t want to lose your friendship. Are you sure you want to do this, et cetera?” He said, “No, I cracked your head open. I know exactly what’s in your head. My money is going to do great.” And he did. I mean, so far it’s like 15, 16 times what he put in, so he’s doing fine.

Mohnish Pabrai (44:27):
So I think that that was a tremendous gift to me. The best $2,000 I spent, I think in my life, it was great. And I think everyone should do this. I think everyone, even before they go to college, because your map doesn’t change throughout your life. Who you are, is not going to change. That is hard-coded. It’s hard-coded at the age of six. From the age of six to the age of 96, it is not going to change. Between your genetics and what happens in the first six years of life, it’s hard-coded.

Mohnish Pabrai (44:58):
So basically, you are who you are. Your traits are hard-coded. Now, if you don’t act in a way that is congruent with those traits, in the end you will not be so happy, and you’ll be frustrated. And you won’t be able to go very far. It’s very important to be in alignment and do what you were designed to do.

Stig Brodersen (45:18):
Thank you for sharing that personal story Mohnish. Another thing that I would like to talk about now that we have the opportunity to speak to you here today, to learn how you structure your learning. We all only have 24 hours a day. We want to learn about new companies, check out on a curve portfolio, but we also want to learn things about just life in general.

Stig Brodersen (45:37):
How do you prioritize what to spend time on whenever it comes to learning? Like if you could put hours, I don’t know if that’s too specific, how do you ensure that you’re aligned on the inside and on the outside like we talked about before and continue to learn? What is the process you have during the day and how to prioritize?

Mohnish Pabrai (45:57):
Well, I think it’s pretty simple. I read three newspapers a day. If I’m not traveling, et cetera, and I get these newspapers and I read the physical papers, so I haven’t moved those to Kindle or whatever. So that is kind of happening every day. Then beyond that, the reading depends on what’s going on. If I am active in drilling down on some business, then there’ll be a lot of reading related to that company. 10ks and transcripts and quarterlies and whatever. So there’s just trying to understand the business.

Mohnish Pabrai (46:28):
And beyond that, then I love to read different books. I really love to read business biographies and business autobiographies. There’ll always be some of that. So for example, recently I ran into a book called the Caesars Palace Coup. Caesars Palace went bankrupt a few years back. A casino is a tremendous business and a casino like Caesars, is beyond a tremendous business. That type of business should never go bankrupt. Okay.

Mohnish Pabrai (46:59):
So somehow the Wall Street yo-yos succeeded in bankrupting an unbelievable business with an unbelievable mode. So I just wanted to get behind it to understand what happened, right? And it’s a thriller. This book is like Barbarians at the Gate. Now, I am never going to invest in a gambling stock or Caesars Palace or any of that, that’s not of interest. But I’m just enjoying the book, so that’s fine.

Mohnish Pabrai (47:26):
Then I recently read another book called Backable. It’s written by Suneel Gupta. And this CNN a doctor anchor Sanjay Gupta, so this is his brother. And this is a great book on how to get people to back you. Whether you’re raising a fund, or trying to get VCs to back you, or just in different areas of your life, how to get people to get behind you. And he did a tremendous job. He’s got a great framework.

Mohnish Pabrai (47:57):
I always have so many books I buy that I have not read yet. So my library is kind of out of control right now. But what I do, is I just go through the large number of books I have sitting around, which I haven’t read yet. And then I just pick one that looks interesting and then go from there. If it doesn’t grab me or whatever, which happens with a lot of books, I don’t need to complete it. I go to the next book.

Stig Brodersen (48:22):
One of the reasons why I asked that question Mohnish is that, well, first of all, I’d like to clone you if I can you know it. This poetic thing about cloning a cloner, right? I sort of had that thought. So I learned that you spend six weeks figuring out why Ted Wechsler and David Einhorn bought GM, which was later turned into [inaudible 00:48:42] GM, but specifically Fiat-Chrysler. Which sort of a story for another day. But I heard you talk about how you also want to throw away ideas in less than a second, or less than a minute at least.

Stig Brodersen (48:52):
So I’m sort of I’m curious in terms of how you curve out time whenever you see something like this and you’re like, wow, that makes no sense and you still find time to spend, I don’t know, six weeks into it. And then there are other things you don’t. It seems like you have extremely flexible schedule since you can do that. And how do you… I guess, I don’t know if this sounds the wrong way, so please don’t take it as such, but how do you curve out six weeks into perhaps something else you should be doing and then prioritize and say, “I don’t understand this, but I still want to get to the bottom of why David and Ted are doing this.”

Mohnish Pabrai (49:24):
I think one of the first things that I learned from Buffet, two things I learned from Buffet which are really important. One is, run an empty calendar. Other than putting Stig on my calendar, I don’t put anything else on my calendar. So typically, in a typical week I have one or two kind of some set calls or meetings or something, but for the most part, the calendar is empty. So I don’t have to be a certain place at a certain time. I don’t have to call someone or whatever. So that’s very important. Protect your calendar, keep it completely flexible.

Mohnish Pabrai (49:59):
And the second is, be really good at saying no. So Buffett gets a lot of requests. Senators will call him, and Congressmen will call them, and big company CEOs will call him asking all kinds of things. He’s really good at saying no. So that frees up a lot of time when you don’t just say yes to everything. And so those are important.

Mohnish Pabrai (50:22):
And the other thing is that, we are in a business, which is an extremely forgiving business, or like what Buffet says, is that there are no called strikes. So if I spend 10 seconds on a business and I say, I’m not interested, and it goes up 1000X, well that’s happened many times. We don’t really care about that. So mistakes of omission are extremely common in our business. The good news is there’s enough opportunity, that even if you miss hundreds and thousands of great businesses, you can still do fine.

Mohnish Pabrai (50:55):
And so I think curiosity is an important trait. So like when I studied GM, I was just puzzled. I hated the auto business, I hated General Motors, all this CapEx and garbage products and everything else. And I said, “Why would these two smart guys own this company?” And I just wanted to answer that question. So I said, “I will dig in.” So Darwin said, “That when you see disconfirming evidence, write it down because the brain is really good at forgetting those things.” So this was disconfirming evidence. This made no sense. So sometimes if you see things that don’t make any sense, that’s a really good reason to [inaudible 00:51:40].

Stig Brodersen (51:41):
So if people have flexible in the calendar, one thing I would encourage everyone to do is I’m holding a book up here to the camera, which makes no sense since this is a podcast. But Mohnish can see this. It’s the book Richer, Wiser, Happier. We had William Green on two weeks ago. And as some of you might remember, the first chapter of that book that was with Mohnish Pabrai, which is absolutely wonderful chapter.

Stig Brodersen (52:03):
And whenever I said that to Mohnish here before we started recording, he said, “No, no, no, no. Don’t read chapter one. It’s with some yo-yo. You should go to chapter six and read about Nick Sleep. That’s where the nugget is.” But I just wanted to mention that, if people out there, they’re sitting here, the Berkshire Weekend, and now we’re sitting here with Mohnish, they can win William’s book.

Stig Brodersen (52:22):
We made a raffle with William. It’s absolutely brilliant book. And I know this is just a bit off the curve here Mohnish, but is there something specifically you want to highlight from William’s book. Let’s just do a huge plaxo, so people can go out and buy this wonderful book.

Mohnish Pabrai (52:37):
Well, I think first of all, William is a very gifted writer and or sometimes I felt like I talk to William for two hours, and it’s three sentences that come out of the two hours that actually make it into the book. So he has had a lot of experience than he was a reporter for Time and Bloomberg. He interviewed all these heads of state, et cetera. So William is a great journalist, and he has this gift of extracting the essence of a person.

Mohnish Pabrai (53:09):
And I think that when I read what William wrote about me, I felt like he completely got me. And so if you actually read what he wrote about, how I think about things, that is never going to change. So like for example, he actually got the fact that one of the things which was in my owner’s manual, was that they told me I love to play games. They said your programming, but they said it is very specific kind of games. So they said, “First of all, the outcome of the game has to depend on you. It cannot depend on a team.”

Mohnish Pabrai (53:45):
So for example, I would not enjoy very much being on a soccer team okay, because that’s like a team sport. That’s not who I am. I would probably enjoy a game like Chess or Bridge or Blackjack, a lot more than soccer because those are individual pursuit games. The second is that, I like to play games where I think I can win those games. So I like to play games where the outcome depends on me and when I think I can win in those games.

Mohnish Pabrai (54:18):
And then what William actually nailed down correctly, is the reason I enjoyed my first company TransTech so much in the early days, because in the early days it was a game. So what I used to do was, I used to send 200 letters a week to CIOs, because it was an IT company, because 200 was a minimum amount you could send as letters to get discounted postage rate from the Post Office for, if is sorted by zip code, and you ordered the letters, they gave you a lower rate, right? And that was important because I had no money.

Mohnish Pabrai (54:53):
So every week I’d send 200 letters. And then every week I’d make 200 calls, plus the calls from the earlier week. So it was this engine where 200 letters were going out every week, maybe three or 400 calls were happening every week, and then all of that would result in two or three meetings every week. And then after a few weeks, there’d be a close. The person becomes a client, right? So the sales funnel suspect, prospect, qualified, lead, close.

Mohnish Pabrai (55:27):
It was a game for me. I enjoyed that so much because I was interested in the statistics and winning that game, right? So for me, the deal was, how many can I close? And how does that work? So William nailed down. He said, Dakshana is a game, and he’s absolutely right. I view Dakshana as a game. Just like I view TransTech as a game. Pabrai Funds is a game because it’s all mathematical, it’s the returns and assets and all of that. It’s a game and it’s a single player game.

Mohnish Pabrai (56:00):
And so Pabrai Funds is a game, Dakshana is a game, TransTech was a game, Bridge is a game, Blackjack is a game. I’m a game player. I was so excited when I got banned in Vegas by a casino because I have a Blackjack system that beat them. I only put $3,000 at risk and I took 150,000, and then they told me, “Never come back again. You have a lifetime ban.” That was great because it proved the system works. They were scared.

Stig Brodersen (56:31):
You won the game. It was simple as that.

Mohnish Pabrai (56:33):
Yeah. So it’s great. And the thing is, the good news is, I’m not banned from Vegas. So I’m still working on that game to get more bans. So I’ll be working in the next few months and few years, to increase those bans.

Stig Brodersen (56:50):
Wonderful. Mohnish, before we let you go, we always want to give you an opportunity to give a handoff to where people can learn more about you, Pabrai Funds, Dakshana, whatever you want to give a handoff to.

Mohnish Pabrai (57:02):
Well, I would say William’s book, Richer, Wiser, Happier. I think he did a great job. Forget the chapter one on some yo-yos like I said. You might also enjoy my blog, Chai with Pabrai, or my YouTube channel. And I think those are good places to go.

Stig Brodersen (57:18):
Fantastic, Mohnish. Thank you so much for being so generous with your time. And make time yet again here during the Berkshire Weekend to speak with us. That’s absolutely amazing.

Mohnish Pabrai (57:27):
Thank you, Stig. Always a pleasure.

Stig Brodersen (57:29):
All right. Fellow value investors, if you’re listening to this episode as soon as it goes out, I hope you enjoy the rest of the Berkshire Weekend. Trey and I will be back 22nd of May for the annual episode, where we’ll unpack the Q and A session with Warren Buffet and Charlie Munger. If you want to ensure that you don’t miss out on that one, remember to subscribe to our free podcast on Apple podcast, Spotify, or whatever app you’re using.

Outro (57:53):
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