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10 Questions to Mohnish Pabrai – Additional Answers

July 25, 2007

GuruFocus: We had a question and answer session with Mohnish Pabrai. Today we got some more answers. Do read them and you will learn something from it.

Mohnish Pabrai:

As I respond to your additional questions, I wanted to alter one previous response. When I answered the biggest investing mistake, I mistakenly fixated on investments I’ve made in the public markets. Among those, there have been plenty of losers and mistakes. However, the biggest investing mistake would be a company I started in 1999 called Digital Disrupters. I personally lost all $1.8 Million that I invested in it and outside investors lost $2.7 Million. Some of those investors invested in Pabrai Funds subsequently and did okay.

Digital Disrupters was a very expensive way for me to get a basic investing education. I’ve become a vastly better investor as a result. Many investing fundamentals got deeply etched in my brain after that. In addition to me, Pabrai Funds investors have gained tremendously as a result. These lessons appear simple, but were important ones for me.

The first lesson was not to be an innovator, but be a cloner. I was trying to extend Buffett’s approach to startups. Well, it does not extend to startup. That’s why Buffett simply goes looking for .400 hitters. He does not try to develop them. Nor does he take a look at a bunch of kids and predict which ones would be .400 hitters in the future. So, I took that lesson to heart. There are so many innovations that Buffett has successfully done over his lifetime that I learnt that I could do quite well by adopting just a small fraction of those.

I learnt the tremendous benefits of being a totally passive investor. Building businesses is very hard work. And when these businesses are startups, it is exponentially harder. It also taught me that one can lose a great deal of money in early stage businesses which appear to have the prospects of very high ROE and one can make tremendous amounts in low ROE businesses that are stable and sizable. In the latter, it is simply due to the follies of Mr. Market. I learned the tremendous scalability that being passive allows. Once you get even slightly active in a given business (taking a board seat, for example), scalability drops off very very quickly. You get sucked in.

I am confident that if Digital Disrupters hadn’t happened, I would have had a much poorer track record in Pabrai Funds and it wouldn’t be half as much fun as it is.

Would you say that in your experience, your best investments have been derived from some obscure "hidden" asset value you find in an investment or from some traditional valuation measures?

The best investments are total no-brainers that can be explained in a short paragraph or two. They are obvious investments. The more words and spreadsheet cells it takes to layout the case for an investment, the worse it’s likely to do. Frontline was obvious. Stewart Enterprises was obvious. Level 3 was obvious. Pinnacle Airlines was very obvious. More recently, Ipsco was very obvious and that was nearly a 300% return in less than 2 years.


Do you speak to management to judge their quality, or do you use just their performance numbers? If you speak to them, what do you ask, and if you just use the numbers, which ones do you find most important?

I don’t endeavor to visit companies or meet up with CEOs or senior management – that comes from Ben Graham. Ben Graham said that the average company’s CEO is a great salesman – that’s part of the skill set required to get that job. They’re not deceitful but one of their personality traits is that you have to be an optimist to lead. If you’re chatting with a charismatic optimist who knows the area that you’re asking about very well, you’re likely to get swayed. More so than if you simply read and analyzed the facts in a more plain setting.

The nature of management is very important, but trying to get to the nature of management by meeting them is not a very good way to go about it. You’re better off getting to know them by looking at the track record. If there is a long historical track record, that’s much more instructive. That’s why business biographies and autobiographies are so useful as teaching tools.

Charlie Munger recently said that unless you have a very specific data point you’re looking to get from management it’s not going to be, in general, helpful to meet them. I like to look at the business and look at the history of the business to gauge what management has done with it. I’m part of a wonderful group called YPO – Young Presidents’ Organization. YPO has 10,000 members worldwide in a wide range of businesses, and many of the businesses that members have, in my opinion, are crappy businesses. But if I meet the average YPOer and I ask him about his business and ask him to describe the future of his business, I probably will always leave that meeting thinking wow he has an amazing business. Even the crappiest businesses presented by a charismatic optimist seem to look awesome in the future. So you’re better off looking at just the hard facts and doing your own extrapolation versus meeting the individuals and then basing it on that.

Congratulations for winning lunch with Warren Buffett. During the meeting with Warren Buffett, what are the most important questions will you ask Warren Buffett?

Thanks. There are five other people attending the lunch and I’m sure they’ll have a number of questions to ask as well. So while the lunch may go for 2-3 hours, I don’t think each of us will get to ask an endless list of questions. The lunch is scheduled to take place in June, 2008. So I have some time to think through the areas I’d like to focus on.

If I were having the meeting with Mr. Buffett tomorrow, I’d begin by thanking him for his selfless sharing and explain the concept of “guru dakshana” to him. In India traditionally in medieval times, the royalty sent their young princes off to a remote forest to get educated at the feet of a learned sage. These gurus were multi-disciplinary and they’d teach these princes the art of warfare, the art of governance, the sciences, the arts, groom them on how to conduct themselves etc. Usually, they’d spend several years with the guru. At the end of their education, the guru would ask for his tuition (called a guru dakshana) and the student would endeavor to deliver whatever the guru asked for. In my case, I feel that, like those medieval princes, I’ve been deeply enriched by Mr. Buffett’s teachings. I’ll suggest to him that he can ask for whatever guru dakshana he sees fit. I’ll also mention to him that our contribution to Glide is hopefully making a small dent in the payment of that guru dakshana since he endorses Glide so strongly.

Then, I’d share with him the focus of the foundation Harina and I recently setup (The Dakshana Foundation; www.dakshana.org ). Dakshana provides comprehensive scholarships and support for very impoverished and very bright kids to undergo 1-2 years of intensive coaching before taking the IIT (Indian Institute of Technology) entrance exam in India . Every year 250,000 kids take the exam for 5000 slots – a 2% admission rate. Bill Gates recently said that if Microsoft had to pick just one school on the planet to recruit from, he’d go with IIT. At Berkshire , Ajit Jain is an IIT grad. The kids Dakshana is funding come from families with income of less than $200 per month. We spend $2000-10,000 per child to relocate them to Kota in Rajasthan in India and get them enrolled at the best IIT entrance coaching institutes. We think at least 25-30% of the kids we sponsor will make it into IIT. Over their lifetimes these kids will be very successful and earn millions (versus the $200/month their parents earned). They have a moral obligation to giveback 10% of their monthly income to Dakshana to support more Dakshana Scholars and help us scale. They can also choose to give nothing and that’s fine as well. We just started and have 7 Dakshana scholars at this time. We hope to scale up to a few hundred in a year or two.

Mr. Buffett has a unique ability to look at a situation and come up with remarkable insights. I’d like to get his take on Dakshana and any suggestions or thoughts he has for us.

Finally, I’d like to drill down on his empty calendar (with some 70 direct reports) and get some more granularity (hopefully) on how he spends his time. I’ve read the headlines and what he’s said in interviews etc., but I’d like to probe deeper and drill down on how he spends his times and balances between many competing priorities. I’m hoping I can learn a lesson or two from that to incorporate in my daily life.

The good news is that I have several months to reflect on this and adjust. I’ll also be listening carefully to all his comments and responses to all the other questions.


Rating: 4.0/5 (67 votes)

Comments

kfh227
Kfh227 premium member - 7 years ago
Before I even get a chance to read this, thank you!
kfh227
Kfh227 premium member - 7 years ago
"Do you speak to management to judge their quality, or do you use just their performance numbers? If you speak to them, what do you ask, and if you just use the numbers, which ones do you find most important?"

The answer is something most here probably agree with. The way you answered though, was total elegance.

And I like Mr Pabrai's take on cahrity. I plan to go more along the liens of hte Buffett route and give when I'm much older since I will be able to spend time compounding (and doing what I know best) to have even more money later. With which I can give to charity.

I keep thinking about my future and even if I could afford a million dolalr yacht, I don't think I'd want it. Much like Buffett. One day, I actually hope to be semi-retired and work at a lcoal sopup kitchen. People think I'm funny (sister in law thinks I'm the funniest person she has ever met. Maybe it's my love of Bill Hicks that causes my humor) so maybe I can bring a smile to some that don't smile that often.
munger
Munger - 7 years ago
Thanks for sharing your insights Nish. Your opening statement is an absolute must read for everyone here.
ARYSHOME
ARYSHOME - 7 years ago
Thank you Mr. Pabrai. How can I get a copy of your first Book? MOSAIC.
snowskater12
Snowskater12 - 7 years ago
Thanks for all of your great insight Monish. In the previous post you responded to two of my questions and I greatly appreciate the time and effort you put into your replies. Being an undergraduate Finance student I find that much of what is taught in school is not practical in the real world, and I believe that you approach investing can be more or less executed by the average investor. I have read dozens of books on value investing, buffet, etc... but I found your book “The Dhandho Investor” to be very well written and informative. Its simplicity was key, and I found that it really highlighted that one must look for low risk high uncertainty situations. I recommend this read to all guru-focus members.

Thanks again for giving back!

tbare06
Tbare06 - 7 years ago
Thank you Monish. There is no better lesson than from one who has learned them himself. I cannot wait for next years BH annual meeting!!!!!!!!!!
gateplayer
Gateplayer - 6 years ago
Thumbs Up!

I also would like to express my gratitude for your efforts to help myself and all other small investors find our path through the Wilds (and Wiles) of Wall Street. I also have read many dozens of books on investing and have permanently placed the Dhandho Investor on the top shelf next to: Buffett the Making of an American Capitalist, One Up on Wall Street, Reminiscences of a Stock Operator, Fooled by Randomness, The Davis Dynasty and few other must read classics.

I wish you the best success in your quest for value and look forward to seeing you, one day, a capitalist 'pop star' with a yearly 'Woodstock Festival' of your own. But please... somewhere other than Omaha...
mountaincloud
Mountaincloud - 6 years ago
Hi, Gateplayer, the Davis Danasy has been on my Wish List (Amazon) for more than 1 year, but haven't bought it yet.....how is the book in your opinion....it looked more like history book instead of investing
gateplayer
Gateplayer - 6 years ago
Mountaincloud -

As a student of the Market, I read everything that time permits me - texts about number crunching AND history books about successful investors. This is one of the later.

To do well, you have to know what the numbers mean. This is essential. However, to do exceptionally well, one has to have background knowledge - the Art(history) - to understand business cycles, numerical versus intangible inputs to value, methods of assigning risk, and how to allocate capital (portfolio manage). For example, Mr. Buffett tends to sit patiently on cash until the market throws him a 'fat pitch', other investors prefer to stay 100% invested, still others invest in 'Plan B's'(Pabrai) when no-brainers are unavailable.

Many of the outstanding investors recognize success as a blend of Art and Science. Theoretical Types will rely on 30 page Risk Profile spreadsheets detailing why they aren't wrong - even as the market hands them their head. Buffett, Davis, and Pabrai, I think, often purchase investment theses based upon what 'could happen' if business execution is good and at least in Pabrai's case 'how bad will the damage be' if I'm wrong. Shelby Davis took a chance in the uncertain insurance industry of the 1950's - the historical numbers weren't supporting his view. Ultimately though, he figured right and reaped the rewards in what he refered to as a 'double dip' windfall from his original thesis.

I believe that it is very important to spend the time to become familiar with history so...one doesn't repeat it.

Buy the book, it is worth the time invested. A thought - if you haven't read, "The Money Masters" by John Train, pick it up first. This is a great intro to some of the classic value guys: Buffett, Graham, Fisher, and Templeton.

thomas

"What we learn from history is that people don't learn from history"--W.Buffett
vuasu
Vuasu - 6 years ago
Thanks Mr. Pabrai for writing a book, The Dhandho Investor, that is easy to understand!

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