Outlook Business Interviews Mohnish Pabrai
What prompted you to get into investing? You were a techie and then you had your own business before you became an investor.
I was an entrepreneur and I really enjoyed running my business. What happens is that as an entrepreneur perhaps 3-5% of your time goes in figuring out your strategy and direction and what you want to do; 90-95% of your time goes in the heavy lifting of your execution, getting after people and motivating them, and getting all your structures in place. I definitely enjoyed the 5% more than the 95% — getting things right in terms of direction is much more interesting. When I first encountered investing and Warren Buffett, it was as if in investing, that 5% increased to 80%. That is what I enjoy so much about investing.
Buffett says, “I am a better investor because I am a businessman and I am a better businessman because I am a better investor.” You need the same skills in investing as when you are an entrepreneur. The good news in investing is there are no HR problems. If there are no humans, there are no problems! And, you get massive leverage on your time, on your thoughts. Your brain cells can effectively be leveraged almost infinitely, almost as if I have huge amounts of capital. People want to pay for thoughts and I can give them some thoughts.
Despite starting off as a techie, you haven’t invested in technology at all. Why is that?
I don’t invest in technology stocks because I understand it. Basically, Buffett would say that he doesn’t invest in tech businesses because they are subject to change. Industries with rapid change are the enemy of the investor. Tech businesses, particularly biotech, is a problem from that point of view. All industries work with change but you should ideally be investing in businesses with a low rate of change, not a high rate of change.
What lessons did you learn as an entrepreneur and by spending time with your father?
I think the human brain goes through two periods of very rapid change: the first, in the first five years of life and the other is during teenage. There are scientific studies that have proven that the experiences you have during your teenage have a lasting impact on you. Luckily for me, this was a period of great learning. I was lucky that my father ran a whole bunch of businesses, started, grew and bankrupted them. Many of these businesses were very highly leveraged. My father was always optimistic and he was maximising leverage on the businesses. But they would blow up because there was no stability in them. From the age of 12 or 13, my brother and I were like the board of directors. He and I would sit down, looking at details of cash flows, trying to figure out how to get past the next day, just one day, every single day. On many occasions when my father travelled, my brother and I actually ran the company. Sometimes we dealt with the staff. I didn’t realise it then, but when I started to work and talked to a lot of people, I realised that I had finished many MBAs before the age of 18. So that period with my dad helped me crack business models much faster than others of my age who were much smarter than me. I was lucky in that regard. That experience was also useful in starting my own business and it is extremely useful now in what I do.
What are the investing mistakes that you have made and what did you learn from them?
Mistakes are the best teachers. One does not learn from success. It is desirable to learn vicariously from other people’s failures, but it gets much more firmly seared in when they are your own. I can give you a couple of examples of permanent losses of capital and my critical learning from those mistakes. One is Sears Holdings. I made this investment because the vast real estate and brand assets of this company are worth multiples of the stock price. But I learnt that those are virtually impossible to monetise because one would need to liquidate the business and lay off tens of thousands of workers. That is gut-wrenching and highly unlikely. Another one is Pinnacle Airlines.
It’s surprising you invested in an airline, considering that Buffett has labeled it as a bad business.
I have a 1-800 helpline to call any time I have an urge to buy an airline stock! I made sure to dial that helpline before deciding to put money into Kingfisher! As you can see Mr Vijay “Branson” is having his share of trouble with airlines and the UB group is being auctioned off piece by piece. Jokes apart, it is a lesson learnt properly.
The reason I bought Pinnacle was that it wasn’t an airline in the traditional sense like Kingfisher or British Airways. Traditional airlines are a losing proposition because of various structural issues — your pricing is set by your dumbest competitor, your costs are subject to a duopoly of airplane manufacturers, a duopoly of engine manufacturers, and a duopoly of maintenance guys and all of them can get whatever they want from you. On top of it, your entire workforce is unionised on every front. You don’t have any leeway to control cost.
Continue reading the interview here.