Mohnish Pabrai (Trades, Portfolio) is a legendary value investor who some have even referred to as the “Next Warren Buffett (Trades, Portfolio)." He first got close to Buffett in 2008 after scoring the highest bid at a charity auction to win a meal with the Oracle of Omaha. That charity meal led to Pabrai meeting up with Charlie Munger (Trades, Portfolio) upon a recommendation by Buffett.
Since then, Pabrai and Munger have met many times. Pabrai used to live in Los Angeles along with Munger. According to Pabrai, Munger “played bridge every Friday at the LA Country Club” and often called on Pabrai as a substitute if one of the “older guys couldn’t get out of bed."
In a recent podcast episode on the Investors Podcast Network, Pabrai revealed insights into Munger's investing style, his quirks and personality. In addition, he elaborated on the genius of Li Lu (Trades, Portfolio). The original podcast was over two hours long, but I have made a supercut edit with my comments on my investing YouTube channel, Motivation2Invest. For those wanting the important info fast, here are my top six takeaways from the podcast.
1. Voracious learning machine
Munger has often stated in past interviews it’s best to be a “continuous learning machine.” Pabrai explains Munger is set up in a “lazy boy type easy chair” and on “both sides of him are high tables." On these high tables is “a big stack of books on one side” in an unread pile and a “big stack of books on the other side” in a read pile.
“Charlie is like an assembly line… devouring [books]... from the unread pile to the read pile.”
Pabrai estimates Munger reads “over 500 books per year” and “more than one a day." His reading style has a lot of “skimming” for the best bits, which would be the only way to explain such a high book count. The selection of books are in a wide range from Value Line and Barron’s content to material on global warming, politics, famous historical figures, architecture and much more. Thus, it’s clear that despite being 98 years old, Munger is still a voracious learning machine.
2. Munger vs. Buffett investing styles
According to Pabrai, Munger and Buffett have “many similarities” with regards to their investing styles. They “used to speak a lot” but now not so much as they “know what the other guy is thinking."
With regards to Buffett and Munger’s differences, Munger has a focus on “better businesses,” referring to the classic Buffett quote:
“It is better to buy wonderful companies at fair prices, rather than fair companies at wonderful prices."
This focus on quality businesses was an area Buffett often admits to have helped evolve him as an investor.
“An area of divergence was Costco (COST, Financial),” according to Pabrai. “Charlie tried to have Berkshire take a much larger position," but Buffett’s perspective was “it’s too expensive."
Apparently there was also some “divergence” regarding the Chinese electric vehicle maker BYD Co. (SZSE:002594, Financial). Berkshire Hathaway (BRK.A, Financial)(BRK.B, Financial) purchased $232 million worth of shares for a 10% stake of BYD in 2008. According to a 2009 story by Fortune, Munger was inspired by BYD’s founder Wang Chuanfu, a chemist turned entrepreneur. In reference to the founder, Munger stated:
“This guy is a combination of Thomas Edison and Jack Welch, something like Edison in solving technical problems, and something like Welch in getting done what he needs to do.”
BYD turned out to be an extremely successful investment for Berkshire with the stake having an approximate value of $5.6 billion. Pabrai states they purchased at “$8 Hong Kong Dollars per share and it’s now worth over $260 HKD per share,” representing a “major home run."
Pabrai sheds some further light on this investment. Apparently Munger had a challenge convincing Buffett to invest. In order to convince Buffett, Munger stated BYD’s founder Wang Chuanfu is like “Thomas Edison, Henry Ford and Bill Gates (Trades, Portfolio) all in the same person.”
This bold statement convinced Buffett to make an investment, but he decided to make “Mid American Energy use their money to buy the stake,” of which Berkshire owned 80% at the time. Then he put David Sokol on the board, who was the former Chairman of Mid American.
3. Munger and Li Lu (Trades, Portfolio)
Li Lu (Trades, Portfolio) is the successful founder of Himalaya Capital who is highly regarded by Munger and generated investment ideas such as BYD and Alibaba (BABA, Financial) which flowed to Munger.
Pabrai quotes Munger in stating, “In investing it’s really important to have somebody to talk to, the person shouldn’t be someone who reports to you.”
Munger “basically instructed” Pabrai and Li to meet once a month for lunch.
They spoke about a few different stocks which were successful. One was AmorePacific (XKRX:090430, Financial), a South Korean cosmetic company which went up by “80 times” according to Pabrai. The two also recently collaborated on Micron (MU, Financial), which is now the largest holding (>99%) of Pabrai’s U.S. portfolio according to the latest 13F filing. You can read more about my thoughts on Micron here.
4. Colorful language
According to Pabrai:
“The first time I met him [Munger], as he was talking I heard the F-Word. I am thinking in my head did God [Munger] just utter the F-Word. Then as I was processing this I heard another F-Word. There were a number of F-Words in that meal."
Mohnish then goes on to say, “Everytime I met God, the F-Word flows freely."
He explains his surprise that no F-Word has slipped out during the Berkshire Hathaway annual meeting or Daily Journal (DJCO, Financial) meeting as it’s “so natural to the way he speaks."
“I have never seen him in an interaction with me, where there wasn’t colorful language.”
Apparently Munger uses it to “make a point.” Munger is only human and so it does make sense. He is also often referred to as having “no filter” by Buffett.
5. Incredible judges of humans
According to Pabrai, “Buffett and Munger are incredible judges of humans” referring to their ability to spot great CEOs, founders, managers and fellow investors.
Pabrai states “Charlie made Li Lu (Trades, Portfolio) an even better investor” after their many lunches togethers.
6. Analyze a business in 10 seconds
When Pabrai meets up with Munger and brings up a business to him, Munger will often have the ability to analyze it in “five to 10 seconds."
An example is a business called Credit Acceptance (CACC, Financial), which has been very successful and “compounded at over 20% per year.” Pabrai goes on to explain the business model as follows:
“They make auto loans to those people who have the worst credit histories. You have defaulted a number of times, you’ve not paid your bills a number of times. And the interest rates are very high. The interest rates might be in the 20% percent rate or 30% percent rate.”
Pabrai then explains the amazing technology the company has which can “stop a customer's car from functioning remotely” if their “payment doesn’t show up on time."
Pabrai was excited about the business, but when he brought up to Munger, Munger stated, “We don’t want to own that kind of business." It “took him less than five seconds” to come to this conclusion just from Pabrai's description.
Pabrai then goes on to say:
“I think what his perspective was is that one of the filters that he runs through is win, win, win. Everything has to be a win across the board. I think what Charlie saw is that the high interest rates are not, even though you could justify it a hundred different ways, he said, it’s not the kind of business we want to be in."
With regards to Munger’s high standard for investing, Pabrai says his bar is high:
“I had been looking at that for several weeks and that particular point never made it through to me. There are lots of really high quality investors who own Credit Acceptance. In many cases, it’s their largest position. And it went through their filters. It never went through Charlie’s filters. It’s an amazing brain.”
Final thoughts
Charlie Munger (Trades, Portfolio) is an incredible investor and a true genius of life philosophy. Mohnish Pabrai (Trades, Portfolio) has helped to reveal further insights into Buffett’s right-hand man and the genius which lies beneath.
