Mohnish Pabrai's Q&A session with the Finance Club of IIT Patna on May 10, 2023
 

  (00:00:00) - Introduction
 
  (00:02:28) - Value investing; Amazon
 
  (00:09:52) - Learnings from Charlie Munger; Doheny Ranch, California
 
  (00:18:23) - Be a harsh grader while choosing your friends
 
  (00:27:17) - Li Lu
 
  (00:33:15) - Investing in China
 
  (00:38:14) - Cryptocurrency & algorithmic trading
 
  (00:39:27) - Book recommendations
 
  (00:40:21) - Identifying multibaggers
 
  (00:42:13) - My investing journey
 
  (00:46:49) - Book recommendation: Poor Charlie's Almanack
 
  (00:48:28) - Adam Grant: Give and Take
 
  (00:54:22) - Identifying great businesses
 
  (01:02:31) - Lunch with Buffett

On behalf of the Finance Club, IIT, Patna, I, Madhudvijay, welcome you all to a very special guest session.

Today, we have Indian-American investor, Mr.

Mohanish Pabrai sir, as our guest, who is the managing partner of Pabrai Investment Funds and the founder chairman of the Dakshina Foundation.

He's also an alumnus of Harvard Business School.

He is a very reputed value investor in the whole world and has also worked and collaborated with top investors like Charlie Munger, Lee Liu, Warren Buffett, Guy Spier, and many more.

The session will be in Q&A format, where in the first half, we will ask the collected questions, and then in the second half, audience members can raise their hands and ask their questions directly.

We are extremely honored and grateful that you have accepted our invitation and will share your insights and experiences with everyone today.

Personally, I am very inspired by your Darshan of Foundation initiative, which is creating an unbelievable impact in India.

Well, Madhur, it's a pleasure and honor to be with all of you.

I think this is my first recorded session with IITians.

So great to be with students at IIT Patna and look forward to speaking about what you have on your minds.

So we observed that in last few years, you have conducted so many sessions with all the educational institutions in the world and you are very keen to share your learnings and experiences with everyone.

And it's really an honor for all of us to learn and interact directly from you.

Well, you know I have an ulterior motive for doing that because the best way to learn is to teach.

So what I'm really actually trying to do is just teach myself and there's a side effect that some other people hopefully are learning a few things so it's a win-win works out well.

So I think we can start with the collected questions.

So can you share your framework of identifying and analyzing deep value stocks, especially in ignored global markets like your investment in a Turkey company?

Well, I mean, I think that value, value comes in many shapes and forms and sizes and sometimes we can see the value very obviously in the numbers or the earnings or the stock price of a company And sometimes we have to dig a little bit.

So for example, through most of its history, Amazon either had very little earnings, or if you look at the P ratio for something like Amazon, it might be around 100 or so.

And the reality is that even if you had bought at that very high multiple, you would have a spectacular result because Amazon really wasn't trading at a hundred times earnings.

Basically what they were doing is they were running a very profitable business, but they were taking the cash flows from that business and investing into the future.

And those cash flows were being invested in a very high return on equity manner.

And so basically that is in general a superior business model to let's say a company like Google, which doesn't appear to be that expensive relative to Amazon, but does not have the same reinvestment engine.

So the really the only choice Google is left with is maybe to buy back stock and so on.

So basically value comes in many shapes and forms and sizes.

We can we can find some things which are sometimes priced very cheaply from an optical point of view And as long as the operations are stable and maybe even growing, if you're buying at a very cheap price, the outcome may be good, even if the business is not that great, you know, we were buying, buying something at 2 times earnings and it should be, might be worth 10 times earnings or so on.

And at other times like Amazon we could be paying a very high multiple and have an even better outcome.

So basically I think the nature of investing is that in terms of kind of finding bargains or finding anomalies or finding things that are likely to be places where value hides, 1 can look at some data points.

So for example, going back to the Amazon example, the first desk that Jeff Bezos had in his office was a converted door.

So he took a door, made that the surface of his desk and just put some stand on it.

And he worked on that door desk for a long time.

And when Amazon established operations in India and the guy who came to run Amazon in India, he used to be a shadow for Jeff Bezos for a couple of years.

Basically, Jeff has these shadows who kind of like apprentice learning everything.

And it was more symbolic obviously because you know Amazon could afford to buy but I think the symbolism was that it is a company that watches its pennies.

And even today at Amazon, nobody is paid more than

So basically, you know, something like below like 1 and a half crore or so, you know.

So the base salaries at Amazon are the lowest amongst all its peers.

And of course people go work there and they stay there for a long time.

But Jeff's perspective is that that money should be enough to live on.

And then the upside can come from the stock and bonuses and other things.

The main way Amazon compensates is through stock option grants, but even stock option grants on a company-wide basis.

or more of their total shares outstanding every year as a stock-based compensation.

Amazon, that number has usually been 1 or 2%.

And Jeff Bezos himself has never awarded himself any options.

So he's typically had a lower salary than even the

He hasn't had a bonus, and he hasn't had stock options.

So when we look at anomalies, you see on 1 side is a company that is really tight about how it spends its cash.

On the other side, we look at their income statement and we see that they have no earnings.

And the third piece is that we know that many of their businesses are truly exceptional businesses.

So for example, they have a large advertising business.

The cost of that advertising business approaches 0.

So The margins on their several billion dollars that are taken on advertising could be somewhere between 50 to

But that money doesn't show up in the income statement.

When they do third party logistics, the third party bookseller, and Amazon doesn't own the book, but it manages the sale process, that is a very profitable business for them, because they have no inventory, and they are providing services, and probably the margins of the return on capital on that business is also very high.

But again that doesn't show up and of course Amazon Web Services is likely to be spectacularly profitable.

So we know that, so when you look at the company's financials, you can see the revenue of all these businesses.

And you may even be able to see expenses of some of the businesses, but you can definitely see the expenses of the whole company.

They may not break out expenses by each business, but we can do an adjustment on that.

So we can say, okay, you know, we think that the logistics business maybe has a, you know, 25% margin, for example.

And we think the cloud business maybe has a 40% margin, for example.

And we think advertising has a 60% or 70% margin.

And you can run those numbers and you can get to kind of more realistic picture earnings.

So what are some of the biggest takeaways from both Charlie Bunker and Lilo which is very rare and important in investing journey?

I would say the most things I have learned from Charlie is not what he has said.

Observing him at his home, in his club, with his friends, with his family, and observing how he organizes his time and and things like that and and so 1 of the things and this is probably true what what Warren and Charlie is when we're working on a particular problem.

And they put all the energy and interest into that.

But after they have solved that problem or fixed the problem, they completely eliminate it from their minds.

And now this may seem obvious, but what happens with other humans is other humans dwell in their brains on things that they have accomplished.

So people like to think back, oh, I did so well in school.

And I am going, I am, you know, got promoted.

They're looking at the past and dwelling on the past.

Warren and Charlie have a very large body of accomplishments.

And the reason their body of accomplishments is so large is they never think about what they have already done.

And they never really even kind of, you can say congratulate themselves about all their accomplishments.

What they are most focused on is the next problem in front of them.

So I will give you an example of this particular phenomena.

There is a very large ranch in California.

And I'm just going to pull it up for a second so I get the size right.

Basically, if you look at Doheny Ranch, which is in central California, it is tens of thousands of acres, and it has 2 miles of beachfront.

I would say probably the market value of Doheny Ranch would be several billion dollars, maybe north of 10-20 billion dollars.

And Charlie found out that the family that owned the ranch was interested in selling it.

And he contacted the family, and he convinced them to sell the ranch to him for $75 million, which is less than 1% or even maybe 1 10th of 1% of the real value of the of the property.

And What he told them is that, look, I will buy this for $75 million, and the next day, I will donate it to the University of California at Santa Barbara.

And that ranch is 8 minutes from the Santa Barbara campus, UCSB campus, if you build like a tram, a tram system to go between the current Santa Barbara campus and this new 20, 000 acres.

And he told the family that look, the California Coastal Commission, which controls all development in the area, they will never let you or any buyer, which is a private party, ever develop this property.

They will put so many roadblocks in front of you for decades that nothing will happen.

But here you can do a lot of good because the university owns it.

They will be able to convince the state and other authorities to allow development because it is for the good of the people of California.

And amazingly that family agreed and Charlie bought that property for 75 million and the next day he donated it to the University of California, Santa Barbara.

Basically, the University of California, Santa Barbara, unlike all the other University of California campuses like Berkeley or UCLA, will never ever run out of land.

They will never, no matter how much they grow, have problems with student housing or anything.

They have plenty of, they have land into perpetuity.

It's beautiful land with hills and valleys and beachfront and everything.

He's never talked to me about it after that.

It was like for 1 time, 1 day, he talked.

And there are hundreds and hundreds of such things that these guys have done.

But the concept of not looking back, not patting yourself on the back, not wanting other people to pat you on the back, and just be a machine going forward, and be a karam yogi, where it is our duty to do our job.

It is not our duty to do a job to expect some reward in terms of people saying you're a great guy or you've done such a good job.

He doesn't really care about those things.

So this has been a very powerful lesson for me because I've actually seen how, and I've seen it repeatedly, he's designing student dorms.

And 1 time he said that this design that he has done for student dorms will eventually probably be used by hundreds of universities around the world.

After he was done with it, he never talked about it.

Buffett bought GEICO, became a great success, doesn't care.

He bought the Burlington Northern Railroad, which will be a property that even 100 years from now will be very powerful and and very important to Berkshire doesn't ever care or talk about it, but he was very focused when that deal was happening so.

I also observed Charlie interacting with his kids, with his grandkids, with his daughter-in-laws, son-in-laws, grandkids, great-grandkids, friends, business partners.

I've seen a lot of interaction with all those people.

And normally what I find is if anyone is looking at all their family members, Every family has a lot of weird people.

My family has more weird people than most of the families.

But all families have strange, weird, crazy people.

And I don't think that situation is any different with the Munger family.

And I've seen Charlie interacting with all these people, And he is able to maintain extremely good relationships and strong relationships, even when the people are strange.

Like he could just say, okay, this person is strange.

I don't need to spend time with this person.

But so what I, and the other thing is about his friends.

We are going to end up with a lot of weirdos as our family member.

And when I met Charlie's friends, what I realized is that the quality of these individuals was extremely high.

It was much higher than any of my friends.

It was much higher than almost most humans I'd ever met.

They were extremely high quality individuals.

In fact, I never met a single friend of Charlie's who was not a truly exceptional, high-quality person.

And so that also taught me that having extremely high-quality friends, Many of his friends are not wealthy.

They might be just ordinary in terms of net worth, but they are very high quality.

1 is I made all of Charlie's friends my friends.

Because already quality, bohot high hai, iss se high thodi ja sakte hai.

And the second is, I have tried hard to apply that filter.

So when we have friends, we have to be harsh graders, very harsh graders.

There are lots of people we are friends with who appear very pleasant, but they are actually useless.

I have, my life has become a lot better because it has created room for other relationships.

It's not so much, I think with Warren and Charlie, so much is in the public domain.

So we can learn a lot without knowing them.

There's no need to know them to learn from them.

And really the main learnings I got from them was not what they were telling me, because almost anything that they are telling me, they have already said before.

It's really looking carefully at how they're living their lives.

These are some of the really, very amazing observations that you shared, like how they always focus on the present moment, then they are not obsessed about fame, status, all those aspects and how dedicated they are by choosing their friends and surroundings so that it would be a good learning environment.

A lot of students like us can highly relate with the friends point because like most of us just become friends with anyone and you try to spend time with all of them and it's a really a game-changer thing because like as it is said you are the average of the 5% that you spend most of your time.

It is a very important thing to carefully look at your friendships and get rid of the bottom

A very common follow up question that most of us have on this topic is that when we remove those bottom 95 or 99 percent then we hardly left with 1 or 2 percent And since we have very limited surroundings, it's very difficult to find really good high quality people in our life.

In IIT Patna, there are so many high quality people.

1 is my father used to say, to live a very happy life, 1 needs just 1 good wife and 1 good friend.

And basically 1 does not need to go out and say, let me find 10 great friends.

And after you have 1 person who you think is truly exceptional.

And you have a good relationship and a deep relationship with that person.

After that, you leave it to nature and osmosis.

Life will bring you in interaction with many, many people.

And if you follow the notion of being a harsh grader, then you will end up with more great relationships.

So I moved to Austin, Texas about 15 months ago.

And when I moved here, I didn't know anyone here.

And my best friends are spread out all over the world.

Even when I was in California, they were spread out all over the world.

There were very few really close friends who lived close to me.

But I said, okay, Let's run an experiment.

Let's try to find, as I said, for sure there are great people in Austin, Texas, and it's a little nicer if you can interact with your friends in the same geography, etc.

So what I decided to do was that twice a month, Different people reach out to me for different things and if something looks intriguing about the person, I invite them to my home in the afternoon for Assam tea.

I make excellent Assam tea, The best around.

It was taught to me by a very talented Pakistani chef.

In California, so my Assam tea I know is exceptional.

So I would say that in the last year or 15 months, I must have had maybe 25 or

And there's only 1 person I invited back.

And then I told him, look, every time we meet, we meet for a Samtee.

And you have been in Austin for so long, and you know this city so well.

We can go check out, you know, go for a walk somewhere.

He said the best place in Austin is at your place for Assam tea.

No other places as good, so I don't want to go any other place.

But basically, the other people I met, I think they are pretty high quality people.

Some of them actually may be very high quality people.

The thing is that there is no penalty for not letting a great person into your life.

But there is a penalty for letting a not so great person.

So I'm sure there were many of those 35 people who, if I had spent more time with them, they would have come across as being exceptional.

But because there are an infinite number of humans on planet Earth, it therefore mathematically follows that there are an infinite number of great humans on planet Earth.

And since we don't need more than half a dozen, 1 dozen great people out of infinity, you can let great people, you can make a mistake on great people, and that's perfectly okay.

The important thing is to not make a mistake of letting in a not so great people.

And so this person who I have met many times, every time I've met him, my opinion of him has gone up even higher And I've gotten to know him even better.

So in 15 months, there was 1 person who passed the filters and if every 15 months 1 person passes that filter, that's okay, it's a great thing, really good.

Now, there's a person coming tomorrow afternoon.

Abhi sirf 3% chance hai ke kuch ho sakta hai yahan par.

So can you tell something that you observed in Li Du which makes him very special as very very less in public about him?

So I I asked Charlie I said Charlie, you meet this Chinese person by accident And then you have never given other money managers money to manage.

And you give this person money to manage.

So Charlie said it was a complete no-brainer.

He said that all 1 had to do was look at the historic record with Li Lu And it became very obvious that I was dealing with someone highly unusual.

So Li Lu was a student leader at the Tiananmen Square protests in

And the Tiananmen Square was 1 of the largest uprisings that took place in China in the last several decades, he would have been 1 of the top 4 or 5 leaders, student leaders, who was heading that protest.

So when the Chinese government cracked down on Tiananmen with the tanks and everything else, they wanted to arrest Li Lu.

And then we would never, ever hear from Li Lu again.

He would be somewhere in some dungeon in China for his whole life.

Some people were able to smuggle Lelou out of China to Hong Kong.

And then some business people from Hong Kong helped him come to the US.

And then Columbia University gave him a scholarship.

He did a law degree, a MBA, and a undergraduate degree, all at the same time.

All 3 degrees, he was near the top of his class.

And you have to remember, when he came to the United States.

Not knowing English and starting those 3 degrees.

He was at the top of his class and all 3 degrees and in the history of Columbia University, before or after Lelu, no 1 has accomplished that.

Columbia University and other supporters had funded all his education and living expenses, some loans and some grants to have him do his degree.

So what would happen at the beginning of the semester is he would get some money to pay his rent and his expenses and tuition and books and everything.

And he would have sometimes this money, which was a few thousand dollars, for a few months before it was needed.

Like they would give him money for 4 months for rent on day 1.

While he was while the money was waiting in his bank account.

I mean, I would say Columbia at that time would have been like $30, 000 a year or something.

So they probably gave him like each year, like

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Mohnish Pabrai's Q&A session with the Finance Club of IIT Patna on May 10, 2023