Mohnish Pabrai's Presentation and Q&A at Indian School of Business on July 13, 2013
 

  (00:00:00) - Introduction 
 
(00:01:41) - Rajat Gupta
 
  (00:04:00) - Compounding: eighth wonder of the world
 
  (00:11:37) - Starting Pabrai Funds
 
  (00:19:42) - Shameless cloning
 
  (00:26:41) - General Motors
 
  (00:34:14) - Cloning Buffett's portfolio
 
  (00:39:11) - ROI model in philanthropy
 
  (00:42:30) - Ashok Kumar: Dakshana Scholar
 
  (00:45:48) - Zero fee structure
 
  (00:48:12) - 2009 financial crisis
 
  (00:54:11) - Investing in Indian markets
 
  (01:00:05) - Business with strong moat vs. Business that clones
 
  (01:04:48) - Micro trumps macro
 
  (01:09:17) - How to build a business
 
  (01:16:37) - The Dakshana Foundation
 
  (01:20:44) - Envy: The greatest human vice

everyone else who helped organize this event, thank you for showing up.

I'd just like to introduce Muneesh to all of you.

Muneesh began his career with Telalabs before he founded his own IT consulting firm, TransTech, which he later sold to Curzum Associates and that's when he made a switch to money management.

He founded Topdye Investment Funds in 1999.

He's perhaps best known for winning, for bidding $650, 000 for a charity lunch with Warren Buffett.

And he's adopted Warren Buffett's value-based investing approach for his own funds and he's even authored 2 books on the same approach to investing.

Today he works with the Dakshina Foundation, which he helped found in 2005, to focus on alleviating poverty by helping to tutor underprivileged children and enabling them to attend some of the country's best institutes of higher learning.

I think last time I was kind of winging it, so this time I thought I'd do a little more prep.

And again, I think before I launch into compounding and investing and so on, I just wanted to share just a little bit of a couple of thoughts I had on ISP, actually before there was an ISP.

And you know, I used to live in Chicago in the 1990s.

And in the mid-90s, early, some of the professors at Northwestern University Kellogg School and Rajat Gupta as such would talk about this Indian School of Business.

You know, it was kind of much of it was in their heads and even I think 1 time broke and drank with Rajat, I've known him for a few years and of course here we are today We have a amazing institution that's thriving and doing really well.

And I just wanted to actually spend a minute or 2 on Rajat, because I think that even if you don't get any value from the presentation I'm making, I think there's, you can say, a Shakespearean value in some of the events that have transpired.

You know, my heroes, Warren Buffett and Charlie Munger, say that envy is 1 of the worst of all the human vices that you have.

In fact, many other human vices you can get an upside from having those vices.

But with envy, if you have envy towards anybody, all that's going to happen is you're going to feel bad.

In the case of Rajat, you know, he was off the chart successful, but his downfall was led by 2 things.

I think the 2 traits, basic human traits.

He was envious of a person who was much more successful than him, at least on paper, and much less capable than him, which is probably true.

And ego is nothing but a false sense of self.

So, you know, all of us are ashes and dust.

We came from ashes and dust and we will be ashes and dust.

Or like a good friend of mine always says, everyone burps and farts.

So basically, if you were to basically eliminate envy from your life, And if you were to eliminate as much as you can, ego, you're very far along the path of doing quite well.

With that, I'll go ahead and get started and we can start the PowerPoint.

Basically, I'm going to talk about a very old Indian tale, actually most of us probably grew up with.

It's a tale about the invention of the game of chess.

So the game of chess was invented about 1400 years ago, 70 score and 4 years ago.

This guy who invented the game when he showed it to the king, the king immediately became a big chess fan and was playing all the time and so he told the inventor of the game that you know ask for any reward and it shall be yours.

So the inventor says that what I want is, I want you to put 1 grain of rice on the first square of the chessboard, and I want you to put 2 grains of rice on the second board of the chessboard and I want to put 4 grains on the third board, third square and keep doubling the grains on every square.

Just when you get to the 64th square then that is the amount of rice I'd like and that's all I want.

Of course the king thought that this was a very stupid request.

He said I wanted to give you such a big reward and this is all you want, a bunch of rice?

So he told his treasurer, measure out the rice this guy needs and get him out of my court.

About a week went by and the guy hadn't figured it out yet.

So he called the treasurer back in and said, why are you taking so much time?

He said, well, it took me a while to run the calculation and it turns out that we don't have the rice.

Not only do we not have it in our greenery, we don't have it in the kingdom.

And not only do we not have it in the kingdom, it doesn't exist on planet earth.

You know, that is the power of the pounding.

So if you took that amount of rice, which is going to

and so on, you know, We have a bunch of people who are going to IIT soon.

So how many grains of rice on their chessboard?

Okay, I won't ask you to lay out the whole number.

So if you calculate that amount of rice in terms of present rice prices, it works out to 300 trillion dollars.

And of course, 300 trillion is a big number.

The entire net worth of every man, woman, and child in the United States is 70 trillion.

And the entire net worth of every man, woman, and child on the entire planet is just about 300 trillion.

So basically what the guy asked for would be pretty much the entire wealth of the planet.

That is the power of compounding and that is why Einstein calls it the eighth wonder of the world.

You know, this story of chess that I told you is something I'm sure most of you already heard before.

In fact, I heard about it when I was a kid.

I was 30 years old and I heard about Warren Buffett for the first time.

When I heard of Warren, I had really no knowledge of investments or capital allocation or any of those things.

What I was lucky about in 94 was the first couple of biographies of Warren Buffett had just come out at the time.

And so I could look at this track record that Warren Buffett had from

Over that 44-year period, he had compounded money at

If you compound money at 31% a year, and I'll show you later, if you compound money at

a year, you will double your money in a little less than 3 years, maybe 2 and a half years or 2.6 years or something.

When Warren Buffett for 44 years had compounded at

He was already on the 18th square of the chessboard when I first heard about him, because he had compounded.

And so I thought back to the story about the chess and the rice and so on.

And I talked to Warren and I said, wow, this guy is actually playing out that chessboard story.

That story is very powerful because if you keep doing it, and if he keeps doing it, he's gonna become the wealthiest person on the planet.

And he became the wealthiest person on the planet.

But you know, when I was thinking about all these things, like I said, I had never been to business school and really hadn't thought much about investments.

You know, basically, the investing world, hardly anyone followed Warren Buffett and his approach to investing.

and even today, hardly anyone had the returns that he had.

So the investing professionals, if you will, did not follow Warren's approach to investing and did not have the results that Warren Buffett had.

And I thought those 2 facts would cause an effect.

I thought that the Buffett approach was the approach to kind of high rates of compounding.

And if you didn't follow the approach, you were basically not going to go anywhere.

And so I had these thoughts that these things were related.

Buffett's approach looked replicatable, and no 1 was replicating.

So I said, you know, I like this compounding, I like this 26% or 31% a year, and why don't I give it a try?

How many of you have seen the movie Forrest Gump?

So we get answers in the extreme front of the room and extreme back of the room.

How many people in black shirts have seen the movie Forrest Gump?

OK, so when you go to IIT, on YouTube, download the movie and watch the movie.

I'm just going to play for you about 1 minute of the movie right now.

So I had to go back to work for the team tonight.

He got me invested in some kind of fruit company.

And so then I got a call from them saying we don't have to worry about money no more.

You know, after I decided to do this replication of Warren Buffett's compounding, I changed my license plate.

And of course I think I might have mentioned to some of the Dakshina scholars last time.

But maybe for the people who are not in black shirts, what does my license plate mean?

So that's my real California license plate on my real 6 Series BMW convertible.

Okay, so the LBE means pound, you know, It's an abbreviation for pound.

I had just sold some assets in this business I was running.

Still have the business, just sold a small portion of it.

And basically, I ended up with $1 million in the bank.

It's the first time actually I had any kind of money in the bank.

At the same time I read these Buffett biographies and the chess overlay with his 18 square.

So I said, hey, you know, why don't we focus on a very simple formula, 1.26Q equals 2, I mean I can handle that math, even though I didn't go to IIT.

And so the 30 year game I decided to play was that if you compound at 26% a year, your money is going to double every 3 years.

If it doubles every 3 years, then in 30 years, it's

years I should add 3 zeros to that because it's 1000 times whatever you had and so it becomes a million which is a better number than a million.

My thought was that even if I fail by 90% or

So I decided I will play this game and of course my hero Swami Vivekananda told me just like I tell all the Dakshina scholars, you just take up 1 idea, make that idea your life, think about it, dream of it, live on that idea.

Let the brain, muscles and nerves, let every part of your body be full of that idea and just leave every other idea alone.

I think Swamiji said that for my benefit to compound money.

You know in 1995 I started putting that million dollars to work and for the next 4 and a half years from 95 to middle of June or middle of the year in

it actually grew at 43.4% way above the 26% And the 1 million had become 5.1 million.

So I said, all right, man, I knew this could be done.

And then, you know, I had all these friends, I used to tell them, you know, different stocks they should buy and They used to make a lot of money with all the stock tips I used to give them.

So they came to me and said, listen, this stock tip business is very random.

And then you do what you want and we can have some benefit of that.

So in July 1st of 99, I set up Cabrai Funds.

And it started with $1 million from 8 friends of mine.

middle of 2007, 8 years, Pabrai funds compounded before fees at

And of course I get paid outrageous fees.

And so after fees it was 29.4% but both numbers are perfectly fine.

So now, you know, more than 12 years have passed since I started this and things were working, going really well.

Again, patted myself on the back, you know, doing well.

And for the next 21 months, we compounded at minus

And I can just tell you, if you compound at minus 47.1%, and the car starts going in reverse, the same thing happens in reverse really fast.

And then for the last 4 and a quarter years, we've been compounding back again at about 32.8%.

But we still have 11 and a half years to go maybe I can make that up we'll see so it's pretty close.

Of course the good news with investing unlike tennis is the more you play the game and the older you get, the better you get.

So this is a game where over time you get better.

And of course, the things that we own in the portfolio is very undervalued, so I think it will do well in the future.

Well, you cannot compound, you cannot beat the index by trying to beat the index.

You have to try to do something different from what the index is doing.

Basically, you make very few bets, you make very big bets, you make infrequent bets, and you make bets with the odds heavily in your favor.

And in this business, you can be wrong a lot and still be okay.

I mean, if you look at my record, I had a 21 month period where we actually had several investments go to 0.

And of course, this is going somewhat off topic in the sense that we could do a separate presentation on each of these things, but if you focus on things like cannibals, companies that are buying back own stock or spin-offs, or clone what other people are doing, what other great investors are doing, which is what I do a lot of, things become a lot easier.

Basically, the other thing is that, you know, I don't make investments unless we have at least the prospects of a double or triple of the money in 2 or 3 years.

And as the amount of money in the portfolio goes down, that number keeps going up.

So for example, the last 5% of assets or last

So that just makes sure that the money goes out during the most distressed times.

and 2008, when I got whipsawed, if you will, I made some changes.

So 1 of the things I came up with was this pre-investment checklist, which has been wonderful.

In fact, our error rate is almost 0 since 2009.

We have hardly had any loss of capital and that makes a big difference.

And the second is that I started having conversations with a fellow fund manager and that was actually investment advice I got from Charlie Munger who said that he always had somebody to talk to.

And until 2008, I never talked to anyone about my investments.

But now I always talk to 1 person who is exceptional actually.

But the conversations are still very helpful.

So that's pretty much the song and dance.

You just need to take a simple idea, you take it seriously.

But pounding is the eighth wonder of the world.

You know, I have no original ideas, basically.

In many, many different ways, I copy Bob Buffett.

And then, of course, you have to come up with your own license plate.

What I'm going to do now is I'm going to play a five-minute Bollywood video for you to put you in a better mood.

So we'll play the mp4 but maximum volume.

Okay, so we'll take your questions and I think we have a couple of mics, maybe if someone can just take the mics around then we can, all of us can hear the question.

You can ask things that are in the presentation and I hope you ask things that are not in the presentation.

So pretty much you can ask anything you want other than what I am buying right now.

My question is, you said it is replicable, the material value of the product is replicable.

But if it is that easy, why not everyone is doing that?

For example, you say 75% of the world is infested with industry, which would become 2 weeks into 3 years.

Let me start with your first question, because that's a very deep question.

So you say, like you said, I said it's replicable, but no 1 has replicated.

So it took me a long time to figure this out.

I'm just about getting close to figuring it out.

So there is something strange in the human genome.

have some time, so I can give you my expanded answer, that makes people very much opposed to being intense copycats.

Humans, most humans, do not want to do cloning.

And they do not want to do cloning because they consider it beneath themselves.

And of course, low-life people like me do not consider cloning beneath myself, and so I'm willing to do it.

So to give you an example, if you look at a company like Microsoft, Microsoft isn't even that great a cloner because anything they work on takes about 3 or 5 or 7 versions.

But bottom line is that most of Microsoft's revenue comes from Windows, which was cloned, comes from Office, which was cloned, you know, PowerPoint was actually bought from another company, Word was from WordPerfect, Excel was from Lotus, and so on and so forth, and you know, even SQL Server was left with Oracle, and It just goes on and on.

You can look at Microsoft money, you can look at Bing coming from Google and so on.

So bottom line is that Microsoft isn't even that great a donor, but it's 1 of the largest and most successful companies out there.

You look at another company, and this is something that really perplexes me, is a company called Walmart.

Sam Walton, the people who knew him well, founder of Walmart, they would not call him a brilliant man.

He was not someone who would have been blowing off IQ tests, and I think most of the people in this room would have a higher IQ than Sam Bolton.

But Sam Bolton, if he were alive today, he would have a net worth of about 150 billion, he'd be the richest person on the planet.

And Walmart, for the first 20 years of its existence, did not come up with any innovation.

All Walmart did was they looked at Tmart's model and they looked at Sears' model and they replicated that model.

And in fact, you know what I find really funny is in India, we had this big debate going on about letting, let's digress for a second, foreign retailers in, so that they can make things more efficient.

And then they talk about Walmart coming in.

There is nothing in Walmart's business model that anyone cannot look at by walking into a Walmart and replicating it.

India does not need Walmart to come in in order for retail to become efficient.

India just needs an entrepreneur to look at that model and replicate it.

So there is nothing special about Walmart's model.

There's nothing special about Microsoft's model.

McDonald's, for example, They have a whole army of people, whole departments, which spend all their time trying to figure out which is the next location they should put the next McDonald's in.

They do a lot of studies and analysis to figure out demographics and all that.

In the United States, Burger King, which competes at McDonald's, has 2 people filling out locations and all they do is look at where McDonald's is putting their locations.

So they look at, oh, McDonald's is opening up in Peoria, Illinois in this corner.

Okay, we'll take a register in that corner, we'll open up over there too.

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Mohnish Pabrai's Presentation and Q&A at Indian School of Business on July 13, 2013