Turning $1M Into $1B+: A Masterclass From The Indian Warren Buffet

Intro (0s)

• Mish Pabrai, known as the Indian Warren Buffett, shares his insights on investing.
• Pabrai emphasizes the importance of finding unloved and hated investment opportunities.
• Pabrai highlights the significance of inactivity in achieving substantial returns.
• Pabrai mentions his friendship with Charlie Munger and Warren Buffett.
• Pabrai stresses the value of identifying entrepreneurial traits in CEOs.
• Pabrai discusses the importance of understanding the big picture and making necessary changes.
• Pabrai expresses his skepticism about Bitcoin and Elon Musk.
• Pabrai acknowledges Sean's expertise as an investor.

Why entrepreneurs make the best investors (1m41s)

• Pabrai explains that entrepreneurs and investors use the same part of the brain.
• Pabrai cites Warren Buffett's quote about being a better investor due to his business experience.
• Pabrai reveals Warren Buffett's early business ventures, including buying and selling cokes.
• Pabrai emphasizes the critical window from age 11 to 20 for brain specialization.
• Pabrai highlights the importance of starting early in specialized fields like coding.
• Pabrai criticizes the education system for not recognizing the significance of this tenure window.
• Pabrai encourages parents to encourage their children to specialize early.

How Warren Buffett’s pre-paid for his college education (4m40s)

• As a young entrepreneur, Warren Buffett made money by publishing racing tips and collecting discarded winning tickets at the racetrack. He also partnered with a friend to fix and rent out pinball machines in barber shops, earning a substantial profit.
• By the age of 17, Buffett had accumulated $155,000 through his business ventures and declined his father's inheritance, choosing to pay for his own college education.
• Buffett developed a passion for investing at an early age, reading about stocks from the age of 11. He was particularly influenced by the book "Intelligent Investor" by Ben Graham, which he discovered while studying at Columbia University.

Becoming Ben Graham’s Protege (9m56s)

• Buffett applied to Columbia Business School to learn directly from Benjamin Graham.
• Graham hired Buffett despite heavy discrimination against Jews at the time.
• Buffett's experience as a businessman helped him develop the ability to quickly analyze businesses and business models.
• Buffett believes that entrepreneurs have a natural advantage in becoming great investors.
• Buffett compares the time spent on strategy versus execution in business to the time spent on research versus investing in investing.
• Buffett emphasizes the importance of entrepreneurial experience for investors.
• Buffett suggests that it is easier to transition from being an entrepreneur to an investor than vice versa.

What Buffett learned about branding from See’s Candies (13m57s)

• Buffett's letter to the CEO of See's Candies focused on practical, operational, and tactical advice.
• Buffett set the prices for See's Candies on December 26th each year, increasing them by 10-15% despite inflation being only 3%.
• See's Candies customers accepted the price increases without resistance, teaching Buffett and Charlie Munger the power of brands.
• Despite paying three times book value for See's Candies, it turned out to be a great deal as the company sent billions in dividends to Berkshire Hathaway over the years.
• The lessons learned from See's Candies led to Berkshire Hathaway's investment in Coca-Cola, which was a much bigger success.
• Berkshire Hathaway's current portfolio includes significant investments in strong brands, such as Apple.
• See's Candies generated substantial free cash flow without requiring additional capital investment.

Buffett’s failed play to be a candy mogul (17m53s)

• Berkshire Hathaway's investment in See's Candies was not as successful as expected.
• See's Candies primarily operates in California, limiting its growth potential.
• Unlike Coca-Cola, See's Candies did not have a global appeal and faced challenges in expanding beyond California.
• Warren Buffett realized that candy consumption has limits, while beverages like Coca-Cola have a broader appeal and can be consumed in larger quantities.
• Berkshire Hathaway shifted its focus from solely quantitative deep value investing to understanding nuances of brands and consumer behavior, which contributed to the success of other investments like Coca-Cola.

Identifying offering gaps (20m54s)

• The speaker's success in investing was largely attributed to luck.
• The speaker's father was a successful entrepreneur who emphasized identifying offering gaps in the market.
• Identifying offering gaps involves recognizing the need for a product or service that does not yet exist, similar to the emergence of Starbucks and McDonald's.

Getting an MBA at age 14 as the son of an entrepreneur (21m47s)

• His father was an entrepreneur who was good at identifying gaps in the market and starting businesses but struggled with managing finances and staying power.
• At a young age, he and his brother acted as his father's board of directors, helping to keep the businesses afloat during challenging times.
• By the age of 12, he had gained significant business experience and knowledge equivalent to an MBA.
• At 15 or 16, his father took him on sales calls, providing valuable insights into customer interactions and sales strategies.
• His father ran a gold jewelry manufacturing business and sold to retail merchants.
• He observed his father's cold calling techniques and gained an understanding of customer interactions and sales processes.
• He and his brother managed the business during his father's absence, handling tasks such as distributing gold and collecting jewelry.
• After studying engineering in college, he joined a telecom networking company as an R&D engineer.
• He became interested in the business aspects of product development, such as pricing, customers, and revenue.
• Frustrated by the lack of attention to these aspects among his engineering colleagues, he switched to international marketing.
• His diverse background, combining engineering knowledge with business experience, gave him an advantage in understanding customer needs and securing orders.
• He found commonalities between his experiences and those of Warren Buffett, despite their different entrepreneurial backgrounds.

The 3 tells of a future millionaire (26m12s)

• Childhood experiences and interests can indicate future entrepreneurial success.
• Parents should expose their children to various activities to discover their passions.
• Common traits among successful individuals include:
  • Running a lemonade stand or similar small business at a young age.
  • Engaging in activities like eBay flipping or sneaker flipping.
  • Participating in competitive video games, which develop strategy, communication, and collaboration skills.
  • Completing a Mormon mission, which involves salesmanship and resilience.
• S Balky, a mutual friend, demonstrated entrepreneurial skills from a young age.
• He started by selling greeting cards he made on street corners at the age of eight or nine.
• By the age of 11 or 12, he had progressed to coding and creating websites.

Mohnish builds his first product with maxed out credit cards at 24 (28m49s)

• Mohnish Pabrai never wanted to be an entrepreneur due to childhood trauma.
• At 24 or 25, his father advised him to quit his job and start his own business.
• Mohnish saw an opportunity in the emerging client-server computing field.
• With $30,000 from his 401k, $70,000 in credit card limits, and working 16 hours a day, he started his IT services company.

The 168 hour framework (31m21s)

• Mohnish explains the 168-hour framework for balancing work and entrepreneurship.
• An employee typically works 40 hours a week, with some time for commuting and personal activities.
• This leaves at least 40-50 hours that can be dedicated to other pursuits.
• Mohnish used this framework to start his business while still maintaining his job.
• He aimed to do just enough at work to avoid getting fired, focusing on his business during his free time.
• After 9 months, he had enough revenue and clients to resign from his job.
• His former employer noticed a decline in his performance but offered him a promotion if his business failed.
• Mohnish saw this as a better option than job hunting and accepted the offer.

“Entrepreneurs do not take risks” (33m56s)

• Entrepreneurs minimize risk by starting with low-risk ventures and gradually expanding.
• Both entrepreneurs and value investors share a common goal of minimizing risk and maximizing returns.
• Venture-backed businesses are high-risk, high-return investments that make up a small fraction of all businesses formed in the United States.
• Entrepreneurs who are not venture-backed prioritize downside protection and carefully manage risk.

How Richard Branson launches Virgin Atlantic with no money (36m10s)

• Richard Branson started Virgin Atlantic with no money by leasing a Boeing 747 from Boeing.
• He convinced Boeing to lease him the plane by pretending to be a potential customer from the UK.
• Branson structured the lease agreement so that he would receive advance payments for future flights and pay for fuel after the plane landed, resulting in negative working capital.
• He was able to launch Virgin Atlantic with zero equity.

How 0.1 percent of the population owns 70 percent of all the motels in America (39m9s)

• In the 1970s, dictator Idi Amin of Uganda nationalized businesses owned by Patel immigrants, who were of Indian descent, and expelled them from the country.
• With limited job opportunities and language barriers, many Patel refugees who came to the United States in the early 1970s turned to buying small motels as a means of survival.
• By living frugally and operating with a low-cost structure, the Patel families were able to undercut the rates of neighboring motels and achieve high occupancy rates.
• Over time, through family members helping each other to acquire motels, the Patel community gradually came to own a significant portion of the motel industry in the United States.

The unfair advantage of being a low-cost producer (43m45s)

• Low-cost producers have an inherent advantage in the market.
• Patel motels were able to thrive due to their low operating costs, which allowed them to charge lower rates than competitors.
• Charlie Munger, Warren Buffett's business partner, advised against competing with Patel-owned businesses due to their strong competitive advantage.

How Mohnish turned his first million into $13M in 5 years (44m49s)

• Mohnish Pabrai was inspired by Warren Buffett's investment strategies and realized that entrepreneurs and investors use similar models.
• He saw the potential for more time dedicated to strategy in investing compared to his IT business.
• After receiving a million dollars from the sale of his business, he decided to test his investment skills in the public markets.
• From 1995 to 2000, he achieved a remarkable 70% annual compounded return, turning his initial investment into $13 million.
• He gradually lost interest in his IT business and eventually decided to focus solely on investing.

Pabrai Funds grows to $600M in assets in less than 10 years (48m18s)

• Friends who had benefited from his stock tips approached Mohnish Pabrai to manage their money.
• He agreed to manage $100,000 from each of them, totaling $1 million, as a hobby rather than a formal fund.
• Inspired by Warren Buffett's partnership model, he decided not to charge management fees but instead only charge performance fees.

What Mohnish knows about fundraising that we don’t (49m42s)

• Warren Buffett's partnership had no management fee and only took a 25% cut of profits above a 6% return, unlike traditional hedge funds.
• PAB funds, which began in 1999 with $13 million, grew to $600 million in assets under management by 2007 and achieved an average annual return of mid-30% for the first eight to nine years.
• Buffett's exceptional market-beating returns attracted investors, as he believed that consistent outperformance would draw investors even in challenging times.
• Due to SEC regulations restricting hedge funds from soliciting the general public, the fund manager held annual meetings with existing investors to maintain relationships and attract new investments.
• The speaker, starting with $1 million, grew it to $2.5 million in a year and $10 million in two years through word-of-mouth referrals from existing investors.
• The speaker's strategy focused on attracting assets to P funds and delivering results to investors.

Pivoting from tech investments in 1999 to value investments (55m46s)

• In 1999, the dot-com bubble was about to burst.
• The author recognized the bubble and switched from tech investments to classic Ben Graham deep value investing.
• Basic businesses had become cheap due to lack of interest, so the author bought funeral homes at two times earnings and steel companies at three times earnings.
• PAB funds performed well during the market downturn, while the NASDAQ dropped 75% and the Dow and S&P also declined significantly.
• Compounding is the eighth wonder of the world.
• The author's returns were compounded over 20 years, resulting in a significant increase in wealth.
• Compounding can turn a small investment into a large sum over time.

2M lunch with Warren Buffett (58m50s)

• In 2007, the speaker bid $650,000 for a charity lunch with Warren Buffett to express gratitude for Buffett's use of his intellectual property.
• During the lunch, Buffett provided valuable insights and turned challenging questions into positive outcomes.
• The speaker's wife admired Charlie Munger, Buffett's business partner, which prompted Buffett to arrange a lunch between the speaker and Munger in Los Angeles.
• The speaker found Munger's directness refreshing and enjoyable, leading to a close friendship.
• Munger invited the speaker to his home for dinner several times a year, strengthening their bond.
• The speaker also had a deep friendship with the "Indian Warren Buffett," Rakesh Jhunjhunwala, which lasted for 15 years.
• They met monthly to play bridge at the LA Country Club, cherishing their unexpected and meaningful friendship.

Be a harsh grader of people (1h4m15s)

• Be selective about the people you associate with.
• Surround yourself with exceptional people who can positively influence you.
• Avoid people who have ethical issues or negative traits.
• Prioritize meaningful relationships over long-standing friendships with problematic individuals.
• Treat people who are unknown to you the same as those who are useless.
• Monish Pabrai met Charlie Munger and was impressed by the exceptional quality of his friends.
• Pabrai decided to befriend Munger's friends as a shortcut to building a network of high-quality relationships.
• Pabrai has formed meaningful friendships with Munger's friends and family.

The Givers, The Takers, and The Matchers (1h8m9s)

• Adam Grant's book "Give and Take" categorizes people into three groups: givers, takers, and matchers.
• Takers are people who only want to extract from others and should be avoided.
• Givers are selfless people who help others without expecting anything in return.
• Matchers try to balance what they give and receive.
• The best way to get the most is to be a giver, as the universe conspires to help givers.
• Excluding a good person from your circle has no penalty, as there are infinite good people.
• Including a substandard person can have negative consequences.
• Warren Buffett has a "good pile" and a "too hard pile" for investments.
• He says that in investing, there are no called strikes, so he can wait for the perfect opportunity to invest.
• There are infinite good humans, so excluding a good person from your circle has no penalty.
• Including a substandard person can have negative consequences.

“Heads I win, tails I don’t lose much” (1h11m30s)

• Look for asymmetric bets where the odds are heavily in your favor.
• In investing, there are anomalies where the upside is high but the downside is capped.

Example 1: Starting a business with a safety net [00:00:00]

• Started a business with $30,000 from 401k, knowing that if it failed, he could return to his job and have a clean slate due to bankruptcy laws at the time.
• The company was already cash flow positive, minimizing the risk.

Example 2: Investing in a steel company (Ipco) [00:03:00]

• In 2003 or 2004, invested in a Canadian steel company, Ipco, which was trading at $45 per share.
• The company had $15 per share in cash on its balance sheet, no debt, and contracts ensuring $15 per share earnings for the next two years.
• After a year, the company announced another year of $15 earnings, and the stock price rose to $90.
• A Swedish company offered to buy the company for $160 per share, and the investment was sold.

Finding anomalies in hated and unloved industries [00:07:00]

• Studied the coal industry, which was hated and unloved, and found a company that was projected to generate $1 billion in annual cash flow for 50 years.
• Invested in the coal industry because it was available for less than $2 billion.

Conclusion [00:10:00]

• In auction-driven markets, there are repeated opportunities to find mispriced assets.
• Look for companies emerging from bankruptcy, unpopular industries, and other situations where things get mispriced.

Private markets v public auctions (1h16m41s)

• Publicly traded companies experience significant price fluctuations, often ranging from 50% to 100% over a 12-month period.
• Private markets, such as real estate, exhibit more stable valuations compared to public markets.
• The intelligent buyer-seller dynamic in private markets prevents extreme price swings.
• Public markets offer opportunities for irrational pricing, which can be exploited by patient investors.
• Index funds are a good investment option for the majority of people (over 99%).
• Index funds are passively managed and do not actively buy or sell stocks.
• The frictional cost of owning an index fund through an ETF is very small (less than 0.05% or 1%).
• Active investing may be suitable for a small minority of individuals who have the talent and patience to identify undervalued businesses and hold them patiently.

The #1 trait that makes a great investor (1h21m15s)

• Patience is the key trait of a great investor.
• The ability to sit quietly and do nothing, like watching paint dry or staring at an airplane seat back, indicates a potential for successful investing.
• This trait allows investors to remain calm and focused during market fluctuations and avoid impulsive decisions.

What people of Reddit think of Mohnish Pabrai (1h22m50s)

• Mohnish Pabrai has fans on Reddit who appreciate his approach to investing.
• One notable comment on Reddit praised Pabrai for refusing to give random stock picks or encourage impulsive buying during a TV appearance.
• This contrasts with the overstimulating and impatient nature of many financial commentators.
• Pabrai's approach highlights the importance of avoiding stock tips from unreliable sources and emphasizes the value of long-term, patient investing.

Starting capital, annual rate of return, length of runway (1h24m26s)

• Compounding is a crucial concept in investing and should be taught in schools.
• Three variables affect compounding: starting capital, annualized rate of return, and length of the investment runway.
• Starting with a larger capital, achieving a higher annualized return, and investing for a longer period all contribute to greater wealth accumulation through compounding.

The rule of 72 (1h25m4s)

• The rule of 72 is a mathematical quirk that helps determine how long it takes for an investment to double.
• To calculate the doubling time, divide 72 by the annual interest rate.
• For example, if the annual interest rate is 7%, it will take approximately 10 years for the investment to double.

“The most important rule in life is how long something takes to double” (1h26m3s)

• The most important rule in life is understanding how long it takes for something to double.
• Warren Buffett started his compounding journey at a young age, which gave him a long runway for his investments to grow.
• A long runway, even with a low compounding rate, can lead to significant growth.
• Starting early and consistently saving, even small amounts, can lead to substantial wealth over time.
• Consistency is key, even if the investments are in simple index funds.
• Saving early and consistently is like a tortoise that will eventually win the race.

Circle the Wagons Philosophy (1h30m21s)

• Buffett's success in investing is due to a small number of key decisions.
• In 58 years of running Berkshire Hathaway, Buffett made only 12 decisions that significantly impacted the company's growth.
• Despite Berkshire Hathaway's impressive long-term performance, with an annualized return of over 20% for 58 years, these 12 decisions were responsible for the majority of the company's success.
• Buffett's hit rate for making impactful investment decisions is only 4%, highlighting the difficulty of successful investing.
• Compounding returns can lead to significant wealth creation over time.
• Doubling one's investment every three and a half years through a 20% annual return can result in 16 doubles over 58 years.
• This compounding effect can turn a $100 investment into $6.4 million over 58 years.

Losing $3B in one unfortunate event (1h32m14s)

• Charlie Munger's 12 bets included companies like Coke, AMX, Gillette, Cap Cities, Washington Post, and Berkshire Hathaway Energy.
• The key to their success was not the buy decision but the "paint drying" decision, meaning they held onto their investments for the long term.
• The best investment Berkshire Hathaway ever made was the search fee they paid to hire Ajit Jain.
• Ajit Jain joined Berkshire Hathaway in 1985 without any prior experience in the insurance business.
• He created a business for Berkshire Hathaway that is now worth over $100 billion.
• Jain's strategy is to write super catastrophe insurance, such as hurricane and earthquake insurance, at high premiums.
• In 2023, Jain wrote a hurricane insurance policy with a maximum payout of $15 billion, collecting a premium of $5 billion.
• Berkshire Hathaway has only paid out a few hundred million dollars in claims under this policy.
• Jain has done this about six times, picking the years when premiums are high and taking a pass when they are low.
• Berkshire Hathaway is now writing insurance for risks that other insurers are avoiding, such as the recent ship loss in Baltimore.

Be fearful when the world is greedy; Be greedy when the world is fearful (1h37m34s)

• The speaker believes in the quote "Be fearful when the world is greedy; Be greedy when the world is fearful" by John Templeton.
• When the world is running away from an investment opportunity, that's when investors should run towards it.
• Look for what is hated and unloved in the market, as that's where mispricing often occurs.

What a value investor thinks of bitcoin (1h38m34s)

• Bitcoin is outside the speaker's circle of competence.
• The speaker believes Bitcoin has no intrinsic value and is skeptical about its long-term prospects.
• Most people who have invested in Bitcoin don't fully understand it or why it should be worth what it is.

Nick Sleep bets (1h39m50s)

• Nick Sleep and Zach Schreiber recognized Amazon's potential despite its high valuation, understanding its investments were categorized as expenses, leading to lower taxes and government funding.
• They invested heavily in Amazon, which grew to become a large part of their portfolio, but later diversified into Berkshire Hathaway and Costco.
• The key takeaway is to follow Warren Buffett's advice of leaving great businesses alone, even if it means taking some profits.
• The Walton family's concentrated ownership of Walmart stock has maintained significant wealth despite not being involved in day-to-day operations.
• In 2018, an undervalued Turkish market led to the discovery of Ras, a warehouse operator with a $16 million market cap and $800 million liquidation value.
• Despite initial concerns, high trading volumes allowed for the acquisition of a third of the company for $8 million.
• Ras has grown significantly since the initial investment in 2019, with an estimated current value of $1.5 to $2 billion.
• The key to success is to leave the investment alone and let the family and son continue running the business.
• Patience and inactivity are crucial for success.
• Other successful capital allocators include Jeff Bezos and Warren Buffett.

The Best Of: Capital Allocators (1h52m49s)

• Under Mark Zuckerberg's leadership, Meta (Facebook) transitioned from being a spendthrift to being financially responsible, leading to improved financial performance.
• Elon Musk is an exceptional capital allocator who has created significant value, jobs, and disrupted multiple industries.
• Tesla's valuation is challenging to analyze due to its innovative nature and exceptional execution.
• Charlie Munger, a close friend of Warren Buffett, emphasized the importance of selflessness and played a crucial role in helping Buffett build Berkshire Hathaway.
• Munger had a profound impact on various institutions, including Harvard Business School, Good Sam Hospital, and Berkshire Hathaway, and was known for his selflessness and giving his business partners the better deal.
• Despite his lack of belief in God, religion, or legacy, Munger remained dedicated to his work and continued to make charitable contributions until the end of his life.
• Even when faced with the possibility of complete blindness, Munger remained stoic and focused on finding solutions, such as learning Braille.
• Munger's extensive body of work, including the "Poor Charlie's Almanack," offers valuable insights and lessons for others to learn from.