0:00:05 An idea is like an asshole. Everyone has one. Okay, ideas don’t mean anything.
0:00:10 This guy is known as the Indian Warren Buffett. He’s billionaire investor Monash Pabrai.
0:00:15 And last month, I went to his house and asked him to teach me everything he knows about investing.
0:00:16 How did you make your money?
0:00:23 After taxes, after everything, I got a million dollars. And I, for the first time, had money in
0:00:31 the bank. That million became about 13 million. And I said, “Wow, well done, Monash.” And so,
0:00:33 they got 70% a year compounded.
0:00:35 How the hell were you getting these returns?
0:00:42 I’m always looking at what is hated and unloved. The key to moving the needle is inactivity.
0:00:45 Met and become friends with Charlie Munger and Warren Buffett.
0:00:51 Good afternoon, Mr. Buffett and good afternoon, Mr. Munger. My name is Monash Pabrai.
0:00:53 How does that happen?
0:01:00 It shouldn’t happen. When I look at a CEO, I always try to find out, did they run a lemonade stand
0:01:05 when they were 12? Because if they didn’t run the lemonade stand when they were 12,
0:01:10 they’re not going to be that great at business at 30. How stupid can you be? If you know the big
0:01:16 picture, you can change the big picture. The most important thing in life is…
0:01:18 Are you a fan of Bitcoin? Are you a believer?
0:01:20 If you put a gun to my head, I would say…
0:01:21 What do you think about Elon Musk?
0:01:22 Elon is not human.
0:01:27 If I said, what’s the number one trait that makes a great investor? What comes to mind?
0:01:40 All right. Welcome. Good morning.
0:01:41 Great to be here, Sean.
0:01:44 You are a great investor, but you started as a businessman.
0:01:48 I’m a businessman trying to become a great investor. How do those two relate?
0:01:54 In our brains, we actually use the exact same part of the brain in both activities.
0:01:59 Warren Buffett has a great quote. He says, “I’m a better investor because I’m a businessman
0:02:08 and I’m a better businessman because I’m an investor.” In his case, a lot of people don’t
0:02:14 know, but Warren had done a lot of different businesses in different areas before he was 17,
0:02:19 starting when he was, I think, five or six years old. His very first business was
0:02:30 buying coax from his grandfather’s store at a nickel a piece and then selling them
0:02:30 at a dime a piece.
0:02:32 Right. Buy wholesale, sell retail.
0:02:35 Yeah. So that was one of his first ones.
0:02:40 And one of the things that a lot of people don’t understand about the way our brains work
0:02:47 is the human brain, actually, when we are born, it is the most underdeveloped organ
0:02:50 when we’re born because the birth canal is not wide enough.
0:02:54 So for the first five years of life, the brain is the fastest growing organ
0:02:59 that we have as humans. The neuron connections are growing at an exponential rate.
0:03:09 From the age of about 11 to about 20, that window is when the brain is set up to specialize.
0:03:16 And the neuron connections get cut. So they actually go down quite a bit,
0:03:23 but the brain allocates areas to hone in and specialize. So if you think of someone like
0:03:30 Michelangelo or Bill Gates or even Warren Buffett, these guys started specializing
0:03:37 at 10 or 11. And if you start writing code at the age of 10 or 11, for example,
0:03:44 like Bill Gates did, by the time he was 20, the expertise that he had,
0:03:49 someone else starting at 20, would not be able to match him even at 50.
0:03:58 So that 10-year window is a very critical window in human development. And unfortunately,
0:04:03 our education system doesn’t recognize that. And unfortunately, I’m 35. So it’s too late.
0:04:08 We hope there are some 11-year-olds listening or we hope when you have kids.
0:04:11 It’s not all, the cake’s not fully baked yet.
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0:04:47 So you get reports, KPIs, and all kinds of AI-powered insights that you can share with your team and
0:04:51 not be flying blind anymore. So if you’re doing content marketing, highly recommend you check
0:04:56 out the Content Hub and Marketing Hub for HubSpot. You can visit hubspot.com to get started
0:05:01 or free. Back to this episode. So I think the thing with Warren was that I think when he was
0:05:07 about 10 or 11 years old, he was running a bunch of very interesting businesses.
0:05:10 What was he doing? I’ve never heard these. So I didn’t know this back story.
0:05:15 One first business was he used to go to this racetrack in Omaha called Aksarban,
0:05:21 which is a Nebraska spelled backwards. And he used to publish racing tips
0:05:25 called stable boy selections, basically telling you what horses to bet on.
0:05:30 And then also what he would do is when all the races had been run,
0:05:36 he’d collect all the discarded tickets on the ground and he’d go home and go through each one
0:05:41 carefully to see if some drunk had thrown out a winning ticket. And he’d find a few. He’d find
0:05:47 a few, but he was too young to go to the window to collect with under 18. So he would give them
0:05:54 to his Aunt Alice who would go and collect for him around the age of 14 or 15. He had a very
0:06:00 good friend in high school called Don Danley. And Danley was a tinkerer. He was like very
0:06:06 mechanically inclined. So one time I think Warren went to his home and he saw that Don’s working
0:06:10 on a pinball machine in his garage. And he asked Don what he’s doing. He said, “Oh, I just bought
0:06:15 this pinball machine that wasn’t working. They gave it away. It paid like 15 bucks for it.
0:06:21 And I think I can get it working.” And Warren asked him, “How much is it going to cost?” He said,
0:06:25 “It’s going to cost like three dollars in parts and maybe a couple hours to get it working.”
0:06:32 And then Warren says, “Can you find more machines like this which don’t work?” He said, “Oh, yeah,
0:06:36 there’s a lot of machines you can buy which people don’t want them because they don’t work,” etc.
0:06:42 So Don and him formed a company in their minds that never actually incorporated anything. They
0:06:49 called it the Wilson Coin Operated Amusement Company. And they went to barber shops in D.C.
0:06:54 And these two boys, you know, kind of, you know, nerdy looking 15-year-olds,
0:06:59 they went to the barber and said, “Look, we work for Mr. Wilson.” And Mr. Wilson did not exist in
0:07:04 the fictitious character. We work for Mr. Wilson and Mr. Wilson has asked us to present you with
0:07:11 a proposition that we can put a pinball machine in the barber shop and we’ll come by once a week
0:07:16 and whatever coins are in there, we’ll split it 50-50 with you, half for you and half for Mr.
0:07:23 Wilson. So the barber said, “Yeah, put it in the corner,” right? And so, Warren got Dan Lee busy
0:07:29 fixing pinball machines and the two of them would go on weekends and, you know, get barber shops.
0:07:33 Yeah, every week they’re making some money. And so, I think he had eventually something like 40
0:07:40 barber shops with these machines. And Warren said that the first week he went back to the first
0:07:46 barber shop, he thought he died and went to heaven. So there was like five or six dollars in there.
0:07:51 And so their take was about like, you know, three dollars on 18 dollars of capital in one week.
0:07:52 Right.
0:07:56 And he just told, “Don’t go as fast as you can.”
0:07:58 Dan Lee, what are you doing right now?
0:08:03 Exactly. Warren had all these different businesses that he was a senior partner and
0:08:09 whoever he was working with was a junior partner. One time, Dan Lee showed him an ad for Rolls-Royce
0:08:15 for sale for 300 dollars, but it didn’t run. It was an old beat-up Rolls and, you know,
0:08:19 people was giving away like junk, right? And he thought he could fix the Rolls.
0:08:25 So they bought the Rolls for 300, maybe another 50 bucks in parts and Dan Lee had it running.
0:08:30 And then they, you know, spruced it up and they would rent it on weekends for 100 dollars
0:08:36 to weddings. And then on the weekdays, the two of them would go to school, the high school,
0:08:42 in the Rolls. You know, so what happened is, and Warren didn’t, he didn’t know this, but
0:08:48 he was specializing and figuring out business in that window of time, the 11 to 20, right?
0:08:53 And so by the time he was 19, 18 or 19, I think he went to college when he was 17.
0:09:00 By the time he was 17 and went to college, he had 15,000 dollars. And he told his dad,
0:09:05 “I’m going to pay for my college myself.” And he also told his dad, “I don’t need an inheritance.
0:09:10 Whatever money there is, you’re leaving. Leave it to my two sisters. I’m good.”
0:09:13 And 15,000 back then is a lot, you know, today’s dollars.
0:09:15 Well, it’s about 10 to 1.
0:09:16 So 150 grand at a 17-year-old.
0:09:20 Yeah, I think it was 17-year-old, 150k, right? And at that time college was cheap, you know.
0:09:29 And the other thing is that he got interested in investing, his dad was a stockbroker. So he
0:09:34 used to go to his dad’s office on the weekends. And he says that at the age of 11, he bought his
0:09:40 first stock. And he said, “I was wasting my time till then.” But, you know, he didn’t really have
0:09:46 a philosophy, didn’t have an investment philosophy. At 19, he read The Intelligent Investor by Ben
0:09:51 Graham. And that was transformational. And he thought Ben Graham was this guy who, you know,
0:09:56 died and passed away. But then he discovered that Ben Graham was teaching at Columbia. He was a
0:10:02 professor at Columbia. So when he finished his undergrad, he applied to Columbia to go to business
0:10:08 school there. So he could learn directly from Ben Graham. And he joined Columbia’s MBA program.
0:10:13 Must have been 20 or something. And then, of course, after that,
0:10:20 Graham hired him. Isn’t there some story where he tells Graham, like, “I’ll work for you for free.”
0:10:23 And Ben Graham says, “Your price is too high.” That’s correct.
0:10:28 But he still ended up convincing him somehow. So actually, Graham, at that time, Jews were very
0:10:32 heavily discriminated against. There was a lot of antisemitism on Wall Street. So Ben Graham
0:10:39 who was Jewish wanted to give the few jobs that he had to Jewish kids and young Jewish people
0:10:43 because they just weren’t many opportunities. So he basically told Warren, “Look, I got to
0:10:47 take care of the community.” But then Warren went back to Omaha and about a few months after that
0:10:53 Graham called him and said, “If you want to come to New York, I got something for you.”
0:10:58 And Warren never asked him what the salary was, what the position was. He just did the next
0:11:05 train to New York with his wife. His experience as a businessman, he was very lucky. It got
0:11:11 seared in that window of time. And both Warren and Charlie, they can crack businesses and business
0:11:19 models really fast. So when we start a business, we will spend maybe three or four, five percent of
0:11:25 our time on figuring out the strategy. What’s going to be the product, service, price point,
0:11:31 yeah, how we’re going to make it work and all the different plans, right? And then 95, 97 percent
0:11:35 is all the blocking and tackling to make it happen. Right. It’s Dan Lee fixing machines.
0:11:43 Yeah, exactly. And so in the case of investing, we use the same brain cells that we use in that
0:11:49 three to five percent of time. And basically, one of the things that attracted me to investing was
0:11:56 that basically that three percent becomes 80 percent because we don’t need a Dan Lee. We’ve
0:12:02 got public bond companies and all of that. And we just have to pick which businesses we want to own
0:12:10 partially and which ones we want to ride and so on. And so I think that I always find it strange
0:12:15 if I run into investors who haven’t been entrepreneurs because I think they’re missing
0:12:21 a very key part. And on the other hand, I find that entrepreneurs are very naturally
0:12:30 already set up to be great investors if they make a couple of tweaks. But what ends up happening is
0:12:36 that we don’t see a lot of entrepreneurs becoming investors. And we also don’t see, we see a lot
0:12:43 of investors who haven’t built businesses, met payroll. And so both have flaws. So if you had
0:12:51 the good fortune of having the entrepreneurial experience, then I think looking at the Buffett
0:12:56 Munger frameworks, it’s a very easy transition. Right. It’s probably also easier to go business to
0:13:01 investor for a long time than suddenly go try to be an entrepreneur. Well, investor to business,
0:13:08 the problem is the windows closed. So you’d be at a disadvantage to start with. But yeah,
0:13:11 the earlier you start on both endeavors, the better off you are. There’s a great,
0:13:15 I don’t know if you’ve seen this, but I didn’t know, like I always heard, okay,
0:13:20 Warren and Charlie, great investors, I read the shareholder letters and the shareholder letters
0:13:24 are often, they’re amazing, but they’re very like, they’re high level and they’re philosophical in a
0:13:31 way. Then you have, I saw this letter of Warren writing a letter to this, I think the CEO of
0:13:35 C’s candy. I don’t know if you’ve seen this, but it’s a, it’s a letter and it’s, I expected it to
0:13:39 be very, again, philosophical amusing. Instead, he’s like brass tacks right away. He’s like,
0:13:44 I went to the store and I have a few ideas for you. It’s a very operational tactical.
0:13:49 I noticed this price point. I noticed this and I was like, oh, he’s, he’s a businessman. Like, he’s
0:13:55 just like, today we only think of him as one bucket, but actually he’s got both gears.
0:14:01 C’s is a wonderful, wonderful business. It taught, it taught them a lot. It taught them more than
0:14:05 they ever thought they’d learn from a stupid candy business. But one of the things Warren did when
0:14:11 he first bought C’s is he told, he told the CEO, listen, you got free rein, run the business like
0:14:18 you’ve been running and so on and so forth. But on December 26th, I’m going to set the prices for
0:14:24 the next year. Okay. So he would sit down with the entire C’s price list and he would bump all the
0:14:34 prices by 10 or 15%. And inflation might have been 3%. Right. And so he would raise prices
0:14:40 significantly above inflation. And what he would observe is volumes went up. So, and then the year
0:14:47 after that, he’d again bump it by another 10, 12% and volume still went up. And so both him and
0:14:53 Charlie were amazed that you could have a business where you’re continuously raising prices
0:14:59 significantly above the rate of inflation and there’s no resistance on the customer base
0:15:05 to accepting those prices. And that’s what gave them a huge lesson in brands.
0:15:12 And, you know, he was a died in the world hardcore deep value investor. It was really hard for them.
0:15:17 They paid three times book value for C’s. They were choking almost when they paid the amount.
0:15:24 So I think they bought C’s for like 25 million. Looking back, they could have paid 200 million.
0:15:35 And C’s has sent dividends to Berkshire in the billions. I mean, it’s been about 50 years
0:15:41 since the purchase. And billions of dollars have flown from C’s to Berkshire, which has then been
0:15:49 used to buy a whole plethora of other businesses. And if you look at their purchase of Coke, for
0:15:57 example, they put a quarter of the entire book value of Berkshire Hathaway into Coke in 1988.
0:16:05 If they had not bought C’s, they would have never bought Coke. So the lessons that they learned
0:16:11 about branding and the power of brands is what led to the Coke investment, which was a much bigger
0:16:15 home run. And they’ve made many more brand investments since then. You have the portfolios
0:16:22 in Apple right now, right? Yeah. So Apple and I think Warren understood this notion of consumer
0:16:30 behavior and how powerful brands can be and how powerful habits can be. And then he went from
0:16:34 there. So yeah, absolutely. And one of the interesting things about C’s is that C’s wasn’t
0:16:40 this fast grower. They bought it and then sales exploded. But what I think the beauty of C’s,
0:16:44 if I remember correctly, is that it was just no additional capital had to go in. So everything
0:16:48 was just free cash flow coming out. Yeah. So C’s is very much a California story, right?
0:16:53 I mean, it was founded in California. Almost all the sales were in California.
0:16:58 If you look at C’s from the time they bought it till today, about 50 years,
0:17:10 the unit volume has gone up on average 2% a year. California GDP, probably at least in the 70s,
0:17:16 80s, 90s was going up about at least 4% or 5% a year. So they were actually, and part of that
0:17:20 might have been the price increases. But even with those heavy price increases, they still got the
0:17:29 volume going up slightly. But when you overlay that, you do 50 years of 10%, that’s a very big
0:17:37 number, right? And so C’s is not cheap today, right? And now Warren was very excited about
0:17:45 being the candy mogul of the world. So they tried really hard to send C’s everywhere, right? I mean,
0:17:50 they would open a store in Chicago and then fall flat on their face. Then they’d open in Arizona
0:17:56 and they fall flat in place. They repeatedly tried over and over and over again to broaden C’s
0:18:05 and expand it. And by and large, those efforts didn’t work. Even today, the bulk of the volumes of C’s
0:18:15 is in California, right? And so when the Koch investment came about, they found something
0:18:22 very different than C’s. They knew C’s doesn’t travel well, but they could look at more than
0:18:28 a hundred year history of Koch and they knew Koch travels really well. There are two countries in
0:18:36 the world where you can’t get Koch, North Korea and Cuba. If they opened up to Koch in either of
0:18:42 those two countries and Koch did not advertise at all, sales would take off. It’s so embedded in
0:18:48 the pop culture. So even in countries and places where they’ve never done any branding before,
0:18:54 people in Pakistan or India or Bangladesh, they’re having Indian food with a Koch, right?
0:19:00 So it’s ubiquitous. And that did not exist with C’s candy. It wasn’t ubiquitous. And Warren understood
0:19:08 you can’t consume infinite amounts of candy. There’s an aftertaste and all that. Koch,
0:19:12 you can actually consume a lot of. Right. There’s no, what do you call it, taste memory?
0:19:18 There’s no aftertaste. Yeah, that’s right. So I think, like I said, I think they move from being
0:19:25 hardcore, quantitative, deep value guys to actually understanding a lot of nuances of brands and
0:19:31 consumer behavior, which was very fundamental to how and why Berkshire did so well.
0:19:38 So you talked about specializing kind of that 11 to 20 years old-ish window. Today,
0:19:42 you’ve done phenomenally well. You’ve managed, I don’t know, almost a billion dollars or maybe
0:19:48 more, who knows, a lot of money and have done incredibly well investing. Did you do that when
0:19:55 you were 20 or were you a late bloomer? So no, actually, it was just dumb luck. A lot of things
0:20:03 in my life have been dumb luck. So my dad was a quintessential entrepreneur. And he was really
0:20:09 good. So a great entrepreneur, one of the first traits you need is you need to be able to identify
0:20:16 offering gaps, some product or service that ought to exist, but doesn’t like Starbucks before Starbucks
0:20:21 or McDonald’s before McDonald’s and so on, right? And so my dad was really good at figuring out that,
0:20:28 oh, this product should be there, but isn’t. And he was really good at identifying these offering
0:20:36 gaps. He was also really good at starting businesses from scratch. But his downfall was that he was
0:20:43 always very aggressive and he was always overlevered. So when the businesses were going, he was
0:20:48 literally taking every last dime of profit coming in and everything that he could borrow
0:20:54 and just pounding into the growth as aggressively as possible. And the negative was that when the
0:21:01 first headwind showed up, the businesses had no staying power. And so they would run into trouble.
0:21:05 So my brother and I, I think after we were like maybe nine or 10 years old,
0:21:11 we were like his board of directors. And I remember like when I’m like 10 or 11 years old,
0:21:16 my dad and my brother and we would sit down in the evening and we had to figure out how to make
0:21:22 the business survive for one more day. So all the walls were caving in. They were everything going
0:21:28 bad and there were a lot of moving parts. And we’d put our heads together and we’d try to figure
0:21:34 out how to make it last. And then we’d make it past the one day and the next night, the same thing
0:21:43 over. And so I finished many MBAs before I was 12. I think at 15 or 16, I was, I don’t know why
0:21:49 my dad did it, but I’m really grateful he did. He used to take me on sales calls. And who takes
0:21:53 15 years on a sales call? It just doesn’t fit, but my dad didn’t care. And that was just incredible
0:22:00 for me because I was getting to see, you know, I was in, I finished high school in Dubai. So I was
0:22:07 in Dubai from the age of 16 to actually 19. And in that window of time, my dad had a gold
0:22:14 jewelry business. And so we used to go, I used to go with him to these, he was manufacturing
0:22:19 gold jewelry and they were selling it to these retail merchants, right? And so he’s going into
0:22:25 cold calling, right? And I’m observing him going into jewelry store. He doesn’t know them.
0:22:30 Were you a silent shadow or did you have a role? No, no, I was very silent. But I was soaking it in.
0:22:33 And sometimes when he was traveling, my brother and I would run the business. So they were like
0:22:37 all these goldsmiths and all that and we’d manage giving them the gold and taking the jewelry and
0:22:45 all that. So basically, I didn’t realize it then. But when I went to college, I studied engineering.
0:22:53 And then I joined a telecom networking company as a R&D engineer. And when we were working on these
0:23:00 products, I’d ask my boss, so what are you going to sell this for? And who’s a customer? And what
0:23:04 kind of like, what are you going to make on it? And my boss would tell me, those are all questions
0:23:08 for marketing and sales. We don’t need to care about that. Just design the product. He didn’t
0:23:13 know the answers. Yeah. That’s the poker tell. He didn’t know the answers. He didn’t care.
0:23:17 And I found that all the people I worked with, the engineers didn’t care. I said,
0:23:22 how stupid can you be? You don’t have the big picture. The big picture is interesting and
0:23:29 exciting. If you know the big picture, you can change the big picture, right? And so what I did
0:23:35 after two and a half years with the nerds is I switched to international marketing. And that
0:23:40 was such a breath of fresh air. It was so great. And my learning again skyrocketed. And I had a
0:23:44 big advantage because I had a very strong engineering background, but I also had all
0:23:53 the background for my teen years. And so what I found is that I was able to connect with customers
0:24:00 and figure out kind of what they wanted and how to really get the order much better than guys 20
0:24:05 years more experience than me because they hadn’t had all these experiences and they didn’t think
0:24:12 like an entrepreneur, right? It was just a small subset. And later in life, when I heard about
0:24:16 Buffett for the first time, I found a lot of commonality, right? I mean, he had a very different
0:24:21 experience in the sense that he was his own entrepreneur. But one of the things that’s really
0:24:28 important is that when I look at a CEO, I always try to find out, did they run a lemonade stand
0:24:32 when they were 12? Because if they didn’t run the lemonade stand when they were 12,
0:24:38 they’re not going to be that great at business at 30, okay? The little itty-bitty lemonade stand
0:24:47 has a lot of lessons. And so I think when we have kids, I think it’s really important in that window,
0:24:53 they don’t need to run lemonade stands, but they really need to be doing what’s going to be their
0:24:59 calling. And I think that’s what the biggest responsibility of parents is. They need to expose
0:25:05 them to more of what they think their passion is. You know, I’ve done like maybe 500 plus episodes
0:25:10 now of this. And the podcast is named My First Million because when we first started, I would
0:25:14 just say I was fascinated by the many different ways people became millionaires. I thought that’s
0:25:19 cool to hear the stories. That’s how the podcast started. And along the way, I noticed three common
0:25:23 things of what you were doing in your teens. Because I used to ask this question, I was like,
0:25:27 you know, you’re amazing now. If I met you when you were 14, what were you doing? And what I have
0:25:30 known that you were going to go on to do things, most people are very humbled. They’re like, oh,
0:25:34 you wouldn’t have known. But then when I say, what were you doing? It’s always something that no other
0:25:39 13 or 14 year old is doing. It’s like, oh, yeah, I used to go to the shop and I found these, you know,
0:25:44 these CDs, Rosetta Stone that I could go sell for 3x on eBay. And I made an eBay account or, you
0:25:48 know, I started buying shoes and flipping them. So it was always like eBay flipping or sneaker
0:25:53 flipping is like a super common one. Another one was competitive video games, because a lot of the
0:25:59 strategy, you know, communication, collaboration, you know, just extreme competitiveness gets built
0:26:05 in there. And there’s a couple others, but another one is like a Mormon mission. So Mormons would
0:26:10 go and have to sell, you know, Jesus to a bunch of people get rejected 1000 times in two years,
0:26:14 they become incredible salespeople. And so you see these backgrounds where, oh, you were kind of
0:26:20 forged at an early age to do this. Well, we have a common friend, you know, Said Balki, right? And
0:26:26 you interviewed him for your podcast. And Said was an entrepreneur at the age of eight or nine,
0:26:32 you know, even maybe even earlier than that. He was selling greeting cards. He was making and
0:26:37 selling on streetcars, you know, and and then by the time he was 11 or 12, I think he was writing
0:26:43 code and make a website, you know, and went from there. Right. Yeah. How did you make your money?
0:26:47 Give me the highlights of your progression in terms of your own ability to generate money and
0:26:52 then start to invest it? I actually never ever wanted to be an entrepreneur. I never wanted
0:26:59 to start a business because I had seen so much turmoil trauma in my in my childhood. Right.
0:27:07 And I remember I was like 24 or 25 years old. And my dad was visiting me. I was living in Chicago.
0:27:14 And he tells me it’s time to quit and start your own business. And so I said, you know,
0:27:20 have you forgotten? Have you forgotten my childhood? And, you know, all the ups and downs.
0:27:26 He said, my dad just said, oh, that’s what makes life great. But he says, look, the company you’re
0:27:33 in, the business I work for had 2000 people. He said, you’re such a tiny cog in such a big wheel.
0:27:38 You could drop dead tomorrow. They won’t even miss you. Okay. You don’t matter. And what you
0:27:47 really want to to be doing is figure out something where there’s an offering gap and go for it. Right.
0:27:51 And and I was actually getting a little bit frustrated at work because the company had been
0:27:57 growing and we get more and more bureaucratic. And so I actually started to think about
0:28:05 what might be possible. And I didn’t have any money, you know, basically I was 24 25. So what I
0:28:13 did is I came, I came up with some IT services offerings that I thought would be pretty unique
0:28:20 because that time client civil computing was just getting going early nineties. And so I had about
0:28:26 $30,000 in my 401k. And I said, okay, we’ll worry about retirement later. And we pay the penalty.
0:28:33 I pulled that out. Nice. And I, I, I applied for every credit card I could get my hands on.
0:28:41 And so I had 70,000 available to me in different credit limits in credit cards. And so I said,
0:28:47 okay, we’ve got up to a hundred thousand that we can play with. And the third thing that I did is I
0:28:57 basically did both. I was going to my, my job and I had started my company at the same time because
0:29:02 basically what I would do is like from like six to nine in the morning at work on my business.
0:29:06 And then from 6pm to midnight, I work on my business again and weekends. But somebody was
0:29:12 paying the rent. I still had a paycheck and all that. And I said, okay, once we have enough revenue
0:29:20 clients profit, I can quit, right? And, and I always tell, tell people that basically if you
0:29:28 think about it, there’s 168 hours in a week, your employer needs you for 40, right? And if you live
0:29:33 close to work or work remote, the commute time is not that much. And if you take out time for
0:29:39 eating, sleeping, everything else, you have at least another 40, 50 hours that you can engage on
0:29:45 something other than work. And I used to always get great reviews. When I was starting my business,
0:29:51 I said, okay, look, the plan is to not get fired. The plan is not to be employee of the year.
0:29:58 Right. I don’t need to overshoot. So I said, I’m going to give them just enough. So I’m just above
0:30:03 firing level, you know, where it’s not so bad that they call me in and terminate me. I need to
0:30:08 be above that. Okay. And I did this over nine months. And then I had clients revenue and all
0:30:14 that. And I went into my boss and his boss, and I resigned, right? And they, they said, you know,
0:30:22 Monash, we really couldn’t figure out last nine months, like you checked out. I said, exactly.
0:30:29 I said, my goal was to just do enough so I didn’t get fired. But he said, yeah, we saw a big drop
0:30:34 in the old Monash and the new Monash, and we talked about it. And we actually said,
0:30:39 it’s not so bad that we would fire him. But there’s something off. We couldn’t figure it out,
0:30:43 right? And then so I explained to them, I was going into a business, my own business was not
0:30:48 comparative with theirs. And so they said, look, when your business fails, not if your business
0:30:53 fails, when your business fails, you can come back, we’re going to give you more money, we’re
0:31:00 going to promote you, and you’re going to do great. So I said, you know, my plan was that if I failed,
0:31:04 when I was going to my business, I failed, I said, look, I got my degree, I can look for a job,
0:31:09 I can apply for personal bankruptcy, clean everything off and start over, right? I said,
0:31:14 this is even better. I don’t have to look for a job. I get more money, right? And so I actually
0:31:22 felt like the, you know, people think there’s a, people have a false mental model. People think
0:31:29 entrepreneurs take risk. Entrepreneurs do not take risk. They do everything in their power
0:31:35 to minimize risk. If you think about Buffett’s pinball machine business, what was the risk
0:31:41 those two 14-year-olds, 14-year-olds took? Nothing. Okay. It’s $15 in a pinball machine,
0:31:47 which they could use themselves. Three dollars, three dollars in parts. So the second pinball
0:31:52 machine will only get bought when the first one’s already producing cash, right? And the third one
0:31:58 after the second one. So basically, there’s no risk, right? If it fails, they sell those machines
0:32:02 for more than they bought them. Entrepreneurs are actually great risk reducers. They start with
0:32:07 something that seems risky. So that’s the other thing that is a commonality between entrepreneurs
0:32:14 and value investors, which is why the same brain cells get used. Both are trying to minimize risk.
0:32:19 You know, we as value investors want to go low risk, high return. And great entrepreneurs,
0:32:24 that’s exactly what they’re doing. They’re going low risk, high return. Nobody is doing high risk,
0:32:30 high return. The only, only, so if you look at the United States, probably around a million
0:32:36 businesses, more than a million businesses a year get formed in the United States. Venture-backed
0:32:43 businesses are less than, much less than even 1% of that pie. Might be in most years less than 1/10
0:32:49 to 1%, right? So if there was no venture capital and no venture-backed businesses, it would make no
0:32:54 difference to the landscape, okay? We still have the million businesses being formed. Venture-backed
0:32:59 businesses are a different animal because they are high risk, high return, right? What the VC wants
0:33:04 you to do? The VC has got 10 bets. He doesn’t care whether your bet works or not. He just wants
0:33:10 one of those 10 to work. So he wants you to step on the gas as aggressively as possible. If you
0:33:16 blow up, you blow up, right? When you’re an entrepreneur who’s not venture-backed, that is not
0:33:22 how you go. You don’t put just, you know, foot on the gas. You’re very careful about downside
0:33:28 protection. So what happened? Even some of the big, big entrepreneurs, Richard Branson, I think
0:33:34 is the, people see him as this free, you know, risk taker, reckless sort of guy, but you’ve pointed
0:33:38 out that that’s not true about Richard Branson in this case. One of those stories I love about
0:33:47 Branson is when he had the idea to start Virgin Atlantic airline, right? The minimum that you
0:33:55 need to start transatlantic service is a Boeing 747. Okay? A couple of hundred million dollars,
0:34:04 right? And Branson got Virgin Atlantic off the ground with no money. So what he did is,
0:34:11 he calls directory assistance in the United States, 551212 in Seattle, 206551212,
0:34:16 asked for the number for Boeing, okay? Gets the number for Boeing, calls the main switchboard
0:34:22 and says, I’d like to lease a 747 that you guys might have hanging around that you’re not using.
0:34:28 They hang up on him, okay? He keeps calling them. And finally, the lady at the switchboard says,
0:34:34 let me transfer you to someone who can get rid of you properly, right? So she transferred him
0:34:40 to someone who’s head of like commercial sales. And so this guy tells him, listen, Mr. Branson,
0:34:49 in every country, we have one customer. And you are not the customer in the UK. It’s British Airways.
0:34:55 And so therefore, there’s nothing to talk about. So Richard tells him, listen, I agree with you,
0:35:02 that’s fine. But just humor me for a second. Do you have an old Boeing 747 lying around that you’re
0:35:08 not using? And he says, yeah, actually, we do. And if one of your customers like the one in the UK
0:35:12 called you, like British Airways called you and they wanted a plane, what would you lease it for?
0:35:17 So he says, well, I really don’t need to have this conversation, but we would lease it for
0:35:25 about 200,000 a month, okay? 200,000, 300,000 a month. And Branson was able to convince Boeing
0:35:31 to lease him that 747 because he was sitting and doing nothing. Then when he set up Virgin
0:35:38 Atlantic, he said, you get paid for all the future flights in advance because people buy tickets.
0:35:43 So the plane’s going to fly in April. People already bought tickets in February. So you say,
0:35:47 I got cash coming in two months, three months before the plane’s going to fly. And I’m going to
0:35:54 pay for the fuel 30 days after that plane lands, okay? So he had negative working capital and the
0:36:02 lease payment is also in arrears. So basically, he was able to get Virgin Atlantic off the ground
0:36:08 with zero equity, right? Now, the way I look at it is that if you can start an airline
0:36:15 with no money, you can start any business with no money, okay? You just have to replace capital
0:36:21 with creative thinking, right? How is it possible that 0.1% of the population
0:36:26 owns almost 70% of all the motels in America? That’s an incredible story. Can you explain
0:36:33 how is that possible? In the early 70s, a dictator came to power in Uganda, Idi Amin.
0:36:41 And Idi Amin noticed that in Uganda, most of the businesses were controlled by East Asians, Indians,
0:36:48 Patels. They controlled like 80% of the economy. And these Patels had come to Uganda. They were
0:36:56 brought to Uganda about 100 years ago to work on the railroad almost as slaves, right? But because
0:37:04 they’re natural entrepreneurs, they went from railroad builders to eventually owning and controlling
0:37:12 his own economy and he was pissed. So Idi Amin said Africa is for Africans and you guys are not
0:37:20 Africans. And these Patels had been in Uganda for three or four generations. That was the home.
0:37:26 They were Ugandan citizens, you know, born and raised, right? And what he did is he nationalized
0:37:30 all their businesses and he threw them out of the country. Which just means took their businesses,
0:37:35 right? He basically confiscated all, not their businesses, homes, everything, confiscated all
0:37:41 the assets. And he told them, you’ve got 90 days to leave the country. So these, these Patels in
0:37:47 Uganda were stateless. Okay, you’re being thrown out, you know, you’re a citizen of a country,
0:37:53 countries throwing you out, right? And, and they lost all their money. So they, they were able to
0:38:00 convert a very little small sliver of their assets into gold. And the United States took some Patels
0:38:08 as refugees, the UK took them, Canada took them, India, surprisingly refused to take the Patels,
0:38:13 refused to recognize the Patels at any right to return to India, because they said, you haven’t
0:38:17 been here for a hundred years. And, and India was at that time dealing with the Bangladesh refugee
0:38:22 crisis. So it couldn’t deal with anything more. But a small number of Patels, a few thousand of them
0:38:30 came into the United States in the early 70s, the refugees. They didn’t have skills there where
0:38:35 they could get great jobs. They didn’t have, they spoke English with a funny accent. And
0:38:45 they, they realized that, look, if we buy a really small motel, 10, 12, 14 room motel,
0:38:52 the family can live in one or two rooms, motels are labor intensive. The family can do all the work,
0:38:57 you know, the job in a house together. Yeah, so basically cooking, cleaning, front desk, laundry.
0:39:04 And so what, what they started doing is they would buy these motels and basically fire all the staff
0:39:12 and move in into two of the rooms. And because they had no costs, they were able to charge
0:39:18 nightly rates that were lower that all the neighboring motels. So what would happen is that
0:39:24 the Patel owned motel would be running a hundred percent occupancy. The other motels couldn’t
0:39:29 match that rate because they’d lose money, right? Because they had staff and workers comp and staff
0:39:34 and all that stuff, right? And what the Patels started to do, and they, Patels are very frugal,
0:39:38 they basically were vegetarians. At that time in the US, if you’re a vegetarian, you’re really
0:39:45 host. You couldn’t really eat out anywhere. So buy, they were forced to just cook themselves,
0:39:51 which was cheap, right? So there wasn’t much of a grocery bill. And what they started doing is,
0:39:59 as their nephew came of age, for example, they would help him out to buy his own motel, right?
0:40:06 And then the nephew would get that going and then the next one, the next one. And you run this for
0:40:15 50 years and you end up with 70% of the motels in the country under Patel ownership. Not only that,
0:40:21 they’ve actually gone upmarket now. So a lot of the Hilton’s, Marriott’s, Western’s, if you really
0:40:26 look, you’ll find it’s under Patel ownership, right? Same, same math. They always are very good
0:40:31 operators. And then they went into 7-Eleven, Laundromats, Dunkin Donuts, all of it, you name it.
0:40:39 And, but bottom line was that these were entrepreneurs that were low-cost producers,
0:40:44 right? Low-cost producers have an inherent advantage. And I remember when I first,
0:40:52 when I first met Charlie, he had read my book and we were discussing the Patels.
0:40:55 He says, “Yeah, you know, I got some friends in the motel business. I just tell them,
0:41:01 don’t ever, ever try to compete with a Patel. If you ever find yourself in competition with a
0:41:05 Patel, just find another game to play. Just move on. It’s not worth it.”
0:41:12 So you said you met Charlie. That’s got to be kind of a surreal thing for you to have met and
0:41:17 become friends with Charlie Munger and Warren Buffett. How does that happen? How does that come
0:41:22 about? It shouldn’t happen. You know, I was this squany kid who grew up in the suburbs of Mumbai.
0:41:29 And I accidentally heard of Warren Buffett in the mid-90s and it was a big aha moment for me.
0:41:34 At that time, I was lucky. The first couple of biographies on him had come out. And what I
0:41:43 realized is when I read about how Warren was investing, I said all these models are the same
0:41:48 models that an entrepreneur uses. It’s the same. That’s exactly what I was saying, that, you know,
0:41:54 better businessman because I’m an entrepreneur and vice versa. So I said, you know, but the
0:42:01 big advantage he seems to have is that 4% of time of strategy is 80% time for him. And
0:42:07 even in the business I had created, the IT business, which had grown and scaled,
0:42:14 I always enjoyed the 4% more. I was happy doing sales calls and, you know, building teams and
0:42:22 all that. That was great. Do it once. I said, wow, if I go into investing, it would be 80%
0:42:27 of my time because there’s no blocking and tackling someone else is doing that. And so
0:42:33 for me, that was a big aha moment that I should switch. I was lucky in the mid-90s.
0:42:38 Someone bought a small portion of my business. After taxes, after everything, I got a million
0:42:45 dollars. And I, for the first time, had money in the bank. And I didn’t really need the million.
0:42:48 So I said, okay, what we’re going to do is we’re going to take this million. We’re going to invest
0:42:56 in the public markets. And we’re going to find out if we can actually do this. You know, an idea
0:43:02 is like an asshole. Everyone has one. Ideas don’t mean anything. So you really have to execute.
0:43:07 It’s really execution on the idea that has value. Entrepreneurs get kind of hung up on,
0:43:11 oh, I need to get a patent and all that. One of the things you have to understand is you can
0:43:16 go to your most direct competitors. You can tell them all your trade secrets. They will listen to
0:43:22 you really carefully and they will not change behavior. Okay. So you don’t need patents for
0:43:29 anything. The ideas don’t mean anything. It’s really the execution. And so basically, I said,
0:43:32 okay, let’s take the million. Let’s start investing it. Let’s figure out what happens.
0:43:39 And I was surprised we did really well. I think that from like 95 to 2000, five-year period,
0:43:45 that million became about 13 million. And I said, wow, well done, Monish. And
0:43:53 so they got 70% a year compounded. Yeah. And so I was getting, I was doing investing part-time
0:43:57 while I was running my IT business. I was much more interested in the investing side,
0:44:02 losing interest on the business side till that point when in 1999,
0:44:08 I didn’t even feel like going into work. I said, this is, I just want to just focus on investing.
0:44:15 And so I made, I made a couple of big changes then I looked for and found a CEO to run my company.
0:44:24 And basically 13, 14 million, I felt was enough to retire, do nothing. I could do investing full
0:44:29 time. And so my plan was, okay, someone can run the business, whatever’s value is there is there,
0:44:37 it doesn’t matter. I can go off and just now do investing full time. And I had a few friends
0:44:44 who had basically, I used to just give them stock tips. In the mid 90s, I’d find some company and
0:44:49 make the investment. After that, I didn’t care who bought the stock. I mean, I already bought it.
0:44:53 And so I tell my friends, Hey, you know, I found this company, you ought to see if you want to
0:45:00 take a, take a flyer on it and buy it and so on. And they did really well on the stock tips, right?
0:45:06 But, you know, some guys worth like 5 million, they would put 10,000 to what I told them and
0:45:10 they would triple the money wouldn’t make any difference, right? So a bunch of these friends
0:45:14 came to me and said, look, we don’t like this randomness of these stock tips. We don’t see you
0:45:22 sometimes and you may have sold. We don’t know. We want you to manage some money for us. And so
0:45:26 they were proposing giving me a hundred thousand dollars each and it would be a million dollars
0:45:31 in all, right? And I said, okay, I’ll do it. I thought of it as a hobby. I didn’t even think
0:45:36 about it as a fund, but I want to do it in a format that works for me. So I love the Buffett
0:45:41 partnerships where he didn’t charge management fees. He only charged performance fees. So
0:45:45 what’s a normal structure and then what did Warren do? So a normal hedge fund would be a
0:45:50 two and 20 structure. They would take 2% of assets to the management fee for breathing.
0:45:57 Every year? Every year. And then 20% of the profits, right? So if a hedge fund, for example,
0:46:02 let’s say has a billion dollars in the management, right? The general partners would take 20 million
0:46:10 dollars a year for breathing. And then if it went up 10%, so they would make 100 million,
0:46:15 for example, on the billion, they’d take another 20 million on that. So basically what would happen
0:46:22 is the investor who put up the money on a 10% return gets a 6% return, right? Below the S&P,
0:46:27 right? Because of all these frictional costs. So Buffett had run his partnership by saying that
0:46:34 there’s no management fee. The first 6% returns go to you. And above that, I’ll take 1/4 and you
0:46:43 take 3/4. So in the same situation, if the fund is up 10%, in Buffett’s case, the first 60 million
0:46:49 goes to the investors and the remaining 40 million is split. So it becomes 10 million to him and 30
0:46:53 million to the investors, right? So it’s a better, it’s a half the fee basically. And you’re paying
0:46:58 for performance. If he’s not up that much, you don’t pay anything. So I like that structure.
0:47:05 And so I told them I want to set up a fund. So it’s all legal. And we will do it with that
0:47:10 structure. They really didn’t care what structure it was. And so Pabrai Funds really started in
0:47:17 ’99 as a hobby with me and my buddies. And I had 13 million on the side, which was my main focus.
0:47:22 And I said, yeah, there’s another million here. It’s okay if I find something and buy for both.
0:47:29 It makes no difference, right? And about a year after that, there was about 2.5 million. We were
0:47:35 up like 70% the first year. And some more money had come in. And I said, you know, why do I treat
0:47:40 the fund like a stepchild? Why don’t I think of it like a real business? And why don’t I
0:47:48 basically grow and scale it like a real business? And so I started to do that. And Pabrai Funds,
0:47:55 we had a very good run for the first eight or nine years. I think we were doing like mid-30s
0:48:01 a year on average, no down years. And the assets grew. We were at about, I think in 2007,
0:48:06 we were at about 600 million in assets and the management. And I had made a lot of money,
0:48:09 you know, the fees and the compounding and all of that.
0:48:12 So in like a 10-year period, you turned the million dollars of managed money
0:48:16 into about 600 million of assets and management, including new money.
0:48:21 Yeah. It wasn’t all, it wasn’t just organic, but the original money had almost tripled.
0:48:23 You know, tripled or quadrupled in that period.
0:48:26 I had asked you yesterday when we were hanging out, I said, you know,
0:48:28 there’s really two questions when you hear the story. Number one,
0:48:31 how the hell were you getting these returns? What did you know about invest? What was that part?
0:48:35 But the second part is, what did you do on the fundraising side? How did you get so much more
0:48:40 money to come through the door? And you had a great line about that, about how you get more money
0:48:43 to come through the door. Because you didn’t strike me as a guy who wanted to be out there
0:48:48 fundraising and knocking on doors and trying to raise funds. So how does it happen?
0:48:53 Buffett has a great, great quote. He says that if you are in a rowboat in the middle of the Atlantic,
0:49:01 they will swim to you in shock-infested waters to invest with you if you have beaten the market,
0:49:06 right? They will find you. He says you could be a leper and they will invest with you.
0:49:06 That’s what happened.
0:49:14 And also, one of the things that was very difficult for me was that the SEC has a lot of rules and
0:49:20 laws around hedge funds. One of those is you cannot solicit to general public, right? So when I was
0:49:25 running my IT business, I would call on any CIO and say, hey, you know, would you like to use our
0:49:30 services, et cetera? I could literally call anyone out of the phone book. When you’re running a fund,
0:49:34 you can’t just get a list of dentists in North Carolina and pound them. That’s not legal. You
0:49:41 can’t do that. So the SEC said you can only talk to people you know, okay? I said to people I know,
0:49:46 I’m going to run out of my robotics in like five minutes. There’s very few people I know. So what
0:49:52 I did is I started to meet my investors once a year for an annual meeting where I would give them
0:49:57 their results and take their questions and all of that. And I told them, listen,
0:50:06 there was one reason and one reason alone you were put on planet earth and that is to bring
0:50:13 assets to Pabrai funds, okay? Humans are always looking for a calling. They are looking for some
0:50:19 cult leader to follow and be part of cult, okay? So you gave them one. So yeah, they were wandering
0:50:24 in the wilderness. They needed purpose, okay? So I said, here’s what you need to do. You need to go
0:50:28 talk to your friends and family because I can’t talk to them. The SEC won’t let me talk to them.
0:50:34 You can talk to them, okay? You talk to them. You tell them about me. You tell them to contact me.
0:50:40 Once they contact me, I can engage with them, okay? So go out and spread the word, okay? And
0:50:47 send me more of your assets too, okay? So basically what, like I said, I started the million a year
0:50:53 later. It’s two and a half million. Two years later, it’s 10 million and it’s growing, you know? And
0:50:58 part of it was that the annual returns are adding, but part of it was that, so I had eight investors
0:51:03 when I started. A year later, they were 17 and two years later, they were 25. So now I had an
0:51:12 audience of 25 to proselytize and spread the word, you know? And of course the results, now the other
0:51:20 thing that was happening is that when I started the funds in 1999, we were nine months away from
0:51:29 the biggest bubble about to burst that had happened in decades, the dot-com bubble, right? And I was
0:51:35 able to see the bubble not very much in advance of the rest of the world, maybe just two or three
0:51:43 months ahead. I knew the internet was transformational, but I also knew that the euphoria was too much.
0:51:50 You know, we had pets.com trading at multi-billion dollar valuations with no revenues, right? I mean,
0:51:54 it was just common to have a lot of companies, people were counting eyeballs. They’re not counting
0:51:59 dollars and they’re not looking at net income. They’re not even looking at revenue. They’re just
0:52:06 looking at eyeballs, right? And so I said, okay, this is bad news. It will blow. At some point,
0:52:11 it’s going to, the bubbles are going to burst. I didn’t know when. So I had always been a tech
0:52:16 investor from like the mid-90s and I had done really well. Tech had had a great run from
0:52:21 95 to 2000. It had just done really well. And I’d written that coattail.
0:52:28 But what I did in 99 when the fund started and also with my own capital is I did a 180. I switched
0:52:35 completely to classic Ben Graham deep value, you know, what Buffett had started doing in the 50s.
0:52:38 And one of the things that was happening in the equity markets at that time was
0:52:45 the day the Nasdaq peaked, I think March 8th or March 9th, 2000, was the day that Berkshire hit
0:52:49 a multi-year low. And literally people were pulling money out of their Berkshire stock
0:52:55 and buying pets.com, right? And then that goes to zero eventually. And so I said, okay, basically
0:53:02 there’s a lot of basic businesses that have become really cheap because nobody was interested.
0:53:06 So I was buying funeral homes at two times earnings and buying steel companies at three
0:53:13 times earnings. And so a lot of basic businesses which are very predictable and doing well,
0:53:22 trading really cheap. And and so Pabrai funds did really well. In fact, the Nasdaq imploded
0:53:28 basically it hit 5000 in March 2000. By the time it bottomed out the next two or three years,
0:53:35 it was at 1200, 70% drop, you know, and the Dow and the S&P didn’t go down as much, but they also
0:53:43 went down a lot. And so it was it was a traumatic period for investors. It was a great period for
0:53:50 me. And and so it was very easy for me to talk to my investors because I was the only guy making
0:53:55 money for them. Okay, if they had like five accounts, they just moved it all to me because
0:54:01 everything else was going down. Everything else is red. So that’s how we got going. So in 2007,
0:54:11 I think my net worth at that time was like 84 million. And Warren had been running these
0:54:17 charity lunch auctions where once a year you could bid on eBay to have lunch with Warren Buffett
0:54:21 and the money would go to the Glide Foundation, which was doing, you know, feeding the homeless
0:54:29 and all that in San Francisco. So I said, you know, I am using this guy’s intellectual property,
0:54:36 I’m making all this money off him. I really have a big tuition bill I need to pay. So I said,
0:54:43 the lunch is a great way to do that. I said, I can bid for the lunch. And I’ll meet Warren,
0:54:47 I’ll be able to thank him in person. And it goes to a cause that he supports. So I thought about
0:54:54 it’s okay, 84 million, what’s an appropriate tuition bill? I said, 2 million is he is good.
0:55:00 I think if I if I gave him 2 million, I’d feel good about that. Right. So I said, okay, I decided
0:55:05 in 2007, I was going to bid for that lunch and I decided I would go up to $2 million. And you can
0:55:09 bring up to seven other people to that lunch. So I was going to take my family, but there still
0:55:14 were a couple of seats empty. So I contacted my friend Rice Guy Spear, he lives in Zurich. I said,
0:55:18 hey, guy, I’m going to bid on this lunch, blah, blah. And I said, do you want to come in with me?
0:55:23 And I said, if you and your wife want to join us, because there’ll be four of us and two of you,
0:55:29 you can pay one third. And and I’m willing to go up to 2 million. So Guy says, well,
0:55:34 that’s too rich for me. I can’t pay one third of 2 million. He says, I’m good for a quarter million.
0:55:41 So I said, okay, whatever the bid ends up at, you’re capped at a quarter million. Right. And
0:55:50 so I bid for it. It settled at $650,000, much less than what I was willing to pay. And then one
0:55:57 third of that got paid by Guy. And so my only agenda in meeting Warren was to just say thank
0:56:01 you, Warren. Right. I didn’t have and of course, he was a big fanboy and you know, meeting him and
0:56:08 all that. Warren’s agenda when he has these lunches is really different. His agenda is
0:56:15 he wants the people who want that lunch to feel like they got a great bargain. So
0:56:20 he would take all our what I would call our lemonade, lemon questions and can turn them into
0:56:27 lemonade. So he’s always exactly what it does in the Berkshire meetings is he’s a great teacher.
0:56:34 And so he was trying to give as much value as he could in that lunch. And like he told us when
0:56:39 we met him, he said, look, I got nothing going on all afternoon. Right. So when you guys are sick
0:56:44 and tired of me, you just let me know and I’ll leave. Right. We kept asking him questions for
0:56:48 three hours and then we were exhausted. And so we said, Warren, we just don’t have anything else to
0:56:56 ask you. You know, he said, okay, I’ll take off. No problem. And in that lunch, I told him, I said,
0:57:04 look, Warren, my wife, then Harina, I said, she’s a huge fan of yours, but her true love in life
0:57:10 is Charlie. Okay. And Warren got competitive. He said, Charlie is a very boring guy. He’s a very
0:57:15 kind of pessimistic, always says no to everything. I’m the guy who’s really interesting. So he said,
0:57:20 what I’m going to do is you guys live in California in LA, I’m going to set you guys up to meet
0:57:25 Charlie for lunch. And then when you meet him for lunch, you’re going to find that he’s useless
0:57:28 and I’m the guy. So I thought he was joking about that. Right. And two days later, I got an email
0:57:34 from his assistant, Charlie’s assistant copying us, basically saying, Hey, I met this wonderful
0:57:38 couple in California and they seem to think you’re more interesting. I think they just
0:57:44 don’t understand. So I want them to meet you so we can set the record straight. Right. And so
0:57:46 this is really what he was saying. This is exactly what he said in the email. Right.
0:57:52 Was he joking or was he not? And then I, Charlie’s assistant sets us up to meet Charlie for lunch.
0:57:58 Now, Warren, you can bribe and have lunch with. Okay. Charlie, there’s no bribing. This is great.
0:58:06 And so we met Charlie, my wife and I, we met Charlie in 2008 at the California club in LA.
0:58:11 And I actually found that lunch a lot better than the Buffett lunch. Okay. It was great because
0:58:19 I think Charlie is just so direct. And I never expected these lunches or any of this to lead
0:58:27 to anything. It’s a one and done, but it led to a friendship with Charlie. He started asking us
0:58:33 to come to his place for dinner. And I would meet him like four or five times a year for dinner.
0:58:38 And then we started playing bridge together. Usually on Fridays, he would play bridge at the
0:58:42 LA country club. I’d meet him about once a month or something to play bridge. And that used to be
0:58:50 lunch and then about four or five hours of bridge after that. So it was a wonderful deep friendship
0:58:55 for 15 years, which I was unexpected. You know, just never expected that.
0:58:59 Let’s go back to the lunch. You asked him questions for three hours. Yeah. What were the
0:59:03 interesting questions and answers? I know you’ve said one that I want to hear you explain because
0:59:07 I didn’t fully, I’ve heard the tidbit, but I want to hear the full story, which was he said something
0:59:14 about being a harsh, greater of people. Yes. What does that mean? Well, I told Warren, I said,
0:59:21 Warren, you know, you are, both you and Charlie, are such good judges of humans and human nature.
0:59:28 Were you always that good at figuring people out? So he says to me, Monash, you’re mistaken.
0:59:32 I am useless at figuring people out. He said, if you put me in a cocktail party
0:59:37 with a hundred people and you gave me five or 10 minutes to meet each person,
0:59:44 I could tell you three or four people are exceptional. And I could tell you three or four
0:59:49 people you want nothing to do with. And the remaining 92, I would have no opinion on because
0:59:59 it’s not enough time to figure them out. But he also said that, look, what you do in life is
1:00:05 those three or four people who are exceptional, you bring them into your inner circle. And
1:00:11 obviously the three or four people who are, you know, not the great humans, you’re not going to
1:00:17 have anything to do with them. But the third thing you do is you treat the 92 just like the useless
1:00:24 humans. And you exclude, so he says, be a harsh, greater. So he says that when you have friendships
1:00:30 and when you have people you work with, your peers and all that, he says there’s a gravitational
1:00:35 pull. If you hang out with people better than you, you’re going to get better. If you hang out
1:00:39 with people worse than you, you’re going to get worse. So he said that one of the things that
1:00:48 most humans are not willing to do is loyalties get in the way for them, right? So they may have
1:00:54 a friend who’s kind of weird or quirky or has ethical issues, but they’ve had a long friendship.
1:01:01 So they’ll keep that person going with them. That has detrimental impacts. So basically,
1:01:10 I really took that to heart. And I said that I’m really going to try to see if I can
1:01:16 focus on the great relationships, you know, the great people. And that’s actually been
1:01:25 a journey I’ve been on now for like 16, 17 years. It’s been tremendous. It’s great.
1:01:31 Now, it’s unfair, right? Because you’re treating the unknown the same as the useless people.
1:01:36 But that’s the way life is. I think that sometimes you have to make these difficult choices.
1:01:44 Because if you don’t do that, then the impact of that is significantly negative. And one of the
1:01:51 things I realized when I started to get to know Charlie, I got to meet Charlie’s friends. So I
1:01:57 would play bridge with his friends. I’d meet his friends. And what I realized is his friends
1:02:04 were so off the charts. They were so exceptional. I said, wow, this is like a different world, right?
1:02:10 And I said, I’m going to take a shortcut. I’m going to make Charlie’s friends my friends,
1:02:14 because he’s already done all the work. He did the filtering is you can get a better filter than
1:02:21 Charlie Munger, right? And so I worked on building relationships with Charlie’s friends
1:02:27 and some of his family. And that’s been beautiful. I mean, some just great friendships. And, you know,
1:02:36 I realized that there’s such a huge delta in off the charts, top 0.1%, top 1% of humans,
1:02:42 and the rest. And, you know, we talked about this, Adam Grant wrote this wonderful book,
1:02:47 Give and Take, right? And he categorizes people in three buckets, right? The givers,
1:02:52 the takers, and the matchers, right? Now, the takers, you don’t want anything to do with.
1:02:57 They’re just going to like want to extract whatever they can from you. So they’re just not
1:03:02 people you want to have in your life. The givers are people who are selflessly trying to help the
1:03:08 planet, not really concerned about what comes back to them, right? Those are the ones you want to be
1:03:13 with. And then the matchers, they’re kind of doing math in their heads. Oh, you know, Sean did this
1:03:18 for me. So I’m going to do something similar for them. They’re kind of, and so even the matchers
1:03:23 aren’t that great. So what you really want to do is you want to seek out the givers. And more
1:03:29 important than that is you want to be a giver, right? And so the interesting thing that he pointed
1:03:36 out in that book is that when you’re a giver, the universe conspires to help you. And I found it
1:03:42 magical how, and Warren and Charlie are great examples of givers. Everyone’s trying to help them
1:03:48 in any way they can. And so that’s the funny thing is that the matchers who are trying to do this,
1:03:55 you know, equalization, they end up losing. The best way to get the most is not asked for anything.
1:03:59 It’ll all come to you, you know? And so these are wonderful models to
1:04:05 incorporate. Yeah, there’s even some game theory with that, which is the cost of excluding somebody
1:04:11 who might be good or might be great is actually quite low to you, but the cost of accidentally
1:04:16 including somebody who might have some toxicity, it’s quite costly to you. And so, you know,
1:04:21 I think even in investments, he has the good pile and then the too hard pile.
1:04:26 Warren has a lot of baseball analogies. He says that in investing, there are no call strikes,
1:04:30 right? So in baseball, you’re at the pitch, three strikes, you’re out, right? He says,
1:04:36 I can let a thousand balls go by, thousand stocks go by and not swing, right? I only need to swing
1:04:42 when eight moons line up, right? And so, the fat pitch, right? The fat pitch, right? And so the
1:04:49 thing is that we live in a world with infinite humans. If there are infinite humans, it also
1:04:55 implies that there are infinite number of good humans. So, basically,
1:05:02 making of excluding a good human from your circle, because you can’t figure them out,
1:05:07 there’s no penalty for that, right? Because there’s an infinite supply, just to put it away for the
1:05:13 wait for the mathematical way, mathematically. But but when you bring in a substandard person,
1:05:19 it just, there’s so many drains, it’s just negative. I want to hit you with some of your
1:05:24 big investing philosophies and give me the kind of the punchy version of like, what is that,
1:05:31 what does the phrase mean and how you use it? So, let’s do one, heads I win, tails I don’t lose much.
1:05:37 Well, I mean, I think this is classically comes from the patelles, right? It’s the dando philosophy.
1:05:45 But this is how we want to do all our bets with people, with stocks, with everything.
1:05:51 Asymmetric, yeah, basically, where we always want to look for things where the
1:05:59 odds are so heavily in our favor. And so, in investing, we do get these anomalies,
1:06:04 where you you take what’s one that you’ve benefited from or what’s an example in your
1:06:09 portfolio, your career investing, where you felt like you recognize asymmetric upside,
1:06:13 your downside was cap, but your upside was high. Well, I mean, I think that if I look at my first
1:06:19 business, for example, right, I mean, I am taking 30,000 for my 401k, which I can make up. And at
1:06:25 that time, the credit card laws were very different, where if you declared personal bankruptcy, you
1:06:29 got a clean slate, and actually didn’t affect your credit, because you couldn’t file again for seven
1:06:34 more years. So everyone will give you money after you file. Okay, so actually, they’ve changed the
1:06:41 laws now. But at that time, what I had, I realized that starting a business has high rates of failure,
1:06:47 right? And so I said, how do I minimize the risk on that? And this is what all entrepreneurs do.
1:06:52 And I said, okay, so basically, if this thing blows up, which there’s some probability that could
1:07:00 happen, I got my job already, they want to take me back. And I clean up the slate. And I’d also
1:07:06 de-risked it because the company was already cash flow positive. By the time I quit my job,
1:07:11 right? And so there was already a pipeline and such. And so repeatedly, what I’ve what I found is
1:07:18 even in investing, I mean, I’ll give you an example, like for example, I think in 2003 or 2004,
1:07:26 there was a steel company in Canada, Ipsco. And I noticed that they were trading
1:07:35 for three times earnings, right? And they, the stock was at $45. They had $15 a share of cash
1:07:40 on their balance sheet. They had no debt. And they had contracts over the next couple of years,
1:07:46 where they had said our earnings for the next two years are going to be $15 a share each year.
1:07:52 Given, because these were, these are not forecasts. These were hard contracts, right?
1:07:57 So I said, okay, so the stock said $45. If I just buy the stock and hold it for two years,
1:08:02 I got $45 cash in the company. Now it was cyclical business. Third year could be zero,
1:08:08 could be negative. But I said, I own all the plant equipment, everything for free, right?
1:08:14 So my, my, I made the investment, I put 10% of assets into Ipsco. And I said, all I want to do
1:08:18 is I want to see what Mr. Market does with this stock in two years. I’m just going to hang out
1:08:24 and see what happens. So we make the investment. And then a year later, the company announces that
1:08:30 we’re going to have one more year of $15. Okay. So now you’re going to have 60 versus 45, right?
1:08:37 And by now the stock has kind of gone up and it’s sitting at about $90 double in one year.
1:08:42 So I said, okay, it’s still a very cyclical business. Maybe we should take our chips off
1:08:48 the table. And while I’m thinking about all that, one day I wake up and the stock said $155.
1:08:53 Some Swedish company came and offered $160 to buy them. Five minutes later, I sold the company
1:08:58 and moved on, right? So what I’m saying is that that’s what we’re looking for, right? And in the
1:09:04 equity markets, because these are auction driven markets, when you look in areas which are hated
1:09:11 and unloved, you will find these anomalies. Last year, for example, I spent about seven or eight
1:09:20 months studying the coal industry, four letter word, hated and unloved, more than anything else.
1:09:26 I mean, a lot of endowments and funds are not even allowed to invest in the coal industry.
1:09:34 There’s so much hatred for it. So you got excited. The math was like this. If there’s a business
1:09:41 that is going to exist for 50 years, on average, it’s going to produce a billion a year in cash
1:09:47 flow that’s going to be distributed to shareholders available to buy for less than $2 billion.
1:09:59 Where do I sign? That was the coal industry. And so it’s like in auction driven markets,
1:10:06 you repeatedly run into these things where there’s companies emerging from bankruptcy,
1:10:13 there’s things that people just don’t like. There’s different reasons why things get mispriced.
1:10:18 You talked about private markets versus public auctions and why you think public auctions
1:10:21 present more of these dislocations, more of these opportunities.
1:10:28 Well, I think that let me put it this way. Let’s say this home of mine was a publicly
1:10:36 traded company listed on the NYSE. Every day its price would change. It would be wiggling here
1:10:43 and there. And if I look at the average public company on the New York Stock Exchange, the
1:10:53 12 month range of the stock might be 70 to 140 in 12 months. If I just throw a dart
1:10:57 at any company in the New York Stock Exchange, and I just look at the 52 week range on that
1:11:05 stock price, it’s going to be 60 to 100, 70 to 130. So like a 50% swing. It’s a big swing, right?
1:11:13 My home, which maybe might go up 4% in a year or in a good year, maybe 3%,
1:11:19 would be vacillating in value. It would be sometimes trading 20, 30% more than it’s worth
1:11:26 and sometimes trading 20, 30% less than it’s worth. And if I had a realtor friend and I said to him,
1:11:30 “Listen, can I call you every day and just tell me what my house is worth?” The guy would think
1:11:34 I was stupid. But I would call him on Monday and say, “Hey, what’s my house worth?” He said,
1:11:38 “It’s worth 2 million.” I said, “Oh, thank you.” I call him the next day. He said,
1:11:44 “Still worth 2 million.” Third day, he said, “Listen, idiot, it’s 2 million.” And after a month,
1:11:51 he would tell me, “Oh, it’s moved to 2 million 30,000.” And then again, he would be at 2 million
1:11:56 30,000 for a while. It wouldn’t move because it’s an intelligent buyer facing an intelligent seller.
1:12:05 And so you’re not typically going to get a company like Ipsco available as the whole company
1:12:12 for the price you can buy some shares. Because the whole company, there’s an intelligent guy,
1:12:18 the Swedish company paid four times that price to buy the company. And so that’s just the nature of
1:12:25 it. So the reason I like the, I’ve always liked public markets is because there is so much irrationality.
1:12:32 And if you’re just willing to be patient, in a year, if I can make two good investments,
1:12:40 it’s a good year. So we don’t need a lot of activity. We just need to be patient and wait for
1:12:49 the times when something weird is causing a mispricing. So let me ask you a few questions.
1:12:56 So number one, should, in your opinion, should somebody just buy the index, low-cost index
1:13:04 fund, or actively invest? The index is a really good way to go. The index is too dumb to know
1:13:11 that it owns Nvidia. And it’s even more dumb, it’s even more dumb that it won’t, it’ll never sell
1:13:17 Nvidia, okay? Or it’s own Apple the last 10 years and never sold it, for example. So I would say for
1:13:23 the overwhelming majority of humans, probably more than 99% of humans, you’re best off just
1:13:31 buying an index. And I think that the US equity markets and the US financial services industry
1:13:39 is so efficient that the frictional cost for owning an index through an ETF is single-digit
1:13:49 basis points, less than 1/10th or 1%, less than 0.05% or 1% or so on. So it’s very small. And so I
1:13:56 think it’s very smart to go with indexing, absolutely. Yeah, for the vast majority of people.
1:14:02 Yeah, for almost everyone. And for whom, who shouldn’t do that? Well, if you have the talent
1:14:11 and the patience to figure out what a business is worth and then have the ability to buy those
1:14:17 businesses well below what they’re worth and patiently hold them, those sliver of humans that
1:14:23 can do that would be better off just doing it that way. All right, if you’re listening to this pod,
1:14:29 I already know something about you. You, my friend, are nosy. You want to know the numbers
1:14:33 behind all of these things that we’re talking about? How much money people make? How much money
1:14:37 people spend? How much money businesses make? You want to know all of this? People’s net worth,
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1:14:59 We ask all these questions, but we do it anonymously. And so people are willing to reveal
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1:15:12 click the salary and compensation report. It’s going to blow your mind. You’re going to love
1:15:17 this stuff. Check it out. Now, back to the pod. If I said, what’s the number one trait
1:15:24 that makes a great investor? What comes to mind? Patience. If you are a guy who loves to watch
1:15:30 paint dry, you paint a wall and just sit there and watch it dry, you will do very well.
1:15:37 Did you ever watch Seinfeld? Not religiously. So the thing is that Elaine is on a flight
1:15:44 with her boyfriend. I forget the name of the boyfriend. And I think if you pull up Google,
1:15:50 you can probably find this clip. The boyfriend is just staring at the seat back in front of him.
1:15:57 And so Elaine says to him, would you like something to read? He keeps looking at the
1:16:03 seat back and says, no. Do you want to talk about something? And he says, no, he’s just
1:16:08 doing nothing. He’s just looking at the seat back in front of him. By the end of the flight,
1:16:14 she’s broken up with him. He would have made a great investor.
1:16:24 That’s what you need. If you can be happy or like Pascal has a great quote, he says that
1:16:30 all man’s miseries stem from his inability to sit quietly in a room alone and do nothing.
1:16:36 And so if you have this ability to watch paint dry, watch the back of an airplane seat for a few
1:16:42 hours and just be in a Nirvana state, this is the work you need to be doing.
1:16:46 I don’t know if you know this, but you have fans in a subreddit on Reddit. Have you ever
1:16:50 been on that? I haven’t done much on that. So I went when I do my research for this,
1:16:52 I’m seeing what do people think about you and what questions do people have.
1:16:56 And I go and one of the best comments that I thought was such a great compliment. They go,
1:17:02 the day I knew that this is my guy I want to follow, he’s on CNBC, he’s on a TV show,
1:17:06 and they’re asking for stock picks. So give me a stock pick and they go around the horn. Everybody
1:17:09 gives their stock. It’s going to be this. It’s going to be this. It’s going to go up. They go to
1:17:14 you and you go, I don’t really give public stock tips like this. And they’re like, well, you got,
1:17:19 you’re on TV, you got to do something. And they’re like, the comment was, he refused to just like
1:17:23 randomly name a pick or tell people to go buy something. And the TV host were like, why are
1:17:28 you on TV? And he was like, that’s not what I do. And he just stayed said fast. And I thought it was
1:17:33 such a great compliment, but also so big of a contrast from you go watch Kramer or these guys.
1:17:38 And it’s like, you go on and it’s like over stimulation telling you, you got to do something
1:17:42 right now, the opposite of patients, basically. Is that, should people avoid that?
1:17:48 Yeah. I mean, I think that it’s a big red flag. If you’re taking stock tips on some guy on TV,
1:17:51 I think that’s just not going to end well. You know, the guy on TV is not going to be
1:17:56 there when it’s down 30%. He’s all somewhere not available. Have you seen the reverse Kramer index?
1:18:02 People just, whatever he said, do the exact opposite and you’re up like you’re crushing
1:18:07 the market. If you just did the exact opposite of this guy. Yeah. So I mean, I think, I think that,
1:18:11 like I said, I think indexing is a great way to go for most people. I mean, so, you know,
1:18:18 I wish in high school, so even middle school, compounding was part of the curriculum from
1:18:24 an investing point of view. And you know, just, it’s really simple, but you know, the people,
1:18:31 people don’t pay attention to the math, you know, there are three variables that matter
1:18:37 with compounding, right? I mean, one is the starting capital you have. The second is the
1:18:43 annualized rate of return you get. And the third is the length of the runway, right? Now,
1:18:48 there’s something known as the rule of 72, which is a kind of mathematical. Very helpful rule,
1:18:53 but explain it. It’s a beautiful learn this. Luckily one teacher in college, she used to
1:18:57 be a student. She came back to teach because she’s like, I wish we actually taught things that were
1:19:01 relevant in the rule. So she took it on herself, became a teacher to come back and teach personal
1:19:04 finance. And the one thing she did was she’s like, you know, compounding is the eighth wonder of the
1:19:08 world. And let me just tell you the rule of 72, very simple math. So the rule of 72 is just a
1:19:15 mathematical quirk that happens to work. So for example, if I’m getting a 7% return a year,
1:19:18 and I want to know how long is it going to take for this money to double,
1:19:24 I can take 72 divided by seven, it’s approximately 10 years, right? Now, if I have a 10% interest
1:19:30 rate that I’m getting, and again, if I do 72 divided by 10, it’s seven years. So you can,
1:19:35 you can switch between the years or the interest rate. And it tells you the other one.
1:19:42 Right. And this is the most important thing in life is how long does something take to double?
1:19:46 Okay, because that basically leads to everything else. So for example, if you look at someone like
1:19:53 Warren Buffett, right, he started, he started his compounding journey when he was like 10 or 11
1:20:00 years old. I think he’s, he would say it’s when he was seven years old. He’s going to be 94 this
1:20:08 year. Okay, that’s a 87 year runway so far, right? Now, the thing is that if you have a really long
1:20:17 runway, then a low rate of compounding would still get you a big number. Or if you have a
1:20:24 shorter runway and a higher rate would again get you the same result. So it’s very important in
1:20:30 life. And that’s why I think that I wish to do this in high school is to start that engine early.
1:20:37 So for example, let’s, let’s take a situation of someone who’s just finished college, right?
1:20:42 At 22 years old, they got some job, maybe like making, you know, 70, 80,000 a year or something.
1:20:52 And they, they put away $10,000 in their 401k, right? They’re 22 years old in an index, right?
1:20:58 The index has done 10% a year. Now, what that means is the 10% a year means that that 10,000
1:21:08 will double every seven years. So let’s take a situation where the person is now 64 years old,
1:21:18 right? Now, they started at 22, it’s 64, so it’s 42 years. 42 years is six doubles, right?
1:21:24 I do this to make it easy, right? Okay, so six doubles, right? That’s two to the power of six.
1:21:34 Two to the power of six is 64. So that 10,000 that the person saved at 22 is 640,000 at 64.
1:21:42 But that’s not all they have. At 23, they save 11,000. That’s again, sitting at some big number
1:21:47 and you keep going. And, you know, sometimes we see these news articles, there’s some guy who’s a
1:21:53 janitor of some college, and he gives 4 million to the college and lived in a one bedroom apartment,
1:21:59 whatever, right? Why are we surprised? Okay, if you actually run the math, he actually didn’t even
1:22:03 save that much. And he didn’t even have that such a great compounding engine. It’s not like he found
1:22:08 Apple 20 years ago or something. That’s not what happened. What happened was that
1:22:15 there was a consistency. And so actually, my pushback to my dad when he was telling me to start
1:22:22 a business is I was telling him at that time, I said, look, I got a 401k. I got 30,000 in the 401k,
1:22:28 right? I’m going to, I’m continuing with 15% a year. My employer at that time was matching the
1:22:35 first 2%. So it was becoming 17%. Tax free, basically, it’s tax deferred. And my income’s going up over
1:22:44 time. So I was, when I first started working, my salary was 31,000, right? So I’m saving 4500 a
1:22:49 year, right? But if I was still working, my, my, my pay would have been hundreds of thousands or
1:22:54 more. And I’m putting away a lot of money. So by the time I get to retirement, it’s like, it’s
1:23:01 game over, you know, lots of extra cash available, no problem. And I never missed the money because
1:23:09 it was pre-tax taken out. So it’s just great. So I think, I think, I, I wish that young people
1:23:14 understand that, yeah, listen, you can pursue lottery tickets. You can pursue entrepreneurial
1:23:20 dreams. You can do all of that. That’s fine. But on the side, keep this going and start it early.
1:23:26 Let it be boring. Let it be a stupid index one Vanguard and whatever. And, and that’s it.
1:23:33 The tortoise is going to win the race, right? You know, what’s the circle, the wagons philosophy?
1:23:38 Well, the circle, the wagons philosophy actually came out of when I was thinking about Buffett’s
1:23:47 letter last year to the shareholders, the 2023 letter, he pointed out that in 58 years of running
1:23:54 Berkshire, there were only 12 decisions that he had made that had moved the needle for Berkshire.
1:23:59 Now Berkshire had a tremendous run. They’ve compounded, I mean, till recently were compounding
1:24:05 at 20 plus percent a year for 58 years. That’s, you know, if you’re doing, if you’re 20% a year,
1:24:12 you are doubling every three and a half years. Okay. And that means after 35 years, it’s a 10
1:24:23 doubles and 58 is another 23 years. So you’ve got another, what one six, six, so 16 doubles,
1:24:29 two to the power 16. Now the way to do two to the power 16 is two to the power 10 times two to the
1:24:33 power six, two to the power 10 round numbers, 1,000. It’s a thousand X, right? And two to the
1:24:42 power six is 64. It’s 64,000 times what you started with. Okay. If you started with a
1:24:49 hundred dollars, it’s 6.4 million. Okay. $100 to 6.4 million. Okay. So he’s saying,
1:24:55 I would calculate in the last 50 years, 58 years, Buffett’s made three or 400,
1:25:03 at least 400 different investment decisions. He’s saying 12 are the ones that mattered, right?
1:25:11 The God of investing has a 4% hit rate. That’s the God of investing. That’s why we should index.
1:25:13 Right. What are the rest of us mere mortals supposed to do?
1:25:19 So now the thing is that the, I was thinking about his 12 bets, right? And I thought about,
1:25:22 okay, which were the 12? And I think he never mentioned that, but you could guess which one.
1:25:27 C’s would be one of them. Coke would be another one. AmEx, Gillette, CapCities, Washington Posts,
1:25:31 you know, you can come up with the names, you know, Berkshire Hathaway Energy,
1:25:35 Ajit Jain, Hiving Ajit Jain. Probably the biggest bet for them, paid off, huge for them.
1:25:39 What’s the story with Ajit? There’s something about the recruiter for him?
1:25:44 So what I realized when I thought about these 12 bets was it wasn’t the buy decision.
1:25:52 The buy decision is important. The important thing was they never sold. C’s stayed in the stable
1:26:00 for 50 years. Coke has been in the stable for 40 plus years, right? So it wasn’t the buy decision.
1:26:07 It was the paint drying decision. Okay. That was the important thing. So when you find yourself
1:26:15 in the happy position of a small ownership in a great business, just find something else to do
1:26:22 with your time, play bridge or whatever. Have you considered golf? Golf is great. And so
1:26:29 if you ask Charlie, he would say the single best decision, best investment Berkshire Hathaway ever
1:26:36 made was the search fee they paid to hire Ajit Jain. Okay. Now Ajit Jain walks into their offices
1:26:41 in 1986, 1985 actually, never having worked in the insurance business, right?
1:26:50 From scratch, without them putting up venture capital or anything, the business he’s created
1:27:00 for them today probably has a value north of a hundred billion. Okay. I mean, it just gets lost
1:27:08 in Berkshire where Berkshire is so big. But I’ll give you an example of a discussion I had with
1:27:17 Charlie. I think maybe two, three months before he passed away. So he was telling me that Berkshire
1:27:24 Hathaway writes super catastrophe insurance, like insurance against hurricanes, earthquakes and so
1:27:32 on, right? And many, many years, when people are looking for earthquake insurance in Florida,
1:27:37 of hurricane insurance in Florida, Ajit would look at the rates being offered and just take a
1:27:42 pass. Okay. Basically, he would find his two competitive, whatever else people are not giving
1:27:49 enough. Okay. What he did in 2023, and they mentioned it at the meeting actually, is that
1:28:02 he wrote hurricane insurance on Berkshire’s behalf, re-insurance with a maximum payout
1:28:09 of $15 billion. So if these hurricanes had hit, now, basically the math is like this,
1:28:15 I just want to explain how Ajit’s mind works. Berkshire would pay out on a big catastrophe,
1:28:24 like hurricanes, 3 to 5% of the total insured loss incurred. So for them to have a $15 billion
1:28:31 payout, you would have to have had an event with insured losses in Florida of $300 billion.
1:28:36 It’s beyond Andrew and beyond Katrina, is beyond all of those, right? So it would need to be a
1:28:44 really big event for them to have a $15 billion payout. The premium he collected to write that
1:28:49 $15 billion policy, take a guess. Take a guess. Five billion. He collected five billion.
1:28:55 Okay. I’m sweating that guess. But he collected, that’s exactly what he collected. How much did
1:29:01 he pay out in ’23? Zero. There was one that came through. My guess would be they might have paid
1:29:05 out $300-400 million. Okay. You know, some $300 million. Collect $5 billion. And what Charlie
1:29:13 said to me is Ajit’s done this about six times. Okay. Where he’s picked the years that he’s written
1:29:18 these policies because what was happening in most years is the premium offered was $2 billion.
1:29:23 He just took a pass. Right. Right. A lot of all the other insurers wrote that policy.
1:29:33 Berkshire took a pass. Right. No call strikes. Right. And now, for example, we’ve had some unusual
1:29:40 losses. Like, for example, that ship in Baltimore. Right. Now, that’s going to end up being about
1:29:47 three to five billion in losses. Right. And it’s the biggest maritime loss in global history.
1:29:54 It’s going to change premiums for ships in the future. Berkshire will probably be writing
1:29:59 when everyone else is saying, “I don’t want to do that.” You know, it’s like the cat who sat on
1:30:04 a hot stove and doesn’t want to sit on any hot or cold stoves ever again. You know.
1:30:08 You have a thing over there I saw in your office that says, it’s like a placard. It says,
1:30:11 trouble is opportunity. Absolutely. That’s a quote. What’s the story of that?
1:30:16 It’s a quote by John Templeton. And I actually, there’s a good friend of mine, Prem Watson in
1:30:23 Canada. They call him Berkshire Hathaway of Canada, Warren Buffalo, Canada. And I had seen that
1:30:29 plaque on his desk and somebody sent it to me. And so it’s a great quote. I mean, I think that
1:30:36 that’s what we are trying to do with investors is we want, we need to be fearful when the world is
1:30:43 greedy and we need to be greedy when the world is fearful. And so basically, when the world
1:30:51 is running away from coal, we need to run towards coal. So I’m always looking at what is hated and
1:30:56 unloved. And usually you will get a lot of mispricing when something is hated and unloved.
1:31:01 Tell me about Bitcoin. Are you a fan of crypto Bitcoin? Are you a believer?
1:31:06 Outside my circle of competence. And I would say that if you put a gun to my head, I would say,
1:31:14 it’s gonna end badly. And why is that? It’s in the eye of the beholder. There is no intrinsic value,
1:31:22 as I understand it, to Bitcoin. Now, you can argue that there isn’t an intrinsic value to the dollar.
1:31:28 But it has the full faith and credit of the US government, which is then backed by the
1:31:33 hardworking American people. So basically, I think that, I think that it’s,
1:31:38 for me, it’s in the too hard pile. But I think for most people, I would just say,
1:31:44 take a pass. Most people who have invested in Bitcoin couldn’t really tell you
1:31:51 why it’s, or what it’s going to be worth and why it should be worth that.
1:31:56 Okay, fair enough. So one of the reasons I wanted to fly here is because it’s fun to
1:32:01 meet these kind of outlier investors or even just hear the stories. And I’ve heard you tell
1:32:05 a couple stories about guys I’ve never heard of that I would love for you to tell the story.
1:32:11 Because I think most people have never heard of these people. So tell me about Nick Sleep.
1:32:15 Who’s Nick Sleep or Junjunwala? Whichever is your favorite. Give me one of the stories.
1:32:23 Well, I think Nick is a wonderful guy. And there’s a book called Richard Weiser Happier that came out
1:32:28 two, three years ago. And there’s a chapter on him. Nick is very, he’s a recluse. He doesn’t do
1:32:33 interviews and such. I was actually surprised he even talked to the author. But it’s worth reading
1:32:41 the book. And, you know, him, he and his partner Zach, they would come into their office and
1:32:47 basically just sit and read annual report after annual report. They were blue in the face. You
1:32:54 know, I mean, they were just, and, and, and they would want to see if they could understand
1:33:00 different businesses. And that exercise of reading those annual reports led them to the
1:33:08 annual report of Amazon. Right. And for example, I, I’ve been a customer of Amazon known Amazon for
1:33:13 a long time, et cetera, familiar with the business. But every time I would take a cursory glance at
1:33:18 Amazon, it looked very expensive on an earnings basis or PE basis. It looked really expensive.
1:33:24 And the reason it looked expensive is they were investing so far ahead of the curve on the growth
1:33:31 that what, what should have been categorized as CapEx wasn’t, was just categorized as expenses.
1:33:34 So the U.S. government was really funding their growth because there were no taxes
1:33:40 being collected. Now, what, what Nick and Zach were able to do, because they were just sitting in
1:33:46 their office with no distraction, reading year after year of Buffett’s offer, Bezos’s letters.
1:33:52 And the Bezos letters are worth reading. I mean, I think they’re very clear. He clearly laid out
1:34:00 in those letters what he was up to, right? And that he’s basically that, that he wasn’t,
1:34:06 he wasn’t completely candid, but he was basically, you could tell that the business had very high
1:34:11 returns on capital and he was investing. He was throwing a lot of things against the wall,
1:34:15 but basically they were very low risk bets. If any single bet didn’t work, it didn’t,
1:34:22 wouldn’t sink the company. And so for example, one of the bets they made was AWS, right,
1:34:26 which became a huge, and they didn’t know it was going to become as big as it did. But, but
1:34:31 basically they also made a bet on fire, Amazon fire, which didn’t work. But basically, I think what,
1:34:39 what Nick and Zach realized is that here was a very gifted capital allocator who understood
1:34:45 all the different facets of building a team, going after different markets. He actually disrupted
1:34:55 multiple industries. And so they had placed a bet on Amazon. And, and because Amazon was doing so
1:35:03 well, it was becoming a larger and larger portion of their fund. And in the UK, there are more
1:35:08 regulations on hedge funds than we have in the US. The UK regulator was telling them that we see
1:35:18 this position as very high risk. And you guys need to diversify. So they were getting
1:35:25 pressure. And they felt that they understood the business so well. So they looked at each other.
1:35:30 They were, they were managing, I think, two or three billion. They had made hundreds of millions
1:35:37 in for each of them. And they said, look, we are independently wealthy. We never thought we’d be
1:35:44 here. We’re young. Why do we have to listen to some regulator, right? We could return all the
1:35:52 capital to all our investors. And what, what Nick said is if I turn the capital, I’m going to put
1:35:57 everything into three stocks. And these are three stocks. He owned maybe a dozen stocks,
1:36:01 but he was going to go into three stocks. The three stocks he was going to put one third each
1:36:07 into was one third Berkshire, one third Amazon, one third Costco, right? And so he said, I’m very
1:36:14 comfortable with these three stocks. They’re very built to last businesses. And he did that.
1:36:21 And what, what happened a few years after they hung up their boots is it’s really funny. The
1:36:29 Amazon still kept, you know, it’s a juggernaut. It still kept going. And so it became 70, 80%
1:36:35 of the pie. So instead of them being one third each, it was 80, 10, 10, for example, right? And
1:36:43 Nick decided that, oh, maybe I should take some chips off the table here. And so he cut the
1:36:50 Amazon position in half and bought another business, which has not done well sideways.
1:36:58 And that goes back to Buffett’s point of 12 that worked in 58 years is we are not going to,
1:37:04 if Warren Buffett has a 4% hit rate, the rest of us are going to have a 2% hit rate. Okay. So,
1:37:10 but you also need to get rich just one. So I think that what worked really well
1:37:15 for Nick and Zach was they took the Buffett lesson, which is that once you have a great business,
1:37:22 just leave it alone. Now, even after he was sloppy and he took chips off the table from 80%
1:37:27 or whatever, still done very well. And I think one of the things that investors forget
1:37:35 is that if you look at the Walton family, none of them are running Walmart.
1:37:40 Sam Walton passed away a long time ago. It’s been several decades and Sam Walton passed away.
1:37:46 The Waltons have, for the most part, kept the Walmart stock. And for most of them,
1:37:52 it’s almost the entire net worth in a single stock, right? So more concentrated than even
1:37:59 Nick’s sleepers, right? And it’s not a business that they control. It’s not a business that they
1:38:06 run. It’s not a business that they’re on the board of. None of them gives them sleepless nights,
1:38:17 right? And so, for example, in 2018, I started visiting Turkey. And I was just looking at things
1:38:22 hated and unloved at that time. And I saw that the Turkish markets were screening really cheap.
1:38:28 Everyone in the brother was just exiting Turkey. And I have a really good friend of mine in Istanbul,
1:38:35 very good investor, kind of classic Ben Graham investor. And I told him, hey, Hyder, I’d love
1:38:41 to visit Istanbul. And I’d love to, if we could visit all the companies in your portfolio,
1:38:46 starting with the company with your strongest conviction, biggest position to the smallest
1:38:52 position. And I said, don’t take me to see any companies where you don’t have money in, okay?
1:38:55 He said, one, it should be a blast. So I went in 2018, first time to Istanbul,
1:39:02 the blue fish on the brosferus was great. And all these different businesses we saw were great.
1:39:06 And I didn’t really do much work. He told me what places we were going to. But I just said,
1:39:15 let me meet the companies first. I went back in 2019. And we’re driving to this company. And I,
1:39:20 like I said, all these Turkish names and companies, I said, I will do the work on the
1:39:25 back end. I’m not going to spend time. So as we’re driving over, I said, Hyder, remind me,
1:39:29 what company are we going to? What’s the, what’s the cliff notes version? He said, okay,
1:39:34 he says, this company going to visit race us has a 16 million market cap, 16 million dollar
1:39:40 market cap. And he says, a liquidation value of the business we sold it today is 800 million.
1:39:47 So I said, is it a fraud? He said, he said, no, I’m invested in the company. And so I said,
1:39:53 you’re telling me the company is trading for 2% of liquidation value. He said, yeah,
1:40:01 I said, why? He said, it’s Turkey, you know, everything’s cheap. I said, this is outlier
1:40:07 cheap. Okay. And race us basically is a very simple business. They, the largest warehouse
1:40:13 operator in Turkey, they rent out all these warehouses. These are 99% leased inflation indexed
1:40:21 and they’re leased to Amazon, Ikea, Carrefour, Mercedes, Toyota, like blue chip clients and
1:40:28 all of that, right? So I went and met the father and son who run the company and the founders. And
1:40:34 and then after that, I went and visited a bunch of the warehouses and I couldn’t find anything wrong
1:40:42 basically. And he was absolutely right. If you just went to any realtor in Turkey and said,
1:40:48 this is their 80 warehouses, give me a value in each one. He would just look at the rent.
1:40:53 And he would tell you, okay, you know, you’re looking at about $70, $80 a square foot
1:40:57 for each warehouse. They had 12 million square feet. It was about a billion dollars.
1:41:03 And there was 200 million debt. So 800 million liquidation value and 16 million market gap.
1:41:09 Okay. And so then I thought, okay, this thing probably trades by appointment and maybe can’t
1:41:16 buy the stock, but Turkey has very high trading volume because they’re all gamblers. And so I
1:41:22 found that when I started buying the stock, that huge volumes are available. And I spent
1:41:29 $8 million to get a third of the company. Okay. Now, the way I look at it is that, you know,
1:41:34 when you look at Buffett’s letter with the 12 positions or you look at Nick’s Leap with Amazon,
1:41:43 right? The family that runs the business, they have maybe 40, 45% ownership, right?
1:41:50 I’m an outside investor at 33%. I have no board seat. But the way I look at resas
1:41:58 is the way the Walton family looks at the Walmart stock, right? I said, and what I’ve noticed since
1:42:05 then, since 2019, is they have increased the value of that business. So I would say that
1:42:12 probably today, the business might be worth one and a half to two billion somewhere in that range.
1:42:17 And I think they’ll continue, because I’ve never seen them make any decisions that were stupid.
1:42:25 They’re very smart about the decisions. It’s very well run. So I say, okay, basically, we are done.
1:42:34 We will keep that business. I don’t care about the stock price. So the 16 million market cap now
1:42:41 is about 500 million, you know, in four years. And, you know, the Turkish lira, which when we were
1:42:48 investing, it was five lira to the dollar. Today, it’s approaching 33 lira to the dollar. Turkish
1:42:59 lira has collapsed. In dollars, we are up almost 30X, right? But the business is worth more, right?
1:43:05 And so the thing is that it’s exactly what Buffett says is that basically, just leave it alone.
1:43:13 And as long as that family and that father and son are running the business, we will just keep
1:43:21 our stake and let it keep running. So basically, the idea is that I’m also going to, when I look
1:43:28 back, I’m going to find there were a few things that move the needle big time and the rest did.
1:43:34 And the key to moving the needle is inactivity. And so that’s what you’ve got to be. You’ve
1:43:39 got to be very patient and be very inactive. Right. You talked about Bezos being a capital
1:43:47 allocator. Buffett, obviously, capital allocator for Berkshire. And who are the other, I guess,
1:43:51 like, if I just throw some names at you or some companies at you, like, I’m curious to hear your
1:43:56 take on how well they allocate capital. Because we know how good their brand is or their product is,
1:44:00 but we were talking about this yesterday. There’s a transition from you’re a product manager where
1:44:04 your focus is building product and you’re a people manager where you’re building an organization.
1:44:08 And then you’re a money manager and you’re now, you know, you’re sitting on a hundred
1:44:12 billion dollars, you have to figure out some way to invest it. This is like, you know, so tell me
1:44:16 meta or Facebook, what do you think, how do you think they’ve done with capital allocation?
1:44:25 Well, I think, I think it was really surprising to see how he did a 180. I mean, I think Mark
1:44:33 basically moved from being a spendthrift to being a hotel. You know, he, I mean, literally, I just
1:44:40 can’t, I think it was remarkable to see an entrepreneur pivot that way. So, you know,
1:44:45 meta was a country club, you know, they had all this spending going on in all these areas. And
1:44:51 he really tightened it up. I mean, I was really, I mean, and it showed up in the numbers. They,
1:44:55 I mean, Facebook is a great business. You know, all the different brands they have and different
1:45:03 properties they have are tremendous. It is the norm in capitalism that great businesses will be
1:45:11 sloppy with how they execute. I think normally it’s very rare to find a great business, which is
1:45:19 also tightfisted. And meta wasn’t tightfisted, but it is now. And so that was just wonderful to see.
1:45:23 So I think, yeah, I think the capital allocation there is excellent now.
1:45:27 Right. What do you think about Elon Musk, fellow Texas resident?
1:45:33 The United States, this is one of the most beautiful things about the United States,
1:45:41 is Elon wasn’t born here. Okay. And he wasn’t educated in his first 20 years of life over here.
1:45:48 We, the United States, got a finished product, basically. And he’s created tremendous value,
1:45:56 tremendous jobs, and disrupted multiple industries. I think Elon is an exceptional
1:46:01 allocator capital. Yeah, it’s terrific actually. And Tesla gets a lot of, there’s a lot of
1:46:06 conversation. Is Tesla overvalued? Is it undervalued? Is it, you know, too frothy? I guess
1:46:09 what’s your take on, when you look at a business like Tesla, how does your mind
1:46:16 analyze a business like Tesla? It goes into the too hard pile. I would say this. I would say that
1:46:23 Elon is not human. Okay, he’s beyond human. If you just think about all the things he’s done,
1:46:32 I mean, other neural net and, you know, boring company and, you know, what he’s doing with SpaceX
1:46:40 and all that, it’s just really very remarkable. The execution is off the charts. And I think,
1:46:46 like I said, I think he’s just unbelievable in terms of what he’s been able to accomplish. So
1:46:51 I have a lot of respect. I think, I think Elon understands capital allocation really well.
1:46:59 And I think all the businesses that he, he gets involved in or he founds, they do so well because
1:47:06 he gets so much out of the people, which basically means he gets so much out of the capital, right?
1:47:12 I mean, he’s, his hiring is so good. The teams that he’s building are so exceptional that,
1:47:17 I mean, when you’re hiring a software engineer, they could be an engineer who’s worked 10,
1:47:22 10 million a year, and they could be another guy worth 100,000 a year. And he can tell the
1:47:26 difference. Right. And so he’s, that’s, that’s a great skill to have. Yeah, I love that. Well,
1:47:31 end with this. We have Charlie, you know, here and he passed away and you were friends with him.
1:47:35 What’s a, maybe your favorite story or lesson from, from Charlie Munger?
1:47:42 Yeah, I mean, I, I obviously I miss Charlie. I think he, he was one of a kind. I think he was
1:47:47 just a, and then I’ve been thinking last several weeks, several months about so many of the lessons
1:47:52 and things. But one of the things Charlie said in one of the last interviews he gave,
1:48:01 someone asked him, I think, what would you like on your gravestone? And he said, I tried to be
1:48:08 useful. And I think those, those words I tried to be useful encapsulate Charlie really well.
1:48:12 If you look at Warren Buffett’s tribute to him that he did this year in the letter,
1:48:19 Charlie selflessly helped Warren a lot. I mean, without Charlie Munger, there’s no Berkshire
1:48:28 Hathaway, even though you had a Warren Buffett there. And I twice I went to Charlie when I was
1:48:35 facing difficult personal situations, nothing related to investing, right? Extremely helpful to
1:48:42 me. On point, I just did exactly what he told me to do. And those issues disappeared, right? And so
1:48:52 Charlie always was trying to see how can I help the world in all the institutions that he touched.
1:48:57 You know, his memorial was at the Harvard Westlake School in California in LA,
1:49:03 transformed that institution. He was at the board of the Good Sam’s Hospital, transformed
1:49:08 the hospital Berkshire Hathaway transformed. I met so many partners he had in different businesses,
1:49:17 always gave them the better deal. And I think in every way possible, he, I think that was just
1:49:23 absolutely correct. He selflessly tried to be useful. And, you know, Charlie, I don’t think
1:49:27 Charlie believed in God. I don’t think he believed in religion, right? And I think he
1:49:31 didn’t believe in legacy. He, I think he believed that when we’re gone, we’re gone.
1:49:39 It’s asher than dust, right? Till one day before he passed away, he was in the hospital. He knew
1:49:45 he was dying. He was trying to get one last grant done to a nonprofit. No upside to him. He’s dying,
1:49:54 right? Six days, six days before he passed away, he was buying a stock. Okay, you know,
1:50:00 a stock we discussed, you know, and I’d send it right up on. So I’m just saying that I think
1:50:07 Charlie extracted everything he could from his mind and his body. The other thing was that he
1:50:14 never complained. Lost sight in one eye. Many decades ago, he was almost blind in the other eye.
1:50:22 He cared most about reading, right? That was most important to him. And I saw him one time when
1:50:26 the second I was giving him a very serious problem where he could have gone blind. This was maybe
1:50:31 10 years ago in the second eye. Even when he was facing the prospect of complete blindness,
1:50:42 he was so stoic. Never said, oh, poor me, self pity. His response to me was, I’m going to have
1:50:46 to learn Braille, you know, you know, that’s, that’s how he was going to deal with it, you know.
1:50:53 And so I think they were, I think it’s just great. We have such a big, rich body of work that he
1:50:58 left poor Charlie’s Almanac and I think a lot to learn from him. Right. Well, thank you for sharing
1:51:02 that. And thank you for doing this. This is hopefully your, you know, process of sharing
1:51:06 some of your wisdom. So thank you for doing this. It’s a pleasure. I really enjoyed the session.
1:51:10 Thank you. I know. Okay. All right. Sounds good. Thank you.
1:51:19 I feel like I can rule the world. I know I could be what I want to put my all in it like no days
1:51:23 off on a road. Let’s travel never looking back.
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