Mohnish Pabrai a renowned Indian-American value investoris a self-proclaimed “cloner” of Warren Buffett, meaning he tries to emulate his investment philosophy and principles as much as possible. But do you know how Pabrai met his idol, Warren Buffett in person? Well, it all started in 2007, when Mohnish and his best friend Guy Spier, a Zurich-based hedge fund manager, decided to bid for a charity auction for a ‘power lunch’ with Buffett. This auction is held every year by Buffett to raise money for Glide Foundation, a nonprofit organization that provides services to the poor and homeless in San Francisco.
Mohnish and Guy were determined to win the auction, as they saw it as a once-in-a-lifetime opportunity to learn from the master himself. They also considered it as a ‘Guru Dakshina’, a Sanskrit term that means offering gratitude and respect to one’s teacher. They pooled their money together and placed a bid of $650,100, which turned out to be the winning bid that year. They then had a three-hour lunch with Buffett in New York City. They asked him many questions and learned a lot from him. They also donated another $650,100 to the charity as a token of appreciation.
But that was not the end of their relationship with Buffett. After the lunch, Buffett invited them to visit him in Omaha and attend his annual shareholder meeting. He also arranged for them to meet his partner and vice-chairman of Berkshire Hathaway, Charlie Munger. They have since maintained regular contact with him through phone calls, emails, letters, and visits.
Mohnish considers his meeting with Buffett as one of the most valuable investments he has ever made in his life. He says that it has improved his investing skills and results, his personal happiness and fulfillment, and his philanthropy. He is the founder of Dakshana Foundation, a nonprofit organization that provides world-class education opportunities for exceptionally gifted children from impoverished backgrounds in India. He has received praise from Buffett for his efforts.
In this video, we will share with you the amazing story of Mohnish Pabrai and his simple but powerful investing model that made him one of the most successful and respected investors in the world.
Mohnish Pabrai was born in Mumbai, India, on June 12, 1964. He came from a wealthy family that allowed him to attend an exclusive private school in the city. At school, he saw how some people were very rich and others were very poor. He felt really bad for the poor and “untouchables” who had to live in slums, which would later inspire him to start his charitable foundation, which would be founded thirty years later.
Pabrai moved to the United States in 1983 to study computer engineering at Clemson University. After graduating in 1986 he joined Tellabs, a telecom company, where he worked for five years. He then started his own IT consulting and systems integration company, TransTech, in 1991 with about $30,000 from his own 401(k) account and $70,000 from credit card debt. He grew the company to over 100 employees and sold it in the year 2000 to Kurt Salmon Associates for 20 million US dollars.
But Pabrai was not interested in running a business. He was passionate about investing. He had read books by Warren Buffett and Charlie Munger, two legendary investors who are known for their value investing approach. Value investing is a strategy of buying stocks that are undervalued by the market and holding them for a long time until they reach their true value. Pabrai decided to follow their footsteps and started his own hedge fund, Pabrai Investment Funds, in 1999 with $1 million from his own money and some friends and family.
Pabrai’s hedge fund was inspired by Buffett’s partnerships that he ran in the 1950s and 1960s. Pabrai charged no management fee and only took 25% of the profits above a 6% annual return. He also invested most of his own net worth in the fund, aligning his interests with his investors. He followed a simple rule: invest in few businesses that he understood well, that had durable competitive advantages, that were run by honest and capable managers, and that were available at a significant discount to their intrinsic value.
Pabrai’s strategy paid off handsomely. Between 1999 and 2007, his fund returned an astonishing 37% annualized, compared to 6% for the S&P 500 index. His assets under management grew from $1 million to over $1 billion in just five years.
Some of his best bets during this period were:
• Frontline Ltd., a shipping company that he bought in 2002 for $7 per share and sold in 2004 for $40 per share.
• Stewart Enterprises Inc., a funeral services company that he bought in 2003 for $3 per share and sold in 2006 for $8 per share.
• Horsehead Holding Corp., a zinc producer that he bought in 2005 for $9 per share and sold in 2007 for $24 per share.
Of course, not all of Pabrai’s investments were winners. He also made some mistakes and learned from them. Some of his worst bets were:
• Delta Financial Corp., a subprime mortgage lender that he bought in 2007 for $12 per share and went bankrupt in 2008.
• Horsehead Holding Corp., a zinc producer that he bought again in 2014 for $18 per share and went bankrupt in 2016.
• Fiat Chrysler Automobiles NV, an automaker that he bought in 2012 for $5 per share and sold in 2018 for $21 per share, But could have made more money if he had kept it longer because the company split into two parts and one part was Ferrari, which became very valuable.
Pabrai has written two books on his investing style: “The Dhandho Investor: The Low-Risk Value Method to High Returns” and “Mosaic: Perspectives on Investing”. In these books, he shares his insights and principles that guide his investment decisions. He also explains how he applies the concept of “dhandho”, which means “endeavors that create wealth while taking virtually no risk” in Gujarati, a language spoken by many Indian entrepreneurs.
Some of the key ideas that Pabrai advocates are:
– Cloning: Pabrai believes that one of the best ways to learn and improve as an investor is to copy the ideas and actions of other successful investors. He calls this “shameless cloning” and admits that most of his investments are cloned from other value investors like Buffett, Munger, Seth Klarman, Joel Greenblatt, etc. He says that cloning is not only ethical but also smart because it saves time and reduces errors.
– Checklist: Pabrai uses a checklist of over 100 questions that he asks himself before making any investment decision. He says that a checklist helps him avoid cognitive biases and emotional traps that can cloud his judgment. He also updates his checklist regularly based on his mistakes and learnings.
– Heads I win; tails I don’t lose much: Pabrai looks for investments that have asymmetric risk-reward profiles, meaning that the upside potential is much higher than the downside risk. He calls this “heads I win; tails I don’t lose much” and says that this is the essence of dhandhoinvesting. He gives an example of his investment in Fiat Chrysler Automobiles in 2012, when he bought the stock at around $4 per share, valuing the company at $5 billion. He realized that Fiat’s stake in Ferrari alone was worth more than $5 billion, and that the rest of the business was essentially free. He sold his shares in 2018 at around $20 per share, making a 5x return on his investment.
– Spawners: Pabrai also looks for companies that are able to spawn new businesses or opportunities from their existing operations. He calls these companies “spawners” and says that they can create enormous value over time. He cites Amazon as an example of a spawner, as it has spawned businesses like AWS, Prime, Kindle, Alexa, etc. from its core e-commerce platform. He also mentions Berkshire Hathaway as another spawner, as it has spawned businesses like Geico, BNSF, Dairy Queen, etc. from its core insurance operations.
– Global diversification: Pabrai is not afraid to invest in different countries and markets, as long as he finds compelling value opportunities. He says that he follows Buffett’s advice of being a citizen of the world and not limiting himself to any geographic boundaries. He says that he has invested in countries like India, Turkey, South Korea, Japan, etc. where he has found attractive businesses trading at cheap valuations. He says that he does not worry too much about macro risks or currency fluctuations, as long as he is confident about the quality and durability of the businesses he invests in.
So these are some of the key principles and strategies that Mohnish Pabrai follows in his investing journey. He is a great example of how one can achieve extraordinary results by learning from the best and applying simple but effective rules. We hope you enjoyed this video and learned something valuable from it. If you did, please give it a thumbs up and share it with your friends. Also, don’t forget to subscribe to our channel for more videos on finance and investing. Thank you for watching and see you next time.
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