Dhandho. Heads I win | Mohnish Pabrai | Talks at Google

MALE SPEAKER: Welcome everyone. Anyone who has read "An Annual Letter from Berkshire Hathaway" has often marveled at Warren Buffett's ability to synthesize complex concepts into highly intuitive language. Our speaker today, Mohnish Pabrai, is someone who paid $650,000 for a lunch with Warren Buffett in 2007. It's a sum he considers a bargain. And in the same spirit as Warren Buffett and Charlie Munger, he has a very intuitive, very evocative, very emotionally engaging way of distilling complex concepts into his way of connecting with his audience. He is probably a fantastic teacher, although he does not hold that official title, if you look at some of his presentations to various university groups.

Our speaker from last time, Michael Mauboussin, talked about the role of luck and skill in life. He talked about how there is usually not a linear chain of cause and effect, but rather a spectrum of probabilistic outcomes in life. Mohnish goes one step further. He

talks

about being preferential toward probabilistic scenarios in which there are limited downsides, but disproportionately high upsides. He could also go on and on about his investment philosophy, his philanthropic activities, etc. But I think what we'll see here is how he really cares about connecting with the audience and what a good teacher he is.

So, without further ado, ladies and gentlemen, please join me in welcoming Mohnish Pabrai. MOHNISH PABRAI: Thank you. Thanks Sarab. That's a wonderful, warm welcome. Much appreciated. And it was very exciting for me when we got the email from Sarab about the possibility of speaking at Google. Because it's easy to be a fan. And I think it's a wonderful company. In fact, I think in many ways in the end, when we look back, I think Google could very well be the greatest company ever created, for a variety of reasons. And one of your board members...he's not a friend, he's an acquaintance of mine.

And a few years ago I asked him: what is the next Google? And in his response, he instantly said that the next Google is Google. And I think that's a great answer. Because I think the way the company is designed... you know, Warren Buffett always says that investing in companies with rapid changes is the enemy of the investor. In many ways, Google is future-proofed from that standpoint, simply because of the way it's structured. So it's very exciting to be outside of Plex, to look inside and see all the wonderful things that are happening. Anyway, from several perspectives, I'm delighted to be here.

And I will always beat myself up for never investing in Google stock. But there's still time and we might get there one day, so we'll see. So investor Dhandho, the book that came out a few years ago, Buffett has a quote. He says I'm a better investor because I'm a businessman. And I'm a better businessman because I'm an investor. And essentially, that book, The Dhandho Investor, is the expansion of that phrase into over 100 pages, basically delving into that particular nuance. And the word Dhandho is a Gujarati word. And do we have any Gujaratis in the room?

Oh, we have one. A Gujarati? Alright. That's good. People always think that I am from Gujarat in India, because I wrote a book called Dhandho Investor. And I always have to correct them and say: I am not Gujarati. I had a roommate from Gujarat, and he, when I was doing my undergraduate studies in engineering and he was also studying engineering, he used to disappear on the weekends, because his whole family, his extended family, had all these motels. and laundries. , gas stations and everything they had in the Carolinas. And then he would come back on Sunday night and be full of stories about the new investments his family had made and all the economics of those investments.

And at the end he finished and said Mohnish, Dhandho. And that was his way of saying that: the literal transition of the word Dhandho means business. But the way Gujaratis use it, what it means is that it is a way of doing business where you basically have advantages with almost non-existent disadvantage. What is the key to investing. As Buffet says, rule number one: don't lose money. And rule number two, don't forget rule number one. That was the backdrop behind the title and the book. And Indians make up about 1% of the US population. A little more than 3 million people.

And the Patels, who are from Gujarat, are a much smaller portion of those 3 million. My guess is that it would probably be less than 1/5 of 1% of the US population, well under half a million or so. And although they are such a small portion, probably more than 60% of the motels in this country are owned by Patel. And that's a surprising statistic, considering that 40 years ago there were no Patels around. So they went from having a basically stable start to practically dominating this industry. And they have risen in the markets. So they used to be on the lower end: the smaller 10, 20, 30 room roadside motels.

And now they're buying Marriott's, Westerns, Hiltons and all that. So they are moving up the chain. And they came to the United States as refugees, and most of them came from East Africa, from Uganda. And at that time, in the early 70s, there was a dictator, Idi Amin, who came to power in Uganda. And actually the Patels had come to Uganda several decades, more than 100 years, before that. And they arrived mostly as contract workers. But over time, using their Dhandho techniques, they practically controlled large portions of Uganda's economy. And Idi Amin was very angry about that.

And his perspective was that Africa is for Africans. And what he did was practically nationalize all of his assets, he seized all of his personal assets and expelled them from the country. So, in reality, there were stateless people. They didn't really have any state to go to. India was recovering from the Bangladesh war and all the refugees coming from Bangladesh. So India actually refused to take in the Patels as refugees. England took some. In the United States, at that time, the Nixon administration, they were quite familiar with the subject. And they had sympathy for the Patels' plight, but they were limited.

So America took in a few thousand Patels. A few thousand more arrived in Canada. And most of these Patels who appeared in the US in the early 70s were not very educated. And the only money they could really carry with them was what they could quickly turn into gold, a few thousand dollars. So that they landed in the United States. And they actually found that they had virtually no skills that would be useful to most employers. They had a thick accent and didn't really have many skills. But they discovered that buying motels was a great way to do it.

And the reason they thought that was because a typical Patel family, at that time, could buy a 10 or 15 room motel for less than $100,000, maybe $50,000 to $75,000. And the family could live in one or two of those rooms. And since motels are labor intensive, they would pretty much lay off the entire staff and the family would do all the work. So do the laundry, clean the rooms, keep an eye on the front desk. Everything was done by different family members. And they became low cost operators. They examined every facet of the business. And so, once a motel came under Patel's ownership, two things happened.

One is that the operating cost went down. And because operating costs were lower, they were able to charge lower rates and increase occupancy. And so, typically, the Patel-owned motel in a particular area would always do better financially, in terms of cash flows, than the other non-Patel-owned motels. And as soon as they had enough cash flow, they would buy the second motel and then the third. And they would continue to take advantage of them and buy them. And we end up with the result of where we are today, where they practically dominate the space. And that aspect of the way they did their business has a lot of correlation with investment.

Because Buffet's whole phrase about being a good businessman is a great skill set to be a great investor. And the particular facet that they followed was this notion that I call "

heads

I win and tails I don't lose much." So if we look at the economics of a Patel buying a motel, they would typically put down $5,000 or $10,000 as a down payment. And most of it was a bank loan. And if for some reason they were not able to manage the cash flows, the banks would prefer not to repossess the motel, seizing it. They would prefer or do what they did recently in the financial crisis: extend and pretend.

Keep the same guy running it and hope things get better. Either way, the bottom line was that the Patels, even with high leverage, were unlikely to lose their holdings. And they didn't. Because they were smart operators, they didn't come close to that mark. And after a few years, the banks really wanted to make loans to the Patel-owned motels, because they saw that the default rates and everything were markedly different than the rest of the population. And that worked pretty well for them. And there's this notion that it's just the Patels who have this stingy way of operating, and this "

heads

I win, tails I don't lose much." But it's actually available to us everywhere we look and we find it in all kinds of places.

So, for example, if you look at Richard Branson in England, he is as far away from the Patels as you can imagine. And if you look at the way Branson runs his various businesses, they're very much in sync with Patel's model of operating on a "heads I win, tails I don't lose much." So, for example, before the formation of Virgin Atlantic Airlines, Branson used to be in the music business. He was a music editor. And these different ones like Boy George and the Sex Pistols, etc., were some of the brands that he had mentioned. Then, one day he goes to his partners and tells them that he wants to found an airline.

And he basically wants to fly between London and New York, and he thinks it's a great market to enter. So his partners were quite stunned. They said look, he's doing very well for us in the music business. We don't know anything about the airline business. You need a jumbo jet to get into the airline business. And that jumbo jet costs about 200 million dollars. We don't have $200 million and we don't know anything about the business. So he says, well, someone sent me this business plan. And Branson was smart. He said that if a music business executive receives a business plan to start an airline that flies between London and New York, he will know that this business plan has gone to 300 other places before that, and was rejected everywhere. that they knew something. about the business.

But the plan intrigued him. And he tried calling British Airways over the weekend to try and book some flights, just to see what the customer service was like. And he couldn't get through. So he said, well, either there's so much business that there's enough for a second player to come in. Or they are so bad that a second player can come in and do a better job. Either way, there's room for that. And then his partners told him that yes, everything is fine, Richard. But we don't have the money. We don't have the jet. We don't have a jumbo jet.

How are we going to do this? And what he did was call (206)-555-1212, which is the operator in Seattle, to get Boeing's number. And they gave him Boeing's main phone number. And he called Boeing and said he wanted to talk to someone who rents jumbo jets. And they hung up on him repeatedly. And finally, he found a guy who actually wanted to talk to him. And he said, look, we normally have one or two clients in each country. We know who they are. You're not one of the people we spoke to in England, goodbye. So he said no.

No, listen. Before we hang up, do you have an old, used jumbo jet that you would rent to one of these customers if they came to you? He said, well, you're not one of them. But yeah, if they came to us, we actually have an old jumbo jumbo laying around. He said, oh, well, if these people came to you, how much would it cost to free the jumbo jet? And then the guy mentioned the price and so on. He said: Would you do a short term lease? Because the jumbo is there. He said yes, we would be flexible with our clients.

He then convinced Boeing to rent him that jumbo jet. Because he was just sitting there. And then in the airline business, before the plane takes off, you've sold all the tickets. So your income arrives before you've spent a cent. And then you pay for the fuel 30 days after the plane lands. Therefore, it is a negative flow business, in the sense that not even working capital is needed. And then he went into advertising, hired the staff, got everything going and got this airline off the ground. And if you think about it, if someone can start a business in a strictly regulated industry like aviation, with very high Capex needs, like the need for these jumbo jets, without capital, then you can say they can do it in any business.

Good? And if you think about the way Branson set it up, he had no problem with it. Because what would happen if the thing didn't work? Well, I'd just return the plane. And it would be a few thousand dollars in terms of tensthousands or whatever. And his music business at the time was producing about $3 or $4 million a year in cash flows. So they had more than enough money to meet any eventuality. And that's the nature of Dhandho: you're making asymmetric bets. And one of the reasons I think Google is such a fascinating and incredible place, because I don't think Sergey and Larry ever thought about it in these terms, is that Google is the ultimate Dhandho business.

And the reason why they are Dhandho's best businesses is if you look at, for example, their self-driving cars. So driverless cars, the real capital expenditure would come when you need to build large-scale factories to produce millions of cars. It's not when you're doing R&D for those cars, or you have some prototypes and you put a few dozen engineers on them, and that kind of thing. So if you think about the outlays that Google has on the self-driving car, I bet you're probably spending more on campus food than on self-driving cars. And so it is an asymmetric bet.

Good? Basically, if it doesn't work, it has no impact. There is no impact on cash flows or anything. And if it works, it will be a game changer. The same with Android. You know, a few years ago, Android with a project such as the autonomous car. And it went from being one of those atypical projects to being a very central and cash flow project. And then even when you look at your Internet-enabled globes, or all the other different projects that they're working on, basically each one of them has the potential to be a game-changer, in terms of where the world ends. above.

But none of them have costs associated with them that have to do with how threatening the company is in any way. Good? I mean it's a rounding error in terms of the cash flows that the company produces. So the fact that the DNA of a place like Google is capable of doing things that aren't in adjacent fields is pretty spectacular. And most other companies don't have the DNA to be able to do that. And my two cents, looking from the outside, is that probably the only other company I see that has the ability to do that is Amazon.

And I believe that in the end we will confront them face to face on several different fronts. That's why it's a great place to be. And the other notion that I wanted to talk about briefly is the notion of capitalization. So can we play that video? We'll play maybe a couple minutes of this video and then I'll talk about it. OK. So you know this notion about confusion and you saw that slide with Albert Einstein, who says that compounding is the eighth wonder of the world. There was a guy who invented the game of chess. And the King was so enthusiastic about the game and he became an addicted player, that he told the inventor that you can ask for whatever you want and it will be yours.

And the inventor of the game simply says: I just want you to put a grain of rice on the first square of the chess board. And then put two grains of rice in the second square. And then keep doubling the grains of rice until you get to square 64. And that's all I want. And that emperor clearly wasn't smart enough to be a Google employee. And he was mathematically challenged. So he basically got mad at this inventor. He wanted to give you all these things, and this is all you want, a bunch of rice. Then the guy says, yeah, that's all I want.

So he tells his treasury, you know, measure the rice for him and take it out of my court. And after a week, when the treasurer still hadn't finished, he asked him what the problem was. He said well, you know, it took me a while to do the calculation, but we don't have the rice. In fact, he said there is not enough rice in the kingdom or on the planet to meet the order. And the amount of rice becomes 2, 64 minus 1, which is a long number, similar to Google's. In today's dollars, that's about $300 trillion. And I think it's just global GDP.

Actually, not the global GDB, but global wealth. So if we take the wealth of every man, woman and child on the planet, it would be approximately equal to 64 minus 1 grain of rice. That is the power of capitalization. Good? It grows spectacularly. And when I first heard about Buffett in 1994, he had been composed for about 44 years at that point, roughly from 1950 to 1994. And when I looked at the history, I realized that he would basically move on to the next chart in less than three years. For the first 44 years he had averaged about 31% annually. So if he compounds 26% annually, his money will double every three years.

And of course, if you were doing 31%, then you'd go even faster. Basically, that's the essence of Buffett and Munger's genius: they absolutely understand the power of compounding. And they've basically done it with this very long track and so on. And of course, if you look at it from 1950 to 2014, it's no surprise that Buffet ended up being the richest man on the planet. Because if you keep aggravating it, that's what ends up happening. One of the important takeaways I learned from Buffett and Munger is that you don't actually have to do extraordinary things to get extraordinary results.

If you can double your money every three years, then a few doubles start to add up to some serious numbers. If you start with a million dollars, in 30 years it becomes a billion. If you start with $10,000, it becomes $10 million. It's just incredible, in terms of what happens. And the doubling every three years, the way I looked at it was that if you buy a stock at less than half its value, and you just sit there, and in two or three years it becomes what it's worth. -- Lo and behold, you will have your 20%, 30% annualized. And sometimes you might get it in a year.

And sometimes you might make mistakes. And the combined result of all that ends up being where it is. So I think capitalization is a very powerful notion, very synchronized with the whole Dhandho framework. And another thing I wanted to mention is that, following the same type of mentality as Google, the market is confused between risk and uncertainty. And in a way it confuses one with the other. And risk and uncertainty are two very different things. And generally, whenever you get into a situation where the risk is low, but the uncertainty is high, the chances are high that the stock in question or the business in question is mispriced.

And it will probably be priced lower. So that combination of low risk and high uncertainty is a great combination. Low risk means its downsides are limited. And a good way to think about that is, for example, when Bill Gates founded Microsoft, people always think that these companies that are formed are high-risk companies. But if you really look at it, when Gates founded Microsoft, he had no net worth, no assets, no capital. So the fact that he was taking a high risk, well, there's no capital to lose. So you can't really take risk due to a capital loss.

And if you think about the opportunity cost, he hadn't finished college yet. At that time, with the couple of years he had spent at Harvard, his value in the job market was very low. So if he went out looking for a job and stuff like that, people wouldn't be willing to pay him that much. And if the company didn't work out, then he moved to New Mexico, started Microsoft. And if you think about the idea that Microsoft doesn't work, well, he goes back to Harvard and finishes a bachelor's degree. And now, when he graduates, he'll have interesting things on his resume: what he did in New Mexico for a year.

No matter how you look at it, Microsoft's startup was almost risk-free. But the uncertainty related to Microsoft was very high. It could have been that the company went bankrupt and the little money it had was gone. Or he could have become the richest human being on the planet, and he did. Therefore, up to that point a very wide range of outcomes could occur. But the key was that the risk was low. And in fact, if you study startups that are not venture-backed. Startups without venture capital backing, like the Patels, are taking no risks. In fact, if businesses are repeatedly studied, there are over a million businesses started in the United States each year.

Fewer than a thousand of them are backed by companies. Maybe a couple thousand. So over 99% of companies formed in the United States are not venture-backed companies. And most of them follow this low-risk, high-uncertainty principle when they start, like the Patels. That is why it is important to keep in mind that I believe that capital can be replaced by creative thinking, as Richard Branson did. And certainly, for most businesses, capital isn't even needed. And certainly, in a knowledge economy type business, capital actually becomes useless, so to speak. So I can continue, but I think with that, what I would like to do is really listen to you and see what you have in mind and maybe try to address questions or comments along those lines.

So I'll open it up for all of you to talk. MALE SPEAKER: Thank you very much Mohnish. MOHNISH PABRAI: Sure. MALE SPEAKER: And we will open the floor for questions. AUDIENCE: I've heard phrases like "beware of spreadsheet geeks" from people like Buffet. Is there anything specific that technically minded people should keep in mind when investing? MOHNISH PABRAI: I mean, I would say there are these... what I just talked about with the uncertainty thing, right? Typically, engineers want to see precision. And you have to be really open to things that you may not have all the answers to.

In fact, by definition, investing is a very uncertain exercise. Because what you really have to do is extrapolate what a company's future cash flows will be, then reduce it to the present, and then decide whether that works or not. And in many cases, in many companies, I would say there's probably no one on the planet, including the founders of Google, who can say what Google's cash flows will be five years from now. But, for example, if you could put a floor on those cash flows, that might give you a basis for investing. Because you would say: Okay, I know what my disadvantage is.

And the cash flow floor is much easier than actually predicting cash flows. Good? So if you can, with a high probability, start putting floors on things... Then I think the engineering mindset needs to change a little bit. And, to some extent, Google has done that. If you look at your server farms, you'll find unreliable hardware with high failure rates and all that. And, to some extent, unpredictable times and places where things can go wrong. But that's built into the engineering of the solution. And that is why it is capable of adapting to a high degree of uncertainty.

So you don't know which server is going to fail and when, but I think statistically you know how many will fail. And you can design around that. So I think as long as you can deal with uncertainty, in general. And the second thing is that it's probably best that you never touch Excel. Good? So Excel has nothing to do with investing. And that might be heresy at Stanford Business School or something. But the way to really look at investing is that when you look at, again, a company like Google or Microsoft or Berkshire, you really have to put yourself in the shoes of the people who run the company.

And you have to ask yourself, how do they run the business? Do you run it on a set of spreadsheets? Or how do they execute it? And I would bet that most of these companies are run in a way where the founders or CEOs really look at three to five variables that dominate most of their thinking, results, and direction. And so, as an investor, you have to focus on the same variables. So if you can get to the same variables... if you're going to invest in Microsoft, you can get to the same variables that they're using.

If you Google the same variable that Larry and Sergey use, you'll be very close to trying to figure out what the company could do. And from there, you can extrapolate whether the price is low or fair, etc. That's what I would suggest: avoid using spreadsheets and avoid precise thinking. AUDIENCE: Could you give us an example (may not be current) where you've analyzed a business, you've analyzed an industry, and you said, I think if I want to analyze this business, here are the three variables? which I think are the most important. Maybe an example from the past would help...

MOHNISH PABRAI: So, a business that I didn't invest in, or...? AUDIENCE: It could be something that you invested in and maybe guide us through. Here are the three variables that I thought were the most important. MOHNISH PABRAI: Sure. No problem. I think it's a good question. A few years ago, I think this probably goes back over 10 years, I invested in a funeral services company. So you know, as the gurus say, don't invest in fast-changing industries. It takes us humans a long time to change the way we treat our dead. It takes a few centuries for that to change.

There is a bit of a trend towards cremations, which you can adjust to, but overall, it's a pretty stable situation with cremations.Then there were these two companies. They had made an important deployment of funeral service companies. One was Stewart Enterprises, based in Louisiana. And the other one was Service Corp. And what they had done is bought a bunch of family-owned funeral service operators. And much of it was bought with debt and part with equity. And what ended up happening is that these companies were highly leveraged. And then they got so leveraged that they started to lose confidence in their bank debts and so on.

And when I looked at the companies... I think when I looked at the Stewart companies, they were trading at a little less than $2 a share. And the cash flows it generated at that time were close to $1 per share. And it was pretty tight in terms of debt service and all that, but they were still generating positive cash flow. But they had a lot of assets that weren't generating cash. And they paid significant amounts for it. For example, they had bought hundreds of funeral homes in Europe. And collectively they weren't making any money off of that and so on.

So I thought a business like that, trading at double cash flows, was ultra-cheap. Because I said, you know, what I'll do is wait two years. And then the amount that we will pay for the business will be there in cash. And what theyWhat we started to do after having made the investment was that they announced the sale of a large part of the European companies. Which, again, had no impact. But they generated a significant amount of cash from that sale. And then gradually they were able to start restructuring some of their loans, interest rates, covenants and all that.

And within a few years, those shares were about $8 each. So that's an example of looking at something. Another one I had looked at was a steel company called IPSCO. And IPSCO had these long contracts to supply steel. And if we look at the current cash flows and the cash flow for the next two years, I think they were trading at around $90 per share. They had about $30 per share in cash. And the next two years of cash flows equaled $60. And then if you held it for two years, you'd have the whole $90 in cash, but you'd have the entire business.

And it was really difficult to know after two years what would happen to margins and cash flows. There's a lot of uncertainty on that front, but I didn't really care about that. Because I said, we'll keep it for two years. And of course, we get to two years. In fact, they received the $90 in cash and still had the engine running. And I think that over time we managed to quadruple that investment. There are different models that you can look at. But I would say the most important thing is that before you invest, you need to be able to explain the pieces without a spreadsheet, in four or five sentences.

And I usually write those sentences before investing. So if you're chatting with someone, you could quickly explain: Look, these are the reasons why this investment makes sense. AUDIENCE: What do you think are the top five attributes of a successful investor? And the second, unrelated question is: does his investment style change when he has control over a company, rather than just being another stakeholder? And how does that change and how important is it from an investment point of view? MOHNISH PABRAI: Okay. Well, we'll see if we can get to five. Well, I would say good traits, or important traits, to be a good investor.

Number 1, the most important skill is patience. So I think the point is that markets have a way of tricking us. Because when you turn on CNBC and see all those flashing red and green lights and all that, it prompts the brain to think that you need to act now. And it is necessary to act immediately, when nothing could be further from the truth. Buffet always

talks

about having this punch card. In life, you take 20 hits. And every time you buy a stock, you hit it once. So in life, you would make 20 investment decisions. Which means that if you started investing at 20 and finished at 80, every three years, on average, you would make an investment.

And that's very difficult for most people to do. And so the more you can slow down your investment and the more patient you can be, the problem is that the time scales that companies go through changes and so on are very different from the time scales that markets operate on. of values. So you really have to focus not so much on the stock market, but much more on the nature of change in companies, and be willing to be there for a while. And like I told you, for compounding to work, you don't need to double your money every three months.

Even if you double your money every three years, or even every five years, that's enough. Because it's just a matter of how many doubles you can get and such. So, patience is the number one skill. I think the second important skill would be that if you've run a business before, that's a huge advantage. Because of all the interaction between investing and running a business. Because it is very important to be able to understand how a CEO thinks and the factors that mainly focus on thinking about when he runs the business. And that's hard to do with spreadsheets and such.

And I think another very important trait for successful investing is staying within your circle of competence. That's why I think Buffett always says that what matters is not the size of the circle, but knowing its limits. He is absolutely critical. And Charlie Munger talks about that. He gives a couple of examples. One is that if in a small town you bought the McDonald's franchise, you bought the Ford dealership...the Ford dealership. The gas station is not that good. And at the gas station we left for the Patels. Low cost operations. OK? And then you want the best kind of office building and you want the best residential building.

Good? So if you have these four assets... and you don't need to own them outright. You would own 20% of each of them. Good? So his perspective was that if in Peoria, Illinois, you owned these four assets and kept them for your entire life, you would probably end up being pretty rich. And if you think about it from the point of view of a modern portfolio, you would say, well, it's not diversified. Everything is in a geography, etcetera, etcetera. Yes, but it will most likely still work. And in fact, he has a friend here near Stanford, John Arrillaga, who...all he did was buy real estate about a mile from the Stanford campus.

And I think Arrillaga is a multimillionaire. And what then is Arrillaga's circle of competence? You know, it's that small. So the size of the circle is not relevant. Staying within the circle is very fundamental. That's why I think the circle of competence is a very important trait. Another important feature is the safety margin. So you buy things for less than they're worth. And then I think the final piece would be what Ben Graham says. You are not buying a piece of paper, you are buying a fraction of a business. So if I had to think about investing in Google, for example, the question I should ask myself is: If my family had a trillion dollars, would I be happy to invest $410 billion?

Is that the market cap right now? 410 billion dollars? Good. So if I donated a billion dollars, would I feel comfortable investing $410 billion in Google? And if the answer is no, then you should not invest 10 dollars in Google. Good? Many times when people ask, what do you think of Apple? And they don't know Apple's market capitalization. So my question is, then why are you talking to me about Apple? You don't even know why the company is for sale. So if you're going to invest, at a minimum, you should know what price the entire business is selling for.

And would you be willing to invest 50% or 60% of your total family assets, if you had that amount, in that business? And if the answer is no, then don't go there. And I would have been willing to do that at Stewart Enterprises. For the price I was looking at and all that. In fact, what I would have done is also bought a large amount of debt, just to have complete control over the situation. And then, you know, just sit in those cemeteries. They'll be fine. Your second question was? AUDIENCE: If you look? MOHNISH PABRAI: Yes. So control is overrated.

So people tend to think that when they have control, they can sprinkle fairy dust and everything will be great. And frankly, I don't think that's the case at all. I think there are companies like Amex, Coca Cola, Google, etc., that are such high-quality companies that it's not so much a question of control, but more a question of whether the correct price was entered. And those kinds of things matter a lot more. AUDIENCE: But if you talk about passion, about what you are doing here. I think Warren Buffet doesn't really care about money. He loves what he does, right?

Do you think that's what you're doing? Do you love what you are doing? And do you think that's really important? And do you think this can become an obsession? Reading "The Snowball" I get the impression that investments have become an obstacle in Warren Buffet's family life. Good? How does that fit? MOHNISH PABRAI: Right. I would say that my opinion is that Buffet is a very aligned individual, in the sense that he is absolutely dedicated to what he loves to do. He would be bored to death if you sent him fishing forever, or sent him golfing, or just asked him to do all those other things he has no interest in doing.

That's why I think he loves the game of investing. He loves it more than investing. In fact, he loves to buy up entire businesses. So he's absolutely aligned on that front. The thing is, I think you can optimize some variables. So if you look at a person like Gandhi, Gandhi's son became a prostitute. OK? And, in fact, Gandhi neglected his children. So there could be a whole debate about whether Gandhi had done the right thing or the wrong thing with it. To some extent, I think the point is that we are human. And it may well be that a person like Gandhi would not have been able to optimize on both fronts.

You have the same problem with Nelson Mandela. So if you look at Nelson Mandela's personal life, there are all kinds of problems with his spouse and so on. And in Buffett's personal life, you had... in fact, I always tell my wife that her wife gave Warren a mistress. And I tell my wife so she knows that's an option. And so far she has not decided on that option. But there is still time. So my opinion is that I think there are many positive traits in Warren Buffett that have nothing to do with investing. In fact, I admire the way he raised his children, etc.

But I think the best thing we do when we look at these types of iconic figures is not to focus so much on the details, because you are going to find things in the closet that will give you goosebumps. But I think you have to look at the bigger picture and say: what can we extract from that that can be useful? AUDIENCE: I note that you have not talked about the importance of the catalyst. I am referring to the catalyst for correcting the undervaluation of financial assets such as stocks. Warren Buffett or Munger don't talk much about it either.

But some other value investors, like Maybe, insist that the catalyst is very important for betting on the value of the stock. For example, I sometimes have the experience of buying stocks at a very high valuation, perhaps below liquidation value. And maybe only several times the cash flow. But without a catalyst, the stock could remain undervalued and perhaps decline. And I just want to know your understanding... your suggestions on situations like this. What do you think about the importance of the catalyst? MOHNISH PABRAI: Overall, you're right. I have ignored the importance of a catalyst. I think catalysts are not required.

In most cases, value is its own catalyst. And I would also say that when you buy companies, let's say below liquidation value, for example, in my book, there is no value trap. I think there are mistakes in investing, but not value traps. So in the end everything is valued quite a bit. And so, to the extent that you end up with an unsatisfactory return on investment, it probably has less to do with whether the catalyst is there or not, and more to do with the nuances of the intrinsic value of that business. So I've found, in many cases, that... in fact, the catalyst actually goes against the uncertainty.

Because if you have a catalyst, you have no uncertainty. And given the nature of the type of investor I am, I prefer to buy low risk and high uncertainty and let the catalyst work on its own. And it has, for the most part. I'd say '94... which is what? Five years before starting my fund, through 2013, before fees and all that, it's been a little over 26% annually. And that engine has not needed catalysts. But there is more than one way to skin the cat. And Seth Klarman's investing format, although it's value investing, because value investing is a very big tent, is very different from Buffet's investing method.

One simple difference is that Baupost has over 100 investment professionals and Berkshire has one. You could say one and a half, with Charlie. But that's all. That's why I think there are many different ways to skin the cat. Without a doubt, an established approach has worked for a long time. But my personal preference and approach is to not bother with catalysts.AUDIENCE: Hello. I have a two part question. The first is that last week we had a speaker: Michael Mauboussin. He talked about untangling skill and luck in business and investing. And I thought it was very interesting.

He gave the example of Bill Gates and how his mother knew someone at IBM, and that was part of the reason he was presented with that opportunity. Would you mind commenting on that? MOHNISH PABRAI: Yes. But I think there are many other people whose mothers know all kinds of people. Well, I would say yes, I would say with Bill... so if you also look at the book "Outliers", for example. You know, he talked about the 10,000 hours and all that. So Bill Gates...a big part of Bill Gates' success came when he was born. So if Bill Gates had been born 10 years earlier, or 10 years later, it wouldn't have mattered who his mother knew.

So I would say that weather and stuff definitely gave it tailwinds, very significant tailwinds. But I would also say that Bill Gates, and the Larrys and Sergeys of the world, would do well, even in the face of headwinds. They wouldn't do as well as they have. Because to do it as well as they do, everything has to be perfectly aligned. But I would still say that you could throw Bill Gates into the fishbowl with a bunch of other people and he would come out ahead. AUDIENCE: The second part of my question is that I recently watched a program about the Salton Sea, which was a very popular tourist area in Southern California in the '50s and '60s.

And there was a lot of investment in that area and what There seemed to be very little chance of loss. And then there was a flood in 1976 that decimated the area and it never recovered. I would like to receive your comments on that one. Because, for example, if you bought motels in that area, it would have been a total loss. MOHNISH PABRAI: That's right, you know. Like I said, I think the thing about investing is that there are no absolutes. So you're trying to make what I would say, a high probability bet. And certainly, if you're a Patel who just left Uganda, with Idi Amin breathing down your neck, and all you can do is buy a motel, then... and that's the nature of most motel owners. business.

It is at certain times in their career, they will have an extreme concentration risk. And it's quite normal. I mean, we have so many bankruptcies happening in America all the time. And many of them are not your fault. They were simply in the center of a tornado. And then they hit you. So this is the nature of the beast. So the good news for you as a passive investor is that you can spread it out a little bit. So I would say don't buy 40 shares. But you could buy four or three. And even if you bought three stocks after properly researching them, the greatest asset you have is yourself and your ability to work at Google, generate cash flows, etc.

So you have another ace up your sleeve, if you find yourself in that kind of situation. So I think, in your particular circumstances, you don't need to all go to one place. AUDIENCE: You talked about the value investing store. And you also talked about 20 hits. And if my understanding is correct, then the 20 strikes naturally make Warren Buffett's investing style look for compounding machines. Because you have a limited time in your life to identify composition machines. And in those times, he has been willing to pay what may not traditionally seem like value. For example, he paid about 28 times his earnings at Moody's.

And he paid 25 times for Coca-Cola. And obviously there is the other extreme, like Ben Graham. Where exactly do you fall? And have you felt the need or need to say throughout your previous career that I need to change my shop and move a little bit here, a little bit there? What have been some of the? MOHNISH PABRAI: Right. Yes, that's a great question. The best possible business you could invest in is a large business that is growing at a good pace, has high returns on capital and can absorb the capital it produces. That would be the gold standard.

And Google is probably the closest to that. I would say that even a company like Coca-Cola or Amex, the problem is that they are very good companies; yes, they can't consume the cash they bring in. So those types of businesses, which are capitalization machines, which are capable of absorbing capital, tend to be few and far between, and they generally tend to be ridiculously overpriced. Or at least according to perception, they are too expensive. So if you can't find that, then go to plan B. And Buffett has made, and even now continues to make, a lot of plan B type investments.

So, for example, he bought the debt of a specialized financial company called FINOVA, which It was basically mispriced, and they were just looking to liquidate all of that and get a return on it. But it's nothing like Coca-Cola or Amex. So I would say, first plan, composition machines. You can't get that, so you move on to plan B, which is undervalued assets, and so on. I've learned, probably the hard way, that it's best to invest as much as you can in big companies with great managers. Even if you pay a little. But you know, old habits die hard.

We also like to continue looking for extremely cheap deals. And so it's a mix. I would say it's a mix. And it just depends on... I'm flexible. I think that when investing it is very important to be a learning machine, have flexibility and be willing to take advantage of opportunities that arise. And decide if you need to do something or what is the best thing to do based on the opportunities available? And then continue from there. So sometimes it can just be one of those misjudged bets that comes to fruition in two or three years. And maybe that can go into a compositing machine, and so on.

Flexibility is a nice feature, but it's always nice to get into those composition machines. I think those are the holy grail. MALE SPEAKER: That being said, let's say a big thank you to Mohnish for the talk.