Mohnish Pabrai's conversation at Schroders - The Value Perspective podcast on October 10, 2023
Dec 26, 2023
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Mohnish Pabrai, value investor and founder of the Dakshana Foundation, discusses his introduction to Warren Buffett, the power of cloning as a mental model, examples of successful cloners like Microsoft and Walmart, the importance of portfolio concentration, and the risks of diversification. He also shares insights on improving probabilistic thinking, capital allocation, and macro-economic factors in investing.
Learning from successes and mistakes, being a lifelong student of great investors like Warren Buffett and Charlie Munger.
Cloning is a powerful mental model that is often overlooked by investors but has been successfully employed by companies like Microsoft and Starbucks.
Concentrated portfolios can offer potential for outsized returns and successful investors often hold a significant portion of their wealth in single stocks.
Deep dives
The Influence of Monish Pabrai's Dad's Entrepreneurial Experience on His Understanding of Risk
Monish Pabrai discusses how his father's experiences as an entrepreneur shaped his understanding of risk. Despite his father's repeated failures, he was exceptional at identifying market gaps and starting businesses. However, due to his impatience and desire for rapid growth, these businesses were often highly leveraged and vulnerable to even the slightest headwinds. Monish observed this pattern and initially opted for a more stable career path, but eventually followed in his father's footsteps after realizing the excitement and opportunities that came with entrepreneurship. He emphasizes the importance of learning from both successes and mistakes, and highlights the value of being a lifelong student of great investors like Warren Buffett and Charlie Munger.
Cloning as a Strategy and the Importance of Probabilistic Thinking
Monish Pabrai shares his perspective on cloning as a strategy in investing. He believes that cloning is a powerful mental model that is often overlooked by investors due to a perceived aversion or a belief that innovative ideas have already been done. Monish highlights the importance of probabilistic thinking in investing and recommends playing strategic games like bridge or blackjack to develop this skill. He acknowledges that concentrated portfolios can come with risks, but argues that well-known investors like the Walton family and Warren Buffett have successfully achieved wealth through concentrated holdings in exceptional businesses. Monish also discusses the influence of ergodicity on investment decisions and the need to assess the potential for ruin in certain investments.
The Rationale Behind Monish Pabrai's Cloning Approach and the Importance of Great Business Ownership
Monish Pabrai explains the rationale behind his cloning approach to investing. He emphasizes that cloning is often misunderstood and undervalued by investors, but argues that successful companies like Microsoft and Starbucks have created immense value by cloning and improving upon existing ideas. Monish also highlights the importance of great business ownership and the compounding of assets over time. He discusses how founders and successful investors often hold a significant portion of their wealth in single stocks, illustrating that the benefits of concentrated ownership can outweigh the risks. Monish acknowledges that while concentrated portfolios come with risks, they also offer the potential for outsized returns.
The Influence of Permanent Capital on Monish Pabrai's Investment Approach
Monish Pabrai discusses the idea of permanent capital in investing. He explains that while his current structure allows for investments from external sources, he is prepared to continue managing his own capital alone if necessary. Monish values the confidence and trust of the families and investors who have chosen to invest with him, but also acknowledges that the vehicles can eventually become permanent if investors choose to leave their capital invested. He expresses contentment with either outcome, emphasizing that his primary focus is on investing in exceptional businesses and achieving long-term success for himself and his investors.
Risk Management in Concentrated Portfolios and the Importance of Business Resilience
Monish Pabrai discusses risk management in concentrated portfolios. He explains that the level of diversification in a portfolio diminishes after a certain number of holdings, and that adding more positions can actually increase the risk due to lack of knowledge and attention. He shares the example of his investments in Turkey, where he recognized the risks associated with the country's economy and currency. However, by focusing on exceptional businesses with global value and resilient management, he believed that the investments could withstand potential currency fluctuations. Monish emphasizes the importance of weighing all factors, including geography and currency risks, alongside the quality and resilience of the businesses being invested in.
Mohnish Pabrai's conversation at Schroders - The Value Perspective podcast on October 10, 2023
(00:00:00) - Introduction (00:02:45) - My introduction to Warren Buffett (00:04:28) - Chuck Feeney: The Billionaire who wasn't (00:06:28) - The Dakshana Foundation (00:08:28) - Learnings from my childhood (00:14:21) - Cloning is a powerful mental model (00:15:50) - Microsoft: The most relentless cloner (00:17:33) - Sam Walton: Walmart (00:20:48) - Can cloning be competitive? (00:22:54) - Different styles of investing (00:25:16) - Ben Graham: GEICO (00:27:46) - Stone Trust Insurance: Francis Chou (00:35:20) - Berkshire's insurance investments (00:37:50) - Burlington Northern Railroad (00:42:12) - Improving probabilistic thinking (00:44:04) - Importance of portfolio concentration (00:45:43) - Ergodicity: The Walton family (00:48:31) - Investing in Turkey: Reysas (00:50:53) - Nick Sleep: Amazon (00:53:21) - Capital allocation (00:55:26) - Macro-economic factors in investing (01:00:49) - Book recommendation The contents of this website are for educational and entertainment purposes only, and do not purport to be, and are not intended to be, financial, legal, accounting, tax or investment advice. Investments or strategies that are discussed may not be suitable for you, do not take into account your particular investment objectives, financial situation or needs and are not intended to provide investment advice or recommendations appropriate for you. Before making any investment or trade, consider whether it is suitable for you and consider seeking advice from your own financial or investment adviser.
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