Go From $10k to $1M in 3 Years With This Strategy | Mohnish Pabrai

26:34That was 140. And then And one that's happened more recently was a company in Turkey where that was just so mispriced. We couldn't be shooting fish in a barrel. Where the market cap when we invested in 2019 was$15 million. And now it's a billion and a half. So it's gone up 100x. And that one, we owned about 40 % of that business.

27:04Mohnish Pabrai:How do you decide when to sell? to take money off the table? Well, so when we make an investment, I always feel that you learn the business after you own it. You may think you know it before you invest, but you really get to know it as you live with it, right? And there is no such thing as a risk-free investment. The biggest mistake I have made in life is selling too early. Really? Yeah. So I used to, for example, I used to own, my funds used to own 1 % of Ferrari at a cost base of$10 million. Okay. So in effect. What is it today about? It'd be about 50 times that. Okay. So, and the thing is that when I look at a business like Ferrari, it should never be sold.

28:00In capitalism, there are very, very few businesses that have long-term sustaining, enduring modes. And when you end up with a business that is exhibiting those characteristics, you don't want to touch them. My biggest mistakes and greatest learnings have been to become more patient. Like, for example, this company in Turkey, which has gone up 100x, it looks embryonic. It's still undervalued. It's still trading about half of what it's worth. And they could compound for 20, 30 years, 40 years. So that's a business we will just hold as long as we can. As long as I don't see secular declines in the business, we understand the business well.

28:50We hold it. And it's not our only holding. We have other holdings. So the nature of the way capitalism works is that very few of your investments will end up with giving you most of your wealth. And this is the way the Walton family got wealthy. This is the way the Berkshire Hathaway people got wealthy. This is the way the Koch founders got wealthy. It is by concentrated holdings in particular companies. And so the key to investing is that when you find yourself in the happy position of partial ownership of a great business, don't sell it when it's fully priced. Don't sell it when it's overpriced.

29:36Only possibly sell it when it's egregiously overpriced. Like you can't justify it in any possible way. then you can look at it.

29:47Mohnish Pabrai:What is your mental model that you like the best for deciding the next bet you're going to take? If you only get 10, you must have very clear models for determining when you want to add on a risk. Yeah. So what we are looking for is total no brainers. So let's say I own a home in Austin. Okay. And let's say I bought the home for$2 million. Okay. And I go to my realtor after one month of buying the home and say, Hey, what's my home worth? They said, Oh, Vonish, it's still worth 2 million. Okay. And let's say I go back after another month and the guy would say, yeah, still worth 2 million. And then maybe after a few months, you say, oh, you know, it's$2 ,050 ,000.

30:34Okay. So if you just kept writing down what that house is worth and what a buyer would pay for it, you're going to see very little change over time. If I look at all the stocks in the New York Stock Exchange and I throw a dart at any one of them, let's say IBM or Amazon or whatever, and I just look at the 52-week range on their prices, it will be 100 to 200 or 80 to 150 it's a wide range your house is not going to go from one and a half million to two and a half million or one to two million it doesn't do that so auction driven markets accentuate price movements much more than you would if you were not auction driven and because they accentuate price movements sometimes you get extreme mispricing in both directions.

31:31You get extreme overvaluation and you get some extreme undervaluation. So what I'm looking for is anomalies. I'm looking for weird things that make no sense. And because we have so many stocks and so many things going on, you will find weird things. And so when the weird things, I remember like, for example, there was a company called Level 3 Communications. Level 3 built this massive fiber optic network. You know, they were going to be transporting all the internet data everywhere. Massively overbuilt. Okay, the data never came. And the company is upside down. So the stock has collapsed. It was a darling.

32:20It collapsed. And people are concerned they'll go bankrupt. So they had a lot of debt, right? Now, they had these bonds that they had issued where the bonds were trading at 18 cents on the dollar. So someone paid a dollar for the bond, they're now at 18 cents. The bonds had a coupon of 6%, which means if you bought it at 18 cents, you were getting paid interest of 33 % a year, right? I looked at the level three balance sheet and I saw that they had enough cash to make the debt payments for at least four or five years. So I said, in three years, I get my money back. And I still have a claim of a dollar because it's a bond.

33:11It's not a stock. And they still have money after that. And I think that in three years, and it's a very high quality business with the people running it, they may sell assets, they may do different things. I said, I don't see how I can lose money there. I don't see if I buy a level three bond. So I put 10 % of the fund in level three bonds. I didn't know it at the time. Warren made the exact same bet at the exact same time for the exact same reasons. Okay. What happened is we went for three years. We clipped the coupons and after three years, the bonds are at 60 cents. I didn't even wait. I sold them.

33:57So basically, we tripled our money on what we paid for the asset. Plus, we got the interest in the meanwhile. And that wasn't even a stock investment. It was a fixed income investment. So basically, there's always weird things going on. And we just want to pay attention to them. And the other thing is that this is not a business of a lot of activity. If I find something like level three once a year, I might only have one or two ideas like that. But that's all I need. I need an idea like that once every two or three years. I don't even need it once a year.

34:42Mohnish Pabrai:So part of the game is you really have to just stop yourself from doing too much. My job is to just read and be with Cody at a podcast. That's my job. Well, it's funny. I remember when I was at Goldman, Warren invested in Goldman and everybody thought he was crazy. But obviously, and I was a little peon, tiny little, you know, nothing at that company. But I remember, you know, the senior people explaining how the deal got done and the price that he got it at and the terms and our balance sheet. And just there was so much noise about how, you know, we were something like a countrywide that was doing all of the insurance, you know, the backing of the mortgages.

35:22Mohnish Pabrai:when in fact, Goldman had none of that risk on its balance sheet. So he made one of the best bets ever. And I want to tell you something about what happened then. Warren paid$130 a share at that time for Goldman Sachs during the financial crisis. The stock went down further. I bought it at$65 a share, okay? Half of Warren's price. Now, like Ferrari, another stupid thing I did, which is a company like Goldman Sachs should never be sold. So I tripled my money. Where did I'm bullish? I sold. I should never have sold it. It's like a Ferrari. It's like these durable moats. And I made money on Goldman.

36:15I made money on Ferrari, but I should have never sold them. So eventually I will learn from these mistakes not to do that.

36:25Mohnish Pabrai:Well, I think you're doing pretty well to date. You know, I kind of want to talk about some cultural things happening. Yeah. Like, for instance, kids buying Pokemon cards and trading them at crazy valuations today. Do you think that that's a good idea or no? No, not a good idea. How do you explain to this younger generation why that's a bad idea? If they go, no, no, but I bought it for 50 bucks and today it's at 250, you don't understand. It's different today. What would you say to them? Well, let me distinguish, let me look at two different examples of what you can invest in. So you can buy a Rembrandt and it's a million dollars, okay?

37:12Or you could buy three apartments, which can be rented out, which are also a million dollars. And you make these two investments. knows. The Rembrandt, you say, could be worth 2 million in the future or 3 million in the future. The future value of Rembrandt depends on the perceived value by other people in the future in a very subjective way. The future value of the apartment building that you bought will depend on the rents it's generating. So if you bought it in a great place with a great demographic and the neighborhood becomes better, the rents could triple or double in some time and the apartment would be worth two or three million.

38:03So if you understand Rembrandt so well that you have a very high probability of saying this is going to be worth 10 million in 10 years, go buy the Rembrandt. That's like the Pokemon card. You should always be within your circle of competence. So if you're buying Rembrandt, you're buying Pokemon cards, or you're buying apartment buildings, all of these you should be knowing them good. And if you've got the confidence that it's going to be worth more, that's fine. It just may be that you're correct about Pokemon cards because I don't understand them, and I'm correct about apartments because I do understand them.

38:41Mohnish Pabrai:Why do so many people get caught up in these bubbles? Like maybe you could say we might be in the AI bubble today. You might be able to say we're in a collectible nostalgia bubble today. Like what is it about human nature that makes you a bad investor emotionally sometimes? Humans want to invest in things that have recently done well. We just have giant recency bias, basically. It's just the nature of people wanting to go to flavor of the day. And actually that going to the flavor of the day actually makes it possible for me to do what I'm doing. There is a lemming aspect to human behavior. There is a herd mentality.

39:24There is want to buy flavor of the day, want to buy what's popular. All of that is there. And it is those characteristics that allow someone like me to do what I do.

39:39Mohnish Pabrai:How do you go against the crowd to invest when everybody else might think you're crazy? Like, have you ever had somebody say like, this is crazy. Don't do this. Why are you investing? And you did it anyway? Yeah, I mean, I think you're going to have conviction on your ideas. I mean, the thing is that it's the same thing as starting a business. You want to start some business. Everyone's going to tell you it's not going to work, right? And they may or may not be right, but you feel passionate about it and you go for it. If I've done the work and I understand things and I've got conviction, then I'm going to act based on that.

40:17Yeah, absolutely.

40:18Mohnish Pabrai:Take it from Anish and I, the most expensive mistakes don't happen because you're dumb or I'm dumb. They happen because we're alone moving fast and taking guesses. Business owners do this constantly. Boredom is for business owners doing seven figures, at least in revenue, and who do not want to make the wrong decisions in isolation. Just like he is going to pay$650 ,000 to sit down with Warren Buffett to learn from him, I've realized that when I have a third party who gives me advice and I get to steal all their homework, I make way more money. How does it work? In boardroom, you actually get to sit down with my operating team and partners.

40:54Mohnish Pabrai:You bring the bottlenecks, the issues in your business like cash flow, hiring, sales, marketing, and we help you find the next lever to fix with our operating tools, advisors, weekly coaching, quarterly planning, and owners who follow our exact private equity playbook to scale revenue and profits. This is not for people who do not have a business. This is only for people who are already building their business. But if you are that, then you should apply to join Growth Boardroom here. You can go to contrarianthinking.co slash growth dash boardroom. You also kind of famously said you don't lie. Is that true?

41:30Well, we try not to lie. that if I did not lie at all, I would be at a Jesus level, okay? I'm not at a Jesus level yet, okay? Or a Buddha level or a Gandhi level. So the whole lies versus truth is a very powerful mental model. There's a book I read a long time back called Power Versus Force, written by a kind of new age guy in Arizona, Dr. David Hawkins. But he had a theory that he said that If I lie to you, and in your conscious state, you don't know I'm lying to you. In your subconscious state, you do. And he said that there's a pipe that goes between the subconscious and the conscious. But for most humans, that pipe is mostly clogged.

42:20Okay, so the signal cannot get through. But he says the pipe is not fully clogged. so what happens is that you uh in his terms he said you either go weak or strong in the presence of a person telling the truth versus telling lies so if someone lying to you you may not know directly that they're lying to you but you will feel i don't know they want to spend time with this person you know like the used car salesman you don't know what part of what he's telling you is a lie, but you know there's a lot of lies in there, right? So you don't want to be there. Like, that's why people want to shop at home.

43:02They don't want to go to the car dealership because it's not a pleasant experience. They'd rather just go online, buy the car and have it delivered and then be done with it, right? And so basically, we know, we know at least subconsciously when people are not being truthful with us. And we see that play out. Humans get strong and love being around the truth. And so we crave that. And so in leadership and in entrepreneurship or in a selling situation, the more truthful you can be, the better off you are long term you know it's interesting we had a leadership meeting yesterday and um and the

43:52Mohnish Pabrai:meeting was sort of last minute the reason that i held it candidly was because i heard little little bickeries you know little oh this person did this and this person did this but they weren't going to each other to having a conversation and so i heard it enough times that i just thought well we don't have time for this so i pulled everybody into actually this room where we're sitting. And I said, all right, this is your shot. It's free. But if you don't bring it up here, that means it's not a real issue. So you have to look the person in the face and don't say generalities. You have to say, Cody, you did this.

44:25Mohnish Pabrai:Blah, so-and-so, you did this. And what's fascinating to watch is how many people will not tell the truth because they'd rather be diplomatic. And I'm wondering, have you found ways to indoctrinate that culture, to get more people to have difficult conversations? Yeah. When you have conflict or whenever team members are not being candid, I think that having them speak in a kind of moderated way where one person speaks without interruption what their perspectives and feelings are and everything then the other person speaks and again shares eventually can lead to a better outcome it may not may or may not solve the problem but but i would just say this that i don't want to be part of a team which has dysfunction like that so if you have things going on where that people are talking to you in the back and all these things going on you have to fix it yeah it's interesting i've learned like ilan has this uh line that i love where he says running a company is just finding the series of compounding lies inside of your company and i related to that because i think it's um it's truthful and sort of non-egoic to say that right to say hey i'm one of the best entrepreneurs in the world and i still know that whether it's to your point not complete deceit but just sort of hiding the truth or not even realizing it or whatever, your job as an investor is to find the truth in a company or not.

45:57Mohnish Pabrai:And then when you're running a company, it's probably to find the truth even inside of your own company, which was a crazy realization for me to realize the first time I ran the company. Yeah. Also, I think when Elon interviews people, he interviews a lot of people, I think he interviewed the first 3 ,000 hires at SpaceX himself. He asked them, one of the questions he asked the engineers is, what's the most difficult problem you solved? right and he says that when they start answering the question if they really didn't solve that problem it's going to become obvious because he's smart enough as a as a problem solver to figure it out so he just goes deeper and deeper into that area with the person and he says eventually just reveals itself whether they actually solved that difficult problem or whether they heard about it and they think they can fudge their way through it.

46:51Mohnish Pabrai:Now, you only have 10 investments and you hold them for a long time. That is like having a relationship, I would imagine, with a lot of that senior executive team or the CEO team in some way. You could compare it to marriage, you could compare it to dating, you could say that they become partners of yours in some way. How important is it screening the CEO and the founders and the key team, not just the underlying assets in the balance sheet? And if it is important, how do you determine whether you want to bet on a person or not? Yeah, so the culture and the nature of the people is very fundamental.

47:33And that takes time. Some of it we can get by looking at long histories of the business. Business has been around for a while. You could say, what did they say 10 years ago? And then what happened? and so definitely we have to have a good understanding of the people and we have to be comfortable and confident that we can be long-term partners. And the other thing about investing is that it tolerates a high error rate, right? The moats of the companies, the competitive advantage of the company, the nature of the CEO, the nature of his team, many of these things we may or may not have gotten it exactly right.

48:17And sometimes they are much better than where you think they are. It's a little much worse, but we definitely try.

48:26Mohnish Pabrai:Is there a question that you ask or that you, I know you can't, if they're public CEOs, you can't always, you know, go direct to them to ask questions in the same way. But is there a question that you ask to screen an individual that you find really helpful? Well, one of the things that, which I got from Warren is, he says that when you go meet a company, you ask the company leadership that if I were not investing in your business, which of your competitors would you suggest I should invest in? And which of your competitors do you think I should short or I should never invest it. It's a great question even to ask if you run a company.

49:12Mohnish Pabrai:Like I'm thinking about what would my answer to that question be. And that also tells me who do I want to go hire from those competitors. Like, you know, which products do we want to launch? Which would kill? What have they already done that we're trying right now that may or may not work? Yeah. That's a very, that's a good mental model. Yeah. What does a day in the life of a billion dollar investor look like? If you're up at 6 a.m., you have 16 meetings, coffee breaks. No. I work from home, even though my office is half a mile away. Maybe two or three times a week, I speak to some of my team on Zoom.

49:45I go to the office maybe once a year or something, very rare. But I just decide on a... I don't have a lot of preconceived, I want to do this and that for the next three months. I leave it very free to have the flexibility to go into any area I want to go into. So it's very, very much seat in the pants based on what is going on.

50:20Mohnish Pabrai:Yeah. You know, it's so interesting. I ran our biggest asset management company. We've had, we only manage just a little bit over nine figures. But we, it's interesting, my husband is the one who runs our investment portfolio now. And I always joke, I want to come back in my next life as that instead of operating companies. We still are not good enough. You know, I think we're good operators of company. We've grown a lot every year, you know, sort of tripled or, or a little bit more each year. But it's the leverage there is so different than investing. And so I think a lot of times the cool part of you sharing stuff like this is most people don't realize, like you said, the power of compounding.

51:02Mohnish Pabrai:They don't realize the power of not taking an action every decision, which you've talked about. They don't realize the power of being patient. And when you have capital, allowing that capital to do the work for you as opposed to you having to do all of it. And so I think it's a give to share that with people because most people, I mean, how many employees do you have to manage your fund group roughly? They're just two people full-time and they're two part-time. I mean, it's wild. And then you imagine if our company does, let's say, shy of nine figures a year here, we'll have 130. And so the leverage is so different.

51:40And also the other thing is that if I went from 1.4 billion to 14 billion, it might be a couple more people. That's wild. You know, it's not going to be 10 times the number of people we have, you know, it's just going to because that's the beauty of the business. The reason I went into this business is because I could just see that the economics are great. It just works great. I'm a single player, single game player guy. So I'm not the kind of person who's happy being on a soccer team. I'm probably going to be happier playing tennis. Yeah.

52:18Mohnish Pabrai:Yeah, that makes sense. So maybe for somebody listening, explain, sort of wrap it up. If you are looking at business models and deciding, I think a lot of what matters is the game you choose to play, not just because of who you are, but also whether that is a good game or not. We talk about a silly thing like vending machines. I like vending machines to learn how to do business. It's cheap. There's not a lot of risk. You have an entire business and company with very little capex. It's sort of a great, but it's a terrible business at scale, actually. really tough business. How do you think about business models in general?

52:53Mohnish Pabrai:Do you have a mental model to determine if one business model is better than another? Yeah. I mean, I think that a lot of that comes naturally. I'll give you an example that I think you might find interesting is when Buffett was a teenager, he was in Washington, D.C. His father was a congressman and he hated being in DC. He was already back in Omaha, but he was in DC. And there was a guy in his high school, Don Danley. And one day Warren went to Don's house and he saw Don tinkering with a pinball machine. Okay. And he said, what are you doing? He said, oh, you know, I got this pinball machine that doesn't work for like five bucks because people are just giving it away.

53:43and I think for another five or seven dollars in parts I can get it working okay and uh so Warren says to him um are there a lot of pinball machines that you can get that are not working so there's people just have them sitting all over so what Warren did was he's like 16 or something 15 he tells Dan Lee to fix pinball machines non-stop like they get 20 30 of them right and puts them to work fixing those and then he and Dan Lee go to the barber shops in DC and they tell the barber that we work for Mr. Wilson because they're two kids right there's no Mr. Wilson Mr. Wilson is a fictitious character they say we are we work for Mr.

54:33Wilson and Mr. Wilson has authorized us to make you an offer, which is we'll put the pinball machine in your barter shop for free. And every week we'll come and pull out where coins are there and half come to you and half we take for Mr. Wilson. So the barter said, put the machine in the corner. Like, I mean, there's no downside, right? So those pinball machines, when Warren was leaving D.C. after high school, he had 45 barbershops with the pinball machines and he said the first week he went into first barbershop there was five dollars in there and he gave two and a half to the barber he thought he died and went to heaven because on a ten dollar investment in four weeks they were going to clear the money and then you know the return capital is infinite so what i'm trying to say is that You talked about the vending machines, right?

55:29The vending machine, the entrepreneur is not doing anything unusual. If Warren bought pinball machines at market price and put them in the barter shops, it'd be a terrible business, right? It became a great business because they flipped it a little bit. So understanding the economics of a great business is not difficult. In fact, what I would just say, I would say the following. My filter for understanding whether a business is great or not is, does it blow me away? Okay, does it hit me in my head with a two by four? like when I see Buffett's pinball machine business, you instantly know that's a great business, right?

56:20You know they're not spending anything on the pinball machine. It's fantastic, right? And the same business, when you buy it at list price and you put it there, you lose your shirt. You're going to be a terrible business. So what we want to do is we want to find the anomalies, right? And so that's exactly how I look at businesses is that is it the pinball business? Is it Buffett's pinball business? And if it is, like level three was like Buffett's pinball business, right? So we look for these weird things and we're looking for weird things that make no sense. And then we find them and we go back to doing what we're doing and look for the next weird thing.

57:02Mohnish Pabrai:So good. Not enough people try to take the complex, simplify it and just do it a few times. Yeah. So we can make the vending business really good. We just have to get the machines for free. That's true. Be the one that can fix them. Yeah. Because you're right. That is the, that's where the best businesses in vending when we had a bunch of them, because we had a bunch of laundromats. So you put vending machines in the laundromat. It's not just similar to Warren. Yeah. But the best part of that business ended up being the people who fix the vending machines because they break all the time. Absolutely.

57:36Yeah.

57:36Mohnish Pabrai:and so um and they do the same thing they then take the vending machines fix them up resell them so i think that's that's the thing is is uh the business opportunity the all over these were these were kids coming up with this who didn't even have any experience yeah you know and uh you know warren had so many you know he had he had this other kid where um he used to sell golf balls on the street corner in Omaha. But he had a couple of friends who would go dive in the water to get the golf balls out. And Warren never ordered to do it. He said, I never want to do any hard work. So he paid those kids to dive and then he sold the golf balls.

58:16But again, the golf ball is free. You know, it's free. And so you're going to make a lot of money when you do that. So basically, we want to look for these businesses where some part of the equation is different than the mainstream. and that just changes it completely.

58:32Mohnish Pabrai:Ambitious but lazy. I love it. This was such a useful conversation. Thank you so much for being here. Where do you like people to follow along? Well, you know, I'm on X and LinkedIn. Monish Pabrai. Okay. Yeah. So let's start there. Okay. Follow along for the ride. But thank you so much for being here. Always a pleasure, Cody. Thank you so much.