Mohnish Pabrai: This will save you 10 years of bad investments

26:44And one of the things about investing to also understand, the businesses that you spend the least amount of time studying tend to be the ones that make you the most money. Because they tend to be the simplest, they're obvious and all of that. But yes, you have to couple the circle of competence with the introduction of randomness. And so those two are not in conflict with each other. the introduction of randomness is how you grow. And that's how you may actually, the circle is going to expand over time, naturally going to expand, but you don't need to focus on expanding it. In your book, you have some great stories.

27:28The one I remember is the American Express. The salad oil crisis. The salad oil crisis. I didn't know about this. It's a little bit before my time. Tell this story. It's an amazing story. American Express at that time had, they've always had a number of different businesses that we don't think about. one of their businesses was asset-based lending business. And there was kind of a crooked guy. He basically got them to finance his inventory of salad oil, where he said, I've got these warehouses filled with salad oil. This is not a finance, a literal salad oil. Yeah, salad oil, right. In barrels.

28:02Yeah. And so they financed it and there wasn't any salad oil, it was seawater. Okay, so - Somebody figured this out. How did they know there was just seawater in the barrels? Well, later it came out because basically when they went to collect, you know, the guy's already taken the money. He's a crook. It's gone. And when they went and got the asset and looked at it, they found that they got nothing. Like they basically had been duped. Right. And it was a very significant loss for Amex where a big dent on the balance sheet. So obviously when they reported it, the stock collapsed. and Warren felt that the big value of Amex was in its brand.

28:43His question was, is confidence shaken in the credit cards? So for example, if I'm a restaurant owner and I accept the Amex card, in effect, Amex owes me money, right? So what he did is he went to a number of different restaurants in Omaha and just stood by the cash register and just wanted to see whether the restaurants had any concern about accepting the Amex card. And he saw zero, zero concern of any kind. So he felt that the moat of Amex was unaffected and the trust and confidence in the brand was unaffected. And the stock, on the other hand, had collapsed, right? So he actually put 40 % of his fund into Amex.

29:3140. 40. 40 % of the single stock. It may have been about$40 million,$30,$40 million of capital. So maybe like$10,$15 million or something went in. The crisis abated. You know, Amex started to kind of get their balance sheet kind of straightened out and all of that. And of course, the stock eventually, because these businesses were fantastic, and their credit card business at that time was growing gangbusters. You know, it was just on a rocket ship. Eventually, the stock, and you know, the interesting thing is he met Walt Disney once just before Disney died. And then he felt funny. He went to see Snow White.

30:09He said, I went to see Snow White with my briefcase because he said, everyone else is there with their kids. I went to actually study the business. Okay. Study what Snow White's all about. I think he owned like 5 % of Disney. And of course, for him at that time, there was no buy and hold. It was just, you know, look for the next cheap thing. So he had a significant ownership in Amex, significant ownership in Disney. He sold all of these at a good profit, but he could have just carried them on. If he had kept them for 20, 30 years, they would have done extremely well. I'm trying to piece together this puzzle of what are some of the traits or some of the behaviors that can lead to great investing.

30:50When I think of investor, I think of finance, strategy, numbers, Excel, spreadsheets. That's where my brain goes. That's the mental model, the picture I had in my brain. But when you're describing, it's like he goes to the movie theater to observe. He stands outside the restaurant. He asks the guy a question. And these are not spreadsheet. This is like journalism. It's first-hand research. It's maybe gut, I guess, for you. Do you do the same? Teach me about that. One of my 10 commandments of mental models is thou shall not use Excel, right? And another model is that if you cannot explain your investing thesis to a 10-year-old in about four sentences, so that 10-year-old can understand it, it's a pass, right?

31:36So basically at the end of the day, every investment has to be very simple. It starts off being this complex thing, but when you've, you know, understood it, it needs to get down to those four sentences. That, to me, is one of the most interesting parts of investing. So I think the way it works is that we have 50 ,000 stocks around the world. If you're just investing in public markets, the data set is too large. No one is ever going to know 50 ,000 companies. A large number of those businesses, something like 90 % or 95 % or 98 % of them, should go into the too hard pile. So Buffett has a box on his desk, which has too hard written on it, right?

32:21And I think one time when I visited his office, I told him, Warren, the too hard box is empty, right? And he always said, 98 % goes in the too hard box. And he immediately took a bunch of papers and put it there, like, over, he said, it's full. It's all full. In his case, he made the metaphor real, right? With the too hard pile. So most businesses that we would encounter or look at, usually there'd be two problems. One is it's either outside my circle of competence or it's too hard. And this is an exercise in honesty, inner scorecard and all of that, where you have to be honest with yourself and not be delusional that you know everything about everything.

33:05So exercise in humility. Peter Lynch used to say that when you're looking at businesses to invest in, he said, make a list of everything you use, right? What shoes do you wear? What clothes do you wear? You know, what brands, where do you go to eat? So make a list of everything that you consume and study those companies. Because many of those companies are publicly traded. because it's very difficult for a company to get even a dollar from you. All of us as humans are very discerning about how we want to spend our money. And we make our choices. And those choices are very specific. So if you are already a consumer of the product, you understand the product.

33:52That gives you a basis to try to understand the business because you are a consumer of the product and then you can kind of go from there. We are in a business which Buffett says, has no called strikes. So if you're a baseball player, three strikes, you're out. Which means if the ball is within the strike zone, you have to swing at it. Even if it's like not in the sweet spot, you have to swing at it. In investing, we can let 10 ,000 balls go. So it's only when we get the fattest pitch in the center of our sweet spot, do we need to act. And if those conditions are not satisfied, just let it go.

34:35What you mentioned is entrepreneurs are all about action. Investors are also all about action. The action is below the surface. So basically, a person like Warren is spending all his time studying businesses. Now, usually not much comes out of it, right? because we only see the whale when it surfaces. The whale is swimming all the time. And the activity that investors need to enjoy if they're going to be good at this field is just turning the pages, one after the other after the other. So there used to be a racetrack in Nebraska called Aksarban, which is Nebraska spelled backwards. When I used to first go for the Berkshire meeting in the 90s, early 2000s, the meeting used to be at the Exarbon racetrack, about 10 ,000 people.

35:32But Buffett used to go to that racetrack when he was 11 or 12 years old. And what he used to do was he used to gather all the tickets that were lying on the floor or the trash cans that people had thrown away. And he'd go home and study each ticket one by one. And some drunk may have thrown away a winning ticket. right they may not have looked at it carefully some things in horse racing are difficult you know win place show it could be a place or a show and could have still won and that sort of thing so he'd gather up the few tickets that he's fined after sifting through this whole mess that actually winning tickets because he was 12 he couldn't go to the window to claim them because you had to be over 18 he'd give it to his aunt aunt alice his aunt alice would go to the racetrack and collect on those tickets and then give him the cash.

36:23And when he was in his early 20s, he went through the Moody's manuals. And on eBay, I bought one of these Moody's manuals because they don't publish them anymore. But they're on very thin paper, very small text. And they have some financials about three or four companies on one page. He went through all of them in the early 50s, two or three times. turning one page at a time. And what he was looking for is he was looking for anomalies. And Ajit Jain made a comment this time at the Berkshire meeting. He says that, you know, when we hire these people in the insurance business, the instructions I give them is whenever someone comes to you for any deal, always say no.

37:14Say no to every single thing presented to you. And then he says, you'll see a deal that hits you in the head like a two by four and you can't believe the deal. That's when you bring it to me and then we look at it. Okay. And investing is the same way. So when he was going through these Moody's manuals, he's looking to get hit in the head with a two by four. And he found this company, for example, Western Insurance. The stock is at$15. They made$25 last year. and the$40 of cash on the balance sheet, okay? That's hitting you in the head with a two by four, right? So he pulls that out, invests in it, you know, looks at it, goes and understands more of the company and all of that.

37:59And then the next thousand companies, nothing. Then he again finds something. Recently, last four or five years, he made the bet in the Japanese trading companies, five Japanese trading companies. Those came out of something like the Moody's manual called the Japan Company Handbook. which is an English publication updated once a quarter, two public Japanese companies on every page. It's a thick book, right? He's been going through the Japan Company handbook for at least 20 years, okay? This is the first time after 20 years of going through it that he made these bets. But it was a huge home run because again, hit with a two by four.

38:40So these Japanese trading companies, in this case, what he did was all of them had a dividend of eight or 9%. He borrowed the entire$5 billion that he put into these companies in Japanese yen. So it's 100 % levered at half a percent a year. The companies are paying 8 % or 9 % a year. So he's getting 7.5 % cash just for holding these investments. Then in the next three, four years, they doubled their dividends. So now it's 16%. And the stocks doubled. So the$5 billion became$10 billion. and the 10 billion is paying 800 million a year. Okay. And it was almost fully risk-free. Right. Right. So basically that is the nature of investing is that the game we are playing is there is continuous activity of a different kind than the way an entrepreneur, but it is orgasmic activity.

39:38Okay. If you have that type of a temperament. Right. Right. If you really enjoy looking for needles in haystacks, then the payoffs are huge. At the Berkshire meeting, Buffett had this line I loved. He said, the stock market is like a church with a casino attached to it. And he said, seems like a lot of people, that casino is getting crowded. Seems like a lot of people are visiting that casino nowadays. And I'm curious what you think about that. And especially in the context of you've got prediction markets and Robinhood and options and two-day options and leverage. And there's so many ways to play the casino.

40:18And I think all of that, from my point of view, makes it better for me. The wealth transfer. Exactly. I mean, the thing is, the more hyperactive people get, the better it is for me. And I mean, it is unfortunate because the stock market serves a very important function of allowing gifted leaders and entrepreneurs to get the capital to pursue their dreams. I mean, that's really the reason why we have capital markets, right? Is basically to funnel capital to the best uses, best uses of the capital. And of course, the side effect of that is that you have all the casino activity that comes with the church.

41:02And the interesting thing is that after the, there was a big bubble in the UK, the South Sea bubble, where there was a big speculation orgy and prices went crazy. And then eventually a lot of people lost money. The British government's response to that was to ban public markets for 200 years. So interestingly, even when there were no public markets, a number of great businesses got created in the UK and capital still found its way to them. So it doesn't always need to be through an auction-driven market. But the main purpose of the New York Stock Exchange and the Hong Kong Stock Exchange and so on is to funnel and allow the capital to go into the Teslas of the world, go into the SpaceX of the world, and allow those businesses to improve the lot of humanity, right?

41:57And of course, the side effect of that is there's all the casino activity going on, and as we've seen with Robin Hood and so on. And so it's a negative for humanity. And the more that becomes prevalent, that's more negative it is. But when I look at it from an individual point of view, like from my own self-centered, self-interested point of view, the more the merrier. That's just going to be more helpful to someone like me. I don't know if this is fully accurate, but New York Times said this. On Polymarket, 0.1 % of the users have 60 % of the profits right now. And so they said some number, like 2 ,000 traders had made like half a billion dollars this year.

42:37It's just 2 ,000. So it was an immense wealth transfer from the casual gambler to what's likely an insider just sitting there who has more knowledge or a bit of a sharp who's being more selective. Well, the simple thing is, so if you look at something like horse racing, the track takes 21 % of every dollar because, you know, physically paying for horses to run is expensive. Whereas, let's say, if I go play blackjack at a great game in Vegas, the house has a 0.2 % or 0.3%, 0.4 % edge. So every time a gambler bets, 49.5 % or more is coming back to them, right? It's a 49.5 % odds that they will win that bet.

43:28It's a pretty decent. Whereas in horse racing, you've already lost. The 20 % is gone already. But the thing is that there are people who make a livelihood only betting on horses. And the way they make the money is the same as what's happening in poly markets, which is they watch all the horses and all the races, and they pick the one where the odds make no sense. Right? So they know the horses, they know the races, because the odds are set based on how much is being bet. Right. Just like the stock market all the way. You're betting against the other bettors. Yeah, you're betting against the other bettors, right.

44:09And that's what's happening in poly markets as well. Right. I was looking through all the stories you've done, and one of the craziest ones is that you paid$650 ,000 to have lunch with Warren Buffett. Was it worth it? So what happened is in 2007, my net worth hit, I think,$84 million. And most of it was because of the intellectual property of Warren Buffett, which I had paid nothing for. And I felt like I wanted to thank him and just look him in the eye and just say how grateful I was. Now, when Buffett does these lunches, his agenda is that whatever someone paid, they should feel like they got a bargain.

44:54And so from his point of view, he just wants to make sure that there's tremendous value delivered, right? So before we met for the lunch, there was about a kind of one-year gap between the time I won and we actually sat down for lunch. So his assistant had asked for bios of everyone who was attending and he'd studied all of those. So when he got there, he basically told us, my entire afternoon is free. So whenever you guys get sick and tired of me, just let me know and I'll leave. What was the one thing you took away now, 20 years later? Yeah, I made some notes after the lunch and I think we had a total between everyone about over 50 questions that we asked him.

45:39And of course, you know, Warren has this great skill of taking lemon questions and converting them to lemonade. So sometimes I asked him questions which were just innocuous questions, just an update. Like I asked him, for example, what happened to Rick Goran? Explain who Rick is. So Warren and Charlie Bunger were partners for decades, several decades. Originally, there were three of them. There was Warren, Charlie, and Rick Goran. And in the 60s, they did a bunch of stuff together, early 70s. and then Rick Goran disappeared off the radar. I mean, we never heard from him. So I just want to know what happened to Rick, you know.

46:18So I asked Warren and he converted that question. So he said, Charlie and I always knew we were going to be rich, but we were not in a hurry. And Rick was in a hurry. So then he talked about how Rick was always levered. He always had margin loans. and when the downturn of 73 and 74 came, 73, 74 were the very severe stock market correction. It was a crash in slow motion. Basically, the markets went down more than 50 % over that two-year period. Rick got a number of margin calls and Warren said that he bought Rick's Berkshire shares from him for 40 bucks a share. I mean, those shares are over 700 ,000 now, right?

47:06And he then said, if you are even a slightly above average investor and spend less than you earn and do not use leverage, you can't help but get rich over a lifetime. So he wanted to communicate the message about the ills and follies of leverage. But I felt there were so many lessons. there was another important thing he talked about. He said that there are two ways you can live your life. You can live your life with an outer scorecard, which is what people think of you and react to that. Or you can live your life with an inner scorecard, which is you measure yourself with internal metrics, not with external metrics.

47:56And he said that, would you prefer to be the greatest lover in the world, but known as the worst or the worst lover in the world but known as the greatest. So he said, if you know how to answer that question, you've got it made. So I think this inner and outer scorecard is really, to me, it's a really fundamental mental model. You have to be true to yourself. Right. Because we can be swayed, easily swayed by external inputs, external stimuli. So to keep it centered is awesome. I've thought about that one a lot. I think I read in his biography, I think he called that the most important lesson his father taught him was to live life with the inner scorecard.

48:40How does one do that? How do you go from going from the outer scorecard to inner? You've got critics who are very harsh, right? Who want to pull you down and taking you below where you know reality is. So one of the things I frequently run into is I've met people who criticize Gandhi a lot, criticize Buffett a lot, criticize some folks that I think have lived remarkable lives, right? And they nitpick at, oh, what about this? What about that? And so the way I look at it is I say, okay, if they can criticize Gandhi, then I'm fair game, okay? So, you know, just understand that the Gandhis of the world being criticized.

49:28And so - Don't be shocked when you are too. Anytime you have any kind of a public presence or anything else, you are going to get all of the above. Berkshire has something like almost, what, 400 billion in cash? Yeah, 380, yeah. What are they doing? What are they waiting for? Well, I mean, I think that this has been the history of Berkshire where the cash will build up and then they'll find opportunities and they'll put it to work. They're not suffering right now because treasuries are playing pretty well. So they're making decent money. But the second is that we get dislocations and we don't know when these dislocations come.

50:04We had dislocations during COVID. We had dislocations in the financial crisis. If I were to make a guess, I would say that five years from now, the cash may be half or less of what it is today. Berkshire used to be run by a great capital allocator. now it is run by a great operator and a pretty good capital allocator berkshire is going to get phone calls and warren used to say that when they call you on a saturday that's when you know you're going to make a great deal he said the saturday calls are the best because it's the most desperate because usually they need the deal done before tokyo opens on sunday night u.s time So when there is a crisis, and Berkshire is a little better known now than it used to be, Greg will get the call.

50:59And, you know, the investing game is interesting because you need extreme patience with extreme decisiveness. Charlie used to say, it's like standing by a stream with a spear looking for salmon going by. And he says, you know, you might be there for a while, but then suddenly a juicy salmon comes in. And when a juicy salmon is passing by, you have to act fast. You can't start contemplating your navel at that point. Right? So you have to be very patient where you have the spear. And you don't know whether it happens in the next five minutes or the next five hours or the next 12 hours. But you're ready.

51:40Right. In your whole investing career, what one investment has been the best for you? So, I had two more than 100-bagger investments, which went up more than 100x before I started the funds. So, I started investing on my own in 94 or 95. And then by the time I got to 2000, I had two businesses. One went up 140x and the other went up about 100x. and in one case, I had invested about 10 million, no, 10 ,000. I had a million dollars in about, in 94. So I invested just 10 ,000 in one business. It became 1.4 million. But there was another business I invested in which became more than 10 million. And so these two were the outliers.

52:36So the original million became like 14 million or something, but it was driven by these two investments. More recently, the company in Turkey that we bought at 3 % liquidation value, it's just about hitting 100x now. Which one is that? That's Resas. That's the warehouse? Yeah, the warehouse operator. Okay. I mean, so what happened there is that we were buying a company, I think when we first started buying it, it was a$15,$16 million market cap. Liquidation value was about$800 million. and what was the big misunderstanding like you know you've told me these words before i look for what's hated and unloved or where people have confused risk with uncertainty or was it something else in the turkish market why was it trading when you say three percent of liquidation value that means the price of the business there's 30x that in just the assets that it owns if it had to liquidate everything.

53:35So, you know, 33 % or whatever. Turkey was, and even still is, in such a weird state that it's hard to believe. So, for example, at that time, the company was trading at, what should have happened with a company like that was that the owners should have taken it private. And the owners of the business did not have a good understanding of buybacks and taking it private. They are very good operators and they went to the public markets to raise capital so they could grow. Right. They got the capital, they were growing, they never cared about the stock price. They've actually never, even now, even today, they don't really calculate their kind of wealth by the stock price.

54:23They calculate it based on what they think the business is worth. They don't really care about the stock price, which is actually a good way to - In a scorecard. Yeah, great way to run. But actually, you really want the business to trade near the stock price, near the value, so that anyone entering or exiting is getting a fair deal. That's what Buffett tries to do. He wants to make sure that Berkshire's value is always around what it's worth. But there were other businesses, like I remember the first company I visited in Turkey was trading at a PE of 0.1. Never heard of that. Not one, 0.1, which means that the market cap was equal to one month's earnings.

55:00Okay. And I remember my friend had sent me a list of the businesses we were going to visit. And I did no work on these companies. I said, I'm going to do work on them after I visit them because I don't want to waste time if I don't like them or whatever else. So as we were driving to the company, I start asking him questions. So I'm just somewhat intelligent in the meeting. So I said, okay, so what's going on here? He said, well, Monish, it's a P of 0.1. I said, 0.1? And it's one of the largest banks in Turkey. I said, what's going on? He said, ah, they violated some UN sanctions. They were doing some wire transfers with Iran that we're not supposed to do.

55:37And what happened with that company was that the CFO of the business, who didn't have anything to do with this craziness, went to the US to vacation with his family at Disney World. And when he landed in New York, the Southern District of New York folks picked him up at the airport and put him in Rikers prison in violation of the sanctions. And they told him the rest of the family can continue on to. Enjoy Disneyland. So when that news hit the street, I mean, that's like, you know, you want to be cut off on the SWIFT system. the U.S. can put sanctions on you. I mean, you could just, you know, kneecap the bank.

56:24And Erdogan at that time was calling Trump in his first term saying, can you please release the guy? And he didn't do anything. And Trump said, it's New York State. And so all of this was playing out while I'm going to see the company. And actually the business was a well-run bank. And I told my friend, it's too much hair even for me. I'm not going there. Okay, so Turkey then and even now has some crazily priced assets, which is why I decided, take a simple idea, take it seriously. I said, okay, this is the situation where half the winners of the Aksarban racetrack have thrown away winning tickets, right?

57:07Instead of one in a thousand or one in 500, it's 50 out of 100 have thrown away winning tickets. So basically, it's going back to the mental model. You take a simple idea, you take it seriously. You know, I remember when this company was 15 million, Turkish stocks are allowed to go up 10 % a day. They were limited in a day a company. So I was concerned how much stock I can buy. So I told the broker, buy every share available. Don't worry about the volumes. Take out all the asks. You know, the stocks at 15, someone's willing to sell at 16 or 17, whatever. I said, all the asks up to 10%, just take them all out.

57:46If anything more shows up, take it out. I said, just take everything you can get, right? So the guy calls me, the broker calls me and says, I have 5 % of the company being offered by Templeton Fund, the US fund in Turkey. Templeton Fund is offering 5 % of the company for a million dollars, okay? So 20 million market cap, basically 1 million. I said, why are you calling me? Take it, right? And so now this is not a Turkish investor. These are not people who are day traders. Somebody in New York made a decision, I'm out of Turkey. And the reason they were going out of Turkey is the currency was very unstable and inflation was rampant.

58:28And they were right about that. So two things that were bothering investors a lot, which can be very detrimental to making an investment, is an unstable currency and high inflation. and other mental models came in to help me. So one of the things that I think I discussed with Charlie is let's say there's a thermonuclear event, global thermonuclear event. 99 % of humans are dead. So we've gone to 70 million humans left out of seven or eight billion and everything's destroyed. The 70 million humans that are left, someone is going to start producing Coke concentrate. And someone is going to resurrect a Coke bottling plant because there's 70 million humans.

59:21And there's no currencies anymore. But humans will be willing to trade 15 minutes labor for a Coke. So a company like Coke is not dependent on inflation. It's not dependent on exchange rates. It's not dependent on anything. There is a benefit it gives. So it doesn't matter whether you're trading Coke cans in seashells or dollars or lira or whatever. There is an exchange that would take place. So I said to myself when I was looking at this warehouse company, I said, what is a warehouse? It's land, paint, cement, and steel. Okay? All four are inflation indexed. If the currency goes crazy, all of these prices are going to go up.

1:00:15So I don't care about the currency. And then the exchange rate also didn't matter because these are prime assets in a prime city. People need those assets just like they need to have a Coke. So I only looked at investments in Turkey, which were naturally immune to the whole inflation or whatever else was going on. And what happened in Turkey is when we were buying this company, it was five lira to the dollar. Okay, that was the exchange rate. Seven years later, it's 45 lira to the dollar. Okay, the lira has collapsed by 90%. In dollars, I'm up 90x. Okay, in dollars. In lira, I'm up infinity. Right.

1:01:02Who cares? Okay, I don't care about that. I'm just looking at it in dollars. And the reason we went up in dollars 90x is exactly, so there was another mental model where I said... All right, big news. We just hit 300 ,000 subscribers on Spotify. Thank you to everybody who subscribed. If you're not, go there and watch on Spotify. It's the best place to watch our podcast. There are many businesses in Turkey that will get hurt by inflation. We're not interested in those. So there was another company there called TAV Airports. All their revenue is in euros. Everything is in euros. Right. Okay. They're listed in the Istanbul Stock Exchange with all the gamblers.

1:01:43Okay. Now, airport operators, these are phenomenal businesses. And normally you look at an airport operator, like you look at one in India, the trailing P it'll sell at is 70 times, 50 times. This is like a natural monopoly, right? Natural monopoly, very desirable. Everyone wants in. And so it's just overinflated and all of that. In Turkey, it's sitting at like four times, three times. You know, it's sitting at nothing, like basically. So, and in this case, in the case of TAV airport, the currency is not relevant. They're not even, in fact, what is happening is their revenue was in lira, in euros, and their costs are in lira.

1:02:24So in fact, what's happening is the employees are getting poorer every year. And so basically, it was just using a few models. Take a simple idea, take it seriously. Active versus passive. Understanding that thermonuclear event, people want coke. And let's look at assets where the currency is not relevant. Right? And when I was able to look at those four things, there was no one else on the planet applying those four models at that same time in that market. Right. That's it. How difficult was that? So I want to ask you the hardest question, I think. I think the hardest question, let me tell you how I arrive here.

1:03:08I love the idea of studying businesses because I love business and I love studying, put them together. I'm happy. I enjoy it. I think it's a great intellectual sport and I do it. I pick some stocks and I have some index and I combine the two. At the same time, it seems like most people lose money doing this. Even smart people lose money doing this. And for example, I had Kathy Wood on the podcast. I said, Kathy, you know, she's super popular. I think she's really smart. I even agree with her about many of her theories and theses about where the world is going. At the same time, I told her, I was like, look, if I look at the last one year, two years, five years, you haven't beat the S &P.

1:03:45but you're taking huge fees on your money. The way her model works is that. And I said, look, I think you're an honest person. Like I asked her the question, I said, would you invest in someone with your track record? And she said, you know, she had a great answer. Like, actually, I really appreciate you giving me the chance to answer that. And so she gave me a good answer. But I'm curious, you know, same thing. How hard is it to beat the market really? And how do you feel? Because in some years you do and some you don't. I don't know exactly because you have funds and you have the ETFs. It's hard to even piece together fully.

1:04:14Yeah. But I guess, give me two answers. One is, what is your track record? You managed something like a billion dollars. So what is your track record compared to just blindly put in the index? And secondly, how do you feel about that, you know, as a sort of smart, honest person who's studying this game and trying their best to do the best they can? Yeah, so the track record, it depends on the fund because we've got different funds and so on. But if you look at our oldest fund, which is now, what, it's 20, more than 27 years old. Every dollar is turned into about$30. So a dollar has become about$30 in the oldest fund.

1:04:54And I think the S &P is every dollar is less than seven, approximately, six or$7. That fund has done well. Well, if I take the newest one, which is our ETF, for example, which has got about two and a half years of history. If I look at the entire two and a half years, we are behind the S &P because I think the S &P has done like 19 % since on average per year. In the last two and a half years, then we've done like 15, 16%. But this year we are ahead. So if you look at three months, we are ahead, six months, one year, and even 18 months, we are ahead. And I think in the last one year, for example, we are beating the S &P by more than 20 points.

1:05:42Pretty significant. So in the ETF case, I think it took us some time to get properly invested because I only can find a couple of things in a year. I would say that I would expect that in the fullness of time, if we look at after five or 10 years, we should be ahead of the S &P. Also, the S &P has, it's a handicap situation for the S &P because it's overvalued. You know, it's sitting kind of elevated in valuations and such. And so at some point, the stock market becomes a weighing machine. And so I think that in general, the index, broad index of the S &P may not do that well for the next decade.

1:06:25Just because there's been so much growth into the future in the last decade. So I think we'll be fine. Yeah. I guess, do you feel like, the question I think I'm trying to ask is more like, how hard is it to beat the index? Well, so yeah, so if you look at the entire US stock market over the last 90 years, 4 % of companies have basically delivered the market return. So the return we're getting in the market has come from 4 % of businesses. The other 96 % have just treaded water. And if you look at Warren Buffett, for example, and he said this himself, that 12 investments he made over 60 years is what has created Berkshire Hathaway.

1:07:12He has made more than 300 or 400 investments. So again, his success rate is 3 % to 4%. And this is the reason why indices do well. Because the index is too dumb to know that it owns Nvidia. And it's too dumb to sell it. Okay? it's too dumb to know that it owns TSMC and it's too dumb to sell it. Whereas an individual investor or a portfolio manager will look at it and say, oh, it's overvalued or this and that or whatever else, or the mistress looks harder or whatever else and make that change. So this is the reason why index investing does well because it includes that 4%. So you don't need to think about it.

1:07:53You have captured the 4 % and you will get a market return, which is very good. when I look at what I'm doing, I don't think I would have the wealth I have had and I don't think my investors would have had what they have done if we had indexed. We've done better than the index. The way I look at it is that every year that goes by, I'm getting to be a better investor. So I think that if I were playing a game like basketball, I would start declining, right? And when I get to my 30s and 40s, I'm gone, basically. But investing is a game where you can keep getting better. And you keep seeing more patterns, you expand your circle, you get better at looking at different things.

1:08:38So experience is a huge plus. And all of this accumulates and also you get to ride the winners, if you will. So the important thing in investing is not the mistakes you make. it's not selling the winners. The 4 % bets of Berkshire that worked, the other 96%, whatever Buffett did with them did not matter. It didn't matter whether he sold them, bought them, liquidated them, whatever else. That didn't really move the needle. What mattered was not selling Coke, not selling Apple, having Greg Abel run Mid-American Energy, having Ajit Jinn run the insurance and not firing Ajit and not getting rid of him.

1:09:22Those were the important things. This is your circle the wagons concept. Circle the wagons. So the thing is that we have to understand that capitalism is brutal. And almost every business will eventually go to zero because of the competitive destruction forces. But there's a sliver of businesses that what happens is that a brand gets built or tastes happen. Like a business like McDonald's, it starts off with no moat. Right. But now it has a brand. You know, there'll be a sign of the highway saying, McDonald's eight miles ahead. Right. You see that sign and say, that's where I'm going. Right. Right.

1:10:05Even if Sean's burger shack is one mile away. Exactly. That's okay, pass. That's the moat, right? And so it's actually accidental for the most part, how and when moats get built. But once a moat gets built, some of these moats become enduring for a very long time. Like if you look at something like FICO, for example, the FICO scores. I mean, that business just prints cash, right? But it started off with no moat. Then as more and more people start using that score, and now there's some movement where people are talking about other things, but people don't want to move away from FICO. It's too entrenched, right?

1:10:42And so we as investors have the advantage of buying into existing moats, right? And so if I look at, for example, the largest bet we have, which is the Turkish warehouse operator, they have prime warehouses, extremely well-built in prime parts of Istanbul, okay? And that's a very important city. It's a big city. It needs it. It's fundamental. I don't think that's going away. In fact, the demand for warehouses increases in an e-commerce world, right? Because you need, in fact, what they were building, a quarter million square foot warehouses are now becoming million square foot warehouses because all the nuances happening with e-commerce.

1:11:30So we want to look at businesses where the moats have staying power for a long time. An airport operator, a Coke bottler, you know, it's going to go on, right? So we want to look at these enduring morts. Eventually, we want to own parts of those enduring morts. I want to ask you about some new things. So, you know, it's very interesting to look at the kind of investments of maybe early days Buffett and just things that are around for 100 years. But then there's new things that might be around for 100 years from now or might not. I'm curious your opinion on these. So I'm going to throw four kind of topics at you that you can rapid fire.

1:12:07Give me just your kind of where you're at mentally on these different things. So first is AI. I don't think you could be an investor in the world and not have AI thoughts, whether you think it's going to disrupt certain businesses or create new industries or really be huge tailwinds or headwinds. Invest in the pickaxe makers. So I think that the alphabets and metas of the world are playing a game they haven't played before, which is having businesses very high capex. May work, may won't work. I don't know. But what I do know is they have to pass through some toll bridges. they all have to pass through TSMC.

1:12:44They have to pass through ASML. They probably have to pass through Micron. So I have no bets in any of these areas because it either goes in the too hard pile or it goes in outside circle of competence or it's too expensive. So if I'm not making a bet, it doesn't matter whether I'm right or wrong, right? So what I'm saying is that there's no way I'm going to sell the Turkish warehouses to buy TSMC because that trade makes no sense to me. The mistress looks much uglier than the wife. Yeah. And there's no bonus points for difficulty. Because of the valuation. Yeah. Yeah. You, when I came to your house once, you were telling me about your investments in coal and you've talked about how you look for things that are hated and unloved.

1:13:35Yeah. It's a clue for you to go spend some time because you think that there might be opportunity there. I feel like right now in my world, the hated and unloved bucket is SaaS companies, vertical SaaS companies. And I saw you invested in Constellation. So I'm curious, and I've been thinking about this too. A lot of great businesses are on sale right now. So that was an area where things fell within circle of competence and it made sense. So the idea that Betsy in HR is going to fire up some AI software, whatever, and develop her own software and get rid of Workday or whatever else they're using in HR is just a pipe dream.

1:14:21So I think what is not understood well by the market is that software is not coding. okay coding is automated and will get even faster and whatever but it may be at most one-fifth of the pie and so just because you can get something coded quickly doesn't mean that adobe is going out of business or you don't need photoshop and you don't need all the products that they have And so I actually feel the market has got it wrong. So in my view, the advantage will go to the incumbents. So an Adobe will be able to reduce its costs because, I mean, Microsoft's laying off people. They're all laying off people, right?

1:15:11Because they don't need so many because they can automate it. So all of these incumbents are going to reduce their costs. Now they may also end up reducing price. But I don't really see, they may not even need to reduce price, okay, depending on how much the moat is. I don't see their cash flows going down. And so if you drop the price in half and the cash flow is not going down, where do I sign? And I specifically only invested in the Mark Leonard universe of businesses because he has a unique mouse. So the reason why I invested in Mark Leonard is no one else has ever cloned Constellation. And no one else ever will be able to clone Constellation.

1:16:06Explain who he is, because he's this mysterious guy. There's like two photos of this guy on the internet. Mark is a highly, highly unusual leader. Okay, there's no other person like Mark. Let's put it that way. What he's built at Constellation is very unique. So there are probably 70 to 100 ,000 vertical model software companies, private companies in the US. They have a team, a biz dev team, that touches all these companies twice a year with a phone call and twice a year with an email. Okay. And in fact, the funny thing is I was in Omaha at the Berkshire meeting and a guy comes up to me and says, Monish, I'm a huge fan of yours.

1:16:54I'm in the Constellation M &A team. I said, don't go anywhere. Need to talk to you, right? So tell me what's going on. And, you know, I try to get a conversation going because, you know, Constellation is such a black box. But anyway, they have this large M &A team. They buy a company like every three days or something, right? Yeah, they bought like 200 companies last year, for example, right? And they bought more than 1 ,000 companies. And they don't use bankers, right? And so they're doing direct deals. And now I think paying, they might be paying five times cash flow or something, or maybe six times cash flow.

1:17:29But then almost immediately within a year or two, the effective price becomes like three or four times cash flow because they bump up the revenue a little bit. They bump up the license fees about 20%, whatever. And then they've got all these best practices that they built up. Now, they don't tell the companies do this and that, but they say, look, you're in this business. Here's, you know, 80 other companies we have like this, and this is what we've learned. So this is what we suggest. And you do your thing and whatever you want. So they actually extract more efficiency out of their engine. So on an organic basis, if they were not buying anything, they'd be growing about 3 % a year.

1:18:04So these companies they're buying are not dying. On average, they are still growing. So if you think about buying a business that's growing 3 % a year and, you know, interest rates are where they are, you would be fine paying 15 times cash flow. That would probably be about where the deal should be done. What's the math there? I don't understand. The math there is that a business is doing 10 million in sales, and let's say they're putting 1 million to the bottom line, okay? And that 1 million is going up 3 % a year. Now, let's say you were buying that company for 10 million, okay? Your alternative is put it in treasuries.

1:18:43You put it in treasuries, you're going to get 400 ,000 a year, okay? You put it here, you're getting a million a year, right? And the million is growing, but it has more risk than treasuries, So you won't pay exactly what a treasury is playing. So that's the math is, you know, the risk-free rate effectively makes it that if you knew a business was growing at 3 % a year, you would be willing to pay in a low interest rate environment 10, 15 times cashflow, whatever. And so they're effectively buying it for three or four times because they get these efficiencies. So now you're taking the cashflow the business is generating and you're reinvesting it at a 25 % rate.

1:19:24Right? I mean, that's, and then you're continuously doing that. So nobody else has the patience to put in the engine to touch the 70 ,000 twice a year. And also the more difficult part is integrating them. Right? So the culture to say, let's do this and that, in many ways, constellation is superior to Berkshire Hathaway. Berkshire Hathaway buys businesses of all kinds. These guys buy only one kind of business, right? And they're buying one kind of business and they're buying it in a delegated manner now because the people doing the deals are not even at headquarters. They don't even need an approval for it.

1:20:05They've been told any business up to 20 million, you can just do your deal. And as those teams have kept doing that and have the track record, they bump up how much they will need. So it's actually a delegated model now at this point. And so for my point of view, you've basically got a mousetrap that's growing cash flows at 20, 25 % a year. What should you pay for a mousetrap that's growing cash flows 25 % a year? You would be paying 40 times. If you knew that was going to continue forever, you'd easily pay 40, 50 times. It went down to teens multiple. And it came down to a point where even someone like Monish, a cheapskate like Monish got interested.

1:20:44And the thing is, so I think that the DNA he has is very, very special. And this universe of companies that he's going after is too small for private equity. Right. Private equity hates doing these itty-bitty deals. Right. Right. And the second is they don't want to buy and hold them. So he's buy and hold. These guys want to flip. So the frictional costs of buying a tiny company and then trying to find another buyer and all that, there's too much nonsense involved. So quite frankly, the only competition they would have would be if someone decided, I want to do everything exactly the same. And the market could tolerate three constellations.

1:21:25It's large enough for three or four constellations. I see. But there are none. There's only one. Right. So that's why we are in. And now the thing is that we don't need, you have to understand the 4 % rule of Buffett, right? Only 4 % of his bets work. So if you look at my bets, like, you know, airports, coal, warehouses, If all of them work, now, if you ask me about each one, I'll give you a case why it works. All of them are not going to work because there's no way. If all of them work, we're doing 100 % a year. Okay, that's not going to happen. But if half of them work, we have a home run. Even if 40 % work, we have a home run.

1:22:07So this is a very forgiving business. And so that's where this is, which is I don't know which half works. I wish I knew. Yeah, if you knew. Yeah. If only. I don't know which half of them. So like I know that our cold bets, for example, there are things that can cause that bet to fail. They are low probability, but they could happen. Right. So maybe those things happen. Maybe they don't happen. I don't know. Right. Constellation, maybe cloners arrive. I don't know. Maybe the DNA of the company deteriorates after Mark is gone. I don't know. Right. So there are these unknowns, but it's a favorable bet.

1:22:42It's not a hundred percent bet. It's a favorable bet. And as long as we keep making these favorable bets, we're okay. So Howard Marks came on the podcast. Oh, great. Wonderful. And he laid out why the S &P might be a bad bet for the next 10 years. And his take was basically, if you look at the current P.E. ratio of the S &P, I think it was like 23 or something like that, that the forward 10-year return had vacillated between negative 2 % and 2 % any time that had happened. Yeah. And so I just want to give you kind of like a just quick reaction, bullish bearish on the S &P index right now if you were to be an investor?

1:23:17Bearish. Bearish. Same reason? Yeah, I don't, Howard is very smart. I don't disagree with that. GLP-1s. So it's amazing. We have a miracle drug. The best thing since sliced bread. Yeah, exactly. And it put sliced bread out of business. I read a stat that the GLP-1 drugs, Ozempic and the others, they're currently generated double the revenue of the AI companies. So it's like 79 billion a year versus 40 billion a year. And we are embryonic right now. And we're early stages. And also I think the science is going to get a lot better. Yeah, so like give me your, how you're thinking about that right now, whether from an investor point of view or just, you know.

1:23:58Well, I think from an investor point of view, for me, it goes a too hard pile. And the reason it goes a too hard pile is industries with rapid change are the enemy of the investor, according to Warren. So we go, we was king, Then Manjaro became king. And then now they're talking about some of these tablets. The tablets are going to have a hard time because they have to go through the liver and all that. But basically, to me, I think that this trajectory is going to continue. But given the valuations and given where it's headed, there are too many. Right. Coal is simpler. A few years ago, when I was at your house, I asked you about Bitcoin.

1:24:34And you similarly were like somewhat bearish on it. But you said, you know, ultimately too hard pile for me. Yeah, it's also too hard to pile. Outside confidence. Has anything changed in your opinion? Because the more time goes by, in a way, like all money is a confidence game, as you know, right? Every currency, every gold bar is a confidence that this will last. I was curious if anything had changed over time for you with Bitcoin. I prefer gold to Bitcoin. It's not used by a bunch of scammers and ransom seekers and whatever else. So to me, the whole thing is in the too hard pile. But I would just say that given that we already have gold, why do we need Bitcoin?

1:25:17Okay, I won't debate you on that. It'll be a four-hour podcast. Yeah, there's a couple of life models I wanted to ask you about. Because I asked you many of the investing truths. Yeah. But then some of yours, I feel like maybe are related to investing, but probably not. One was don't die at 25 and get buried at 75. Yes. What do you mean? So that's a quote by Ben Franklin. As you know, I have no original ideas. So Ben Franklin said that many people die at 25 and are buried at 75. And basically what that's saying is that you've stopped growing and you've stopped kind of doing things and you're kind of just coasting.

1:25:58You know, I had discussed a stock with Charlie in my last meeting with him, and he was buying that stock six days before he died. Okay. He was 99.9 years old. He didn't know he was going to die in six days. But when you have a 99.9 year age, you know life expectancy is not 20 years or 10 years. Okay. But he was, I saw Charlie make investments and bets and decisions. ignoring his mortality. Like he was 25. He was making the best as if he was 25. And so I think that living till the very end, truly living is really important. So we want to be pursuing our passions. We want to be getting our music out.

1:26:47We want to be doing the things that we want to do for this very finite time we have here. What does that mean, get your music out? I saw that on your list, but I didn't know what it meant. Well, all of us have music in us. And it's different. You know, for the musicians, it is actual music. But the thing is, we have to understand who we are. And understanding who we are is not easy, but we have to understand who we are. And we have to understand what would be something we want to bring to this world that makes the world better and makes us feel a sense of accomplishment for doing that. So we all have special talents and there's no person who's got nothing, if you will.

1:27:34Everyone has something special. We have to get that out because that's going to be a fulfilled life. September 28th, 2075. Apparently that's the date I'm going to die. All right. One of your pieces of advice is, and I quote, ask God Google when you are going to die and act accordingly. Last night I Googled when I would die. I gave it all my info. I told it I'm a non-smoker. This year's old. I've done this, et cetera, et cetera. And it gave me a, hey, here's a range. Yeah. And here's the most likely date. September 28th, 2075. Awesome. All right. Now what do I do? You freaked me out. Now what do I do?

1:28:16So contrary to Seneca, life is short. And Gandhi has a quote. He says, live as if you were to die tomorrow. Learn as if you were to live forever, right? And even Steve Jobs said that if he spent two, three, four days doing not what he really wanted to do or loved doing, he would make a change. So I think that 2075 seems a really long ways away, you know, like 49 years or whatever. But it's not that far away. And I think that there's a Buddhist saying about living in the moment. And living in the moment is fantastic. So I think that treating every day as if it's your last and living it to the fullest for the full 49 years, that's what you want to be doing.

1:29:03So I think, you know, people say, oh, I'm going to graduate and I'm going to work three years at McKinsey. Then I'm going to get some experience. Then I'm going to start my business. You know, Buffett would say to that, that's like saving sex for old age. Not a good idea. Okay. So don't make a lot of long-term plans. We have to enjoy today. Don't wait to live. We have to enjoy every day. So I think getting the music out, doing what we love to do, working with people we like, admire, and trust, and pursuing our passions. We have to do that all the time. Right. Those are sort of like the eat clean, exercise, get good sleep.

1:29:43What those are to health. Yeah. I feel like what you're describing is to like living life well. Absolutely. You know, one of the things that I think is part of your music you get out is that not only do you study investing and study companies to invest in, but you study the investors. And my favorite learnings from you have actually been the stories and the insights you have having studied all the great investors. I want to ask you about a couple of names I didn't ask you about in previous ones. The first is Ed Thorpe. Right. Tell me about Ed Thorpe. What do we learn from Ed Thorpe? The first time I met Ed Thorpe, I was naked.

1:30:23Go on. So just to give you the long form answer. So Ed Thorpe, MIT trained PhD mathematician, very smart. He actually worked with Claude Shannon. And if you study Shannon, there's podcasts on him and all that. But Shannon is, you know, probably one of the smartest humans around ever lived. But Ed Thorpe basically used MIT's mainframe computer to figure out how to optimally play blackjack, right? And he came up with what we now call basic strategy. And at that time in the early 60s, when he did this, casinos in Vegas and Reno, et cetera, played single deck blackjack to the end of the deck. And blackjack is a game where every time a card is played, the odds change.

1:31:07And so if a deck gets, you know, filled with more aces and tens or whatever else, then you're basically, as a player, it's in your favor. And smaller cards, it's against you. So he's counting cards, it's easy to do. And when the deck got loaded, he'd increase his bet, and when not loaded, he'd reduce his bet. And he cleaned the casinos out. And at that time, the casino, the mob run. And so they basically showed him a baseball bat and said, don't ever come back. Okay. And so - Did they even know what he was doing? Or they just said, we don't need to know. They knew that they were losing money. They didn't know why they were losing money.

1:31:44And that's all they cared about, that they were losing money. Right. And so he went back and he's a, you know, very meek, timid guy. He said, wow, this is like, like they might actually like, you know, kill me or something. So he said, I'm not going back. But to get back at them, he wrote a book called Beat the Dealer, which sold millions of copies. which basically says, here's how we beat the casinos. And the casinos freaked out because they said, now we've got like 10 ,000 head tops coming at us. And so blackjack became a game from then till now, which where the rules have continuously changed, where they started not playing to the end of the shoe.

1:32:23They introduced multiple decks and all the different rule changes and everything else to keep up with all of that. And you know the movie 21 where the MIT kids went in with all of that. So anyway, he did well. He wrote Beat the Dealer. And then he realized that there was a better casino than Vegas, which was the New York Stock Exchange. And there's something known as the Black-Scholes formula, which is the way how options are priced. So the guys who came up with it, Black-Scholes and another guy, They got the Nobel Prize for that. Basically, it tells you, if you've got a stock with whatever volatility, how to price the options, the call options, whatever else on that.

1:33:11Ed Thorpe cracked how options were priced before Black Shoals, but decided instead of getting a Nobel Prize, he was going to make money off it. Okay. Good choice. So he set up an entity called Princeton Newport Partners, and they killed it, like 25, 30 % a year and no down years and any of that. And did that for a while, became very wealthy. He moved to Newport Beach, became a professor at UCI. And then someone introduced him, just think about this is like a kind of Forrest Gump story. Someone introduces him to Ken Griffin, you know, Citadel's founder. While he's at Harvard, you know, training out of his dorm room, Ken asked, because Ed was not using his, all his algorithms and everything else, he had retired.

1:33:59Ken asked if he would give it to him Ed talked to Ken Realized he's very unusual And said you can have it all And I want to invest with you And so he becomes One of the early investors in Citadel So that engine just keeps going Oh my god And then also He meets Buffett For Bridge I think in the 70s And realized this is the guy And he puts a bunch of money with him So you know he's invested with Ken Griffin with Warren Buffett, with himself, Princeton-Newport Partners and the casino, all of the above, right? Legend. Now I'm in Irvine, California. I'm at this club where I go play racquetball and I'm getting ready for my racquetball game.

1:34:41So as I'm getting ready, I'm naked. And this guy, this older guy is looking at me and there's a Wall Street Journal next to my, and he says to me, what do you do? I said, oh, I run a hedge fund, right? And he starts talking to me and I forget that I'm naked. Okay. And then he says, I'm Ed Thorpe. And I get so excited. I said, oh my God, Ed Thorpe. And I go up to him and I'm talking. And then I realized, Monish, you're naked. You know, this is not appropriate. So I said, Ed, can we just meet for lunch? You know, I said, I promise you, I won't show up this way. Okay. And he said, absolutely. Right.

1:35:15And so then I met him for lunch and got to know him. In fact, I just got a Christmas card for him and he wrote me a nice note. But Ed is fantastic. I think that's a great guy. And, you know, he's, I think, 90, great health. and you should get him on the podcast. He also beat roulette too, did he not? Oh yeah, he had a device by which they could, I forget, there's something where they wore. Something in a shoe or something. Yeah, there's something they wore which would kind of tell them what was going on with the roulette. That is an unbelievable story. You mentioned Ken Griffin. I've heard some of the kind of Ken Griffin lore.

1:35:48What do you know about him and what kind of made him special and why maybe Ed initially spotted that this guy might be a little bit different? So I met Ken around 2000 or so. I was running an IT company and someone I knew said that they were looking for consultants. And my wife went in as a consultant to Citadel. Okay, so she's actually at Citadel. Ken is like, there might be like 10 people at Citadel at that time. And she'd come home every evening with a whole bunch of Ken stories. Like he said, she tells me this guy is very unusual and the place is very unusual. Everything's very unusual. So he had hired some whiz-bang Russian mathematician, PhD, postdoc, whatever, who was working with the algorithms.

1:36:38And everyone at Citadel would come to this Russian guy with their problems. And Ken didn't want anyone coming to him. He just wanted him to crank without anyone bothering him. So my wife told me that there's a temp that was hired. and Ken told a temp that here's your desk, here's you, here's a mathematician, no one crosses. So the temp says, oh, what do I do? Nothing. Your whole job is to make sure no one crosses, no one talks to him. So she's just looking at this temp and the temp herself is in shock. Someone's paying me to like, you know, file my nails. So yeah, Ken is a very intense guy, but I think he's very smart.

1:37:19I think he found all the different nooks and crannies, built a tremendous business. And so I have a lot of respect for him. Awesome. Did a great job. Yeah. I feel like Ken Griffin, intensity stories is something that I can binge on. I've heard, you know, when Enron was going out of business, did you hear this story? Yeah, they all went in and he got all the traders. Got all the smart guys out? Yeah. Like a rescue mission? I just read the other day that they had made an offer to some guy at Harvard or whatever, as a new grad, and Ken asked him, so let's say you made$10 million a year, what would you do?

1:37:52He said, oh, I'd quit. I'd go prime the tallest peaks, this and that, whatever. So Ken says to him, please reject our job offer. You know, we've already made the job offer you. We can't rescind it, but please don't accept it because we really don't want someone like you. Right. We don't want someone at$10 million who dies at 25. Right. You know, you've done podcasts like these before with me and then others. I think our podcast together, more than 5 million people have listened. However, the sad part of that is, I bet if I talk to those 5 million and I say, what'd you really take away? What'd you remember?

1:38:27What was the thing that you took? I'm not sure how many would have something that clicks. And so I want to make it easy for them this time. What's the thing that they can't miss out of this one? Because I don't want people to just listen, be entertained and go back to doing things exactly how the way they were. Lead an aligned life. So who we are is hard-coded at the age of five. So between our genetics and what happens till in the first five years, how old are your kids? I have a six-year-old, five-year-old and a two-year-old. Okay, so you've got some work you can do for the two-year-old, but the six and five-year-old, the cake is already baked, okay?

1:39:00And especially after they're about 12, after they're 12, the only thing you can do for them is control who their peers are. What happens with us humans is we show up in this world without an owner's manual, okay? We don't know what our calling is. The calling is predetermined at the age of five. If we don't follow that calling, this is our inner map and this is how we are externally. We are misaligned. And to have a great life, it needs to be like this. Now to get from here to here means you have to understand who you are. And there are clues to understanding who you are. So what you have to do is whenever you do any activity, you have to ask yourself, how much did I like that?

1:39:47When you meet someone, how much did I like meeting that person? And so you have to try to get to the point where the glove fits. So you may be a lawyer, but you were meant to be an artist. Or you may be a musician, but you were meant to be a running back. Okay, so I mean, I found it out by going through these industrial psychologists who we did all this work with and all that. And I was able to get to what my calling is when I was 34 or 35 years old. Till then, I was wandering the wilderness, completely lost, right? And then life became a lot better. Getting to an aligned life is the most important thing.

1:40:25It's not being a great investor or finding great investments or any of that. I think the thing is, you have to get your music out and you have to understand what that music is and you have to live an aligned life. and it's worth the pursuit, however painful it may be, to understand that as early as you can in life. The shortcut is you could go through psychological tests with a psychiatrist. What do you ask them for? What are you asking them to do? Is there a name for this? You're going to tell them that I want to understand who I am and what is my calling in life? What am I supposed to be doing?

1:41:01Now, you could go to my guy. You can go to him. Yeah, who's your guy? His name is Jack Skeen. I've met Jack. Okay. Yeah. All right. Yeah, he does the kind of full life 360 sort of analysis. Yeah, so you can go to Jack, and Jack can only do like 20 a year or something, okay? So he can't do it at scale. But he may know others. Right. And so that's a pretty foolproof way to get there. Other than that, I think you have to feel your way. If you're not willing to do that, then you have to look at what you like, what you don't like. You have to look at whether doing something energizes you. or doesn't energize you, that sort of thing, right?

1:41:37And so you have to find what you love doing. And if you only do what you love doing, you'll do it very well. And why do you think most people don't do that? It's because the world tells us what we are supposed to do. And we think that what the world tells us what we're supposed to do is what we're actually supposed to do. For example, the human brain is set up optimally to start specializing after the age of 11. and from the age of 11 to 20 is a window to specialize. That is the exact window when the education system makes you a jack of all trades. So like Michelangelo, you know, he was doing his sculptures and paintings and all that, 10, 11, Buffett picking stocks, Gates coding at 11 or 12, right?

1:42:22So you have to try to, within the context of a world that wants to be a jack of all trades, start getting to what is your calling, like the way Buffett and Gates did it, they were in a world of jack-of-all-trades. But within that world, Gates spent an inordinate amount of time doing coding. He would slip out of his parents' home at night and code all night and come back and sleep and whatever. And so he got 10, 20 ,000 hours of coding experience by the time he was in his early 20s. And nobody could touch him after that. So yes, we have to, at that age, that's your job as a parent. Make sure the kids at 11 or 12, you're trying to figure out what they're good at and trying to increase the time that they get for that?

1:43:04Well, I don't know what my calling is just yet. Actually, if I look back at that age, I was doing something very similar to this. The two things I really loved to do back at the time was I loved to play any kind of game where there was a score. I was playing online poker at a very young age, things that related to business and money. And then the other was I was doing improv all the time. I loved it. What's a podcast, but an improv session. I just did this for whatever, three hours, and it was no problem, right? And I could have known that signal at a younger age. I think if you're not there, you're damn close.

1:43:38I want to leave you with one thing. I have a gift for you in this envelope. I want you to take a look. We asked somebody who knows you well to write a letter, and it's your friend Guy Spear. Oh, wow. And Guy wrote this letter for you. He knew you were here today. All right, so let me just start reading it because I'd really like to read it later at leisure. So that's awesome. So the title is what I did not learn at HBS. Monish Prabhai taught me everything I needed to succeed in business. Dear Monish, this is fun. Dear Monish, I met you some years after my MBA. But the truth was, despite the degree, I knew next to nothing about business.

1:44:16My real education didn't begin until we met for dinner at the restaurant at the Delamar Hotel in Greenwich, Connecticut. I remember that evening vividly. I came away from that one dinner with more ideas than I had in two years at Harvard. Books I'd never heard of and ideas I'd never thought of. You introduced me to Power vs. Force by David Hawkins and to Gandhi's autobiography, The Story of My Experiments with Truth. We discussed Robert Cialdini's influence, The Psychology of Persuasion. But what struck me was that you had not merely read about these ideas, You had put them into practice in your own life in a way that I did not even know was possible.

1:44:55Sitting opposite you, I realized that I was a conventional thinker. You, on the other hand, had a very unusual mind. Someone who knew how to get things done in the real world and translate ideas into action. I myself was very misaligned at the time. I'm deeply grateful that you were willing to become my friend. that allowed me over time to untangle some of the misaligned elements in my personality. Alignment. You couldn't give me a better gift. This is very special. Yeah. Thank you so much. I want to thank Guy for doing it. We called him last minute. I said, you know, who knows him better? Excellent.

1:45:34Manish, thanks for doing this. Okay, awesome.

1:45:45Hey, let's take a quick break. I want to tell you about a podcast that you could check out. It is called The Science of Scaling by Mark Roberge. He was the founding CRO of HubSpot, and he's a guest lecturer at Harvard Business School. The guy's smart. And he sits down every week with different sales leaders from cool companies like Klaviyo and Vanta and OpenAI. And he's asking about their strategies, their tactics, and how they're growing their companies as head of sales or chief revenue officer. If you're looking to scale a company up, if you're a CRO or head of sales, just looking to level up in your career, I think a podcast like this could be great for you.

1:46:16Listen to The Science of Scaling wherever you get your podcasts.