When I first met Mohnish Pabrai years ago at a conference, I was completely intimidated. Tall, imposing, firm handshake, penetrating gaze, he just exudes confidence and commands attention. I cannot even recollect what I said to him (clearly it was nothing significant).
What gets even more apparent as one listens to him is his stark candour and heightened sense of self awareness. The hustle and madness of life doesn't faze him.
On approaching him for this conversation, he informed me that he has no interest in seeing the questions beforehand, and welcomed tough questions. I found that very daring. He also urged me not to repeat what was already discussed in previous interviews. A herculean task because he is extensively covered in the media.
This is part of a series where I attempt to understand the behavioural traits and mindset of money managers and investors. At the end of this (slightly edited) transcript, I have listed the 20 individuals interviewed for this series.
MOHNISH PABRAI is a world renown author and investor. He is the Founder and Managing Partner of Pabrai Investments Funds.
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When you look at an investment, you bring this very analytical mindset to the table. You decide on particular criteria, and in the first few hours as to whether a company even passes the test. When you think in such structured terms, does it spill into your personal life? Do you introspect about relationships and how you relate to people? Do you over analyze situations or conversations?
People close to me have said that I have a very low emotional response to most events. Some of them wish the emotions were higher. I became aware of this when others put a mirror in front of me.
But it's not something I can control. It is the way it is. We are hard coded in terms of genetics and our experiences in the first 5 or 6 years of life.
That is definitely an advantage in business and investing. Many times, it’s also an advantage in life, but it also has its disadvantages.
I was listening to podcast where you said that the world functions on trust and not contracts. People do business with you because they trust you. Clearly, you bring a lot of candor and integrity into a relationship. What about arrogance? Does arrogance in people put you off?
One of the natural filters I use, and probably a lot of other humans use…
Ego is a turn off. Arrogance is a kind of a subset of ego. Those types of traits, generally speaking, are a turn off.
When I had the lunch with Buffett, I said to him, “Warren, you are an exceptional judge of humans. Were you always so?”
He replied that I was actually mistaken and claimed not to be that great at judging humans. He went on to say, “If you put me in a cocktail party with a hundred people, and you gave me about 5 minutes to meet each person individually, I would probably be able to tell you that there were 4 who were exceptional, wonderful people and 4 who were probably turn offs. Regarding the other 92, I probably wouldn't be able to form an opinion about.”
He went one step further and said that you should bring those four you were impressed with into your inner circle, and let the other 96 go. In effect, he was being a very harsh grader. He was grading the people that he couldn't tell in the same way that he was grading the people who turned him off.
That is a very powerful mental model, but also a very unfair one. One of those in the 92 may be a really good person, who is excluded. And it is not fair to that person.
If you take the perspective that there are an infinite number of humans on planet Earth, it also means that there's an infinite number or near infinite number of good people on planet Earth.
So we don't pay a penalty for excluding a good person from our circle. We play a big penalty for including a not-so-good person in our circle. Basically, by being an unfair, harsh grader, you get a huge advantage in life.
Buffett also says that if you hang out with people better than you, you become better. And if you hang out with people worse than you, you become worse.
When I meet people for the first time, the filter is pretty rigorous. If I uncover anything, even minor, that may be a concern for me, I'll just exclude the person. The people who get included are the ones that impressed me very much.
I get a lot of requests from people who want to meet. Usually, a lot of them get discarded right away. But some I decide to meet either for a coffee or lunch. I moved to Austin close to two years ago. Over this time, I must have met around 30 individuals, one-on-one. Only one person became a very good friend and I like to spend time with him. There might be one or two others who are kind of okay to hang out with. It is not that the rest are bad people or anything, it is just that I was using Buffett's filter where, even if I couldn't tell, I move with the decision to move on.
It's a difficult mental model for most people, because they want to be fair. But I think the fairness will get in the way of being the best version of yourself.
So what is a trait, either in someone you meet or in a promoter of a company, that makes you say, “Okay, I gotta keep my distance”?
I would say that ego is one part of it. You can usually tell if someone is has no ego or a high ego. How they treat people 3 to 4 levels below them, people at the bottom of the totem pole. What their friends are like. Their likes. Their dislikes. How they make decisions. What they choose to spend time on. There's a lot of tells…
Some of those things might be fine for the person. They may be good. They just may not be a fit for someone like me, to interact with them.
Like Buffett said, many times we can't tell because people put up fronts. So it's not always possible in a short meeting to get past those fronts. To the extent that you can, it can be really helpful.
Our personal experiences have a huge impact on the way we deal with money. You get married. You have children. You have turbulent relationships. You make immense money. You incur financial losses. You yourself said your parents lost money quite often when you were young. How has all this impacted your idea of loss and risk?
When I finished college with a degree in engineering, I got a very good job as a software engineer. I was 22 and wanted to stay in that company forever. Get promoted along the way. Put 15% into my 401k retirement plan. I figured that in 30 years or so I would be set financially. That's the kind of the path I wanted, because I was trying to run away from the turbulence that I had seen with my parents.
When I was a little under 25, my dad visited me in Chicago and said that it is time for me to quit and start my own business. I told him that I had no plans ever to do that, going by my childhood experiences and the gyrations I witnessed, the ups and downs with the businesses… My father brushed that aside and said that that is what makes life fun. It's part of the great experience of living. He told me that in the company I was employed, I would not see most of the reward of what I do because I am just one cog in a very big wheel. And neither would I be able to exercise all my creativity because I would be viewed as a particular person in a particular area, and that’s about it.
At that time, I was part of this business group looking at international sales and marketing. They had a dominant US footprint but were going overseas. When I joined that group, we were just seven of us and our mandate was to get half the revenue of the company from overseas. In about 3 years, that team of seven had gone up to around 800 people; we had done an acquisition and grown a lot. And I noticed that my job description, which was doing everything when we were a team of seven, kept getting narrower and narrower. I actually liked it better when it was just seven of us.
I was not happy with the situation, even though it was a great company and they took great care of me. So I worked on a startup on the side. Once that got traction, I left.
My father was really good as an entrepreneur when it came to identifying opportunities and scaling them. But he was very aggressive, and the businesses were under capitalized. So usually the first storm would just bankrupt the company. I learned a lot from that experience, and I tried to build in much more resilience into the businesses. Those experiences in childhood were very helpful in helping me navigate. I focused a lot on the downside while going for the upside.
How did the Global Financial Crisis impact the way you deal with loss?
My net worth in June 2007 had peaked at $84 million. At the absolute bottom it was under $20 million.
There are worse problems in life than a $20 million networth. So it was not the end of the world. But it had the greatest impact on the Dakshana Foundation. We had agreed that we would give away 2% of our net worth every year to the foundation as long as the net worth was over $50 million.
Dakshna was off to a very strong flying start in 2007. Late 2008 and early 2009, Dakshana was spending around $1.5 million a year. It had a significant footprint. There were no outside donors as I was basically funding it. I got very concerned that at that level of outflow, if my network never increased, it would put things in peril.
We had hundreds of kids preparing for the IIT exams and so on. I had a joint venture with the Government of India. So I informed them that we will fund these students and see them through their studies and IIT admissions. But we're not going to take another batch in 2009. The people in the Ministry of Human Resource Development recommended reducing the scale of the programme, instead of eliminating it, because restarting would be hard. I took their advice.
We were taking about 400 kids a year at that time. In 2009 we took the smallest batch of 50 kids. It was still going to be some burden, but less than a quarter million dollars. That was something I was comfortable with.
It didn't impact me much because I have a modest lifestyle. I was poorer than I was two years back, but I had no leverage.
I could also see that the businesses that I had invested in looked extremely cheap. I was selling at a PE of 4 to buy at a PE of 2. I could see that there was a decent chance that things would kind of bounce up from here.
The markets bottomed out in March 2009. In the year 2009, the different Pabrai funds were up between 110% and 130%. By the time we got to the end of 2009, my net worth almost doubled from the bottom, though we were still below $50 million. Then we had several years of very strong performance because we were coming out of such lows.
In 2010, Dakshna was back with a batch of 400.
How do you view success? Because from every parameter you are hugely successful. How much of a role does money play in your idea of being a successful human being?
Charlie Munger just passed away earlier this week. He was 99.9 years old; just one month shy of his 100th birthday.
I developed a very good friendship with Charlie over the last 14 years. I played bridge with him. I had meals with him. I had many dinners at his place. I got to observe him in a very intimate setting. One of the things I noticed over time was that Charlie never looked back.
I would tell him that his body of work was so immense and impressive that he would go down as one of the great historic figures of all time; as a philosopher and an investor. He would always brush it off. His focus would always be on whatever problem was facing him.
Berkshire has been really successful. But he would say, “we have too much cash. We can't find investments. We're looking. Things are so expensive.” He was also chairman of a company called the Daily Journal Operation. He was looking for a CEO successor and would say that he needs to find someone but is unable to do so.
He would not spend time even wanting to talk about the past of Berkshire Hathaway or the past of Charlie Munger. All of his energies were focused on taking the next step forward. They were not focused on looking back at the distance covered.
Normal humans look back. We did well at school. We did well in a business. We did well at my investment fund, or Dakshana, and so on. Anyone else would forget what's in front of them with such an impressive history. But that's not how he thought. That's also not how Warren Buffett thinks. I try to learn from that.
I think that it's a better mental model to focus the energies going forward.
So I don't think in terms of “what is success?”
My dad was not a religious guy, but he had an area where he used to go and say his prayers in the morning. In that prayer area was a quote that said that success is not a summit or a peak. Anything you do can be done better.
I've been very lucky. Luck plays a big role in where we end up. Right place. Right time. Right people. So there's a lot of luck involved in everything that happens in life, especially the good things. So my focus is more on the next problem or next milestone and direct my energies to that.
Does anything make you insecure or give you sleepless nights?
I don't have any problems with sleep.
My kind of personality template is that I don't have a high emotional response to a lot of things.
In 2009, when we were at the bottom, I wasn't so concerned about what was happening with me. I was more concerned about my investors. The index was down about 40% and my funds were down around 65% from the peak. My concern was that if they exit, I can never make it back for them. Thankfully, the exits were somewhat limited, which was good.
But what I did was to create a spreadsheet of my portfolio, where I put down the current prices of everything, and what I thought those businesses were worth. I spent more time thinking about what their values were vs. their market prices.
When I was around 10 or 11 years old, my father had gone bankrupt. He was down to nothing. There was this astrologer who used to show up at our home in Mumbai. He used to read my father's horoscope and share his thoughts on what he thought the future would be.
My father was an engineer. A very rational guy. I asked him why he would pay him every week when our resources were few. My father said that when I pay him and call him again the next week, he knows that he will only be invited back if he gives me a rosy forecast for the future. He said that he was at the bottom of a very deep well, and needed a rope to climb out of that well. This astrologer was his rope. Because it allowed him to suspend reality and immerse himself into what he was saying will be reality in the future. It gave him the energy to look at what he could do next.
In 2009, that spreadsheet became the rope. I spent more time looking at what the businesses should be worth than what the quoted values were. That helped me keep a sensible outlook.
But I never really got depressed. It's just not the way I'm built. I'm grateful for that. And on a day-to-day basis everything was just fine. A roof over our heads. Good food to eat. There was nothing to really get panicked about.
You're a public figure. You're always in the limelight. I see some people fawning over you, and some very acerbic, very critical. How do you stay mentally resilient in the face of all these expectations and comments?
There are people who are very critical of Warren Buffett or Charlie Munger or Jesus Christ or Mahatma Gandhi. So if they are critical of me, I'm very low life compared to all of these people. So the way I look at it is that if I can learn from the critics, that’s great.
When we met Buffett for lunch, he asked, “would you like to be the greatest lover in the world, and known as the worst? Or would you like to be the worst lover in the world, and known as the greatest?” He said if you know how to answer that question, you got it all set.
Warren Buffett talks about the inner scorecard and the outer scorecard. I try to focus on an inner scorecard of putting the chips where they are; the good, bad, and ugly, basically looking at it from a holistic point of view. So not thinking that I'm awesome and not thinking that I'm the worst person, but trying to have a sense of reality.
So external folks coming to me and fawning over me or being critical doesn't have much impact. I try to look at it from an internal point of view.
The late American investor, Julian Robertson of Tiger management, employed a psychoanalyst, Dr Aaron Stern, to tell him how people in his team looked at risk, and how they worked together. Stern liked sports guys because it made them very competitive at work. He liked generalists, not specialists, because they understood multiple angles to a story.
The reason I'm bringing this up…
Decades ago you employed two industrial psychologists to do 360 degree analysis on you. They did a bunch of tests. They interviewed your spouses, friends, employees and colleagues. They helped you fathom who you were on the outside vis-a-viz on the inside.
Here's my question.
If you had to do the test today, how would you fare? Are you perfectly aligned with who you are inside and the role or image you project on the outside?
Those guys were a godsend. That initiative cost me $2,000. Probably one of the best $2,000 I spent. Now it north of $10,000.
The mental map of who we are is hard coded at the age of 5 or 6. That is not going to change. But the further we are out of alignment from who we are on the inside, the less the degree of happiness and effectiveness.
In an ideal situation, you want to lead a kind of perfectly aligned life. There are some individuals who get to that perfect alignment. When you get to the perfect alignment you can go through brick walls. I would say that Warren Buffett and Charlie Munger are pretty darn close to being perfectly aligned. Probably people like Bill Gates, Steve Jobs, Elon Musk - very strong alignments between the internal and external.
Once they gave me the map of who I was, it made life a lot easier because I could see for the first time who I was on the inside.
I think I'm much closer to alignment than I've probably ever been since when I went through that; around 24 years ago. I've deliberately been trying over the last 24 years to move closer towards an alignment with the inner self. I still feel that I'm not there. There's still some misalignment. But that's what makes life fun because we can keep working on that. The closer you get to that, the payoffs are exponential.
What makes you happy? What must happen in a day for you to say “what a happy day this was”?
One of the things I try to do is to look back on things that I've done recently, and ask myself: Did I enjoy that? Was that fun?
For example, I used to go for a lot of live Bridge tournaments in the 1980s. I'm a math guy. I like to play games. And it was a lot of fun. I was single, and I could go for 3 days to Michigan and play a bridge tournament. When the kids were younger, Bridge took a backseat with a lot of family responsibilities.
Recently, I got back into online Bridge. Now I playing Bridge live at tournaments. I spent a few days this summer in Chicago playing Bridge from morning till evening. I hadn't done that in a live setting in a very long time, probably 15-20 years. I just went for another tournament to Atlanta.
While I enjoyed those experiences, I realised that I could improve. I want to keep learning and getting better at Bridge, so I need to play with people who are much better than me. In Chicago and Atlanta I played with people who were at my level, or a little lower. If I make that change, that will increase the euphoria. The next national tournament is in Louisville, Kentucky, in March. I'll go for that if I can figure out the partners and team that I can be part of.
So basically, I just look at things I do and the degree of enjoyment I have. When I like something, I try to increase that in my life. And when I find something that I didn't like, then I try to push that down. If I meet someone I really like, I'll try to increase the interaction with that person. If I go to a place for dinner, and I really like that, I'll try to increase the times I go there. Same with the foods I like to eat or the activities I like to do.
In all these cases, I'm trying to basically increase happiness. I've been so deliberate about this for so many decades that life is very blissful.
Very few have that privilege.
It's not that hard for a lot of people, because the best things in life are free. Happiness doesn't correlate very much with wealth, once you get past a certain base level.
So if people just spent more time thinking about what would make them happier, and take some deliberate actions on that, they would get there.
Talking to you has made me happy. Thank you!
Individuals interviewed by Larissa Fernand for this series:
- Prashant Jain
- Sankaran Naren
- Nilesh Shah
- Vetri Subramaniam
- Anand Radhakrishnan
- Devina Mehra
- Saurabh Mukherjea
- Raunak Onkar
- Samir Arora
- Kenneth Andrade
- Rajeev Thakkar
- Aswath Damodaran
- Ian Cassel
- Vishal Khandelwal
- Sanjay Bakshi
- Ramesh Damani
- Jim Rogers
- Ben Carlson
- Mohnish Pabrai
- Christine Benz