Richer, Wiser, Happier: How the World's Greatest Investors Win in Markets and Life
304
Richer, Wiser, Happier: How the World's Greatest Investors Win in Markets and Life
304Hardcover
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Overview
Billionaire investors. If we think of them, it’s with a mixture of awe and suspicion. Clearly, they possess a kind of genius—the proverbial Midas Touch. But are the skills they possess transferable? And do they have anything to teach us besides making money?
In Richer, Wiser, Happier, William Green draws on interviews that he’s conducted over twenty-five years with many of the world’s greatest investors. As he discovered, their talents extend well beyond the financial realm. The most successful investors are mavericks and iconoclasts who question conventional wisdom and profit vastly from their ability to think more rationally, rigorously, and objectively. They are master game players who consciously maximize their odds of long-term success in markets and life, while also minimizing any risk of catastrophe. They draw powerful insights from many different fields, are remarkably intuitive about trends, practice fanatical discipline, and have developed a high tolerance for pain. As Green explains, the best investors can teach us not only how to become rich, but how to improve the way we think, reach decisions, assess risk, avoid costly errors, build resilience, and turn uncertainty to our advantage.
Green ushers us into the lives of more than forty super-investors, visiting them in their offices, homes, and even their places of worship—all to share what they have to teach. From Sir John Templeton to Charlie Munger, Jack Bogle to Ed Thorp, Will Danoff to Mohnish Pabrai, Bill Miller to Laura Geritz, Joel Greenblatt to Howard Marks. In explaining how they think and why they win, this “unexpectedly illuminating” (Peter Diamandis) book provides “many nuggets of wisdom” (The Washington Post) that will enrich you both financially and personally.
Product Details
| ISBN-13: | 9781501164859 |
|---|---|
| Publisher: | Scribner |
| Publication date: | 04/20/2021 |
| Pages: | 304 |
| Sales rank: | 216,308 |
| Product dimensions: | 6.00(w) x 9.10(h) x 1.20(d) |
About the Author
Read an Excerpt
Chapter One: The Man Who Cloned Warren Buffett CHAPTER ONE The Man Who Cloned Warren Buffett
How to succeed by shamelessly borrowing other people’s best ideas
A wise man ought always to follow the paths beaten by great men, and to imitate those who have been supreme, so that if his ability does not equal theirs, at least it will savor of it.
—Niccolò Machiavelli
I believe in the discipline of mastering the best that other people have ever figured out. I don’t believe in just sitting down and trying to dream it all up yourself. Nobody’s that smart.
—Charlie Munger
It’s 7:00 a.m. on Christmas Day. Mohnish Pabrai steps into a minivan in Mumbai as the sun rises in the smoggy sky. We drive for hours along the western coast of India toward a territory called Dadra and Nagar Haveli. Our driver intermittently executes terrifying maneuvers, swerving wildly between trucks and buses. I close my eyes and grimace in horror as horns blare on all sides. Pabrai, who grew up in India before moving to the United States for college, smiles serenely, always calm in the presence of risk. Still, he concedes, “The accident rate in India is high.”
It’s a riveting drive, full of mind-bending sights. At one point, we pass a plump man by the side of the road who’s stacking bricks on top of a skinny woman’s head so she can carry them. As we drive deeper into the countryside, we see squat huts covered with grass—structures that seem to belong to another millennium. Finally, we reach our destination: a rural high school called JNV Silvassa.
Pabrai, one of the preeminent investors of his generation, has traveled here from his home in Irvine, California, to visit forty teenage girls. They are part of a program run by his charitable foundation, Dakshana, which educates gifted children from disadvantaged families across India. Dakshana is providing these girls with two years of free schooling to prepare them for the infamously difficult entrance exam to the Indian Institutes of Technology (IIT), a group of elite engineering colleges whose graduates are coveted by companies such as Microsoft and Google.
More than a million students apply to IIT each year, and less than 2 percent are accepted. But Dakshana has cracked the code. Over twelve years, 2,146 Dakshana scholars have won places at IIT—an acceptance rate of 62 percent. Pabrai views Dakshana (a Sanskrit word meaning “gift”) as a means of uplifting the most underprivileged segments of Indian society. Most Dakshana scholars come from rural families that survive on less than $2 a day. Many belong to lower castes, including “untouchables,” who have suffered centuries of discrimination.
Whenever Pabrai visits a Dakshana classroom, he breaks the ice by posing the same mathematical problem. Everyone who has solved it has subsequently won a place at IIT, so it’s a useful way to gauge the talent in the room. The question is so hard that almost nobody gets it right, and he expects none of the Silvassa students to meet the challenge. Nonetheless, he writes the problem in chalk on the blackboard at the front of the classroom: n is a prime number =5. Prove that n2 -1 is always divisible by 24. Then he leans back in a flimsy plastic chair while the girls attempt to divine the answer.I I wonder what they make of this flamboyant, larger-than-life creature—a tall, burly, balding moneyman with a luxuriant mustache, who’s dressed in a Dakshana sweatshirt and pink jeans.
After ten minutes, Pabrai asks, “Is anyone close?” A fifteen-year-old girl named Alisa says, “Sir, it’s only a theory.” Her tentativeness instills no confidence, but Pabrai invites her to the front of the classroom to show him her solution. She hands him a sheet of white paper and stands meekly before him, head bowed, awaiting judgment. Above her, a sign on the wall says, in charmingly garbled English, SO LONG AS YOU HAVE FAITH IN YOU, NOTHING WILL BE ABLE TO ABSTRACT YOU.
“It’s correct,” says Pabrai. He shakes Alisa’s hand and asks her to explain her answer to the class. He later tells me that she solved the problem so elegantly that she could rank in the top two hundred in the IIT exam. Pabrai tells her that she’s “a sure shot” to get in: “All you have to do is keep working hard.” I subsequently learn that Alisa is from the Ganjam district in the state of Odisha, one of India’s poorest districts, and was born into a caste that the government calls Other Backward Classes. In her previous school, she ranked first out of eighty students.
Pabrai asks Alisa to pose for a photograph with him. “You will forget about me,” he jokes, “but then I can tell you, ‘We have the picture!’” The girls laugh delightedly, but I find it hard not to cry. We have witnessed something magical: a child plucked from poverty has just proven that she has the mental firepower to propel herself and her family into prosperity. Given the environment in which she was raised and the odds against her, it’s a kind of miracle.
Later that morning, the students pepper Pabrai with questions. Finally, one plucks up the courage to ask what everyone must want to know: “Sir, how did you make so much money?”
Pabrai laughs and says, “I compound money.”
Searching for a way to illustrate the concept, he says, “I have a hero. His name is Warren Buffett. Who here has heard of Warren Buffett?” Not a single hand goes up. The room is a sea of blank faces. So he tells the students about his eighteen-year-old daughter, Momachi, and how she earned $4,800 in a summer job after high school. Pabrai invested that money for her in a retirement account. He asks the students to calculate what would happen if this modest nest egg was to grow by 15 percent a year for the next sixty years. “It’s doubling every five years. That’s twelve doubles,” he says. “Life is all about doubles.”
A minute later, the students have figured it out: in six decades, when Momachi is seventy-eight years old, her $4,800 will be worth more than $21 million. There is an air of wonder in the room at the awesome power of this mathematical phenomenon. “Are you going to forget about compounding?” asks Pabrai. And forty impoverished teenagers from rural India cry out in unison, “No, sir!”
Not so long ago, Mohnish Pabrai hadn’t heard of Warren Buffett, either. Raised in modest circumstances in India, he knew nothing about investing, Wall Street, or high finance. Born in 1964, he spent the first ten years of his life in Bombay (now Mumbai), where his parents rented a tiny suburban apartment for $20 a month. They later moved to New Delhi and Dubai.
The family was full of colorful characters. Pabrai’s grandfather was a famous magician, Gogia Pasha, who toured the world posing as a mysterious Egyptian. As a boy, Pabrai appeared with him onstage. His role was to hold an egg. Pabrai’s father, Om Pabrai, was an entrepreneur with an uncanny knack for founding companies that went bankrupt. Among his many ventures, he owned a jewelry factory, launched a radio station, and sold magic kits by mail. Like his son, he was an incorrigible optimist. But his businesses were fatally undercapitalized and overleveraged.
“I watched my parents losing everything multiple times,” says Pabrai. “And when I say losing everything, I mean not having enough money to buy groceries tomorrow, not having money to pay the rent.... I never want to go through that again, but what I saw is that it didn’t bother them. In fact, the biggest lesson I learned from them is that I didn’t see them get rattled by it. My father used to say, ‘You could put me naked on a rock and I will start a new business.’”
As a child, Pabrai performed poorly at school, once placing sixty-second in a class of sixty-five, and he suffered from low self-esteem. Then, in ninth grade, he was given an IQ test that changed his life. “I went to the guy who administered the test and said, ‘What does the result mean?’ He said, ‘Your IQ is at least one hundred eighty. You’re just not applying yourself.’ It was like someone whipping a horse and it starts. That was a big turning point. People have to be told they have something in them.”
After high school, he headed to Clemson University, in South Carolina. There he discovered the stock market. He took an investing class and averaged 106 percent going into the final. The professor tried to convince him to switch his major from computer engineering to finance. “I completely ignored his advice,” says Pabrai. “My perspective at that time was that all these fuckers in finance are dumbasses. They don’t know shit. And this super-easy class I’m taking in investing is one-tenth as hard as my engineering mechanics class.... So why would I want to go into a field with these losers?”
After college, Pabrai took a job at Tellabs. Then, in 1990, he launched a technology consulting company, TransTech, bankrolling it with $70,000 in credit card debt and $30,000 from his 401(k). Most people couldn’t stomach that level of risk, but he’s always had a gambling streak. Indeed, we once spent an entire flight discussing his adventures at the blackjack tables in Las Vegas, where he doggedly applies “an extremely boring” system developed by a card counter with a PhD in finance. Pabrai’s game plan is to make $1 million and get banned from the casinos. By 2020, he’d turned $3,000 into $150,000 and been banned for life by “one small, seedy casino.”
TransTech thrived, ultimately employing 160 people, and Pabrai set aside $1 million in savings by 1994. For the first time, he had a war chest to invest. That year, he bought One Up on Wall Street by Peter Lynch while killing time in Heathrow Airport. It was there that he first read about Buffett. He was astonished to learn that Berkshire Hathaway’s chairman and CEO had racked up investment returns of 31 percent annually over forty-four years, starting at the age of twenty. Thanks to the magic of compounding, this meant that an investment of $1 in 1950 would have grown to $144,523 by 1994. Pabrai reached a logical conclusion: Buffett was not a dumbass.
As a boy, Pabrai had heard a tale about an Indian who supposedly invented chess. He presented his game to the king, who offered him a reward. The game inventor requested one grain of rice for the first square of his chess board, two grains for the second square, four for the third, and so on, all the way to the sixty-fourth square. The king, who was arithmetically challenged, granted the request. Pabrai, who is not arithmetically challenged, says the king owed 18,446,744,073,709,551,615 grains of rice, now worth around $300 trillion. Remembering this story, Pabrai grasped instantly that Buffett had mastered the game of compounding. In forty-four years, he’d doubled his money eighteen times and was already well on his way to becoming the richest man on earth.
This set Pabrai thinking. What if he could figure out how Buffett picked stocks and could mimic his winning approach? Thus began what Pabrai describes as a “thirty-year game” to turn his $1 million into $1 billion. “The driver for me is not to get wealthy,” he says. “The driver is to win the game. It’s exactly the same driver for Warren, which is to show through the results that I did the best and I am the best because I played the game by the rules, fair and square, and I won.”
Pabrai’s approach to the challenge of becoming a billionaire holds important lessons for us all, not just as investors but in every area of life. He didn’t attempt to reinvent the wheel by, say, devising a new algorithm to exploit subtle pricing anomalies in the markets. Instead, he identified the most skillful player of this particular game, analyzed why he was so successful, then copied his approach with scrupulous attention to detail. Pabrai’s term for this process is cloning. We could also call it modeling, mimicry, or replication. But the terminology doesn’t matter. This is a technique for people who care more about winning than sounding respectable or highbrow.
By cloning Buffett—and later, his polymathic partner, Charlie Munger—Pabrai has become one of the leading investors of our time. From 2000 to 2018, his flagship hedge fund returned a staggering 1,204 percent versus 159 percent for the S&P 500 index. If you had invested $100,000 with him when he started managing money in July 1999, it would have grown to $1,826,500 (after fees and expenses) by March 31, 2018.II
Yet Pabrai’s success both as an investor and a philanthropist is built entirely on smart ideas that he has borrowed from others. “I’m a shameless copycat,” he says. “Everything in my life is cloned.... I have no original ideas.” Consciously, systematically, and with irrepressible delight, he has mined the minds of Buffett, Munger, and others not only for investment wisdom but for insights on how to manage his business, avoid mistakes, build his brand, give away money, approach relationships, structure his time, and construct a happy life.
Pabrai’s commitment to cloning raises an array of provocative questions. Is originality overrated? Instead of struggling to innovate, should most of us focus our energy on replicating what smarter and wiser people have already figured out? If cloning is such a powerful strategy for success, why don’t more people use it? Are there dangers to cloning? And how can we benefit from it while also being true to ourselves?
Over the last seven years, I’ve spent a great deal of time with Pabrai. I’ve joined him on multiple trips to Omaha for Berkshire’s annual meeting; I’ve interviewed him at his office in California; we’ve traveled together for five days in India, even sharing a bunk bed on an all-night train ride from Kota to Mumbai; and we’ve overeaten together everywhere from his local Korean barbecue restaurant to a roadside shack in Jaipur.
Along the way, I’ve come to appreciate the tremendous power of his method of reverse engineering, replicating, and often improving on other people’s successful strategies. Pabrai, the most relentless cloner I’ve ever encountered, has taken the art of appropriation to such an extreme that, paradoxically, it seems oddly original. His thinking has had a profound impact on me. In fact, the overarching purpose of this book is to share what I would call “ideas worth cloning.”
When Pabrai discovers a subject that fascinates him, he attacks it with obsessive fervor. In Buffett’s case, the available resources seemed limitless, including decades of letters to Berkshire’s shareholders and seminal books such as Roger Lowenstein’s Buffett: The Making of an American Capitalist. Pabrai devoured it all. He also began to make a pilgrimage each year to Omaha for Berkshire’s annual meeting, showing up without fail for more than twenty years.
Eventually, Pabrai would develop a personal relationship with Buffett. Through Buffett, he’d also become friends with Munger, who invites him for meals at his home in Los Angeles and games of bridge at his club. But in those early days, Pabrai’s knowledge came entirely from reading. And the more he read, the more convinced he became that Buffett, with Munger’s help, had laid out “the laws of investing,” which are as “fundamental as the laws of physics.”
Buffett’s style of investing seemed “so simple” and “so powerful” that Pabrai considered it the only way to invest. But when he studied other money managers, he was perplexed to find that almost none lived by Buffett’s laws. It was like meeting “an entire set of physicists who don’t believe in gravity.... Whether you believe in gravity or not, it’s fucking gonna pull you down!”
It was clear to Pabrai that most fund managers owned too many stocks, paid too much for them, and traded them too often. “These mutual funds are sitting there with one thousand positions or two hundred positions. How can you find two hundred companies that will all double? Then I look at what they own, and they own things that are trading at thirty times earnings.... I saw that they were all hosed.”
Pabrai had read a book by the management guru Tom Peters that told a cautionary tale of two self-service gas stations on opposite sides of the street. One prospers by providing high-quality service, such as cleaning windshields for free. The other does the bare minimum. What happens? Its customers inevitably drift to the better gas station. This error amazed Pabrai, since nothing could have been easier than simply to copy the superior strategy sitting in plain view.
“Humans have something weird in their DNA which prohibits them from adopting good ideas easily,” says Pabrai. “What I learned a long time back is, keep observing the world inside and outside your industry, and when you see someone doing something smart, force yourself to adopt it.” This sounds so obvious, even trite. But this one habit has played a decisive role in his success.
So, with the zeal of a true disciple, Pabrai committed to invest “the way Warren said I should.” Given that Buffett had averaged 31 percent a year, Pabrai naively assumed that it shouldn’t be hard to average 26 percent. At that rate, his $1 million would double every three years and hit $1 billion in thirty years. As a reminder of this compounding target, his license plate reads COMLB 26. Even if he missed by a mile, he expected to do fine; if, say, he averaged 16 percent a year, his $1 million would turn into $85.85 million in thirty years. Such is the glory of compounding.
Of course, he had no MBA from a fancy school such as Wharton or Columbia, no qualification as a certified financial analyst, no experience on Wall Street. But Pabrai, who regards his entire life as a game, expected his rigorous application of Buffett’s methodology to give him an edge over all of the fools who failed to follow the Sage of Omaha. “I want to play games that I know I can win,” says Pabrai. “So how do you win the game? You’ve got to play according to the rules. And the good news is, I’m playing against players who don’t even fucking know the rules.”
As Pabrai saw it, Buffett’s approach to stock picking grew out of three core concepts that he’d learned from Benjamin Graham, the patron saint of value investing, who taught Buffett at Columbia and later hired him. First, whenever you buy a stock, you’re purchasing a portion of an ongoing business with an underlying value, not just a piece of paper for speculators to trade.
Second, Graham viewed the market as a “voting machine,” not a “weighing machine,” which means that stock prices frequently fail to reflect the true value of these businesses. As Graham wrote in The Intelligent Investor,III it’s useful to think of the market as a manic-depressive who “often lets his enthusiasm or his fears run away with him.”
Third, you should buy a stock only when it’s selling for much less than your conservative estimate of its worth. The gap between a company’s intrinsic value and its stock price provides what Graham called a “margin of safety.”
But what does all of this mean in practical terms? Graham’s insight that Mr. Market is prone to irrational mood swings has profound implications. For master investors such as Buffett and Munger, the essence of the game is to detach themselves from the madness and watch dispassionately until the bipolar market provides them with what Munger calls “a mispriced gamble.” There are no prizes for frenetic activity. Rather, investing is mostly a matter of waiting for these rare moments when the odds of making money vastly outweigh the odds of losing it. As Buffett has said, “You don’t have to swing at everything—you can wait for your pitch. The problem when you’re a money manager is that your fans keep yelling, ‘Swing, you bum!’”
Sublimely indifferent to the cries of the crowd, Buffett can twiddle his thumbs for years. For example, he bought almost nothing from 1970 to 1972 when euphoric investors drove stocks to crazy valuations. Then, when the market crashed in 1973, he bought a major stake in the Washington Post Company, which he held for four decades. In his classic article “The Superinvestors of Graham-and-Doddsville,” Buffett wrote that the market valued the company at $80 million when “you could have sold the assets to any one of ten buyers for not less than $400 million.... You don’t try and buy businesses worth $83 million for $80 million. You leave yourself an enormous margin. When you build a bridge, you insist it can carry 30,000 pounds, but you only drive 10,000-pound trucks across it. And that same principle works in investing.”
In our hyperactive world, few people recognize the superiority of this slow and discerning strategy, which requires infrequent but decisive bursts of activity. Munger, a nonagenarian whom Pabrai considers “the brightest human” he’s ever met, embodies this approach. Munger once observed, “You have to be like a man standing with a spear next to a stream. Most of the time he’s doing nothing. When a fat juicy salmon swims by, the man spears it. Then he goes back to doing nothing. It may be six months before the next salmon goes by.”
Few money managers function this way. Instead, says Pabrai, they “place many bets, small bets, and frequent bets.” The trouble is, there aren’t enough compelling opportunities to justify all of this activity. So Pabrai, like his two idols, prefers to wait for the most succulent salmon. During a conversation in his office in Irvine, he says, “The number one skill in investing is patience—extreme patience.” When the market crashed in 2008, he made ten investments in two months. In more typical times, he bought just two stocks in 2011, three in 2012, and none in 2013.
In 2018, Pabrai’s offshore hedge fund owned no US stocks at all because nothing seemed cheap enough. Just think about that for a moment: out of roughly thirty-seven hundred companies listed on the major US exchanges, Pabrai couldn’t find a single irresistible bargain. Instead of settling for American stocks that seemed richly valued, he took his fishing spear to better-stocked waters in India, China, and South Korea. As Munger likes to say, there are two rules of fishing. Rule no. 1: “Fish where the fish are.” Rule no. 2: “Don’t forget rule no. 1.”
Then, in the spring of 2020, the US market crashed as the COVID-19 virus spread terror among investors. The retail industry was ravaged, with stores forced to close indefinitely and consumers required to stay home in lockdown mode. One company at the epicenter of uncertainty was Seritage Growth Properties, whose tenants included many retailers that could no longer afford to pay their rent. “The market hates all of this near-term noise and pain,” says Pabrai. He exploited the panic to buy a 13 percent stake in Seritage at exceptional prices, figuring that he’ll ultimately make ten times his money as fears recede and others recognize the value of its prime assets.IV
Buffett, Munger, and Pabrai are not alone in pursuing this strategy of extreme patience and extreme selectivity. Their elite cohort includes great investors such as Francis Chou, one of Canada’s most prominent fund managers. When I first interviewed him in 2014, Chou had 30 percent of his assets in cash and hadn’t made a significant stock purchase in years. “When there’s hardly anything to buy, you have to be very careful,” he told me. “You cannot force the issue. You just have to be patient, and the bargains will come to you.” He warned, “If you want to participate in the market all the time, then it’s a mug’s game and you’re going to lose.”
How long can he go without buying? “Oh, I can wait ten years—even longer,” Chou replied. In the meantime, he studies stocks that aren’t cheap enough to buy, hits balls at a golf range, and reads two hundred to four hundred pages a day. One technique that he uses to distance himself emotionally from the day-to-day drama of the market is to think of himself in the third person instead of the first person.
Like Chou, Pabrai has constructed a lifestyle that supports this heroically inactive investment strategy. When I visited his office in Irvine, he was dressed in shorts, sneakers, and a short-sleeved shirt. He looked less like an adrenaline-fueled stock jockey than a vacationer contemplating a lazy stroll on the beach. Cloning Buffett, who once showed him the blank pages of his little black diary, Pabrai keeps his calendar virtually empty so he can spend most of his time reading and studying companies. On a typical day at the office, he schedules a grand total of zero meetings and zero phone calls. One of his favorite quotes is from the philosopher Blaise Pascal: “All of humanity’s problems stem from man’s inability to sit quietly in a room alone.”
One challenge, says Pabrai, is that “large motors aren’t good at grinding away without resulting actions.” He thinks Berkshire Hathaway’s shareholders have profited immensely from Buffett’s passion for playing online bridge, since this mental distraction counteracts the “natural bias for action.” Pabrai plays online bridge, too, and he burns off energy by biking and playing racquetball. When there’s nothing to buy and no reason to sell, he can also direct more attention to his charitable foundation. He says it helps that his investment staff consists of a single person: him. “The moment you have people on your team, they’re going to want to act and do things, and then you’re hosed.” In most fields, a hunger for action is a virtue. But as Buffett said at Berkshire’s 1998 annual meeting, “We don’t get paid for activity, just for being right.”
Pabrai, a loner with a misanthropic streak, was purpose-built for the bizarrely lucrative discipline of sitting alone in a room and occasionally buying a mispriced stock. Back when he ran a tech company, he hired two industrial psychologists to profile him. They revealed how comically ill-suited he was to managing a large staff: “I’m not this nurturing leader who can have a bunch of weepies and nurture them and babysit them and all this other shit.” Investing felt more like a game of three-dimensional chess in which the outcome, crucially, depended solely on him.
One of Pabrai’s first stock picks was a tiny Indian technology company, Satyam Computer Services, which he bought in 1995. He understood the business, since he worked in the same industry, and the stock was “ultracheap.” Pabrai watched in wonder as it rose about 140 times in five years. He sold in 2000, when it was outrageously overvalued, and pocketed a $1.5 million profit. The late-nineties tech bubble then burst, and the stock dropped more than 80 percent. Amused by his good fortune, Pabrai cheerfully likens himself to Forrest Gump, who made a killing in “some kind of fruit company”—namely, Apple Computer.
Through a combination of luck and smarts, Pabrai turned his $1 million into $10 million in less than five years. Aware that he had more to learn, he wrote to Buffett offering to work for him for free. Buffett replied, “I’ve given a lot of thought to the optimal use of my time, and I simply do best operating by myself.” So Pabrai pursued Plan B. Several friends had profited from his stock tips, and they wanted him to manage their money. In 1999, he launched an investment partnership with $900,000 from eight people and $100,000 of his own. A year or so later, he sold his technology consulting company, TransTech, for $6 million so that he could focus exclusively on investing.
From 1956 to 1969, Buffett had managed investment partnerships with spectacular success. So Pabrai did what came naturally: he cloned every detail of Buffett’s partnership model. For example, Buffett charged no annual management fee but collected a performance fee of 25 percent of any profits over an annual “hurdle” of 6 percent. If he made a return of 6 percent or less, he didn’t get paid a dime. But outsize returns would be richly rewarded. Pabrai adopted the same fee structure, reasoning that this alignment of interests made it an “honorable way to do business.”V
As it happens, Buffett had borrowed this fee structure from Graham, who used it in the 1920s. No stranger to cloning, Buffett has said, “If you learn, basically, from other people, you don’t have to get too many ideas on your own. You can just apply the best of what you see.” Part of the challenge is to discern the best and jettison the rest, instead of blindly cloning everything. For example, Graham was a devout believer in diversification, whereas Buffett got rich by focusing his bets on a much smaller number of undervalued stocks. This is an important point. Buffett borrowed liberally, but he adapted and refined Graham’s practices to suit his own preferences.
Following Buffett’s lead, Pabrai constructed an unusually concentrated portfolio. He figured that ten stocks would give him all the diversification he needed. When you’re buying so few stocks, you can afford to be choosy. Pabrai glances at hundreds of stocks and rapidly rejects almost all of them, often in less than a minute.VI Buffett is a master of this practice of high-speed sifting. “What he’s looking for is a reason to say no, and as soon as he finds that, he’s done,” says Pabrai. Indeed, Buffett has said, “The difference between successful people and really successful people is that really successful people say no to almost everything.”
Buffett provided Pabrai with several simple filters that helped him to streamline the sifting. First, says Pabrai, one of Buffett’s “core commandments” is that you can invest in a company only if it falls within your “circle of competence.” When Pabrai analyzes a company, he starts by asking, “Is this something I truly understand?” He pushes himself to consider whether he’s at the center of his circle of competence, approaching its edge, or outside it.
Second, the company has to trade at a large enough discount to its underlying value to provide a significant margin of safety. Pabrai doesn’t bother to construct elaborate Excel spreadsheets that might give him an illusion that he can precisely predict the future. He wants an investment that’s so cheap that it’s a “no-brainer.” That usually means paying less than fifty cents for $1 worth of assets. “I have very simple criteria: if something is not going to be an obvious double in a short period of time—you know, two or three years—I have no interest.”
Third, under Munger’s influence, Buffett gradually shifted away from stocks that were merely cheap toward an emphasis on buying better businesses. Among other things, this meant that a company should have a durable competitive advantage and should be run by an honest, capable CEO. Munger pointed out to Pabrai that Graham, who was fixated on buying stocks that were quantitatively cheap, scored his best returns by owning GEICO. “It didn’t make him money because it was cheap,” says Pabrai. “It made him money because it was a great business.”
Fourth, the company’s financial statements should be clear and simple. As Buffett observed, “The only reason that one may not understand a financial statement is because the writer does not want you to understand it.” If it isn’t easy to figure out how the business generates cash today and roughly how much it’s likely to generate in the years to come, Buffett relegates it to what he calls the “too hard” pile. Pabrai once took a photograph of a box on Buffett’s desk that is literally labeled TOO HARD—a visual reminder to resist the lure of complexity. Enron and Valeant Pharmaceuticals, both of which blew up, were easy for Pabrai to reject on that basis alone.
For Pabrai, one of the secrets of successful investing is to avoid anything that’s too hard. He automatically passes on investments in countries such as Russia and Zimbabwe, given their contempt for shareholder rights. He avoids all start-ups and initial public offerings (IPOs), since he’s unlikely to find bargains in arenas dominated by sales hype and inflated expectations. He has never sold a stock short because the maximum upside is 100 percent (if the stock falls to zero), while the downside is unlimited (if the stock soars). “Why bet with those odds?” he asks. He also largely ignores the infinite complexity of macroeconomics, focusing instead on a handful of critical microfactors that are likely to drive a specific business. In short, simplicity rules.
These basic principles that we’ve just discussed are extraordinarily robust and have served Pabrai well. But what’s remarkable is that none of this is original. Every major idea on which he has built his investment career has been stolen from Buffett—except for the ones stolen from Munger. Writing about this makes me slightly queasy. How can I hope to say anything new or profound while enumerating ideas that Pabrai has ripped off from other people? But that’s precisely the point. His competitive advantage lies in the fact that he doesn’t care whether you or I think he’s derivative. All he cares about is what works.
One evening, over dinner at a Korean restaurant in Irvine, I ask Pabrai why more people don’t clone in his systematic way. Between mouthfuls of a dish called “spicy beef danger,” he replies, “They’re not as shameless as me. They have more ego. To be a great cloner, you have to check your ego at the door.”
Pabrai’s purloined investment approach worked like a dream. When he launched Pabrai Funds in July 1999, the tech bubble was about to burst. It was a perilous time to be an investor. Over the next eight years, the best-performing US index—the Dow Jones Industrial Average—eked out an annualized return of 4.6 percent versus Pabrai’s annualized return of 29.4 percent after fees. The media hailed him as “a superstar,” “the next Warren Buffett,” and “the Oracle of Irvine.” His assets under management swelled to $600 million. He recalls, “I could do nothing wrong.”
Pabrai’s returns were driven by a string of bets on undervalued stocks gripped by uncertainty. For example, he invested in Embraer, a Brazilian producer of jets, shortly after the 9/11 terror attacks, which caused many airlines to cancel aircraft orders. This short-term shock led fearful investors to overlook the longer-term reality that Embraer was still a high-quality business with a superior product, low manufacturing costs, first-rate management, and loads of cash on its balance sheet. Pabrai paid about $12 per share in 2001 and sold his last shares for $30 in 2005.
Similarly, in 2002, he invested in a Scandinavian shipping firm, Frontline Ltd., after the price for leasing oil tankers collapsed. The stock had plunged to $5.90, but he calculated that Frontline’s liquidation value was more than $11 per share. Leasing prices would eventually rebound, since supply would become constrained. In the meantime, Frontline could survive a cash crunch by selling ships one by one. As with Embraer, uncertainty scared investors away. But the upside potential easily outweighed the downside risk. Pabrai coined a motto that summed up this type of bet: “Heads, I win. Tails, I don’t lose much.” In a matter of months, he made a 55 percent return.
In 2005, he bet heavily on another no-brainer: a specialty steel producer called IPSCO Inc. Pabrai paid around $44 per share at a time when the company had about $15 per share of excess cash on its books. He expected IPSCO to generate around $13 per share of excess cash in each of the next two years, giving it a total of $41 per share in cash. With the stock trading at $44, he was effectively buying all of IPSCO’s steel plants and other assets for only $3 per share. Pabrai couldn’t predict what the company would earn beyond the next two years, but, as he saw it, the stock was so cheap that there was scant risk of losing money. When he sold in 2007, his $24.7 million investment was worth $87.2 million—a 253 percent return in twenty-six months.
In recent years, it’s become almost an article of faith that it’s impossible to beat the market over the long run. But Pabrai, thanks to Buffett and Munger, had found a formula for outperformance. As we’ve seen, the key principles were not that difficult to identify and clone. Be patient and selective, saying no to almost everything. Exploit the market’s bipolar mood swings. Buy stocks at a big discount to their underlying value. Stay within your circle of competence. Avoid anything too hard. Make a small number of mispriced bets with minimal downside and significant upside. Yet Pabrai was almost alone in his fanatical determination to observe these rules. “Nobody else is willing to do this,” he marvels. “It might as well be the Indian guy.”
Pabrai wanted to express his gratitude in person. So in July 2007, he teamed up with his best friend, Guy Spier, to enter a charity auction for a “power lunch” with Buffett.VII Pabrai and Spier, a Zurich-based hedge fund manager who is similarly obsessed with Buffett, won the auction with a bid of $650,100. The money would go to the GLIDE Foundation, a charity that helps the homeless. But Pabrai saw the donation as his version of a “guru dakshana”—a Hindu term for a gift presented to your spiritual teacher when your education is complete.
On June 25, 2008, Pabrai finally met his guru. They spent three hours together at a Manhattan steak house, Smith & Wollensky, ensconced in a wood-paneled alcove at the back of the restaurant. Pabrai brought his wife, Harina, and their two daughters, Monsoon and Momachi, who sat on either side of Buffett.VIII Spier brought his wife, Lory. Buffett, who was jovial and grandfatherly, brought bags of gifts for the kids, including M&M’s with his picture on them. The conversation ranged from his favorite company (GEICO) to the person he’d most like to meet (either Sir Isaac Newton, who was “probably the smartest human in history,” or Sophia Loren, for less cerebral reasons).
For Pabrai, the lunch yielded two unforgettable lessons—one about how to invest, one about how to live. The first came when he asked Buffett, “Whatever happened to Rick Guerin?” Buffett had mentioned Guerin’s superb investment record in “The Superinvestors of Graham-and-Doddsville.” But Buffett told Pabrai and Spier that Guerin used margin loans to leverage his investments because he was “in a hurry to get rich.” According to Buffett, Guerin was hit with margin calls after suffering disastrous losses in the crash of 1973–74. As a result, he was forced to sell shares (to Buffett) that were later worth an immense fortune.IX
By contrast, Buffett said that he and Munger were never in a hurry because they always knew they’d become enormously rich if they kept compounding over decades without too many catastrophic mistakes. Over his meal of steak, hash browns, and a Cherry Coke, Buffett said, “If you’re even a slightly above average investor who spends less than you earn, over a lifetime you cannot help but get very wealthy.” Pabrai says this morality tale about the perils of leverage and impatience has been “seared” into his brain: “Right there, the Buffett lunch was worth it.”
But what resonated most profoundly for Pabrai was the sense that Buffett was true to himself—that he lived in extraordinary alignment with his own personality, principles, and preferences. Over lunch, Buffett explained that he and Munger always measure themselves by “an inner scorecard.” Instead of worrying how others judge them, they focus on living up to their own exacting standards. One way to tell whether you live by an inner or an outer scorecard, said Buffett, is to ask yourself, “Would I rather be the worst lover in the world and be known publicly as the best, or the best lover in the world and be known publicly as the worst?”
Buffett manages every aspect of his life in ways that mesh with his own nature—from his childish diet (which consists largely of burgers, candy, and Coca-Cola) to how he runs his business. For example, he made it clear that Berkshire’s decentralized structure was never designed to maximize profits: it simply suited his character to oversee Berkshire’s many businesses in a hands-off manner, trusting his CEOs to use their freedom wisely. Likewise, he pointed out that he handles his own daily schedule and keeps it blissfully uncluttered by rebuffing almost any request that might distract him from reading and contemplation. Similarly, he insists on working solely with people he likes and admires. As a stock picker, too, he has always gone his own way, avoiding whatever overvalued asset class is currently in vogue.
This discussion had an enduring impact on Pabrai and Spier. In May 2014, I joined them at Berkshire’s annual meeting. The next day, we flew from Omaha to New York on a private plane that Spier had chartered from NetJets, a Berkshire subsidiary. He and Pabrai had just come from a breakfast with Buffett and Munger and were giddily happy. During the flight, our main topic of conversation was this notion of living by an inner scorecard. As Pabrai saw it, “Probably ninety-nine percent of people on this planet wonder what the world thinks of them.” A tiny minority take the opposite view, which he poetically expressed as follows: “Fuck what the world thinks.”
Pabrai and Spier reeled off a random list of inner-scorecard exemplars: Jesus, Mahatma Gandhi, Nelson Mandela, Margaret Thatcher, Steve Jobs, and leading investors such as Buffett, Munger, Ted Weschler, Li Lu, Bill Miller, and Nick Sleep (whom we’ll study in depth in chapter 6). Pabrai observed, “All the guys who reached the pinnacle, that’s the only way they got there.”
Nobody I’ve ever met lives more determinedly by his own rules than Pabrai. Buffett’s example strengthened his commitment to construct a life congruent with his personality. On a typical day, Pabrai sleeps late and arrives at his office after 10:00 a.m. with no agenda. An assistant brings him printouts of his emails around 11:00 a.m., and Pabrai scrawls the briefest of replies directly on the paper—a practice cloned from Munger. Like Buffett and Munger, Pabrai spends most of the day reading. He takes a guiltless nap most afternoons, then resumes reading until late in the evening.
As much as possible, Pabrai remains inside this cocoon. He avoids meeting the CEOs of companies that he’s analyzing because he thinks their talent for selling makes them an unreliable source of information—a policy he cloned from Ben Graham.X He avoids speaking with his own shareholders, except at his annual meeting, and he refuses to meet with potential investors: “I genuinely don’t enjoy that whole interaction, the mumbo jumbo of all that.”
It doesn’t bother him if this attitude irritates people or costs him millions of dollars a year in forgone fees. “Munger says he doesn’t care about being rich. What he really cares about is having independence. I fully endorse that. What the money gives you is the ability to do what you want to do in the way you want to do it.... And that’s a tremendous benefit.”
Pabrai approaches relationships with the same ruthless clarity about his own priorities. During their lunch, Buffett said, “Hang out with people who are better than you and you cannot help but improve.” Pabrai acts on this advice to a degree that would horrify many people. “When I meet someone for the first time, I evaluate them afterwards and say, ‘Will it make me better or worse to have a relationship with this person?’” If the answer is worse, he says, “I’ll cut him out.” Likewise, after a lunch meeting, he asks, “How did I enjoy that?” If he didn’t, “There will never be another lunch with the person again.” He adds, “Most people don’t pass the smell test.”
Diplomacy is not his strong point, but Pabrai regards truthfulness as a higher concern. In the late nineties, he read a book titled Power vs. Force: The Hidden Determinants of Human Behavior by David Hawkins, which Pabrai describes as “a huge part of what I believe in.” Hawkins argues that “true power” stems from traits such as honesty, compassion, and a dedication to enhancing other people’s lives. These powerful “attractors” have an unconscious effect on people, making them “go strong,” whereas traits such as dishonesty, fear, and shame make them “go weak.” Pabrai took one specific lesson from Hawkins and determined to live by it. “You can’t get away with lying to other humans,” says Pabrai, “and that’s a very profound idea.”
During the financial crisis of 2008-09, Pabrai’s highly concentrated funds fell about 67 percent before staging a rapid recovery. At his 2009 annual meeting, he told his shareholders, “Most of the mistakes in the funds occurred because I was stupid. They didn’t happen because of market issues.” He highlighted several “dumbass” errors he had made in analyzing stocks such as Delta Financial and Sears Holdings, which were crushed. Almost none of his investors abandoned him. The lesson: “You go as far out as you can on the truth variable and the payback is huge.”
Indeed, one of the pleasures of interviewing Pabrai is that he answers every question candidly, with no concern for how he might be judged. As an experiment, I once emailed him some impertinently personal questions, including one about his net worth. He wrote back, “Net worth as of 11/30/17 is $154 million.” He then shared additional financial details to clarify what this figure excluded. It was a marvelous display of trust in the power of truthfulness.
To my mind, what’s most remarkable is Pabrai’s unshakable consistency in sticking to such principles. “When you encounter these truths that other people don’t understand, you just have to latch on to them big-time,” he says. “Anytime you get a truth that humanity doesn’t understand, that’s a huge competitive advantage. Humanity doesn’t understand Power vs. Force.”
Intelligent people are easily seduced by complexity while underestimating the importance of simple ideas that carry tremendous weight. Pabrai, the ultimate pragmatist, doesn’t fall into this trap. “Compounding is a very simple idea. Cloning is a very simple idea. Telling the truth is a very simple idea,” he says. But when you apply a handful of powerful ideas with obsessive fervor, the cumulative effect “becomes unbeatable.”
The trouble is, most people dabble half-heartedly when they find an idea that works. Pabrai cannot conceal his contempt: “These fucking humans listen and say, ‘Oh, yeah, that makes sense. Whatever. So what? I’ll try to incorporate it.’ And you know, that fucking doesn’t work. You’ve got to go ten thousand percent or not at all!”
As he sees it, the attitude we should clone is that of the nineteenth-century Hindu sage Swami Vivekananda, who told his followers, “Take up one idea. Make that one idea your life. Think of it, dream of it, live on that idea. Let the brain, muscles, nerves, every part of your body, be full of that idea and just leave every other idea alone. This is the way to success.”XI
As Pabrai’s fortune grew, he faced a pleasurable problem: what to do with all the money. Once again, he turned to Buffett for inspiration. Over the years, Buffett has repeatedly spoken about how little his wealth contributes to his contentment. I remember sitting with Pabrai and Spier at one of Berkshire’s annual meetings when Buffett told the audience, “My life would be worse if I had six or eight houses.... It just doesn’t correlate.”
Pabrai is not exactly ascetic. He once spent thousands of dollars on a pair of bespoke shoes, and he drives a blue convertible Ferrari—a fitting reward for a huge home run on Ferrari stock. But he knows that hedonism is an unreliable route to happiness. He’s also wary of bequeathing hundreds of millions to his daughters, having internalized Buffett’s advice that the ideal amount to give your kids is enough so they can do anything, but not so much that they can do nothing. Buffett had pledged to give the bulk of his billions back to society, so Pabrai decided to “clone the giving.”
He began by asking, “If I were to die today, what cause or organization would I want most of my assets to go to?” He wanted a charity managed like a cost-efficient business, with precise metrics tracking how much good it did for every dollar spent. Nothing excited him until, in 2006, he stumbled on an article about a program in rural India run by Anand Kumar, a math teacher who gave free coaching and accommodation to thirty poor high school graduates each year. The Super 30 program had an incredible success rate in preparing them for the IIT entrance exam.
Pabrai grasped at once the strength of this model: it was low cost, offered talented teenagers a life-changing chance to escape from poverty, and provided measurable results. He emailed Kumar, offering him money to enlarge the program. But Kumar didn’t want to expand. Undeterred, Pabrai made a fateful decision: “You gotta take a trip and just show up.”
Bihar, which was often described as the “kidnapping capital of India,” wasn’t an alluring destination for a high-flying hedge fund manager. So Pabrai hired two bodyguards from a New Delhi security firm to accompany him on his mission. One was a former Black Cat commando—an Indian counterterrorism specialist “trained to storm hijacked aircraft and take the kidnapper out.... From being asleep to killing the guy was less than three seconds!” The commando had to travel separately by train to Bihar because he couldn’t carry his gun on the plane. It later turned out that Kumar had also hired four bodyguards to ensure Pabrai’s safety.
Pabrai found Bihar a desolate and desperate place where thieves would sometimes steal railway tracks and sell them for scrap. His grumpy verdict: “The weather sucks, the infrastructure sucks, the hotel sucks.” Pabrai harbors fantasies of becoming so enlightened that he could happily stay in one-star hotels. Alas, he’s not there yet. Still, despite the discomfort, he would never forget the day he spent with Kumar, who taught his students in a rented shed without walls. Pabrai was blown away by his intellect, passion, and gift for teaching: “He’s one in hundreds of millions.”
Unable to convince Kumar to take his money, Pabrai requested permission to replicate—and scale up—the Super 30 program. His appropriation of Buffett’s investment strategy had proven to him the power of cloning. So why not apply the same approach to philanthropy? Kumar gave him his blessing, and Pabrai set to work.
Kumar’s renown meant that thousands of students applied to his program. He then handpicked the most brilliant. Pabrai solved the problem of sourcing brainiacs by partnering with a government-run network of almost six hundred selective boarding schools, which educate tens of thousands of poor rural children each year. Pabrai’s Dakshana Foundation offered scholarships to hundreds of the “most promising brains” from this pool and gave them two years of coaching in math, physics, and chemistry to prepare for the IIT exam. “If they don’t bust their asses, they’re going back to the villages with nothing,” says Pabrai. “This is their one shot.”
The strength of this philanthropic model is that it costs so little to change so many lives. In 2008, Dakshana’s total cost per scholar was $3,913, and 34 percent of its students won places at IIT. By 2016, Dakshana had become so efficient that its cost per student had dropped to $2,649, and its success rate hit an astonishing 85 percent. Even better, the government heavily subsidizes both the boarding schools and IIT: Pabrai figures that for every dollar Dakshana spends on a student, the government spends more than $1,000. So he’s effectively making a leveraged bet with an enormous social return on his invested capital.XII
Before meeting Buffett for lunch in 2008, Pabrai sent him Dakshana’s first annual report. Buffett was so impressed that he shared it with Munger and Bill Gates. Then, in an interview with Fox TV, Buffett declared that Pabrai “thinks as well about philanthropy as he does about investments.... I admire him enormously.” The disciple—the shameless copycat—had been blessed by the master. “After that,” says Pabrai, “I felt that I could die and go to heaven.”
Since then, Dakshana has grown exponentially. By 2018, it was coaching more than one thousand students simultaneously at eight sites across India, including a 109-acre campus called Dakshana Valley, which Pabrai bought at a discount from a distressed seller. Eventually, this site alone could accommodate twenty-six hundred students. Meanwhile, Dakshana has broadened its focus beyond IIT: it now also prepares hundreds of poverty-stricken students for the entrance exam to medical schools. In 2019 alone, 164 Dakshana scholars won places to study medicine—a 64 percent success rate. All of these initiatives are managed by Dakshana’s CEO, a retired artillery officer named Colonel Ram Sharma, who charges one rupee per year for his services.XIII
In other words, what began as a humble replica of Kumar’s program has become a behemoth—a testament to the fact that intelligent cloning involves more than crude imitation. In Dakshana’s case, Pabrai borrowed a model that worked in miniature and rebuilt it on an industrial scale. “His success is because of his attention to detail,” says Colonel Sharma. “I can definitely say that.”XIV
When Pabrai and I traveled to Dakshana Valley, we met with Ashok Talapatra, one of the foundation’s star alumni. Talapatra told me that he grew up in a $6-per-month shack in a slum in Hyderabad as the son of a tailor who earned $100 a month. Their home was so basic that it had a pink shower curtain instead of a front door and an asbestos roof that failed to keep out the rain. When Pabrai and his daughter, Monsoon, visited Talapatra there, his mother served them chai and snacks on top of a stool because the family didn’t own a table.
But Talapatra was a brilliant student. He aced the IIT entrance exam, ranking 63rd out of 471,000 applicants—the highest position that any Dakshana scholar had ever achieved. He went on to study computer science and engineering at IIT Bombay, then landed a six-figure job at Google. After a stint in London, he moved to the company’s headquarters in California, where he now works as a software engineer. “He’s moving up the ranks,” says Pabrai. “He’s on a very rapid trajectory.” Within a year of joining Google, Talapatra bought his parents a new apartment with two bedrooms, a kitchen, air-conditioning, and an impermeable roof.
Talapatra’s remarkable journey hasn’t stopped there. Inspired by Pabrai, who has become a friend and mentor, he’s increasingly fascinated by investing. Pabrai recommends investment books to him, and Talapatra regularly joins him at Berkshire Hathaway’s annual meeting. When I see them together in Omaha and consider the impact that Pabrai has had on Talapatra’s life, I’m amazed that one man’s knack for betting on mispriced stocks has produced so much good. In sentimental moments, I find myself thinking of the Talmudic saying “Whoever saves one life, it is considered as if he saved the whole world.”
But Pabrai, in his brutally honest way, ridicules any notion that he’s some sort of righteous savior. While sitting in a taxi in Mumbai, he tells me, “Once you have a sense that life is meaningless, what should you do? Not fuck up life for other people. Leave the planet a better place than you found it. Do a good job with your kids. The rest of it is a game. It doesn’t matter.”
After many conversations with Pabrai, I found myself thinking more and more about the power of cloning and how to use it in my own life. On a plane ride home from Irvine, I even wrote a memo to myself entitled “Lessons from Mohnish.” It began with two fundamental questions: “What winning habits are out in the open that I should clone, and who should I clone?” For example, it makes sense for me, as a nonfiction writer, to reverse engineer books by authors I admire, such as Michael Lewis, Malcolm Gladwell, and Oliver Sacks.XV
As I considered Pabrai’s life and what I should learn from him, several principles particularly resonated with me. In my memo, I wrote:
- Rule 1: Clone like crazy.
- Rule 2: Hang out with people who are better than you.
- Rule 3: Treat life as a game, not as a survival contest or a battle to the death.
- Rule 4: Be in alignment with who you are; don’t do what you don’t want to do or what’s not right for you.
- Rule 5: Live by an inner scorecard; don’t worry about what others think of you; don’t be defined by external validation.
Finally, quoting a line of Munger’s that Pabrai often cites, I wrote, “Take a simple idea and take it seriously.” Of all these lessons, that last one might just be the most important. Too often, we encounter a powerful principle or habit and we contemplate it, take it for a quick spin, and then forget about it. Pabrai becomes consumed by it. He lives by it. That’s a habit I have to clone.
But the goal here isn’t to become a slavish follower of someone else’s ideas. It’s often smarter to take the spirit of a principle and adapt it to suit our own priorities. For example, I kept thinking about Pabrai’s fixation on going “as far out as you can on the truth variable.” That led me to wonder, What if you were to focus instead on going as far out as you can on the kindness variable or the compassion variable? Pabrai’s habit of focusing single-mindedly and without compromise on a specific virtue has real power, but we don’t have to choose the same virtue.
I think it also works best when we clone in ways that match our own talents and temperament. Pabrai and Spier often discuss companies before deciding whether to invest in them—a practice they cloned from Buffett and Munger. As a result, they tend to own many of the same stocks. But Spier’s position sizes are significantly smaller because he’s more cautious and less self-confident than Pabrai. As he puts it, “I don’t have balls of steel like Mohnish.”
In 2015, Pabrai had half of his funds’ assets in just two investments: Fiat Chrysler and General Motors warrants. Spier, who had about a quarter of his assets in them, found Pabrai’s level of concentration “breathtakingly scary” and worried that he’d failed to protect his friend from hubris and overconfidence. Another hedge fund manager warned that Pabrai’s overweighting of the auto sector was “batshit crazy.” But Pabrai made seven times his money in six years as Fiat’s stock surged. Unrepentant, he had 70 percent of his offshore fund’s assets in two stocks in 2018—a fearlessly aggressive stance that led to a 42 percent loss that year. As Spier once told me, “The border between brilliance and stupidity is hard to discern.”
Pabrai’s strategy of “extreme concentration” is influenced by Munger, who has said that “a well-diversified portfolio needs just four stocks.” But it would be suicidal for you or me to clone that approach unless we share Pabrai’s extreme intestinal fortitude and analytical gifts. When I asked him how he coped with the stress of a 67 percent drawdown during the financial crisis of 2008-09, he said, “I don’t have stress.... My wife couldn’t even detect that there was an issue.” On the contrary, the stocks he bought amid the crash were so cheap that he found the experience “orgasmic.”
Psychologically, it also helps that Pabrai doesn’t take anything too seriously. He once told me, “On my gravestone, I want them to write, ‘He loved to play games, especially games he knew he could win.’ Cloning is a game. Blackjack is a game. Bridge is a game. Dakshana is a game. And, of course, the stock market is a game. It’s just a bunch of games. It’s all about the odds.”
What’s amazing to Pabrai is how easy it’s been to stack those odds in his favor by studying other people’s playbooks and consistently borrowing their best moves. “The thing is, none of this stuff is hard,” he says, with an exuberant laugh. “Don’t spill the beans, man! Don’t tell the world!”
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