Manish Pabrai on Investing, Philanthropy, and Life Lessons

The Challenges of Giving Up on Investments

Manish Pabrai begins by discussing the difficulty many investors have with giving up on investments:

"A lot of humans have difficulty with giving up. They don't want to give up. Like you're saying, okay, I like this business. I've seen this business. I spent some time on the business, but I don't understand this part of it. And how do I get to understanding that part of it? And I think Buffett and Munger's answer would be that 99% of businesses need to go in the too hard pile."

He emphasizes the importance of being willing to put most investment ideas into the "too hard" pile, rather than trying to force understanding of every business. This aligns with Warren Buffett and Charlie Munger's approach of staying within one's circle of competence.

Compounding Relationships and Investments

Pabrai draws an analogy between relationships/friendships and stocks in a portfolio:

"We know that the best things in life comes from compounding. And so we want to circle the wagons of our current friendships. But you probably perhaps also want to be open to new wonderful relationships."

He suggests approaching relationships and investments similarly - focusing on compounding the best ones while remaining open to new opportunities. However, he cautions against constantly chasing new options:

"The mistress always appears to look better than the wife, but she may actually not be better. Appearances can be deceiving. We have to keep in mind that is this mistress really better or is the newness what is making it better?"

Pabrai recommends having a hierarchy in one's portfolio, only considering new investments if they are significantly better than existing holdings:

"If something in the portfolio is a 6 and a half out of 10 and the new kid on the block is 9 and a half out of 10 then yeah that should be a good candidate for considering a change."

The Power of Long-Term Compounding

To illustrate the power of long-term compounding, Pabrai shares an example about Walmart:

"Let's say you invested in the Nifty50. You put $100,000 into the Nifty50 and $2,000 of the $100,000 went into Walmart. One of 50 bets. Now, let's also assume all the other 49 holdings go to zero...If you kept it invested for the last 55 years with 98% of the portfolio going to zero, your annualized returns are almost 15% a year and you blew out the S&P 500 with a 98% error rate."

This example demonstrates how a single great investment held for decades can more than make up for many losing investments. It underscores the importance of identifying truly exceptional businesses and holding them for very long periods.

Dakshana Foundation and Effective Philanthropy

Pabrai discusses his experience running the Dakshana Foundation, which provides education to underprivileged students in India. He shares insights on effective philanthropy:

1. Focus on a small number of key metrics: "We only have two things we're looking at. We're looking at the brilliance and we're looking at the socio-economic status of the family."

2. Run it like a business: "We run it like a business. We run it the way you run your business."

3. Aim for continuous improvement: "All I'm trying to do is that next year slightly better than this year on all fronts."

4. Leverage alumni: "More than half the folks we hire now are our alums...For these individuals, it's not about the paycheck. It's very clear to me when I meet them that their passions for Dakshana vastly exceed mine."

5. Be realistic about challenges: "It's not just difficult, it's impossible to optimize for more than one variable."

Moats and Competitive Advantages

Pabrai shares his perspective on competitive moats:

"Enduring moats are few and far between. It's just the nature of capitalism that everything gets competed away...It is really anomalies in capitalism that lead to moats. It's very difficult to actually conceive of a business and then start a business saying I'm going to have XYZ moat and actually be successful at doing that."

He suggests approaching claims of moats skeptically, as they are rare and often develop accidentally rather than by design.

The Importance of Humility and the "Too Hard" Pile

Pabrai emphasizes the importance of intellectual humility, sharing an anecdote about Warren Buffett:

"I noticed that on his desk there's a box which says too hard...Someone as disciplined as Warren needs a physical box to remind him that most things he cannot understand. This is a very high IQ guy. This is, you know, a guy who's a child prodigy and all of that, right? Still has the humility to understand that 99% of stuff I'm not going to understand."

He advises investors to be very comfortable saying "no" quickly to most investment ideas, suggesting that there should only be about 10 companies in the world that an individual investor truly understands.

Evaluating Track Records

On evaluating investment track records, Pabrai suggests:

"You need plenty of time. You need more than 10 years and preferably something like 20 years."

He cautions against judging performance over shorter periods, noting that even great investors can have periods of underperformance. He cites the example of Ted Weschler, who was hired by Berkshire Hathaway despite recent poor performance because they looked at his longer-term record.

Happiness and Wealth

Pabrai shares his personal experience with wealth and happiness:

"I felt that when I was around 33 or 34 years old, I wouldn't be able to consume the wealth I had at that point. And I knew right then that incremental spending at that point would not increase happiness."

He emphasizes that beyond a certain level of wealth, additional money does not increase happiness. He admires Warren Buffett and Charlie Munger's modest lifestyles despite their immense wealth.

Conclusion

Manish Pabrai's insights cover a wide range of topics, from value investing principles to effective philanthropy and life lessons. His perspectives emphasize the importance of long-term thinking, focusing on one's circle of competence, maintaining intellectual humility, and recognizing that happiness comes from more than just accumulating wealth. For investors and philanthropists alike, Pabrai's experiences and wisdom offer valuable food for thought in approaching both financial decisions and life choices.

Article created from: https://www.youtube.com/watch?v=bbdEsPAPq9M