Mohnish Pabrai on Cloning & Compounding | #495

Episode Summary

Executive Summary: Mohnish Pabrai discusses how investing, bridge, and philanthropy are all shaped by probabilistic thinking, patience, and concentration in a few great outcomes. He explains his views on compounding, long-term ownership, foreign opportunities in Turkey and India, why Apple should be held until permanent secular decline, and details Dakshana’s high-impact education program in India that transforms poor students’ lives.

Main Topics: Bridge as a model for investing (Priority: 5/5): Pabrai explains his long-time love of bridge, how it resembles investing through probabilities, partnership, and long-term learning, and shares stories about playing with Warren Buffett and seeking a bridge partner. Compounding and financial education (Priority: 5/5): He argues that high school students should be taught compounding, the rule of 72, and the importance of starting early, spending less than you earn, and avoiding leakage from retirement accounts. Dakshana philanthropy and education in India (Priority: 5/5): Pabrai describes Dakshana’s mission to identify very poor but bright students and prepare them for elite Indian engineering and medical exams, creating massive upward mobility at very low cost. Concentrated investing and power laws (Priority: 5/5): He emphasizes that most returns come from a small number of big winners, citing Buffett, Shelby Davis, venture capital, and trend following as examples of power-law outcomes and the need for patience. Apple, Berkshire, and the hold-vs-sell question (Priority: 4/5): Pabrai says Berkshire should not trim Apple unless there is a permanent secular decline, arguing that great businesses can be held for very long periods like founder-family ownership. Foreign investing in Turkey and beyond (Priority: 4/5): He explains why he invested in Turkey despite macro turmoil, focusing on mispriced businesses, local expertise, and companies insulated from currency/inflation risk rather than the country headline risk. Finding anomalies in public markets (Priority: 4/5): He shares memorable examples like Ipsco and funeral home stocks to illustrate his preference for obvious anomalies where cash flows or liquidation values create asymmetry.

Key Arguments: Compounding is under-taught; if young people truly grasped its logarithmic effect, they would save and invest much earlier. Retirement systems should be more automatic and opt-out, because behavioral inertia prevents people from building wealth. Most investment returns come from a tiny fraction of holdings, so high conviction and long holding periods matter more than constant activity. An investor should think like a founder or long-term partner, not a trader, especially in exceptional businesses like Apple. Macro headlines matter less than business-specific economics when investing in distressed foreign markets; the key is finding companies insulated from local turmoil. Turkey offered opportunities because many foreign investors exited indiscriminately, creating mispricings in strong businesses and asset-heavy companies. Dakshana works because a small donation unlocks much larger public subsidy and changes a poor student’s earnings trajectory dramatically.

Data Points: Dakshana program age: 16 years - Pabrai says the education initiative has been operating for 16 years. Oldest Dakshana alumni age: 32 years old - He notes the program’s oldest alumni are now 32 and beginning to distinguish themselves. IIT entrance exam applicants: 1.3 million - Number of 18-year-olds taking the IIT exam annually. IIT seats: 16,000 - Available seats for IIT admissions. IIT admit rate: 1.3% - Pabrai compares the IIT admit rate to elite U.S. schools. Exam score threshold for IIT seat: 34% - He says scoring 34% can earn a seat at IIT. Negative marking: 0.25 point deducted per wrong answer - He explains the exam penalizes wrong answers. Candidates scoring below zero: 70% - He says 70% of test takers end up below zero after penalties. Dakshana success rate: north of 60% - Success rate for students reaching IIT through the program. Dakshana success rate including NITs: over 90% - When including next-tier schools, outcomes exceed 90%. Cost per student: about $3,000 - Total cost to support one student through the two-year Dakshana program. Government subsidy match: 25 to 1 - Dakshana’s spending unlocks about $75,000 of government-supported educational value. Annual Dakshana graduates: about 1,000 - The program produces roughly 1,000 graduates each year. Current share of IIT seats: about 4% - Pabrai says Dakshana students now occupy around 4% of IIT seats. Turkey investment count: 3 companies - Despite visiting many businesses, Pabrai says he only invested in three Turkish companies. Turkey businesses visited: 80-90 businesses - He visited roughly 80 to 90 Turkish businesses over the years. Turkey warehouse example: $700 million liquidation value vs $20 million market cap - He cites an extreme anomaly in Turkey to show mispricing. Ipsco cash: $15/share - Cash on hand at the Canadian steel company when he invested. Ipsco expected earnings: $15/share for next 2 years - Guidance gave visibility into future earnings. Ipsco stock price at entry: $42 - He bought when the market price was below expected near-term cash generation. Ipsco stock price later: $157 - He sold after the stock rerated sharply. Funeral home P/E: 2x earnings - He describes buying funeral service companies at very low multiples. Twitter followers: 188,000 - He mentions the size of his Twitter audience when asking for a bridge partner. LinkedIn followers: 50,000 - He cites his LinkedIn audience in the bridge-partner request. Facebook followers: 5,000 - He notes a smaller following on Facebook. Berkshire/MidAmerican investment: $2 billion to nearly $100 billion - He cites this as an example of a 50-bagger. Buffett money concentration: about 4% of bets - He says Buffett made most of his money on roughly 1 out of 25 investments.

Pivotal Quotes: "the power of compounding. And, you know, what Einstein says, the eighth wonder of the world." — Mohnish Pabrai: Explaining why financial education should start in high school. "we are in a business with no call strikes." — Mohnish Pabrai: Arguing that investors should not feel pressured to act on every idea and can let many opportunities pass. "do nothing. till there is a permanent secular decline." — Mohnish Pabrai: His view on what Berkshire should do with Apple.

Implications: The episode argues for patience, concentrated ownership, and early education in compounding, while showing that philanthropy and foreign investing can create outsized impact when paired with local expertise and long time horizons.