TIP347: Value Investing in 2021 w/ Mohnish Pabrai

Episode Summary

Executive Summary: In this podcast, host Stig Brodersen interviews investor Monish Pabrai, who shares his evolved investment framework inspired by Nick Sleep. Pabrai moves from seeking '50-cent dollars' to focusing on 'spawners'—companies with the DNA to create new businesses, like Amazon. He emphasizes extreme patience, aligning inner and outer selves, and finding long-term compounders in undervalued markets like Turkey and Japan.

Main Topics: Evolution of Investment Framework (Priority: 5/5): Pabrai transitions from the 'Compound 26' approach (buying at 50% discount) to Nick Sleep's framework of holding great businesses long-term, focusing on whether the business is getting better rather than fixating on multiples. Spawning as a Key Investment Concept (Priority: 5/5): Pabrai introduces 'spawners'—companies like Amazon, Alphabet, and Alibaba that create new businesses from within, benefiting from tax advantages and high returns. He seeks to build a portfolio of such companies. The Importance of Patience and Owner's Mindset (Priority: 4/5): Pabrai stresses extreme patience, comparing it to watching paint dry. He advocates thinking like a founder, not selling unless the business deteriorates, and cites examples like the Walton family and Naspers. Self-Discovery and Alignment (Priority: 4/5): Pabrai shares his experience with industrial psychologists who gave him his 'owner's manual,' helping him align his inner self with his actions. This led him to leave a hated business and start Pabrai Funds. Market Cycles and Global Opportunities (Priority: 3/5): Pabrai discusses 17-year market cycles of overshooting and undershooting, noting that U.S. markets are overvalued in some areas while Japan, Korea, and Turkey offer deep value. He advises fishing where the fish are. Learning and Time Management (Priority: 3/5): Pabrai describes his learning process: reading three newspapers daily, business biographies, and drilling down on disconfirming evidence. He emphasizes an empty calendar and the ability to say no.

Key Arguments: The best investors are entrepreneurs who never sold, as exemplified by the Walton family holding Walmart for 51 years. Spawning allows companies to reinvest pre-tax profits into new ventures, with Uncle Sam acting as a benevolent VC. Mistakes of omission are acceptable; missing thousands of great businesses is fine if you find a few exceptional ones. Every stock sale is an admission of a mistake, per Thomas Phelps; buying correctly means holding forever. Curiosity about disconfirming evidence (e.g., why smart investors own GM) can lead to valuable insights.

Data Points: Compound 26 target return: 26% per year - Pabrai's original goal: buying at 50% discount, converging to fair value in 3 years yields ~26% annually. Walmart holding period by Walton family: 51 years (1970-2021) - Example of long-term holding without selling, contrasting with institutional investors. Naspers' return on Tencent investment: 8,000% - Naspers invested $32 million in Tencent in 2001, now worth over $250 billion, never sold. Amazon stock price in 2014: $300 per share - Nick Sleep advised investors to put money in Amazon at that price; it has since 10x'd. Pabrai's investment in Turkish company: $7 million for 33% stake - Company had $19 million market cap vs. $300M-$1B liquidation value; Pabrai now holds long-term. Cost of industrial psychologist assessment: $2,000 - Pabrai paid $2,000 for his 'owner's manual'; one psychologist became an investor with $100,000.

Pivotal Quotes: "The best investors in the world are not investors at all. They are entrepreneurs who never sold." — Monish Pabrai (quoting Nick Sleep): Pabrai explains the shift from trading to permanent holding, using the Walton family as an example. "The number one skill to be a great investor is extreme patience. If you can derive tremendous pleasure from watching paint dry, you will be a very wealthy man." — Monish Pabrai: Pabrai emphasizes the importance of patience, comparing it to a meditative state. "Every sale is an admission of a mistake. If you bought correctly, you would just buy and hold." — Monish Pabrai (quoting Thomas Phelps): Pabrai argues that selling a great business is an error, reinforcing the long-term holding philosophy.

Implications: Investors should shift from short-term value plays to identifying 'spawners' with long runways, embrace extreme patience, and seek undervalued global markets. Personal alignment and curiosity about disconfirming evidence are critical for success.