Mohnish Pabrai
The most successful investors tend to sound like they are describing something obvious. Mohnish Pabrai has spent decades refining an approach so simple it fits on an index card: buy things that are cheap for reasons that are temporary, hold them until they are not.
What makes Pabrai unusual is not his performance - roughly 70% annual returns over five years after selling his IT company in the mid-90s, turning 13 million - but his insistence that this simplicity is the entire point.
The Shameless Cloner
Pabrai has a label he wears proudly: the shameless cloner.
He copied Warren Buffett’s partnership structure when launching Pabrai Funds in 1999. He copied an educator’s model when building the Dakshana Foundation. He points to Sam Walton as proof that originality is overrated - Walmart innovated nothing in its first 20-25 years. Everything was copied from competitors.
This extends to finding investments. Pabrai recommends Value Investors Club, a free website where vetted investors post detailed writeups. Why do the hard work of generating ideas when you can borrow from people who already did?
The insight here is counterintuitive. Most people assume success requires novel thinking. Pabrai argues the opposite: novel thinking is expensive and error-prone. Copying proven models is cheap and reliable.
The 2x4 Test
Here is how Pabrai describes what he is looking for in an investment: something that hits you in the head like a 2x4. (YouTube)
The numbers should not make sense. In the early days, Warren Buffett found Western Insurance trading at 25 in earnings per share and $80 in book value. That is a 2x4.
The corollary is that most ideas should be rejected immediately. Pabrai estimates 99% of investment opportunities belong in what Buffett calls the “too hard” pile - a physical box on his desk where ideas go to be forgotten. (YouTube)
Buffett would not use Excel to analyze an investment. If you need a spreadsheet, there is something complicated happening that you probably do not understand. Einstein’s hierarchy of intelligence, as Pabrai tells it: smart, intelligent, genius, simple. The highest level is simplicity. (YouTube)
Risk vs. Uncertainty
Wall Street pays a premium for certainty. Companies with predictable earnings trade at high multiples. Companies surrounded by uncertainty get “taken out back and shot,” as Pabrai puts it. (YouTube)
But here is the twist: uncertainty is not the same as risk. Risk is the chance of permanent capital loss. Uncertainty is just not knowing exactly what will happen.
The best investments combine low risk with high uncertainty. The downside is protected - by hard assets, contracts, or cash on the balance sheet - but the outcome is murky. Wall Street hates murkiness. Pabrai loves it.
His shorthand for this: heads I win, tails I do not lose much.
The Rick Guerin Lesson
Pabrai paid $650,000 for lunch with Warren Buffett. What he learned over that meal was worth considerably more.
Buffett told him about Rick Guerin, his third partner alongside Charlie Munger. Guerin was every bit as smart as Buffett and Munger. But he was in a hurry. He used leverage.
When the 1973-74 crash came, Guerin got margin called. He had to sell his Berkshire Hathaway shares to Buffett at 700,000.
The lesson Buffett drew: if you are even a slightly above-average investor, spend less than you earn, and use no leverage, you cannot help but get rich over a lifetime. (YouTube)
The problem is patience. Buffett noted that in 58 years of running Berkshire, only 12 decisions out of roughly 300 moved the needle. One good idea every five years. (YouTube)
Circle of Competence
John Arrillaga became a billionaire investing only in real estate within two miles of Stanford’s campus. That is it. One asset class, one geography, one lifetime.
Pabrai calls this “inch wide, mile deep.” Know everything about a narrow field. Let others chase breadth.
Nick Sleep said the best investors are entrepreneurs who never sold. They know their domain so deeply that valuation anomalies are obvious to them and invisible to everyone else. (YouTube)
The Plan A / Plan B Framework
Pabrai offers a simple system for someone with $10,000 who wants to become wealthy.
Plan B is the default: dollar-cost average into Berkshire Hathaway Class B shares. Even at 10% annually for 49 years, that is a 128x return. This is better than an S&P 500 index fund when the market is expensive.
Plan A is the upgrade: run a mental Geiger counter over everything you encounter, looking for anomalies. When you find something that does not make sense - numbers that seem too cheap, a situation everyone misunderstands - peel off 10-15% of your Berkshire position, make the bet, let it play out, then return to Plan B.
The key is that Plan A is optional. Most people do not need it. Most years Pabrai himself does not find anything worth switching from Plan B.
Second-Order Thinking
Buffett’s most important question, according to Pabrai: and then what?
Pabrai invested in Frontline, a shipping company, and made 80%. Good outcome. But he missed the 80x outcome because he did not think past the first order.
Here was the full logic he missed: shipping rates had collapsed, so shipbuilding stopped. But demand for shipping would return. When it did, supply would take 3-4 years to catch up. During that lag, existing ships would become enormously profitable. (YouTube)
The 80% came from recognizing the company was cheap. The 80x would have come from seeing what happens next.
Die With Zero
Pabrai has calculated his death date: June 11, 2054.
This is not morbid planning. It is math. He subscribes to the Die with Zero philosophy - recycle wealth at high rates of return rather than hoard it for heirs.
Large inheritances are like an IV drip, he argues. They prevent children from reaching their potential. Buffett put it another way: give kids enough money to do anything they want, but not enough to do nothing. (YouTube)
Pabrai aims to have exactly $10,000 left the day before he dies. The rest will have compounded through philanthropy.
The Dakshana Model
Dakshana Foundation prepares poor Indian students for the IIT entrance exams. The numbers are striking: $800 per student, 70% admission rate, versus a 1.3% national average.
True to form, Pabrai copied this model from another educator. He found something that worked and scaled it.
The foundation fits his investment philosophy in miniature. Low cost, high payoff, simple mechanism. The intervention is not complicated - intensive tutoring for high-potential students - but the leverage is enormous.
Personal Operating System
Pabrai describes himself as wired for single-player games. He discovered this through a 360-degree personality assessment that gave him what he calls his “owner’s manual.”
These traits are hard-coded by age five, in his view. The useful exercise is not trying to change them but understanding them. His owner’s manual explained why running a team-based IT company felt exhausting and running a solo investment fund feels natural.
He takes a daily nap. Working tired, he says, produces a dimly flickering light. Jeff Bezos makes all important decisions in the morning. The pattern holds across high performers: protect cognitive energy, do the hard work when the tank is full.
See also: Warren Buffett, Charlie Munger, Value Investing, Dakshana Foundation
Source: Asking a Billionaire Investor How to Turn 1M ft. Mohnish Pabrai - My First Million