Mohnish Pabrai returns for a second appearance on My First Million to walk Shaan through a complete framework for turning $10,000 into $1 million. The conversation covers Buffett’s Berkshire as a default index, hunting for anomalies using Value Investors Club, the critical distinction between risk and uncertainty, Sam Walton’s obsessive learning from competitors, and why the greatest investment ideas require no Excel. Mohnish also shares stories about his Vegas blackjack ban, his visit to Michael Burry in 2008, his Dakshina Foundation philanthropy as a math game, and the importance of knowing your own owner’s manual.
Speakers: Shaan Puri (host), Mohnish Pabrai (guest, value investor, founder of Pabrai Funds)
Introduction and the 10K-to-$1M Challenge [00:00:00]
Shaan: Mohnish, welcome back. Round two.
Mohnish: Shaan, it’s always a pleasure.
Shaan: So let’s play a game. You’re my coach — my investing coach, let’s say — and I have $10,000 and I want to turn it into a million. Podcast called My First Million. I want to go from 10K to a million. That’s a 100x. How would I take 10K and turn it into a million?
Mohnish: The thing about investing is that opportunities are not going to show up just because you have the cash. So I would make some tweaks to your thinking first.
The 10K is a good starting point, but I also want you to have a day job. And I want you to spend less than you’re earning. Take the 10K, and also take your annual savings — maybe that’s $5,000 to $10,000 a year, whatever it is.
Normally I would say put it into an index. But the S&P is overheated circa 2025. We cannot go there right now. Maybe 2035 we can, but not 2025.
So what I would do is treat Berkshire Hathaway as the index. The default right now is you dollar-cost average into Berkshire Class B shares and you keep doing that, day in, day out.
Shaan: And if you do that, the math is…?
Mohnish: Very simple. Even at 10% a year — which I think is pretty reasonable for Berkshire — rule of 72 says you double every seven years. Life is all about doubles.
Let’s say you’re a 20-something with $10,000 and you go for 50 years. That’s seven doubles. Seven doubles is 128x your money. I gave you more than 100x in 49 years, without having to be a genius, without doing anything. That’s just plan B.
The 10,000 becomes $1.28 million with no taxes paid — no dividend, no nothing. And we haven’t even gotten to plan A yet.
Plan A: Hunting for Anomalies — The Frontline Story [00:04:30]
Mohnish: Every once in a while, there’ll be opportunities that show up. What we’re looking for is something that hits you in the head with a 2x4. The best investments are ones that make no sense. You cannot make sense of the numbers. It’s too good to be true. It’s just weird. When those things come together where the numbers don’t make sense in a positive direction, that’s when you want to dive in.
Shaan: Give me an example.
Mohnish: I’ll give you one where it made money for me, but I didn’t capture even 3% of the money I should have. It was given to me on a platter and I blew it. I still made money, but you know — usually the best ideas, when you finally figure them out, they’re very simple.
Around 2001 or 2002, I encountered a shipping company called Frontline. Frontline owned a fleet of about 75 VLCCs — very large crude carriers. These are giant ships that transport crude from Saudi Arabia to the US. The entire global fleet at that time was 300 VLCCs. Frontline owned 75 of them — 25% of the market.
The founder, John Frederickson, had put the entire fleet on the spot market. He could have done time charters — one, three-year deals with guaranteed cash flows — or be a gambler and put it on the spot market, taking whatever the price is that day. He chose the spot market with the whole fleet.
VLCCs have a cost of around $15,000 per day to break even, with crews and all. At that time, the Iraq war and other things caused oil demand to fall, and there wasn’t enough need for VLCCs. Shipping rates collapsed to $7,000 per day. So now you have Frontline losing $8,000 per day, times 75 ships. And they’re levered.
The stock got taken out back and shot — a 90% drop. And most of it was valid, because what equity markets want to see is consistency of cash flows. What we were seeing here was consistency of losses, and no one could tell you when those losses would abate.
Shaan: So the stock is down to what?
Mohnish: Around $3 per share. And when I looked at it, I noticed two things.
First, all their debt was non-recourse. The debt was tied to individual ships. There was no debt at the parent level. If they defaulted on the debt of a ship, the bank could just take that ship — like a car loan. They couldn’t take the company.
Second, there was a somewhat liquid market to buy and sell these ships. Even when rates went to $7,000 a day, the ships had only dropped in price by maybe 25–30%. So if Frontline got into a cash crunch, they could sell three ships, pay off that debt, and have enough cash left to keep operations going for six to nine months. Then sell three more after that.
I felt there was really no way the company was a bankruptcy candidate. And I could look at the entire company and say: what if they sold all the ships? If they sold all the ships and paid off all the debt, you’d end up with about $9 or $10 a share — and you’re at three bucks. You’d make three times your money if they just liquidated the whole business. That’s the arbitrage between the stock price and the net price of the assets in a distress scenario.
I said, “We really can’t lose money here.” So I put 10% of my fund into Frontline, because I just couldn’t see a way we could lose.
Shaan: And then what happened?
Mohnish: A few months later, the rates start improving. Oil demand comes back. Rates go to $15,000. Then $20,000. The stock hits $10. I sell my shares.
Shaan: Well done, Mohnish. Tripled your money.
Mohnish: In about eight months. And I said, “Okay, this was exactly what I thought.” Rates then go to $300,000 a day.
Shaan: Wait — $300,000?
Mohnish: At $300,000 a day, they’re making $285,000 a day times 75 ships. That number is like infinity.
Shaan: I was trying to do the math.
Mohnish: Just assume it’s infinity. The stock goes up in the next three years 80x.
Shaan: Oh wow.
Mohnish: Here’s stupid Mohnish, patting himself on the back with not even a double — I got about an 80% return and that was that. That was an example of first-order thinking without second-order thinking.
The second-order thinking is what Buffett always says is the most important question in investing: “And then what?” If I had been smart enough to ask that question — you see the rates are terrible, you see the scrapping, you see the fleet is going to shrink. So even if oil demand doesn’t come back, it’s going to come into balance eventually, and those losses are going to go away.
And then you do the next thing, which is that when oil demand came back, it would take three to four years to build one of these ships. So when rates went to $30,000 or $50,000 and everyone could see it was a great business, they’d go to the Korean shipyards — which are now inundated with orders — and those yards would say, “Go to the back of the queue. I’ll give you a ship in five years.” And by the way, the ship is no longer $70 million — the new price is $120 million.
So once demand became tight, you really couldn’t increase supply for at least three to four years. What’s $285,000 times 75 ships times 1,000 days? That’s the minimum time when that price is not going to come down. It’s only after three or four years that more ships get delivered and you get more balance. An insane amount of cash flow.
Warren Buffett’s Hit Rate and the 12 Exceptional Decisions [00:16:00]
Mohnish: As Jim Cramer says, there’s always a bull market somewhere. So plan A is: keep a Geiger counter running over everything, looking at different things, and when something doesn’t make sense, drill down. Every so often you’re going to hit a mother lode.
When you find something that’s a mother lode, you peel off 10–15% of what you have in Berkshire, put it into that, let it play out, then put it back into Berkshire. You keep doing that, and now your 100x is going to show up in half the time or less.
If you look at Warren Buffett’s 2022 letter, he said that in 58 years of running Berkshire, there have been 12 decisions that moved the needle for Berkshire stock. In 58 years, he made more than 300 to 400 purchase decisions for stocks and businesses. Out of 300, only 12 were exceptional. One good idea on average every five years. This is Warren Buffett — a 4% hit rate.
Shaan: So great investment ideas are rare.
Mohnish: We’re not going to run into them every week, every month, or every year. Plan A: stick it in the index. Plan B: keep running a Geiger counter over everything, and when something doesn’t make sense, drill down.
Where to Look: Value Investors Club and the Moody’s Manual [00:20:00]
Shaan: You tell me the story about these ships, and when you explain it I can see it. I see the opportunity. But the thing I don’t get is — why are you looking at crude oil ships in the first place? How do I even know where to look? Do you pick one industry and look at 100 companies in it? Do you read books on 50 industries? Do you look at what other investors are doing and reverse engineer? Where do you even know where to look?
Mohnish: I’m going to lay it out for you. It’s going to be so easy. But it takes a certain temperament. Let me talk about the temperament first.
When Warren Buffett was a teenager, he used to go to the racetrack in Omaha. One of the things he did, when he was around 14, is after all the races were done, he’d pick up all the tickets people had thrown on the ground. These are mostly losing tickets. He’d go home and one by one look at every ticket. He’d find ones where a horse came in second and the ticket was for “win or place” — an actual winning ticket, but they’d discarded it because they were drunk or didn’t understand. He’d always find a bunch of tickets that were actually in the money but had been thrown away.
He was underage, so he couldn’t go to the counter to collect the money. He gave it all to his Aunt Alice, his favorite aunt — she’d go collect and give it back to him.
When Warren got older, around 23 or 24, he went through the Moody’s Manual. For nostalgia, I bought these on eBay. This is Buffett’s nighttime casual reading at 23 years old. They cover railroads, airlines, shipping, traction, buses and trucks. Each manual covers a different sector.
What the Moody’s Manual does is give you a summary of every company — maybe two or three per page, very fine print. Buffett went through these two or three times, page by page, looking for anomalies. He’d find something like Western Insurance, where the stock price was $15 and the earnings last year were $25. Book value of $80. The stock is $15, earnings are $25, book value is $80 — that’s what we call an anomaly. Hitting you in the head with a 2x4. Makes no sense.
He’d make a list of all the companies that made no sense in a positive direction, study them, and make investments.
Now, in order for Warren to find Western Insurance, he might have had to spend 14 hours a day for three months reading non-stop before finding one or two of them. But he only needs very few. Warren’s mind was programmed for this intensity — the work never bothered him. No other teenager was going to pick up all those tickets off the floor and go through each one with the optimism that they’d find a free lunch.
Shaan: And the shortcut for the rest of us?
Mohnish: There’s a website called Value Investors Club. It’s free. You give them your email and you can see all ideas that are 60 days or older. It’s very difficult to become a member of Value Investors Club — members have to submit two ideas a year that get a decent rating to keep their membership. So it’s curated, with a lot of brainpower.
There may be 500 to 800 write-ups in a year. Each write-up is around 10 to 15 pages. What I’m saying is that it’s much easier than the Moody’s Manual because someone is digesting the information for you. You could read one a day easily — you could have a full-time job and do that. And you don’t need to read the whole thing. Read the first few paragraphs and see if it’s something interesting or grabbing you. If not, move on.
I look at every idea that’s posted, and I don’t care to look at them right when they’re posted, because those ideas will work even five years from now. I recently started investing in a company where the original write-up was in 2021 — it’s 2025 and still valid.
But you should use it only as input to ideas. Just like the Moody’s Manual is not telling you what to buy and sell — once you see the idea, you do all your own work. Make sure it’s something you understand well. Make sure it’s within your circle of competence.
Japan Trading Companies: Buffett’s No-Brainer Bet [00:27:30]
Mohnish: Buffett is still doing this. His Japanese bets — there’s a book called the Japan Company Handbook, similar to the Moody’s Manual. And I’m excited about this because you hear a lot about Buffett’s well-known bets — See’s Candy, Coke, Geico. But as I understand it, his Japan bets were incredible.
Five Japanese trading companies had an 8% dividend yield. Very cheap. Japan’s index has not gone anywhere for like 30 years. Warren borrowed the entire amount in yen at half a percent a year — not a small amount, about $5 billion.
So he’s bought Japanese companies paying dividends in yen, which he borrowed in yen. The dividend coverage is 16 times his interest payment. He put in essentially no equity and he’s instantly making 7 to 7.5% on $5 billion — roughly $350 to $400 million out of nothing, just coming to him.
Then in about three or four years, because these companies were so cheap, they all doubled in price. The $5 billion became $10 billion. The equity that went in is nothing — so it’s an infinite return. They all raised the dividend. Based on the original purchase price, the dividend is now about 15%.
And after that, he increased the bet. He was under 5% in all of them, and he’s now approaching 10% in all of them.
Anyone could have looked at the Japan Company Handbook. It’s a matter of how hungry you are. It’s the same as any entrepreneur — if you truly are focused on it, you can do very well. The universe is going to conspire to help you with whatever your passion is. It’s just a matter of whether you want it.
Shaan: Does he use Excel?
Mohnish: No, he does not use Excel. He uses his computer mainly to play bridge. Warren wouldn’t be caught dead using Excel. Because when you’re going through the Japan Company Handbook or the Moody’s Manual, there is no Excel needed. When the earnings are $25 a share and the stock is $15, you don’t need Excel. When the dividend yield is 8% and you’re borrowing at half a percent, you don’t need Excel.
Did I need Excel for Frontline? No. I looked up the liquidation price of the ships. I looked up where the ships were. All very basic numbers.
Recently I was talking to a friend looking at some international stock exchange that trades at a trailing P/E of around 30, growing at 15 to 20% a year, with 60% of revenue as profit. As they grow, that 60% might become 70% due to operating leverage. If you just forward two or three years, the P/E becomes less than 10. No need for Excel — you can do it all in your head.
It’s got $10 of earnings today. $12 a year from now. $14 to $15 two years from now. Maybe $17 to $18 three years from now. Stock’s at $30. When you’re at $18 earnings, you’re already at a 15 multiple — and it’s growing. By that time, it may be trading at even more than 30 times earnings, so the stock could be at $600 or $700.
If you can’t do the math in your head, it’s an automatic pass. Something complicated is going on that doesn’t fit.
The Rules: No Excel, No Leverage, Explain It to a 10-Year-Old [00:33:00]
Mohnish: Another important thing: you should be able to explain your thesis for a stock in about four or five sentences to a 10-year-old. If you can’t do that, it’s a pass. You can’t sit down with a 10-year-old with an Excel spreadsheet — they’re not going to like you and they’re not going to be interested.
Einstein used to say there are four levels of intelligence: smart, intelligent, genius, simple. The highest level of intellect is simplicity.
And the other thing about investing is that you have to have conviction. It’s very difficult to have conviction if you keep needing to go back and look at your Excel model. You need it in your head. Buffett never needs to go anywhere. He knows what the dividend yield is, what he paid, what the yen rate is — it’s all pre-programmed.
So: don’t use Excel. Don’t overcomplicate it.
Shaan: And then the second rule is leverage?
Mohnish: Don’t overleverage. And the story I like here is about the missing third bust on this table. You know there’s Warren, there’s Charlie — there should be a third partner. Someone’s missing. Can you tell that story?
Mohnish: Warren, Charlie, and Rick Guerin used to do deals together — all independent, sharing ideas, sometimes going in together. Rick found Blue Chip Stamps for them, and I think he also might have been the contact for See’s Candy. After the early ’70s, we never heard about Rick. He kind of fell off the radar.
When I had lunch with Warren, I asked him: “Warren, what happened to Rick? Used to be three of you.” And Warren said, “Charlie and I knew that we would get very rich, and we were not in a hurry. Rick was in a hurry.” Rick was always using some leverage. When the ‘73–‘74 downturn came — a crash in slow motion over two years, stocks down more than 40 to 50% — Rick got margin calls. And Warren said, “When he got the margin calls, I bought his Berkshire Hathaway for $40 a share” — the stock that’s now $700,000.
Rick was forced to sell at the worst possible time.
Warren went one step further, because he’s always trying to add value at these lunches. He said: “If you’re even a slightly above-average investor and you spend less than you earn and you use no leverage, you cannot help but get rich in a lifetime.”
Risk vs. Uncertainty: Where the Greatest Opportunities Lie [00:38:30]
Shaan: Tell me about the difference between risk and uncertainty.
Mohnish: That’s an important concept, because Wall Street gets confused between the two — and that’s where the greatest opportunities lie.
Frontline was an example of a situation where uncertainty was extremely high and risk was very low. Wall Street is looking for certainty. A company like ADP — they process payroll — has had something like 50 years of non-stop growth. Cash flows going up in a straight line. Wall Street rewards that extremely well. It gets priced for euphoria. Overpriced.
On the other hand, if a company exhibits high uncertainty, it gets taken out back and shot. And those are where the opportunity lies. One of the cues to look for: is this a business with low risk and high uncertainty? That combination — low risk plus high uncertainty — equals high rewards.
Shaan: I was looking at your portfolio and you have this Turkish company — a Coke bottler, I think. Is that a good example of the risk and uncertainty mismatch?
Mohnish: We made money on it but we exited. The Coke bottler had a parent company that was the dominant beer bottler in Turkey and several other countries. Their largest operations were in Russia, where they had a number-one market share in a 50/50 joint venture with AB InBev. Russia effectively nationalized that business — I think because they were somewhat upset with Erdogan about his support for Ukraine.
When that happened, it went into the too-hard pile for us.
Shaan: The too-hard pile — that’s something I stole from you the last time you were here. Explain it again.
Mohnish: It’s a Buffett thing. It’s a physical box on Warren’s desk. If you Google “Warren Buffett too hard,” the image will probably pop up. He has a box on his desk that he calls “too hard,” and he says that 99% or more of investment ideas you encounter should go into that box — because we’re not going to be able to figure them out.
If there are 50,000 stocks in the world, we’re not going to understand more than a few hundred of them, even after quite a while of studying. Most companies we encounter should go into that box. One of the most important things in investing is humility — the humility to know that you don’t know most things. You don’t need to. If you can understand a very small sliver of things, and you know when those things get overpriced and underpriced, that’s all you need.
Circle of Competence: John Arrillaga and the Stanford Campus [00:44:00]
Shaan: There’s a guy who owns a bunch of real estate, but in a very small area — John Arrillaga. What’s his story?
Mohnish: John Arrillaga was a billionaire. He passed away maybe two or three years ago. His daughter is married to Marc Andreessen — billionaire to the power of billionaire.
He had a very narrow circle of competence. He didn’t understand most things, but he only invested in real estate within two miles of the Stanford campus. If you walked with him around the campus, for every single building he could tell you the full history — when it was built, the current value, the rents, the owners, all of it. An inch wide and a mile deep. That’s a really good trait for an investor.
He ran a very underlevered portfolio — not much debt. When downturns came, he aggressively bought distressed properties around some of the most prime real estate you can think of. He’d buy from banks when people were getting foreclosed and bankrupt, get them all leased at fair value, take the leverage back down, and repeat the cycle. He never wandered into Mountain View. He didn’t go to Irvine. He stuck to real estate right there, did it extremely well, and died a billionaire.
We don’t need to know many things about many things. We need to know a lot about a little. If I’m looking at Frontline, I should learn everything I can about shipping — oil shipping, tankers, the history, who makes them, every nuance. The deeper I go, the better it’s going to be for me. I shouldn’t be spending time next week on airplanes. One thing, one by one, right?
Shaan: Why do you think most people don’t do that? When you say it, I think — there’s a blueprint. Go deep in a two-mile radius, become super knowledgeable, don’t get distracted, hold forever. If you think about it, that’s a blueprint.
Mohnish: I think it was Nick Sleep who has this quote: “The best investors are entrepreneurs who never sold.” If you think about entrepreneurs — that’s what they are. They are John Arrillaga. Sam Walton is John Arrillaga.
Sam Walton: Learning from Losers, Measuring Aisles in Brazil [00:48:00]
Shaan: Tell me more about Sam Walton.
Mohnish: Sam Walton said that there is no human who has ever lived, or ever will live, who has spent more time in competitor stores than him. Whenever he’d go on vacation with his family and they were passing a retail store, he’d say, “I’ll be back in 20 minutes,” and he’d go in.
One time he went into a store and his manager said, “That was such a badly operated store.” And Sam said, “Yes, but did you see the candle display? Did you see how fantastic that candle display was?” His perspective was: I can learn from losers. I want to find the spark in something that’s a total loser.
One time in Brazil, in a retail store, they find this older guy flat on the ground. They call the paramedics. It turns out it’s Sam Walton. And what he was doing is measuring the space between the aisles. He didn’t have a tape measure, so he laid down — because the space between the aisles is a very important data point for a retailer. You’re going to either waste square footage or be too narrow. And he was in Brazil thinking: How are they doing it? Am I three inches too wide at Walmart? Am I three inches too narrow? That’s who Sam Walton was.
In fact, Walmart has not innovated at all — at least not for the first 20 or 25 years it ran. Everything came from competitors. They took a lot from Sears. They took a lot from Kmart, and then they killed them. Sam Walton used to say, “I’m not the smartest tool in the toolbox. I’m not a smart guy. But I’m a learning machine. I’m going to keep at this.”
He goes to visit Sol Price, the founder of Price Club, which eventually leads to Costco. He looks at Price Club and says, “This is fantastic,” and creates Sam’s Club.
Shaan: Wait — Sam’s Club is Sam Walton? I didn’t even know that.
Mohnish: It’s part of Walmart. And it was completely cloned from Price Club, the predecessor to Costco.
So Sol Price, who was an incredible entrepreneur — someone tells him, “No one has had more impact on retailing than you. Sam Walton cloned you, Jim Sinegal at Costco cloned you, and those two companies influenced Amazon.” They said, “You are the father of retailing globally.” What does he think of that?
Shaan: What did he say?
Mohnish: He said, “I wish I’d worn a condom.”
Shaan: That’s too good.
Mohnish: You know, some of the things Costco does — they pay 50% more than Walmart pays their entry-level employees. Sol Price’s view was similar to Henry Ford’s: I want the people who work in my stores to be able to shop in my stores. Henry Ford said he wanted his workers to be able to buy his cars. At that time automobiles were for the rich, and he wanted to drop the price. At Costco the lowest wage is like $20 an hour when you’re starting out, and they have tuition reimbursement and all kinds of other things. They get a lot of productivity out of their people because of that.
Mohnish’s Library, Napping, and the Calm Investor Schedule [00:55:30]
Shaan: You’ve got books everywhere — we’re in your library right now. How many books do you have in here?
Mohnish: A few thousand.
Shaan: You’ve got business books, investing books, retail books. Science on that wall. What does this door go to?
Mohnish: That’s my bedroom.
Shaan: So you essentially live in the library. And you nap every day, I think.
Mohnish: Absolutely. I’ve been so used to napping that if I don’t nap, my productivity goes down. And I actually don’t like to work if I’m not productive. Even if I lay down for half an hour, 45 minutes, I’m re-energized. For the work I do, I need to be all in. I actually can’t do this work if I’m tired.
Shaan: There’s this athlete, Conor McGregor, and they asked him about his training schedule. He said one of the big mistakes he made was always trying to train all the time — three, four times a day. He thought that’s how you win. And his coach basically said, “You’re like a light that’s always dimly flickering because you never turn off, and therefore you can never turn on and be as bright and as effective as you could be.” I’ve used that in my own model — where’s my light right now? If I need to just shut it down briefly to come back full brightness, that’s the way.
Mohnish: Jeff Bezos says all important decisions happen in the morning. He’s very particular about needing a solid eight hours at night. He leaves work at a normal time, but he doesn’t do important decisions in the afternoon — first thing in the morning, highest energy levels. I find my best work is in the morning too.
Shaan: I came over to your house once and you were very calm. You weren’t on the clock. No big bustling team of analysts. You seemed to keep a pretty clear calendar. Is that intentional?
Mohnish: In the business I’m in, if I can find a couple of things to buy in a year — in Buffett’s case, one thing every five years — I’m doing well. This is not a situation where a packed schedule helps anything. I’m taking in a lot of information but there’s not much action. I’m trying to improve my mental models, understand the businesses I already own, and going through Value Investors Club and Sum Zero looking at what else is out there. Sometimes I find an amazing idea, and then there’s a deep dive — that might take a while.
Shaan: In our first episode, you talked about how you got started — you were an entrepreneur first, and then you said this great thing: as an entrepreneur, maybe 3 to 5% of your brain power was on strategic decisions and really clear thinking, and 95% of your time was blocking and tackling. As an investor, that 3% becomes 95%. It’s just about clear thinking and making the right strategic move.
The Owner’s Manual: Single-Player Games and Self-Knowledge [01:00:30]
Shaan: I read that you took some personality test or analysis that basically told you your temperament is for single-player games. What did you do?
Mohnish: This happened kind of accidentally, and it turned out to be one of the great things in my life. In 1999, I was at a crossroads where it was very clear to me that the IT business I had built — I had lost interest in it. I had become a lot more interested in investing. I had 170 people in the company who thought I was motivated, and I can’t fake it.
Very accidentally, I was with two industrial psychologists and they did a 360 on me. Bunch of tests. They talked to my direct reports, my friends, family, spouse. Built a 360 view of who I was. Then they gave me what I call my owner’s manual.
I think everyone should have their owner’s manual. Like the manual that comes with an appliance. We show up in the world and we don’t have one. Each one of us is programmed differently.
What they said is: the way a human is — their traits, their likes and dislikes, their passions — that is hardcoded by the age of five and is not going to change from five to ninety-five. You can try to change behaviors, but you cannot change traits. The traits are set between your genetics and the first five years of life. They’re hardcoded.
The problem most humans have — which I had — is we don’t know what those traits are. Most of us do what they call mirroring: we look at what the world considers acceptable and adapt our behaviors to fit in. But that can be a big disservice.
Shaan: What did your owner’s manual say?
Mohnish: They said, first of all, I had very high horsepower. They said I was one of the smartest guys they’d come across. But they also said: you are a person who likes to play single-player games. You are not the kind of guy who would be happy being on a soccer team where your performance depends on the team. You seek out games where you think you have an edge, and when you think you have an edge and it’s that kind of game, you will kill it.
I noticed this about myself — I got banned in Vegas playing blackjack.
Shaan: I need to know this story.
The Vegas Blackjack Ban [01:07:00]
Mohnish: I figured out a system which basically beat them. And I did it without counting cards. It took the casino almost a year of watching me to figure it out.
There’s a publication called BJ21 — BJ21.com. You give them $100, they give you a PDF with the odds of every blackjack table in North America. Every table at every casino, including what your odds are if you play perfect blackjack. The house usually ends up with about a 2 to 3.4% edge, meaning every $100 bet, you’re losing roughly 50 cents to $1.70.
There’s a casino in Vegas called the El Cortez. Small place. They improve the odds to get people in the door. The single-deck game at El Cortez has the thinnest house edge of any blackjack table on the planet: 0.18%.
They deal single deck but only deal half the deck, then shuffle. The reason they deal half is to make it difficult for card counters — the deck might become very favorable but then they shuffle, so the high cards at the back never get dealt.
I had a system that relied on the fact that blackjack occasionally has streaks. You might win six, seven, or eight hands in a row, or lose six, seven, or eight in a row. In my betting, when I was losing, it was always the minimum bet. When I was winning, the bets were increasing. With that variance, I was able to overcome the 0.18%.
Shaan: What confused them?
Mohnish: Normally, card counters bet low on a brand-new shoe and increase as the deck gets favorable. In my case, on a brand-new shoe, I would have a high bet. They said, “We just shuffled — there’s no edge he has on a fresh deck. And yet he has a high bet.” They couldn’t figure out what I was doing.
So, I’m playing blackjack. The general manager, who’s very friendly with me, comes and sits next to me and tells the dealer to stop dealing. She’s in the middle of a hand and just keeps dealing. He screams at her, “Stop dealing now!” Like, literally middle of a hand. She shuffles. We’re done.
Then he tells me, “Mr. Pabrai, I like you. I’ve read your book. I’ve watched your videos. And you have a system we cannot beat. So you can come to this casino anytime you want, but you cannot sit down at a blackjack table.”
And I’m thinking: why would I come here if I can’t play blackjack?
Shaan: How much did you take them for?
Mohnish: About $150,000. And this was a very low table limit — only $2,000. At $2,000 I took them, and they said, “We’re done.”
Whenever I go somewhere to talk, I always tell them: “Just say that I have a lifetime ban in Vegas.” Street cred through the roof. Everything else on my CV is irrelevant. It’s like getting into Harvard is impressive, but being a Harvard dropout is the higher status signal. Getting banned from the casino is the highest status.
The Games I Like: Blackjack, Bridge, Investing, and Dakshina [01:14:30]
Mohnish: What I’ve noticed is the games I like — blackjack, bridge, investing, and even my philanthropy, the Dakshina Foundation — they’re all mathematical games. Single-player games where I think I have some edge.
People think I’m doing all this good in the world with Dakshina. What they don’t understand is I’m a game player. What I’m trying to do with Dakshina is: how much money is going in, and what’s coming out? That’s the only thing I’m focused on.
Shaan: What ended up happening with Dakshina? I don’t even think I know exactly what it is.
Mohnish: If you want to give money away to make the world a better place, the natural second step is: I want very high social returns on the money I’m putting out. Most nonprofits don’t even think this way. They see a homeless person and want to help — they don’t analyze what’s going in and what’s coming out.
I ran into a model in 2006 where a guy was taking 30 kids who were very, very poor in India — in Bihar, most from illiterate parents, but with very high IQs — and prepping them for 10 months to take the IIT entrance exam.
The IITs are the best technical institutes in the world. About 1.3 million kids apply for 16,000 seats — a 1.3% admit rate. Princeton is about 5%. Harvard is about 5 to 6%. This is 1.3%. And if you get into IIT, it’s essentially free to attend — the government subsidizes it.
So if you’re a very poor person and you get into IIT, Microsoft will hire you, Google will hire you. Meanwhile, a family making $60 a month — the kid graduates IIT, Google hires him for $120,000 a year. In five years he’s making $300,000 a year. The transformation is total. And this guy was spending $800 per kid on training.
You spend $800 and you take a family from $60 a month to $10,000 a month. The ROI is off the charts. So I went to him and said, “I’d like to fund you.” He said, “I don’t want to scale. I do 30 kids. I don’t want even 31. I don’t want outside money.” I said, “Do you mind if I clone your model?” He said, “Please do — it’d be great, I’ll help you in any way I can.” That’s what Dakshina is.
We spend about $3 to $4 million a year. Just imagine the output. We’ve been doing it for 17 years. A lot of other nonprofits would not get that impact out of even $100 million a year.
The IITs accept 1.3% of the kids who apply. They accept 70% of our kids.
Shaan: That’s amazing.
Mohnish: One day before I die, I want to have $10,000 left. Large inheritances tend to do more harm than good. You don’t want a person on an IV drip for their whole life. Buffett has a great quote: “I want to give my kids enough money for them to do anything they want, but not enough to do nothing.”
I’m investing for a living, compounding is going, and I’m going to end up with more than I need. I could not increase happiness by spending more. So everything else needs to get recycled at high returns.
I asked Google — if you Google “I’m 52 years old, when am I going to die?” it’ll give you an average. I made it poetic: June 11, 2054. My birthday is June 12th. So I’ve got about 29 years and change. At any kind of compounding rate, it’s a ridiculous amount of assets built over that time. But I want to end on June 10th with $10,000. One game is giving it away. The other game is making it. The giving-away curve needs to become dominant in the next few years. The $3 million a year needs to go to $5, $10, $15 million eventually. It’s the same as blackjack. It’s just a math game.
Meeting Michael Burry in 2008: The Core Dump That Went Over His Head [01:26:00]
Shaan: You’ve run into all these characters. We’ve talked about Warren and Charlie. I want to know about Michael Burry — one of my favorite movies is The Big Short. Did you ever meet him?
Mohnish: What you’re going to find out when we finish this conversation is that my middle name is Forest Gump. God loves me. He loves me more than other people. In 2008 — the financial crisis hadn’t happened yet, it’s like March or April — things are getting topsy-turvy. I was visiting San Jose and I knew Michael Burry had an office there. I didn’t know him, but I sent him an email saying, “Mr. Burry, I admire you and would love to visit.” He was not very well-known yet — he was posting on Value Investors Club and things like that. He said, “Oh yeah, stop by.”
I go to his office in San Jose. A few analysts are sitting outside. It seems like a very depressing place — a little dark. I go into his office and there are huge piles of paper everywhere, and he immediately launches into CDSs. He says, “Mohnish, I want to tell you something that’s going to make you extremely wealthy.” And then he downloads to me at a million miles an hour — I’d never heard of a CDS. He’s talking about the housing crash, the coming implosion. Housing has never crashed in the US. None of that. About 80 to 90% of what he said went straight over my head. He just gave me a full core dump in half an hour. My subhuman intelligence couldn’t handle it.
I come out of the meeting, my head is spinning, and I say, “Okay. Well, that was interesting.” And of course, he rides off into the sunset. The movie comes out. And he’s exactly like they show him in the movie — that’s how he is.
God who loves me so much takes me to the epicenter of the best place to be, the best teacher to have — and the idiot Mohnish blew it.
Shaan: Where does that rank in terms of the best calls you’ve seen in your career?
Mohnish: I think what happened is right. Even now, I think it was right of me to not do anything with it, because I couldn’t understand it. Even after the financial crisis, it took me a while to really understand CDSs and tranches and how they were doing all that stuff. And even after knowing all that, I would have been skeptical about making that bet. Hats off to him — he figured it out. A very small number of people figured it out.
The Greatest Investor from India: Rakesh Jhunjhunwala [01:32:00]
Shaan: Tell me about the greatest investor from India.
Mohnish: The greatest investor from India was Rakesh Jhunjhunwala. I never met Rakesh, but I know his friends quite well. Guy Spier actually went to his office and met him. Wonderful guy, died relatively young a few years back.
Rakesh was a very interesting split-brain. He’d have three or four Bloomberg screens in front of him, all these charts, rapid-fire trading going on. But on the other hand, he had two or three stocks he never touched. And those stocks just went through the roof.
One example: a company in India called Titan Industries, which does branded jewelry. Branded jewelry basically didn’t exist in India — it was all mom and pop. There was a trust deficit; you’d go to a jeweler and you didn’t know whether the 22-karat gold was half gold or 80% gold. The jeweler knew but you didn’t. The Titan brand is owned by the Tatas, who have very high integrity. They were able to take a sector with a huge trust deficiency and dominate it. Titan is still in its infancy, and Rakesh made a huge return. I think he compounded at north of 40% per year for several decades. He started with like $10,000 borrowed — didn’t even have that on his own; someone lent it to him.
Shaan: What made him great?
Mohnish: He was a trained CPA — in India, the equivalent is chartered accountant. He understood numbers well. And just before he died, he had figured out that IndiGo — a low-cost carrier in India with something like 70% market share, growing really rapidly, might become one of the largest airlines in the world — was a great business. He’d done well as a passive investor in IndiGo, but then he took the next step and set up a clone of IndiGo. Think about the guts you need to set up an airline from being a passive investor. While he was dying, in bad shape in hospital, that airline was up and running and cranking and doing great. So if he had lived longer, I think he would have shown he could be not just an investor but also an operator.
The Most Important Variable: Starting Early [01:37:00]
Shaan: You said something like — if he had lived longer — and this idea of runway, of how early you start, matters a ton.
Mohnish: Even Buffett — if he had not been giving away so much money along the way, he’d be the wealthiest person in the world right now.
Shaan: Is that your number-one message when you go talk to people? You should have started 30 years ago?
Mohnish: I think the important thing is if there’s a young person listening: it’s really important to start. The funny thing is that if you look at the rules for an IRA or a Roth IRA, there’s no minimum age. You could be six months old and have an IRA — the only rule is that you can only put in wages that you earn.
I was just reading in the Wall Street Journal about some entrepreneur who’s hired his kids, who are like four and six years old, to do different things in the business — because he’s putting $6,000 or $7,000 into their Roth IRAs, equal to their W-2 earnings. Probably stretching the limits of what he can get away with with the IRS.
But even if you’re not doing that — if you start at 22, a small amount saved at 22 is more important than a larger amount saved at 32, because you get started earlier. Spend less than you earn. Put it into Berkshire. Set it and forget it.
If you start at 22 today, you’re going to live over 100 — 110, maybe, by the time all the advances take place. That’s a 90-year runway. At even a 10% return, every seven years you double. 2 to the 13th is… 2 to the 10th is a thousand… that’s $8,000x. The first $10,000 you invested is at $8 million. The second $10,000 is another $8 million. It’s a mind-blowing amount of money if you start early. The length of the runway is really important.
Macro, AI, and Playing to Your Strengths [01:42:30]
Shaan: Do you pay attention to the macro? Interest rates, wars, all these different factors — some people really pay attention to that.
Mohnish: No, because I can’t handicap it and I wouldn’t know what to do with the information. I always try to keep the bet simple — explain to a 10-year-old in five sentences. I’m not going to be able to figure out the macro. That’s why I couldn’t make the CDS bet. There was so much going on: housing’s going to crash, this is going to happen, that’s going to happen. I just couldn’t get my arms around it.
Shaan: In my world, everybody’s talking about AI. Do you think about AI at all?
Mohnish: The problem is I bring nothing to that party, and I’m probably going to get my head handed to me if I try to participate. It’s not in the no-brainer category. It’s not something where I have an edge. I do believe it’s transformational. But I knew the internet was transformational. I knew electricity was transformational. I knew the App Store was transformational. In investing, you can do extremely well without understanding all these things. We go back to John Arrillaga — he doesn’t understand any of these things. Even Buffett sold most of his Apple. He might have sold all of it by now.
We don’t need to understand the flavor of the day. We don’t need to understand Nvidia. If you understand it, more power to you — and if you know how to leverage that understanding into dollars, even better. But that’s not me. We all have to play to our strengths.
Wrap-Up [01:46:00]
Shaan: Well, Mohnish, this has been incredible — part two. I asked you at the beginning: is this like one of those Hollywood sequels where the first one was incredible and the second one is just a cash grab? But no — I think we did a good job. The sequel was, if not better, at least as good.
Mohnish: It was fun. I enjoyed it.
Shaan: Awesome. Thanks for doing it.
Mohnish: Thank you.