Asking a Billionaire Investor How to Turn $10,000 into $1M ft. Mohnish Pabrai

how would i take ten k and turn it into a million what we're looking for is something that hits you in the head with like a two by four we don't need to know many things about many things we need to know a lot about a little what do you think most people don't do that buffett always says the most important question to ask is and then what the he excel warren wouldn't be caught dead using excel okay usually the best ideas when you finally figure it out they're very simple you should be able to explain your thesis of a stock in about four or five sentences to a ten year where do you even know where to look i'm gonna lay it out for it's going to be so easy all someone has to do is i feel like i could rule where to know i could be what i want to from at all in it like a days off on a goal travel never looking back okay here we go on unleash welcome back round two sean it's only the pleasure so let let's play a game you're my coach you're my investing coach let's say and i have ten thousand dollars and i wanna turn it into a million right podcast called my first i wanna go from ten k to a million so that's a hundred x how would i take ten k and turn it into a million 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 about the ten k so i would say okay the ten k is a good starting point but i what i also want you to do separately from that is have a day job yeah okay and i want you to spend less than your earning and i want you to take the ten k and i also want to take your annual savings maybe that's five ten thousand a year or whatever it is and normally i would say put it into an index right the index like the s and p is overheated we can't go there right now circa out twenty twenty five we cannot go into the s and p okay okay maybe twenty thirty five we can but not twenty twenty five so what i would do is i would treat berkshire hathaway as the index so i would just say the default currently is you put it you know dollar cost average into the into berkshire class b shares right and you keep doing that day in day out and if we did that you know the the math is really simple even if we were doing ten percent a year right i mean which i think is probably pretty reasonable for berkshire rule of seventy two we were double every seven years life is all about doubles okay let's say we are a twenty something guy with ten thousand and you go for fifty years or forty nine years it's seven doubles right okay seven doubles is one twenty eight okay it's one twenty eight times your money i gave you more than a hundred x right i gave you one twenty eight x in forty nine years without having to genius with without doing anything right right so this is just plan b right where we put the ten thousand in it becomes more than million one point three three million with no taxes access paid right there's no dividend there's no taxes there's nothing and we haven't even gotten to plan a yet right this is just sitting there now the other thing is that every once in a while there'll be opportunities that show up and what we're looking for is something that hits you in the head with like a two by four so 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 and all of those things so when when these kind of unusual things come together where things don't make sense right that's when we wanna dive in give me an example of a great investment is one that doesn't make any sense the numbers just seem wrong and you know you in the moment well i'll i'll i'll give you one example where it was a money maker for me but i didn't make even three percent of the money i should have okay you know i mean it it was like it was given to me on a platter and a blew it i still made money right but it you know usually the best ideas when you finally figure it out they were very simple so in in the year i think this was like around two thousand one or two thousand two i had encountered the this shipping company called frontline and frontline was a company that owned a fleet of about seventy five vlc very large crude carriers these are giant ships that transport crude from like saudi arabia to the us and that they're just huge the entire global fleet at that time was three hundred chips three hundred vlc seventy five of them were owned by frontline twenty five percent of the market the the guy who ran and was a founder of frontline john fred had put the entire fleet on the spot market so there are two ways he could have dealt with his fleet he could have done time charters kinda one year three year deals where he's guaranteed cash flows per day and all that or be a gambler put it on the spot market and play it whatever the price today is right so he had put it on the spot market the entire fleet now these vlc cc they have a cost with the cruise and all of that off around fifteen thousand dollars per day to break and at that time we had like the iraq war and different things going on so oil demand fell a lot and there wasn't enough need for vlc so the shipping rates collapsed to the point they went to seven thousand per day okay so now you have frontline losing eight thousand per day time seventy five shares right okay and they're lever okay and so basically the stock got taken out back and shot okay like a ninety percent up okay and it most of it was valid because basically you know when we are making investments so when the equity markets look at a company they want to see consistency of cash flows they reward consistency of cash flows here what we were seeing is consistency of losses okay no one could tell you when these losses ab debate so the the dynamics were the stock i think was down to like three dollars per share and when i looked at it i noticed two things okay the first thing i noticed is all their debt was non recourse their debt was tied to individual ships there was no debt of the parent right so basically if they defaulted on the debt of a ship the bank could just take the ship they couldn't really take the company or just take that ship they carlo right right and the second thing i noticed was that there's a very somewhat liquid market to buy and sell these ships so even when the rates went to seven thousand per day the ships had dropped in price by something like maybe a third twenty five thirty percent drop from where they used to be right so what i realized is that if frontline got into a crunch where they were having cash problems they could just sell three ships if they sold three ships paid off the debt they'd have enough cash left over to keep sustaining operations for six to nine months they could sell three more ships after that so i felt like there was really no way the company was a candidate for bankruptcy and there was really no way and the other thing is i could i could look at the entire company and say okay what do they sold all the ships if they sold all the ships paid off all the debt you would end up with like nine or ten dollars a share you're a three bucks right okay so you you'd make three times of money if they just liquidate the whole business so there was a arbitrage between the price of the stock and the net price of the assets in a distressed scenario right and so i said okay we really can't lose money here so i put ten percent on my fund into frontline right because it's i just couldn't see a way that we could lose money after a few months the rates start improving the oil demand starts coming back up the rates go to fifteen thousand then they go to twenty thousand the stocks at ten bucks okay i sell my shares well done okay tripled my money yeah in in like eight months or something okay and i said okay this was exactly what i thought right rates then go to three hundred thousand a day okay at three hundred thousand a day they're making something like two hundred and eighty five thousand a day times seventy five ships okay that number is like infinity yeah i was trying to do the math just assume it's infinite the stock goes up in the next three years ad x oh wow okay here's stupid moon ish okay patti himself on the back with the double and i didn't even get a double i got like eighty percent return of money and that was that and so that was an example of where i did first order thinking but i did not do second order thinking mh so the second order thinking was you know buffett always says that the most important question to ask in investing is and then what if i had been so smart as to ask the question and then what so you see that rates are terrible you see the scrapping you see that that fleet gonna shrink so even if oil demand doesn't come back the way it was it's gonna come into balance eventually that those losses are are gonna go away and then you do the next thing on ten war which is that when oil demand comes back it takes three to four years to build one of these things so when the rates went to thirty thousand or fifty thousand and all these guys can see this is a great business now well when you go to the korean shipyards who are now inundated with orders they're gonna 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 seventy million the new price one twenty right okay because i got more orders that i can handle right so we had this dynamic if i had thought about it that once the demand became tight you really couldn't increase supply for at least three or four years so what's two hundred and eighty five thousand times seventy five times one thousand days right that's the minimum number of time and that price is not gonna come down it's only after three or four years more ships start getting delivered and you start getting more balanced and all of that but that's an insane amount of cash flow mh right so the thing is that there are always like you know our friend jim kramer says there's always the bull market somewhere okay so basically if we if we are plan a berkshire hathaway plan b looking for anomalies right every so often not not very often every so often you will find something weird and we've got all the time in the world we can research something for three months it turns out it's not that great let it go right we've got berkshire shell cranking okay so if you look at warren buffett you know in in his twenty twenty two letter he said that in fifty eight years of running berkshire there have been twelve decisions that have moved the needle for berkshire stock now in fifty eight years he made more than three or four hundred purchase decisions for stocks and businesses okay out of three hundred if i take a conservative number it's actually more than that only twelve were exceptional and he said there was one good idea on average every five years okay this warren buffett right with a four percent hit rate okay so basically great investment ideas are rare we're not going to run into them every week or every month or every year so plan a sticking the index plan b keep running a guy counter where everything looking at different things and when something doesn't make sense to drill down and every so often you're gonna hit a mother load right and when you find something that's a mother load you peel off ten fifteen percent of what you have in berkshire put it into that let it play out then put it back into berkshire right right and just you keep doing that and now your hundred x is gonna show up in half the time less alright let's take a great quick break because they had a little freebie for you so if you're listening to this episode and you like what when you just talking about you might be like me you're trying to take notes you're trying to remember these principles that he's talking about because the dude is just a wealth of knowledge when it comes to investing well to find folks at hubspot listen to this episode they took the transcript they put down the nine principles that he talks about as well as the examples that he you have and they put it all in a pdf for you so you don't need to take notes they did it all for you you could read that learn from it that's much better way to get more value out of these episodes it's in the show notes below just go download that and enjoy so you you tell me the story about these ships and when you explain it i can see it just like you see it oh that's the opportunity but the thing i don't get is why are you looking at crude oil ships how do i get to like how do i even know where to look and so what is that process for you do you do you pick one industry and look at a hundred companies in it do you read books on fifty industry do you look at what other investors are doing and try to reverse engineer like where do you even know where to look i'm gonna lay it out for you it's gonna to be so easy but but it takes a certain temperament okay so first i wanna talk about the temperament okay so if we go back to warren buffett when he was a teenager he used to go to the racetrack in omaha and one of the things he did the racetrack he was like fourteen years old or something is after all the race that had been done he'd pick up all the tickets that people are left thrown on the ground right these are mostly losing tickets right they just kinda toss them from the garbage cans he'd pulled them on out then he'd go home and one by one look at every ticket he would find now sometimes a horse would come in second and the ticket was for win a place he was actually winning ticket but they didn't understand they were drunk or whatever right so he'd always find a bunch of tickets which were actually in the money but they been discarded so now he was under underage age he couldn't go to the counter to collect the money so he give it all to his aunt alice his favorite aunt she used to go to the counter collect the money and give it to him okay so when warren when warren became older let's say when he was let's say twenty four or twenty five years old he went through the moody's manual and what he was doing at the moody's manual and you know for nostalgia i bought these on ebay and i wanted you to see the moody's manual okay so so this is too off was buffett was twenty three years old this was his nighttime casual reading this was his so what he did now with the moody's manual they were there were a number of these that came out like in the year nineteen fifty three this is just railroads airline shipping traction brass and trucks i even know what this is is this the earnings reports so this is the boundary line of that day okay okay so if you if i open the moody's manual to any random page okay what what it's doing is it's got like two or three companies per page you can see how find the print is yeah okay alright like a magnifying glass and it's basically giving you a summary of every company right now buffett went through now this is just one of them in nineteen fifty three for nineteen fifty three they were probably about seven or eight of these books that came out in fifty three similar number in fifty four fifty five so so you're talking about a big stack right right he went through the these books two or three times he went through what he did is he read each one page by page right and he was looking what he was looking for he was looking for anomalies so he used to host these mba students and actually he bought he brought for them printout outs from the moody's manual to the ones that he made an investment in so he would find something like western insurance for example where the stock price was fifteen and the earnings last year were twenty five okay the stock is fifteen dollars a share earnings are twenty five dollars a share book value is eighty dollars a share right okay that's what we call an anomaly right hitting you by a head head with the two by four makes no sense right he would make a list of all these companies that made no sense in the positive direct right okay and then he'd study them and then he would make investments right now in order for warrant to find western insurance he would he might have had to spend fourteen hours a day okay nonstop reading these for three months before he finds one or two of them but he only needs very few of them and warren mind you know he's he's a prodigy so his mind was programmed to have this intense the the work never bothered him just like no other teenagers were going and collecting all those tickets on the floor and then going through each one with the optimism that i am going to find something that is basically a free lunch right right and so he went through the movies manual and basically started finding anomalies and then started making investments in them and did well etcetera now we have a shortcut you know because i know that your listeners are not going to do what buffett okay i cannot do what buffett did i do not have the wherewithal and the ferocious intensity that warrant almost no one does i think that he's just the extreme anomaly on that front so for example there's a website called value investors club mh okay now if you go to value club it's free you don't to pay anything whatever if you give them your email you can see all ideas that are sixty days or older okay and if you don't give them your email you can see all ideas that are one twenty days and old it actually doesn't matter because there's ideas and values in nurses clubs that are ten years old fifteen years old it's very difficult to become a member of value assist club posting ideas so it's like a curated website right okay the members have to submit two ideas a year which get a decent rating in order to keep their membership so you have what i have found is the value club has a lot of brain power it has brain power coming out of the years okay it's all free so all someone has to do is sit down and read the write ups on value versus club so they may be i don't know six or seven hundred eight hundred write ups maybe five hundred write ups in a year each write up maybe around ten fifteen pages max then there's comments and whatever but what i'm saying is that it's much easier than the moody's madness right because someone is actually digesting the information for you and you could do one of those a day you could easily do one one of this pathetic i'm saying even but even you said if there's three hundred total but i'm just understand less than a year it would be easy for someone without getting putting too much work into it to read four or five ideas a day right i mean they could have a full time job and easily to that that's not a difficult thing to do and you don't need to read the whole idea what i would say is you read the first few paragraphs and see if this is something that's interesting you or not or something that's grabbing you and right right and what i do is i look at every idea that's posted right and i don't i don't care to really look at them right when they're posted because they actually those ideas will work even five years from now like recently i started investing in a in a company where the original write up was in twenty twenty one okay it's twenty twenty five still valid okay now what you still have to do is you should use it only as an input to ideas just like the moody's manual not telling you what to buy and sell once you see the idea you do all your own work do your research do everything make sure it's something you understand well make sure it's within your circle competence whether you buy into the area idea or not etcetera and buffett buffett is still doing this so his japanese bets so there's a there's another book called the japan company handbook okay and and i'm gonna bring the japan company handled okay alright here we have it and i'm excited about this because you hear a lot about buffett you know sees candy coke geico like those kind of well known buffett best bets yeah but as i understand it buffet made some incredible investments in japan so just let me explain how no brainer the total no brainer nature of that bad right okay so these five japanese trading companies had a eight percent dividend yield okay so they were paying a eight percent dividend it was very cheap japan has the index has not gone anywhere effort like thirty years and a warrant actually got a insane return on these so what he did is he borrowed the entire amount in yen at half a percent a year and it was not a small amount was like five billion yeah yeah he put five billion but he borrowed the five billion at half a percent the whole thing in yen yeah in japan right so now he's bought japanese company paying dividends in yen which he's bought in yen right the dividend coverage is sixteen times his interest payment okay so he put no equity right and he's instantly making seven and a half percent on five billion which is like you know what about three fifty four hundred million out of nothing right it's just coming to him now what happens is because these companies are so cheap in about three or four years they all doubled in price right so now the five billion has become ten billion okay the equity that went in is nothing so it's infinite return they all raised the dividend the dividend based on the original purchase price is about fifteen percent okay so basically and then after that what he did is he increased the bet so he was he was under five percent of all of them he's now approaching ten percent on all of them and anyone could have looked at the japan handbook basically i think it's it's a matter of how hungry are you it's the same as any entrepreneur right i mean basically anyone who starts a business or whatever they've they gotta go all in right now intense passion eighteen hours a day all in very strong belief it's the same thing here if you truly are focused on it you can do very well i mean the universe was gonna conspired to help you with whatever your passion is and it's just a matter of whether you want it by the way to see use excel well no he does not use excel for sure okay he uses his computer now now he uses google and all that but he uses his computer mainly a pre bridge i mean lauren wouldn't be caught dead using excel okay because the thing is that he's looking for things that hit tune in the head with the two by four right so when he's going through japan company handbook or a moody's manual there is no excel needed what what what will excel help you with when the earnings at twenty five dollars a share of the stock is fifteen dollars you don't need excel right okay when when the dividend deal is eight percent and you're borrowing at half percent you don't need excel right okay in fact if you need excel it's an automatic pass because it means that there's something complicated there which is not fitting in did i need excel for frontline no i didn't need excel for frontline i mean i look up the liquidation price of the ships i look up the where the ships are at i look at all i mean the thing is all these things are very basic numbers you don't need excel for it right you know recently i was talking to a friend of mine looking he's looking at some international stock exchange okay this international stock exchange trades at a trailing pe of like thirty okay it's growing at fifteen percent twenty percent a year very rapid growth okay sixty percent of revenue is profit okay and as they grow that sixty percent might become seventy percent because they got operating leverage so if you just forward two or three years the p becomes less than ten okay there is no need for excel right you can just do it all in your head okay it's got ten dollars of earnings today is gonna have twelve dollars a year from now fourteen fifteen dollars two years from now maybe seventeen o eighteen dollars three years from now stocks at three hundred now when you're at eighteen you already did at a fifteen multiple right you already cut it in half right it's growing by that time it may be trading it should be trading at even more than thirty times earnings so the stock may be at like you know six or seven hundred by then right it's just in just just a math of all of that so what i'm saying is that if you can't do the math in your head it's an automatic pass mh because that means there's something complicated so another important thing is you should be able to explain your thesis of a stock in about four or five sentences to a ten year old okay and if you can't do that it's a pass you can't sit down to the ten year old with an excel spreadsheet okay they're not gonna like you and they're not gonna be interested right einstein used to say there's like four levels of intelligence smart intelligent genius simple okay the highest level of in intellect simplicity right and the other thing i would investing is that you have to have conviction it's very difficult to have conviction if you keep needing to need to go back and look at your excel mode right you need it in your head so buffett never needs to go anywhere it's in his head he knows what the dividend yield is he knows what he paid he knows what the yen is he knows all of that it's pre programmed right so we have don't use excel don't over complicate it is really what that means and the second is leverage so don't over leverage and i think the the story here that i like is there should be a third bust on this on this table next to us somebody's missing that was an original partner with them yeah can you tell that story i think it i had his named rick so actually warren charlie and rick g used to do deals together and they've all independent doing their thing but they used to share ideas and sometimes they'd go together rick found blue chip stamps for them and i think he also might have been the guy sees candy he contacted and so on after the early seventies we never heard about rick he kind of fell off the radar so when i met warren for lunch i asked him just a very innocent question i said warren what happened rick you know it's be three of you run then we never heard from him after that and warren said that charlie and i knew that we would get very rich and we were not in a hurry and he said rick was in a hurry and so rick was always using some leverage and then when the seventy three seventy four downturn came that was a very intense that was a crash and slow motion basically okay over a two year period where the stocks went down like more than forty fifty percent it was a big big drawdown and rick got margin calls and and warren said when he got the margin calls i bought his berkshire hathaway for forty dollars a share the stock that's now seven hundred thousand right so rick was forced to sell it at a time when it was probably the worst time to sell right right and so then warren actually went one step further because he's always trying to add value of these lunches and all that so he says he says to me and guy 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 reach in a lifetime tell me about the difference between risk and uncertainty yeah well that's important concept to understand because wall street gets confused between the two and in fact when wall street gets confused between do is where the greatest opportunities lie okay so we talked about frontline frontline was an example of a situation where uncertainty was extremely high and risk was very low right what wall street is looking for is certainty okay so if we look at a company like adp you know their process payroll right i don't know they've had some like fifty years of nonstop growth because you know your payroll you're running payroll is gonna keep going up your cash flow is gonna go up it's all in a straight line that's beautiful and wall street will reward you extremely well for that right and it's priced accurately it'll be priced for euphoria it'll be oil overpriced okay because they love that that's what they're looking for on the other hand their type yeah i mean that's is that's that's music to the years on the other hand if a company exhibits high uncertainty it will be taken out back in shot right and those are aware the opportunity so one of the cues to look for is is this a business with low risk and high uncertainty combination of the two and when you get to the combination of the two lori risk plus high high uncertainty equals high rewards i was looking at your portfolio and you have this company investment in turkey that's like a coke bottling yeah company would you say that's a good example of of kind of the risk and uncertainty mismatch yeah we we actually made money on it but we exited it okay and the reason i exited is that so the coke bottle basically had a parent company which was the dominant beer bottle in turkey and several other countries their largest operations were in russia where they had a their number one market share fifty fifty joint venture with am bev and russia has effectively national that business i see and i think they did it because there was somewhat upset with or gun about something so they went and did that what his support for ukraine or something and when that happened it became when a two hard pile for us explain the too hard pile that's something i stole from you yeah last time i was it's a it's a warrant we'll get to there a second but basically it was something i couldn't handicap sure so we were sitting at again and we have this event take place i get to get my bet back with some added return and we close it i said where to assign right right i can go find something else to play with but the two hard pile is actually a physical box on warrants task okay and so actually if you google it if you just google warren buffett too hard image would probably pop okay so he has a box on his desk which he calls too hard and he says that ninety nine percent or more of investment ideas that you encounter should go into that box because we're not gonna be able to figure it out so one of the things to understand is that if there's fifty thousand stocks in the world we are not really going to understand more than a few hundred of them at the most after quite a while of studying them so most companies that we would encounter should go into that box okay so it's the one of the important things in investing is humility humility to understand i mean warren has no issues with the humility to know that it doesn't know most things right that most things are not going to be able to be figured out or handicapped or any of that and we don't need to if you can understand a very small sliver of things and you know when those things get over overpriced and under priced that's all you need right you don't need anything else there's a guy who owns a bunch of real estate but like in a very small area right john area yeah what's his story because it sounds like it's it's a good example of this a very thin kind of sort of competence but he knew the pricing and was able to so john arr was a billionaire he passed away maybe like two three years ago pretty recent and his daughter's married to mark and research right yeah you know so it's billionaire to the power of billionaire okay so anyway john area basically 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 okay that's all he usually just right around the campus and if you walked with him around the campus every single building he could tell you the full history of the building when was built what the current value was what the rents were who the owners were and what the history was right he knew that whatever you're building and you know so he was a he was a inch wide and a mile deep and that is a really good trait for investor is to be very narrowly focused right right now what john area did is he ran generally speaking a very under lever portfolio he or his portfolio always not much not much debt when the downturn came he aggressively bought because all these distressed properties around i mean this is the most prime real estate you can think of yeah other than park avenue or something okay and so he would just buy these things up and everyone was getting fore clothes and bankrupt and go to banks and buy it from them and all of that and then you know get them all least then fair value and all of that again take the leverage down and again next down cycle again the same thing and he he's stuck to that so the thing is he didn't wander into or let me go to mountain view and do it right okay let me go to or when california do it he didn't do all that i mean he's basically oh let me invest in tech or something he didn't do any of that he stuck to real estate that's all he did and he did it extremely well and he died a billionaire in her we don't need to know many things about many things we need to know a lot about a little that's the important thing right know a lot about a little right so like for example if i'm looking at frontline i should learn everything i can about shipping i should learn everything i can about oil shipping about tankers about the history who makes them and every nuance about it right the deeper i go the better is gonna be for me right okay i shouldn't be spending time next week on airplanes okay the leave alone like one by one by one right what do you think most people don't do that because you when i hear that i think a there's a blueprint to just say i'm gonna go deep and in this two mile radius i need to become super knowledgeable and i don't need to get distracted by everything else and a hold forever right like blueprint if you think about it i think it was next sleep who has this this court he said the best investors are entrepreneurs who never sold so if you think about entrepreneurs that's what they are they are john arr right so if i look at sam walton sam walton is john all he did was retail all he did was visit competitor stores he never bothered anything else so sam walton founder of walmart yeah i mean what what you can tell tell me more about it we can well so sam walton i mean he said that there is there is no human who has ever lived or ever will live who has spent more time in competitor stores than me okay whenever he go on vacation to his family and they were passing a retail so he's i'd be back in twenty minutes and go what is he doing in there what did he do so i'll give you i'll give you an example one time he went into the store and his manager says to him he that was such a badly run operation and sam says yes but did you see the candle display did you see how fantastic that candle display was so his perspective was i can learn from losers okay i wanna learn that spark that's there in something that's a total loser right right so he was going in and our one time in brazil in this this 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 he was measuring the space between the aisle and he didn't have a tape which his body so he laid down he laid and you know the space between the aisle is a very important data point for a retailer because you're gonna have waste square footage or be too narrow and the people who wanna enjoy the experience so you have to get that right right and so he was in brazil saying how are they doing it am i three inches two widen walmart am i three inches to narrow what am i what's going on here right so that was this was a game of inches that's who sam walton was and in fact walmart has not innovated at all at least for the first twenty twenty five years that walmart ran everything came from somebody else who was already a competitor they took a lot from sears they took a lot from kmart and then they killed them and they kept learning from one competitor after another so walton actually 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 gonna keep at this and what others have so you know it's very funny he goes and visits its whole price the four founder of price club which eventually leads to costco right and he looks at price club and he says this is fantastic and he creates creates sam's club right and costco was also taken from price club so both sam's club and costco they would not have sam's club is sam walton i don't yeah know that it's for of walmart i didn't even know that oh yeah it's part walmart and it was it was completely cloned from price a price club which was a predecessor settled to costco right so soul price was an incredible entrepreneur someone goes to and says you know no one has had more impact on retailing than sole price because sole price influenced sam bolton in a major way any influence jim pinnacle the founder of costco going in a major way i mean these are the the pillars and then of these two companies influenced amazon right right so it's all coming from soul price so someone told soul price you know you are like the father of retailing in the us and actually globally what do you think of that he said i wish won a condom that's good that's a amazing so so sam walton is yeah but just wanna say that for example some of those things that costco does costco pays fifty percent more than walmart pays its employees so the entry level people are making fifty percent more okay hasn't a hasn't hurt their profitability in fact sole prices view was similar to henry ford's view that i want the people who work in my stores to be able to shop in my stores mh just like henry ford said i want my workers to be able to buy my cars you know that time their were cars were automobiles were for the rich right and henry ford said no i want them for everyone right so you wanted to drop the price and and so i think at at costco the lowest wage is like twenty bucks an hour you know like when you're starting all whatever and then they have tuition reimbursement and all kinds other things and they get a lot of productivity out of their people yeah because of that you've got these books here and we're sitting in your we're at your house we're you're your library you've got i don't how many books you think you have in here this is a thousand books a few thousand a few thousand books i mean just to set the scene so that your office your computers over there yeah we're surrounded by a cave of of books on every topic so i i see some business books over here i see investing books you got you just brought a retail a book about sole price the founder a price club from over there there's science i think on that well this what does this door go to what it what is like my bedroom that's a better okay so you you live in the library essentially and you nap every day i think absolutely yeah yeah so we're both nap i've been i've been so used to napping that if i don't snap my productivity goes down yeah and so i'd i actually don't like to work if i'm not productive and and what i find is that even if i you know lay down for half an hour forty five minutes to it's i'm re energized right and i think for the work i do i need to be on in yeah so i can't i actually can't do this work if i'm tired you know yeah there's a this athlete conor mcgregor and they asked him about his training schedule and he said you know one of the big mistakes i made is that i was always trying to train all the time i wanted to come to the gym three times four times a day i thought that's how you win and the his coach was basically you're like a light that's always just dim flickering you because you never turn off mh and therefore you can never turn on and be as bright and as effective as you could be yeah and this flickering dim light it's not doing you any justice so i've used that in my own model of like where's my light right now and if i need to just shut it down briefly thirty minutes an hour or whatever it is to come back for brightness that's that's well a jeff bezos you know he said all decisions important decisions in the morning mh and he's very particular he needs a holiday hours at night right and he he leaves work at a normal time right right but he says that they don't do these important decisions in the afternoon right it's the first thing in the morning because he wants the highest energy levels and they in fact what i also try i find my best work is in the morning i'm curious about your style because i came over to your house wants and you were you're very calm you weren't like it didn't seem like you were on the clock you're moving from one meeting to the next didn't there was not a big bustling team of analysts and junior people and and a it didn't seem you seem like you keep a pretty clear calendar is that intentional do you think that's is that just what you like or is that effective well in the business i mean if i can find a couple of things to buy in a year in the case of buffett wanting thing to bio five years right i'm doing well and so this is not of a situation where having some pack schedule or whatever i think the thing is that this is a case where you're taking in a lot of information but there's not much action right and so you're basically trying to improve your metal models you're trying to understand more about the businesses that you already own and i'm going through like you know value versus club and some zero and that sort of and just looking at what else is there right and and sometimes i find a amazing idea or whatever and then now then they'll the deep dive right and then that might take a while i was reading something interesting so in our first episode we talked about your how you got started it you're actually an entrepreneur first and then basically so you said this great thing you go i realized that as an entrepreneur maybe three to five percent of my brain power was on right strategic decisions really clear thinking coming up with right answer and then ninety five percent of my time was blocking and tackling and you're like as an investor it's great because that three percent becomes ninety five percent yeah i'm i'm just it's just about clear thinking and making the right strategic move and not i don't have to busy myself but one thing i thought was cool was i've read that you took some personality test or you got some analysis done on you that basically helped you you know they sort of told you your temperament is forced single player games what what is this i i didn't understand what what you did yeah so this was kinda accidental that happened and i think it turned out to be one of those great things that happened in my life is that in in nineteen ninety nine actually i was at a crossroads where so it was very clear to me that the business that i had built by it business i had lost interest in it and i had become a lot more interested in investing and it was a difficult time because i had like a hundred and seventy people in the company who thought i'm motivated and i can't fake it you know and so very accidentally i was with these two industrial psychologists and they basically did three sixty on me so they had me take a bunch of tests they talk to my direct reports they talked to my friends family spouse so on and they built a kind of three sixty view of who i was and then they gave me what i call my owner's manual and i think everyone should have the owner's man like it comes with a appliance you bought yeah i mean it's it's it we show up we don't have a owner's manual and each one is each one of us is programmed differently so what they said is look the way a human is his traits dislikes dislikes and what passions they are that is hard coded at the age of five mh and that is not gonna change from the age of five to the age of ninety five okay you might try so so you cannot change traits you can try to change behaviors but you cannot change traits traits are between your genetics in the first five years of life hard coded now the problem most humans have which i had is we don't know what those traits are what most of us try to do is we do what what they call mirroring we look at what the world considers acceptable and we adapt our behavior so that we can of fit in mh but that can be a big disservice okay so so basically what they were able to tell me is they said look you you are a person they said when we look at the company you're running and we look at who you are we don't even know how you can go to how you're functioning yeah we don't have and actually i was in pain i was in a lot of it and the the the thing was that i love that business when it was just me mh and i love the business as was growing until we go to the first ten fifteen people and then as i started growing beyond that my life became and my job description became hr i'm just hurting cats i'm not a cat holder okay that's not who i am okay so what they said is that that business that you have you need to get rid of it in some way as soon as you can and i was just thinking at that time this was in march or april of to in nineteen ninety nine i was just thinking of starting for b funds right they looked at it and they said this is perfect for you this is gonna work extremely well for you in fact one of them invested he's one of the first investors who came in it was so and put the skin in the game here i to i told him listen you know i'm paying you guys two thousand to do this you're giving me a hundred thousand i really don't wanna lose your money they said i don't have any doubts mona you're gonna do very well so i don't see any risk here right and he did extremely right and so they were actually right because now it's been twenty six years since i've been running it and haven't gone board so what did your owner's manual say so said i don't like that my owner's manual basically said that well first of all they said that i had very high horsepower right and they said that i was one of the smartest guys that had come across etcetera which was great but they said that you are a guy who likes to play single player games you are not the kind of guy who would be happy being in a soccer team for example where you're one of the forwards or whatever and your performance depends on the team right they say you do they say you seek out games which are single player games where you think you have some edge and when you think you have some edge and it's that's sort a game you will kill it and actually what i've noticed is like so for example i got banned in vegas playing blackjack right okay i i gotta know their story i i figured out a system which basically beat them okay counting cards what were you doing and actually did it without counting cards right and and in fact it it took the casino almost a year of watching me so i used to go every like six weeks or something and they played those tapes over and over because the markers that they look for were not there and what we'll talk about that in a second okay so what i'm saying is that so what are the games i like i i like blackjack i like bridge mh i like investing and even ducks induction for example reduction of foundation that's also a game right these are that's your phil yeah but they're all mathematical games even ducks as a mathematical game because what i'm looking at is input ratios people think people think i'm doing all this good in the world and all that what they don't understand is i'm a game player okay and what i'm trying to do with ducks reduction is how much money is going in and what's coming out right and that's the only thing i'm focused on is what's going and what and what what ended up happening with the entity like ducks is you know warren buffett told me a letter saying that this is the best right i mean like he took the time to write the letter like this is the best okay never done that for any phil that he's looked at and the reason is because there's a game player who's not focused on you know name and lights or a bunch of fancy pictures in the annual report we have no pictures in the annual report and just like the bullshit report right but it's it's about an honest input to output singular so what i did is every year that we ran reduction now well explain what it is i don't even know if you take a step back and say okay i wanna give money away to make the world a better place so the natural second step you would get to with that is i want very high returns on the money i'm putting out right so social return on invested capital should be extremely high now most nonprofit don't even think this way they're all heart there's a homeless cry let me help the guy right they don't really do an analysis of okay what is going in and what is coming out so i ran into this model this guy was running and i think in two thousand six i ran into it where he was taking thirty kids they were very very poor in india in in bi behind and most of these kids were coming from illiterate pair etcetera but they have very high iq and he prepped them for about ten months and he had them take the ii entrance exam the ii that the you know the they technical institute to the world and prints now the thing about the ii is that there's about one point three million kids applying for sixteen thousand seats it's about a one point three percent admin admit rate okay princeton is about a five percent admin admit rate harvard is about five or six percent this is one point three percent and if you get into the ii it's basically free to ten the government subsidize it so if you're a very poor person and you get into the ii well now microsoft will hire you google will hire you anyone will hire you right and but getting in is expensive because the coaching is expensive so what this guy had done is he had made the coaching free for these very poor kids and now what was happening is you had a family that was making sixty dollars a month let's say and the kid graduates and google has for a hundred and twenty thousand a year okay i mean you know the the transformation and in five years the guy making three hundred thousand a higher right and so they're just a that and he was spending eight hundred dollars per kid on the training the person the the whole so you spend eight hundred dollars and you take a family from sixty dollars a month to ten thousand dollars a month right okay i mean what's the roi on that and you're gonna do that for this whole lifetime mh and you're gonna reset the extended family and all of that it's a the roi is off the charts right right so when i saw that i said well this is the holy grail so i went to the guy and i said i'd like to fund you right he said i don't wanna scale i do thirty kids i don't want even thirty one kids i don't take outside money of that so i'm the shameless clone so i told him do you mind if i clone your model he said this is a very good thing i think you should clone it that'd be great i'll help you in anyway okay so i took his model and that's what ducks induction is so we we are spending ducks induction spends about three or four million dollars a year just imagine what the output of that is right you know when when you look at it from each family and then you and we're doing three four million we've been doing it for seventeen years so basically but we get out of three million dollars a year a lot of other nonprofit would not get out of in a hundred million a year right so we actually you know have a footprint that is much larger than what it should be in terms of impact right and to take it back it's a math game right so basically we we had two or three things that were important and that's how i looked at this the first was the yield so the ii accept one point three percent to the kids who apply they accept seventy percent of our kids that's amazing so now what i'm doing is i have a game which puts two models together so one day before i die i wanna have ten thousand dollars left okay so basically inheritance just don't do much right i mean my kids already have they're doing well yeah what is your philosophy on that so well in general large inheritance are gonna do more harm than good and you know basically you don't want the person to be on an iv trip for their whole life i mean that's this the worst thing you can do some right and so buffett has a great court he said i wanna give my kids enough money for them to do anything they want but not enough to do nothing okay okay so because i am investing for a living and we have this kinda compounding going i'm gonna end up with more than i need i mean basically i don't need to spend any more than i'm spending i could not increase happiness by spending more there's no point to spending more i mean i'm very happy with the with the lifestyle and everything else right so everything else basically needs to get recycled but if you needs to get recycled at high returns so on one hand i have a compounding engine and a network worth that's growing on the other hand i have to give it away so god google told me that on june eleven twenty fifty four i'll be leaving planet earth okay so you asked ai what what did you do if you if you average life expectation if you go to god google and just say hey i'm you know fifty two years old and tell me when i'm gonna die he will tell you okay and now that we have the date so what you know my birthday is june twelfth just to make it point i had made it june eleventh okay okay so we have an exact the number so basically twenty fifty four means i've got like twenty nine years and change left right and at any kind of compounding rate it's a ridiculous amount of you know assets that can build a all time but i wanna end on june tenth with ten thousand dollars okay so there's one game which is to give it away and the other game is to make it and we need the two curves to be where the giving away becomes probably in the next few years needs to become very much more dominant so right like the three million a year needs to go to five ten fifteen eventually right and so on and so for me you know it's the same as playing blackjack it's just a math game these are both math right right and yeah there are a lot of families getting helped and my investors are happy and so then that's fine okay so what was your blackjack system i'm i'm skeptical so the the blackjack system it would destroy the casino they would have to either change the game or something but basically i'll give you i'll give you some pointers of kind of what's what's going on here there's a there's a cup there's a publication called b j twenty one b j twenty one dot com okay you go to b twenty one dot com and you give them a hundred bucks they're gonna give you a pdf it gives you the odds of every blackjack table in north america okay so for example if i go to the win las vegas right the win i also guess there's a bunch of different blackjack game single deck double deck six decks whatever else every single one of those it gives you the odds if you play perfect blackjack and these odds vary depending on how competitive so if i'm going to some you know river board in indiana i'm not gonna get the same odds as vehicles vegas strip is going more more efficient because it's more competitive so usually the house will end up with something like a point three point four percent all the way to like two percent edge edge over the over the better which means every bet you're making if you make a hundred dollar bed every bet you're making or losing the fifty cents or whatever so there's a casino and wages called the l cortez and the a cortez a small casino so in order to kind of induce people to come they kind of improve the odds okay still in their favor but the single deck game at the el cortez has the thin house edge of any blackjack check table on the planet okay the house edge is point one eight percent okay so if you look at that bj twenty one and all of the they have the edge of every table this one is a is a lowest right so this is a very thin and and i have a system which took them a long time to figure out they play single deck blackjack right but they only deal half the deck in the shuffle so the reason they deal half the deck is so they they can just make it difficult for the counters because you may be counting cards the deck becomes very favorable but then they shuffle right right so you either the the high cards at the back but they never get dealt right so the count gets screwed right so i i had a system where it basically relied on the fact that blackjack occasionally has streak it has streak where you may win six or seven or eight hands in a row or you may lose six seven or eight hands in a row and what i did in the betting was that usually when i was losing it was always the minimum bet and when one else i was winning the bets were increasing so with the variance of that what happened is i was able to overcome the point one eight point one eight right right so i don't wanna give more than sure that gives you like and what i wanna do is when the cameras turn off i'll explain it to you okay great so when you go to the next time and you get call cartel but but now what happened is so what happened with them would what really confused them which they had never dealt with before is normally what the counters do is on a brand new shoe it's a low minimum bet yeah in my case there was a brand new shoe there's a high bet so they said we just shuffled right the whole deck is there there's no odds edge he has on that deck because the entire deck is there right he has a high bet did they ever figure it or they took them so what happened is i'm playing blackjack the general manager was very friendly to me comes and sits around next to me it tells a dealer stopped dealing okay so she's in the middle of a hand she just continued dealing she's he says he screams at her stop dealing now they should never hurt that at before okay like literally middle of her she said she said shuffle right we're done we're not dealing anymore then he tells me that mister i like you okay i read your book want your videos and you have a system that we cannot beat right so i said i i told him i said you know you know i'm not calling cards he said that's what threw us off he said we know you're not counting cards and we know you'll beat us and so you can come to this casino anytime you want but you cannot sit down at a blackjack table then i'm thinking why would i come here okay why to helm for this not going to a blood and so there was but you know whenever i like i go someplace to talk or something and you know they're introducing me i'll tell them listen just say that i have a lifetime ban in vegas yeah i mean street credit because the i really don't care about everything else on my cv that's really re irrelevant and that's what's relevant it's just like if you you get into harvard wow that's impressive yeah your harvard dropout that's the higher status signal and so you're good at blackjack made money in blackjack i was banned from a casino that is the highest status yeah so i i i mean i i took them for like about a hundred and fifty thousand or something and i and and you know this was a very low table limit right the table limit is only two thousand but at two thousand i took them so they they said okay we're done you know it you you've run into all these characters so we've talked about warren we've talked about charlie and i know about some of the other characters your stories are amazing i could listen to your stories all day so michael burr one of my favorite movies is the big short and michael burr this kind of mysterious character did you ever well what you're gonna end up and we finish this conversation is you're just gonna know that my middle name is forrest sc okay that's really where we're gonna end up so you know i always tell people that god loves me he loves me more than other people and i'll explain why right in two thousand eight okay so the financial crisis is not yet happened it's like march or april of two thousand and eight right so things are getting tops right and i was visiting san jose for some something i was going to san jose and i knew michael burr headed an office in san jose and i didn't know him but i sent a email saying you know mister burr i like you admire you etcetera and would love to visit you so he he was kinda well known he was not very well known but he was he was like posting on value investors club and he that he was like he was there a little bit and and i liked the way he thought you know and he said a stop okay so i go to his office in san jose and there's a few kinda of analysts sitting out it's very kind of a seems like a very depressing place okay and because a few is kinda little dark and there's a few analysts there and then i go into the office and there's huge piles of paper everywhere and he launches into cds okay and he says morning i wanna tell you something about something that's going to make you extremely wealthy okay and he then downloads to me at one million miles an hour i've never heard of a cds okay and he's talking about housing crash and the coming imp and all this stuff you know and housing never were crashed okay in the us none of that and eighty percent ninety percent he said went straight over my head okay like he was just he just give me a full core dump in half an hour my sub human intelligence couldn't handle okay i couldn't and you know so i come out of the meeting my head is spinning and i say okay well that was interesting okay and then you know of course he rides off into the sunset right and then the movie comes out right and then it's exactly like the show in the movie right that's how he is right so i felt like okay you know god who loves me so much takes me to the epicenter of the epicenter of what would have been the best place to be right the best teacher to have and the idiot moon ish blue but that's the way it is you know that's i mean what where does that rank in terms of like you know sort of the the best calls or or you know foresight in terms of that you've seen in your career was but i mean i i think this has happened to me a lot i mean in the sense that like i said you know we put ninety eight ninety nine percent or to hard pile right even now i think it was right of me to not do anything with it because i couldn't understand it right even after the financial crisis it took me a while to understand the cds right and all these tran and how they were like doing all this stuff and all that i mean that took me a while to like really get my arms around it and even after knowing all that i would have been skeptical about making that bet so hats off to him right i mean he figured it out a few people figured it out but it was a very small number of people who figured it out right tell me about the greatest investor from india who is the greatest investor for the greatest investor of for india would be rake waller i i know a met rake i mean i i know his friends quite well guy actually met him i actually went to the office and and and met him wonderful guy died relatively young few years back but rake was a very interesting kind of split brain in the sense that he'd have like three or four bloomberg screens in front of him and he had all these charts and everything seen going on rapid fire trading going on but on the other hand he had these two or three stocks that he never touched so he had i mean i i don't know anyone like that who's okay who's and he was great at both but the ones that he never touched i mean they just went through the roof like there's the there's a company in india called titan industries and titan industries does branded jewelry branded jewelry basically didn't exist india you know it all mom and pop yeah and there was a trust deficit it right so you go to a jeweler in india and india they have like twenty two carat gold right and you're buying the gold you don't know whether it's half gold eighty percent gold of what hell's hell going on right the jewel knows what you know right the the that titan brand is owned by the tata well very high integrity so basically they were able to take a a sector which had a huge thrust efficient deficiency and i mean they've i think titan is still in its infancy right and i think a rake vacation made a huge huge i mean our rake i think compounded at north of forty percent a year for several decades so unbelievable and you know he started with like ten thousand dollars borrowed you know didn't didn't even have that on his own someone lent of the money what made him great was he a brilliant mathematical mind was he you know because what was the trait that really helped i think what so he was a trained cpa india's equivalent cpa chartered accountant and so he obviously an understood number as well and just before he died so he had figured out that indigo which is a low cost carrier in india they have like something like seventy percent market share growing really rapidly it might become the largest airline in the world i mean they were wow thousand planes on order or something okay so they they they're growing very fast he had done well as a investor in indigo but then he took the next step and he set up a clone of indigo i mean just think about the the guts you need yeah to set up bloody airline okay from being a passive investor and while he was dying you know he was like in bad shape and hospital and all of that and that airlines up and running and cranking and all of that and doing great so if he had lived longer i think he would have gone not just as an investor but also shown that he could be an operator you said something like if you had live longer this idea of like runway and how early you start yes matters a ton even buffett i think you've said that if had he not been giving away so much money along the way be the wealthiest guy yeah he'd be the wealthiest guy in the world right now yeah and i guess when you said but when you go talk to people are you just sort of like you know you should've have started thirty years ago is that the number one method what we started our conversation with right i think the important thing is that if there's a young person listening the funny thing is that if you look at the rules for a ira or a roth ira there's no minimum age you could be six months old and i have an ira right the only rule is that you can only put in wages that you earn and i was just reading in the wall journal there's some entrepreneur who's hired his kids who are like four years old and like six years old to do like different things in the business because he's putting like six thousand seven thousand into their roth ira right which is equal to their w two earnings right i'm probably stretching the limit of what he can get away with with the irs that's beautiful i mean the thing is that but but even if you're not doing that if you start at twenty two i mean that's the important thing is that when you when you start earning at twenty two a small amount saved at twenty two is more important than a larger amount saved at thirty two right because you get started earlier right so it's really important to have the whole spend less than you earn and put it into berkshire sell it and forget it right yeah because then then if you start at twenty two and you're twenty two today you're gonna live over a hundred right you know you're gonna go to a hundred hundred and ten by them you know got all the advances taking place that's a ninety year runway i mean a ninety year runway is something i mean if you're talking about a even a ten percent return we are only gonna look at doubles right so every seven years that's two to the power thirteen two to power ten is a thousand that's two thousand two that's eight thousand x okay the first ten thousand you invested is at eight million right the second thousand ten thousand is another eight eight million you know so the thing is it's a mind blowing amount of money if you start early so the length of the runway is really important do you pay attention to the macro because you know my head starts to spin interest rates and then there's wars and there's all these different factors that you could pay attention to and there's are some people who really pay attention to that do you pay attention to the because i can't handicap and i wouldn't know what to do with the information so i always try to keep the bets simple i need to be able to explain her ten year old in five sentences right i'm not gonna be able to figure out the macro that's why i couldn't make that cds bet right you know it was like so much stuff going on about housing is gonna crash is gonna happen that's gonna happen i mean i just couldn't get my arms around you know in my world everybody's talking about ai do you think about ai at all the the problem is i bring nothing to that party mh and i'm probably gonna 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 of course i do believe that it's transformational but you know i knew the internet was transformational we've known electricity is transformational we've known the app stores transformational but in investing you can do extremely well without understanding all these things we go back to john area you know don't understand any of these things or even warren buffett it and and you know apple apple is in the rearview you this this sold most of it yeah and they wanna sold all of it by now but but basically that was the one and done but basically yeah i think that we don't need to understand flavor of the day we don't need to understand nvidia mh we don't need to understand ai if you understand it move more power to you that's awesome and if you know how to leverage your understanding into dollars you can make that's even better but that's not me so we all have to play to our strengths yeah okay well man this is been incredible part two i'm happy with it this is i i asked you at the beginning i said is this like one of those hollywood sequels where the first one was incredible and the second one they just they just did but no i think we did a good job i think the the sequel was if not better at least as good no it was fun i enjoyed it was awesome awesome thanks for doing it okay thank you i feel like i could rule word i know i could be what i want to put at all in it like a days off on a travel never looking back