Mohnish Pabrai gave a great talk to a UC Irvine class. Thanks Jana Vembunarayanan for sharing it.
It delights me that a one-time talk to a small group of people on a certain day is now available anytime to anyone in the world. But being available isn’t enough, we need to avail ourselves of this. Let’s do just that.
1/ Skin in the game. “Roberto Goizueta himself owned 2% of Coke, he had a significant economic interest.”
The first chunk of Pabrai’s talk is about the Berkshire Hathaway investment in Coke and he says that Coke had Lollapalooza effects because it was a great business with a great manager (Goizueta). Why was he so good? Because he has skin in the game.
Skin the game changes decision making. Tim Ferriss said he plays poker different with his own money. Mellody Hobson said that managers act different. Chris Dixon said a16z succeeds – in part – becaus of “aligned interestes.”
2/ Understand the simple things. “It’s not the numbers. The factors that drive long term success don’t have much to do with spreadsheets. They have to do with understanding human nature or nuances of how things work…(for example, a) distribution engine is very difficult to recreate.”
Pabrai explains the history of Coke so well, and with no numbers. Coke succeeded because good branding, distribution, costs, and human psychology. Don’t think the simple things are easy to understand, they often aren’t. Charlie Munger said “plain vanilla stock picking is hard enough.” Jocko Willink said good leadership is “simple but not easy.” Napoleon Bonaparte aimed for simple instructions because they held together better in the fog of war.
3/ Learning things. “They (Buffett and Munger) get a little more information because they’re willing to dig deep and read a lot, which most people aren’t willing to do.” “You would do well if you enjoy reading…reading from the context of ‘I’m going to get better at knowing how the world works.’”
When I received my graduate degree I thought I was done with formal education, and most learning. Finished. Complete. I knew there were ‘life lessons’ ahead of me and I’d have to learn how to fix a clogged sink, but book learning had passed me.
Now I read more than ever.
Podcast episode #016 looked at Sebastian Junger’s conversation with Tim Ferriss. Here is what Junger said about his enlightenment about learning:
“I wrote a thesis about Navajo long distance running, and I just came alive academically doing that. I was a pretty indifferent student, I was much more of an athlete than a student. The idea that you could just go out in the world and gather information, gather research, interview people, and bring it back and then turn it into words that people will read and be moved by and maybe changed by was such an extraordinary idea.”
And our learning never stops. Pabrai said, “I’m getting an education in the insurance business, and I’m finding out that I’d rather own See’s Candy.”
4/ Sunk cost bias. “When we spend a lot of time on something, we feel we should get something in return for that time, it’s a danger if you say, I’m going to research a company and decide if I want to invest or not. I think you’re better off researching a company with no such preconceived notion.”
Investing is hard. “It’s not easy to be a weekend investor…it’s a lot of work reading 100 years of annual reports,” said Pabrai. Charlie Munger said “plain vanilla stock picking is hard enough.” Auren Hoffman said, “do it as a full time job” or don’t do it at all.
Now layer on the sunk cost bias.
Richard Thaler guessed that part of the reason the standard economic model has yeilded so little to the behavioral economic model is due to the sunk cost bias. People invested too much of their careers to give it up.
Pabrai’s suggestion is the machete to the vines of sunk costs. Walk out of bad movies. Put down unexciting books. Turn off awful podcasts, especially mine. Take Marc Andreessen’s advice; have strong views but weakly held.
5/ Hitting the reset button. “I have a rule I’ve followed for my entire career: if on Monday morning I’m not fired up for work I do two things. Number one, I don’t go to work. Number two, I hit the reset button.”
I loved the clarity and conviction Pabrai expressed when he said this, but also the explanation. At first it sounded Silicon-Valley-ostentatious, do what you love, follow your passion, man. But, being excited can lead to better work.
“One trick related to passion is that you are not likely to be passionate about something you do not understand.” Tren Griffin
Pabrai pointed out that the safety net in America is pretty good. Many failed startup founders said their journey was hard, but net-net it was worth it. They may have lost time and money, but came out as better, different people. Phil Knight said the same thing about running a shoe business:
“If Blue Ribbon went bust, I’d have no money and I’d be crushed. But i’d also have some valuable wisdom which I could apply to the next business. Wisdom seemed an intangible asset, but an asset all the same.”
It doesn’t take a lot of money either. Casey Neistat bought one computer to start making vidoes. Sophia Amoruso scoured used clothing at estate sales. Ramit Sethi gave free talks at college. Daymond John sold homemade hats out of a garbage bag.
If you aren’t excited to do some work, try a reset, and know that it doesn’t take much.
6/ Have extras. “Don’t focus on being fully invested.”
Pabrai said that he looks for companies with a good moat and runway. To have the option to buy them though, he needs (extra) cash on hand.
Greg Ip wrote about extra physical and financial space between us and danger. Nassim Taleb wrote, “mother nature likes redundancy.” Microsoft’s extra cash allowed them to buy LinkedIn. Jocko Willink shared the military mindset, “two is one and one is none.”
When we don’t have extras, bad things happen. Charles Ponzi ran out of extra money before he could turn his scheme around. Niall Ferguson wrote:
“The Ming system had created a high-level equilibrium – impressive outwardly, but fragile inwardly. The countryside could sustain a remarkably large number of people, but on the the basis of an essentially static social order that literally ceased to innovate. It was a kind of trap. And when the least little thing went wrong, the trap snapped shut. There were no external resources to draw on.”
Extra [______] allows you room to move when conditions change, and they always change.
Thanks for reading, I’m @mikedariano on Twitter. If you’d rather listen to these kind of posts, I have a podcast; https://itunes.apple.com/us/podcast/mikes-notes/id1055386383, https://soundcloud.com/mikesnotes, https://overcast.fm/itunes1055386383/mikes-notes.