We Study Billionaires - The Investor’s Podcast Network - TIP295: Mohnish Pabrai on Value Investing & Philanthropy (Business Podcast)

Starting point is 00:00:00 You're listening to TIP. On today's show, we have a powerhouse guest, Mr. Monish Pabri. Monish is a famous value investor and friends with Charlie Munger and Warren Buffett. Monish started off as a tech entrepreneur starting his company in the 1990s and selling it 10 years later for $20 million. For the next 20 years, he ran his famous Pabri investment funds with significant outperformance of the S&P 500 since inception. Most importantly, I'm not sure I know anybody.

Starting point is 00:00:30 that reads more books than Mr. Pabri. We sure try to keep up, but we're not even close. In fact, in our show notes, we'll have a link to his reading list in case anyone wants to check that out and see what Mr. Pabri has read throughout his lifetime. So without further delay, here's our interview with the one and only Mr. Monish Pabri. You are listening to The Investors Podcast, where we study the financial markets and read the books that influence self-made billionaires the most. We keep you informed and prepared for the unexpected. Welcome to The Investors Podcast. I'm your host, Dick Broderson, and as always, I'm accompanied by my co-host, Preston Pish.

Starting point is 00:01:20 We are honored to welcome Moniz Pop Rite on The Investors Podcast for the third time. Marnish, thank you so much taking time out of your busy schedule to speak with Preston and me here today. Stig, you guys are doing a great service for the community. And I'm actually one of your fans and listeners. I enjoy many of your podcasts. So wonderful to be here. Thank you so much for saying that, Monis. It really warns more hard for you to say that.

Starting point is 00:01:48 Today we'll be talking, of course, about investing. And we'll be doing that in the first part of the interview. In the second part of the interview, we'll also be talking about the Dashkaner Foundation where Monish is founder and chairman. But let's jump right into talking about investing. Last time you're on the podcast, you recommended to our community to read Paul Charles' Elmanac. And I would highly recommend everyone out there to do the same thing.

Starting point is 00:02:14 And especially you talked about the last talk in the book called The Psychology of Human Misjustment. And Chiamonga outlines 25 psychology biased tendencies. There are useful to understand in our personal lives, but also as investors. Which bias do you have the hardest time dealing with, whether or not it's mentioned in the talk? These biases that Munger brings up are very, very deeply embedded in our psyche. And as humans, we have to work pretty hard. So I am pretty sure things like association tendency where Coke advertises in the Olympics and the Olympics is a happy place and we like Coke, you know.

Starting point is 00:02:56 And so those association tendencies work at such a deep level in our brains that affects us significantly. I'm not sure if that's the one that is the hardest one, if you will. I'm generally a very rational person. And for example, another one of the very, very important misjudgment of humans is the tendency for self-pity. So when we encounter adversity, it is a very natural reaction for humans to have self-pity and say, oh, poor me, look what happened to me, etc. Charlie himself struggled with that. I mean, it's documented, I think in poor Charlie's Almanac that when he lost his first son to leukemia in his 30s, I think the boy was about 11 years old, he used to be walking the streets of Pasadena just crying. And I know that the Charlie Munger

Starting point is 00:03:46 that I see today is not like that. I think recently he mentioned to me, Monash, you know, 99% of my friends are dead. And he just kind of matter of fact, there was a little bit of sadness in that statement. And I told him, yeah, but Charlie, you know, you have new ones like me. So you keep adding new friends and they're younger. And he said, yeah, yeah, life is great. No problem. But, you know, the thing is I think self-pity is a very important one to avoid. And I think just being rational and especially in times like this, just in the context of we are in the midst of the virus and it's spreading and there's a lot of gloom and doom around. Something I was saying from my childhood that I'm not even sure who the author was,

Starting point is 00:04:34 it says that if wealth is lost, nothing is lost. If health is lost, something is lost. And if character is lost, everything is lost. So basically, at least on the investor podcast, you know, the investors are concerned about their very quickly vanishing wealth, well, I think that you can consider irrelevant. As long as you have food on the table and you're not homeless, we're okay. Even in the 2009 crisis, when I saw my network declined by 65, 70%, basically, I didn't think there was a calamity because I always go back to that saying and that saying helps center you. And clearly health is important and character is most important. Very insightful, Monish. And I just want to say, for the record, we are recording here

Starting point is 00:05:25 March 24th. So please keep in that mind whenever you're listening to this. And we wanted to publish this the first week of May. It's not by coincidence. You also did that last year. Perhaps some of our audience know that, and that's because that is the weekend of Berksa Heatherway and on shareholders meeting where unfortunately we won't be going this year, but we hope to go next year. Going back to the talk, Manish, as I was rereading the talk, the bias really stood out to me and perhaps it was just where I was in my life at the time, but that was really the liking and disliking tendencies and how I unfortunately filter facts through different lenses instead of focusing on the actual facts.

Starting point is 00:06:05 Now, you are in the privileged situation that you often have a chance to meet up with the management in the companies you're considering investing in. So how do you combat the liking bias? For instance, whenever you meet up with the management in rain industries or mothers and sumi, management that you really admire. Yeah. So, you know, I think for most of my investment career, I took the approach of never meeting management. And that approach is fine in the United States because the odds that I'm going to lose money because of outright fraud is never happened in a quarter century in the U.S. But when I'm investing outside the U.S., I think that the risk factors are higher. So I think looking back now, given that I met a large number of management teams, mostly outside the U.S., I think that the risk factors are higher. So I think looking back now, given that I met a large number of management teams, mostly outside the the U.S. I think it was a mistake for me not to meet them in the U.S. It would have been helpful.

Starting point is 00:06:58 The main thing is not the bias of liking them. I think the issue is all these guys who are CEOs of these very significant companies or founders who built these big businesses, by definition, they've got tremendous sales skills. And sales skills means they've got tremendous charisma. And you're being mesmerized by their charisma. And of course, you're talking about subjects with them where they know everything and you know nothing. And so the combination of great charisma and the combination of them coming across kind of guru-like status in those sectors can lead to serious biases.

Starting point is 00:07:41 And so I think then only way you can combat that is to go back to what Buffett and Munger say, which is look at the track record. And I think that one of the advantages we have when we look at public companies is we do have a track record that we can look at. If you look at the guy from Mothersansumi, who I think of is perhaps one of the best business leaders anywhere in the world. He's exceptional. I mean, he's in a really, really tough industry. And in that tough industry, he's banged out more than 25% a year for decades. It's just an incredible record. So I think that the record should dominate your thoughts, the facts about the business should

Starting point is 00:08:21 dominate your thoughts a lot more than the persona of the individual. We had someone as good as Jack Welsh make serious mistakes with his successors at GE. In fact, out of the three managers he had shortlisted to succeed him, only one or the three of them ended up doing an exceptional job long term when he left GE. The other two, one of whom stayed at GE and one of whom went to other businesses like Home Depot, etc., didn't do so well. So this is, you know, after someone has watched a person for years and years, has access to a track record, has access to everything. So human judgment about leadership, management, and especially how leaders act in the future, is a very complex area.

Starting point is 00:09:11 It's not that easy to figure out. Another thing that becomes an issue for me, especially when I'm looking at some businesses in India, is many times I'm meeting a founder in India where they own 60, 70% of the business. And already their net worth is $500 million or $700 million, which in India is a huge amount of money. And so then the question for me is not so much about competence because I can see the track record. I can see what they've done. My question then becomes more about hunger, you know. And in some cases,

Starting point is 00:09:47 when I've asked the question very directly, I've gotten a very direct answer that growth of the stock price or increase of the stock price or shareholder returns in the future is not the number one factor for them. I mean, for them, they have switched to preservation mode. They're not in growth mode. They're in preservation mode, which is great for them because they're already in the promised land. but may not be so good, then I see the kind of capital allocation decisions that are going on. And it's extremely conservative, but it's not a good place to put capital. You've got to be just be careful. I think this is not an easy area. So, Monash, I'm sure, like Stig and I, one of your favorite reads is the essays of Warren Buffett.

Starting point is 00:10:31 And what's really fascinating about the book is how much Warren Buffett has evolved as an investor, whether it's his thoughts on investing, governance, acquisitions, whatever it might be. And so continuing on that train of thought, I know one of the things that Warren Buffett and Charlie Munger preach so often, they talk about the difficulty lying and not so much developing new ideas, but maybe escaping the old ideas. Which ideas for you personally have been the hardest to escape as an investor? Well, the ideas that did the most damage to me. in the past was I did not appreciate the ill effects of leverage as much as I should.

Starting point is 00:11:14 So you know, after the financial crisis in 0809, I created the checklist, pre-investment checklist. And the pre-investment checklist was actually created based on actual losses very good value investors had in real investments they made. And the question was, was their data available before these people made these investments, That should have been a red flag to them, but they somehow missed it. And so the number one reason that investments don't work out, and the number one reason that things go the wrong direction in investing is leverage. And so leverage is fatal.

Starting point is 00:11:55 In fact, during financial crisis, I had one business that went to zero, and I had another one that lost more than 90%. And those caused serious damage to the portfolio. from there and we came back. This time, when we are hitting what will be unemployment numbers, at least now the current run rate, which is higher than the financial crisis, I look at the portfolio and I don't have those concerns because that or the lessons learned then have taught me that. The other thing that Charlie Munger taught me, which I think is a very important lesson, he said, learn from your mistakes, but don't learn too much. So, you know, what happens is that we

Starting point is 00:12:37 should not kick ourselves too much when we make mistakes or when we lose money because investing is not an easy game. We are trying to forecast the future of many businesses. I mean, just look at what's happening right now. Who could have forecasted? This is where we would be. And so mistakes are par for the course. We're going to make mistakes. We want to learn from them, but you don't want to go overboard in the learning. You go overboard in the learning and you go like everyone goes by T-bills, that's probably not the right answer. But killing your best ideas, those are really good things to do. The third thing that I'm implementing more recently, the more recent kind of insight that came to me is Kahneman's book, Thinking Fast and Slow, which is a great book. I am really

Starting point is 00:13:26 good at thinking fast. If I can pat myself in the back, I'm exceptional. I can crack business models pretty quickly. I can get to the essence of what makes a business run pretty fast. All those things are very valuable in investing. But that is not the be all and end all of investing. To be a great investor, one has to be good at thinking fast and one also has to be very good at thinking slow. I'm not so good at thinking slow. I tend to reach conclusions relatively quickly. Pretty much my conclusions would be better than most other humans if all of us were given the same amount of limited time to look at a certain set of facts. But in investing, that's not how investing works. There is not a limited amount of time to look at a set of a pact. One can take six months

Starting point is 00:14:17 looking at an investment. There's no rule that says that half an hour after you know for a company, you have to make a decision whether to buy or not buy or one day after or one week after or one year after. There's no such rule. And so the second thing I've learned is that if I slow down and if I let these facts permeate a little bit more and ruminate in my brain a little bit more, my results get a lot better. So over time, the thinking slow will bring in data that doesn't happen when you think

Starting point is 00:14:52 fast. And so one of the more deliberate action that is. I decided to take recently was not to go all in on an investment right after I've decided it's a great investment. I've decided to take a small position and then study it some more. And maybe after three months, you can increase the position a bit if you're still feeling the same way. And maybe six months later, you could go to a full position.

Starting point is 00:15:17 So these are some of the ways I'm trying to improve the way the brain operates. It's interesting that you mentioned the third part there because it kind of takes me to the next question because... In investing, we seem to focus a lot on the research process before we invest. And I think that all experienced investors recognize that we don't really start to learn about a company before we are invested in that company. We just seem to digest the information differently. But how about after you exit your position, how much do you follow companies that you have been invested in and how do you find yourself processing perhaps that information differently?

Starting point is 00:15:55 Yeah, so I think that's really correct that we really learn about a business after we own it. You really don't know much about it. That's why, you know, people who run paper portfolios is not going to get you the promised land. You actually have to put real money to work. You have to lose real money. And when you lose real money, that's when you paid the tuition bill and so on. And in terms of, I think the companies have exited, yeah, actually it's a big advantage because right now I'm looking at a bunch of companies that I've exited in the past. Because the thing is that I'm familiar with

Starting point is 00:16:31 those names. Some of those names have fallen a lot now. And it will not take me as much time to get up to speed on what is going on because I have quite a rich repository of data already about it. So definitely one of the things about investing is that if you're a student of business and you love studying businesses, then of course you are very curious about all kinds of businesses, the ones you've exited, the ones you've invested in, the ones that are sitting on the sidelines and you're looking at them, admiring them, or thinking they're useless, whatever else. I mean, I think that that's the nature of the game is that we want to keep improving our knowledge about the way business works, the way the world works, absolutely.

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Starting point is 00:21:20 slash WSB. All right. Back to the show. So, Monish, in 1965, the average tenure of companies in the S&P 500 was 33 years. By 1990, it was 20 years. And if we run some of the newer numbers, it might be as low as 14 years by the year 26. We all know that the mighty fall, but as the tenure has become ever so shorter, has it made

Starting point is 00:21:47 you rethink how you identify and invest in compounders? Yeah, I think that's a fantastic question. And I think that one of the big mistakes I've made over the last 25 years is a serious underappreciation of compounders. For most of my investing career, I always focused on by finding 50 cent dollar bills. And basically the idea was invest at 50 cents, sell at 90 cents. Hopefully the transition from 50 to 90 happens in two or three years. And that's a great and value of return. Well, there are two, three, problems with that. Number one is taxes because you end up with significant tax bill. And the second is that you have to continue to be right. So if I invest in a company for three years and I double my money, I now have to find a second investment for three years. And I have to keep finding these two, three years best. And I have to always keep being right. And so it's not that easy to continuously be right like that. On the other side, when you go to the compounders, of course, that's the issue is that businesses actually are extremely fragile. People think they're not fragile,

Starting point is 00:23:02 but they're very fragile. And the odds at a business lasts for even a few decades is significantly against. I mean, the kind of comparative forces that work on a business are just so intense that there's just a sliver of companies that can withstand that. And even the sliver of companies that can withstand that, they may have issues after 10 or 20 years. So if you look at a company like American Express, almost a 200-year history, like 180 years or something, but they had to reinvent their business so many times.

Starting point is 00:23:42 Amex used to only be travelers checks, right? And then they had to make that transition and they were a late arrival on that scene, but they still were able to make it work. So I think it's not easy to make assumptions. So let's take a business like Costco. Okay? Costco is such a high quality business.

Starting point is 00:24:05 And we are seeing even in the time of Corona, how wonderfully well they're doing. The thing is that what does Costco look like 25 years from now? That's a really, really hard question to answer. Is there a Costco in 25 years? Is the market cap more than today? Would it between now and the next 25 years deliver shareholder returns in the double digits? I don't know the answer to these questions.

Starting point is 00:24:30 So my answer to the dilemma you pose is buying and selling doesn't get you to the promised land. Buying and holding also has issues because of this situation, with finite runways and when do businesses falter and all this stuff. So my answer is I found a path, and that is the path that I think works for Monash. There are three kinds of businesses, businesses that are cheap, but not necessarily great compounders. They're just cheap on current earnings and what they'll make in the future, but who knows where they are 10 years from now, right?

Starting point is 00:25:11 Then the second is that there are compounders, which are well known and Visa MasterCard. Coke and Amex and so on and Costco, and they've got huge runways ahead of them. Those businesses, which are known compounders, probably rightfully trade at high multiples. Then there's the third class of businesses, which I would say are the hidden compounders. So the hidden compounders is where I have put all my efforts now. Okay, because that's the holy grail for me. may not be for the investors. But the thing is that if you get a chance to invest in American Express at normalized five times earnings, you should do that all day long. We don't need to know

Starting point is 00:25:57 whether Amex is around 25 years from now. We will make money on that bet. We can look enough out into the future to know that the odds that we lose money is close to zero. I mean, Amex would be that's a great example because recently it got down to seven, eight times earnings, normalized earnings. I mean, their earnings are going to get hammered pretty heavily in the next year, two or three. But when you get to normalize earnings, by the way, it's not a stock tip. I'm not investing in Amex, et cetera. I did spend time looking at it. It didn't quite get to the point that I was drooling and so I had to let it go.

Starting point is 00:26:36 But if it got five times normalized earnings, I'd go all in. If for some reason, Costco got to single digit earnings, five, seven times earnings, oh, you'd make that bet all day long. So we can't do those bets. Now, in distress times like this, once in a while you might be able to find a compounder that's being tossed out. Amex is almost being tossed out. Visa and MasterCard are not being tossed out as much because they do have credit risk that Visa and MasterCard don't have. But there are hidden compounders.

Starting point is 00:27:06 and the hidden compounders are ones that have the runways, have the growth, have all these things going on, but people haven't figured it out yet. And sorry to disappoint your stick and your listeners, they shall go nameless. Okay, but the thing is that the key is to focus on the hidden compounders. I mean, I'll give you an example. So I made an investment in Fiat Chrysler. I think this was in 2012. The entire market cap of the company at that time was $5 billion.

Starting point is 00:27:42 80, 90% of Ferrari was inside Fiat Chrysler. Ferrari, even in a time like this where no one can go to the dealership, is trading, I think, at the market cap of like north of $25 billion probably. That $25 billion was embedded inside that $5 billion. That's classically the hidden compounder. So even if you didn't care about the Fiat business, And Fiat itself, actually, I didn't even understand in 2012 when I looked at Fiat, I didn't even care about Ferrari.

Starting point is 00:28:15 I looked at Ferrari earnings. I said, yeah, this is giving me, you know, I discounted how great a business it was. At that time, Ferrari's earnings were also not that high. They've actually done a really good job. I said, okay, no, Ferrari, $2, $3 billion, $4 billion. That's what it's worth. We don't worry much about it. It gives us some floor.

Starting point is 00:28:32 I was really focused on the company having $100,000. 30 billion in sales and 5 billion market cap. And I said, that's not going to last because they're, you know, the auto UAW contract got redone, all these different things are going in. Sergio had come in. And so I was focused on the core business. And the core business actually went, it's come down now, but it went up four or five times over the course of the holding and, of course, Ferrari did even better.

Starting point is 00:28:59 Fiat wasn't a hidden moat. It was just one of my classic undervalued deep value plays. But once in a while, what happens is we dumb luck end up with a compounder inside. And of course, that was too stupid to hold Ferrari. Now, I've learned that when you have these compounds in your portfolio, just hang on to them. And once in a while, you don't need many of these. I would say that when I look at 2019, 2019 was a tremendous year for me. And the reason actually, even 2018 was pretty good,

Starting point is 00:29:36 2018, I found, I definitely found one incredible hidden compounder. 2019, I found three. Okay. If I find three in a year, that is, you know, an orgasmic experience. So we don't need many of them. If in a year I can find a couple of them, that's pretty good. And now in the time of corona, I found one. So life is great.

Starting point is 00:30:08 Life is great. Moniz, here for the second part of the interview, I'm very excited to talk to you about philanthropy. And I think it's even more important these days in times of corona. Like you mentioned before, if we sit home and we feel sorry about ourselves for looking at our portfolio, we should probably in the first place be happy. about having a portfolio in the first place. And specifically, I'm very interested, talk to you about Daskanah Foundation that you founded

Starting point is 00:30:38 with your wife, Harina, back in 2005, and your daughter today is, Montsoon is today's, is vice president. It's just an amazing organization. And as a true cloner, instead of reinventing the wheel, you adopted an Anquemas model for the foundation. For those of us who are not familiar with and then Kumar and Super 30, could you please talk to us about how you met him and what you learned from him? Oh, sure, yeah. Anand is a wonderful human being.

Starting point is 00:31:09 And in fact, there was a big Bollywood movie made on his life story last year, which was a big hit called Super 30. And hopefully that will get translated and such and subtitled so people can watch it all over the world. Yeah, I think that he's a wonderful guy. a great teacher. And when I saw what he was doing, so I heard about Anand Kumar for the first time in 2006 in an article in Business Week. And when I read that article, I said, wow, this sounds quite amazing. So he was identifying 30 very poor kids who were extremely bright, who were 17 or 18 years old. And most of these kids were illiterate parents, you know, parents say the farmers

Starting point is 00:31:54 or laborers, probably typically making less than $40 or $50 a month. And he provided room and board and tutoring, coaching for them for a year to prepare for the IIT entrance exam. And the thing about India is that if the IITs in India, they are the MIT of India, it's very, very difficult to get in. But because these are government-owned and government subsidized, once you get in, it's almost free to get educated. So you do not need to come from a wealthy family or even a middle-class family to attend IIT. You just need to be very bright. But the problem is that without proper training

Starting point is 00:32:37 and coaching, no matter how bright you are, you'll not be able to do well on the entrance exam. And so it had become a gating factor where only the middle class or higher in India could go to the IITs because coaching was so expensive. And what Anand did is he offered that coaching for free to the extremely poor and extremely bright. And he got incredible results. So more than a million kids a year in India try to get into IIT and they're like 12,000 seats.

Starting point is 00:33:10 So it's a 1% admit rate. In the case of Anandqar, many years, all 30 of his 30 kids go to IIT. And even in the worst year he's had, I think 22 out of 30 have gone. So he's always had very high success numbers. And so when I looked at that model, I said, wow, what he spends in a year on those kids. And I'd asked him whether at that time in 2006, he was spending about maybe $600 or $700 a year per kid to get them into IIT.

Starting point is 00:33:46 His mother used to cook the food for them. and all the coaching, everything, took place inside a slum in Bihar and India. It was a very low-cost operation. I mean, the classrooms open air. There was no roof, et cetera. It gets really hot in the summer, really cold in the winter. But, you know, they had almost no costs. And so I said, wow, you know, he's spending $500 or $600 per student.

Starting point is 00:34:09 Once they go to IIT and finish, there's no difference between that kid and a kid from Stanford or MIT. in terms of being attractive for a number of global companies to hire them. And so I said that these kids, in effect, get connected to the global economy, and they go straight from zero to hero. And so I said, wow, this is, you cannot think of a higher return on equity or higher return on social return on capital versus spending. In Daksana, we spend close to $3,000 per student. we do have a roof over their heads

Starting point is 00:34:47 and we do have air conditioning so the cost is a little higher and my mom, she passed away no family members cooking for them so there are professional chefs and so on in the picture and we've got a professional team of tutors and faculty

Starting point is 00:35:01 so I found that you could spend $3,000 and the person, we've got one of our alums at Google and I think he's well over a quarter million a year I mean, he's only like 26 years old or 27 years old or something. He's pretty young.

Starting point is 00:35:18 And most recently in the, I think two years back, I think last year in the Google I know, their annual conference, he worked on a piece of the presentation that Sundar Pichai gave almost directly with the CEO. And he's moving up the ranks really fast. So the thing is, and he's not the only one. You know, we've got several people at Google, Microsoft, Amazon, all over the place. You know, all the major tech, U.S. tech companies, Indian tech companies, we've got people in Korea at Samsung, in China, in Singapore, France, all over the world now. And, of course, a huge number in the top companies in India. Thank you for sharing that story. And I think it's very important to understand for the listeners that IAT, if you allow me, I would not say they're just MIT.

Starting point is 00:36:06 There's this story that, you know, Chinatemonger asked Bill Gates with school would be his number one choice to recruit from for Microsoft. And he said, IITs would his first choice and the next choice would be a distant second. I mean, it is the best of the best students. That's right. Yeah. I mean, I think that it is the hardest school to get into. The IIT entrance exam is the hardest exam in the world. It's really, really tough.

Starting point is 00:36:32 We know what we put our kids through to prepare for that exam. It's pretty intense, yeah. Let's take a quick break and hear from today's sponsors. No, it's not your imagination. Risk and regulation are ramping up, and customers now expect proof of security just to do business. That's why VANTA is a game changer. VANTA automates your compliance process and brings compliance, risk, and customer trust together on one AI-powered platform.

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Starting point is 00:40:00 So, Monash, one of the things that I want to ask you about, Warren Buffett has a quote saying that it's actually harder to give the money away than to make the money. And so for people they hear that, they might kind of roll their eyes and say, oh, my God, this is obnoxious. But what he's getting at by saying that is he's talking about the metrics and to not just give money to a company that then employs a whole executive suite of people that nothing actually goes to the mission of the organization. So what he's really talking about is how can you have metrics on the mission in making sure that, like, a good example that my wife recently told me, because she's involved in the nonprofit space, was Habitat for Humanity. They don't just give people a house. These people have to go through and pass these financial tests. They have to go meet all these different criteria before they're eligible to receive the house. and they're doing this in a manner to ensure that the mission is met, which is taking care of people,

Starting point is 00:41:04 that they have a good home to live and that they're going to be able to sustain themselves after they receive it. So I'm kind of curious for you in the world of philanthropy, what metrics and how do you look at that difficulty of making sure that every dollar you receive goes towards the mission? Some of these things I discussed with Warren because he brought it up at the lunch I had with him in 2008. So the foundation had just started. I had just published my first annual report. Before Buffett came to the lunch, he had read the entire report. Not only had he read the entire report, he knew what was on what page by memory.

Starting point is 00:41:41 So he tells me, you know, on page seven, that quote you have from Bill Gates saying something to Charlie Munger. he didn't say to Charlie Munger, he said it to me. I said, no, Charlie told me he said it to him, okay? So he said, well, then he said it to both of us. I said, yeah, well, that's fine. But I'm just saying he had a photographic memory of everything in the annual report. It was really remarkable. So one of the things I always say that on my grave, they should always say he was a shameless cloner.

Starting point is 00:42:08 Everything in my life is cloned. It's one of the most powerful models one can adopt to make your life great. The only thing you learn from this podcast is to be a shameless cloner, that's it. That would make your life really good. So I created my wealth by cloning Buffett. When I was about 40 years old and maybe 42, 43, Buffett had just given a pledge to the Gates Foundation and his foundations of his three kids where he would give away 5% of his Berksha shares every year.

Starting point is 00:42:40 I think this was starting in 2006 or so. And I found that 5% of the... number very interesting because Buffett always wanted to compound till the end and then give it away at the end. He always pushed it off. And when he did that 5%, he was 76 years old when he did that, I brought it up in my annual report about that 5% formula. I said, look, Berkshire is going to compound at more than 5%. Okay, we know that for sure. And therefore, when he gives away 5% a year, his wealth is going to still keep increasing. So that formula is not going to end up Buffett with zero.

Starting point is 00:43:17 And the second thing is that the number of shares given away every year go down. So if he has a million shares gives away 5%, next year is 950,000, you're going to give away 47,500 and so on. So the number of shares keeps going down, but the amount given keeps going up. What I had done is I cloned that with Buffett, where once our net worth crossed 50 million, I said, you know what I'll do is I'll start giving away 2% a year. And I was 42 or 43 years old. And I said, okay, 2% a year means a million dollars a year will go to charity.

Starting point is 00:43:49 It's not going to impact the compounding engine because highly likely I'm going to make more than 2%. So that, you know, my network's not going to go to zero or any of that because I still had, you know, almost 40 years of life left ahead of me. So I adopted that 2% formula. Warren, he brought it up in the lunch. He said, Monash, you know, I read that 2%. I said, you know, Warren, I also talked about there, about your 5%. And that's where it comes off. He says, yeah, it's beautiful. It's just awesome. And so this was blessed by the Messiah. It's great. Okay. And so one of the things was that, and the reason I picked the 2% and the reason I picked the million is because giving money away is

Starting point is 00:44:31 really hard. Okay. So you have to have two or three principles that are different from investing when you're giving money away. Number one principle is expect to fail. When we invest, we do everything to avoid failure. And in Buffett terms, what he said, this is what he told Bill Gates of the Gate Foundation, swing for the fences. So the Gates Foundation, for example, puts money into finding vaccines for 20 years. They haven't found a vaccine yet on anything. But the thing is, the payoffs are so huge and so important, it's worth it. And humanity needs that. We need a universal virus vaccine, right? How do you get that? It may not pay the private sector to invest in that. It makes absolute sense for the Gates Foundation to dump billions into that, because look at what's happening

Starting point is 00:45:26 now. So the thing is that you swing for the fences. So the problems we are trying to address in philanthropy, education, health care, environment, poverty, these are very, very tough problems. These are problems where governments for hundreds of years has spent trillions of dollars and they have not solved these problems. And these are not because the governments are corrupt or bad. These are tough problems to solve. So in philanthropy, you are forced to confront tough problems.

Starting point is 00:46:01 The tough problems are not easy to solve. Swing for the fences. and don't be afraid to lose money and don't be afraid to fail. So when I started Daksana in 2007, I said, okay, the million dollars a year is going in. I assumed the million would just go down the tubes. People in India would rip me off. The model wouldn't work. We wouldn't get the results.

Starting point is 00:46:25 I said, all that is fine. Let that happen because after paying a tuition bill for 10 years, I will finally know what to do. So I was willing to go for 10 years, giving the Kupesend a year, assuming it all generated no return, and then hoping after 10 or 15 years, we would get somewhere. And I felt that if it happened after 15 years, I would be 57 years old. I would still have a runway ahead of me to do things. As it turned out, because cloning is so powerful, we picked a phenomenal model with Anand Kumar and Super 30. and I also lucked out where I got a phenomenal team.

Starting point is 00:47:05 And the combination of the great model and the great team just made the model work extremely well. And one of the things in our model is that when we take these kids who are so poor and have had such a tough life, some of them are almost homeless, they are extremely motivated to succeed. So even if I don't have the best faculty or I have shortcomings in how Daxana is doing, the kid is very motivated and the kid is pushing you. So the model is really powerful because the recipient of our aid is very determined to try to make the best use of it. And this doesn't apply to everyone, but most of the kids we have are like that. So I think the thing is that Daxana, the 2% model, made it very easy every year. I didn't have to think about it.

Starting point is 00:48:00 January. I would figure out what my net worth was, figure out what the 2% is. I then changed that model where once we were over 100 million, I made it 3%. And so on. And of course, in the land of Corona, we are no longer over 100 million. But there are worse problems in life than that, no problem. So that's the key is be willing to swing for the fences. Be willing to fail. You don't need to be a rich guy. You can do this experimentation with 2000 a year

Starting point is 00:48:29 also or 5,000 a year also because the problem is the same. What you want is how to get the best use out of the 5,000, right? There are a zillion charities around. You could give it to any of them and then you can study them and analyze them and such. Or you could do it retail. You could do it in your community, your school, your homeless shelter, there's a hundred different options. So I don't think it is about having millions or billions. I think it's about getting started somewhere and most important learning from those experiences and getting better every day. Speaking of that 2007 report, it's actually quite beautiful. You have two quotes by Warren Buff, and then you also have a quote by Gandhi just below, which I hardly see them compressed like that.

Starting point is 00:49:17 But it's amazing. And you talk about this dilemma about, just like Buffett has talked about, would it be better for humanity if you compounded because that, if I could say that, might be your forte and then give back? Or should you give back sooner, learn more as you go along so we can give back more efficiently, which is a very fascinating discussion in itself? I think Buffett's idea originally was that his first wife would outlive him. and he really didn't have much interest in giving money.

Starting point is 00:49:47 I mean, he didn't want to get involved in that whole area. So he just thought, okay, the estate will pass to her and then she'll figure it out, right? That was his original plan. And I think when she passed away, then he started thinking about it and then he said, no, I need to put something more form in place. And actually, I think if we went and talked to Warren Buffett today, I think he would say that he would have been better off if he had started sooner. I think now his perspective would be that probably that where he had come out on it, which is let me compound and then give it away, he probably said maybe five, ten years before that I start giving away some smaller amounts.

Starting point is 00:50:24 So, Monash, if I was just going to give you some huge kudos here, I would tell you that your writing style in the way that you write not only the report that goes out to some of your investors, but to your foundation. I guess there's a quote where Buffett has given you high praise saying it's one of the best annual reports for a foundation that he's ever read. But with all that said, I guess I'm hitting at, you have to make hard decisions with your nonprofit. And what would you say has been the hardest decision for you since establishing it? Well, we are making some hard decisions right now. We just shut down our coaching at all of our. locations because of the virus. You know, the government of India issued a mandate that all schools have to shut down. Our campus in Daksna Valley is technically not a school, but we want to follow

Starting point is 00:51:22 the spirit of that order. And so we're going through that right now. We don't know how long this is going to last or how it impacts everything. And, you know, but for us, I think the thing is that there are bigger concerns than maximizing our IID and mid rate and so on. So it's unfortunate for the kids, but we're going through that right now. There have been a number of times when core principles we've had have been tested, and they've been tested pretty hard. So, for example, one of the principles that I laid out for Daksana, when we were operating in India, is no matter what,

Starting point is 00:51:59 we would never pay anyone a bribe of even $1. We would rather shut down than pay a bribe. And India is a country where bribery is rampant. So I'll just give you an example. I think this was in 2009. We were running our own hostel in North India. And we had rented this place. We were housing the kids there.

Starting point is 00:52:23 We had our classrooms there, everything. And we needed more power to be available. at that place because we were running these air conditioners and such. So we needed the local utility to increase the power coming to us. And we approached them and said, look, we need more power, blah, blah, blah. And, you know, of course, we'll pay the higher bills and all that. So the guy produced like a tariff card for us. And the tariff card was actually a tariff card of bribes. So he said, look, what we have done in our department is we have done. standardized the bribes.

Starting point is 00:53:01 Okay? And we published this card which has the bribe. So if you need so much power, you pay so much bribe. If you need so much power, you pay so much bribe. And it was just like an officially

Starting point is 00:53:11 printed document. Wow. Wow. Really? Okay. So we told the person, look, we are a non-profit. We are taking care of these poor kids.

Starting point is 00:53:22 Blah, blah, blah. And we cannot pay any bribe. Please do this for us. You can have your bribing from all the other people. dealing with. He said, no, sir, we don't work like that. We made it universal and there are no exceptions. We cannot give you the power. And the bribe was very little. The bribe was about less than $300. Okay. So Dachana, of course, is not going to pay the bribe. Now, what we did

Starting point is 00:53:52 is we installed these massive diesel generators. The diesel generators cost us thousands of dollars. I think we spent more than $10,000 or $15,000 on those generators. And then we were spending about $700, $600, $700 a month on the

Starting point is 00:54:12 fuel for the generators. Right? But it never crossed our mind to do a cost-benefit analysis. That was out of the question. So I hated the generators because they produced so much pollution and it smelled so bad because we had to install it in the front yard,

Starting point is 00:54:32 which was just a mess. But none of that mattered versus paying the bribe. And we could have paid the bribe. No one would have known about it. It would have been much better off. We would have more money for poor kids, all of that, but we didn't do that. And we've repeatedly not done that because, you know, we bought a large property, these property transfers.

Starting point is 00:54:53 It took years for us to get our paperwork done because, as we are not willing, willing to bribe. And these bribes were insignificant. They were less than $100 here, $200 there, whatever. We were buying a property for $10 million. We never paid a dollar. And that's the principle we live by. And so far, we have not had to shut operations because of this. But we were very willing to. We found a workaround with the diesel generators. We'll always try to find a workaround. And usually most of the time, what I've used is I've used a stick approach where Usually when someone's asking for a bribe, I go high up in the government, the people I know, and they come and hammer the person.

Starting point is 00:55:32 And then the bribe request disappears. In the case of the power, we couldn't do that. So I think the core principles like that, that's what makes companies do well. I think you really want even in investing to look at businesses which are very honed in on core principles. I mean, you know, Southwest Airlines, their culture, I have a. employee of mine who was a consultant with them for a while. So he used to go into their headquarters. He was a senior IT guy.

Starting point is 00:56:03 He said every time I'd go in to meet them, meeting, the first thing they'd all do was hug me. He said, I worked with United Airlines. I worked with Delta. I worked with all these other airlines. Nobody ever hugged me, even once. He said the entire team would hug me before the meeting started. And he said, I went to the Southwest headquarters. They have no art.

Starting point is 00:56:27 They only have employee family pictures. So culture of a place is really important. The principles of a place is really important. Profit or non-profit, it doesn't matter. Thank you for sharing. And I just want to say that both my wife and I are teachers. And I kid you not whenever I say that we both have this dream of starting our own school from Powerist Intelligent students one day.

Starting point is 00:56:52 and I actually ran into my wife after I read through some of your annual reports and she just looked at me like, what's going on? Stig and I said, I feel the same way about this charity as how whenever I found Buffett's letters. Like, this was who I needed to clone. And I know that's the best flattery. I told my wife, and she can testify to this, this is how we need to do it. Like someone already did the hard work. We need to work harder. We need to fund this. But this is the model in our area where we can make an impact? I think that warns my heart a lot. I mean, I think that one of the side effects I was hoping for with Daksana was that

Starting point is 00:57:32 I was hoping I'm not the only guy reading my reports. It was very heartwarming with the comments Buffett made. But I think after that, many, many times I sent him the report, I would get a request, send 20 copies. And he would give it to his board. He'd give it to all his kids and grandkids. And so that was very flattering. And of course, Charlie Munger reads reports as well.

Starting point is 00:57:55 So, yeah, I mean, I think that the reports are good because they're cloned. Okay. I couldn't have come up with those reports on my own. And I think Buffett appreciates the fact that there's no pictures. He's gone to pictures. But I still haven't gone to pictures yet, even though we have tremendous pictures to share. So we leave them for our website. Monish, we cannot thank you enough for coming on.

Starting point is 00:58:20 You always just have so much wisdom and just set the example for everybody out there. We're going to have links in the show notes to the Dukshana Foundation. If anybody wants to check that out, and if you want to donate, we highly encourage you to donate there. But, man, thank you. Thank you. Thank you. Thank you. It's a pleasure.

Starting point is 00:58:40 Actually, it's enriched my life, made my life a lot more interesting. And I think all your listeners will find that, you know, I wrote about this in my last annual report. that probably the biggest beneficiary of my foundation is myself. I mean, and I wrote that the giver has actually become a big receiver. So what I have gotten back from Daksana has blown away anything I have given. And I think that all of you will find that when you go down that path, it's just a beautiful path. I think you're so right. And we'll also make sure to link to the latest annual report from the 2018, where you talk

Starting point is 00:59:20 about a very personal story at the end of your letter. I think the audience will find that heartwarming. Thank you so much for inspiring us with what you do. Thanks a lot. Take it was fantastic. Thank you for listening to TIP. To access our show notes, courses or forums, go to theinvestorspodcast.com.

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