Video Link: https://youtu.be/5MwLlmCAftg
In this episode, Mohnish Pabrai was asked if he's going to decide whether to invest in a company that is totally new to him, what will be the first feature that he will look at or first of few features?
In this episode, you’ll learn:
Why index investing make sense for most people?
How Mohnish Pabrai taught his daughter about the power of compounding?
3 keys to building wealth.
To check out all Collection: Mohnish Pabrai <click here>
AUDIENCE MEMBER 00:00
Thank you for the talk. We can see that you learned a lot from Warren Buffett and Charlie Munger and it’s not easy to build up the business acumen throughout the years.
So my question is if you’re going to decide whether to invest in a company that is totally new to you, what will be the first features you will look at or first of few features?
MOHNISH PABRAI 00:24
Well, I would say that it’s a very good idea to consider indexing.
You know, one of the things are one of the reasons I wanted to give this talk is that I think it’s not easy to be a weekend investor, if you will. If you think about like for example the work that they did on Coke, it’s a lot of work. It’s a lot of work to read a hundred years of annual reports.
So for the – for large number of investors, index investing will do quite well for them and there’s nothing wrong with that, that’s perfectly fine. And I think that if – it’s a good idea to study a business for the sake of studying it, it’s not a good idea to study the business just purely from the perspective of “do I want to invest this or not?”
And you know, one of the things that happens is that there is a – humans have a commitment bias. So what happens is that when we spend a lot of time on something, we feel we should get some return for that time. And so it’s a little bit of – I would say a danger if you say that I’m going to research a company and then decide whether I want to invest or not.
I think you’re better off just researching company with no such preconceived notion because as you go deeper into the business, you’re spending more time, and then you’re feeling like, well if I don’t do anything, what’s the point and so on. So I think that maintaining the objectivity is important and just not being compelled to act.
You know, my younger daughter is in the room, so I’ll repeat a story I told her one time. And so I was – I picked her up, you know, she goes to school in New York, and so she’s usually coming in this late night flight, so I picked her up one time at like 1:00 in the morning from LAX and we were driving back.
I think it was December last year, we were driving back home from LAX to Irvine. And she had worked in the summer as an 18 years old and she had made a little less than $5000 over the summer. And the IRA rules allow you to put up to $5500 dollars into an IRA or if you make less than $5500 then the amount you earned, so if you made $4000, for example, you could put $4000 to an IRA.
And so I had asked her to open a Roth IRA and then we put the $5000 dollars or so into that Roth IRA. And you know, she’s in the car almost falling asleep, and so I was saying you know, you’re 18 years old, let’s fast forward to when you’re 68 years old, which is 50 years from now.
And let’s say that we are – that $5000 is growing at something like let’s say 10% a year or something for example, and so I said that you know, what would it be when you’re 68 years old?
And so, you know if you’re compounding at 10%, you’re rule of 72 every 7 years the money going to double, so 50 you could take 49 years is 2 to the power of 7. And what is 2 to the power of 7? Is that 128?
128. So you take the $5000 and you’re at about something like $700,000 or something or $650,000 or something at that rate and that’s at the age of 18, if she does another internship at the age of 19 with something similar and then, you know eventually at maybe 22 or 23 enters the workforce and you know, let’s say when she enters the workforce, she gets a – I don’t know – $60,000 job or something at that point, maybe hopefully saving 15% in a 401k and reducing your income by 10% or something.
I mean, the key to getting wealthy is to spend less than you earn. And so what I – once I told her that she was going to have like $650,000, she was wide awake. And she said “What what what happen? How did that happen?”
And I explained how it happened and then I said, but that was at 18, and I said then at 19, you do another internship that becomes another $600,000, and at 20 do another internship and eventually you enter the workforce and eventually at 30s you’re making probably six figures and so on. And if you keep spending less than you earned, what happens when you’re 70? And eventually she gave up, she said the number is too big, right.
And so the thing is that the – that’s with doing no stock picking, you know, to your point no reading, you know, just party all the time, right, but just make sure that 15% get saved.
And so the thing is that the key to getting wealthy is actually very simple. Number 1 spend less than you earned. Number 2 put it into something consistent, some kind of S&P index or something like that. And then number three don’t take loans against it and don’t use it to go on vacation or down payment for your house or any of that, do all that stuff somewhere else and just let this go.
And it’s amazing what those numbers will end up being at that time and so that’s a good way to go. And you know, it’s not a tragedy if she doesn’t get 10%, even 7% will double every 10 years. You know, so you still – the key is to start early and have a long runway and then you end up doing just fine.