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Collection: Mohnish Pabrai - #134 'Lessons From Charlie Munger's Investment on Tenneco & Li Lu'


Video Link: https://youtu.be/2l9GXYh4pfM


In this episode, Mohnish Pabrai talks about lessons from Charlie Munger's investment on Tenneco and Li Lu (Munger's investment partner).


In this episode, you’ll learn:

  • Lessons from Charlie Munger's investment on Tenneco.

  • Few Bets. Big Bets. Infrequent Bets.

To check out all Collection: Mohnish Pabrai <click here>

 

[Transcript]

(Source: https://youtu.be/bLjoL5zhBxA)

MOHNISH PABRAI 00:00

And then, you know, some of you might think that these are stories which are so far back, different times, this time when exist today, how can we take advantage of these things today and such.


So in 2002, Charlie Munger made an investment that he read about in Barron’s, Barron’s is a weekly magazine and he had been reading Barron’s for almost half a century, so every issue of Barron’s probably has at least 10 stock tips.


And so if you want to read them for half a century or something, that’s about 2500 issues or about 25,000 stock tips. After 50 years of reading Barron’s, he made one investment and that investment was in 2002 where he invested $10 million in Tenneco and Tenneco invested in the stocks as well as their bonds were 35 cents of the dollar and they converted to stocks as well. And he sold Tenneco couple of years later and the $10 million had become about $80 million, about 8x, 2004-2005.


And then he turned around, he met a promising young Asian manager, Li Lu, and he gave the $80 million to Li Lu to invest in a new fund, Li Lu was starting to invest in Asia primarily. And that $80 million, I don’t know the exact number but it’s something like $500 million today, it's gone up, you know, 6 or 7 times since then.


So if you think about it, you know, you have one action in 2002 to buy Tenneco, you have second action in 2005 or 2006 to give that the proceeds to Li Lu and you end up the $10 million becomes $500 million, 50x in the last 15 years and these 15 years we were all alive, we could’ve done the same thing. I certainly didn’t do the same thing, which is why here I am talking to you instead of, you know, being up there on the slide.


But the thing is that it again demonstrates the importance of making bets when the odds are heavily in your favour. Charlie was sure because Tenneco had all these very dominant brands with Monroe struts and mufflers and brakes, which are all now leaning but at that time they were quite prominent.


And in fact, if he had held on he was buying this stock for, you know, $1.50-$1.75 it eventually went to $55 a share, so even if you just held on some more you would have made even more than what he did.


And so he – the interesting thing is that you go through multi-decade period of listening to one pitch after another and do nothing then you step in and make one investment and then you will step in to make another investment. And so in Charlie’s word, the $500 million with Li Lu pretty much came out of nothing.


And if you think about, you know, in 2002, I think Charlie was a billionaire by then, so $10 million that he put in were kind of been like 1% of his net worth and Rick Guerin like to say that it’s always good to keep $10 million and checking in case something shows up.


So I would kind of rephrase that as saying that it’s always good to have maybe 1, 2 or 5% or some single digit percentage of your net worth sitting there waiting to be deployed when you have extreme odds in your favour with very high return possibility and they will show up from time to time, they show up infrequently and one has to be prepared to act in size when that happens.


And so these were some thoughts that I really wanted to share with you, which is you know, the core is, you know, the “Few Bets. Big Bets. Infrequent Bets.” The ability to take pain and the ability to be decisive at the point when you’re encountering no brainers. And so with that, Professor Yang you can maybe open up for questions and such.

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