MOHNISH PABRAI 00:00
This time I have a a brand new talk that I have never given before, so it’s a first time I’m giving this which is exciting for me. So but hopefully it’ll go over okay on your end and everyone will like it as well. Is the audio good?
ARVIND NAVARATNAM 00:26
MOHNISH PABRAI 00:28
All right, perfect.
Okay so anyway, you know, a few thousand years ago, we were told about Moses going to the top of the mountain and then coming back with the commandments – the ten commandments – and that story is slightly off.
So, you know, I have a lot of conversations with God and in one of my conversations, you know, he said that you know Mohnish when Moses was coming down the mountain he dropped the tablets and they shattered into many different pieces and so my commandments were lost, but he felt really bad and humanity was expecting these commandments so he made them up. And we’ve never had the real commandments, so he gave me the real commandments to usher on to the world through Arvind’s BC class and so that’s what I’m going to try to do.
And so God also said that he really wanted to focus the commandments on investment managers and not humanity. And unfortunately Moses kind of broaden the scope of the task he had been given. And so these are the commandments for investment managers. And Moses was right, there are exactly ten commandments so he got that part correct.
But anyway the first commandment – so you know, I don’t know how long these are going to take to go through so I’ll try to speed them along so that we have enough time for Q&A and such, and certainly if the flock is looking for more clarity on one or more commandments we can certainly do that during the Q&A.
So anyway the first commandment is thou shall not skim off the top.
And what the Lord means by that is that, you know, one of the things with all these commandments is that – the reason they’re being presented is that – most participants in the investment management business violate them. And they are sinners and so we are trying to kind of improve the lot if you will.
So skimming off the top basically is setting up an investment operation where you’re either taking, you know, some percentage of fees as a fixed fee. And in the case of hedge fund they’re usually taking one or two per cent off the top and they're adding performance fees on top.
And, you know, two of the original practitioners Warren Buffett, Charlie Munger, they practice the art with no fees off the top. So Buffet had I think 0/6/25 once he merged all his partnerships I think in 1962 where he took no fees off the top. And Charlie I think had a third – I think one third above zero, is my belief I think that’s what he did. But of course he was – that was kind of specialist operation, little different operation that he was running and very little capital.
But the bottom line is that both Buffett and Munger have said that if you’re in the investment management business what should have already happened before you set up your own shop or started managing other people’s money is practice the art – on your – with your own limited assets.
And if you did well with those assets then you know the power of compounding is such that even a small amount of money becomes quite significant after a few years. I mean if you’re compounding at anything north of 15, 20, 25% which you should be able to do on small amounts of capital. I mean your money will be doubling every kind of, you know, 4 to 7 years type deal.
And so even a small amount becomes fairly large in a few years which gives you the ability to in effect live off that base while the assets are growing. So anyway that’s the first commandment.
1st Commandment of Investment Management: "Thou shall not skim off the top."
Just be like Warren Buffett's partnership 0/6/25 Fee Structure, its more fair and logical to both you and your investors.
0/6/25 = 0% Management Fees, On Top of 6% Fund Manager takes 25%.
if your return of investment is 15% at the end of Year 1, you as the fund manager takes 2.25% (25% x (15%-6%)) as the performance fees from the gain, where your investors kept 12.75%.
Hence, the better you perform the more you and your investors gain. It's a win-win fee structure.