Collection: Mohnish Pabrai - #153 '6th Commandment of Investment Management'



[Transcript]

MOHNISH PABRAI 00:00

Then commandment number six, "Thou shall always have a rope to climb out of the deepest well."


So in case someone who didn't understand that fully, let me try to decipher what the good Lord meant by commandment number six. So when I was growing up, my dad was an entrepreneur and he was really good at starting a number of businesses with nothing, no capital and he was really good at getting them to some some scale.


I mean, you know, some of these would get up north of 100 employees and such. I mean they would move pretty quickly but he was always very aggressive with his growth plans and leverage and such, and overly optimistic and invariably these businesses will blow up. And so he went through a a number of bankruptcies.


You know, so when I was growing up and my parents were very bad kind of financial planners so as the business did so did our, you know, household fortunes if you will. So when the business was doing well, things were loose and going well at home and when the business blew up we didn't have money for rent, we didn't have money for groceries. We were, you know, asking relatives to help us out, asking friends. So it was a tough situation.


And one time I think when I was like maybe 9 or 10 years old and my father had gone bankrupt. He had this guy who was a astrologer show up to our house – our apartment every Sunday – and this astrologer would have all these, you know, orange robes with a bunch of marks on his forehead with a bald head and all that. And he would have all these different charts and he would tell my father about the future. And then my father would pay him and then the guy would come the following week and this was kind of a weekly thing going on.


And I told my dad after observing this for a few weeks that, you know, because my dad was an engineer, he was a very rational guy. And I said, you know, you have to know that this person is just talking utter nonsense you know.


And so my dad said to me that I am at the bottom of a well and I need a rope to climb out of the well, and this orange robe guy is my rope because when I pay him he make sure that he tells me that the future is great, because he knows if he says that the future is not great, he’s not coming back the following week. So every week when I have my session with him, he is telling me about these future businesses that I'm gonna start and all this prosperity that's going to come and I need something to climb out of the well that I'm in.


And one of the things that surprised me repeatedly what my dad was that the ability to bounce back. I mean I noticed as he get older that his bounce back was harder than it used to be when he was younger – yeah, I think it just was harder going through it over and over – but I was always very surprised at the quickness with which as he was, you know, putting one business, you know, the last semblance of it going under he was already kind of thinking about the next one and such.


So in the investment business, we are going to have gyrations. And we’re going to have periods when performance is great and we're going to have periods when performance is not so great.


And so, for example, in the financial crisis in 2008 or 2009, Pabrai Funds from the peak in June of 2007 to the bottom in March of 2009, the funds dropped between 65 and 70%. It's a huge drop.


And you know when I told you about commandment number one, "Thou shall not skim off the top." So basically if my fund will work let’s say, 600 million dollars or thereabouts, let’s say in June of 2007, basically by June of 2008 in order to collect a fee it needed to be at least 636 million – You know 6% return and then I get paid – instead the funds were below 200 million.


So 600 million goes to 200 million the base level required to earn a fee is 636 million. I am in a very deep well. And so I thought back to the guy in the orange robes and unfortunately I didn't have his email address and I don't even know if he was alive then. He may have passed away probably. So I was looking for a guy in the orange robe but he was nowhere to be found so I said I'm at the bottom of the well and I need a rope. I need a rope to pull me out.


And what I did is I violated commandment number five. I first sought the forgiveness of the Lord and said, you know, in order to follow the commandment number six I need to temporarily get a pass on commandment number five.


And after many years I fired up Excel and what I did is I took my portfolio and I put in prices for all the stocks that were in my portfolio in at the end of 2010, and at the end of 2011. So I put my best guess as what these companies would be trading at the end of 2010 and 2011. And of course, things have collapse, you know, I mean there were a lot of bargains at that time. I mean anything I was investing in went up several times after that.


And when I looked at the numbers of the aggregate portfolio at the end 2010 and at the end of 2011, it was well north of 600 million partially because I had control over what went into those cells, just like the astrologer had control over what he was going to say in the future was going to do. And you know like we hear about Steve Jobs' distorted reality field, we need distorted reality to climb out of wells.


And so what I did is instead of focusing on the 200 million dollar number in my mind, I focused on the 2010 or 2011 number when I was going to be in fee earning territory and life would be, you know, great happy days will be here again.


And that actually worked, in fact, I still have the spreadsheet and every once in awhile if I feel that, you know, we are in a, you know, well and we need to climb out, I'll always go back to that. And so I don’t use Excel for doing investment analysis, I do use Excel to climb out of wells and it works pretty well.


So you always need not only in investing but in life a rope to climb out of deep wells. So it is a guarantee that both in investing and in life you will find yourself in deep wells. Life would be quite boring if that didn't happen. So that's commandment number six.

(Source: https://youtu.be/9tGjXPhnp-s)

 

[YAPSS Takeaway]

6th Commandment of Investment Management: "Thou shall always have a rope to climb out of the deepest well."


There will be up and down in life and the key to happiness or success is don't get stuck in the past, learn from it and just keep swimming.