Collection: Mohnish Pabrai - #81 'Circle of Competence'


Video Link: https://youtu.be/p6tm703_0rw


In this episode, Mohnish Pabrai was asked as a new investor, what are some tips on improving the circle of competence or expanding it?


In this episode, you’ll learn:

  • Why circle of competence can be very tiny and that's perfectly fine?

  • John Arrillaga circle of competence.

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

[Transcript]

(Source: https://youtu.be/7F2IGzES7Uc)

AUDIENCE MEMBER 00:00

Thank you so much, it is an honour to hear you speaking to us tonight. You were talking a little about your circle of competence, as a new investor what are some tips on improving our circle of competence or expanding it?


MOHNISH PABRAI 00:13

That's a great question.


And you know, what Buffett says is that the size of the circle is not relevant, knowing its boundaries is absolutely critical.


So what he means by that is that let's say, you know, this was your circle of competence, you just kind of understand a very tiny sliver of businesses, right? You are not at a disadvantage if that is the case.


I know that may seem counterintuitive where they're having like such a big circle of competence versus this small. How can they be – but you know, Charlie Munger give the example of his friends, this guy John Arrillaga.


And John Arrillaga is on the Forbes 400, I think he's worth 2-3 billion. after having given away several hundred million to Stanford. And all he has done is he has invested and develop real estate within 1 or 2 miles of the Stanford campus.


So what is John Arrillaga circle of competence?


John Arrillaga circle of competence is not even real estate, it's not even real estate in California, it's not even real estate in Northern California or in the Bay Area. His circle of competence is limited to a few square miles of real estate and that's it. And what he has done is he has understood the dynamics of that area and he only put all his energies into that area and you know, he made a fortune doing that.


So you know, and Munger goes on to say that if you lived in a small town, okay? And you never left that small town, you know, let's say you were in Peoria, Illinois. And you know, you grew up in Peoria, Illinois and you just live there, all your life and so on. And you know, you feel like the whole world is around you and you don't know anything.


He said that if you invested in the Ford dealership in Peoria, Illinois, and you invested in the McDonald's franchise in Peoria, Illinois, and you invested in the best apartment building in Peoria, Illinois, and you invested in the best office building in Peoria, Illinois.


And you did nothing for the rest of your life, you had those 4 investments and you don't even need to own the whole thing, part of a McDonald's, part of Ford dealership, part of the best apartment complex and part of the best class A office building. And the key is you bought those 4 at the right time, at the right prices, right?


And then you just sit on your ass and do nothing for 60 years or 80 years and you're done. There's no need to even enroll in Arvind's class because you know, he's sadistic. Let me just tell you he wants to make you work hard for no reason. All you need to do is move to Peoria, Illinois make those 4 investments and you can say goodbye Arvind, I don't need you.


So circle of competence can be very tiny and that's perfectly fine. I'm sorry Arvind that they won't be coming to class anymore. (Laughter)


ARVIND NAVARATNAM 03:52

Well, there is not much class left. So that's – (Laughter)

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