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Collection: Mohnish Pabrai - #94 'Upside Without Downside'



The fifth model is upside without downside. So I also call this playing the bubble.

So what happened in the – you know, in the late '90s, the dot-com boom was on in a big way, and everyone thought it's going to be transformational, it's going to change everything. So these companies like, etc., they had huge valuations. You know, even Amazon was a huge valuation, Yahoo – all these companies.

Now – I had spent some time in technology. I knew that the internet was important but I also could not tell which company would make it, which company would not make it. And I was definitely not interested in buying anything which was even trading at 10 times earnings. You know, I like to buy things at three times earnings, or even better, like Fiat, one times earnings, that's even better.

So I was not interested in buying these businesses, but there was a bank in Silicon Valley called Silicon Valley Bank, a really good bank. And it was a normal bank except that they had one thing.

What they did was – In the Silicon Valley what happens is that if you are a landscaper or a gardener for Google, they'll give you stock options. If you are a chef for Google, you'll get stock options. If you are a waiter in a restaurant, they'll give you stock options. Stock options is like breathing in Silicon Valley.

So this company, Silicon Valley Bank, whenever they made loans to all these dot-com companies, besides getting all their loan terms, they always got warrants. And the companies didn't care. They gave them warrants.

So every time they would do some loan or some deal, they would get these warrants from these dot-coms, and they never disclosed how many warrants they had, what warrants they had, what the strike prices were. No disclosure. They only said that "We just get warrants."

So there was an unknown element to what these warrants were worth, but the bank itself was trading at a very low valuation, just slightly above book value. And a very well run bank, even now it's in existence, has done well over the years.

So I said, "Okay, this is the way to play the bubble." Which is buy Silicon Valley Bank and if those warrants turn out to be useless or worthless, we don't lose any money. We still have the bank. And if they turn out to be something, then we have a huge, huge run.

And basically, I think we had a two and a half – Yeah, we made about two and a half times our money in two and a half years on the stock. And if I had held it a little bit more, another year, I would have made five times the money because then they disclosed the warrants just as the '99, 2000 bubble was peaking, and then they started selling those warrants. So they monetized them which worked great.

And then the other company, which was the first company in my portfolio that went up 100x, was a company called CMGI. And they were an incubator of internet businesses. And I bought them just slightly above book value because at that time people didn't fully understand what that the business was doing.

So they just kept taking stakes in dozens and dozens of internet companies, and then they had a whole basket of them. And then the markets fell in love with these kinds of companies so they took it to the stratosphere. They took it – Our $100,000 became $10 million and I sold almost nearly at the top. I think maybe 20-30% off the top, I sold.

And so this is something that comes into play when you have bubbled. It's probably not the most elegant way to make money, but sometimes you can get these upside without downside situations when that can play out.

And with that those are the kind of the five models. You know, so we have the huge tailwinds with the idiots who can run the company and the company does well. Then the second is a huge tailwind, but you cannot have idiots, you need smart people running it, kind of like Amazon and GEICO. Then the third is markets getting confused between risk and uncertainty. So we talked about Ipsco and Tesoro, Frontline, and Teck Cominco on that.

And the final one was the grave dancer, Sam Zell. You know, bankruptcy, reorganizations, public LBOs, busted LBOs, special situations. And those can all work out quite well as well. And then you finally have the upside without downside which has happened only once to me because they have the most mega bubble that I had in 22 years was in the late '90s with the dot-coms, when most of you were still, I think, maybe not even in kindergarten, but maybe just in kindergarten. So with that, I think we can talk about what you want to talk about.



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