Value Investing, Videos

Mohnish Pabrai – Talk With Class Of 2019 Dakshana Scholars – Dec. 24, 2017

Mohnish Pabrai at JNV Kottayam, Kerala, India on Dec. 24, 2017.

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I heard about a person called Warren Buffett in 1994 I was 30 years old and I was an engineer like many of you will become engineers and when I heard about warren buffett that is the first time in my life I understood the power of compounding and compounding is the you know Einstein used to call compounding the eighth wonder of the world because you get some just extreme results from the way compounding works and so I'll just before I answer your question I'll just go a little bit into compounding so Warren Buffett when he was 20 years old in 1950 he had $10,000 that he had made from working as a teenager $10,000 will be about 7 lakhs six and a half seven lakhs 6.4 lakhs actually and he was planning to invest that money and and grow it so if you let's say have let's say six lakhs okay and let's say you will you will go to IIT in 2019 you will graduate in 2023 right you get a job you start working you save some money three lakhs a year by 2020 20 five and let's forget about your future savings every year you really save some money but let's forget about that we'll get to that later let's say this six lakhs is in creasing at 24% a year how we get to 24% we will talk about later but let's say you're able to do 24 percent a year increase in the money there is something known as the rule of 72 how many of you have heard of the rule of 72 raise your hand have you heard of the rule of 72 so one of the sad things is that in never they and in CBAC curriculum they have not put rule of 72 do you know rule of 72 but so I'll explain the rule but did you learn about it on your own you heard from your teacher good ok so let me let me just go through rule of 72 very quickly one of the most important things to know is rule of 72 rule of 72 say is that if I know the rate of interest compounding rate of interest then I will know how long it takes money to double so I Phi if I do 72 divided by 24 it's 3 so if my compound rate of interest is 24 percent every 3 years the money will double okay one point to four point one point two four times one point two four is approximately two if I am increasing if I'm compounding at 7% it will take 10 years 72 divided by 7 approximately 10 years if I am compounding at 15% it will take 5 years so this 72 is the magical thing where it works with many different numbers not all numbers of most numbers it works so if I am compounding for example at 10% how long will it take for the money to double raise your hand yeah go ahead ok so have a seat we don't care about the point 2 we are going to do what my mother used to call mota hyssop okay so don't me 0.2 then point threes if I am compounding at 12% how many years will it take for money to double 6 years good and if I'm compounding at 9 years 9 percent how long will it take for money to double okay now the other thing about the rule of 72 is I can reverse it which is if I know how many years it takes to double I know what the rate is okay so I am doubling my money every four years what is the rate of compounding correct so we this is one a very beautiful elastic math where if I know the number of years it takes to double I can figure out my rate of return if I know my rate of return I can figure out how long it takes to double most important thing in life is how long it takes to double so at 24 percent we are doubling in three years right in 2025 what will be your age 23 so and your name so Samir is 23 years old he has six lakhs Samir please have a seat when will you die what the age will you diet or neediness at 80 so if if a baby is born today and a baby is born four years from now the baby born four years from now will live one more year than the baby born today because medicine is advancing okay so I may live into my 80s you will probably live more than me because you were born about thirty plus years after me so my guess is you may make it to 90 congratulations okay so Sameer is going to live till he is 90 he starts when he is 23 so how many years do we have 67 so 67 years I always like to do math easily let's say instead of 90 you don't make it to 90 unfortunately you died at 89 okay so we have 66 years how many periods of three years are there in 66 years 22 so if you are going at 24 percent it's 2 to the power 22 times 6 lakhs right he had six lakhs when he was 23 years old he somehow managed to get 24 percent a year on it and he went till he was 89 just before dying he was still compounding and then he died okay so Samir when he when he passes away assuming he never saved any other money when he was 24 years old he bought a fancy motorcycle when he was 25 years old he bought a fancy car not saving money just enjoying life but he only saved the six lakhs okay so what is two to the power 22 again unlike all your professors I like to make things easy so two to the power 22 is and eventually I will answer your question I'm ponch you're a deer a deer a panja here is 2 to the power 10 times 2 to the power 10 times 2 to the power 2 right what is 2 to the power 10 no you're going to raise your hand yeah okay so we have motorized half car there what is 2 to the power 10 1000 forget the 24 so 1000 times 1000 times 4 times 6 lakhs what is that number so 6 lakhs times 100 is 6 crores 60 crores 60,000 crores 240,000 crores congratulations so so wealthy have a seat

Mohnish Pabrai Indian-American businessman, investor, and philanthropist famous hedge fund investors, value investors, chai with pabrai, heads i win tails i don't lose, pabrai funds, Mosaic: Perspectives on Investing, clone investing, The Education of a Value Investor, The Dhandho Investor: The Low - Risk Value Method to High Returns, Zinc, Horsehead holdings

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