Mohnish Pabrai gives the keynote speech at the 8th Morningstar Investment Conference in Mumbai, India on October 24, 2018 and discusses the 10 Commandments of Investment Management.
Mohnish Pabrai: The 10 Commandments Of Investment Management – 8th Annual Morningstar India Conference – Oct. 24, 2018
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Thank you very much. Pleasure to be here. Pleasure to be at a Morningstar conference. Actually I used to I used to live in Chicago in the 80s and 90s and actually the new morning starving was very embryonic. And it's always done really good work. And in fact it's just a coincidence but their focus on investor first kind of dovetails with with what I've always always thought are are important and fundamental aspects of investing. So anyway the subject at hand today I'm going to talk about is the Ten Commandments of investment management and these. Commandments. Basically Waldo over the years actually came up with the framework in the last few months but they've been really very fundamental and I don't think they're really subject to debate if you will it's almost like the laws of physics. So given that we are in a somewhat tight schedule I'll get get going with them so the first the first commandment which is thou shall not skim off the top. And so suggest just in case that nebulous when when Warren Buffett and Charlie Munger ran their. Investment partnerships in the 1950s and 60s the fee structure that Buffett followed was to not not charged any management fees. There was zero management fees and then there was the 6 percent hurdle and then he got paid one fourth of the returns above 6 percent and was subject to high watermark. So for example if the fund was up 10 percent in a year he would get 1 percent with a 5% he wouldn't get paid anything and if it was up 15 percent he would get about two and a quarter percent.
So it was a complete alignment with the investors and the fee structure has a number of. Effects on how fund managers think. So one of the first effects has is that they stop becoming asset gathering machines because you don't get paid for assets you get paid for performance and and that's generally a good thing. And and the second is that they get focused on trying to you know do the best investing they can and and it would lead to a lot of other things like for example being relatively concentrated the lack of fees also means the lack of a team which I will get to in the second commandment but basically the intense focus that comes out of that on not having frivolous expenses and so. So the question that a lot of investment managers would have is well. How do I take care of the expenses off an investment operation if I'm not guaranteed a certain amount of fees. So I mean my answer to that is that if you set up a steel mill or you start an airline or almost any other business ventures out of a refinery there is nothing ordained in capitalism