Published on Jan 23, 2017
September 2016, San Juan, Puerto Rico Museum of Art, Raul Julia Theater
Mohnish gives a completely new talk.
He discusses the Charlie Munger latticework of mental models and the work of David Hawkins on Power vs. Truth.
More text and video below
Mohnish Pabrai and the Horsehead Holdings catastrophe
Munger Model #1: Lies Distort Reality
The gist is that although you may not know that somebody is lying to you consciously that your unconscious mind does. Conversely you prefer to work with truthful people because your unconscious mind knows.
Mohnish explains that if he died his hair or put on a toupee that people would know it as a lie.
Today he tries to purge any white lies. This has had a huge positive impact on his life.
Truthfulness has strengthened his marriage.
In 2008 Pabrai funds were down two-thirds. This was twice the hit to indexes in the bearish stock market during the Big Short.
Mohnish could have taken two approaches. One approach would have been to write that he was in the same boat as all other hedge fund managers. Blaming an external event is a white lie.
Instead he decided to divulge all the mistakes that he felt let to the large drawdown in capital.
He was surprised that his investors were uniformly supportive. He attributes this to his honest communication.
Monish explains that Donald Trump was a Teflon candidate because of his frank talk. People have tired of politicians with pre-canned responses.
As horrible as some of “The Donald’s” comments might seem during his campaign they were spoken honestly. And this has won over a large and supportive voter base.
People appreciate the candor. Trump does not say whatever he's saying because some PR firm told him to.
Mohnish encourages the students to get rid of the small white lies. He explains that this is an uncomfortable path at times for fear of offending someone.
But if you take this path and bite the bullet Pabrai explains that it has huge payoffs.
The choice between truth and diplomacy is clear. Choose the truth.
He explains that the world works on trust rather than lawyers enforcing contracts.
As you become more and more and more truthful you become more and more trustworthy. And trustworthiness is a huge advantage in the world.
Try to push the boundaries of your comfort level as you practice this.
Truthfulness is the first of the 3 latticework models of Charlie Munger.
Munger Model #2: Poor Returns Distort Reality
The second model is the model of compounding. Einstein said that compounding was the eighth wonder of the world.
Mohnish emphasizes that it is important to think beyond interest rates. He offers an example from a letter Warren Buffett writes to his investors in the 1950s. Buffett said that the American Indians were based in what was Manhattan in 1626. It's rumored that they sold the island of Manhattan to the Dutch for twenty-four dollars.
Say that in 1626 that the Indians could take that $24 and invested it at seven percent a year. He uses the Rule of 72 to show that it takes 72 / 7 ? 10 years to double. Mohnish further explains that 100 years to power 10 is 1,024.
In 1726 they will have $24,000. This grows to $24 million by 1826.
By 1926 the tribe will have $24 billion. This would grow to $24 trillion by 2026.
Know that 300 trillion is the entire wealth of the United States.
Pabrai explains that there are two factors that lead to this massive compounding. The first is time.
The second is the rate of interest (or return).
The discussion moves to the example of an eighteen-year-old with very few skills who can only get a minimum wage job. He makes $15,000 per year.
But he can earn 7% in the market.
He saves and invests $1,500 (10%) every year into his retirement account.
His income rises with inflation. He retires at age 68 in 50 years.
The result is that he will retire with more than a million dollars in his retirement. It makes a huge difference in end wealth if a person starts saving and investing at the age of 18 rather than 28.
Compounding is a very important concept Mohnish Pabrai wants UPR-MBA students to incorporate into their lives. He warns them not to pull the money out of their employer sponsored 401(K) plans as he did.<
Munger Model #3: Wasting Time Distorts Reality
Pabrai made a lot of money selling his first business. But he warns UPR-MBA students to not quit their day jobs.
This allows the entrepreneur to bring in money to pay the rent, utilities, and groceries at the star.
This means working 40 hours a week in a regular salaried job and another 40 on your own.
He could leave his day job in 1991. He sold the company for millions and started the Pabrai Fund in 1999.
he maintained good relationships with his bosses because he kept working for his day job while he started TransTech. They are investors in the Pabrai Fund.