Google Talk by Mohnish Pabrai in Investing. Introduction by Saurabh Madaan.

1. GOOGLE TALK BY MOHNISH PABRAI | Compiled by Venkatesh Jayaraman
Transcript of Google Talk by MOHNISH PABRAI
Date: July 21, 2014
My Twitter account: https://twitter.com/VenkateshJayar2
Introduction by Saurabh Madaan
Mohnish had paid $650,000 for a lunch with Buffet in 2007, which he calls it a bargain. He has a
unique way of distilling complex concepts. Mohnish does sessions in various business schools. He
is preferential to probabilistic scenarios where there is a limited downside and unlimited upside.
Hands over to Mohnish Pabrai.
Intro.: Mohnish Pabrai was excited when a received a mail inviting him for a speech at Google.
Google was the best company that was ever created. WB says, “Investing in business having rapid
change are enemies to the investor”. One of the board members of Google is an acquaintance of
Mohnish. He once threw questions “Which is the next Google?” the instant answer was ‘Google’.
Mohnish Pabrai has not invested in Google, but there was a long way to get it one day
About his book: Quotes Buffet, “I am a better investor, because I am a business man. I am a better
business man because I am a better investor”. His book “Dhandho Investor” is the expansion of
that one sentence into 100 pages.
Background of the book title: What is Dhandho? Many people mistake him that he is Gujarati,
just because he used this word in his book title. Mohnish clarifies that he is not a Gurajati, but his
engineering friend is. He used to Vanish on Friday nights to meet his extended family members
and get back on Sunday night with lot of stories about the investments made by his family and
its economics. He used to conclude the speech with the word “Dhandho”. The literal translation
of this word is ‘Business’. The way the Gujaratis mean is that a business must have an unlimited
upside but a limited downside. This is the key to investing. Quotes Buffet again, “Rule 1: Don’t
lose money in investing, Rule 2: Don’t forget Rule 1.”
About Patel Community in US: The US population contains roughly 1% Indians. Patels constitute
a 1/5 of this 1%. Despite being such small, Patel control about 60% of motel business in the United
States. This is stunning statistics given the fact that some 40 years back there were no Patels in
US. These people came as refugees from East Africa, Uganda. These people came from India as
laborer several 100 years ago and soon using their Dhandho techniques grew up and started
controlling major portion of Ugandan Economy. Idi Amin did not like this. He was of the view that
‘Africa was for Africans’. He nationalized all their assets and personal properties and threw them
out of the country. They were stateless, and India could not take them back as India was reeling
from Bangladesh war. United States knew the issue and accommodated them into their country.
They landed in the US in early 70’s without much skill, education and a medium English accent.
The only money that they carried was around $2000 which they could manage by selling their

2. GOOGLE TALK BY MOHNISH PABRAI | Compiled by Venkatesh Jayaraman
gold assets. The Patel thought that motels were a great way to start. These people brought small
motels with 10 rooms with 2 rooms for their family. These motels were labor intensive with need
of people for laundry etc. To save cost the family members themselves used to do these works.
Because of this the operating cost was less, the room rent also became less leading to higher
occupancy rates. The Patel owned Motels had good cash flow when compared to motels owned
by others in an area. Once they got some cash flow they would buy another one and so one. The
motels would be purchased with some down payment and rest with loan. After a few years, bank
wanted to give more loans to motels owned by Patels because of good business model and low
default rates. This aspect of the way the business was carried out, had a lot of correlation with
Buffet type of doing business. “Heads I win, tails I don’t lose much…”
Dhandho Model in other business: But it is not only the Patels who do this… But many examples
exist… One example is Richard Branson runs business which is very much in Sync with the Patel
model of doing business. Before formation of Virgin Airlines, Richard was in Music business.
Richard spoke to his partners that Airlines was a great business and he was interested to fly an
aircraft from London to New York. Their partners said that their Music business was doing good
and they did not knew about the Airline business. Added to it, they needed a Jumbo Jet costing
200 Million, for which they did not have money.
So, Richard started doing his homework. On speaking to British Airways, he found that there was
scope for a second player to come in to this business or the existing service was not good enough
that a second player could come in. Either way there was an option for the second play to start
business. But he did not have the sufficient money. So, he called up Boeing and talked to
someone requesting to give an aircraft for a short time lease. Aircraft business models are such
that we make revenue first by collecting money for tickets before flying, then pay for 30 days
later after the plane lands. Basically, it does not need much working capital. Richard could start
a business in a highly regulated sector that has a high capex, without much capital in hand. Then
any one can do it in any business. In case of any eventuality, the would have returned the aircraft
with some few amounts of liability that still could be balanced from his music business that
earned him millions.
Good knowing or unknowingly was doing the Dhandoo. In the self-driving cars that it is building
need not have much capex for the R&D, but only at the time of full production setup. It does not
have much impact in case if the initiative did not succeed. But if it worked, it could be game
changing. A few years Android was a project in lab. But today it is a game changer. Most of the
companies do not have this sort of DNA. Another company that has this DNA is Amazon. Probably
down the line Google and Amazon may meet head-to-head!
Compounding: Mohnish requests to play a video on Compounding (When watching that part of
the video, I had a bit of tears in my eyes and determined not to cry, I assured that I would come
out in successfully down the line. I had to struggle with lot of bouncers.! Hope the initiative from

3. GOOGLE TALK BY MOHNISH PABRAI | Compiled by Venkatesh Jayaraman
July 2016 takes off like Virgin Airlines). He then talked about the inventor of game of chess. The
king is excited about this game and offers to give any gift to the inventor. The inventor demanded
rice grains in the chess board doubling every square. The king was upset over this small demand
and asks his treasurer to give the requested amount of rice to the inventor. A week later the
treasurer was still counting and came back saying that the amount of rice requested by the
inventor is not available in kingdom nor the planet. This equates to 264 – 1, which is a googlish
number and translates to a value of 300 Trillions of rice and even the global wealth...Wealth of
every person in the planet.
Mohnish heard about buffet in 1994, he had an investment life of about 44 years, compounding
at the rate of 31% year. Compounding at 26% doubles the money every 3 years. He was moving
to the next square in less than 3 years. That is the essence of genius of Buffet and Munger. So in
2014, it is no wonder that Buffet is the richest person in the planet. This was a learning that
Mohnish had from Buffet. One need not do extra ordinary thing to get extra ordinary results. This
is very powerful notion and part of Dhandoo framework. Buy a stock at half the worth and sit on
if for 2-3 years to double, we could easily get an annualized return of 20-30%
Risk and uncertainty: Market gets confused between risk and uncertainty. They are portrayed as
being identical but are very different. When risk is low and uncertainty is high, the stock would
be mispriced/Under priced. Low risk means the downside of the opportunity is limited. The start
up of Microsoft was less risky but the uncertainty was very high. When Gates started Microsoft
he did not have a network or assets. There was no capital to lose and no risk of loss of capital. In
terms of opportunity cost, gates had not completed his graduation and his value in the job market
was very low. If the venture did not succeed he could always go back to the university and finish
his graduation. So the start up of Microsoft was almost risk free. He either lost his money that he
had or became the richest man in the planet. This gives rise to a wide range of outcomes. Replace
capital with creating thinking as to how Richard did.
Q1: About use of spread sheets in investing.
A: Engineers want to see precision. But be open to situations where one does not have all the
answers. Investing is an uncertain exercise with need to extrapolate to distance future. But put a
limit on cash flows instead of predicting the cash flows. This will give an indication of downside.
Putting a limit on cashflow is much easier than trying to project the cash flows few years down
the line. No one can say what would be cash flow would be 5 years down the line. MS Excel has
to do nothing with investing. The engineering mindset needs to change. You are best of without
touching excel. Avoid use of spreadsheets and precision thinking.
The CEO of a company does not run his business with spreadsheets. The CEO of a business focus
on 3-5 variables. These variables dominate most of the thinking and outcome. As an investor if
we can focus on the same, then we are close to it.

4. GOOGLE TALK BY MOHNISH PABRAI | Compiled by Venkatesh Jayaraman
Q2: Give an example (if not recent one) where this focus on 3-5 variable was used.
A: 10 Years back, Mohnish invested in a funeral services company. Warren buffet does not like
industries where there could be rapid changes. This is a company where the business model
would not change rapidly. It may take centuries to change.! One of the company was trading at
$2, generating a cash flow of $1 and was highly levered. So the business is trading at two times
the cash flow, which means within 2 years of investing the amount paid comes back as cash. They
had lot of assets that did not generate cash e.g. Many homes in Europe which was not making
any money. They announced a sale of European assets which generated lot cash. The company
started restructuring their loans, interest rates and covenants. In a few years the stock was $8 a
share.
Another example is a steel company called IBSCO, which had long supply contracts to supply
steel. The company was trading at $90 and the current cash flow was $30. The next two years
would generate $60 of cash. So, if one held this investment for 2 years, the money is back. After
two years, it was hard to tell what the margins or cash flows would be. There is a high amount of
uncertainty. He made a 4x in this investment.
One must be able to explain the thesis of investing in a company without a spread sheet within
four or five sentences. Typically, Mohnish writes down these sentences that he could list out
when discussing with someone.
Q3: What the attributes of a successful investor?
1. Patience – Most important skill. Markets have a way to deceive us. TV Channels induces
brain to act now (immediately). Buffet talks about using a punch card in a life time. This
is very hard for many people to do. The more one has patience. The more you slowdown
in your investment decision, the better you are off. This is because the time scale in which
the Economic Value of the company changes and the stock price changes is different. So
rather than focusing on changes in stock market price, have focus on the changes
happening in the company. Like Buffet have an imaginary punch card with 20 holes,
meaning that one can make 20 investments in his life time, which translate to a
investment every 3 years. No need to double money every 3 months. Even doing it every
5 years is enough.
2. If you have run a business before it is a huge advantage due to the interplay between
investing and running a business. We can think like a CEO.
3. Stay in circle of competence: it is not the size of the circle but knowing the limits is
important. Staying inside this circle is important.
4. Margin of Safety – Buying things for less than what they worth.

5. GOOGLE TALK BY MOHNISH PABRAI | Compiled by Venkatesh Jayaraman
5. We are not buying a piece of paper, but a fraction of business. If my family had 1 trillion,
would I put this 410 billion (40-50% of total family assets) into Google. If the answer is No,
one should not put even $10.
Q4: Does the investing style change when Mohnish has control over the company then being one
of the stake holder.
Control is over rated. Business like Amex, Coke and google are high quality business. In such
companies getting into them at the right price is more important than investing with an intention
to control. It is no use to get these companies in an intention to control.
WB is a much-aligned individual. He is pursuing what he loves to do. He loves the game of
investing. He is interested to buy the entire business. The good traits of WB have got nothing to
do with investing. Take some traits from the icons, like Gandhi neglected his family. Same with
Nelson mandela. Look at the bigger picture and see what we could take from them.
Q5: Catalyst is needed to realize the value. MP has ignored the importance of catalyst?
A: Even WB or CM does not talk about it. Catalyst are not required. Value is its own catalyst.
There is no mention of catalyst in his book When buying business, below liquidation value are
likely to be value traps. These are mistakes in investing. Catalyst and uncertainty go together.
Value investing is a very big tent. Buffet way of investing is significantly different from this tent.
Not needed not buy 40 stocks… Research well and buy 3-4 stocks. The biggest asset is yourself
and ability to forecast the cash flows.
There are 20 companies, look for companies with high return on capital and look for
compounders. But they are ridiculously priced. Then have a plan B type of investing. Buffet even
now has this plan B. The first preference is compounding machines, followed by under value
assets. I learnt the hard way that it is always good to have better business with better managers
even at higher prices. But old habits die hard and hunt for companies what are priced very low.
It is basically a mix and one needs to be flexible and willing to learn and made a decision with
opportunity in hand. Sometimes there could be mispriced bets which could level out in 2-3 years.
But compounding machines are a preference.
Good business must growth in a cliff and must be ABSORB CASH that it generates. That is the gold
standard and google is close to that.