everything they can to minimize risk.
The first thing you want to do
is define the market that you’re going after.
That it’s not the size of the circle
that matters but knowing its boundaries.
So if you don’t truly think it’s something
that you would yourself be a customer of,
don’t try to pitch it.
The single biggest advantage
a value investor has is not IQ.
It’s patience and waiting.
Avoid the use of spreadsheets
and avoid precision thinking.
And that’s no fun, it’s not fun
to hit your head against a brick wall.
So what you want is a business
that has a deep moat with lots of piranha in it,
and that’s getting deeper by the day.
I’m flexible, I think it’s very important
in investing to be a learning machine.
Pay a lot of close attention
to the feedback you get from the people
who are listening to the pitch.
– He’s an Indian-American investor,
businessman, and philanthropist.
He sold his company TransTech Inc.
in 2000 for twenty million dollars.
Today he is a managing partner of Pabrai Investment Funds.
He’s Mohnish Pabrai and here
are his top ten rules for success.
(musical zoom)
– People think that entrepreneurs take risk
and they get rewarded because they take risk.
In reality, entrepreneurs do
everything they can to minimize risk.
They’re not interested in taking risks.
They want free lunches, and they
go after free lunches, and so
if you study any number of entrepreneurs,
from Ray Kroc to Herb Schultz at Starbucks
to even Buffett and Munger and so on,
what you’ll find is that they have
repeatedly made bets which are low risk bets
which have high return possibilities.
So they are not going high risk, high return.
They’re going low risk, high return.
And even with Bill Gates, for example,
the total amount of capital that ever went
into Microsoft was less than 30 thousand
between the time it started and today.
That’s a total amount of capital
that went into the company, so
Microsoft, you cannot say was a high risk venture,
because there was no capital deployed.
But it had high uncertainty.
Bill Gates could have gone bankrupt
or Bill Gates could have ended up
the wealthiest person on the Forbes 400.
And he ended up at the extreme end
of the bell curve, and that’s fine,
but he did not take risk to get there.
He was comfortable with uncertainty,
so entrepreneurs are great at dealing
with uncertainty and also very good
at minimizing risk, that’s the
classic, great entrepreneur.
If you look at any market, any product,
any market, they will typically be
three or four players at the most
that control 80 percent of that market,
and it could be making airplanes,
or it could be making hair clips,
you can pretty much go across the board.
It could be making software, anything you want,
and I found that stunning, and if you
invert that, so one of my heroes
Charlie Munger says, every time you
encounter something always invert
the logic to try to get some other place.
So if you invert that principle,
first of all if you agree with
that principle, then the inversion will be
that if you’re starting a business
and you say that this is a ten billion dollar market
and I just need ten percent of it
and I’ll be a billion dollar company
well, right there, you’re off,
because the inversion will be that
if you’re going after a market,
your approach has to be, how do I get
sixty percent of that market, and so
if your starting point is that
I’m going to take two percent of this market
or five percent of this market,
what you have not done is you have not
segmented that market properly.
And that is a fatal flaw, so the first
thing you want to do is define the market
that you’re going after, and after
you defined it, if you don’t get to
very clear cut game plan, to get
50, 60 percent market share, then
don’t even try, because either
you have not done your job correctly
or you don’t have anything to offer
that is going to be that compelling to people.
I think another very important
trait for successful investing
is to stay within your circle of competence.
So I think Buffett always says
that it’s not the size of the circle that matters
but knowing its boundaries is absolutely critical,
and Charlie Munger talks about
that he used a couple of examples.
One is, he says, that if in a small town
you bought the Mcdonalds franchise,
you bought the Ford dealership–
– [Man] Gas station?
– Ford dealership, gas station not so good.
And gas station we’ll leave for the Patels,
low cost operations, okay, and then
you want the best classy office building
and you want the best residential buidling,
so if you got these four assets,
and you don’t need to own them completely,
you could own 20 percent of each of them.
So his perspective was that if in Peoria, Illinois
you own these four assets and you just
sat on them for your whole life,
you would end up probably quite wealthy.
And if so you think about it from a
modern portfolio theory point of view,
you would say, well, you’re not diversified,
everything is in one geography, et cetera, et cetera.
Yeah, but the odds still work out.
And in fact he has a friend here in, near Stanford,
John Arrillaga, who, all he did, was bought
real estate within a mile of the Stanford campus.
And I think Arrillaga is a billionaire.
And so what is Arrillaga’s circle of competence?
It’s this small, so the size of the circle is not relevant.
Staying inside the circle is very fundamental.
Do not try to sell something that you wouldn’t buy yourself.
So if you don’t truly think it’s something
that you would yourself be a customer of,
don’t try to pitch it, don’t be
a used car salesman, so please
make sure that whatever you’re trying
to come up with is compelling enough
that you would yourself be deeply
interested in buying that product.
So Charlie Munger likes to say that
you don’t make money when you buy stocks
and you don’t make money when you sell stocks.
You make money by waiting,
and so the biggest, the single biggest advantage
a value investor has is not IQ.
It’s patience, and waiting, waiting for
the right pitch, and waiting
for many years for the right pitch.
– So what’s that saying of Pascal
that you like about just sitting, and?
– Yeah, all man’s misery stems from
his inability to sit in a room alone and do nothing,
and all I do to adapt Pascal
is all investment managers’ miseries
stem from their inability to sit alone
in a room and do nothing.
The way to really look at investing is that,
when you look at, again, a business like Google
or Microsoft or BugShare, you really
have to put yourself in the shoes
of the people running the business
and you do ask yourself how do they run the business.
Do they run it through Excel spreadsheets,
or how do they run it?
And I would bet that most of these
businesses are run in a manner where
the founders or CEOs are really looking
at kind of three to five variables
that dominate most of their thinking
and outcome and direction, and so
as an investor you’ve got to hone in
on those same variables, so if you
can get to the same variables,
if you want to invest in Microsoft,
you can get to the same variables
that they are using, and if you’re
Google, you get the same variables
that they are using, then you are
getting very close to
trying to figure out what the business might do
and from there you can extrapolate
whether it’s underpriced or fairly priced and so on.
So that’s all I would suggest is
avoid the use of spreadsheets and
avoid precision thinking.
The stronger the marketing,
the weaker the sales engine can be, so I do not consider
myself a good salesman.
I consider myself a poor salesman.
I consider myself a pretty strong marketing person.
And so if you have done your marketing homework,
you can be a leper and make sales.
And a standing example of that is
someone in front of you, because
basically my approach to sales
would be 180 degrees approach to
your traditional used car salesman
schmoozing model and golf courses and all that,
none of that is of much interest to me.
So the stronger the marketing,
the less important the sales engine becomes.
So it is very important in my opinion
to spend incredible amounts of time
on the marketing aspect of the business.
Because if you don’t spend that time
on that aspect of it, you will spend
50 extra that time on that sales end
and hit your head against a brick wall.
And that’s no fun, it’s not fun
to hit your head against a brick wall.
So it’s good not to go there, so I just feel
the stronger the marketing, the weaker the sales.
– Now, quickly define moats in terms of
a business that keeps competition away.
– Well, you know, if you talk to
Michael Porter, he would give you
five books on what is meant by strategy
and competitor advantage and durable competitor
advantage, and if you talk to Warren
and Charlie they would just say
it is a moat, and they’d break it down to one word,
but basically it’s the ability of a business
to have some type of an enduring competitive advantage
that allows it to earn a better-than-average
rate of return over an extended period of time,
and so some businesses have narrow moats,
some have broad moats, some have moats
that are deep but get filled up
pretty quickly, so what you want
is a business that has a deep moat
with lots of piranha in it
and that’s getting deeper by the day.
That’s a great business.
I’m flexible, I think it’s very
important in investing to be a learning machine,
and to have flexibility and to be
willing to look at the opportunity set
and decide whether you need to do anything at all
or what is the best thing you can do
based on the available opportunities.
Let’s say you have come up with a
compelling value proposition.
Let’s say you’re absolutely truthful,
you truly understand it, and your pitch
is truthful and all of that.
What I have found is that basically
whatever you come up with, and
you’ve come up with it in your lab
and thinking about it, talk with friends,
looks great, the service, the product looks great.
The real litmus test of that is
when you put it in front of customers.
So when you go out and make your pitch,
your kit and ad and whatever else,
and the very, very important thing for a
entrepreneur to do is when they put that out there
be very, very, pay a lot of close attention
to the feedback you get from the people
who are listening to the pitch,
and this is very important at the front end.
Because what is probably the case
is that whatever you came up with, is off base.
It’s not exactly what your market wants.
And I’ll give you an example.
There’s a friend of mine in Chicago
and he started this company started InstallShield,
and many of you might be familiar
with the company and you’re installing
different windows products, InstallShield comes up,
and Viresh basically was like,
I think 19 years old or something
when he came up with InstallShield,
and he said, he went to a trade show,
he was going to go to a trade show,
some software tools trade show,
and he was trying to do
a whole bunch of different things, he was
trying to GoogleMaps 30 years ago,
when there was no way that the
computing could support that sort of thing.
But he went to this trade show
and he had created this kind of
trade show booth with the different products
and he had seven products, seven
different tools that he was pitching,
and it wasn’t balancing on that booth
’cause he wanted to put four bullets on one side
and four bullets on the other
and he was at like four and three
so it was really bothering him
and so, as an afterthought, this little tool he had
was just to install software,
for installing software was his eighth bullet.
He just put that at the end, the bottom,
and it will install a software installation tool.
And through all of the whole week goes by,
I think it was just a couple of days
he was at this trade show booth
and all of these people are coming by
and all this stuff going on, and there
was a guy across the aisle from him
who spent two days looking at those eight things
because he was in the software business
and after two days he came up to him
and said you know, that product,
I am interested in that product.
And this product did not exist,
it was in Viresh’s mind, and so
this was one of the only leads
he’d picked up at the show,
so he went back and created the product
and gave it to the guy, and then
he found that other people wanted
it, and so on, and so forth.
So bottom line is, if you study startups,
you will find over and over that
what actually works is not what you actually came up with.
What actually works is that, you know,
some tangent or some kind of, you mentioned something
to a customer in passing and then they grab
onto that, say I want that, and you say
oh, he’s unusual, he wants unusual thing,
I’ll still keep my core pitch: no.
What you really have to do is pay
really close attention to what is going on.
– Thank you so much for watching.
I made this video because Caesar V asked me to.
So if there’s a famous entrepreneur
that you want me to profile next,
leave it in the comments below
and I’ll see what I can do.
I’d also love to now which of the top ten
rules had the biggest impact on you and why.
Leave it in the comments, I’ll join
in the discussion, thank you so much for watching.
Continue to believe.
I’ll see you soon.
”
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