Transcript: Value Investor Mohnish Pabrai’s Interview on DOAC Podcast

But if you look at it, for example, two of the greatest cloners, I think in human history were Bill Gates and Sam Walton.

Now we think of Bill Gates as an innovator and we think Sam Walton created Walmart, which was also new, but actually they both were “me too” models. And Microsoft would not have existed without being a great cloner.

So when we look at Microsoft Word, it came from WordPerfect, which was a company, a competitor that he took out. We look at Excel, it came from Lotus. We look at Bing, came from Google. And you know what Bing is, but it’s not Google. Everything that Microsoft has done well at has come from copying someone on the outside.

And when we look at Sam Walton, who’s the Walton family, if you pull them all together, it’s the richest family in the world, it’s richer than Elon and everyone. And Sam Walton by his own admission, would tell you that he has no original ideas. So originally, Walmart cloned Sears and Kmart.

STEVEN BARTLETT: For my international listeners, these are two big supermarket chains.

MOHNISH PABRAI: Yeah, and they’re both gone. In fact, Walmart buried them. And Sam Walton was one of the most intense cloners ever. So if he was driving on vacation with his family and he’s passing some retail store, he would tell his family to stay in the car and he would go in the store just to check it out. And he said that there is no human who has lived in history or will live in the future who has visited more retail stores than he has.

One time there was a manager of his, and he would go in with his managers to these stores. Retail is one of the most transparent businesses. You can go into your competitor’s store and you’ll figure out the entire business model in 10 minutes. You don’t need to talk to them. It’s beautiful.

So he went into this retail store and the manager says to him, “Oh, what a terrible operation.” The whole store was topsy turvy. It was really bad. And Sam says to him, “Yeah, but did you see the candle display? The candle display was fantastic.”

So Sam felt that he could learn from anyone. It didn’t matter if you were a useless operator or great operator or whatever. Anyone in the middle. Walmart is just an amalgamation of ideas from other places.

If you look at a company like Starbucks, we think of Starbucks as innovative. But actually what Howard Schultz did is he saw a concept in Italy, and his idea was that “I think this will work in the US” and so he cloned that idea from Italy and brought that coffee shop experience to the US.

If you are a great cloner, you will be 90% ahead or 95% of the rest of humanity.

The Myth of Entrepreneurial Risk

Now, another mental model. Humans have this perspective that starting a business is risky. In reality, entrepreneurs do not take risk. They do everything in their power to minimize risk. And in many cases, when they embark on a business, the risk approaches zero.

What is extremely risky is a 9 to 5 job, because we have one life and it goes away. And you may not get to do what’s in your heart. You may not get your music out. And so getting our music out is really important.

So this notion, which is drilled into us, that if you’re an entrepreneur, you’re taking risk, really kind of does a big disservice to most humans. And if humans understood that if I embark on a business, I can do it in a format where the risk is zero or close to zero, and I can clone an existing business. Now, you’ve combined two mental models, and we can start adding more to them. But 2 has become 11. One plus one has already become 11. It’s nonlinear.

Why am I saying that entrepreneurs do not take risk? So if I take my own case as an example, and I can give you 100 cases like that, but if I take my own case, I was working 9 to 5 at a company and I had a business idea. My employer expected me to work 40 hours a week. There’s 168 hours in the week. So I felt like there must be at least another 30, 40 hours that I could work on my startup.

STEVEN BARTLETT: Could you show me this in context of this?

The Time Management Framework

MOHNISH PABRAI: Right, so if we look at our whole week, for example, these beautifully arranged Legos, if I take one of these blocks of Legos, so each one of those blocks in there is two hours. So eight hours a day, we are sleeping eight hours a day, right? And we’re doing that seven days a week, right?

So basically we’ve got seven days a week, eight hours a day we are sleeping. The blue Legos are showing our 40 hours a week. Eight hours a day, five days a week we’re working, right? Then we get to other, you know, preparing dinner and showering, shaving, getting ready, whatever else. So that’s about four hours a day on the weekdays, which is including commute time, and about eight hours a day on the weekend.

Then we get to free time, you know, social media and watching Netflix and hanging out with friends, going for dinner. And we’ve got quite a bit. We’ve got about four hours a day of doing that and about eight hours a day on the weekends. So this is kind of typical what a typical week for most people would look like right now.

When you’re starting a business, the important thing is don’t shut off the cash flow. Some other person is paying your rent and some other person is paying your groceries. So we don’t want to rock the boat, but we’re going to make one.

STEVEN BARTLETT: Change to blue, which is the amount of hours I’m working for my 9 to 5.

MOHNISH PABRAI: Now. Before I started my startup, I used to get top reviews as an employee. I was very focused on doing a great job for my employer. All in the day. I decided I’m going to do my startup. I decided I need to be just above firing level. My performance needs to be just good enough so they don’t can me, but nothing beyond that because I need all my energy to go into my startup. So that’s the only tweak I’m making is blue stays. But we are not doing extra blues like we were doing before, right?

STEVEN BARTLETT: And blue for anybody that can’t see because you’re listening on audio is work.

MOHNISH PABRAI: Exactly. Yeah. Blue is work. Exactly.

The True Purpose of Business

Now when we embark on a startup, we should never do a startup to make money. It’s the worst reason to start a company. The purpose of business is not to make money. The purpose of business is to deliver an incredible product or service to humanity. If you do that, the money is a side effect. It’ll happen. We don’t need to focus on it. So what we are looking for is do we have a product or a service that we are thinking about that we could bring into this world that is going to improve the world in some way?

STEVEN BARTLETT: How do I know if it’s a good idea?

The Power of Rapid Prototyping

MOHNISH PABRAI: Whatever idea you have come up with is not going to work, okay? Because you came up with it in an ivory tower between your years, okay? And that’s not really a great place to find great ideas. What’s going to happen is we are going to be doing what I call rapid prototyping, which is we take this idea and show humans what it is. And when you show it to humans, you will get feedback.

So maybe I’ll just give it in more practical terms. When I was starting my first business, it was going to be a IT services business, okay? Information technology services. And I was going to be providing these services to very large businesses, companies that are billion dollars or more in earnings or cash flows.

I was in a meeting with a senior IT guy at a very large bank in Chicago and I was going through my PowerPoint deck with them. I came to the 10th slide, said my spiel, went to slide 11. So the boss who was sitting in the meeting said, “Go back to Slide 10.” So I went back to Slide 10 again, gave my speech that I had for Slide 10, and took it to 11. He said, “Go back to Slide 10 and do not change the slide. I don’t have an interest in any other slide,” okay?

So I took it back to slide 10 and all he wanted to talk about was what was on slide 10. My deck was talking about seven things we could do. Slide 10 was one of those seven. It was an extreme pain point for him. He needed help on that one thing. He didn’t need help on all the other riff raff stuff I was talking about.

So when you’re doing a startup, you have to be listening very carefully. Your customers or potential customers will tell you exactly what you need to do. When whatever you came up with may be 80% right or 70% right or 40% right, but your customer will tell you what is 100% right. Okay. Because that’s a real pain point.

So I went back and thought about it and I realized that his pain point, and I could see it was a severe pain point because he gave me a purchase order at the end of that meeting, was going to be a pain point for a lot of people. So I went back, I took slide 10, blew it up into 20 slides and that became the deck. Okay. Everything else got thrown out. Right now I couldn’t have done that without him. My brain is too small to have figured that out.

So anytime you’re doing a startup of any kind and you have a prototype or an early product or something going on, your users are going to tell you exactly what tweak they want.

The Universal Application of Customer-Centric Thinking

STEVEN BARTLETT: You’ve just reminded me of a conversation I had this morning, okay. Where I interviewed someone. Because much of what you’re saying is orientated towards startups, but it’s actually every single day of everyone’s life because I interviewed someone this morning for a really critical role in the company.

And this person has spent 20 years at one of the biggest companies in the world. And when I was doing the interview, she was telling me about lots of things she’s done in those 20 years. And I was just trying to get to this one thing, can you put on events? And she was telling me about this and that and the other thing and this and this and the other thing. And I was just. Actually, I’d only come to this interview to figure out if she could do put on big scale events.

So we spent of an hour conversation, we spent 55 minutes talking about a bunch of things I wasn’t interested in. And actually as you were speaking, I was going, do you know what she could have done at the start of that conversation? She could have gone, “Steven, can I ask you one question? What are you looking for from this person?” And then I would have gone, “I just want someone that can put an event.” And then the next 55 minutes could have been persuading me that she can do that.

MOHNISH PABRAI: Sure.

STEVEN BARTLETT: And it just applies to what you just said there. How could you, as the salesperson that day in that meeting with what you know now, how could you have done a better job without going through all of those slides?

The Power of Listening and Customer Focus

MOHNISH PABRAI: Well, I think what I would do now if I were doing something like that is that my radar on listening would be 10x. We don’t learn when we speak, we learn when we listen. So I would really be trying to talk less and extract more and I wouldn’t even rely so much on slides, I’d like to really try to bring them in. Into what they are trying to say.

And so basically, if you study businesses, venture backed, non venture backed, whatever, this is a very common thing. There are almost no businesses who end up with the business model that was originally conceived. I mean, that just would be such an anomaly. It’s really the interplay between the founding team and the early customers, which really leads to taking this wet clay and making into something that people want.

And so if you think of something like Google Glass, when they came up with those glasses that they thought the whole world was going to wear. So it didn’t work well. Why didn’t it work? Well? The reason it didn’t work is you’re talking about something extremely personal. Like, for example, Wrigley’s chewing gum. My mouth is a very personal space. I’m not going to put Glott’s chewing gum in there.

STEVEN BARTLETT: What’s Glott’s chewing gum?

MOHNISH PABRAI: Exactly.

STEVEN BARTLETT: Yeah.

MOHNISH PABRAI: You’re not going to put some brand that’s half the price of Wrigley’s in there because you don’t want to go there. That’s not of interest to you. So when we wear glasses or sunglasses or anything we wear, that’s very personal. So the ergonomics and the human factors are very important. If it’s slightly off. Now, Meta is trying to do the same thing, but they went to Ray Ban. Right. They did a JV with Ray Ban. Those glasses look like normal glasses. I think there’s a higher chance.

STEVEN BARTLETT: Well, I’ve got some. We use them.

MOHNISH PABRAI: Yeah. You don’t have any Google Glass.

STEVEN BARTLETT: No, no, no. I think they cut the project, didn’t they?

MOHNISH PABRAI: Yeah. So what I’m trying to say is that we have to pay very close attention to the customer. I mean, Steve Jobs was right. The customer doesn’t know what he wants. But if you put it in front of them, then they can now tweak and tell you exactly what they want. Right.

And that’s another mental model, which is. Now we get to the third, which is that you’re not smart enough. Whatever founding team you have is not smart enough to figure out what people want, period. So you have to have very good listening skills and you have to have the flexibility to. And again, when you’re listening, separate the signal from the noise, take in what is real signal and leave out what is the noise. And then you’re starting to get down a path which is going to make more sense.

The Game of Inches: Cost Control and Attention to Detail

STEVEN BARTLETT: The other thing, that’s kind of a model, maybe woven into there was this idea of just like attention to detail. I’m not even sure if that’s a model, but when you told me about the Walmart founder laying between the aisles to measure the exact centimeter of length. The model there for me was just like precision and detail.

MOHNISH PABRAI: It’s a game of inches. I mean, what I’m saying is that when Sam Walton was trying to figure out the name of the company, one of the reasons he went with Walmart was it was seven letters and he was looking at the cost of putting up signage in stores and he was trying to come up with a name with the fewest letters because it cost less.

Cost sensitivity is all over the place in Walmart. That’s just front and center with what they do. They just really squeeze blood out of a rock. So basically I think that was, and that’s the reason why they became so successful. One of the things you can always control in business is your costs. You may not be able to control your margins and selling prices and a lot of other things, but you can always control costs. So that’s another model where you have to have discipline. You have to have very strong discipline on the cost side.

If you look at something like LVMH, you know the guy who runs it, I mean he’s in luxury goods, he’s in high end LVMH.

STEVEN BARTLETT: Make Louis Vuitton and.

MOHNISH PABRAI: Yeah, yeah, I mean everything, you know, they’ve taken over Tiffany’s, everyone. But when you look at how the company is run, it’s very tight. He spends money on the best real estate because that’s important. But the deals he negotiates on those real estate is mind blowing. So it’s a very tightly run operation on a product category that doesn’t necessarily need it. But that’s why he’s become the wealthiest guy in Europe.

STEVEN BARTLETT: Because that mentality will then apply to every decision.

MOHNISH PABRAI: Absolutely.

STEVEN BARTLETT: And if you apply it to 100 things, it does matter.

MOHNISH PABRAI: Oh, it does matter big time. Yes.

Working ON Your Business vs. IN Your Business

STEVEN BARTLETT: So I have these yellow blocks here which represent hours working on your own business.

MOHNISH PABRAI: Yes.

STEVEN BARTLETT: So show me how you would take some of these blocks away.

MOHNISH PABRAI: Yes.

STEVEN BARTLETT: And introduce hours working on your own business.

MOHNISH PABRAI: Yeah. So basically it’s really quite simple. We’re really not going to mess with our sleep cycles. We’re going to leave that alone.

STEVEN BARTLETT: Sleep staying the same.

MOHNISH PABRAI: And we need our blue, which is our workspace, 40 hours. We need that to continue. One of the changes we’re going to make is we’re going to live close to work. So we’re going to cut down commute time as much as we can, because every hour matters.

So the area that we’re going to focus on is the free time. And the reason why taking out the free time is not a problem is because what we are embarking on, like we just discussed, is not about making money, is getting our music out.

STEVEN BARTLETT: Getting our music out. What do you mean by that?

MOHNISH PABRAI: Which means that we have something in us that we know the world needs and we want to bring it to that world. We want to bring it to the world. And because we want to bring it to the world, it’s not work.

Finding Your Calling

STEVEN BARTLETT: I think the audience might be challenging themselves in their head and saying, but I love my. The thing I do for work. I’m one of maybe the rarer group of people that I get to work with puppies every day. And I love that.

MOHNISH PABRAI: Yeah. So I think this is not for everyone. So I think you have to ask yourself who you are. If you are truly excited about your 9 to 5 job and what you’re spending your main waking hours on. Awesome. That’s great. I mean, everyone’s not going to be an entrepreneur. Everyone’s not going to have a startup. Everyone. They may be getting their music out in a different way on someone else’s platform, which is perfectly fine.

But if that is not you, where when you go to work, you’re not super excited to get up in the morning and you’re not tap dancing to work every day, if that’s not happening, then there’s something wrong. And you have to ask yourself, well, is there something else that you’re passionate about that you want to do? And this is not something that should take a lot of effort.

So if we go back and look at, for example, Bill Gates and Paul Allen, right? I mean, Bill Gates is at Harvard and he sees a magazine which shows a very early personal computer. And he realizes that there’s a paradigm shift, and he realizes that he needs to be part of it. And Paul Allen is the one who sent him that magazine. And he told Bill, “We got to go do this now. This is our time now.”

And for Bill, it was a very easy decision. Very easy decision. Very difficult for his parents. His parents were in shock that he’s going to abandon his degree. He told his parents, “Don’t worry about it. I’m going to come back and I’ll finish the degree.” And several decades later, Harvard gave him an honorary degree. And his parents were in the audience, and he told them, “I told you, I’d come back, finish it off right.”

STEVEN BARTLETT: So I put some numbers to this. 12% of people, according to the stats that are listening right now, are explicitly unsatisfied with their job, which means they hate it. 85% of workers globally are disengaged, meaning they’re not fully invested or happy at work. So it’s a huge number of people. More than half of the US workers are at least somewhat satisfied, but engagement remains worryingly low. So if we look at that 85% number, 85% of workers globally are disengaged, meaning not fully invested or happy at work. So it’s really those people.

MOHNISH PABRAI: And the thing is, it’s not just enough to be unhappy at work. That’s one piece of it. The unhappiness can be a symptom, and one of the causes can be that you have a different calling in life and you are not following your calling.

Now, sometimes for someone like Bill Gates, for example, and Paul Allen, they figured out their calling and they just went. For many of us, it may not be that easy. So what we have to do is we have to try a few things. You try on different shoes to see what fits. Have some thought experiments, talk to your friends, say, “Okay, I’m a UPS driver. This is what I do. And I really like playing the guitar, or I like to make these art figurines or something at home and whatever else.” Right. So you have to figure out what your calling is. And I’m probably not the best person to tell you how to figure out what the calling is. Maybe another guest of yours can help them with that.

STEVEN BARTLETT: Do you think everyone has a calling?

MOHNISH PABRAI: Yeah, I mean, I think we are all unique children of God. And I think we all have some music, we want to get out. And knowing what that is and getting it out may not be the easiest thing, but it’s a worthwhile journey to try to get there.

We can’t do this just because we’re dissatisfied, and we can’t do this just because we want to make money and get rich. We’ve got to have something that we think the world would be interested in.

The Game Player Mentality

And in my case, I’d gone through this session with a couple of industrial psychologists and they told me, “Mohnish, you like to play games, you’re a game player.” And actually they couldn’t be more accurate. So when I was doing my startup, I’m a numbers guy and a math guy, so I actually like that.

So what I used to do is, because I had no money, I used to send 200 letters a week to these senior IT people at 200 different companies. But what I did is, so all these people I was sending this letter to, they had a gatekeeper, some secretary, etcetera, whose job was to not let anything through. And my whole purpose was, I need this letter to get through it, needs to get through the gatekeeper.

So I was using mail merge, which was mass producing these letters. But there was a customization. The mail word where if some person’s name was David Smith, it said “Dear Dave.” And then throughout the letter, it talked Dave. Dave’s name came up like three, four times. When the assistant got the letter, she couldn’t tell whether I know Dave or not.

STEVEN BARTLETT: Because you used his shortened name.

MOHNISH PABRAI: Shortened name. And she doesn’t want to throw a letter that somebody that he knows. So the letter would go through enough times. Right.

Now, what I also did is one week after those letters were delivered, I made 200 calls. I called all 200 people, and basically, if I got voicemail, left a message, whatever else, right now they have entered the sales funnel. So Dave Smith is in the sales funnel. If I get no response from Dave Smith after one week, there’s one more call, then the calls start getting spaced out, double time, two weeks out, then four weeks out, then eight weeks out, then 16 weeks out. But Dave never leaves that funnel until he tells me, “Do not bother me anymore, and I have no interest.” They’re going to stay in that funnel.

So the second week, I send out another 200 letters, make another 200 calls, right? And now I’ve got the first week, second week. So you can see as time goes on, I’m calling nonstop, right? Because this thing is. But what I was tracking, because I’m a math guy, what I was tracking is, okay, these 200 letters went out. How many people did I get any kind of positive response from? Because not everyone’s telling me to get lost. And how many meetings am I having? And what is the ratio of calls to meetings, meetings to close, etcetera? And my ticket size of the item I was selling was very large. Hundreds of thousands of dollars. Right?

Nine months after doing this. Where. Now let’s go back here. So we’re going to take our free time. So what I’ve tried to describe is that what I’m doing is actually more exciting than the orange. The yellow is more exciting than the orange. So basically, what is the yellow? The yellow is our startup.

STEVEN BARTLETT: So that’s working on your startup.

The Startup Mindset: Making Your Business More Exciting Than Netflix

MOHNISH PABRAI: So on the weekends, I’m going to do 10 hours a day because I’m not working right. And on the weekdays, I’m going to do four hours a day because I’ve got other things to do because I have a job and whatever else is going on. So there’s my weekdays, five days where I’m putting in four hours a day and then I’m putting in 10 hours on the weekend.

And the free time, this is not as exciting as pounding Dave. Pounding Dave continuously till he says either “get off my back” or “here’s your purchase order” is very exciting. It’s way more exciting than playing some social media or watching Netflix or whatever.

STEVEN BARTLETT: Else, which is what people currently do with their free time.

MOHNISH PABRAI: So one of the litmus tests of whether you should be doing a startup or not is yellow needs to be more exciting than orange.

STEVEN BARTLETT: Your startup needs to be more exciting than your free time.

MOHNISH PABRAI: Netflix should be so painfully boring for you. And going on Facebook or Instagram, whatever should be very boring for you.

STEVEN BARTLETT: Compared to.

MOHNISH PABRAI: This is exciting.

STEVEN BARTLETT: Compared to building your company.

MOHNISH PABRAI: Yes. So you know the Pink Floyd song, “We don’t need no education.”

STEVEN BARTLETT: Yeah.

MOHNISH PABRAI: “We don’t need no thought control.”

STEVEN BARTLETT: Yeah.

MOHNISH PABRAI: We don’t need none of this. This is so useless. You understand how useless this is? Yellow is where it’s at. It’s not the orange stuff. You don’t need this. Thank you, Stephen.

STEVEN BARTLETT: So we don’t need any free time.

MOHNISH PABRAI: This is better than free time.

STEVEN BARTLETT: Building your business.

MOHNISH PABRAI: You’re having an orgasm every hour. So what can be better than this?

From 9-to-5 to Financial Freedom: The Mental Models You Need

STEVEN BARTLETT: Much of what I do here when I’m having these conversations is I’m trying to put myself in the shoes of the person who is currently sat in a 9 to 5 job and they’ve got an idea and their idea hasn’t really gone anywhere yet necessarily. And the pressure they’re feeling in their lives is probably now a financial one. They want financial freedom. They want more optionality in their lives to be able to go on holiday, make more choices and have more freedom. If you’re that person, what are the mental models that we haven’t discussed yet that you need to be thinking about to get from 0 to 1?

MOHNISH PABRAI: So one of the things to keep in mind is that we live in a world now where most things that you would want to do in terms of starting a business are not capital intensive.

STEVEN BARTLETT: What does that mean?

MOHNISH PABRAI: Doesn’t take much money. In fact, what’s been happening over time is startups need less and less and less money because they need more and more and more brain power. So the good news is that a gating factor is not that you need money.

When I started my business, I signed up for every credit card that would come to me. So I had $70,000 in unused credit lines in probably a dozen Visa and Mastercards. Right. I had about $30,000 in my retirement account, my 401k, which I also took out and said, 25, I can make that up later. Right. So basically I had $100,000 of capital and that $100,000 got used because once I got going, I needed working capital and so on.

But then the business was actually cash flow positive. Nine months after I was doing this, I was able to get rid of this. So after nine months, my business was producing enough cash flow that I went and resigned.

And what happened is that I went to my boss and his boss and basically told them that I started a business, it’s not competitive with the company and I’m going to be leaving in two weeks and this is my two weeks notice. And basically that was that. Right.

And they sat me down and said, “You know, Mohnish, we were so confused for the last nine months because we met several times because we saw big drop off in your performance, but it was never so low that we wanted to fire you.” I said, “Exactly. That was exactly what I was trying to do. I was trying to say just about firing level.”

He said, “Well, you mastered it because we met several times but we couldn’t get rid of you.” So what they told me is they said, “Look, when your business fails, not if your business fails. When your business fails, please come back, we’ll give you more money, you’re going to get a promotion and we’d love to have you back.” I could immediately come back.

So I said, I got one free shot where I leave my job. I go, I do this thing and if it doesn’t work, I’m back to almost exactly where I was. Almost no change. Right.

STEVEN BARTLETT: Amazon’s type one, type two decision making. Yeah.

Starting with Zero Capital: The Richard Branson Model

MOHNISH PABRAI: And this is not just me. What risk does Bill Gates take? Okay, Bill Gates, what is his value as a Harvard freshman in the job market? Zero. Nobody would pay him anything. And he could come back anytime and finish that degree. Let’s say he went to New Mexico, things didn’t work out. He’s got wealthy parents in Seattle. He just comes back, graduates a year later and he goes on. What was the risk? There was no risk.

If you study entrepreneur after entrepreneur after entrepreneur, what you’re going to find. So if we look at Sir Richard Branson, he wants to start an airline. Now, to start the airline, you need a jumbo 747 that costs like $150 million.

STEVEN BARTLETT: The plane.

MOHNISH PABRAI: The plane, right. That’s some serious money. Richard Branson got Virgin Atlantic off the ground with zero and with zero risk. So here’s what he did. You replace capital with creative thinking.

So he calls 206-555-1212, which is directory assistance in Seattle, Washington, and he asked for the phone number for Boeing. Okay? So he calls the main Boeing switchboard.

STEVEN BARTLETT: Boeing sell the planes, right?

MOHNISH PABRAI: Yeah, Boeing makes the 747. So he calls switchboard of Boeing, giant, huge company, and says, “I’d like to lease a Jumbo.” And they hang up on him. He calls about 30 times and they keep hanging up. And finally they get tired of his calls. And the lady says, “Let me put you in touch with somebody who’s in charge of leasing, and they can tell you to get lost.”

She transfers him to a person who’s actually leasing jumbos. This person tells Richard, says, “Look, Mr. Branson, in every country we have one customer, and in the UK that is British Airways. So we have nothing to talk about.”

So he said, “Well, just humor me for a second.” He said, “If British Airways called you and said that they wanted to lease old used Jumbo, do you have one lying around?” So the guy says, “As a matter of fact, we do, but that’s academic.” He said, “Well, what would you lease it to British Airways for? Just since we’re having a conversation.”

What ended up happening is Boeing leased him that Jumbo. And the reason they leased him the Jumbo is they had one just sitting around. So they didn’t really have any risk because they said the moment the guy doesn’t make any payments, we’re going to pull the plane, right?

So now when you have an airline, you sell all the seats four months in advance. The cash has already come in. You pay for the fuel 30 days after the plane lands, and you pay for the lease after the plane lands. You don’t need any capital. Virgin Atlantic got off the ground with zero capital, okay?

Now, if you can start an airline that needs a jumbo with zero capital, you can start any business with zero capital, okay? So basically, when you look at business after business after business, all of them, what they do is they start small, they’re embryonic, they minimize risk, they get a few customers, and then after that they just roll with the customers, and then that’s how they get going.

The important thing is that when we take the blue out, when blue is no longer here, which is work, which work is gone, yellow is going to almost double or triple because this is where all the orgasmic activity is.

STEVEN BARTLETT: So we move the work. We quit the 9 to 5 job and we moved that time over to.

MOHNISH PABRAI: Work on the startup. I was working on my startup like from 7 to 9 in the morning, and then I would come back 6pm and work till 10 or 12 in the evening.

STEVEN BARTLETT: When you had a job?

MOHNISH PABRAI: When I had my job and then I’d work on the weekends. And I was so desperate to just go full time into it because I just said, if you just let me go full time, I can tear it up. And that’s exactly what happened.

I mean, in about first year we did $400,000 revenue, second year, $1.4 million, third year, $3 million. And by the sixth or seventh year we were at about $15, $17 million. It just grew because basically then I had no shackles on me. I could just go full out. And the engine, I knew all the statistics of these letters. So many calls, so many this, so much this means this and all of that. And it works.

And if it doesn’t work, you can go back to your 9 to 5 and give it another shot. So you actually could do this a few times.

The Law of Averages: Why Six Emails Isn’t Enough

STEVEN BARTLETT: I think that’s a really unappreciated framework, as you call it, or mental model, which is. Cause you said you sent 200 letters so many times, kids come up to me in the street and they say, “Look, I’ve been looking for a job. I’ve sent six emails.”

MOHNISH PABRAI: Yeah.

STEVEN BARTLETT: And they go, “No one’s got back to me.”

MOHNISH PABRAI: Yeah.

STEVEN BARTLETT: And you can see that it’s hit their confidence. And now they’ve actually arrived at the conclusion that getting a job is like hard or impossible. Cause they sent six.

MOHNISH PABRAI: Yeah.

STEVEN BARTLETT: Now when I interview people like you, they all give me much bigger numbers. They say 200, 305. You know, and there’s something in this sort of law of averages which is just like, just take more swings, you know, you see it in like cricket.

MOHNISH PABRAI: My daughter, when she was graduating from Berkeley, came to me and I was really surprised. She said, “I want to work at a hedge fund.” And so I said, “Okay.” And her degree was not in business, so she was not a natural candidate to be even considered.

I said, “Can you make a list of every hedge fund in New York and LA and put it in Excel? Managing partner’s name, address.” Now, we don’t know people’s email addresses. But we know everyone’s mailing address. Okay? The mailing address is a public piece of data. The address, the address is easy, right?

And I said that. So she got a list of about 1,200 funds in LA and New York. And I said, “What you’re going to do is you’re going to ask for the job, but you’re going to have two pages behind that giving them a stock tip, you’re going to give them a pitch that you have written up of a company that if they invest in, they’re likely to make money.”

We sent the 1,200 letters, physical letters, okay? All physical letters, no email. Right. And there’s a 85 year old guy in New York who gets the letter. He’s retired, the fund doesn’t exist, it shouldn’t have been on the list, whatever. But he has a friend in LA, he says, “Hey Jamie, aren’t you looking for an analyst?” And this girl, she seems to have the perfect kind of background and she ends up with a higher salary than anyone who went to Berkeley business school with a much higher GPA than hers.

High Signal, High Impact: The Framework for Effective Outreach

STEVEN BARTLETT: I was thinking about what you’re saying and I made a video the other day which I think is somewhat relevant, where I was trying to describe to people how to send a message to someone in a way that creates impact. And the framework that I came up with, which I’ll animate on the screen, but is basically.

So this axis here is the signal versus noise of the channel you’re using. So a high signal channel is one where it gets past the PA, it’s less saturated, less busy. A high noise channel which is the opposite would be sending an email to the like press@company.com email. So everyone goes through that path and doesn’t get to the person.

And then the other axis is basically the emotional impact of the message. So high emotional impact is doing what you said. Put a stock tip in there, you’re going to stand out, they’re going to think you’re a little bit strange. Or what you said about shortening the name, that creates more emotional resonance. And then low would just be AI slope, copy and paste jargon. And really like the most successful messages are up here.

MOHNISH PABRAI: Absolutely.

STEVEN BARTLETT: Like high signal channel, high, emotionally resonant.

MOHNISH PABRAI: Absolutely.

STEVEN BARTLETT: But what ends up happening is people send loads of messages down here and then they get depressed and demotivated and say, “No one’s going back to me.”

MOHNISH PABRAI: Yeah. Like Michael Jordan used to say, “You miss every shot you don’t take.”

STEVEN BARTLETT: Yeah, yeah, yeah.

MOHNISH PABRAI: So basically it is, I mean, I think one of the things about entrepreneurs is that you need to have resilience. Like for me, what the data I was looking for is that if I send 5,000 letters, okay, which takes 25 weeks, six months, how many meetings does that end up in? If that ends up with 10 meetings or 20 meetings, well, now I have my number, right?

And then the second part is the meeting to close ratio, right? And so to me as a math guy, I was just interested to know that it’s not zero. Okay. I just want to make sure. And I could see very quickly it was not zero. Literally within the first two, three months I could see it’s not zero.

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I think one of the most formative experiences you can give your children, which I got at 16 through 16 to 19 years old, which is what I did, was working in cold telesales. So my job at 16 years old was to call people at 9pm cold and try and get them to buy windows and doors. And it taught me the exact lesson you’re describing, which is yes, 80% of people tell you to fuck off, 98%.

MOHNISH PABRAI: Say no, but doesn’t matter.

STEVEN BARTLETT: I always say like 80% told me to fuck off, 15% said it in a nice way and then 5% were at least receptive to what I had to say. Maybe 1% close, but when you understand that, you think of life through that lens.

Learning Resilience Through Family Business

MOHNISH PABRAI: And actually, Steven, I had the almost same experience. So my father was an entrepreneur. He was really smart at identifying what I call offering gaps, like things that should exist in the world but didn’t. And he would get these businesses off the ground with no money. I saw him do it repeatedly.

His downfall was he was very aggressive in growing the businesses. And so they didn’t have staying power. There was almost no equity, always very leverage. So he went bankrupt eight or nine times, repeatedly.

When I was about 11 or 12 years old, my brother and I, we were like his board of directors. Okay. Because he had nobody else. The three of us would sit down at night to figure out how to make the business last for one more day. Okay. Everything’s caving in. The creditors are caving in. The business is collapsing. How do we make it work for one more day? And then the next night we’d get together and how do we get it work for one more day again? Right.

At 16. And I don’t know why my dad did this, but I’m so grateful that he did. He was at that time, he had a gold jewelry factory in Dubai, and he was going cold, calling in person to jewelry shops to buy his jewelry that he was manufacturing. So he took me with him on many of these trips. And I was 16, just like you, right?

So we would take the taxi from Dubai to Abu Dhabi, and now there’s all these gold shops. He doesn’t know any of them, right. And he’s going one after the other after the other after the other. And I would be stunned. That fifth shop, he makes a sale, and it’s a very small sale because he has no trust and all that, but he’s made the sale.

Then I noticed that after three months, we go back to that same shop, we made the little sale to the guy brings out tea. There’s a lot of chemistry, bigger order. And then I saw the orders increase, and then he’s continuing to do that. I went with him to Doha, Qatar. Qatar. And again, the same thing. It was like, you know, I saw how those doors opened, and I saw how it didn’t matter to him when they closed. That was irrelevant to him.

STEVEN BARTLETT: You know, really interesting new way to think about it, because what you’re saying there is actually, when you get that one. Yes. It’s actually a seed that’s being planted that can grow into something.

MOHNISH PABRAI: We just care about the ratio and the number. Okay, so what effort did it take? Like I was saying, If I send 5,000 letters and I get 20 meetings. That’s awesome. I mean, that’s a fantastic ratio because one sale is going to get me about $200,000 or $300,000. It’s a significant amount, right? I mean, so I don’t need large.

STEVEN BARTLETT: Numbers, but the lifetime value of that, it’s huge.

MOHNISH PABRAI: Yeah, yeah. I mean, these relationships I got then, they’re still with me. So it’s like forever.

The Power of Inconsequential Conversations

STEVEN BARTLETT: Here’s a philosophical way to think about that for just everybody, which is you can remember probably conversations you had in your life that you thought were totally inconsequential. But then eight years later, that seed became a business relationship.

The example I always give is, when I was 14, I applied for the Apprentice. They did this, like, Junior Apprentice on the BBC. And it’s a long story. 35,000 kids in London and across the UK applying. I met a kid in the line while I was queuing up for my audition, and he said to me, “Oh, my dad runs this $500 million company.” And I was like, “Yeah, whatever,” like, not interested.

I went through the auditions. I ended up getting on in the show for whatever reason. But then I ended up, because we were waiting in the queue that day, I was really nice to this kid, and I added him on Facebook. Five years later, I get a message on Facebook, hey, five years later.

Although I didn’t get on the show, which would have got me about $25,000 investment in my company if I’d won, five years later, I’m working on a startup. That kid from the line says, “Hey, my dad has sold his business for a billion dollars, and I’ve been watching you on Facebook for the last five years. My dad would love to meet you.”

It was an Indian family, the Alawalias. They had sold a business called Eurocar Parts. They took me to London when I was literally so broke, I was, like, shoplifting food to feed myself. And his dad invested double what I would have won on the show into my business. And that always reminded me that, like, every conversation that I have is like planting a seed that at any point in my life could turn into something.

The Giver Mentality

MOHNISH PABRAI: I mean, you know, I always bring up Adam Grant’s book, “Givers and Takers.” I don’t know if you’ve seen that all humans on the planet fall into one of three categories. They are either a giver or a taker or a matcher. Okay, There are no other categories of humans. These are the three categories.

Now, the matchers are relatively simple to understand. Their mental framework is, if Steven does me a favor, I’m going to try to do something similar for him. One to one, they can do matching math in their heads.

The takers, who you don’t have anything to ever do with, are trying to scam and screw everyone and always take and never give. Okay? The takers basically go nowhere. And if you have any takers in your life, get rid of them. Okay?

Now the givers, what the givers do is the givers are not focused on what comes back to them. They just want to help you. They want to help humanity. And what ends up happening is the universe conspires to help them. So the givers become the most successful. Everyone is trying to give to them, even though they’re not asking for it.

So basically, and that’s the book that Adam Grant wrote, “Givers and Takers” is one of the mental models. This is a great mental model to have is to be a giver. Don’t play math games. Always try to make sure the other guy gets the better end of the deal. And just keep going through your life that way and that goodwill will compound and it will take care of itself.

STEVEN BARTLETT: And the time horizon. You don’t worry about the time horizon.

MOHNISH PABRAI: You’re not doing it for getting something back. That’s the key. You’re not doing any mathematics like I’m going to do. You’re not calculating. I’m going to do this. So XYZ happens. You’re just doing it. End of story.

Scaling From Freelancer to Agency

STEVEN BARTLETT: I was sat with my girlfriend last night. She runs a breathwork business, so she’s essentially a solopreneur and she’s at that point where she’s trying to scale. In fact, I just meet so many. I think I actually ran a survey before and the vast majority of business owners are in that SME category, that small, small sort of business category. It’s the back startups of the backbone of our economy.

But they, they come to me with the same problem, which is maybe I started as an individual, I’ve got high demand and now I’m a bottleneck and I don’t know how to get out of being like a freelancer. How does the freelancer become an agency? And the thing I was chatting to my girlfriend about last night was the step she hasn’t taken yet is to hire someone exceptional.

And so many founders come to me. These early stage founders are like, “Ugh, like my customers, like me, I do it better. I don’t trust anybody.” I wondered if you had like a mental model for thinking about.

The Importance of A-Player Recruiting

MOHNISH PABRAI: The thing is, so if you look at people like Elon Musk and Steve Jobs. They believe their number one job is recruiting the first 3,000 people who joined SpaceX, all personally interviewed by Elon. Just think about that. Those are 3,000 hires. Think about the number of interviews to get the 3,000 hires, okay? He did not believe there was any other way.

And what Steve Jobs used to say is that “A players want to work with A players.” The moment you start introducing B players, B players will hire B and C players. They will never hire an A player. So your downhill journey’s already started the moment you get a B player.

And so as an entrepreneur, we have a lot of demands on our time, right? But recruiting has to be at the top. And you’ve got to be willing to spend inordinate amounts of time on recruiting, okay? And there are tools that you can use. There’s a company called Caliper we use for pre employment testing.

And the thing is that between the genetics of a human and the first five years of their life experience, who they are, their traits are hard coded. That is not going to change from 5 to 95. It’s not like you’re going to change a human. Human is the way they are, okay? Now these pre employment testing tests can get you data that you’re not going to get in an interview.

STEVEN BARTLETT: One of my companies I’m building at the moment is called Culture Test dot com. It’s exactly this, okay? I mean you’re just like preaching to the choir here.

MOHNISH PABRAI: But what I’m saying is that it was the most we need to get really good at recruiting. Yeah, okay.

STEVEN BARTLETT: It’s my absolute, absolute obsession. And what I found out is that, funnily enough, from doing these culture tests. So I’ve culture tested tens of thousands of people in the general population now. And the shocking part was just to give you some context on what it does, it benchmarks our best performing people and how they make their decisions.

The assumption here is that culture isn’t the thing you come up with at the off site. Culture is how you would behave on Christmas Eve when you get a text message from a client. Like what you do there is your company culture. So it basically creates these questions which simulate optimal culture in that team. And it puts you in that scenario and says, what do you do?

The Power of Team Building and Hiring

MOHNISH PABRAI: So recruiting is really important. And I think the other thing is we’re willing to hire people who may not do things as well as we do. But actually also what I’ve also found is I have so many people on my team who are better than me. They’re better at many of these things because it’s not my natural bent to do those jobs. So that’s really when you get a huge bang for the buck is you end up with team players that are way better than you.

STEVEN BARTLETT: How do you think about firing people? Because this is the other thing I…

MOHNISH PABRAI: Hire slow, fire fast.

STEVEN BARTLETT: Founders really struggle with the fire fast thing.

MOHNISH PABRAI: And it is very important to fire fast. I think fire fast is more important than hire slow. And you’re doing the person a service because they may be exceptional in another role at another place. So you are helping them try to find that and you’re helping your other team members.

Non-Negotiable Traits for Success

STEVEN BARTLETT: If I was trying to work for your companies, what is the one non-negotiable? Like what is the trait that I would demonstrate where you would immediately not even consider me?

MOHNISH PABRAI: The most important is integrity. I mean, we want three traits, right? We want intelligence, we want integrity, and we want willingness to work hard. And none of these three are really negotiable.

STEVEN BARTLETT: And what does integrity mean in your definition?

MOHNISH PABRAI: Well, it’s absolute honesty is pretty simple. It’s black and white. Conduct yourself with the highest levels of ethical standards. So on all fronts, when you’re dealing with a customer or internally or externally, it’s the moral standards need to be very high.

Building Wealth: Business vs. Investing

STEVEN BARTLETT: When you think about your wealth, how much of it has come from building businesses versus being a great investor of the capital that you manage to make from those businesses?

MOHNISH PABRAI: I think currently most has come from the investing side.

STEVEN BARTLETT: You’re very well known for being a really excellent investor over many, many years. I’ll put a graph on the screen that I found which I think shows the returns of your investment strategy versus the Dow Jones. This graph. Have you seen that one before?

MOHNISH PABRAI: I haven’t seen it this way, but people put up all kinds of things.

The Manhattan Story: Understanding Compound Interest

STEVEN BARTLETT: I mean, all this says is that you’re extremely good at investing. So I want to know if I’m starting my investing career. I’m working in a 9 to 5 job at the moment. I’ve got a couple of thousand dollars in my bank account. How shall I be thinking about investing? Should I be investing?

MOHNISH PABRAI: So there are three things that matter in terms of getting a great outcome with investing. Starting capital, how much, the amount you start with, length of the runway, how long are you going to invest the money, and the rate of return.

Before I answer your question, I want to tell you a story, and this is a true story. In 1623, in New York, the Native American Indians in New York who owned the island of Manhattan, the Dutch settlers wanted to buy the island, and so they went to the Indians and said, “We’d like to buy the island of Manhattan. Great natural harbors. It can be a great place for us.” And the Indians and the Dutch reached an agreement to sell the island of Manhattan for $23.

When people hear that, they think, “Oh, the Indians got taken. Manhattan for $23 is ridiculous.” But let’s say the Indians had a trust officer who they said, “Invest this $23 for the benefit of the tribe and try to do a decent job.”

The Rule of 72: A Mathematical Hack

Now, there’s something known as the rule of 72. And the rule of 72 is a very important rule. And I wish they would teach it more in high school than elementary school. It tells us how long it takes money to double. And it’s kind of a mathematical hack.

So, for example, if I’m going to get a 7% return, and I do 72 divided by 7, that’s approximately 10. And at the 7% return, it’s going to take 10 years for the money to double. 7% compounded will take 10 years. If I have a 10% return, it will take 7 years. 72 divided by 10 is 7. If I have a 15% return, it will take 5 years. 72 divided by 15 is 5, approximately. And if I have a 20% return, it’ll take 3 1/2 years.

So this rule of 72 is a nice hack. And it’s very important to know how long money takes to double because then we can start doing a lot of math in our heads.

The Power of Compound Growth

So when we look at these Indians with the $23, if they were getting a 7% return, it would become $46 in 10 years, and then it would become $92 in 20 years and $184 in 30 years, so on.

Now, if you go 100 years, it’s 10 periods of 10, and 10 periods of 10 is 2 to the power of 10, and 2 to the power of 10 is 1024. So we throw away the 24 because we don’t want to complicate the math. So at 7% for 100 years, you would have 1,000 times what we started with.

And this is why, because compounding becomes nonlinear, people have a hard time getting their hands around it. So nonlinear, meaning it’s not going up in a straight curve, it’s going up in a hockey stick.

So in 1723, the Indians would have $23,000. It would have gone up a thousand. And then if they continue at the 7%, in 1823, they would have $23 million. And in 1923, they would have $23 billion. And in 2023, they’d have $23 trillion.

Now, the entire wealth of every man, woman and child in the United States is $150 trillion. One-sixth of that is not undeveloped land in Manhattan. So if the Indians had invested at 7% a year for the last 400 years, they would have more money than owning the land. So they were not taken. They were given a fair deal, but they just didn’t have a good trust officer who could actually make it happen for them.

The Magic of Starting Small

So the magic of compounding is that we started with $23 and we end up with $23 trillion without having a great rate of return. It’s just okay. 7% is just okay. It’s not great. It’s not bad, but it’s okay.

Now, if you go back 100 years, so we started at 1623, go back 100 years to 1523, we had 2,300 cents. In 1623.

STEVEN BARTLETT: $2,300.

MOHNISH PABRAI: $23 is 2,300 cents.

STEVEN BARTLETT: Oh, okay.

MOHNISH PABRAI: If they’d got it just converted to cents instead of dollars right now, if you make it 1000th of that.

STEVEN BARTLETT: So just so I’m clear here, so if you’re saying if you went back 100 years from that point and you gave them just 23 cents, if you…

MOHNISH PABRAI: Gave them 2 cents, if you give them 2 cents, 2.3 cents, to be exact. But if you just gave them 2 cents, 100 years later, there would be $20. If you gave them 2.3 cents, 100 years later, there’d be $23 and now it would be the $23 trillion. Right.

So what I’m trying to say is that if the runway is long enough, the starting capital doesn’t matter. Even the rate of return doesn’t matter if the runway is long enough now.

Practical Investment Advice: Start Young, Save First

So when people are thinking about investing, they have to keep a few things in mind. The first thing is spend less than you earn. So always try to save the first dollar rather than the last dollar. So if you are making $50,000 a year, put $5,000 into savings to start with and then do the rest of your expenses after that.

Now it’s very important when we saw with this example, you start young. So when people start working at 22 or 23, whenever they start working, they have to be saving then because that early money at 22 can compound for 50 years. And that’s what we want.

So we don’t need to do heroic things with finding the next Nvidia or whatever else. We can just put it into an index. And the important thing is spend less than you earn and keep putting that 5, 7, $10,000 every year into the savings. Don’t go have a vacation in Hawaii with it. Let it keep compounding and just put it into a broad index. And we don’t really care.

How to Start Investing: The Basics

STEVEN BARTLETT: So for someone who has never invested before, which would probably be the majority of the audience, how do we simplify even further in terms of just put it in an index? What does that mean?

MOHNISH PABRAI: So basically you could open an account at Fidelity or Interactive Brokers or Robinhood, any of these places. You could open a brokerage account for…

STEVEN BARTLETT: Very little money and there’s lots of them in every country.

MOHNISH PABRAI: Yeah. And then you could just ask them to buy you the S&P 500 index, for example, and they will get you invested in that.

STEVEN BARTLETT: And the S&P 500 is basically the top 500 companies.

MOHNISH PABRAI: It’s the… Yeah, the 500 dominant businesses in the US like Nvidia is in there and Microsoft and Apple and so on.

STEVEN BARTLETT: And you’re going to get your 10% a year if the trend holds over the last century.

Alternative Investment Options

MOHNISH PABRAI: The S&P has plenty of periods where it does nothing. It’s somewhat overheated right now, but I think if you have a long enough time horizon and your dollar cost averaging in, it’s perfectly okay.

What you could also do as an alternative is buy Berkshire Hathaway. So that’s a stock BRKB. So you could again tell these people that. Just put it into Berkshire Hathaway. It’s like an index again, it’s like set it and forget it. You don’t need to think about the investing side. You focus on your career and keep putting this little money away on the side and it’s going to compound.

The Math of Long-Term Wealth Building

And so at 18, if you put away $5,000 and you fast forward to when you’re 68, 50 years later, right now, if you got a 10% return on that money every year, let’s say every seven years, it would double. 72 divided by 10 is seven. Fifty years is seven. Doubles seven times seven is 49. And two to the power of seven is one hundred and twenty eight.

So we can throw away the 28. Keep it simple. You’re going to have 100 times what you started with. So the $5,000 at 18 is going to be $500,000. At 19, if you put money away, that’s another $500,000. 20, you might have $10,000 you can put in. So you can start seeing that over a lifetime, you’re going to be having too much money.

STEVEN BARTLETT: You’ve been referred to as the Dhando investor. And I’ve got a book here which you wrote, called the Dhando Investor. What does this word dhando mean? And why do they call you the Dhando investor?

The Dhando Way of Business

MOHNISH PABRAI: Dhando is actually a word from Gujarat, which is on the western coast of India where Gandhi came from. They are extremely astute business people. And dhando, if you translate it directly in Gujarati, it means business, but it doesn’t really mean business.

What it means is it’s a way of doing business where the downside is non-existent. We already discussed how Mr. Branson is a Dhando investor. He had no downside. Mr. Gates was a Dhando investor. He had no downside. Mr. Walton, as a Dhando investor, had no downside.

So all of these people embarked on businesses, built huge fortunes without taking risk. And so “The Dhando Investor” was written from the perspective of how can we minimize risk while keeping the returns intact.

STEVEN BARTLETT: You use this example of the Patels. What is that story?

MOHNISH PABRAI: The Patels went to Uganda more than 100 years ago, maybe close to 130 years ago.

STEVEN BARTLETT: It was a family.

The Patel Success Story

MOHNISH PABRAI: It’s an ethnic group in India. And so this ethnic group came to Uganda to build the railroad. But they’re very savvy business people. And over the course of the last hundred odd years when they were in Uganda, through their dhando methods of doing business, they became very successful entrepreneurs and they controlled large parts of the Ugandan economy.

And Idi Amin came to power in Uganda in the 1970s and he said, “Africa is for Africans.” So what he did is he threw all the Patels out and he nationalized all their assets. So now the Patels were stateless. The US took them in. The UK took them in, Canada took some of them in.

And when they landed in the U.S. they basically really didn’t have any skills that would allow them to get good jobs, white collar jobs in the US and what a few of them started to do was they realized that if they bought a motel, a small 10 or 20 room motel, the family could live in one or two of the rooms and they could use the money they got out and get a bank loan and run the motel.

Now motels are very labor intensive businesses. So what they did is when a Patel took over a motel, they fired all the staff and the family took over all the jobs, the cleaning and front desk and everything else. And the Patels are vegetarians and they live a very simple life.

So when a Patel took over a motel in an area, what they were able to do is they were able to undercut the prices of all the other motels in the area because they have no labor, they have no payroll, they have no workers comp, none of those things. If everyone else is charging $25 a night, they’re charging $19 a night. So the occupancy was higher than everyone else and they saved their money.

And then what they would do is buy the next motel, send the nephew to run it, and then buy the next motel. And this started happening in the early 70s. And when you fast forward to today, 80% of all the motels in the US are under Patel ownership. 80%.

So the Patels make up 0.1% of the US population. Indians make up about little over 1%, maybe 1.2, 1.3%. Just one-tenth of that is the Patels. And this 0.1% population is controlling 80% of the motels in the country. And it’s because of the Dhando Way.

The Core Principles of Dhando

STEVEN BARTLETT: So if I want to steal from the Dhando Way, you told me it’s good to be a copier. What are the principles of the Dhando way that I need to be thinking about? Because I think there was. Was there nine? Yeah, there was nine principles in total in the book.

MOHNISH PABRAI: Well, the most important one is “heads I win, tails I don’t lose much.” Everything we discussed today, Steven, is heads I win, tails I don’t lose much. When I started my business, when Bill Gates started, when Sam Walton started, when Richard Branson started, that was the formula. If they won, they would win big, and if they lost, they’d lose nothing.

So everything has to be in business about risk reduction. Everything has to be about free lunches. We love free lunches. So we always have to think about how do we get this done without capital, without risk. Free lunches.

Opportunities in Boring Businesses

STEVEN BARTLETT: Do you think there’s an opportunity for people? Because everybody’s at the moment thinking about AI and technology and these really advanced new innovations as an opportunity. But does that create an opportunity in the boring. In the motel, in the laundry mat?

MOHNISH PABRAI: Yeah. So, you know, the reality is. So entrepreneurship is not studied much in business schools because there’s nobody going to give you a consulting project for studying entrepreneurs. If we really study startups in the US or actually anywhere in the world, 99.99% of startups are non venture backed.

STEVEN BARTLETT: What does that mean?

MOHNISH PABRAI: What I mean by that is those are your laundromat, your Chinese restaurant, your eBay seller, whatever, Amazon seller. So on the small businesses, none of those companies were formed because of venture capital. So the media focuses on all the venture capital led businesses. And so people think that, “oh, if I have to do a startup, I got to do something in technology.” Well, that’s like one-tenth of 1% or less. You can ignore it. You don’t need to really worry about it.

The important thing is to be an observer and to look at what my dad would call offering gaps. So let me explain. An offering gap, right? So let’s say there’s a town, let’s call it Town A. Town A. There’s a barber shop in town A. And the barber’s one of many barbers doing well, et cetera. There’s another town about 30 miles away, town B, which also has barbers. They’re also doing fine.

There’s a new township coming up in the middle of these two towns called town C. Town C doesn’t have much of a population, but it’s growing fast. So the barber in town A goes to see what all the hoopla about town C is all about. So he takes a trip there, sees that there’s some increase in population, people are moving in, and he notices there’s no barbershops. Why would there be any barbershops? Because it’s brand new, right?

So he’s thinking, how do I do this without taking risk? And what he does is he rents a sublease as a small storefront, buy some used barber equipment, and then decides that one day a week he’s going to go into that town and cut hair every Wednesday and puts up a note board saying, “I’m available Wednesdays.”

And what happens is people start coming in. They come in because they have no choice. If you don’t go to this barber, you got to spend half an hour driving to one of the other two towns. Now, he normally charges 30 bucks for a haircut, but here he doesn’t need to charge 30 because there’s an opportunity cost of the time you’re saving. So he can charge 45. So he’s charging 45 over here. And then when he’s in his own town, he’s charging 30.

Now, what he notices is Wednesdays are filled up, so he says Tuesday and Wednesday. And gradually what ends up happening is that that business is full time and he’s making 45 bucks an hour per haircut. But the nature of capitalism is more barbers are going to show up. So the second barber comes in, the third barber comes in. Eventually the haircut there is going to be 30 bucks. It’s going to neutralize. But in the meanwhile, he’s doubled his business. What risk did he take?

So going into town C was addressing an opportunity gap. When Howard Schultz started Starbucks, he saw an offering Gap. He thought that what Italians love about cafes might be what Americans love too, didn’t exist. And he went and did it.

Creating Durable Moats

STEVEN BARTLETT: You know, that barber that moves into town C first, and they’re really having a great time because there’s no competition. One of your points when you’re talking about the Dhando method is this idea of creating a durable moat. It’s point four of the nine.

MOHNISH PABRAI: Sometimes what happens is that you start a business. Every business starts off without a moat.

STEVEN BARTLETT: What is a moat?

MOHNISH PABRAI: We have a castle, a knight in charge of the castle to keep the invaders away. And one of the ways to keep the invaders away is you put a moat of water around the castle. So when you put a moat of water around the castle, it makes it harder for anyone to take the castle.

And a business with a moat around it is a business that competitors will have a difficult time taking business away from. So what can happen with our barber in town C? Humans are creatures of habits. We don’t like to change our barber every month. We like the same barber. So if he’s competent and good, what’s going to end up happening is that his client base will stay with him.

The Power of Loyalty Programs

STEVEN BARTLETT: What about loyalty points? I was just struck the other day when I was shopping in LA at Erewhon, which is a supermarket here in LA, and someone had recommended it to me on the plane. Which actually goes to your point about actually give a great product, because an airline hostess on my flight over here went, “oh, you’re on keto diet. You need to go check out Erewhon.” So that’s the recommendation.

MOHNISH PABRAI: And that’s 10x more powerful than any ad or anything else or drive.

STEVEN BARTLETT: And I went there.

MOHNISH PABRAI: Yeah.

STEVEN BARTLETT: When I landed because I needed a supermarket and didn’t know the place. But then, interestingly, when I was at the checkout yesterday after my second visit, the lady at the checkout goes, “hey, are you an Erewhon member?” And I was like, “Erewhon member?” And she was, it does cost. She went. She was honest. She went, “it costs money. Yeah, but here’s what you get.” She goes, “on this order today, you would have got 10% off this entire order, this expensive one.” And she goes, “and we give you a drink every month.” She listed all the things off. I signed up and bought the membership to Erewhon. I tell you now, I’m not going anywhere else. I don’t know what it is, but now that I’m a member and I have the app, I’m not going anywhere else.

MOHNISH PABRAI: Well, now that’s the hack that Amazon did, right, with Prime. And two or three years ago, I was seated at dinner next to Bill Gates. My middle name is Forrest Gump. These things happen once in a while. And Bill is describing to me how the business model of Costco and the business model of Amazon is illegal.

So I said, “why is it illegal?” He said, “when you put a membership fee, what you’re doing to the consumer is you’re locking them in, which means the consumer is no longer going after the lowest price because there’s a distortion in their behavior.”

So now the FTC doesn’t believe it’s illegal, but Bill Gates does. And I was just thinking, well, that’s because you’re competitive with Amazon.

STEVEN BARTLETT: You know that prime thing with Amazon is super smart.

MOHNISH PABRAI: Yeah. And that was taken from Costco.

STEVEN BARTLETT: Oh, okay.

MOHNISH PABRAI: But basically, yeah, the lock in. Lock in is very powerful.

The Apple Case Study

STEVEN BARTLETT: One company I wanted to talk to you about was Apple, because Apple, I find, is a really interesting company. You talked about being a copycat, kind of arriving later to the party with new things. They’ve kind of been a story of both sides of the equation. They’ve been innovative, it seems, especially under Steve Jobs. And more recently, I mean, they were like copying other people, but now I’m not even sure what they are.

MOHNISH PABRAI: Well, so Apple is a very unusual company in that everything emanated from one guy, and that one guy has been gone for a long time. And if you look at Apple, basically nothing new has come out since he left. We don’t have a Steve Jobs at Apple. And the same thing happened at Disney. They had to buy Pixar because there was no Disney anymore. Mr. Disney was gone. And so Apple actually I find somewhat.

STEVEN BARTLETT: Risky as an investment.

MOHNISH PABRAI: Yes. Because if the form factor, so currently humans walk around with a brick in their pockets or in their hands, at some point that form factor is going to change. It may be integrated into something we wear or, or some other more ergonomic situation that may or may not be Apple. And in fact, more likely not to be Apple. It’s probably some guy in a garage somewhere.

If they are smart enough to find the guy in the garage early enough and buy them, they’re okay. And bring them in as an extreme job, that’s okay. But even there the odds are low.

The Specialness of Founders

STEVEN BARTLETT: What does this say to you about founders, the specialness of founders? Are they a unique animal or can you swap them out and still be tremendously successful?

MOHNISH PABRAI: Well, I would say that there are a lot of elements of luck. So first of all, founders are all great at what I call offering gaps. They find something that the world doesn’t have, that needs, et cetera, and they go after it. Sometimes what happens with the offering gaps is a moat gets built, right? Someone starts Visa, it becomes a moat company or American Express and so on, and it perseveres and scales like Apple.

STEVEN BARTLETT: With their ecosystem, their closed ecosystem.

The Longevity of Great Businesses

MOHNISH PABRAI: But 100% of businesses eventually will go to zero. And so it very well could be that a business could last for 50, 100, 200 years. 150 years could last well past the founder’s lifetime. Those are businesses which were built with a lot of principles and a lot of great core values.

The founder of Ikea, every decision he took was with a 500 year view. How many businesses think with the 500 year view? And Ikea? I was studying Ikea, some very remarkable things about it. First of all, he never ever took debt. Every single store they built, they built out of retained earnings and cash. He never took debt.

And I’ve studied business failure quite a bit. The single biggest reason why businesses fail is leverage. They owe people money and they can’t pay it back and they’re gone. So IKEA has never taken debt. If you never take debt as a retailer, you’re going to grow slower. You’ve got to keep bringing in the cash. But it’s a very solid foundation because it’s on a rock solid balance sheet.

And his second principle was no two IKEA stores can be the same. So what he said is that whenever we are opening a new Ikea store, there has to be some innovation that is going into that store that does not exist in our previous stores. Because he says that if I don’t keep innovating, I’m done. And so if you don’t notice it, because we think all the Ikeas are the same, but actually, if you study them and look at when they were built, you start seeing these incremental changes that they’re making.

STEVEN BARTLETT: That’s a really interesting idea that I could implement into everything that I do, which is just making sure that every podcast I do, there’s one new experiment or innovation, or every piece of work you do, whatever team you’re in, is just to run one experiment.

MOHNISH PABRAI: And every day. Absolutely.

STEVEN BARTLETT: But you have to make it measurable.

MOHNISH PABRAI: Right.

The Punch Card Philosophy

STEVEN BARTLETT: Or else it’s not an experiment. So you also talk about making fewer big, infrequent bets.

MOHNISH PABRAI: Yes.

STEVEN BARTLETT: Who’s that relevant for and in what context?

MOHNISH PABRAI: So one of the things that Warren Buffett says, he says that “you get a punch card which you can punch 20 times in your lifetime, and each time you buy a stock, it’s one punch that’s gone.” So what Warren is saying is if there was a rule which said that you cannot buy more than 20 stocks in your whole life, what would happen is you’ll be very thoughtful about what you bought. And chances are those decisions might be good decisions because you only have 19 left, and then you only have 18 left.

So in venture investing, a very small sliver of companies that venture capitalists invest in do well. The high burnout rate. And if you look at the stock market, 4% of listed companies generate 90% of the return. So most companies that we may think about investing in are likely not to do well. For us, it’s a 96% odds that that’s why the index is so important, is when you buy the index, you bought that 4%. And if you go pick stocks, you have 1 in 25 chance of getting one of those 4%.

STEVEN BARTLETT: You said earlier the punch card analogy of 20 things in the punch card, you’ve got to pick 20 in your life. If you only had three to five things that you would bet or back now, which I think is actually kind of what you do, what would those things be?

MOHNISH PABRAI: Well, I mean, so I’m trying to resist going to specific names because I think that would hurt people more than help people.

STEVEN BARTLETT: Okay, that’s fair.

MOHNISH PABRAI: What I would prefer that people do is focus on the other two variables, which is the amount you’re saving and the length of the runway and focus on the index. So I think that it’s kind of like saying I want to be a great AI developer because it’s the way we will. To be a great AI developer is going to take time. It’s just the nature of the situation.

The Day Trading Trap

STEVEN BARTLETT: What do you think about these people that day trade? Because so many young people, specifically men, are being sucked in by these adverts that you can day trade your way to wealth.

MOHNISH PABRAI: It’s not good. I think it’s the broker’s going to make all the money. Robinhood will do well, not you.

STEVEN BARTLETT: Do you think anyone can make loads of money as a long term day trader?

MOHNISH PABRAI: I look at it this way. If you study the Forbes 400, the 400 richest people in the world, actually I don’t see any day traders in there.

Circling the Wagons

STEVEN BARTLETT: One of the last things I wanted to speak to you about is this idea of circling the wagons.

MOHNISH PABRAI: Yes.

STEVEN BARTLETT: What does circling the wagons mean?

MOHNISH PABRAI: Warren Buffett said that over a 50 year period of running Berkshire Hathaway, he’s made hundreds of investments and only 12 have moved the needle for Berkshire Hathaway. So it’s the same 3 or 4% rule where if we say that Warren made 300 investments, he probably made more than 300, but let’s say he made 300 decisions. Only 12 have resulted in what we see as Berkshire Hathaway today. And the important thing was not the buy decision on those 12. The important thing was never selling them.

Circle the wagons is a term that comes from the 19th century when these pioneers were moving west, the wagon trails moving west, and the native Indians would attack or bandits would attack these wagon trails. So what they would do is they would put themselves in a circle, they would circle the wagons, then defend that circle as best they could with their guns and so on. But the wagons being circled was the best possible way of trying to face off that attack. So in effect, they circled the wagons around the crown jewel.

So when I’m talking about circle of wagons, what I’m saying is that in a lifetime of investing, there are very few times when you’re going to actually have a huge multi bagger, a big winner, something that goes up 10x, 50x, 100x. What you want to do is you want to effectively circle the wagons around that idea so it doesn’t get sold.

So we are not going to know before we invest whether something is going to be a multi bagger or not. But we may figure it out after we own it. So we are only going to know a business after we own it. We’re not going to know it before we own it. After we own it, we may understand the business well enough to know that this is a great business. And when we figure out it’s a great business, you don’t want to sell that.

The Biggest Mistakes

STEVEN BARTLETT: When I meet people like you, I’m always so inspired because we spend a lot of time thinking about the wins, the great decisions. We’ve talked about that. I’ve shown you the graph of your great decisions. What is the worst ever decision you made in terms of financial performance?

MOHNISH PABRAI: Well, I’ve had so many zeros.

STEVEN BARTLETT: All the one that got away.

MOHNISH PABRAI: I mean, yeah, I mean, so there’s mistakes of commission, which is things going to zero, and there’s mistakes of omission. The mistakes of omission are far, far worse. Okay, so the biggest mistakes I’ve made aren’t the ones that have gone to zero. The biggest mistakes I’ve made are the ones that I sold and I shouldn’t have. Where I should have circled the wagons and I didn’t. And those have been very costly.

STEVEN BARTLETT: Give me one example.

MOHNISH PABRAI: Well, so I think this was about 13 years back, 2012, I invested in a company called Fiat Chrysler Automobiles. Basically, it was coming out of bankruptcy after the financial crisis. They had gotten rid of all that debt and everything. And the stock was very cheap. It was about 5 or 6 billion dollars that you could buy the whole business.

One of the things I didn’t pay too much attention to at the time was that 80% of Ferrari was inside Fiat Chrysler. And they owned Ferrari, 80% of it. But they had many other assets which I like. They had the Ram Trucks and Jeep and Maserati and so on. And when I looked at the business, I thought the business was worth many times the 5 or 6 billion, even ignoring Ferrari. And I was right.

So in the end, I made several times my money. And in 2017 or 2018, they took Ferrari public. So they actually then listed the company and it looked like that they had captured all the value. And so I sold. I used to own approximately 1% of Ferrari as part of that purchase that I had made. So 80% of Ferrari was in this 5 billion dollar company.

Ferrari now has a market cap of almost 100 billion, and I would have about a billion more if I had not done that stupid thing. So I made a couple of hundred million on this whole thing, but it would have been a lot more. And all I needed to do was just not sell it.

Crypto and Happiness

STEVEN BARTLETT: Do you deal in crypto at all? Do you invest?

MOHNISH PABRAI: No, it’s outside my competence. I don’t understand it.

STEVEN BARTLETT: I was going to say one of the things I noticed about you that’s quite rare for someone that deals in billions is you have a smile on your face. You seem like a really genuinely happy person.

MOHNISH PABRAI: Well, what would be the point of the billions without being happy?

STEVEN BARTLETT: Well, a lot of people aren’t, as you know.

MOHNISH PABRAI: Well, then they’ve lost their way somewhere. I mean, on a daily basis, I specifically ask myself, “How do I want to spend today?” And I focus on spending it not with the focus on maximizing money. I focus it with maximizing what Mohnish loves. And that changes all the time. But that’s the way it is.

STEVEN BARTLETT: What is that?

MOHNISH PABRAI: Well, currently, it’s golf. Like, one of the things I really struggled with today was there wasn’t going to be any golf. So I said, “It’s either Steven or golf. Should I go to Steven or should I go for golf?” I said, “You know what? Give the arms a rest. Let’s go meet Steven.”

STEVEN BARTLETT: I’m glad you did. We have a tradition where the last guest leaves a question for the next, not knowing who they’re leaving it for. And the question left for you is, if you could go anywhere right now, instantly, where would you go?

MOHNISH PABRAI: I’d go to the golf course.

STEVEN BARTLETT: Thank you so much. Thank you for everything that you do. It’s so incredibly important, and I now know why people love listening to you and learning from you. And it’s because you have this most remarkable ability to tell deeply engaging stories. Thank you so much.

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