India’s Warren Buffet Shares $1M Investing Strategy | Mohnish Pabrai

Key Takeaways

So, let's play a game. You're my coach. You're my investing coach, let's say. And I have $10,000 and I want to turn it into a million, right? Podcast called My First Million. I want to go from 10K to a million. So, that's a 100x. How would I take 10K and turn it into a million? >> The thing about investing is that opportunities are not going to show up just because you have the cash. >> So, I would make some tweaks to your thinking first about the 10K. So I would say okay the 10K is a good starting point but I what I also want you to do separately from that is have a day job. >> Yeah. >> Okay. And [clears throat] I want you to spend less than you're earning and I want you to take the 10K and I also want you to take your annual savings. Maybe that's 5 10,000 a year or whatever it is. And normally I would say put it into an index. Right? The index like the S&P is overheated. M >> we can't go there right now. Circa 2025 we cannot go into the S&P. >> Okay. >> Okay. Maybe 2035 we can but not 2025. So what I would do is I would treat Berkshire Hathaway as the index. So I would just say the default currently is you put it you know dollar cost average into the into Burkshire class B shares right and you keep doing that day in day out. And if we did that >> you know the the math is really simple. Even if we were doing 10% a year, right? I mean, which I think is probably pretty reasonable for Burkshire. Rule of 72, we would double every seven years. Life is all about doubles. Okay, let's say we had a 20some guy with 10,000 and you go for 50 years or 49 years. It's seven doubles, >> right? >> Okay, seven doubles is um 128. Okay, it's 128 times your money. I gave you more than 100x, >> right? >> I gave you 128x in 49 years >> without having to genius >> without doing anything. Right? So, this is just plan B, >> right? >> Where we put the 10,000 in, it becomes more than a million, 1.33 million with no taxes paid. There's no dividend, there's no taxes, there's nothing. And we haven't even gotten to plan A yet, right? [laughter] This is just sitting there. Now, the other thing is that every once in a while there'll be opportunities that show up and what we're looking for is something that hits you in the head with like a 2x4. So, the best investments are ones that make no sense. You cannot make sense of the numbers. It's too good to be true. It's just weird. And all of those things. So when when these kind of unusual things come together where things don't make sense, >> right, >> that's when we want to dive in. >> Give me an example of a great investment is one that doesn't make any sense. The numbers just seem wrong, you know, to you in the moment. >> Well, I'll I'll I'll give you one example where it was a money maker for me, but I didn't make even 3% of the money I should have. [laughter] >> Okay? you know, I mean, it it was like uh it was given to me on a platter and I blew it. I still made money, but you know, usually the best ideas when you finally figure it out, they're very simple. >> So, in in the year, I think this was like around 2001 or 2002, uh I had encountered the this shipping company called Frontline. And Frontline was a company that owned a fleet of about 75 WCC's, very large crude carriers. These are giant ships that transport crude from like Saudi Arabia to the US. And they're just huge. The entire global fleet at that time was 300 ships, 300 WCC's. 75 of them were owned by Frontline, 25% of the market. the the guy who ran and was the founder of Front Line, John Frederickson, had put the entire fleet on the spot market. So there are two ways he could have dealt with his fleet. He could have done time charters kind of one year, threeear deals where he's guaranteed cash flows per day and all that or be a gambler, put it on the spot market and play it. >> Whatever the price today is, I'll I'll take it. So he had put it on the spot market, the entire fleet. Now these VCC's, they have a cost with the crews and all of that of around $15,000 per day to break even. And at that time we had like the Iraq war and different things going on. So oil demand fell a lot and there wasn't enough need for VCC's. So the shipping rates collapsed to the point they went to 7,000 per day. Okay. So now you have Front Line losing 8,000 per day times 75 ships, >> right? >> Okay. And they're levered. Okay. And so basically the stock got taken out back and shot. [laughter] Okay. Like a 90% drop. Okay. And it most of it was valid because basically you know when we are making investments or when uh the uh equity markets look at a company they want to see consistency of cash flows. They reward consistency of cash flows. Here what we were seeing is consistency of losses. [laughter] Okay. No one could tell you when these losses will abate. So the the dynamics were the stock I think was down to like $3 per share. And when I looked at it, I noticed two things. Okay. The first thing I noticed is all their debt was nonreourse. Their debt was tied to individual ships. There was no debt at the parent. >> Right. >> So basically if they defaulted on the debt of a ship, the bank could just take the ship. They couldn't really take the company could just take that ship. It's like a car loan. Right. Right. And the second thing I noticed was that there's a very somewhat liquid market to buy and sell these ships. So even when the rates went to 7,000 per day, the ships had dropped in price by something like maybe a third, 25 30% drop from where they used to be. >> Right? So what I realized is that if Front Line got into a crunch where they were having cash problems, they could just sell three ships. If they sold three ships, paid off the debt, they'd have enough cash left over to keep sustaining operations for 6 to 9 months, they could sell three more ships after that. So I felt like there was really no way the company was a candidate for bankruptcy. And there was really no way. And the other thing is I could I could look at the entire company and say, "Okay, what if they sold all the ships?" If they sold all the ships, paid off all the debt, you would end up with like $9 or $10 a share, you're at three bucks, >> right? >> Okay. So, you you'd make three times your money if they just liquidated the whole business. So, they were the arbitrage between the price of the stock and the net price of the assets in a distress scenario, right? And uh so I said, "Okay, we really can't lose money here." So I put 10% of my fund into front line, right? Because I just couldn't see a way that we could lose money. After a few months, the rates start improving. The oil demand starts coming back up. The rates go to 15,000, then they go to 20,000. The stocks at 10 bucks. Okay. I sell my shares. Well done, Mish. Okay. >> Tripled my money. >> Yeah. In in like 8 months or something. Okay. And I said, "Okay, this was exactly what I thought, right? Rates then go to 300,000 a day." [laughter] Okay, at 300,000 a day, they're making something like 285,000 a day times 75 ships. [laughter] Okay, that number is like infinity. Okay. [laughter] >> Yeah, I was trying to do the math. >> Just assume it's infinity. The stock goes up in the next 3 years 80x. >> Oh wow. >> Okay. Here's stupid Monish. [laughter] Okay. Patting himself on the back with the double. And I didn't even get a double. I got like 80% uh return on my money and that was that. And so that was an example of where I did first order thinking but I did not do second order thinking. M >> so the second order thinking was you know Buffett always says that the most important question to ask in investing is and then what if I had been so smart as to ask the question and then what so you see that rates are terrible you see the scrapping you see that that fleet's going to shrink so even if oil demand doesn't come back the way it was going to come into balance eventually that those losses are going go away and then you do the next thing on 10 watt which is that when oil demand comes back it takes 3 to four years to build one of these things. So when the rates went to 30,000 or 50,000 and all these guys can see this is a great business now. Well, when you go to the Korean shipyards who are now inundated with orders, they're going to say, "Go to the back of the queue. I'll give you a ship in 5 years." And by the way, the ship is no longer 70 million. The new price is 120. >> Right? >> Okay. Because I got more orders than I can handle. Right? So we had this dynamic if I had thought about it that once the demand became tight you really couldn't increase supply for at least 3 or 4 years. So what's 285,000 * 75 * 1,000 days >> right? >> That's the minimum number of time when that price is not going to come down. It's only after 3 or 4 years more ships start getting delivered and you start getting more balance and all of that. That's an insane amount of cash flow, >> right? [clears throat] So the thing is that there are always like you know our friend Jim Kramer says there's always a bull market somewhere. Okay. So basically if we if we are plan A burkshireathway plan B looking for anomalies right every so often not not very often every so often you will find something weird and we've got all the time in the world we can research something for 3 months it turns out it's not that great let it go >> right >> we got Burkshire still cranking okay so if you look at Warren Buffett you know in his 2022 letter he said that in 58 years of running Berkshire there have been 12 decisions that have moved the needle for Berkshire stock. Now in 58 years he made more than three or 400 purchase decisions for stocks and businesses. Okay, out of 300 if I take a conservative number it's actually more than that only 12 were exceptional. and he said there was one good idea on average every five years. Okay, this is Warren Buffett, >> right, >> with a 4% hit rate. Okay, so basically great investment ideas are rare. We're not going to run into them every week or every month or every year. So plan A, stick it in the index. plan B. Keep running a geer counter over everything, looking at different things, and when something doesn't make sense, drill down, and every so often, you're going to hit a motherload, >> right? >> And when you find something that's a mother lode, you peel off 10 15% of what you have in Burkshire, put it into that, let it play out, then put it back into Burkshire. >> Right. >> Right. And just you keep doing that, and now your 100x is going to show up in half the time or less.