In 2014, MOI Global teamed up with Guy Spier and Mohnish Pabrai to produce a video of Guy visiting the offices of Pabrai Investment Funds in Irvine, California. Guy toured Mohnish’s office and then sat down for a fascinating conversation between the two value superinvestors.
Watch an excerpt of this MOI Global production:
The transcript has been lightly edited and may contain errors. Watch the video.
Guy Spier: Hi, John. It’s Guy here. Really sorry you couldn’t join us, me and Mohnish, in Irvine, but I hope you will at some point. Delighted to be able to try to give you a short office tour. We’re actually in a pretty non-descript office park in Irvine, California. There is not a financial firm in sight. Most of the other businesses that are here are education companies, companies that prepare people for SATs and I think that’s interesting. In Omaha, Berkshire Hathaway is there with a bunch of construction companies. Mohnish Pabrai here is with a bunch education preparation companies. Let’s go inside. We’re just going up the steps here and I find it interesting Mohnish has amazing photographs of his heroes everywhere. It’s like a reminder of who he’s emulating.
We’ve got Charlie, two photographs of Charlie Munger and a great portrait of Warren Buffett over here and then if we look the other way, another one of Mohnish’s heroes, Mahatma Gandhi, who wrote an incredible autobiography, The Story of My Experiments with Truth. Those photographs and those images are going into Mohnish’s mind every time he comes into the office. Then if you look up there, above the door, you will see a great sign that says, “Invest like a champion today.” It was originally from Notre Dame, “Play like a champion today,” and that is something that is above the door in Warren’s office. We saw it and immediately made a copy. There we go. Mohnish, I’ve shown them the outside of the office and we’ve come straight here. John did a tour of my library and people are really interested, so I guess this is really for John to take a look at how Mohnish is setup in his office.
Mohnish: It’s a messy desk.
Spier: Yeah, why don’t you take the camera around your office briefly and show them?
Pabrai: The wall to my right, if you just take the camera to this wall, this is my wall of mostly Munger and Buffett letters and notes. We’ve got a few others over here, so just odds and ends over the years, which I’ve just kept and enjoyed receiving. Then the rest of the office, if you just scan the other walls is mostly pictures, different sorts of pictures. Right behind you is a set of pictures mostly from Omaha or Pasadena with Charlie and Warren and other luminaries and such. Then we’ve got another wall here, which is mostly the Buffett lunch. This is just any picture I find interesting, will tend to, if there’s wall space, put it up. This is very much a pre-Facebook approach to pictures here and such. That’s what’s happening.
Spier: Does the bedroom exist, Mohnish?
Pabrai: The bedroom exists. Shall we go to the bedroom?
Spier: Let’s take a quick look at the bedroom.
Pabrai: Alright, then we have to go in here. This is the bedroom where the afternoon naps take place. We got some of the bedding from Western Heavenly Bed, so that works out fine. It’s a nice, little room, but it’s very quiet. I actually take a nap every afternoon, so it works out great. The person who is most excited about these annual reports is Guy Spier more than anyone else. Anyway, one of the things I learned from Warren is that anytime you look at a stock, he’d buy 100 shares and he still does. He buys 100 shares, so he can just keep track of it because it forces them to send him the annual report. Since I’m cheaper and more frugal than Warren is, I only buy one share and the one share goes into my wife’s IRA so that we don’t have tax issues for a while. Then that forces them to send the annual report, but now some of these companies have stopped sending it because they want to go all digital. We basically have long histories of annual reports and it makes the research easier when we’re looking at a business and we can go back and look at several years. Basically, what happens with many of these companies is you really cannot get the reports, which are really old anymore. I actually like to read everything hard copy, so I actually prefer the actual, original document issued by the company.
Spier: Here’s a Fiat 2011 annual report.
Pabrai: Fiat has not sent us the 2012 annual report, as an example.
Spier: I’ll say something without question, I think it’s always interesting to visit people’s offices. I feel I’ve cloned Warren Buffett, but I didn’t do a good enough job. One time I was here and I saw a bunch of annual reports. I asked why he is receiving them and then I realized it’s because he had opened an account and he had bought one share. It’s only the last six months that I’ve done the same thing, so I’m looking forward to receiving the annual reports.
Pabrai: Have you gone hyperactive and bought one share of every stock.
Spier: I’ve been paying brokerage fees progressive to the purchase price to Charles Schwab up the yin-yang. A question to you, you can’t keep every annual report, so how do you choose which ones you want?
Pabrai: The thing is we do keep all the annual reports for which we bought the share, we bought the one share. It doesn’t take that much room. This is not all of it, but this probably 80% of it, so it doesn’t take that much room. Let me just continue the tour over here.
Spier: Yeah, Hall of Shame and I’ll stay behind the camera.
Pabrai: I learned this from Chris Davis where he had a Hall of Shame. In fact, I went to his office in New York and he showed me. This wall right in front of me is businesses that we used to have a stake in and we’ve exited fully and we made money. We’ve actually gained in all of these businesses, so things worked out well. That was good. Then if you just follow me here where we may have coffee in the kitchen, we have a smaller number of plaques here, which I think is good because these are the businesses that we had permanent loss of capital. You can see Delta Financial up there, which is a business we lost about $65 million and then there are a few others, which have led to losses. I pretty much see it every day and thankfully this is not growing much. It’s constant. Then if we go just back to our common area, on the wall here, these are businesses where we neither made nor loss money. Actually, we made just a slight amount of money, so they were just basically flat businesses that we invested in, exited, but we didn’t make or lose much money.
There are some other things that you mind find of interest. This is our wall of Berkshire Hathaway annual reports. Warren is quite monotonous in the way he designs the covers ever year of the annual reports. They’re all identical for more than 40 years. The only surprise is what color he places on the cover. The reason I put these up is just to drill in the point that it’s really the content inside the report that one ought to focus on and, in fact, at Pabrai Funds and at the Dakshana Foundation, we’ve taken a cue from Warren and our designs stay very similar and our colors change. That’s worked out well. If you just follow me in there, this is just odds and ends of shareholder credentials at the Berkshire meetings. Again, every year when I go to the meeting, I try to keep them. I think they’re nice collectors’ pieces and I think they do a very good job with them. The office, I’ve just tried to make it a relaxed atmosphere, make it a fun atmosphere and take it from there.
One of the things I thought we might start with is this notion, if you remember from the Buffett lunch, Harina, my wife, Harina, had brought up to Warren that I thought a business like Ikea would be a perfect company for Berkshire to acquire. Harina mentioned that to Warren and Warren immediately says, “Yes, I wrote to them and told them if they were to decide to do something, to give me a call.” Of course, then he explained how the way Ikea was setup with the foundations and trusts and all that, it was unlikely that there would be any kind of transaction with Berkshire or anyone else, but the interesting thing is that recently I was rereading Alice Schroder’s book, The Snowball. I think she did an exceptional job with the depth and the writing style was just wonderful, but one of the things she talked about was one of the things that’s on Buffett’s reading list, he reads American Banker, he reads all these newspapers, but he also gets these furniture publications to his office and he skims that as well. Alice also mentioned that he’s very close to the Blumkin boys, the Nebraska Furniture Mart grandchildren of Mrs. B, Irv and Ron Blumkin. In fact, meets them frequently for dinner and even takes a once-a-year trip with them.
The [PH 011:34] net-net of all this is that he has spent an enormous amount of time studying the furniture business and what has happened out of the study of the furniture business is he’s talked to the Blumkins about what other companies in the furniture business would be good to acquire and Berkshire’s had a number of acquisitions in that space, including Jordan’s and RC Willey and so and so forth. The issue is that in investing, what happens is that it’s one of the broadest disciplines and the edge you can get, if you will – like I think Warren has an edge in the furniture business – comes out of a multidimensional way of looking at it and I came at looking at Ikea being a fit just because the nature of their business being so amazing and I think Warren probably came at it more from the whole Nebraska Furniture Mart experience and probably even the Blumkin brothers might have mentioned it directly to him. The thing is that with someone like Warren Buffett, he had those unusual insights into the insurance business and then went into insurance in a big way. He had that into banks. Warren understands banks really well, he used to own [PH 0:13:00] First Rockford.
If you look at See’s Candy, for example, that was a big learning for Warren and the See’s Candy experience led to the Coke investment, it led to investment in other brands and so on and so forth. The thing with investing, what is most fascinating to me, is when you go through growth and you grow to the next level and you find something that clicks, all the data’s public, but it’s the analytics that become superior. It gives you insights that maybe you’re able to see around the bend that others can’t see. We had some of that when we looked at the car business in the middle of 2012 and also when you looked at Money Center Banks. To me, the interesting thing about the investing business is that one has to continue to, first of all, not only scan the horizon, but also go deep in some of these areas to find those rich veins. I don’t know what your thoughts are.
Spier: Well, my question to you is Nebraska Furniture Mart, was that a successful acquisition? Great, so he knows the furniture business and I believe is Berkshire owned Ikea, that might make up for all of these other furniture businesses, but my sense is that furniture businesses have not been a successful venture for Berkshire.
Pabrai: Nebraska Furniture Mart has been and the reason Nebraska Furniture Mart has been is because of economics. The very simple thing is be bought the business for about $60-$65 million and they were, at the time, were doing less than $100 million a year in sales and Nebraska Furniture Mart today is more than ten times that size. They really haven’t plowed any capital in. in fact, they’ve probably pulled out a whole bunch of capital over the years. Nebraska Furniture Mart particularly is an exceptional business and the reason it’s an exceptional business is because the cost structure – low-cost provider, low overhead – and they’re pulling in people from a several hundred mile radius, coming in, so the per square foot sales is probably 10X than other Omaha competitors, but the other ones, I agree with you.
Some of the other ones, I think Jordan’s, for example, hasn’t worked. That’s the other part of the investing business – you can have a pretty healthy error rate and do fine – but what I’m trying to say is that in aggregate, furniture, one would think looking from the outside, furniture retailing doesn’t come across as an enormously lucrative thing to go into. I think it’s worked out fairly well for Berkshire. The same with jewelry. They’ve made a number of investments in the jewelry business that may have not been so well, but Borsheim’s, for quite a while, same as Nebraska Furniture, a low-cost provider, did fairly well.
Spier: Helzberg Diamonds, not so great, but then I guess even if he doesn’t get to invest in Ikea, he did invest in the flooring company, whose name escapes me right now.
Pabrai: Shaw Carpets.
Spier: Which is a duopoly and in a certain sense, he probably learned from furniture retail to be sure Shaw Carpet was the place in the value chain where they captured the most.
Pabrai: That’s the interesting thing. If you think about something like carpets, a normal investor might just think of it and move on saying, “Okay, carpets – blah,” but when you drill down, that’s when you really start understanding or like, for example, USG, which makes sheetrock. Again, they’ve had [PH 0:16:55] John Manswell in their portfolio and drywall is, you can say, a commodity and USG drywall, the sheetrock breaks and is easier to cut and crack than other drywalls, so contractors, in terms of labor savings and all that, prefer it. Even something as subtle as drywall can have a moat and so the fascinating thing, for me, about the investing business is you don’t need too many. If you can find one of these insights, looking around the curve even every couple of years, that’s quite a bit. The railroad, for example, Warren’s perspective on the railroad, I think Berlin Northern was bought for like $40-odd billion and today, I don’t think it could be bought for $100 billion. It’s gushing cash and that is the ultimate toll bridge because you’re not going to build another trans-[inaudible 0:17:59] railroad and they’re, with every passing day, getting a deeper moat versus trucks and so on.
Spier: The question that comes up for me is that in many of these, the kinds of interviews that John does, there will be the question, “What is your process?” It just seems to me, those insights, those aha, eureka moments come when there isn’t any process. Actually, you said something to me very early on when we met and I don’t think that’s the case with me and all of them, but you have these aha moments. You don’t when you’re going to get them and suddenly you realize you’re onto something. That happened with the automobile business, but if someone were to ask you, “What exactly did you do? How did that happen,” I don’t think there’s any answer that Mohnish can give. It’s probably different, every aha moment happens a different way.
Pabrai: I would say the following, as I have mentioned several times, I’m a shameless cloner.
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