Richer, Wiser, Happier: How the World's Greatest Investors Win in Markets and Life

ISBN-13: 9781501164859

Media Type: Hardcover

Publisher: Scribner

Publication Date: 04-20-2021

Pages: 304

Product Dimensions: 6.00(w) x 9.10(h) x 1.20(d)

William Green has written for many publications in the US and Europe, including Time, Fortune, Forbes, Fast Company, The New Yorker, The Spectator (London), and The Economist. He edited the Asian edition of Time while living in Hong Kong, then moved to London to edit the European, Middle Eastern, and African editions of Time. As an editor and coauthor, he has collaborated on several books, including Guy Spier’s much-praised memoir, The Education of a Value Investor. Born and raised in London, Green studied English literature at Oxford University and received a master’s degree in journalism at Columbia University. He lives in New York with his wife and their two children.

Read an Excerpt

Chapter One: The Man Who Cloned Warren Buffett CHAPTER ONE The Man Who Cloned Warren Buffett
How to succeed by shamelessly borrowing other people’s best ideas



A wise man ought always to follow the paths beaten by great men, and to imitate those who have been supreme, so that if his ability does not equal theirs, at least it will savor of it.

—Niccolò Machiavelli

I believe in the discipline of mastering the best that other people have ever figured out. I don’t believe in just sitting down and trying to dream it all up yourself. Nobody’s that smart.

—Charlie Munger

It’s 7:00 a.m. on Christmas Day. Mohnish Pabrai steps into a minivan in Mumbai as the sun rises in the smoggy sky. We drive for hours along the western coast of India toward a territory called Dadra and Nagar Haveli. Our driver intermittently executes terrifying maneuvers, swerving wildly between trucks and buses. I close my eyes and grimace in horror as horns blare on all sides. Pabrai, who grew up in India before moving to the United States for college, smiles serenely, always calm in the presence of risk. Still, he concedes, “The accident rate in India is high.”

It’s a riveting drive, full of mind-bending sights. At one point, we pass a plump man by the side of the road who’s stacking bricks on top of a skinny woman’s head so she can carry them. As we drive deeper into the countryside, we see squat huts covered with grass—structures that seem to belong to another millennium. Finally, we reach our destination: a rural high school called JNV Silvassa.

Pabrai, one of the preeminent investors of his generation, has traveled here from his home in Irvine, California, to visit forty teenage girls. They are part of a program run by his charitable foundation, Dakshana, which educates gifted children from disadvantaged families across India. Dakshana is providing these girls with two years of free schooling to prepare them for the infamously difficult entrance exam to the Indian Institutes of Technology (IIT), a group of elite engineering colleges whose graduates are coveted by companies such as Microsoft and Google.

More than a million students apply to IIT each year, and less than 2 percent are accepted. But Dakshana has cracked the code. Over twelve years, 2,146 Dakshana scholars have won places at IIT—an acceptance rate of 62 percent. Pabrai views Dakshana (a Sanskrit word meaning “gift”) as a means of uplifting the most underprivileged segments of Indian society. Most Dakshana scholars come from rural families that survive on less than $2 a day. Many belong to lower castes, including “untouchables,” who have suffered centuries of discrimination.

Whenever Pabrai visits a Dakshana classroom, he breaks the ice by posing the same mathematical problem. Everyone who has solved it has subsequently won a place at IIT, so it’s a useful way to gauge the talent in the room. The question is so hard that almost nobody gets it right, and he expects none of the Silvassa students to meet the challenge. Nonetheless, he writes the problem in chalk on the blackboard at the front of the classroom: n is a prime number =5. Prove that n2 -1 is always divisible by 24. Then he leans back in a flimsy plastic chair while the girls attempt to divine the answer.I I wonder what they make of this flamboyant, larger-than-life creature—a tall, burly, balding moneyman with a luxuriant mustache, who’s dressed in a Dakshana sweatshirt and pink jeans.

After ten minutes, Pabrai asks, “Is anyone close?” A fifteen-year-old girl named Alisa says, “Sir, it’s only a theory.” Her tentativeness instills no confidence, but Pabrai invites her to the front of the classroom to show him her solution. She hands him a sheet of white paper and stands meekly before him, head bowed, awaiting judgment. Above her, a sign on the wall says, in charmingly garbled English, SO LONG AS YOU HAVE FAITH IN YOU, NOTHING WILL BE ABLE TO ABSTRACT YOU.

“It’s correct,” says Pabrai. He shakes Alisa’s hand and asks her to explain her answer to the class. He later tells me that she solved the problem so elegantly that she could rank in the top two hundred in the IIT exam. Pabrai tells her that she’s “a sure shot” to get in: “All you have to do is keep working hard.” I subsequently learn that Alisa is from the Ganjam district in the state of Odisha, one of India’s poorest districts, and was born into a caste that the government calls Other Backward Classes. In her previous school, she ranked first out of eighty students.

Pabrai asks Alisa to pose for a photograph with him. “You will forget about me,” he jokes, “but then I can tell you, ‘We have the picture!’” The girls laugh delightedly, but I find it hard not to cry. We have witnessed something magical: a child plucked from poverty has just proven that she has the mental firepower to propel herself and her family into prosperity. Given the environment in which she was raised and the odds against her, it’s a kind of miracle.

Later that morning, the students pepper Pabrai with questions. Finally, one plucks up the courage to ask what everyone must want to know: “Sir, how did you make so much money?”

Pabrai laughs and says, “I compound money.”

Searching for a way to illustrate the concept, he says, “I have a hero. His name is Warren Buffett. Who here has heard of Warren Buffett?” Not a single hand goes up. The room is a sea of blank faces. So he tells the students about his eighteen-year-old daughter, Momachi, and how she earned $4,800 in a summer job after high school. Pabrai invested that money for her in a retirement account. He asks the students to calculate what would happen if this modest nest egg was to grow by 15 percent a year for the next sixty years. “It’s doubling every five years. That’s twelve doubles,” he says. “Life is all about doubles.”

A minute later, the students have figured it out: in six decades, when Momachi is seventy-eight years old, her $4,800 will be worth more than $21 million. There is an air of wonder in the room at the awesome power of this mathematical phenomenon. “Are you going to forget about compounding?” asks Pabrai. And forty impoverished teenagers from rural India cry out in unison, “No, sir!”

Not so long ago, Mohnish Pabrai hadn’t heard of Warren Buffett, either. Raised in modest circumstances in India, he knew nothing about investing, Wall Street, or high finance. Born in 1964, he spent the first ten years of his life in Bombay (now Mumbai), where his parents rented a tiny suburban apartment for $20 a month. They later moved to New Delhi and Dubai.

The family was full of colorful characters. Pabrai’s grandfather was a famous magician, Gogia Pasha, who toured the world posing as a mysterious Egyptian. As a boy, Pabrai appeared with him onstage. His role was to hold an egg. Pabrai’s father, Om Pabrai, was an entrepreneur with an uncanny knack for founding companies that went bankrupt. Among his many ventures, he owned a jewelry factory, launched a radio station, and sold magic kits by mail. Like his son, he was an incorrigible optimist. But his businesses were fatally undercapitalized and overleveraged.

“I watched my parents losing everything multiple times,” says Pabrai. “And when I say losing everything, I mean not having enough money to buy groceries tomorrow, not having money to pay the rent.... I never want to go through that again, but what I saw is that it didn’t bother them. In fact, the biggest lesson I learned from them is that I didn’t see them get rattled by it. My father used to say, ‘You could put me naked on a rock and I will start a new business.’”

As a child, Pabrai performed poorly at school, once placing sixty-second in a class of sixty-five, and he suffered from low self-esteem. Then, in ninth grade, he was given an IQ test that changed his life. “I went to the guy who administered the test and said, ‘What does the result mean?’ He said, ‘Your IQ is at least one hundred eighty. You’re just not applying yourself.’ It was like someone whipping a horse and it starts. That was a big turning point. People have to be told they have something in them.”

After high school, he headed to Clemson University, in South Carolina. There he discovered the stock market. He took an investing class and averaged 106 percent going into the final. The professor tried to convince him to switch his major from computer engineering to finance. “I completely ignored his advice,” says Pabrai. “My perspective at that time was that all these fuckers in finance are dumbasses. They don’t know shit. And this super-easy class I’m taking in investing is one-tenth as hard as my engineering mechanics class.... So why would I want to go into a field with these losers?”

After college, Pabrai took a job at Tellabs. Then, in 1990, he launched a technology consulting company, TransTech, bankrolling it with $70,000 in credit card debt and $30,000 from his 401(k). Most people couldn’t stomach that level of risk, but he’s always had a gambling streak. Indeed, we once spent an entire flight discussing his adventures at the blackjack tables in Las Vegas, where he doggedly applies “an extremely boring” system developed by a card counter with a PhD in finance. Pabrai’s game plan is to make $1 million and get banned from the casinos. By 2020, he’d turned $3,000 into $150,000 and been banned for life by “one small, seedy casino.”

TransTech thrived, ultimately employing 160 people, and Pabrai set aside $1 million in savings by 1994. For the first time, he had a war chest to invest. That year, he bought One Up on Wall Street by Peter Lynch while killing time in Heathrow Airport. It was there that he first read about Buffett. He was astonished to learn that Berkshire Hathaway’s chairman and CEO had racked up investment returns of 31 percent annually over forty-four years, starting at the age of twenty. Thanks to the magic of compounding, this meant that an investment of $1 in 1950 would have grown to $144,523 by 1994. Pabrai reached a logical conclusion: Buffett was not a dumbass.

As a boy, Pabrai had heard a tale about an Indian who supposedly invented chess. He presented his game to the king, who offered him a reward. The game inventor requested one grain of rice for the first square of his chess board, two grains for the second square, four for the third, and so on, all the way to the sixty-fourth square. The king, who was arithmetically challenged, granted the request. Pabrai, who is not arithmetically challenged, says the king owed 18,446,744,073,709,551,615 grains of rice, now worth around $300 trillion. Remembering this story, Pabrai grasped instantly that Buffett had mastered the game of compounding. In forty-four years, he’d doubled his money eighteen times and was already well on his way to becoming the richest man on earth.

This set Pabrai thinking. What if he could figure out how Buffett picked stocks and could mimic his winning approach? Thus began what Pabrai describes as a “thirty-year game” to turn his $1 million into $1 billion. “The driver for me is not to get wealthy,” he says. “The driver is to win the game. It’s exactly the same driver for Warren, which is to show through the results that I did the best and I am the best because I played the game by the rules, fair and square, and I won.”

Pabrai’s approach to the challenge of becoming a billionaire holds important lessons for us all, not just as investors but in every area of life. He didn’t attempt to reinvent the wheel by, say, devising a new algorithm to exploit subtle pricing anomalies in the markets. Instead, he identified the most skillful player of this particular game, analyzed why he was so successful, then copied his approach with scrupulous attention to detail. Pabrai’s term for this process is cloning. We could also call it modeling, mimicry, or replication. But the terminology doesn’t matter. This is a technique for people who care more about winning than sounding respectable or highbrow.

By cloning Buffett—and later, his polymathic partner, Charlie Munger—Pabrai has become one of the leading investors of our time. From 2000 to 2018, his flagship hedge fund returned a staggering 1,204 percent versus 159 percent for the S&P 500 index. If you had invested $100,000 with him when he started managing money in July 1999, it would have grown to $1,826,500 (after fees and expenses) by March 31, 2018.II

Yet Pabrai’s success both as an investor and a philanthropist is built entirely on smart ideas that he has borrowed from others. “I’m a shameless copycat,” he says. “Everything in my life is cloned.... I have no original ideas.” Consciously, systematically, and with irrepressible delight, he has mined the minds of Buffett, Munger, and others not only for investment wisdom but for insights on how to manage his business, avoid mistakes, build his brand, give away money, approach relationships, structure his time, and construct a happy life.

Pabrai’s commitment to cloning raises an array of provocative questions. Is originality overrated? Instead of struggling to innovate, should most of us focus our energy on replicating what smarter and wiser people have already figured out? If cloning is such a powerful strategy for success, why don’t more people use it? Are there dangers to cloning? And how can we benefit from it while also being true to ourselves?

Over the last seven years, I’ve spent a great deal of time with Pabrai. I’ve joined him on multiple trips to Omaha for Berkshire’s annual meeting; I’ve interviewed him at his office in California; we’ve traveled together for five days in India, even sharing a bunk bed on an all-night train ride from Kota to Mumbai; and we’ve overeaten together everywhere from his local Korean barbecue restaurant to a roadside shack in Jaipur.

Along the way, I’ve come to appreciate the tremendous power of his method of reverse engineering, replicating, and often improving on other people’s successful strategies. Pabrai, the most relentless cloner I’ve ever encountered, has taken the art of appropriation to such an extreme that, paradoxically, it seems oddly original. His thinking has had a profound impact on me. In fact, the overarching purpose of this book is to share what I would call “ideas worth cloning.”

When Pabrai discovers a subject that fascinates him, he attacks it with obsessive fervor. In Buffett’s case, the available resources seemed limitless, including decades of letters to Berkshire’s shareholders and seminal books such as Roger Lowenstein’s Buffett: The Making of an American Capitalist. Pabrai devoured it all. He also began to make a pilgrimage each year to Omaha for Berkshire’s annual meeting, showing up without fail for more than twenty years.

Eventually, Pabrai would develop a personal relationship with Buffett. Through Buffett, he’d also become friends with Munger, who invites him for meals at his home in Los Angeles and games of bridge at his club. But in those early days, Pabrai’s knowledge came entirely from reading. And the more he read, the more convinced he became that Buffett, with Munger’s help, had laid out “the laws of investing,” which are as “fundamental as the laws of physics.”

Buffett’s style of investing seemed “so simple” and “so powerful” that Pabrai considered it the only way to invest. But when he studied other money managers, he was perplexed to find that almost none lived by Buffett’s laws. It was like meeting “an entire set of physicists who don’t believe in gravity.... Whether you believe in gravity or not, it’s fucking gonna pull you down!”

It was clear to Pabrai that most fund managers owned too many stocks, paid too much for them, and traded them too often. “These mutual funds are sitting there with one thousand positions or two hundred positions. How can you find two hundred companies that will all double? Then I look at what they own, and they own things that are trading at thirty times earnings.... I saw that they were all hosed.”

Pabrai had read a book by the management guru Tom Peters that told a cautionary tale of two self-service gas stations on opposite sides of the street. One prospers by providing high-quality service, such as cleaning windshields for free. The other does the bare minimum. What happens? Its customers inevitably drift to the better gas station. This error amazed Pabrai, since nothing could have been easier than simply to copy the superior strategy sitting in plain view.

“Humans have something weird in their DNA which prohibits them from adopting good ideas easily,” says Pabrai. “What I learned a long time back is, keep observing the world inside and outside your industry, and when you see someone doing something smart, force yourself to adopt it.” This sounds so obvious, even trite. But this one habit has played a decisive role in his success.

So, with the zeal of a true disciple, Pabrai committed to invest “the way Warren said I should.” Given that Buffett had averaged 31 percent a year, Pabrai naively assumed that it shouldn’t be hard to average 26 percent. At that rate, his $1 million would double every three years and hit $1 billion in thirty years. As a reminder of this compounding target, his license plate reads COMLB 26. Even if he missed by a mile, he expected to do fine; if, say, he averaged 16 percent a year, his $1 million would turn into $85.85 million in thirty years. Such is the glory of compounding.

Of course, he had no MBA from a fancy school such as Wharton or Columbia, no qualification as a certified financial analyst, no experience on Wall Street. But Pabrai, who regards his entire life as a game, expected his rigorous application of Buffett’s methodology to give him an edge over all of the fools who failed to follow the Sage of Omaha. “I want to play games that I know I can win,” says Pabrai. “So how do you win the game? You’ve got to play according to the rules. And the good news is, I’m playing against players who don’t even fucking know the rules.”

As Pabrai saw it, Buffett’s approach to stock picking grew out of three core concepts that he’d learned from Benjamin Graham, the patron saint of value investing, who taught Buffett at Columbia and later hired him. First, whenever you buy a stock, you’re purchasing a portion of an ongoing business with an underlying value, not just a piece of paper for speculators to trade.

Second, Graham viewed the market as a “voting machine,” not a “weighing machine,” which means that stock prices frequently fail to reflect the true value of these businesses. As Graham wrote in The Intelligent Investor,III it’s useful to think of the market as a manic-depressive who “often lets his enthusiasm or his fears run away with him.”

Third, you should buy a stock only when it’s selling for much less than your conservative estimate of its worth. The gap between a company’s intrinsic value and its stock price provides what Graham called a “margin of safety.”

But what does all of this mean in practical terms? Graham’s insight that Mr. Market is prone to irrational mood swings has profound implications. For master investors such as Buffett and Munger, the essence of the game is to detach themselves from the madness and watch dispassionately until the bipolar market provides them with what Munger calls “a mispriced gamble.” There are no prizes for frenetic activity. Rather, investing is mostly a matter of waiting for these rare moments when the odds of making money vastly outweigh the odds of losing it. As Buffett has said, “You don’t have to swing at everything—you can wait for your pitch. The problem when you’re a money manager is that your fans keep yelling, ‘Swing, you bum!’”

Sublimely indifferent to the cries of the crowd, Buffett can twiddle his thumbs for years. For example, he bought almost nothing from 1970 to 1972 when euphoric investors drove stocks to crazy valuations. Then, when the market crashed in 1973, he bought a major stake in the Washington Post Company, which he held for four decades. In his classic article “The Superinvestors of Graham-and-Doddsville,” Buffett wrote that the market valued the company at $80 million when “you could have sold the assets to any one of ten buyers for not less than $400 million.... You don’t try and buy businesses worth $83 million for $80 million. You leave yourself an enormous margin. When you build a bridge, you insist it can carry 30,000 pounds, but you only drive 10,000-pound trucks across it. And that same principle works in investing.”

In our hyperactive world, few people recognize the superiority of this slow and discerning strategy, which requires infrequent but decisive bursts of activity. Munger, a nonagenarian whom Pabrai considers “the brightest human” he’s ever met, embodies this approach. Munger once observed, “You have to be like a man standing with a spear next to a stream. Most of the time he’s doing nothing. When a fat juicy salmon swims by, the man spears it. Then he goes back to doing nothing. It may be six months before the next salmon goes by.”

Few money managers function this way. Instead, says Pabrai, they “place many bets, small bets, and frequent bets.” The trouble is, there aren’t enough compelling opportunities to justify all of this activity. So Pabrai, like his two idols, prefers to wait for the most succulent salmon. During a conversation in his office in Irvine, he says, “The number one skill in investing is patience—extreme patience.” When the market crashed in 2008, he made ten investments in two months. In more typical times, he bought just two stocks in 2011, three in 2012, and none in 2013.

In 2018, Pabrai’s offshore hedge fund owned no US stocks at all because nothing seemed cheap enough. Just think about that for a moment: out of roughly thirty-seven hundred companies listed on the major US exchanges, Pabrai couldn’t find a single irresistible bargain. Instead of settling for American stocks that seemed richly valued, he took his fishing spear to better-stocked waters in India, China, and South Korea. As Munger likes to say, there are two rules of fishing. Rule no. 1: “Fish where the fish are.” Rule no. 2: “Don’t forget rule no. 1.”

Then, in the spring of 2020, the US market crashed as the COVID-19 virus spread terror among investors. The retail industry was ravaged, with stores forced to close indefinitely and consumers required to stay home in lockdown mode. One company at the epicenter of uncertainty was Seritage Growth Properties, whose tenants included many retailers that could no longer afford to pay their rent. “The market hates all of this near-term noise and pain,” says Pabrai. He exploited the panic to buy a 13 percent stake in Seritage at exceptional prices, figuring that he’ll ultimately make ten times his money as fears recede and others recognize the value of its prime assets.IV

Buffett, Munger, and Pabrai are not alone in pursuing this strategy of extreme patience and extreme selectivity. Their elite cohort includes great investors such as Francis Chou, one of Canada’s most prominent fund managers. When I first interviewed him in 2014, Chou had 30 percent of his assets in cash and hadn’t made a significant stock purchase in years. “When there’s hardly anything to buy, you have to be very careful,” he told me. “You cannot force the issue. You just have to be patient, and the bargains will come to you.” He warned, “If you want to participate in the market all the time, then it’s a mug’s game and you’re going to lose.”

How long can he go without buying? “Oh, I can wait ten years—even longer,” Chou replied. In the meantime, he studies stocks that aren’t cheap enough to buy, hits balls at a golf range, and reads two hundred to four hundred pages a day. One technique that he uses to distance himself emotionally from the day-to-day drama of the market is to think of himself in the third person instead of the first person.

Like Chou, Pabrai has constructed a lifestyle that supports this heroically inactive investment strategy. When I visited his office in Irvine, he was dressed in shorts, sneakers, and a short-sleeved shirt. He looked less like an adrenaline-fueled stock jockey than a vacationer contemplating a lazy stroll on the beach. Cloning Buffett, who once showed him the blank pages of his little black diary, Pabrai keeps his calendar virtually empty so he can spend most of his time reading and studying companies. On a typical day at the office, he schedules a grand total of zero meetings and zero phone calls. One of his favorite quotes is from the philosopher Blaise Pascal: “All of humanity’s problems stem from man’s inability to sit quietly in a room alone.”

One challenge, says Pabrai, is that “large motors aren’t good at grinding away without resulting actions.” He thinks Berkshire Hathaway’s shareholders have profited immensely from Buffett’s passion for playing online bridge, since this mental distraction counteracts the “natural bias for action.” Pabrai plays online bridge, too, and he burns off energy by biking and playing racquetball. When there’s nothing to buy and no reason to sell, he can also direct more attention to his charitable foundation. He says it helps that his investment staff consists of a single person: him. “The moment you have people on your team, they’re going to want to act and do things, and then you’re hosed.” In most fields, a hunger for action is a virtue. But as Buffett said at Berkshire’s 1998 annual meeting, “We don’t get paid for activity, just for being right.”

Pabrai, a loner with a misanthropic streak, was purpose-built for the bizarrely lucrative discipline of sitting alone in a room and occasionally buying a mispriced stock. Back when he ran a tech company, he hired two industrial psychologists to profile him. They revealed how comically ill-suited he was to managing a large staff: “I’m not this nurturing leader who can have a bunch of weepies and nurture them and babysit them and all this other shit.” Investing felt more like a game of three-dimensional chess in which the outcome, crucially, depended solely on him.

One of Pabrai’s first stock picks was a tiny Indian technology company, Satyam Computer Services, which he bought in 1995. He understood the business, since he worked in the same industry, and the stock was “ultracheap.” Pabrai watched in wonder as it rose about 140 times in five years. He sold in 2000, when it was outrageously overvalued, and pocketed a $1.5 million profit. The late-nineties tech bubble then burst, and the stock dropped more than 80 percent. Amused by his good fortune, Pabrai cheerfully likens himself to Forrest Gump, who made a killing in “some kind of fruit company”—namely, Apple Computer.

Through a combination of luck and smarts, Pabrai turned his $1 million into $10 million in less than five years. Aware that he had more to learn, he wrote to Buffett offering to work for him for free. Buffett replied, “I’ve given a lot of thought to the optimal use of my time, and I simply do best operating by myself.” So Pabrai pursued Plan B. Several friends had profited from his stock tips, and they wanted him to manage their money. In 1999, he launched an investment partnership with $900,000 from eight people and $100,000 of his own. A year or so later, he sold his technology consulting company, TransTech, for $6 million so that he could focus exclusively on investing.

From 1956 to 1969, Buffett had managed investment partnerships with spectacular success. So Pabrai did what came naturally: he cloned every detail of Buffett’s partnership model. For example, Buffett charged no annual management fee but collected a performance fee of 25 percent of any profits over an annual “hurdle” of 6 percent. If he made a return of 6 percent or less, he didn’t get paid a dime. But outsize returns would be richly rewarded. Pabrai adopted the same fee structure, reasoning that this alignment of interests made it an “honorable way to do business.”V

As it happens, Buffett had borrowed this fee structure from Graham, who used it in the 1920s. No stranger to cloning, Buffett has said, “If you learn, basically, from other people, you don’t have to get too many ideas on your own. You can just apply the best of what you see.” Part of the challenge is to discern the best and jettison the rest, instead of blindly cloning everything. For example, Graham was a devout believer in diversification, whereas Buffett got rich by focusing his bets on a much smaller number of undervalued stocks. This is an important point. Buffett borrowed liberally, but he adapted and refined Graham’s practices to suit his