Mohnish Pabrai on Value Investing Mindset & Process

Pabrai explains value investing foundation: home realtor would quote $200K ±$5K over entire year, but IBM stock swings from $100-200 in same period - not due to business performance change but auction-driven sentiment swings. 'Animal spirits take over' or 'people just hate something.' Businesses 'very rarely appropriately priced - usually all over the place.'

Pabrai recounts classic Buffett teaching example: Western Insurance with $15M market cap but $25M annual earnings plus $30M cash with zero debt. 'Numbers make no sense' - obvious mispricing. Used this with MBA students visiting Omaha. Demonstrates auction-driven markets 'periodically get weirdness in your favor.'

Pabrai uses Seinfeld's David Puddy character (staring at airplane seat doing nothing, causing Elaine to break up) as investor ideal. 'If you can be like putty...and find western insurance and go back to just looking at the seat in front of you if you get excited about watching paint dry...this is the business for you.' Extreme patience is 'biggest skill that's really hard for many people.'

Pabrai underwent psychological testing revealing specific game player type: (1) prefers individual sports (tennis, chess, bridge) over team sports (soccer) where can control outcome, (2) only plays single-player games where has edge and knows can win, (3) rules must be well understood (mathematics, probabilities). Bridge perfect fit: always been good at math, bridge is 'mathematics probabilities all that.'

Pabrai's most extreme example: Turkey's largest warehouse operator, 13M sq ft 99% leased to Ikea/Amazon/CarFour on 10-year leases. Portfolio worth $1B on 'bad day,' $200M debt, so $800M net value. Market cap: $20M - paying '3 cents on the dollar.' After checking they weren't crooks and visiting warehouses, 'went all in.' Now owns 1/3 of business. Went $20M→$140M in 18 months, 'still cheap.'

Pabrai explains Ben Graham principle: market is 'voting machine in near term, weighing machine in long term' - 'watch paint dry in meanwhile.' Turkish warehouse sat at $20M cap for 10+ years while value grew. Father-son don't understand street, no IR department, no investor deck. When asked why not create deck, they said 'why...we are fine with the business.' Were surprised price went up - wanted freedom to keep buying cheap.

Pabrai recognizes father-son as 'exceptional capital allocators' - won't invest in anything without 1-2 year payback, targeting 40-50% ROEs. German wanted to lease warehouse roofs for solar. They analyzed economics, told him 'we don't need to lease it to you,' did it themselves. 4-year equity payback 'the fastest that's the failure for them because they want it back in two years' but financed it anyway. Solar business now worth $100-200M.

Pabrai diplomatically compares the two: Buffett 'very narrow but loves the compounding game,' Munger 'has interest in many games' beyond making money. Key difference: Buffett has 'layer of diplomacy...assumes whatever he tells you gets reported in new york times.' Munger 'doesn't care if it gets reported...he will still tell you what it is.' Enjoyed lunch with Munger's secretary Debbie Bosanek even more - got unfiltered insights into Buffett's routines.

Pabrai got best insights from lunches with Munger's secretary Debbie Bosanek ('way better than the lunches with lunch'). Asked 'between us girls' about Buffett's cell phone. Flip phone sits in her desk drawer, he doesn't know how to use it - only knows to open when rings. She's only one with number, patches everyone through. During financial crisis, Lehman/Barclays left voicemail about deal - 'he got it like three years later.'