Mohnish Pabrai is a well known value investor. At his investor conference, the following interchange with a young investor took place. Notice that he mentions a lemonade stand and Joel Greenblatt’s now famous Little Book that Beats the Market.
The Q&A session at the recent Pabrai Funds annual meeting featured the following priceless exchange between the value investing guru and a boy sitting in the auditorium with his father:
Boy: If a person my age is thinking of becoming an investor , what are the main things I need to do to prepare?
Pabrai: How old are you?
Pabrai: I was two and a half times your age when I got to that question, so you’ve got a solid head start. Well, you’re at the meeting, so this is a good place for you to hang out. Are you having a good time?
Pabrai: Have you been to Omaha [meaning, the Berkshire Hathaway annual meeting – PD]?
Pabrai: Are you planning to go next year?
Boy: I don’t know.
Pabrai: Make sure your Dad takes you. Do you have a brokerage account?
Pabrai: How is it invested? Please get this boy a microphone – we’re going to have an extended conversation.
Boy: Wells Fargo…Bank of America…Fairfax…and Berkshire Hathaway.
Pabrai: That’s four stocks. Is that enough? Do you know about the companies?
Boy: Not too much ‘cause my Dad does it, but he taught me about it.
Pabrai: Why not buy the things that you use? Like, have you seen the iWatch?
Pabrai: Do you like the iWatch? Are you going to get one?
Boy: Probably not.
Pabrai: What about the iPhone 6?
Boy (checks with Dad): No.
(Laughter from the audience)
Pabrai: One of the first things I tell people is, if you want to learn about investing, you want to open an account and make real investments, because that’s when it becomes real. I would suggest, for the stocks you buy in the future for your portfolio, you make the decision. You can consult your Dad, but you don’t need to agree with him. If he tells you, “You should buy it,” you should say, “Thanks for the advice, but I’ll make my own decisions.” Is that okay, Dad?
Dad: That’s fine.
Pabrai: Make your own decisions in the future, and before you buy stocks, understand the business. Have discussions with your Dad and others about the economics of the business, which is how much could you buy the whole business for if you had unlimited cash, and then how much does it produce in earnings, in cash. It’s the same economics as a lemonade stand. If you put up a lemonade stand and you’re buying everything, it might cost $25, and if at the end of the day you end up with $60 that’s a good business, but if you end up with $20 that’s not such a good business. So focus on that. Your Dad can probably direct you towards books that might make sense. One book I would suggest is called The Little Book That Beats the Market. Have you read that book?
Pabrai: Is it at home?
Boy (checks with Dad): Yes.
Pabrai: Maybe you could start by reading that book. Joel Greenblatt actually wrote it so a person of your age could understand quite a bit of it. Beyond that I would say to start reading the annual reports, like Wells Fargo, Bank of America, Fairfax…start reading them and when you come to something you don’t understand, ask questions or go to Google GOOGL -0.24% and ask questions. You’ve got a significant head start. Just continue that and keep reading. Warren Buffett says that if you were told that you could have any car in the world, but the rule was that you could never change that car, so the car you decide to get today would be the car you would keep for your whole life, you couldn’t sell it, so if that were the case, would you maintain that car well? Like, if there were some repairs that had to be done, you would make those repairs, and you’d keep it in good shape, right? Because it would have to last one hundred years.
Pabrai: He says it’s the same thing with your brain. You’ve got one brain, and you don’t get to replace it, and it has to last your whole lifetime. The best thing you can do is keep feeding more and more information and synthesizing more information into that brain. The earlier you start doing it, the greater your advantage. If you start at the age of twelve, it will be of huge value, because from twelve to nineteen is the period of greatest creativity. By the time you go to college it’s all over. So you can really do exceptionally well. Thank you.
Boy: Thank you.