Mohnish Pabrai: What I've Learned From Warren and Charlie

One of the best things about Berkshire Hathaway's Warren Buffett and Charlie Munger is how willing they are to share their thoughts with the public. From shareholder meetings to CNBC appearances to annual letters, the duo is more open about their views on investing, politics, and life than perhaps any other great investor.

But what would you learn that no one else knows if you had the chance to sit down one-on-one with Warren and Charlie? Last month, I asked someone who has done just that: value investor Mohnish Pabrai. In 2007, Pabrai and a colleague paid $650,000 for a lunch with Warren (proceeds went to charity) and followed up with a private lunch with Munger.

Here's what Pabrai learned from Warren and Charlie (transcript follows):

Morgan Housel: You've had lunch with Warren. You've also had lunch with Charlie Munger. What have you learned from the two of them that you did not know from public information before you met with them personally?

Mohnish Pabrai: Well, I think what happens is that certainly with both of them, there is a tremendous amount in the public domain. But I think when I met Warren for lunch with my family, first of all, within about five minutes, he puts you at ease, and you think you're having lunch with your grandfather, which is great. But I think he's very cognizant of the fact that it's an important event for the people who are attending, and he wants to deliver value at that lunch. So anytime you would ask him a question, he would answer it in a manner where there was tremendous learning. So I'll give you an example. I asked Warren a question about Rick Guerin. When Charlie and Warren had started out, there were three of them. It was Charlie, Warren, and then the third guy, Rick Guerin, and they used to make investments together. They ran separate funds, but they used to work together. In fact, even when they did the See's deal, Rick, Charlie, and Warren had interviewed Chuck Huggins to be the CEO together. The three of them were firing questions to him together to figure out whether he was the guy.

Then Rick Guerin pretty much disappeared off the map. I've met Rick recently, but he disappeared off the map, so I asked Warren, are you in touch with Rick, and what happened to Rick? And Warren said, yes, he's very much in touch with him. And he said, Charlie and I always knew that you would become incredibly wealthy. And he said, we were not in a hurry to get wealthy; we knew it would happen. He said, Rick was just as smart as us, but he was in a hurry. And so actually what happened -- some of this is public -- was that in the '73, '74 downturn, Rick was levered with margin loans. And the stock market went down almost 70% in those two years, and so he got margin calls out the yin-yang, and he sold his Berkshire stock to Warren. Warren actually said, I bought Rick's Berkshire stock at under $40 apiece, and so Rick was forced to sell shares at ... $40 apiece because he was levered.

And then Warren went a step further. He said that if you're even a slightly above-average investor who spends less than they earn, over a lifetime you cannot help but get rich if you are patient. And so the lesson. My question was, what happened to Rick? The lesson was, don't use leverage, right? And be patient. These are attributes he's talked about plenty, but I would say that it got seared in pretty solidly after hearing the format in which he put it.

So I think that there were many things that he mentioned during that lunch which you would think, yeah, of course, it's in the public domain, but I think just hearing him in the context, and what got highlighted for me at the lunch, was what is very important to Warren right up there in his brain and what is less important. So those are things that got highlighted.

And with Charlie, I think he's also been a tremendous -- I would just say clarity of thought. I think one time I was having dinner with Charlie, and he mentioned that if an investor did just three things -- and I don't think Charlie's talked about this publicly -- but he said if an investor just did three things, the end results would be vastly better than the rest. And he said one is carefully look at what the other great investors have done. So, in fact, Charlie was endorsing copying off the 13Fs, right? So he said look at what other great minds are doing.

And the second thing he said is, look at the cannibals. And what he meant by "look at the cannibals" is, look carefully at the businesses that are buying back huge amounts of their stock. Because they're eating themselves away, so he called them the cannibals.

And the third is, he said, carefully study spinoffs. Of course, you know Joel Greenblatt has a whole book on spinoffs: You Can Be a Stock Market Genius Too. And so I found it interesting that Charlie basically said that investment operation that focused on these three attributes would do exceedingly well.

The article originally appeared on Fool.com.

Morgan Housel owns shares of Berkshire. The Motley Fool recommends Berkshire Hathaway. The Motley Fool owns shares of Berkshire Hathaway. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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