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 n 2 -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!" How to Turn $1 Million into $1 Billion 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 bou.