Mohnish Pabrai: Spawner Businesses Like Tencent Are Best

Mohnish Pabrai at Brown University: Spawner Businesses Like Tencent Are Best & Key Takeaways

Mohnish Pabrai shared that spawner businesses are the best way to allocate capital and his advice for anyone who would like to start a fund. I share my key takeaways of his talk with Brown University students on August 2, 2021.

The highlights include Mohnish’s thoughts on great investors like Warren Buffett and Charlie Munger, the investment climate, and what you should do before you start an investment fund.

My Key Takeaways from when Mohnish spoke with Brown University students:
1 – Best ways to allocate capital as a business
2 – Spawners like Tencent are monopoly-like businesses
3 – Foreign investments and EdTech regulation
4 – Payment Systems are a moving target
5 – Coca Cola Bottler Moats
6 – The Hunt of Investing
7 – Finding winning tickets
-Upanishads: Your desire is your destiny
8 – Go deeper than stock screeners
9 – So You Wanna Start A Fund
10 – Fiat Chrysler & Ferrari
11 – Mohnish vs Guy Spier Contest & Recommended Books

To expand on Mohnish’s top 3 capital allocation strategies for businesses:
1) Have an internal engine like Tencent that spawns businesses that generate high returns on equity
2) If you can’t do that, then buy or invest in other businesses or assets like Berkshire Hathaway does
3) Then do dividends or share buybacks. Mastercard often does buybacks, which can be extremely powerful if they’re done at modest valuations.

Berkshire Hathaway has only issued a dividend (almost by mistake) one time when Warren Buffett was in the bathroom. Berkshire is a proven example of a company performing better without issuing dividends since it’s a compounding machine.

Spawners lead to new businesses spawning from the original. The India Energy Exchange spawned the India Gas Exchange which both have great operating margins and profitability, but as they scale, they have 2 choices to either 1) give dividends out to shareholders and/or 2) buyback shares.

Tencent has a high return on equity biz dev engine that reinvests the tens of billions of free cash flows into thoughtful private deals, and they tend not to want to have large stakes in order to leave incentives for team. Their engine feeds their business development arm and that’s been very successful in leading to 15-20 unicorns.

Berkshire for 40 years took cash flows from See’s Candies and others and invested it in mostly acquisitions, while Amazon invested in internal projects. Mohnish said that “the prowess to redeploy cash is rare.”

Mohnish commented that the large tech players in China are of very high quality and it is actually healthy for the country to have a robust competitive environment. Many companies didn’t break any laws but had been operating in what was acceptable in a wild west type of environment until the government decided what was best for the economic ecosystem.

Coca Cola bottlers are given territorial monopoly, but most of capitalism is dog eat dog and it’s not common for businesses to have moats that are wide and deep that can endure for a long time with high returns on equity.

If you want to start a fund, you have to love the hunt and successfully compound over many years (such as prove that you have been able generate 50% a year for 10 years). You should be independently wealthy before you start an investment fund, Mohnish asserts. He quoted Buffett in saying, if you have great track record, people will swim in shark-infested waters to get you to manage their money.

Mohnish described how Warren Buffett has been practicing finding winning tickets throughout his lifetime, whether it was at the Ak-sar-ben Race Track, or reading the Moody’s manual twice, or going through the Japan Company Handbook. He just loved the hunt so much, but over time less investments move the needle for successful investors. Instead of being able to compound 50%, he cites Joel Greenblatt, you might be happy with settling for 20-30% annual returns.

He shares this quote by the Upanishads: “You are what your deepest desire is. As is your desire, so is your intention. As is your intention, so is your will. As is your will, so is your deed. As is your deed, so is your destiny.”

Mohnish regrets selling Ferrari as every 100 Ferraris made would have benefited Pabrai Fund investors. For too long he was biased toward the PE of 1 companies, Mohnish laments. He focuses more on the compounders now.

Mohnish said “the one thing to understand about humans is most humans have no idea why they are on earth and they are looking for a mission,” so he told his initial investors their mission is to bring assets to Pabrai Funds and it worked as Mohnish is managing around $750 million now.

If you’re interested in learning how to take control of your finances and start becoming an investor like Warren Buffett, check out my free PDF guide.

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