- In reality, entrepreneurs do everything they can to minimize risk. The first thing you want to do is define the market
that you're going after. That it's not the size of the circle that matters but knowing its boundaries. So if you don't truly think it's something that you would yourself be a customer of, don't try to pitch it. The single biggest advantage a value investor has is not IQ. It's patience and waiting. Avoid the use of spreadsheets and avoid precision thinking. And that's no fun, it's not fun to hit your head against a brick wall. So what you want is a business that has a deep moat with
lots of piranha in it, and that's getting deeper by the day. I'm flexible, I think it's very important in investing to be a learning machine. Pay a lot of close attention to the feedback you get from the people who are listening to the pitch. - He's an Indian-American investor, businessman, and philanthropist. He sold his company TransTech Inc. in 2000 for twenty million dollars. Today he is a managing partner
of Pabrai Investment Funds. He's Mohnish Pabrai and here are his top ten rules for success. (musical zoom) - People think that
entrepreneurs take risk and they get rewarded
because they take risk. In reality, entrepreneurs do everything they can to minimize risk. They're not interested in taking risks. They want free lunches, and they go after free lunches, and so if you study any number of entrepreneurs, from Ray Kroc to Herb Schultz at Starbucks to even Buffett and Munger and so on, what you'll find is that they have repeatedly made bets
which are low risk bets which have high return possibilities. So they are not going
high risk, high return. They're going low risk, high return. And even with Bill Gates, for example, the total amount of capital that ever went into Microsoft was less than 30 thousand between the time it started and today. That's a total amount of capital that went into the company, so Microsoft, you cannot say
was a high risk venture, because there was no capital deployed. But it had high uncertainty. Bill Gates could have gone bankrupt or Bill Gates could have ended up the wealthiest person on the Forbes 400. And he ended up at the extreme end of the bell curve, and that's fine, but he did not take risk to get there. He was comfortable with uncertainty, so entrepreneurs are great at dealing with uncertainty and also very good at minimizing risk, that's the classic, great entrepreneur. If you look at any market, any product, any market, they will typically be three or four players at the most that control 80 percent of that market, and it could be making airplanes, or it could be making hair clips, you can pretty much go across the board. It could be making
software, anything you want, and I found that stunning, and if you invert that, so one of my heroes Charlie Munger says, every time you encounter something always invert the logic to try to get some other place. So if you invert that principle, first of all if you agree with that principle, then the inversion will be that if you're starting a business and you say that this is a
ten billion dollar market and I just need ten percent of it and I'll be a billion dollar company well, right there, you're off, because the inversion will be that if you're going after a market, your approach has to be, how do I get sixty percent of that market, and so if your starting point is that I'm going to take two
percent of this market or five percent of this market, what you have not done is you have not segmented that market properly. And that is a fatal flaw, so the first thing you want to do is define the market that you're going after, and after you defined it, if you don't get to very clear cut game plan, to get 50, 60 percent market share, then don't even try, because either you have not done your job correctly or you don't have anything to offer that is going to be that
compelling to people. I think another very important trait for successful investing is to stay within your
circle of competence. So I think Buffett always says that it's not the size of
the circle that matters but knowing its boundaries
is absolutely critical, and Charlie Munger talks about that he used a couple of examples. One is, he says, that if in a small town you bought the Mcdonalds franchise, you bought the Ford dealership-- - [Man] Gas station? - Ford dealership, gas
station not so good. And gas station we'll
leave for the Patels, low cost operations, okay, and then you want the best classy office building and you want the best
residential buidling, so if you got these four assets, and you don't need to own them completely, you could own 20 percent of each of them. So his perspective was
that if in Peoria, Illinois you own these four assets and you just sat on them for your whole life, you would end up probably quite wealthy. And if so you think about it from a modern portfolio theory point of view, you would say, well,
you're not diversified, everything is in one geography,
et cetera, et cetera. Yeah, but the odds still work out. And in fact he has a friend
here in, near Stanford, John Arrillaga, who,
all he did, was bought real estate within a mile
of the Stanford campus. And I think Arrillaga is a billionaire. And so what is Arrillaga's
circle of competence? It's this small, so the size
of the circle is not relevant. Staying inside the circle
is very fundamental. Do not try to sell something
that you wouldn't buy yourself. So if you don't truly think it's something that you would yourself be a customer of, don't try to pitch it, don't be a used car salesman, so please make sure that whatever you're trying to come up with is compelling enough that you would yourself be deeply interested in buying that product. So Charlie Munger likes to say that you don't make money when you buy stocks and you don't make money
when you sell stocks. You make money by waiting, and so the biggest, the
single biggest advantage a value investor has is not IQ. It's patience, and waiting, waiting for the right pitch, and waiting for many years for the right pitch. - So what's that saying of Pascal that you like about just sitting, and? - Yeah, all man's misery stems from his inability to sit in a
room alone and do nothing, and all I do to adapt Pascal is all investment managers' miseries stem from their inability to sit alone in a room and do nothing. The way to really look
at investing is that, when you look at, again,
a business like Google or Microsoft or BugShare, you really have to put yourself in the shoes of the people running the business and you do ask yourself how
do they run the business. Do they run it through Excel spreadsheets, or how do they run it? And I would bet that most of these businesses are run in a manner where the founders or CEOs are really looking at kind of three to five variables that dominate most of their thinking and outcome and direction, and so as an investor you've got to hone in on those same variables, so if you can get to the same variables, if you want to invest in Microsoft, you can get to the same variables that they are using, and if you're Google, you get the same variables that they are using, then you are getting very close to trying to figure out what
the business might do and from there you can extrapolate whether it's underpriced
or fairly priced and so on. So that's all I would suggest is avoid the use of spreadsheets and avoid precision thinking. The stronger the marketing, the weaker the sales engine
can be, so I do not consider myself a good salesman. I consider myself a poor salesman. I consider myself a pretty
strong marketing person. And so if you have done
your marketing homework, you can be a leper and make sales. And a standing example of that is someone in front of you, because basically my approach to sales would be 180 degrees approach to your traditional used car salesman schmoozing model and golf
courses and all that, none of that is of much interest to me. So the stronger the marketing, the less important the
sales engine becomes. So it is very important in my opinion to spend incredible amounts of time on the marketing aspect of the business. Because if you don't spend that time on that aspect of it, you will spend 50 extra that time on that sales end and hit your head against a brick wall. And that's no fun, it's not fun to hit your head against a brick wall. So it's good not to go
there, so I just feel the stronger the marketing,
the weaker the sales. - Now, quickly define moats in terms of a business that keeps competition away. - Well, you know, if you talk to Michael Porter, he would give you five books on what is meant by strategy and competitor advantage
and durable competitor advantage, and if you talk to Warren and Charlie they would just say it is a moat, and they'd
break it down to one word, but basically it's the
ability of a business to have some type of an
enduring competitive advantage that allows it to earn
a better-than-average rate of return over an
extended period of time, and so some businesses have narrow moats, some have broad moats, some have moats that are deep but get filled up pretty quickly, so what you want is a business that has a deep moat with lots of piranha in it and that's getting deeper by the day. That's a great business. I'm flexible, I think it's very important in investing
to be a learning machine, and to have flexibility and to be willing to look at the opportunity set and decide whether you
need to do anything at all or what is the best thing you can do based on the available opportunities. Let's say you have come up with a compelling value proposition. Let's say you're absolutely truthful, you truly understand it, and your pitch is truthful and all of that. What I have found is that basically whatever you come up with, and you've come up with it in your lab and thinking about it, talk with friends, looks great, the service,
the product looks great. The real litmus test of that is when you put it in front of customers. So when you go out and make your pitch, your kit and ad and whatever else, and the very, very important thing for a entrepreneur to do is when
they put that out there be very, very, pay a
lot of close attention to the feedback you get from the people who are listening to the pitch, and this is very important
at the front end. Because what is probably the case is that whatever you came
up with, is off base. It's not exactly what your market wants. And I'll give you an example. There's a friend of mine in Chicago and he started this company
started InstallShield, and many of you might be familiar with the company and you're installing different windows products,
InstallShield comes up, and Viresh basically was like, I think 19 years old or something when he came up with InstallShield, and he said, he went to a trade show, he was going to go to a trade show, some software tools trade show, and he was trying to do a whole bunch of different things, he was trying to GoogleMaps 30 years ago, when there was no way that the computing could support
that sort of thing. But he went to this trade show and he had created this kind of trade show booth with
the different products and he had seven products, seven different tools that he was pitching, and it wasn't balancing on that booth 'cause he wanted to put
four bullets on one side and four bullets on the other and he was at like four and three so it was really bothering him and so, as an afterthought,
this little tool he had was just to install software, for installing software
was his eighth bullet. He just put that at the end, the bottom, and it will install a
software installation tool. And through all of the whole week goes by, I think it was just a couple of days he was at this trade show booth and all of these people are coming by and all this stuff going on, and there was a guy across the aisle from him who spent two days looking
at those eight things because he was in the software business and after two days he came up to him and said you know, that product, I am interested in that product. And this product did not exist, it was in Viresh's mind, and so this was one of the only leads he'd picked up at the show, so he went back and created the product and gave it to the guy, and then he found that other people wanted it, and so on, and so forth. So bottom line is, if you study startups, you will find over and over that what actually works is not
what you actually came up with. What actually works is that, you know, some tangent or some kind
of, you mentioned something to a customer in passing
and then they grab onto that, say I want that, and you say oh, he's unusual, he wants unusual thing, I'll still keep my core pitch: no. What you really have to do is pay really close attention
to what is going on. - Thank you so much for watching. I made this video because
Caesar V asked me to. So if there's a famous entrepreneur that you want me to profile next, leave it in the comments below and I'll see what I can do. I'd also love to now which of the top ten rules had the biggest
impact on you and why. Leave it in the comments, I'll join in the discussion, thank
you so much for watching. Continue to believe. I'll see you soon.
