Mohnish Pabrai’s Playbook: Reciprocation, Mental Models, and Circle of Competence

“I think mental models are really important. I think they give you unfair advantage in life. It’s always good to have an unfair advantage.”

At the Ashoka Investment Club, Mohnish Pabrai wasted no time diving into the core of his investing philosophy. “A lot of mental models will come from direct experience,” he said, urging students to “become very intense about reading it and imbibing it.”

And if you want a shortcut?

“You could jumpstart your journey towards having a latticework of mental models by reading Munger’s essay, ‘The 25 Causes of Human Misjudgment.’” It’s a speech Pabrai returns to annually. “Every time I read it I find stuff that I’m sure I’m reading for the first time.”

That’s not the only behavioral edge he uses. Reciprocation, he said, is hardcoded into human psychology: “I send you a $30 cross pen, you send me $10 million. Because they can’t calibrate.”

“Most of my competitors or other funds will… send them stuff online.” Pabrai? “We send them a physical package… a book… a very nice cross pen… they are obliged to me.”

But mental models alone aren’t enough. On cloning he said, “Just because someone else is doing it doesn’t mean that the opportunity is gone”. He added, “Most humans feel that when they create a company… they have to do something new.”

“The reality is… there is room for multiple participants to provide the same product or service.” Just look at Microsoft: “Windows is copied from Apple. Word is copied from WordPerfect. Excel is copied from Lotus. Bing is copied from Google.”

“Everything that has worked for Microsoft… has been from someone else.”

This idea is central to Pabrai’s own fund: “The Buffett Partnerships… were run from 1956 to 1969… I could not find a single case of anyone who had set up a partnership or an investment fund following Buffett’s rules of no management fee.”

“Well, the Indian guy is going to go touch it and take it because it’s just sitting there.”

Even stock picking, he believes, should be filtered through cloning: “Let’s say you look at [20 great investors’] top two or three holdings… you’re now looking at 40 to 60 stocks.” The key question then becomes: “Is this stock in my circle of competence?”

And once you find a great business?

“Do not sell a great business when it’s fully priced. Do not even sell it when it’s overpriced… just sit on it until it just becomes completely egregious.”

“We don’t need too many insights. We don’t need to understand too many things. What we do need is look for things that make no sense. Look for anomalies.”

“Try to answer the question: what is going on here?”

You can watch the entire session here: