From: myfirstmillionpod
The fields of entrepreneurship and investing, while seemingly distinct, share fundamental cognitive processes and philosophical underpinnings. Both disciplines draw upon similar parts of the brain and often benefit from a shared mindset [01:49:03].
Shared Foundations
According to Monish Pabrai, referencing Warren Buffett, there’s a reciprocal relationship: “I’m a better investor because I’m a businessman and I’m a better businessman because I’m an investor” [01:56:06]. This highlights a synergy where practical business experience informs investment decisions, and an investor’s perspective enhances business acumen.
A key commonality between entrepreneurs and value investors is the aim to minimize risk [03:50:00]. They both strive for “low risk, high return” opportunities, distinct from the “high risk, high return” model often seen in venture-backed businesses [03:55:00].
The Role of Early Experience
The human brain undergoes significant specialization between the ages of 11 and 20 [03:11:00]. This period is critical for developing expertise. Many successful individuals, including Warren Buffett and Bill Gates, began specializing in their respective fields during this formative window [03:33:00].
Warren Buffett’s early entrepreneurship included a variety of ventures before he was 17:
- Buying and selling Cokes at a markup [02:22:00].
- Publishing horse racing tips [04:48:00].
- Collecting discarded winning tickets at the racetrack [04:57:00].
- Co-founding the “Wilson Coin Operated Amusement Company” to operate pinball machines in barber shops [06:14:00].
- Fixing and renting out a Rolls-Royce for weddings [07:54:00].
Pabrai emphasizes the importance of early business exposure, jokingly asking if a CEO ran a “lemonade stand when they were 12” as an indicator of future business acumen [00:55:00]. These early experiences, even small ones, teach valuable lessons from entrepreneurship about business [26:31:00].
The Entrepreneurial Journey to Investing
Monish Pabrai’s own path exemplifies the transition from entrepreneur to investor. Despite his father’s significant entrepreneurial background, Pabrai initially resisted becoming an entrepreneur due to the “turmoil [and] trauma” he witnessed in his childhood businesses [28:57:00]. His father, however, convinced him of the lack of impact in a large corporation and the need to find an “offering gap” [29:36:00].
Pabrai’s first business venture was an IT services company, started with 70,000 in credit card debt [30:35:00]. He minimized risk by working on his business outside of his full-time job for nine months until it was cash flow positive [31:07:07]. This strategic approach to minimizing personal risk aligns with the careful approach of entrepreneurs who are not venture-backed [35:58:00].
After building a successful IT business, Pabrai’s interest shifted from the daily operations to the strategic investment strategies of the business. He realized that investing allowed him to focus more on strategy (80% of his time) rather than the “blocking and tackling” (3-5% for business) of running a company [45:41:00].
The Advantage of Public Markets
Pabrai prefers public markets for investing due to their “irrationality,” which creates mispricing opportunities [01:19:02]. Unlike private markets where intelligent buyers meet intelligent sellers, public markets often present situations where a company’s stock price fluctuates significantly from its intrinsic value [01:18:32].
An example of this is the case of Racas, a Turkish warehouse operator, whose market capitalization was 800 million [01:47:59]. This extreme undervaluation, driven by the overall sentiment towards Turkey, allowed Pabrai to acquire a significant stake for a fraction of its true value [01:50:04].
Key Investment Philosophies for Entrepreneurs
Entrepreneurs possess an inherent advantage in becoming great investors if they make a few adjustments [01:29:59].
Heads I Win, Tails I Don’t Lose Much
This philosophy, learned from the Patel community’s approach to business, seeks asymmetric bets where the odds are heavily in one’s favor [01:11:30]. For example, Pabrai’s first business venture had limited downside (return to previous job, bankruptcy option) but significant upside [01:12:17]. Similarly, in an investment like Ipco, a Canadian steel company, the purchase price was justified by two years of guaranteed earnings, effectively acquiring the company’s assets for free [01:13:50].
Inactivity and Patience
Warren Buffett’s success, despite making only 12 “needle-moving” investment decisions in 58 years, highlights the importance of holding onto great businesses for the long term [01:30:40]. The key is not the “buy decision” but the “paint drying decision” – the patience to remain inactive once a good investment is made [01:33:05]. Investors should be like the character who can happily stare at the back of an airplane seat for hours [02:21:51].
Finding Hated and Unloved Opportunities
Pabrai actively seeks out industries or companies that are “hated and unloved” because they are often mispriced [01:24:12]. His investment in the coal industry, despite widespread aversion, exemplifies this strategy. When the market is fearful, that’s when a value investor becomes greedy [01:38:09].
The Power of Compounding and Starting Early
Compounding is crucial in investing, driven by starting capital, annualized return rate, and the length of the runway [01:24:51]. The “rule of 72” helps estimate how long it takes for an investment to double [01:25:05]. Starting early, even with small amounts in a low-cost index fund, can lead to substantial wealth over decades [01:27:04].
Conclusion
The journey from entrepreneur to investor, or integrating entrepreneurial thinking into investing, provides a powerful advantage. The ability to understand businesses deeply, minimize risk, exercise patience, and seek out undervalued opportunities are traits that bridge both worlds, leading to significant financial success.