Watch This Before You Invest Another Dollar

If you bought the S&P when the P/E ratio was 23, your annualized return over the next 10 years was between 2 and -2.

That's all you have to know.

Buffett's made at least 400 investment decisions.

He's saying 12 are the ones that mattered.

The god of investing has a 4% hit rate.

Investing is an infinite game.

You don't really win or lose.

The players just decide to drop out.

Don't be such a freaking idiot.

The riskiest thing in the world is the belief that there's no risk.

When the time comes to buy, you won't want to.

If I said, what's the number one trait that makes a great investor?

What comes to mind?

Um,

so let's play a game.

You're my coach.

You're my investing coach.

Let's say, and I have $10,000 and I wanna turn it into a million, right?

Podcast called My First Million.

I wanna go from 10K to a million.

So that's 100x.

How would I take 10K and turn it into a million?

The thing about investing is that opportunities are not going to show up just because you have the cash.

So I would make some tweaks to your thinking first about the 10K.

So I would say, okay, the 10K is a good starting point, But what I also want you to do separately from that is have a day job.

Yeah.

Okay.

And I want you to spend less than you're earning.

And I want you to take the $10K and I also want you to take your annual savings, maybe that's $5,000, $10,000 a year or whatever it is.

And normally I would say put it into an index, right?

The index, like the S&P, is overheated.

We can't go there right now.

Circa 2025, we cannot go into the S&P.

Okay, maybe 2035 we can, but not 2025.

So what I would do is I would treat Berkshire Hathaway as the index.

So I would just say the default currently is you put it, you know, dollar cost average into Berkshire Class B shares, right?

And you keep doing that day in, day out.

And if we did that, you know, the math is really simple.

Even if we were doing 10% a year, right?

I mean, which I think is pretty reasonable for Berkshire.

Rule of 72, we would double every 7 years.

Life is all about doubles, okay?

Let's say we are a 20-something guy with $10,000 and you go for 50 years or 49 years, it's 7 doubles, right?

Okay, 7 doubles is,

128.

Okay, it's 128 times your money.

I gave you more than 100x, right?

I gave you 128x in 49 years without having to be a genius, without doing anything, right?

So this is just Plan B, right, where we put the $10,000 in, it becomes more than a million, $1.33 million with no taxes paid, right?

There's no dividend, there's no taxes, there's nothing.

And we haven't even gotten to Plan A yet.

Right.

This is just sitting there.

All right.

Let's take a quick break because I got a little freebie for you.

So if you're listening to this episode and you like what Mohnish is talking about, you might be like me.

You're trying to take notes.

You're trying to remember these principles that he's talking about because the dude is just a wealth of knowledge when it comes to investing.

Well, the fine folks at HubSpot listened to this episode.

They took the transcript, they put down the 9 principles that he talks about, as well as the examples that he have, and they put it all in a PDF for you.

So you don't need to take notes.

They did it all for you.

You can read that, learn from it.

That's a much better way to get more value out of these episodes.

It's in the show notes below.

Just go download that.

That and enjoy.

So I want to ask about the S&P because you don't know much about us, but the short version of, of the guy you see across from you there, Sam, is Sam's an entrepreneur.

Sam built his company, he sold his company, and he took the money that he made and he said, look, I worked hard for this money.

Now I want this money to work hard for me, but I need it to be safe.

And so Sam went into a mostly you know, best practice, low-cost index funds in the S&P 500.

And anytime I ask him about his strategy or I tell him, dude, you got to buy Bitcoin, Ethereum, you got to buy this, you got to put some money over here.

Because I'm like, you know, if Sam is vanilla, I don't even know what I am.

I'm some flavor off on the side.

That's— how about strange?

Tutti-frutti.

Yeah, I'm tutti-frutti over here.

And I keep trying to pull him over here, but he says, no, no, no, I like vanilla.

And so he basically just says, the long-term average of the S&P 500 is 10%.

If I just hold this for 50 years, I'm going to double, you know, this many times.

I'm good.

But, you know, I do get a little wary when anything seems too safe or too, too certain or I guess too taken for granted that this 10% number over the long term will be the— be what

it'll be.

I guess what would your message be to Sam?

Is Sam just, you know, is he right?

Is he wrong?

Would you give him a cautionary warning if, if he was your nephew?

He looks like he might be your nephew.

If he was your nephew, what would you be telling him?

Well, on the one hand, Sam, you're right.

Because if you have more money than you need to eat,

the first purpose of your money should be to make you comfortable.

It doesn't make any sense.

Buffett says, don't risk what you have and need to get what you don't have and don't need.

It makes no sense for somebody with a surplus of money to make their

daily life less pleasant by going to investments that put them under pressure.

But there's going to be a but on your statement, it sounds like.

But

on the other hand, the riskiest thing in the world is the belief that there's no risk.

The risk in the markets does not come from the companies, the securities, or the institutions like the exchanges.

The risk in the markets comes from behavior of people.

And it's for that reason that Buffett says, when others are imprudent, you should be prudent.

When other people are carefree, you should be terrified because their behavior

unduly raises prices and makes them precarious.

When other people are terrified, you should be aggressive because their behavior suppresses prices to the point where everything's a giveaway.

So I don't, I mean, look, in the long run, you're right about the S&P.

And over the coming years, American companies on balance are going to produce prosperity.

What's that defined as, long-term in this?

Well, I would say

20 or more is the real long-term.

And I'll tell you in a minute how I get there.

But my favorite cartoon, I have a file of cartoons from over the years.

My favorite one, there's a guy, he's got his, is a car pulled over to the side of the road.

The guy's in a phone booth, so you know it's an old cartoon because there are no more phone booths.

And there's a factory going up in the background and he's screaming into the telephone, "I don't give a damn about prudent diversification, sell my Fenwick Chemical."

In other words, prudent diversification calls for certain investment positions and a variety of them in a certain composition.

Reality says, I see Fenway Chemicals burning to the ground, get me out.

And you can't ignore reality.

Now, what's reality in this case for you?

Reality is recognizing where things stand.

And JP Morgan published a chart around the end of 24, and it was a scatter diagram showing over the years if you bought the relationship between the S&P 500 at purchase and the return

of the annualized return over the next 10 years.

And it looked like this.

On this axis we had return, and on this axis we had P/E ratio.

And it was a, it was a Negative correlation,

which means the higher the P/E ratio you pay, the lower the return you should expect.

Makes perfect sense.

And it showed— there was a number here, 23, on the P/E ratio axis, and it showed— which is what the P/E ratio on the S&P was at the time— and it showed that historically, if you bought

the S&P

When the P/E ratio was 23,

in every case,

there were no exceptions.

In every case, your annualized return over the next 10 years was between 2 and -2.

That's all you have to know.

I wonder, how do you manage your psychology in a period of time where your performance is not as good as you want?

'Cause you seem like a really well-balanced, well-regulated, emotionally regulated guy, but at the same time, this is the game you're playing.

And how do you manage your psychology during a window of time like that?

So yeah, it's an absolutely spectacular question.

It's funny because I did a sort of dry run through.

I'm going to be talking about

the fund to our investors in a day or two's time.

And I think it's like, it's 7 or 8 years that I've underperformed the S&P index in this case.

And so I don't know why it always comes up for me when I think of this is the question that was asked to me just after I'd published my book and I was invited to give a talk at Google.

And the outperformance was looking better at that point than it was, it is right now.

And a very smart engineer asked the question, how do you know that the outperformance you've gotten to date is not luck?

And my answer then, as it would have to be now, is we don't know.

Well, I'm just one data point and amongst thousands of data points.

And so, you know, you would argue that 25 years is a long period of time, but 8 years of underperformance in that 25 years is also a long time.

And so, you know, this was already a year or two ago where I said, In the face of underperformance, what am I going to do?

Am I going to say, this sucks, this isn't working, I need to change my strategy and risk everything that's dear to me potentially?

Or am I going to say, look, I understand what I'm doing.

Somehow the market's not rewarding it the way I would like it to be rewarded, but I know that what I'm doing will, in the, even in the worst possible cases, lead to a really, really

good life.

Even if I am underperforming.

And if I take, for starters, you know, the, my first investors, friends and family, had never invested in equities before.

So in their case, even if they're underperforming the S&P, they've vastly outperformed what they would've gotten in fixed income and all the cash instruments that they have there.

They've won many, many, many times over.

And I actually got to have, I like to call it courage, where I kind of realized that The key is to compound and to make moves that I know will enable me to compound.

And if I can end up beating an index, then that would be great.

But I cannot jeopardize compounding for the sake of beating the index.

I have to focus on compounding.

And if you step back, I mean, I think that, you know, this idea of playing the infinite game, so many people think they're playing a finite game, but they're playing an infinite game.

Explain the difference, finite and infinite games.

Yeah, sorry.

So there's a clear distinction between finite and infinite games.

A finite game is one which has a clear set of rules, a clear space in which it's played out, both in terms of time and physical location.

So an example would be chess.

There's a set of rules, it's played across a board, and there's a winner and a loser according to the time controls, or a game of American football is played on an American football

pitch.

There are N players each side.

The game starts, it ends, there's a winner, there's a loser declared according to the rules.

And, but the thing is, the most important things in life are infinite games.

What is an infinite game?

An infinite game has no clearly defined rules, no clearly defined game space, no clearly defined time when it begins and ends.

And one of my favorite examples for an infinite game was the Cold War.

The Cold War was fought across many battlefronts, whether it was Southeast Asia or building nuclear missiles or rivalry between the superpowers in all sorts of ways.

It's not really clear exactly when it started.

And here's the thing, and it played itself multiple rules, multiple places.

In the infinite game, you don't really win or lose.

Usually one or more of the players just decides to drop out.

In the case of Russia, Russia kind of in a way imploded and dropped out of it.

What's the most important point?

The key mistake that we make so often in life is we think we're playing a finite game when we're playing an infinite game.

Life is an infinite game.

Investing is an infinite game.

So how many people, I would tell you out of, I don't know how many funds that were around at the time that I started, how many around today?

And it's like less than 2%.

Now, some of the people left that game of investing because they actually were utterly superb, made enormous amounts of money, and decided to go and do something else.

A famous example of that is Nick Sleep.

He's in William Green's book.

And so that those people, there are those people, but I did a study of this about 10 years ago and there was a Lipper database where I could look up all the funds that were around at

the time.

They don't really give their reasons for dropping out because But in many cases, because they had an implosion of one kind or another.

And so you don't want to be the guy who implodes.

What's the circle the wagons philosophy?

Well, the circle the wagons philosophy actually came out of when I was thinking about Buffett's letter last year to shareholders, the

2023 letter.

He pointed out.

That in 58 years of running Berkshire,

there were only 12 decisions that he had made that had moved the needle for Berkshire.

Now Berkshire's had a tremendous run.

They've compounded, I mean, till recently were compounding at 20%+ a year for 58 years.

If you're doing, if you're 20% a year, you are doubling every 3.5 years.

Okay.

And that means after 35 years, it's 10 doubles.

And 58 is another 23 years.

So you've got another, what, 1, 6, 6 doubles.

So 16 doubles.

2 to the power of 16.

Now the way to do 2 to the power of 16 is 2 to the power of 10 times 2 to the power of 6.

2 to the power of 10, round numbers, 1,000.

It's 1,000x, right?

And 2 to the power of 6 is 64.

It's 64,000 times what you started with.

Okay.

If you started with $100, it's $6.4 million.

Okay.

$100 to $6.4 million.

Okay.

So he's saying, I would calculate in the last 50 years, 58 years, Buffett's made 300 or 400, at least 400 different investment decisions.

He's saying 12 are the ones that mattered.

The god of investing has a 4% hit rate.

That's the god of investing.

That's why we should index.

Right.

Well, what are the rest of us mere mortals supposed to do?

So now the thing is that I was thinking about his 12 bets, and I thought about, okay, which were the 12?

And I think he never mentioned that, but you could guess which one.

Sears would be one of them.

Coke would be another one.

Amex, Gillette, Cap Cities, Washington Post, You can come up with the names,

Berkshire Hathaway Energy, Ajit Jain, hiring Ajit Jain, probably was the biggest bet for them, but paid off huge for them.

So what I realized when I thought about these 12 bets was it wasn't the buy decision.

The buy decision was important.

The important thing was they never sold.

Cs stayed in the stable for 50 years.

Coke has been in the stable for 40-plus years.

So it wasn't the buy decision, it was the paint-drying decision.

That was the important thing.

So when you find yourself in the happy position of a small ownership in a great business,

just find something else to do with your time.

Play bridge or whatever.

Have you considered golf?

I have.

Golf is great.

Can I ask you about your reading habits?

How do you pick what books you read?

I've never read

any books about how to be an investor, like, you know, multiply this by that and add this and subtract that.

And the books I've found most interesting have always been the ones about investor behavior.

And I mentioned Devil Take the Hindmost.

'99.

One of the greatest books I ever read was before that, John Kenneth Galbraith's book called "A Short History of Financial Euphoria." That was really pivotal for me.

And since I'm a slow reader, I like the fact that it was only about 100 pages.

And then, you know, back in '74, I think Charlie Ellis wrote an article, "Winning the Loser's Game." where he said that because you can't predict the future, active investing doesn't

work.

He was a believer in the efficient market.

So rather than try to hit winners like the tennis player, you should try to avoid hitting losers and keep the ball in play.

And that has always defined my investing style.

In fact, I wrote a memo in the summer of '24 or '23 called Fewer Winners, Fewer Losers, or More Winners?

And that's the basic choice of investing style.

There's a great, I think, like sort of math paradox that you've pointed out, which is that, you know, a fund, I don't know if it was your fund, but any fund, it could be, you know,

never above, never in the top 10%, but sort of never in the bottom 50%.

And there's this strategy of just consistently being above average will place you in the top 5%, right?

It'll, it'll place you in the top percent.

Can you unpack that idea a little bit?

I just sort of butchered it.

In 1990, I wrote a memo called "The Route to Performance," and I had dinner in Minneapolis with my client, Dave Van Venskoten, who ran the General Mills pension fund.

And Dave explained to me that he had run the fund for 14 years, and in 14 years, the equities, General Mills' equity portfolio was never above the 27th percentile.

Or below the 47th percentile.

So 14 years in a row solidly in the second quartile.

Now, if you said to the normal person not in the investment business, so this thing fluctuated between the 27th and the 47th, where do you think it was for the whole period?

They would say, well, let me think, probably around 37th.

The answer is 4th.

So if you can do well for 14 years in a row,

and avoid the tendency to shoot yourself in the foot in a bad year, you can pop up to the top.

At the same time, another investment management firm had a terrible year because they were deep value investors and they were heavy in the banks and the banks suffered terribly.

So they were at the bottom.

So the president comes out and of course, people in the investment business are great rationalizers and communicators.

And he says, the answer is simple.

If you want to be in the top 5% of money managers, you have to be willing to be in the bottom.

Well, that makes great sense, except that my clients don't care if I'm ever in the top 5, and they absolutely don't want to see me in the bottom 5.

So my reaction is the first guy's approach is the right one for me.

So that's why at Oaktree we go for fewer losers, not more winners.

Yeah, I love that because it's one of the unsexy ideas.

Like, I think any idea you can't, you know, make a movie about or won't make you sound really cool are generally undervalued ideas when they, when they actually logically math out the

way, the way that one does.

And so I sort of, that was one that stuck out to me is like, nobody's gonna, nobody's gonna give you a motivational video about being consistently above average and just never shooting

yourself in the foot.

Right.

It's all about heroic greatness and huge risks you can take and being willing to do it.

And so that's all you hear.

But, you know, the Financial Times of London, every Saturday they have an article called Lunch with the FT, and they take somebody to lunch and they write an article about the person,

the restaurant, and the food.

And they did that with me in late '22.

And I

took the reporter to my favorite Italian restaurant near the office in New York where I go 100% of the time if I have a lunch.

And I said to her, "Eating in this restaurant is like investing at Oaktree.

Always good, sometimes great, never terrible."

Now that, to me, that sounds like a modest,

boast.

But if you can do that for 40 or 50 years,

I think it'll compound to great results if you never shoot yourself in the foot.

And I think it's— I don't know if the SEC is listening, but I think it's descriptive of what we've accomplished.

The most important thing in life is how long does something take to double.

Okay.

Because that basically leads to everything else.

So, for example, if you look at someone like Warren Buffett, right?

He started his compounding journey when he was like 10 or 11 years old.

I think he would say it's when he was 7 years old.

He's going to be

94 this year.

Okay, that's an 87-year runway so far, right?

Now, the thing is that if you have a really long runway, then a low rate of compounding would still get you a big number.

Or if you have a shorter runway and a higher rate would again get you the same result.

So it's very important in life

and that's why I think that I wish they'd do this in high school, is to start that engine early.

So for example, let's take a situation of someone who's just finished college, right?

At 22 years old, they got some job, maybe like making like, you know, $70,000, $80,000 a year or something.

And they put away $10,000 in their 401(k), right?

They're 22 years old.

In an index, right?

The index has done 10% a year.

Now what that means is the 10% a year means that that $10,000 will double every 7 years.

So let's take a situation where the person is now 64 years old, right?

Now they started at 22, it's 64, so it's 42 years.

42 years is 6 doubles, right?

I do this to make it easy.

Right.

Okay.

So 6 doubles, right?

That's 2 to the power of 6.

2 to the power of 6 is 64.

So that $10,000 that the person saved at 22 is $640,000 at 64.

But that's not all they have.

At 23, they save $11,000.

That's again sitting at some big number and you keep going.

And sometimes we see these news articles, there's some guy who's a janitor of some college and he gives $4 million to the college and lived in a one-bedroom apartment, whatever.

Why are we surprised?

Okay.

If you actually run the math, he actually didn't even save that much and he didn't even have that such a great compounding engine.

It's not like he found Apple 20 years ago or something.

That's not what happened.

What happened was that there was a consistency.

And so actually

my pushback to my dad when he was telling me to start a business is I was telling him at that time, I said, look, I got a 401k.

I got $30,000 in the 401k.

I'm continuing to put 15% a year.

My employer at that time was matching the first 2%.

So it was becoming 17% tax-free, basically.

It's tax-deferred.

And my income's going up over time.

So when I first started working, my salary was $31,000, right?

So I'm saving $4,500 a year, right?

But if I was still working, my pay would've been hundreds of thousands.

Or more, and I'm putting away a lot of money.

So by the time I get to retirement, it's like it's game over.

Lots of extra cash available, no problem.

And I never missed the money because it was pre-tax taken out.

So it's just great.

So I think I wish that

young people understand that, yeah, listen, you can pursue lottery tickets, you can pursue entrepreneurial dreams, you can do all of that.

That's fine.

But on the side, keep this goal.

I came across a great quote within the last year from a guy who's a retired trader.

From a guy who's a retired trader: "When the time comes to buy, you won't want to."

And that encapsulates So much wisdom, because what is it that causes the great moments to buy?

It's probably the point of lowest consensus.

So when most people don't believe would be the time that the price is going to be the lowest, right?

It's the time with either the most uncertainty or the most pessimism or the most fear, most conservatism.

So you also want to be all those things.

What causes those things you're talking about?

You're talking about the manifestation.

What's the cause?

Bad news?

I don't know.

Bad news.

Bad events.

Bad news.

Either exogenous or in the economy.

Faltering corporate fortunes, declining stock prices, widespread losses,

and a proliferation of articles about how terrible the future looks.

So the point, that's why you don't want to buy at the low.

Who would want to buy under those circumstances?

Right.

And so you talked before in your introduction

about zigging when others zag.

The only thing I'm sure of is if you zig when they zig, you're not going to outperform.

Do you still feel that fear?

You know, the, of you, like when you know you're supposed to buy, do you still feel fearful or do you feel like, nice, hello my old friend.

I love this emotion.

This is what I'm supposed to do.

Oh yeah.

Right.

Yeah.

I mean, it's not easy, but you have to know you have to do it.

If you think about it, the fortunes of companies and the outlook for companies doesn't change much.

What— and I'm writing a memo about this that'll come out one of these days.

And what changes is how people think about what's going on and think about the future.

And so what changes is the relationship of price

to what I'll call value.

Sometimes they hate them, sometimes they love them.

When they love them too much, you should expect them to probably go down.

That sounds like a bull market or a bubble.

And when they hate them too much, you should expect them to go up.

That sounds like a bear market or a crash.

And so you have to do the opposite.

And the same developments in the environment that affect everybody else will affect you.

You're subject to them, you feel them, you read about them, you hear about them.

Everybody tells you how dire the outlook is.

And, you know,

it's hard to ignore them, but you have to do the right thing in the face of them.

In 1998, we had the Russian ruble devaluation, the debt crisis in Southeast Asia, and

the meltdown of Long-Term Capital Management.

And one of our portfolio managers who was young, came to me and he said, "I think this is it.

I think we're going to melt down.

I think it's all over.

I'm terribly pessimistic." I said, "Tell me why." He went through his reasoning.

I said, "Okay, now go back to your desk and do your job."

A battlefield hero, and I don't want to compare what we do to being a battlefield hero, but a battlefield hero is not somebody who's unafraid.

It's somebody who does it anyway.

And that's the way you have to be.

Can you give the, I think there's a Mohnish thing, I don't know, or maybe he'd got it from somebody else, the two gas stations across the street.

I thought this was a great metaphor.

So yeah, it comes from Good to Great.

So yeah, it's a beautiful idea that I haven't thought about for an enormously long time.

The idea is, and this is a story I think is in his book, Good to Great, two gas stations opposite, both opposite sides of the road.

And the guy in the one gas station, you know, when he gets a customer, he's made some money, he paints the wall of the gas station, he puts out some flowers, he makes his gas slightly

cheaper.

And these are all actions that the guy on the other side of the road opposite him could do, not only could he do, he's seeing the other guy do it right in front of him, right in front

of him.

And the fact of the matter is that in so many cases in life, the guy on the other side of the road who has all the opportunity to do exactly the same thing as the winning gas station

just doesn't do it.

And you come to this situation and years down the road, and it's very hard to understand why one is so successful and the other isn't.

And so, you know, the way I think I tell the story in my book is, you know, I'm sort of sitting with Mohnish and he's told this story a few times now and I'm like, yeah, yeah, what

a dumb guy on the other side of the road.

He isn't copying any of the things that the one with the successful business is doing.

And I don't know exactly what happens when I realize actually you're the guy on the other side of the road.

'Cause here's Mr.

Mohnish Pabrai doing all these things and you're not doing any of those things.

Why the hell not?

Don't be such a freaking idiot.

Right.