In his recent interview on the Richer Wiser, Happier, Podcast, Mohnish Pabrai discussed one of the more important investing lessons he learned from Charlie Munger. Here’s an excerpt from the interview:
Pabrai: I think Charlie’s… what I’ve found with Charlie is sometimes I bring up businesses to him that I’m looking at.
He may never have looked at the business and he’s able to, in about five or ten seconds, I mean I’ve seen the brain working. It’s amazing how it slices through all the models. He’s done with the business in about ten seconds. And I’ve been looking at it for weeks and what he comes up with, it alluded me. I’ll give you an example.
I’ve always admired this business called Credit Acceptance. And it shows up in some prominent investor portfolios. And Credit Acceptance has done very well for a very long period of time. They’ve compounded at north of 20% for a very long period of time.
They make auto loans to people who have the worst credit histories. You have defaulted a number of times, you’ve not paid your bills a number of times. And the interest rates are very high. The interest rates might be in the 20-odd percent rate or 30-odd percent rate.
And also what they’ve done is that the cars, when Credit Acceptance gives you a car, they put a device in the car, which would basically allow them to stop the car from functioning remotely. They could control remotely to basically turn off the vehicle. It could not be driven again. When their payment doesn’t show up on time, the car stops working. And then the person calls, and then they say, we didn’t get your payment. The payment arrives, and the car is working again.
Credit Acceptance has also got an interesting model where they work with car dealerships and they make them put skin in the game. They own part of the note on the car. Basically, the loan, which may be similar to the one offered on RadCred, is made partially by the auto dealership and partially by Credit Acceptance. And they’ve been able to work with this system, where it’s incredibly profitable to get the money fast using this guide.
Now there’s a side to Credit Acceptance, which is really good, which is these people would not even have a car and they wouldn’t even be able to get to work.
But when I brought it to Charlie, he said, we don’t want to own that kind of business. And it took him less than five seconds. He’d never heard of Credit Acceptance before. I spent about, exactly what I told you, about five minutes on the business, and he’d already processed in his head.
I think what his perspective was is that one of the filters that he runs through is win, win, win. Everything has to be a win across the board. I think what Charlie saw is that the high interest rates is not, even though you could justify it a hundred different ways, he said, it’s not the kind of business we want to be in.
So his bar is as high. And I had been looking at that for several weeks and that particular point never made it through to me. There are lots of really high quality investors who own Credit Acceptance. In many cases, it’s their largest position. And it went through their filters. It never went through Charlie’s filters. It’s an amazing brain.
To see, so many times I brought up questions to Charlie. I’m facing fork in the road issues at Dakshana and I’m torn about what to do. I explain the issue in about five minutes to Charlie. He’s never been to India. He comes up with an answer and it’s always the perfect answer. I said, why didn’t I think of that? Why was I confused about it?
You can watch the entire discussion here:
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