During this interview with My First Million, Mohnish Pabrai discusses Warren Buffett’s investment strategy and performance, particularly highlighting a key point from Buffett’s 2023 letter to shareholders.
Buffett noted that over his 58-year tenure at Berkshire Hathaway, only 12 investment decisions significantly impacted the company’s success. Despite making hundreds of investment choices, it was these few critical ones that made a difference.
Pabrai emphasizes that even a highly successful investor like Buffett has a hit rate of just 4%, underscoring the importance of indexing for average investors. The immense success of Berkshire Hathaway, with its 20% annual compounding over decades, demonstrates the power of a few good decisions amidst many.
Here’s an excerpt from the interview:
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 had a tremendous run.
They’ve compounded, until recently, at 20 plus percent a year for 58 years. That’s, you know, if you’re doing 20% a year, you are doubling every three and a half years.
And that means after 35 years, it’s 10 doubles and 58 is another 23 years, so you’ve got another 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 number is 1000, it’s a thousand times, right? And 2 to the power of 6 is 64. It’s 64,000 times what you started with.
If you started with $100, it’s 6.4 million. $100 is 6.4 million. So he’s saying, I would calculate in the last 58 years, Buffett’s made 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.
You can watch the entire interview here:
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