Nugget: Pabrai on risk and uncertainty

There is a quite interesting interview with Monish Pabrai on Forbes online, in which is talks, amongst other topics, about the entreperneurial approach to risk and uncertainty. I very much share is views as there is a vital difference between risk and uncertainty. Here is an excerpt from the interview:

Forbes: “Does this tie into your ideas and other value investors’ ideas of low risk, high uncertainty?”

Pabrai: “That’s right. I mean, I think the low risk, high uncertainty is really something I borrowed from entrepreneurs, and you know, the Patels in India or the Richard Bransons of the world. Basically if you study entrepreneurs, there is a misnomer: People think that entrepreneurs take risk, and they get rewarded because they take risk. In reality entrepreneurs do everything they can to minimize risk. They are not interested in taking risk. They want free lunches and they go after free lunches. And so if you study any number of entrepreneurs, from Ray Kroc to, you know, Herb Schultz at Starbucks ( SBUX – news – people ) and to even Buffett and Munger and so on, what you’ll find is that they have repeatedly made bets which are low-risk bets, which have high-return possibilities. So they’re not going high risk, high return. They’re going low risk, high return.

And even with Bill Gates, for example. The total amount of capital that ever went into Microsoft ( MSFT – news – people ) was less than $50,000, between the time it started and today. That’s the total amount of capital that went into the company. So Microsoft you cannot say was a high-risk venture because there was no capital deployed. But it had high uncertainty. Bill Gates could have gone bankrupt. Or Bill Gates could have ended up the wealthiest person on the Forbes 400. And he ended up at the extreme end of the bell curve, and that’s fine. But he did not take risk to get there. He was comfortable with uncertainty. So entrepreneurs are great at dealing with uncertainty and also very good at minimizing risk. That’s the classic great entrepreneur.”

Here you can read the complete interview


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