Why Mohnish Pabrai Sold Micron Before the AI Boom | Stocks | Investment

You and Li Lu did deep work on Micron, and you owned it in the hedge fund. Why

not own it in the ETF as the AI data center built out lit the rocket, and do you regret selling earlier than ideal, potentially forgoing a 10X? I had

completely exited Micron before the mutual fund or the ETF even was started.

So, we the mutual fund started in September 2023, and by that time we had fully exited Micron. And while I have regrets about exiting businesses like

Ferrari and Goldman Sachs and BYD and so on, I do not have regrets about decision to exit Micron because I don't think we could have I think it would have been

almost impossible to have kept it till today based on what was going on. And I

think we had pretty justified reason to exit at the time we did. So, I think what is happening with Micron is kind of a set of outlier events that have taken place, which have driven the stock.

Obviously, if we owned it today, we would keep the position because they've got some tailwinds for a while, but we're not inclined to buy it at current valuations, etc. But, I wanted to just

explain that Micron was front and center large bet. It was our largest US bet for

large bet. It was our largest US bet for 6 years. We kept that bet from 2017 to

6 years. We kept that bet from 2017 to 2023, 6 years. We kept it through the pandemic. And in 6 years of owning

pandemic. And in 6 years of owning Micron, basically all we got out of it was a double. So, it was okay 14% return or something over that period, but it

wasn't what we thought we might get when we had originally invested. And a very key part of the thesis for investing in Micron was that it was an oligopoly with

three rational players, Samsung, SK Hynix, and Micron. At that time in 2017, 2018, I met with all three of the

companies. In fact, in Seoul in Korea, I

companies. In fact, in Seoul in Korea, I had multiple meetings with the senior guys at SK Hynix and the semiconductor guys at Samsung, as well as I met Sanjay

briefly and I had number of interactions with their CFO, etc. Over that period.

So, at that time in 2017, 2018, 2019, it was very clear that this was an oligopoly where it was almost impossible then and even today for a fourth player

to enter the memory business. I think

that the odds of that happening is almost zero. It's very The barriers to

almost zero. It's very The barriers to entry extremely high. And these three players, if you have, for example, let's say American Airlines and United

Airlines, and let's say they have 80% market share flying between Chicago and New York. It is illegal for them to sit

New York. It is illegal for them to sit in a room and collude and set prices on what the New York-Chicago airfare should be. But what they do do is that if

be. But what they do do is that if American raises or lowers the fare even slightly, United is going to watch that and react almost immediately to that.

So, there is a very immediate reaction to anything that one player does. And in

the memory business, it was very important So, the history of the memory business that had been a terrible business. It had been a terrible

business. It had been a terrible business for decades. Most of the players went bankrupt, did not earn its cost of capital, just a bloodbath. And

the reason it was a bloodbath is that the players would go for market share.

They would want to grow. And the way you go for market share is you drop your prices. And the Because the moment you

prices. And the Because the moment you drop your prices, the customers will switch vendors. And then, of course,

switch vendors. And then, of course, it's a race to the bottom because the second person's going to drop their price as well. What we came away with in the research in 2017 to 2019 and beyond

was that these three companies were not colluding. They're not sitting in a room

colluding. They're not sitting in a room setting prices, but they were content with the market shares that they had, and none of them had any plans kind of

muscle the other out of the equation etc. So, Samsung was the 800 pound gorilla with more than, you know, 50% market share and the other two were about equal at 25% each and they were

going to kind of stay there. And I

discussed the Micron situation with Charlie Munger about how stable these oligopolies are. And Charlie brought up

oligopolies are. And Charlie brought up that Warren had studied Coke and Pepsi bottlers in almost every geography around the world. And he said that and

what Warren found is that in 95% or 97% of cases, both bottlers made great money and it was a great business. But there

were like 3 to 5% of geographies where because of the personalities involved, one or the other bottler decided that they wanted more market share and they became more aggressive with the

promotions. And the other person, of

promotions. And the other person, of course, is going to react like American and United is going to react and it became a race to the bottom. And so

these 3 to 5% of Coke and Pepsi bottlers made no money. Can you just imagine that having franchise where you're the only guy bottling Coke and you're still not making money. And so it's very important

making money. And so it's very important in oligopolies that the players are rational. And we saw a lot of evidence

rational. And we saw a lot of evidence that there was rationality. But then

what happened in 2023 is Samsung changed tactics and decided it wanted more market share and wanted more growth and

they became more aggressive. And

basically immediately the other two players reacted as well and the profits disappeared. So we're looking at a

disappeared. So we're looking at a situation in 2023 where cash flow has gone and we had held the stock for 6 years. We had a double. There was

years. We had a double. There was

[clears throat] a concern whether this would lead to a secular decline because if they continue down this path, that's not a good situation. So, it was murky enough for us to say, let's, you know,

ring the register, take our situation, and move on because core assumption has changed. Now, what has happened since

changed. Now, what has happened since then, especially in the last couple of years, is that, you know, the whole AI and all of that taking off has meant

that there is simply not enough chip capacity around. And all three companies

capacity around. And all three companies are trying to increase capacity as aggressively and as fast as they can.

But no matter how fast they're going, they're still going to have difficulty meeting the demand. The demand is that intense. So, they've got tailwinds for a

intense. So, they've got tailwinds for a long time. And because they cannot meet

long time. And because they cannot meet the demand, they have raised prices very dramatically. I mean, Micron is not

dramatically. I mean, Micron is not trading at a high multiple because they raised prices so much. I feel that the spending that's taking place with the Googles and Metas of the world, a lot of

it is going to the chip tax makers, the Microns of the world who are making super normal profits. So, when Google raises 80 billion of capital to invest in data centers, they are not getting what that 80 billion would have bought

them 5 years ago. They may be getting 20, 30 billion or less of what they were able to get a few years back because the prices have gone up so much. So, I think it's become much harder for these scalers in terms of what they're doing.

But from our point of view and from my point of view, with all the data I had available in 2023 and everything that I was looking at, I just felt that doing anything else at that point was actually

going to be gambling. No regrets on selling Micron, and no plans to buy it at this point.

Mohnish Pabrai first bought Micron in the fourth quarter of 2018 at an average price of roughly $37 per share.

After holding the stock for nearly 5 years, he exited his position in late 2023 at around $64, earning a respectable return of about 100%. But what happened next stunned the

100%. But what happened next stunned the investors.

Shortly after Pabrai sold, the AI boom ignited unprecedented demand for high bandwidth memory chips, sending Micron's stock soaring. [music]

In less than 2 years, the stock multiplied roughly 15 times from his original purchase price, representing an estimated dollar 2 billion in missed gains for his fund. [music]

Was selling a mistake? Not necessarily.

Pabrai's investment thesis was based on the fundamentals available at the time.

And when those fundamentals changed, he did his decision.

This is a powerful reminder that great investors follow business fundamentals and not market hype. [music] And

sometimes even the best decisions can lead to massive opportunities lost in hindsight. The difference is that

hindsight. The difference is that legendary investors don't spend years regretting the winners they missed. They

accept the outcome, move on, and focus on finding the next great opportunity.

Retail investors like us, on the other hand, often become trapped by regret, constantly looking back at what they could have made instead of searching for the next investment that could create life-changing wealth.