Mohnish Pabrai has achieved 25.7% of annual return over 18 years of time horizon. Today we will try to decode his investment strategy from his book "The Dhandho Investor" and his some famous interviews available on YouTube. My goal is to collect information which can make us better investor in coming times. So here are some of his brilliant thought in a simple English.
1. Be a shameless cloner: Simplest way to find bargain is to be a cloner. Every quarter smart people and mutual fund has to disclose what they own. Keep track of these information. Find what they are buying. Reverse engineer them. We don't need an analyst. This is a very smart and very obvious strategy from a niche but only few people do this. Every quarter most well known investors and mutual fund are legally required to show what stock they own. So Mr Mohnish strategy is to find the investor who has given good return in past and one that you trust. Simply copy their investment. For this you have to just search super investor holding India on google you will find tons of website.
2. Buy a stock with moat:
(Moat is water surrounding the castle obviously used as protection) Moat is a competitive advantage that company has that allows it to earn better then average rate of return over a extended period of time. Some have narrow moat, some have broad moat and some have deep moat which gets filled easily. So what we want is deep moat with lots of piranha, which is getting deeper and deeper day by day. Now for investing moat is used as an analogy used for business that has strong competitive edge. Even if more competitors come and try to take piece of business, the moat (competitive advantage) is so big that so many piranhas (cash) will eat it. So its too hard for competitors to attack. For example Facebook: its not easy for competitor to come in and replicate it as user based is so strong that impossible to replicate it. So when you buy stock make sure that company has big moat or we can say big competitive advantage. We all know what happened to Thums up when coca cola entered Indian market with lot of cash.
3. You make money by waiting: Mr Pabrai says that "he think the biggest edge he has is his attitude". Charlie Munger use to say "you don't make money when you buy stocks, you don't make money when you sell stocks, You make money by waiting". So the biggest single advantage a value investor has is not IQ, its patience and waiting for right pitch. You might have to wait for years for the right pitch. As Blaise Pascal's says "All men's miseries stem from his inability to sit in a room alone and do nothing".
4. Don't engage in short selling: He also don't engage in things like short selling. He says "Why would you want to take bet where your maximum upside is double and maximum downside is bankruptcy". It never make sense to him.
5. Low risk High uncertainty: It is really something he borrowed from entrepreneurs. Patel's in India or the rich of the world, if you study them there is misnomer that entrepreneur takes risk. They get reward because they take risk. In reality entrepreneurs do everything they can to minimize the risk . They are not interested in taking risk. They want free lunches and they go after free lunches. So if you study any entrepreneur from Ray Kroc of MC Donald to Herb Schultz of Starbucks and to Buffet and Munger they have repeatedly made bet which are low risk and have high return possibilities.
They are not going for high risk & high return. They are going for low risk high return. First thing he look into any business is how he can loose money in that company. Can he minimize his downside. Important thing that value investors focus is downside protection and that's what entrepreneurs do. Protecting the downsize is the only relationship between entrepreneur, investor and value investors.
6. Have a checklist: Checklist of Mohnish Pabrai has 80 items on list. We will discuss that in detail sometime but for now on lets concentrate on some of the important ones. When he is studying a business he goes through normal process of analyzing the business and once he is done with it, he goes through his checklist before buying stock.
He check all his 80 points and if he finds 7-8 checklist with no answer, he goes and find these answers. If he found red flag on any of this checklist, he knows this is my downside risk. If he is ok with these red flag he pulls the trigger else he move to other company.
He has created this checklist from his mistake and other great investors mistake. One of his famous example from his checklist is:
- Can this business be decimate by low cost competition from china or other low cost countries.
- Is this win win business for entire ecosystem. He say if this business is not doing good for society like tobacco or liquor business this may end up due to higher tax by government or regulations. So he pass those investments.
- Is there too much leverage in the business.
You can make your questions and checklist too by looking at the business which lost peoples money. For example Dexter shoes is the company where warren buffet loose money due to low cost Chinese competitors.
Another example of Charlie Munger is Cort furniture which was bought during dot com bubble, where people where buying lot of furniture for offices. So demand for rental furniture was rising. Once the dot com bubble end these offices got close and so the earning of Cort furniture. So from here checklist question arises are we looking at normal earning or boom earning.
He says you don't have to sit in front of TV to see every tick of stock market. You just have to learn from history and do simple things which successful investors have done in past.
