Over the past few days, I’ve been reading The Dhandho Investor which reading led me to investigate a little more about the author, Mohnish Pabrai (I often like to read about authors whose works I’ve enjoyed). Pabrai is an Indian-American investor who from the mid-90’s to 2013 achieved a pretty impressive annualised return (more on that below!). He comes across as intelligent, down to earth and genuine. I first heard about Pabrai from John Huber of Saber Capital Management who posted a link to an online recording of a seminar Pabrai gave at Columbia University’s Business School during the (northern hemisphere) Spring of 2013. If you’ve got a spare 1hr 20mins you can watch the entire seminar with Q&A via the link above (the lecture itself lasts around 1hr). I highly recommend it.
In the seminar, Pabrai recalled having sold his IT services business in 1994 and with $1mln USD in hand decided to start investing. He talked of examining Warren Buffet’s track record, during 3 time periods:
1950-1956 43% annualised return
1957-1964 27.7% annualised return
1965-1993 29.1% annualised return.
Buffett averaged a 31% annualised return between 1950 and 1993.
and asked himself ‘why not play a 30 year game and see if I could double my money every 3 years. He noted to do this requires a 26% p.a. return.
How do you compound at 26%
Pabrai supposed you can’t beat the indices by trying to beat the indices, and that absolute targets are a must. He also suggested not buying something that isn’t very likely to go up 2-3 times in the next 2-3 years. He also shared some words from Hindu Monk Swami Vivekananda which I thought were inspiring:
“Take up one idea, make that one idea your life. Think of it, dream of it, live on that idea. Let the brain, muscles, nerves, every part of your body, be full of that idea, and just leave every other idea alone. This is the way to success” – Swami Vivekananda
So how did Pabrai fare? From 1995-1993 Pabrai returned 25.7% p.a. (this included the dot.com bubble and the 2008 GFC!)
Mohnish provided some examples of his portfolio construction at 2013 and in the past, and the changes he made to ensure he wouldn’t suffer as huge losses as he did in 2008 when he had a highly concentrated portfolio.
- the first 75% of his cash goes to equities likely to double in value in 2-3 years (positions are ~10% each, so 7-8 positions)
- the next 10% goes to equities likely to appreciate a minimum 3x in 2-3 years
- next 5% must rise a min. 4x in 2-3 years
- next 5% must rise a min. 5x in 2-3 years
- and the last 5% must rise by more than 5x rise in 2-3 years
Doing the math, Pabrai seems likely to hold around 11-12 positions, which is still fairly concentrated, although provides some diversification out of equity specific risk (non market risk) and makes ‘riskier’ bets a smaller proportion of his portfolio. In this way too, if Pabrai couldn’t find stocks likely to appreciate 3, 4 or 5+ times in the next few years, he would be ‘forced’ to sit on cash which would be a good hedge against a market decline.
Another strategy Pabrai recommended is using a checklist for every aspect of investing (screening, valuation, selling etc.), having someone to discuss your investments with and ‘cloning’ the best (which he suggests is reading their 13f’s but which you could extend to their methods/approaches to investing).
These ideas might seem simple, but it’s often the simple-yet-good ideas, implemented consistently which lead to great results. I won’t share too much more (lest you feel there’s no point in watching the seminar!) but there are tons of useful bits in there and at the Q&A which follows too. I ended up with 2-pages worth of notes in my word doc I had opened as a followed along.
Some of my own notes from the Q&A:
- Investing doesn’t need to be a full time job, you can do quite well as an investor even with 10hrs a week.
- Mohnish stated he can crack business models very fast, getting to its essence relatively fast (this is his edge)
- Make bigger bets and clone within your circle of competence (i.e. it’s not the size of your circle, but knowing it’s limits that’s important. Know your circle; Pabrai knew Indian computer company Satium (sic?) well, and was able to profit from this)
- in The Dahndho Investor, the Kelly formula looked at how to figure out your maximum bet given the odds of success. It can’t apply to investing because you don’t have the coin-toss analogy. You can’t make the bet 1000 times, you can only make an investment once. So…Don’t use the Kelly formula.
- Mohnish used to do 10×10 investing (10% allocation to each equity) but this led to problems in 2008 GFC.
- The beauty of the investment business is that you can be wrong 40% of the time and still come out looking good.
- The market isn’t always willing to wait for high returns, if you’re patient you can snag a miss-priced stock
- They key with moats is that you have to understand the business, which moats come in all sorts of shapes and sizes. In capitalism, all moats are going to be gone eventually. Identifying a moats durability is important, maybe 80% of the battle to an investment doing well.
- ‘if wealth is lost, nothing is lost, if health is lost, something is lost, if character is lost, everything is lost’ – keep investing in perspective.
- You can’t have a concentrated portfolio that’s high risk – it must be, “heads I win, tails I don’t lose much”
- Look at all the mistakes great minds made, especially when it was obvious it would happen and create a checklist to avoid these pitfalls.
Hope you enjoy the seminar and if you watched or know of Monish, I’d love for you to share your thoughts in the comments below! 🙂