Mohnish Pabrai’s Advice on How to Win without Losing Much

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What You’ll Learn:

  • Why managing risk matters
  • The importance of patience
  • How to combine risk with patience for outsized returns

Mohnish Pabrai – Background

Pabrai worked with Tellabs between 1986–91, first in its high speed data networking group, and then in 1989, joined its international subsidiary, working in international marketing and sales.

In 1991 he started his IT consulting and systems integration company, TransTech, Inc. with about US$30,000 from his own 401K account and US$70,000 from credit card debt. He sold the company in 2000 to Kurt Salmon Associates for US$20 million. Today he is the managing partner of the Pabrai Investment Funds (a family of hedge funds inspired by Buffett Partnerships), which he founded in 1999. (Source: Wikipedia)

You will also know Pabrai as having split a $650,100 lunch bill with good friend Guy Spier.

You can read Guy’s thoughts of the lunch and what he took away.

The Dhandho Investor: The Low-Risk Value Method to High Returns

In Pabrai’s Google Talk, see video below, he talks about the investment concepts in his book The Dhandho Investor – a book highly recommended in the Old School Value’s best investment book list.

Most value investors have read it already, but for those that haven’t, the Dhandho concept of doing business centers on risk vs uncertainty, circle of competence and margin of safety.

Here’s an excerpt from Amazon.

A comprehensive value investing framework for the individual investor

In a straightforward and accessible manner, The Dhandho Investor lays out the powerful framework of value investing. Written with the intelligent individual investor in mind, this comprehensive guide distills the Dhandho capital allocation framework of the business savvy Patels from India and presents how they can be applied successfully to the stock market. The Dhandho method expands on the groundbreaking principles of value investing expounded by Benjamin Graham, Warren Buffett, and Charlie Munger. Readers will be introduced to important value investing concepts such as “Heads, I win! Tails, I don’t lose that much!,” “Few Bets, Big Bets, Infrequent Bets,” Abhimanyu’s dilemma, and a detailed treatise on using the Kelly Formula to invest in undervalued stocks. Using a light, entertaining style, Pabrai lays out the Dhandho framework in an easy-to-use format. Any investor who adopts the framework is bound to improve on results and soundly beat the markets and most professionals.

The Most Important Thing

Here are the sticking points from the video that you should take away.

“The most important thing is that, before you invest, you should be able to explain the thesis without a spreadsheet within four or five sentences. Typically I write down those sentences before I invest, so if I have a conversation with someone you could very quickly explain why this investment makes sense.” —Mohnish Pabrai, Google Talk July 21, 2014

I would add that once you have a firm understanding of the investment case, then you can dive into the numbers with stock analysis tools. Just don’t fall into the trap of making the numbers fit your thesis.

Patience is the Single Most Important Skill

“Good traits, or important traits for being a good investor, number one the single most important skill is patience. So I think the thing is that markets have kind of a way of deceiving us, because you know when you turn on CNBC and you see all those flashing red and green lights and all that, its inducing the brain to think that you need to act now, and you need to act immediately. Nothing could be further from the truth.  You know Buffett always talks about having this punch card where in a lifetime you make twenty punches, and each time you buy a stock you punch it once so in a lifetime you’d make twenty investment decisions. Which means that if you started investing at twenty and ended at eighty, every three years on average you’d make one investment. And that is very hard for most people to do. And so, the more you can slow down your investing, and the more patient you can be, so the issue is that the time scales of which companies go through change and such, is very different from the time scales of which the stock market operates. So you really have to focus not so much on the stock market and have a lot more focus on the nature of change in businesses and be willing to be in there for a while.” —Mohnish Pabrai, Google Talk July 21, 2014

Watch Mohnish Pabrai’s Talk

Play the video at 2x and you’ll be done in half the time.

Additional Reading

About the Author

hurricanecapThe pseudonymous Hurricane Capital was Born in the 80’s, lives in Sweden with a Masters of Science in Business and Economics from Stockholm University. Got interested in value investing and devotes his free time and investing. The main goal through the Hurricane Capital blog is to learn about different investing topics, investors and business cases for investment.

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