Mohnish Pabrai, a technologist turned super-investor, has a unique approach to value investing that emphasizes predictability and cash flows. Let’s delve into his concentrated investment strategy and explore the key principles he follows:
Geographic Diversification
- Mohnish Pabrai believes that markets vacillate between fear and greed. During pessimistic periods, it’s easier to find mispriced securities. He looks beyond the US market and invests in places like South Korea and Japan, where multi-decade flatlining or negative market activity creates opportunities for investors
- Interestingly, there are no US stocks in the Pabrai funds because he doesn’t see significant mispricings there anymore. The diminishing pool of companies tracked by an increasing pool of high-IQ investors makes it challenging to find undervalued opportunities.
Pabrai’s Law of Large Numbers
- Pabrai avoids investing in businesses that generate more than $3 billion to $4 billion in annual cash flow. These “blue-chip” companies are unlikely to endlessly grow their cash flow. Instead, he seeks smaller, predictable businesses with room for growth.
Buying at a Substantial Discount to Intrinsic Value
- Mohnish Pabrai’s investment philosophy aligns with Warren Buffett’s focus on intrinsic value. He aims to buy businesses at a substantial discount to their true worth.
- He calculates intrinsic value using discounted cash flow (DCF) analysis. By comparing the expected cash flows and sale price, he determines whether investing in a business is better than alternative options (e.g., bonds or other investments).
The Dhando Checklist
- Pabrai’s book “The Dhandho Investor” outlines his value investing principles. The Dhando checklist includes commandments such as:
- Don’t skim off the top: Avoid excessive fees or unnecessary costs.
- Investing is not a team sport: Pabrai follows Buffett’s approach of doing his own research without a team.
- Focus on your circle of competence: Understand what you know and stick to it.
Lunch with Buffett
- Pabrai bid six figures to have lunch with Warren Buffett. Although he didn’t expect any investment secrets, he gained insights into what mattered most to Buffett.
- Buffett’s concept of an “inner scorecard” (grading oneself based on personal values) left a lasting impression on Pabrai.
In summary, Mohnish Pabrai’s concentrated approach involves seeking undervalued opportunities globally, focusing on predictable cash flows, and adhering to timeless value investing principles. His emphasis on intrinsic value and disciplined decision-making sets him apart as a successful investor.