I had the distinct pleasure of interviewing Mohnish Pabrai, and wanted to share his timeless wisdom.
We discussed a range of topics including the legendary value investor's views on value investing (is it dead?), compounders, importance of entrepreneurship, having intestinal fortitude during market sell-offs, his investment in Turkey and more!
Who is Mohnish Pabrai?
Mohnish is the managing partner of Pabrai Investment Funds which he started in 1999 with $1Mn after selling his IT company, TransTech, for $20Mn. As of Q3'2020 that has ballooned to $469Mn due to Mohnish's Munger/Buffett focused value investing style (BRK.B).
In other words, his fund has had a 12% CAGR vs. the NDAQ's (QQQ) 8% in the same time frame. Mohnish is now extensively involved in philanthropy with Dakshana Foundation where he provides educational opportunities for gifted but underprivileged children worldwide.
I learned of Mohnish a few years ago after reading the Forbes article, "How Mohnish Pabrai Crushed The Market By 1100% Since 2000." The article gave me my first introduction to Mohnish's proud Buffett/Munger copy-cat styled value investing. In the article, he cites the University of Nevada study by Martin and Puthenpackal showing how merely investing alongside Warren Buffett (after information about Berkshire's buys and sells became public through the 13Fs) managed to beat the market by 11% every year over a 31-year period.
To say the least, I was very excited to have the opportunity to interview Mohnish and soak in his knowledge. Here are my 3 key takeaways:
Maintaining Intestinal Fortitude
I have been analyzing the greatest investors and found a common trait: temperamental control. While investing prowess is certainly important, the nature of the investor is equally, if not more, important.
Mohnish's fund lost 65-70% of its value during the Great Financial Crisis, and even then, as a result of maintaining his conviction and buying aggressively in the trough, his fund has outperformed the NDAQ. I wanted to know how he remained calm.
He says, 'Auction-driven markets are dictated by buying and selling in the short term, and in the long term they get weighed appropriately, i.e. based on what they are worth.'
He goes on to explain that while his funds were down two-thirds in 2008, the intrinsic value of the fund itself was much higher and so he remained calm. In 2009 the fund value was up more than 110%.
If you are going to participate in auction-driven markets you have to understand that volatility is part and parcel of that.
A few tips?
1. Avoid leverage at all times
2. It is a temporary loss of wealth, do not panic. These tend to be the best time-periods to invest and improve your portfolio.
3. Dollar cost average: In '08-'09, commodity prices and stocks got crushed. "They went to numbers that made no sense." So, he made a basket of commodity bets and kept on allocating 2% of the portfolio and all the 7-8 bets went up at least double and some even went up 7-8x due to the significant mispricing by the markets.
If wealth is lost, nothing is lost. If health is lost, something is lost. If character is lost, all is lost.
Of course, Warren Buffett has similar views.
You’ve got to be prepared when you buy a stock having them down 50 percent or more and be comfortable with it — as long as you’re comfortable with the holding.
He also pointed out that in history the stock price of Berkshire Hathaway went down 50 percent for three times. "There wasn’t anything wrong with Berkshire when those three times occurred”, he said.
Structuring a Concentrated Portfolio
Buffett and Munger have famously been against portfolio diversification with Buffett stating that, "Diversification is a confession that you don’t really understand the businesses you own." Munger was more direct: "What he is saying is that much is what is taught in modern finance courses is twaddle."
I was therefore curious to understand Mohnish's thought process when it came to structuring his own portfolio. After all, Guy Spier and he had bought a lunch with Buffett for $650,000 in 2007. Mohnish has also had several interactions with Buffett and Munger throughout the years and received praise for his fund structure that does not charge any asset management fees.
What struck me most is Mohnish's attitude to investing: thinking of being a co-owner to a business he buys stock of. While this thought process isn't ground-breaking, what is admirable is the execution of it. Here he brings up the natural instinct of entrepreneurs to concentrate risk and gives the example of Buffett (BRK.A), Gates (MSFT) and Walton (WMT).
Mohnish revealed that in his personal portfolio, he rarely has more than 2 or 3 stocks. In Pabrai funds, since it is other people's money, Mohnish does not put more than 10% into a single stock at cost. However, there have been times where a single position or two positions have become 60 to 70% of the portfolio. His favorite hunting ground is in the convergence of his circle of competency and that of a great business' undervalued stock. Staying within your circle of competence and really understanding "what you own and why you own it" (Peter Lynch) is key.
Finding Long-Term Compounders
Mohnish became quite famous in the investment community for developing a checklist for investment. For those that are interested, he lays his framework out in his book (linked below). In fact, in one of the graduate finance classes I took, we were asked to model our own checklist off of Mohnish's ideas. Originally Mohnish tried finding a 'dollar bill and paying 40 or 50 cents' and selling when it reverts to mean value; if the intrinsic value increased it could hopefully double.
Another great quality that Mohnish consistently demonstrates is iterative thinking, and this is true of his checklist and investments that do not work. In 2020, he flipped his decades long investing career on its head and switched from finding value opportunities to great compounders. This eliminated the issue of selling when the value reverts to mean that Mohnish was not able to digest with some of the previous compounders he owned.
So if you are right on the runways and long term value creation of fairly valued or slightly overvalued companies, you can make a 10 or even 100 bagger. Mohnish is certainly familiar with the latter, having two 100 bagger investments in 1999, one of which turned $15,000 into 1.5 million (in Satyam Computers) and the other turned $100,000 into $10Mn (CMGI).
Giving the example of the Nifty 50, Mohnish explained the importance of a great compounder. If Walmart was to be included in the Nifty 50 and put 2% to it the index beats all the other indices over the time frame by a mile. If you took it out the Nifty 50 would underperform significantly. Such was the strength of a single stock.
Mohnish admits that it took him 25 years to realize the importance of compounders. In part this thinking was brought about by Nicholas Sleep and Qais Zakaria who ran the Nomad Investment Partnership and earned a cult following for their big bet on Amazon (AMZN) and earning a 921% return versus 117% for the MSCI World Index from 2001 to 2013.
Back to Nifty 50. Today, even if 4 out of 10 bets do not work and you bought at Nifty 50 level highs (think 50, 60, 70 P/E multiples), then you will have made a significant amount of money with a 40% error rate if you found great compounders. In the case of Nifty 50 even if you were 2% correct you would still do well i.e. with a 98% error rate. The key to doing this and remaining invested is thinking like a business owner. Mohnish points to the fact that other than the Walton family, no single investor has held onto the Walmart stock since its IPO though the tea leaves showed that this would be a great business with compounding power and significant moat.
Mohnish goes on to give an example of an investment in 2019 of a shipping company in Turkey. He now owns 33% of the company, buying at 5 cents on the dollar and has already made 7-8x in dollar terms in 20 months. But looking forward 10 to 20 years, how much can the management increase intrinsic value? He estimates in a bear case it could triple. His job? "I have to just sit on my ass."
If you love watching paint dry, then this is the business for you.
In the open Q&A section of the talk, Mohnish delved into his macro outlook (SPY), investment in Turkey, brief thoughts on GameStop (GME) and Twitter (TWTR), his screening process, circle of competence, power of compound interest & Mr. Money Mustache.
Mohnish's combination of wisdom, experience, humor and humility makes this talk a must watch! You can find the full talk with Mohnish here.
I would sincerely like to thank Patrick Gregory and Mohnish Pabrai for helping make this happen. I certainly learned much, as did my friends at the fund.