Investing Lessons from Mohnish Pabrai

Here is a great video from a Mohnish Pabrai (author of The Dhando Investor) presentation at Boston College from November 2013. It is sort of long at 1hr 53min. It is definitely well worth the time. One of the things that Mohnish talks about is doing all of his own research. I've provided my notes here from the video - but you should watch the video (a.k.a. do your own research).

Interesting insights from Mohnish

  • Do your own research - If you invest in ideas that you have not fully researched, you may fall into investments that are outside of your circle of competence. It is interesting that Mohnish says you shouldn't hire analysts and you should do your own research and then readily explains how he uses Warren Buffett and Berkshire Hathaway as his own analyst (along with Longleaf, Seth Klarman, etc.). They generate ideas for him and while Mohnish copies their ideas he doesn't use all of them just as he would if he were paying them to be an analyst for him.
  • Investment Ideas - There are some great tools to use to get or validate ideas... Value Investors Club, SumZero, Gurufocus.com, Sedar, Manual of Ideas, The Corner of Berkshire and Fairfax, Edgar Online, The Graham and Doddsville newsletter
  • Stay in your circle of competence - Your circle of competence doesn't have to be large for you to do well at investing. You need to understand where the boundaries of your circle of competence is though. Do you truly understand all facets of real estate, public tech investing, banks, private equity, etc? Pick your favorite area and focus.
  • Focus - Mohnish doesn't come out and say it, so I'll say it for him... with 50k publicly traded companies in the world, focus is more important than simply "working alone". The first question Mohnish asks himself is if an idea is in his circle of competence. This is an easy filter if you have a firm understanding of what your competence is.
  • Repeatable process - If a company falls within his circle of competence, Mohnish looks at valuation (50% off intrinsic value), initial prospects on the investor relations page, download and look at filings, then he digs deeper into filings/management/etc., finally he writes three or four sentences on why he is making an investment (which can be reviewed periodically to ensure the investment is on track). Mohnish sells at 80-100% of intrinsic value depending on other opportunities and prospects.
  • Invest Assets - Figure out the best way to protect the downside. Investing in debt is ok, but you should decide if it makes more sense to invest in debt or equities and still protect your downside. If you are investing 2-10% of your overall assets in each position, you need to concentrate it in the type of investment vehicle that will protect your downside while allowing for the upside (e.g. invest in optionality)
  • Be Curious - This is important, you need to have an interest in what makes businesses tick and be curious enough to investigate everything about that business (micro & macro). Personally I wanted to be a detective when I grew up and being an investor uses far more of those detective skills than being Magnum PI.
  • Portfolio - Mohnish keeps his portfolio invested for returns in 2-3yrs as follows... 75% invested for 2x, 10% for 3x, 5% for 4x, & 10% for 5x. The last one, the 10% being invested in an idea that will return a 5x return in 2-3yrs is obviously difficult and that portion may remain in cash as a result. Of course he begs you to send him any great 5x returns (mp@pabraifunds.com)
  • Use a Checklist - have a standard checklist, here is a good checklist from Elliott Turner that I think captures a lot of what Mohnish talks about and covers most of the factors that I look at as well.
  • Review failures - Was it obvious before the investment was made, how did the failure represent itself in the numbers, where were the signs.
  • Recommended books from Mohnish - The Frackers & Give and Take.
  • Read regularly - WSJ, FT, Forbes, Fortune, Business Week, Economist, Manual of Ideas,

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