Warren Buffett and Charlie Munger aren’t the only successful value investors around. Value investor Mohnish Pabrai’s long-only equity fund has returned a cumulative 517% net to investors since it was founded in 2000, compared to a cumulative 43% for the S&P 500 Index. Although Pabrai is less well known than some Wall Street fund managers, his performance over the last decade and a half puts him in the top 1% in his profession.

 

Mohnish Pabrai’s advice for successful value investing

Learn about value investing — According to Mohnish Pabrai, the first thing you need to do is learn about value investing. He suggests reading all of Warren Buffett’s annual letters to shareholders and he also recommends the Buffett biographies penned by Lowenstein and Schroeder.

Thoroughly research potential investments — Pabrai says you must do in-depth research to find truly undervalued companies. In general, he is looking for investment where he can make at least five times his money within a few year time horizon. His mantra is: Heads I win, tails I don’t lose much.

Think long term — Mohnish Pabrai clearly Charlie Munger’s admonition that “money is made not in the buying or selling but in the waiting” very seriously. He makes relatively few investments, saying a couple of good investment ideas a year is plenty to keep him busy. He also noted he generally keeps 10-20% of his portfolio in cash.

Deconstruct your mistakes — Always strive to understand what went wrong on a losing investment. Internalizing your errors allows you to avoid repeating mistakes.

Pabrai’s checklist for potential investments

Atul Gawande’s Checklist Manifesto, which describes how the basic idea of checklist has led to huge improvements in safety in the airline cockpit and the operating room, was a real eye-opener for Mohnish Pabrai. He decided to test whether a checklist could also work for investors.

In a recent talk, Pabrai said he began developing his investment checklist by examining the record of the investors he admired and breaking down their mistakes. He mentions Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B)’s purchase of Dexter Shoes — a great product used by everyone with feet, but it’s stock price was decimated within a year or so by cheap foreign labor.

Mohnish Pabrai ended up with more than hundred check boxes on his investment checklist.  The checklist items are grouped into categories. One group relates to leverage.  A second group relates to the durability of the business’s “moat” — how hard is it for new businesses or competitors to duplicate their product or service.  A third group looks at the quality of the company’s management.  There is also a fourth set of miscellaneous items, such as unions and labor relations, or is it’s current success due to temporary factors?

Fund Manager Mohnish Pabrai Seeks Value Home Runs