One of our favorite investors at The Acquirer’s Multiple is Mohnish Pabrai.
Mohnish Pabrai is the Founder and Managing Partner of the Pabrai Investments Funds, the founder and CEO of Dhandho Funds, and the author of The Dhandho Investor and Mosaic – Perspectives on Investing.
He’s one of the smartest guys on the planet when it comes to investing.
One of my favorite Pabrai interviews was one he did with The Graham & Doddsville Newsletter, it’s a must read for all investors.
Here’s an excerpt from The Graham & Doddsville interview:
Question: How did you get started with value investing?
Until I was 30 years old, frankly, I had never heard of Mr. Buffett. I had never heard of value investing. This was 1994 and I was vacationing in London with my wife. I was looking for something to read on the flight back to Chicago, and I picked up one of Peter Lynch’s books. I am an engineer by training, so this was a different field for me. I read that book on the flight and I loved it.
It made all the sense in the world to me, in terms of how to and how not to invest. I thought this was an interesting area and I wanted to know more about it, so I found that Peter Lynch had another book and I read that one too. I wanted to learn even more, but I ran out of Peter Lynch books to read. I remembered that in one of the books, Peter Lynch mentioned Warren Buffett and told a story of how Buffett had called him to get his permission to use a quote.
This was the first time I had ever heard of Warren Buffett. I figured since Lynch was talking to Buffett, I should learn more about who Buffett is. I looked around, and found the first two biographies that had just been published: Lowenstein’s The Making of an American Capitalist and Hagstrom’s The Warren Buffett Way. I read those books and I just had an epiphany. They resonated strongly with me.
The thing that I found very strange was that if there is such a thing as the laws of investing, Warren Buffett has pretty much laid them out. What I couldn’t understand was that when I looked at the entire mutual fund industry at the time, which were the professional managers that I had exposure to, I saw that these guys not only did not follow the fundamental laws of investing, but most of them didn’t even know what they were.
At the same time, their results reflected sub-par performance. So I thought there must be a correlation between these guys not following the rules and having poor performance. The second thing I found very strange was how you can have an entire industry which does not function with a solid framework. To me, it is like people doing brain surgery by just ‘winging it’.
That is how I saw mutual funds work – they were just winging it, or they come up with any nuance or ‘flavor of the day’ they want to pursue. I had a thought that if novices like me simply adopted Buffett’s approach and invested in the equity markets with a concentrated portfolio, etc. that I was likely to do better than most of the industry professionals. So I said it was worth testing this hypothesis out. I was lucky at the time in 1994; I had about $1 million in cash. I had just sold some assets of my business and I decided to go ahead and manage that in a Buffettstyle concentrated portfolio, buying things I understood, etc. That is how I got into value investing.
Question: You have managed Pabrai Funds since 1999. That must have been quite a time to open a value fund.
Actually, 1999 was very interesting. I think it was a great time to start as a value investor because the market in 1999 and 2000 had segregated. As a matter of fact, on the day that the NASDAQ hit its peak, Berkshire hit its 52-week low. What happened is that a lot of money had gone into these frothy dot-com type stocks, but effectively it had come out of brick-and-mortar, normal businesses. A lot of brick-and mortar, real-world businesses were trading really cheap. So it was actually a great time to go into the equity markets as long as you didn’t drink the same Kool Aid that everyone else was drinking. In fact, after Pabrai Funds’ first year, in June 2000, we were up approximately 38% after fees. Then the second year we were up by mid- 30% after fees. We did really well in the year when everything crashed and burned, for that reason.
Question: Over the past 10 years, how have you seen the value investing landscape change?
There isn’t much of a change. The good news is that there is now more of a community with things like Whitney’s newsletter (Value Investor Insight), conferences, and the Columbia Value Investing Program. Clearly there is now more interest. However, if you look at all of the people involved with investing in the equity markets worldwide, the percentage of them that focus on true value investing is still a very, very miniscule percentage. I think that, in general, the opportunity to do value investing is almost as good as it was 10, 20 or even 30 years ago.
Question: Where do you hunt for your ideas?
When I look for ideas, I look in places like the 52-week-low list, Value Line, as well as stocks with low P/E ratios, low P/B ratios, or large discount-to-book value. Now I have Joel Greenblatt’s Magic Formula; I look at that on a daily basis as well. I also subscribe to Portfolio Reports, published by Outstanding Investor Digest, which gives a listing of all the buying of major value investors every few weeks. I also look at 13F filings of the usual suspects such as the Fairholme Fund, Marty Whitman, Einhorn, and all of those folks. That is basically where I go fishing.
Question: What are characteristics of the companies that attract you?
In general, I look for industries with a slow rate of change, companies with some type of moat, and companies with hard assets. I look to buy businesses where I can rest my hat on the hard assets of the business. Other times, I look at businesses that have more of a franchise value, so the intrinsic value is made up more of intangibles such as brand, etc. Basically, what I’m trying to do is find businesses that I can buy well below what they are worth. I usually try to make one bet per industry, and I typically put 10% of the fund’s assets into each