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#MICUS: Value Managers Say Their Style Is Far From Over
Note of Chuck Bath, David Wallack, and Ramona Persaud's presentation from the 2020 Morningstar Investment Conference. Q2 2020 hedge fund letters, conferences and more Dead Again? Value Managers Say Their Style Is Far From Over For more than a decade, large value has been one of the most difficult factors to own. Moderator Linda Abu Read More
What You’ll Learn
- Mohnish Pabrai’s uniquely not so unique investment framework
- How Pabrai crushes the market with checklists
- Pabrai’s investment advice
- Recommended books on Checklists
With an outperformance of 1100% compared to the market since inception in 2000, Mohnish Pabrai is a classic value investor and household name.
I heard about Mohnish around the time he and Guy Spier famously won a lunch with Warren Buffett for $650,100 in 2008.
One of the reasons why we like Mohnish Pabrai at Old School Value is that he is the perfect model of what ordinary people can do when they find something that they love and have the plan, perseverance and discipline to do it.
If you don’t know what I mean, here’s a quick background on how Pabrai became an investor.
Mohnish Pabrai: The Relatable Super Investor
Mohnish Pabrai is an Indian born investor, came to the United States to attend Clemson University in North Carolina in 1983.
He didn’t major in finance.
Pabrai was an engineery by trade and running a successful IT business and never heard of Buffett until he was 30. In fact, the first investor Pabrai discovered was Peter Lynch, not Buffett.
Anyway, here's the part of the story that resonates with me and a lot of other DIY investors.
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 Buffett-style concentrated portfolio, buying things I understood, etc. That is how I got into value investing.
He was an immigrant, didn't have any formal investing training and realized how nonsensical the investment industry was.
Starting with his own money to launching a fund, it's a good thing Pabrai “got” into value investing.
Pabrai's long-only equity fund has returned a cumulative 517% net to investors vs. 43% for the S&P 500 Index since inception in 2000. An out-performance of 1,103%.
- H/T Valuewalk.
Did he have a unique process to achieve such returns?
If you go through the material available on Pabrai, you'll realize what a diehard Buffett and Munger fan he is. From an old interview in 2008, he said that he read Poor Charlie's Almanack 7 times.
And if you listen to any of his interviews, it's full of Buffett and Graham lessons.
Monish Pabrai's Investing Philosophy
In a nutshell, Pabrai's investment framework is:
focus on long-term investing and the power of compounding based on Warren Buffett's “moat-based,” Graham's “Special Situations” and Munger's “Latticework of Mental Models” approaches to investing.
Pabrai lays out his framework in his book The Dhando Investor (highly recommended in my must read book list) where he discusses the Dhando framework.
- Focus on buying an existing business
- Buy simple businesses in industries with an ultra-slow rate of change
- Buy distressed businesses in distressed industries
- Buy businesses with a moat
- Bet heavily when the odds are overwhelmingly in your favor
- Buy businesses at big discounts to their underlying intrinsic value
- Look for low-risk, high-uncertainty business
Just super common sense along with application of Buffett's timeless principles.
The difference is that he stuck with it while his peers were rushing to find the next shiny object, the next big thing.
One of the takeaways he got from his lunch with Buffett was this very idea when Buffett asked him:
‘Would you prefer to be the greatest lover in the world and be known as the worst, or would you prefer to be the worst lover and be known as the greatest?' And [Warren Buffett] said, ‘If you know how to answer that correctly, then you have the right internal yardstick.'
Mohnish Pabrai: The Checklist Investor
Pabrai probably talks about checklists the most (along with Guy Spier).
He is known to have page an intense set of checklists accumulated throughout his investment career. He stated that he doesn't talk about too many specific parts of his checklist because it is his competitive advantage.
However, he provides plenty of high level information on how you should build a checklist and the types of things he looks at.
It just comes down to putting in the time to create your own checklist.
Instead of constantly being on the lookout for new stocks to buy, take a step back and go over your past mistakes.
Pabrai simply started making his checklist by studying the mistakes of Warren Buffett and as of 2013, he had 97 or 98 broad questions on his checklist that takes about 15-20 minutes to run through.
He also saw that most of the mistakes made by the guru investors fell into five groups.
- management and ownership
- personal biases
A good starting point, if you don't use a checklist, will be to focus on these five parts.
So for example, Berkshire Hathaway lost money on Dexter Shoes, when they bought Dexter Shoes. A question that comes up on the checklist is, is this business a business that can be affected negatively by foreign competition? Can it be affected negatively by low-cost labor in other countries? Those came out of, for example, the Dexter Shoes example.
Since I put the checklist in place, in 2008 till today, we have made I think more than 30 different investments in the last five years or so. We only have so far, we invested about $200 million. We've already exited a bunch of positions and we've exited with about $500 million on those positions, and we only lost money on two investments. And the total amount of money we lost from those two investments is less than 5 or 6 million dollars. And I think a large part of that is the checklist significantly brought down the error rate.
If you need some guidance on how to build a checklist, or want a template to start, I have a checklist collection that I share with people
If you want to make it easier on yourself, you can download a collection of checklists that I've compiled. Just click the image below and enter your email to get the download link.
Mohnish Pabrai's Holdings
What you also have to know about Mohnish Pabrai is that he has nerves of steel and has conviction in his own ideas.
He only holds seven total positions total with his biggest position being Fiat Chrysler, followed by GM warrants making up close to 70% of his portfolio.
A lot of people on boards on the internet criticize Pabrai for continually averaging down on ZINC – which goes back to that lover analogy Buffett told Pabrai and Spier during lunch.
Everyone thinks he is a loser for holding and buying ZINC, but he believes otherwise.
The other thing to remember is that you also have to put things into context.
Ridiculing an investor like Pabrai by isolating ZINC is ridiculous. Whether it's a mistake or not is yet to be seen. Everybody is going to make mistakes, but the key is whether you make a mistake with your 48% holding or your 5% holding.
Must Read Books Related to This Article
Further Reading and Related Links
- Mohnish Pabrai, Guy Spier and Michael Shearn on investment checklists
- How Mohnish Pabrai crushed the market by 1100% since 2000
- Pabrai Funds Annual meeting notes 2014
- Making Heads and Tails of Mohnish Pabrai
- Mohnish Pabrai 2015 Investor Meeting
- Pabria's Checklist presentation
- Valuewalk Pabrai resources
- A checklist for investors
- How Mohnish Pabrai and Charlie Munger use a checklist
- Checklist investing and how to avoid errors and learn from mistakes
Interview and Talk by Mohnish Pabrai
Additional Articles I Recommend
This post was first published at old school value.
You can read the original blog post here Mohnish Pabrai – The Checklist Investor Crushing the Market by 1100%.