Distinguished Speaker Series Lecture and Q&A with Mohnish Pabra “The Quest for 10-100 Baggers,” Value Investing Course (1st Ever in China)
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Mohnish Pabrai – The Quest For 10-100 Baggers
Khrom Capital was up 32.5% gross and 24.5% net for the first quarter, outperforming the Russell 2000's 21.2% gain and the S&P 500's 6.2% increase. The fund has an annualized return of 21.6% gross and 16.5% net since inception. The total gross return since inception is 1,194%. Q1 2021 hedge fund letters, conferences and more Read More
Mohnish Pabrai: It’s a true pleasure and honor to be invited to speak to the students and obviously Peking University amongst the best of the best. And I saw a few of the resumes and they look exceptional. We’ve got lots of horsepower in the room which is great. Behind me is a bust of Charlie Munger. Charlie will be overseeing the proceedings for the next couple of hours, so in case we go off track he’ll get us right back on track.
The topic for today is the quest for 10 to 100-baggers This term, 100-baggers, comes from Peter Lynch. It means making 100 times on your investment or making 10 times on your investments. If you say 10-baggers it’s 10 times, 100-baggers is 100 times. I haven’t given this talk before which is always a lot of fun for me because it’s very boring if I have to repeat some talk that I’ve already given before. In some ways, you guys are guinea pigs but in other ways, I think it’ll be exciting. And because I’ve not given the talk before, I’m not entirely sure of the timing, but I’m going to try to move this along because there’s a lot of material. It’ll feel like it’s going pretty quickly but that’s why we have the recording – so later you can watch it more at your leisure if you want to at certain parts. But also certainly during the Q&A we can go through things that you have an interest in.
I started my journey as a value investor 22 years ago, and I quite by accident heard about Warren Buffett for the first time. Unlike you, when I heard about him, I was 30 years old so I was much older. When I read about him I was really stunned. I haven’t been to business school. I’m an engineer by training. All of you probably know a lot more about finance than I do. But I was really stunned with Warren Buffett’s approach and the way he had been so successful. And the crux of his success, at least what I took away from what I read in 1994, was a quote by Albert Einstein which is, “Compounding is the 8th wonder of the world.” Even though Einstein was a physicist, he actually figured out a few things about compounding. And obviously, in ’94 when I had read about Buffett, he had been compounding at the rate of about 25%, 26% a year. And 26% is a magical number. I thought of the magical number then because if you compound money at 26%, it doubles in exactly three years. If you have $1,000 and you compound at 26%, you’re going to have $2,000 in three years and so on. And if you go for 30 years that’s 2 to the power of 10. And this group doesn’t need me to tell you that 2 to the power of 10 is 1,024.
Throw away the 24 and it’s 1,000 times your money. If you had $1,000 and you compound it at 26%, 30 years later you would have $1 million. If you had $1 million and you compound it at 26%, 30 years later you’ll have $1 billion. That’s basically the key to Buffett’s success. I thought it was worth trying to do what Buffett did. Of course, there’s no way that we’re going to have another Warren Buffett. But I thought it was worth trying to compound at high rates. Gradually over five years, I switched from being a CEO of an engineering company to eventually being a hedge fund manager. The key nuance, or you can say mental model I used was very simple. I looked for companies that were selling for half or less than what they were worth in two or three years. So if I could find a dollar bill for 50 cents then what that meant is that if it got valued as a dollar in two years or three years I would be compounding at 26%, and if it happened in two years, it would be even higher. It’d be like 35%, 36%. So I said it’s worth trying to seeing if we can find these 50 cent dollars because 26% sounds high. I didn’t think it was that hard to find things that are half off in an auction driven market, and I thought it was worth trying because the rewards are so high. That’s what I embarked on doing. I said, “Okay, let’s try to find these dollar bills for 50 cents.” And then you just sit back and wait for two years or three years. Markets are a weighing machine in the long term and they’ll get reweighed accordingly. And for the most part, if I look at my performance from ’95 until let’s say 2014, it’s done about the 26% approximately. The last two years I’m down about one-third, so we were taken down a little bit. But we think in the next few years we’ll make it up. We’ll see how it goes. I’ll report to you next year when I’m with you in-person.
Read the full transcript below.