Value Investing

Mohnish Pabrai – Focus On Individual Stocks And Never Ever Invest In IPO’s – Here’s Why

Here’s a great interview with Mohnish Pabrai on ET Now. With regards to IPO’s Pabrai says, “The simple rule to follow is do not buy what is being sold, especially what is being sold by promoters. Just completely side step the IPO market.” In relation to individual stock investment he says, “The most important thing after getting fluency on compounding is to have patience. We will not find investments every day or every month or every year.”

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Mohnish Pabrai Indian-American businessman, investor, and philanthropist famous hedge fund investors, value investors, chai with pabrai, heads i win tails i don't lose, pabrai funds, Mosaic: Perspectives on Investing, clone investing, The Education of a Value Investor, The Dhandho Investor: The Low - Risk Value Method to High Returns, Zinc, Horsehead holdings

Here’s an excerpt from that interview:

Coming to the IPO market, there is so much activity happening there. Now, there are two camps that are approaching this market differently. One camp of course believes you go in for the high prices, names the consumer companies which are coming to the bourses at elevated valuations, buys them for the listing pop and take your gains on day one. The second camp is, of course, more focused on the deep structural stories that are bringing about a change in the economy. For example, you have had a series of insurance papers come into the market from the general insurance side, life insurance side and also reinsurance. As business is picking up you have to keep your faith for the long haul. What would be the best way to approach the IPO market?

Yes, so there is a very simple rule of investing I follow, which is never ever invest in any IPOs and it has not hurt me over the decades following that rule and there is a number of reasons why that should be the mantra of most investors.

So first off all an IPO is a company selling shares into the market. The company controls the timing, the company controls the story, the company has lot of control over many factors and they are optimise to maximise the proceeds that the company is going to get. If the IPO market is hot for consumer non-durables, you are going to see a lot of consumer non-durables come out of that time and so one of the big advantages we have with equity investing in the markets is that these are auction driven entities and auction driven entities basically tend to give us a pricing that goes to extremes.

At times, it gets very euphoric and at times it gets very pessimistic and as an investor you can take advantage when things get pessimistic and usually be a seller when things get euphoric. For example, I mentioned the real estate firms at one-fourth of liquidation value.

If I went to those promoters last year and I said to them listen I want to buy 25% of your company or 10% of your company or 1% of your company, would you sell it to me at a 20% premium to your current stock price they would just laughed me out of their office and say get lost. They would not be willing to sell it to me at five times the price that the stock was trading at because they know what is its worth and they know it is undervalued.

The beauty of the stock market is it allows me to buy those stakes without having those conversations with those promoters and that is the only reason why I was able to buy those stakes. It is the same thing between industries. In 2015, the company would not be willing to issue equity at those prices, they would never have issued equity at those prices but they did not need to. You could just buy it from unsuspecting investors in the market.

The simple rule to follow is do not buy what is being sold, especially what is being sold by promoters. Just completely side step the IPO market.

The second is insurance. Clearly. India has a number of areas insurance, banking, asset management and so on that will grow a lot. They will grow at multiples of GDP growth and GDP growth itself will go through a lot but the investing game is not so much about these macro themes, it is getting down a specific business.

You have to identify businesses where the management is not only honest but they are also highly competent and they are going to go for growth. Also, you have to go for businesses where they are strong tailwinds and which are producing and gushing cash, producing lot of cash and when you get that combination at a reasonable price, that is when you step in. The rest of the time you do nothing.

The most important thing after getting fluency on compounding is to have patience. We will not find investments every day or every month or every year. I mean if you talk to me right now. I can hardly find anything to buy in India.

There are 5000 companies traded in India I can hardly find anything to buy and that is not a tragedy it is perfectly fine. There will come times in the future when we will have plenty of opportunities and the important thing is when those time show up, you should have the will and the resources to act on it.

You can find the complete interview with ET Now here.

Article by Johnny Hopkins, The Acquirer's Multiple

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