Mohnish Pabrai Explains His “Circle of Confidence”

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Mohnish Pabrai is an Indian-American IT entrepreneur and investor who currently manages the Pabrai Investment Funds. Pabrai is a well-known value investor and disciple of Warren Buffett. He has published a book titled “The Dhandho Investor: The Low-Risk Value Method to High Returns.”

Pabrai recently sat down for a Q&A with an audience of investors at The Economic Times Value Investing Summit. He answered questions on a variety of subjects focusing around his investing strategy and experiences.

Understanding Mohnish Pabrai’s “Circle of Confidence”

Satyam Computers was one of Mohnish Pabrai’s earliest investments. He initially bought shares at 40 rupees each, and ended up selling them five years later for 7000 rupees a share. Pabrai said he was very confident about the investment when he first bought the shares, and he knew at the time that he would have to hold them for several years to get full value.

He begins a serious consideration of an investment by running the financial analysis and then writing a five or six sentence paragraph outlining the investment thesis, intrinsic value and potential exit price and timeline. After that, he regularly updates the investment thesis paragraph every few months as necessary.

Firms that qualify for the circle of confidence have to be undervalued and low risk. Pabrai’s investing philosophy can be summed up in two phrases: “Heads, I win! Tails, I don’t lose that much!” and “Few bets, big bets, infrequent bets.”

Pabrai not active in 2013, 2014

When asked what investments he was currently considering, Pabrai replied that he was not very active right now. He said there was “nothing to buy in U.S”, but there were  a “few possibilities in Asia and Europe”. He also noted that the current holdings of the Pabrai Investment Funds were very concentrated, with just 3-4 holdings right now.

Buy and hold is best

Pabrai emphasized the importance of patience and the buy and hold strategy for value investors. When asked about his current investment ideas, he replied “I will be twiddling my thumbs for a while, which is fine with me.”

He went on to talk about a study undertaken by mutual fund giant Fidelity Investment a few years ago. Fidelity looked at all of their accounts, and noted that the two categories of accounts that had the highest long-term returns were the accounts of the deceased and accounts that had been forgotten by their owners.

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