A couple months ago I watched this video of Pabrai giving a lecture at Columbia. I've talked about Pabrai's ideas before on this blog, but I thought this lecture was by far the best I've seen regarding Pabrai's background and how he got his start as a value investor. His comments on compounding are also very interesting.
Pabrai mentioned that in 1994 he began reading about Buffett, and became amazed at Buffett's ability to compound capital. He did a study on Buffett's performance beginning in the early '50s (even before Buffett started his partnership when he was making his greater than 50% annual returns).
Compounding: The "8th Wonder of the World" Buffett Results:
Buffett had incredible returns that absolutely stunned Pabrai:
- 1950-1956: 43.0% annualized
- 1957-1964: 27.7% annualized
- 1965-1993: 29.1% annualized
The interesting thing is, he is actually replicating these results after 18 years! Take a look at how Pabrai breaks down various periods of his career thus far:
- 1995-1999: 43.4% annualized
- 1999-2007: 37.2% annualized (he started Pabrai Funds in 1999 and this is after his fees)
- 2007-2009: -41.7% annualized
- 2009-2013: 32.7% annualized
One of the things I found interesting was how he noticed that mutual funds were primarily index hugging vehicles that didn't provide much value. He noticed that Buffett invested very differently than the mutual funds. “I found that the entire fund industry worked a certain way, and that their results reflected the mediocre way in which they operated.”
So he went from not having ever heard of Buffett in 1994 to deciding that he would spend the next 30 years of his life investing, to now having achieved an 18-year track record of nearly 26% per year. Incredible.
How Did Pabrai Achieve Incredible Investment Results?Here is how Pabrai summarized his presentation prior to the Q&A:
- "Take one idea and take it seriously"
- Remember the power of compounding
- Clone the best investors
Also, remember that to make 26% per year, you have to do things differently. Pabrai said that to beat the market, and to compound at 26% per year, you have to:
- Not try to beat the market. Think in terms of absolute targets.
- Not buy anything that is not going to go up two to three times in the next three years or less.
Those two points are not what you normally hear from other investment professionals. But it is that type of thinking that has enabled Pabrai to make 25.7% gross annual returns.