I recently came across two videos with Mohnish Pabrai (Trades, Portfolio). Readers here know that Mohnish is one of my favorite investors to listen to. He is extremely generous with his time, and he has a genuinely interested attitude toward his audience. You can tell that he truly enjoys teaching others about his investment experiences.
Pabrai has given numerous lectures over the past year, and I wrote a summary of one that I thought was particularly interesting here.
In that post, I summarized Pabrai’s results, which I thought are good enough to repost here:
- 1995-1999: 43.4% annualized
- 1999-2007: 37.2% annualized (he started Pabrai Funds in 1999 and this is before his fees)
- 2007-2009: -41.7% annualized
- 2009-2013: 32.7% annualized
- 1950-1956: 43.0% annualized
- 1957-1964: 27.7% annualized
- 1965-1993: 29.1% annualized
Pabrai runs a concentrated portfolio. He only owns 7 stocks currently, and the majority of his assets are in Horsehead Holdings, General Motors Warrants, Bank of America, Chesapeake Energy, and Citigroup. He has mentioned at recent annual meetings that he is also willing to hold sizable cash positions temporarily while waiting for the right investment opportunity.
Probably the most important thing I’ve ever taken away from Pabrai’s lectures is the following advice that he often gives… He says that in order to significantly beat the market, or to achieve significant results of 20-30% annual returns, you have to do two things:
- Don’t try to beat the market (go for absolute returns as opposed to focusing on what the indices are doing)
- Don’t buy any stock unless you feel it has the potential to be worth 2-3x in 2-3 years
I think there are subtle differences in the way you think about this that can mean big variations in long term results.
The second point is also an excellent one. I sometimes alter the 2-3 years to an indefinite time period, as I’m willing to own stocks for longer periods, but the concept is the same. You need to find huge gaps between price and value. I read write-ups all the time on Seeking Alpha and elsewhere where there is 24% upside, or 35% upside, or even 60% upside. Furthermore, these same write-ups often say things like “plus it has a margin of safety”. To me, if a stock has 35% upside, it doesn’t have much of a margin of safety. I equate the gap between price and value with the margin of safety. Of course, if that amount of upside is accurate, it’s not a bad result. But the problem is that if one thing goes wrong, then the upside disappears in a hurry, threatening your principal.
It’s hard to find 50 cent dollars, and that’s why Pabrai is extremely patient, waiting and waiting for the right opportunity. This unwillingness to invest in moderately undervalued ideas is one reason why he has been able to achieve such excellent long term results. His patience and his ability to wait for the right opportunity is likely one of the main competitive advantages he has as an investor.
Enjoy the videos…
About the author:
By using separate accounts, Saber offers its clients complete transparency and liquidity (the funds are held in the name of the client and cannot be accessed by the investment manager). Saber looks to partner with like-minded clients who are interested in a patient, long-term approach to investing that is rooted in the principles of value investing.
I also write at the blog www.basehitinvesting.com.
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