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Stepan Lavrouk
Stepan Lavrouk
Articles (575) 

Mohnish Pabrai: Don't Think Too Much

Too much emotional investment might not be the best thing for your financial investment

July 20, 2020

Earlier, I wrote an article that looked at two cognitive biases that have undermined many investors: the anchoring bias and the blind spot bias. It’s hard to correct your own cognitive biases - if it were easy, no one would have any flaws in their thinking.

In a 2017 talk at Google, value investor Mohnish Pabrai (Trades, Portfolio) gave his audience a few techniques to overcome their own cognitive biases.

Countering biases

Pabrai began by introducing the concept of a "Best Ideas Fund." The basic idea of a "Best Ideas Fund" is to get a group of the best-performing asset managers together and ask them to submit their number one favourite investment idea. The fund would then invest in those stocks (or bonds, or real estate, or whatever asset class).

It sounds great in theory, but in practice, these kinds of funds haven’t worked out so well. Why is that? As it turns out, thinking too hard about an investment isn’t necessarily the best course of action - it subconsciously commits you to an idea and makes it hard to accept any criticism of it, leading to the development of cognitive blind spots that can often get bigger the more time you spend researching the company.

Pabrai talked about a number of hacks that he uses to fight these cognitive blind spots:

“The first hack was being aware of these facts; this is a huge advantage. Being aware of our biases and how our minds can play games and tricks on us can help us be more rational. Charlie Munger (Trades, Portfolio) says he hasn’t been successful because he’s smart. He has been successful because he’s rational. Another useful thing is to be fluent in the other side of the argument. If you’re going to go long on a stock, it’s probably a good exercise to spend time developing a thesis on why to go short. That forces your brain to think about things it normally doesn’t want to think about. This first hack is to be aware and let rationality prevail.”

So Pabrai’s first tip was just to be cognizant of your biases and to actively try to pick holes in your logic.

His second tip was to develop a filter that will enable you to quickly sort the wheat from the chaff. There are over 3,500 publicly listed companies in the United States, and that’s not even taking into account all the international businesses that are available to investors. You need to have a system that allows you to focus on the ones that are actually worth your time. After all, time is your most valuable resource.

Disclosure: The author owns no stocks mentioned.

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About the author:

Stepan Lavrouk
Stepan Lavrouk is a financial writer with a background in equity research and macro trading. Specific investing interests include energy, fundamental geoeconomic analysis and biotechnology. He holds a bachelor of science degree from Trinity College Dublin.

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