Like many value investors, Mohnish Pabrai (Trades, Portfolio) started his career by finding cheap businesses that were trading at below intrinsic value. However, like so many other value investors in the 21st century, he has adapted his investment philosophy over time to try and identify really great businesses that can compound shareholder wealth and yield 10, or even 100, times what they invested. When addressing students at Peking University back in 2016, Pabrai explained how he goes about finding "multi-baggers."
An accidental 60-bagger stock
In the mid-1990s, Pabrai had been investing in Indian publicly traded companies. At the time, buying shares in an Indian company meant literally buying physical pieces of paper. One day, he was trying to sell his shares in a business and was informed by his broker that one of the certificates was fake and that they would not execute the trade for that particular certificate.
So he put the certificate into his desk and forgot about it. Years later, he looked at it again and thought that it might not be fake after all. And sure enough - he was able to sell the shares. In doing so, he realized the stock that he had accidentally held for 21 years had gone up 60 times. His $7,700 investment would have grown to almost $500,000 if he had kept the rest of the certificates.
While he was doing this, Pabrai began to wonder whether there were other stocks in his portfolio that had continued to compound shareholder wealth to similar levels after he had sold them. After doing some research, he found out that of the 14 Indian stocks that he had owned in 1995, four went up more than 50 times.
Look for strong tailwinds
So how does one go about finding these exceptional businesses? Pabrai sorts these multi-baggers into five distinct categories. The first category are companies that have huge tailwinds, which means:
"They just have all the factors moving in their favour, they have very deep moats, they have very long runways, they have very high return on equity, they typically don't need any debt, and the most important condition is that an idiot can run these companies."
As examples, Pabrai named Coca-Cola (KO, Financial) See's Candy (owned by Berkshire Hathaway (BRK.A, Financial)(BRK.B, Financial)), Moody's (MCO, Financial), Visa (V, Financial), Mastercard (MA, Financial) and American Express (AXP, Financial). His advice to investors is to find businesses around that world that have similar economics to these companies. For instance, if you know that Coca-Cola, or the companies that operate its bottling plants, are great businesses, then you need to find that companies that fill similar niches abroad.
Disclosure: The author owns no stocks mentioned.
Read more here:
- Seth Klarman: Short Selling Should Not Be Banned
- Howard Marks and Seth Klarman: The Difference Between Cycles and Timing the Market
- Advice From Li Lu
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