Being an investor is a continual learning process.The only way one can keep up with the investment environment is to change with the times, learn about different subjects and adapt to the changing environment.
There are many examples of successful investors who've needed to make these changes to stay relevant. One is Mohnish Pabrai (Trades, Portfolio). In a recent speech to the UCLA Student Investment Fund on Nov. 5, Pabrai explained how his investment strategy has adapted over the past few years.
A changing style
Pabrai started off as a deep value investor. When he started his hedge fund around 20 years ago, he focused on finding deeply discounted securities, buying them at a fraction of their net worth and then holding the stocks until the discount between intrinsic value and the market price had narrowed. As the value investor explained in his recent speech:
"I was always looking -- for the last 20 years -- for discounted pies. I didn't really care whether the pie grew or not. My take was that if I bought a business for 40 cents or 50 cents on the dollar, and I've always implicitly assumed that market efficiency would kick in in two or three years. So if I'm correct that a business is worth a dollar and I'm buying it for 50 cents, and I sell it for 90 cents and that convergence takes place in two or three years, it's a very nice rate of return in the 20s."
This "very nice" rate of return, he explained, removed the need to find high-quality compounder style businesses.
However, as he went on to explain, there were two problems with this approach: the fact that "you've got to keep finding the next one and the next one" and "taxes."
A much better approach, he observed, would be to find high-quality businesses and sit on them for decades. But this was not the way "Mohnish is wired," the value investor explained to his audience.
"He is unable to pay up for great businesses," Pabrai added. Other investors are more willing to pay up, but "I know Mohnish and Mohnish is just not wired that way."
This is a remarkable statement because it shows the need to understand our own qualities as investors. Lots of different investment strategies achieve positive results, but there's no point in following a process if you're not comfortable with it. This realization won't occur overnight. It requires emotional intelligence and experience to know what you are comfortable with, and more importantly, what you're not comfortable with.
Rather than pursuing an investment style he was not happy with, Pabrai took the best of both the quality and value methods and merged them into something he was happy with:
"So I am limited to a universe where a compounder is maybe not recognized, or it has hit a temporary hiccup or something where the valuation is really cheap, but there is a genuinely long runway for growth ahead. Instead of just getting off that train when it looks fully priced, which is what I did many times in the past, the idea is to stay on the train and only get off the train when it gets so egregious."
Pabrai explained that he had made this mistake several times in the past, which was part of the reason why his strategy changed. He had sold good companies too early and moved on to other businesses that have not been so successful. This was one of his main lessons of 2020, he told his audience. But with "20 to 35 years" of life left in him, he added, it was not too late to change course.
Disclosure: The author owns no share mentioned.
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