Mohnish Pabrai (Trades, Portfolio) is perhaps best known as a value investor -- and a very successful one at that. However, it turns out that one of his most successful investments ever was not a pure value play. Instead, it appeared to have some of the hallmarks of Phil Fisher-style scuttlebutt investment.
The scuttlebutt
Fisher described the scuttlebutt method in his now legendary book, "Common Stocks and Uncommon Profits." The strategy was relatively straightforward. The investor argued that the best way to find the most desirable stocks was to spend time trying to get to know each business, talking with customers, suppliers and other stakeholders to truly understand what made the business special.
Fisher's philosophy has helped many investors, including Warren Buffett (Trades, Portfolio), who once said that his investment style was 85% Benjamin Graham and 15% Philip Fisher.
At its core, the scuttlebutt method is about understanding the companies you own, which is something many investors overlook.
In a presentation and Q&A session with the UCLA Student Investment Fund at the beginning of November, Pabrai explained that when he started his first investment fund, which had around $1 million in assets under management in the mid-1990s, the portfolio was dominated by a "significant amount of software and technology names." He went on to add that he focused on these sectors because "that's what I knew well." The investor founded his firm after selling a technology business that he had founded several years before.
One of these stocks ended up becoming a 100-bagger for the small fund. As Pabrai explained in his Q&A session, he bought about $10,000 of this Indian tech business, called Satyam Computer Services, because he knew the team well. He said he had some clients in common with the firm and was "very impressed with the way they ran their affairs." However, despite the fact that the business was well run and growing at 50% a year, "they were trading for below the liquidation value of the real estate they owned."
The value investor went on to explain that initially, he had no intention of selling the stock, but at the height of the internet bubble, they spun out a division. Both the parent and the spin-off became very highly valued, so Pabrai decided to sell.
Another 100-bagger was a firm called CMGI. On the face of it, this appeared to be yet another scuttlebutt style investment. The company was creating dot-com businesses. Pabrai said he "knew the internet would be big, and I knew that some of these businesses would make it."
CMGI provided an excellent way to access the dot-com boom without taking on too much risk of investing in individual securities. The company rode the wave to the bubble's peak, earning Pabrai and his early investors good returns.
Today, Pabrai is probably best known for his deep value investments, buying $1 for $0.50. He has had a great deal of success over the years, finding these securities and earning good profits. But his success in finding growth companies in the beginning shouldn't be overlooked. They are two great examples of why it is important to know what you're owning and why having an edge can be hugely beneficial when investing in growth stocks, or indeed any stock at all.
Pabrai said he knew both of the companies relatively well, and with this knowledge, he was much more comfortable buying the stock, especially when it was trading at a discount valuation. The general market sentiment and euphoria of the time undoubtedly helped inflate his profits, but one should not overlook the benefits of detailed research and the powerful combination of buying growth at a reasonable price.
Disclosure: The author does not own any share mentioned.
Read more here:
- Mohnish Pabrai: On Growing Pies and Changing With the Times
- Warren Buffett and Seth Klarman's Advice on Developing a Plan and Sticking With it
- Glenn Greenburg Buys Large Holding of Aon in 3rd Quarter
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