Mohnish Pabrai (Trades, Portfolio) is my favorite value investor. He is also an investor I believe people can learn a significant amount from.
I like Pabrai because his style is simple. Much like Warren Buffett (Trades, Portfolio), he prefers a strategy where the value is clearly apparent, and there is no need for complicated investment analysis to arrive at intrinsic value. Pabrai places an enormous degree of value on a company’s management, the record management has and whether or not he would be comfortable investing alongside them.
One such example is Fiat Chrysler Automobiles (FCAU, Financial). As Pabrai wrote in his second-quarter 2016 letter to investors, if Sergio Marchionne had not been at the head of the company, he probably would have passed:
“If one had invested ~$1 million in Alusuisse when he became CEO in 1996 and then kept moving those funds as Sergio moved, that $1 million would be worth north of $30 million today. And that includes 12 of those 20 years spent in the lousy car business – with zero prior experience in the auto industry. By 2019, when he intends to hang up his boots and study Theoretical Physics (yes, that’s right!), that $1 million will likely have grown to over $100 million.
When Marchionne came to Fiat in 2004, it was on life support and almost bankrupt. It had cycled through three chairmen, five CEOs and three heads of Fiat Auto in the previous four years. He nursed it back to health and solid profits so that, in 2009, when the much larger Chrysler was nearly liquidated by the U.S. government and the lights were about to be shut off in Detroit, he was there to pick up the pieces. And he negotiated the purchase with no cash going from Fiat to Chrysler’s owners. If there is a better negotiator than Sergio on the planet, I am not aware of it.”
Simple value
As mentioned above, Pabrai likes simplicity. He likes companies that are simple to understand and the value is apparent. He is not afraid to wait for the thesis to play out and believes patience is the best trait any investor can have.
On the topic of simplicity, during a talk at Google in July 2014, he said:
“The most important thing is that, before you invest, you should be able to explain the thesis without a spreadsheet within four or five sentences. Typically I write down those sentences before I invest, so if I have a conversation with someone you could very quickly explain why this investment makes sense.”
Later, the conversation moved to patience:
“Good traits, or important traits for being a good investor, number one, the single-most important skill is patience. So I think the thing is that markets have kind of a way of deceiving us, because you know when you turn on CNBC and you see all those flashing red and green lights and all that, it's inducing the brain to think that you need to act now, and you need to act immediately. Nothing could be further from the truth. You know Buffett always talks about having this punch card where in a lifetime you make 20 punches, and each time you buy a stock you punch it once so in a lifetime you’d make 20 investment decisions. Which means that if you started investing at 20 and ended at 80, every three years on average you’d make one investment. And that is very hard for most people to do. And so, the more you can slow down your investing, and the more patient you can be, so the issue is that the time scales of which companies go through change and such, is very different from the time scales of which the stock market operates. So you really have to focus not so much on the stock market and have a lot more focus on the nature of change in businesses and be willing to be in there for a while.”
I do not want to debase Pabrai or his career, but the above quotes really do sum up his investment style quite succinctly; buy cheap companies that are easy to understand with good managers and wait. There is another part of his investment process that is all too easy to comprehend, but few investors fail to follow.
Pabrai’s book on value investing is called "The Dhandho Investor," a title which may not mean much to you at first. As Pabrai explains, however, Dhandho is a Gujarati word, which is a way of doing business where you have upside with almost nonexistent downside – arguably one of the most important lessons in investing.
Disclosure:Ă‚ The author own no stock mentioned.
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