Mohnish Pabrai (Trades, Portfolio) held a presentation in front of Boston College's Carroll School of Management. This talk was published on Oct 12. The full video has been embedded below. Pabrai introduced a new talk. Perhaps it will be turned into a book at some point? The talk includes 10 fundamental investment principles that worked for Pabrai. These are the 10 principles. but watch the entire talk to fully understand the background behind each one.
Thou shall not skim off the top
Pabrai thinks the fee structure in wealth and asset management is wrong. Most money managers are sinners. He takes issue with the fixed fee on assets under management. He specifically highlighted some original practitioners, Warren Buffett, who ran a 0/6/25 structure, and Munger, who ran a 0/33 type of structure. That means a 0% management fee and either 25% above a 6% hurdle or a 33% fee above a 0% hurdle.
Thou shall not have an investment team
Investment management is not a team sport. Any two humans are going to have different circles of competence. For a good investment manager it doesn't make sense to have analysts. After listening to Pabrai, it still seems possible to have analysts but it takes a lot of work to get into a good working relationship.
Thou shall accept I shall be wrong one-third of the time
Investing is a very inexact science. It is very difficult to figure out what will happen to a business years from now. Four out of 10 will not behave in the future at all like you expected at the time you made the investment.
Thou shall look for hidden 1x price-earnings stocks
You should look for stocks based on future earnings or hidden earnings that are trading at a 1x multiple. These can’t show in a screen because they're not hidden, and they most likely wouldn't be good opportunities. When you can buy at this valuation good things tend to happen.
Thou shall never use Excel
This commandment goes hand in hand with commandments before. If you need Excel to figure out if something is a great investment, it can’t be a great investment. If you need Excel, you need to take a pass. Buffett has said something similar about figuring out investments on the back of a napkin.
Thou shall always have a rope to climb out of the deepest well
Pabrai’s dad was very good at starting businesses. But his dad would always run them very aggressively. He used a fortune teller to give him the confidence to pick back up after a bankruptcy. Setbacks are par of the course, but you need a way to deal with them.
Thou shall be singularly focused
Only focus on the company. You should not care about the macro or anything else. Focus on the business and close out the noise.
Thou shall never short
We don’t need to figure out what will happen to Tesla (TSLA, Financial). Tesla is entertainment to Pabrai, and he likes it that way. He said that he will go to his grave without ever having shorted a stock. The risk/return profile is asymmetrical. Shorts can at most deliver a double but move against you many times.
Thou shall not be leveraged. Neither a long-term lender nor a short-term borrower be
You don’t want leverage in your life. To finish first you need first finish. The key is to spend less than you earn. Put that in a compounding engine. Pabrai hammered home the importance of not blowing up. If you compound at a stellar rate but you follow a string of winning years with a single zero, you have compounded at 0%.
Thou shall be a shameless cloner
Cloning is good for your health. There are many great investors. Look at their highest conviction ideas. This is a shortcut that works, and it helps with other commandments like not hiring analysts.
Disclosure: Author is short Tesla.
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