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Rupert Hargreaves
Rupert Hargreaves
Articles (889)  | Author's Website |

Mohnish Pabrai's Ten Commandments Of Investing

The ten rules of investing according to Mohnish Pabrai.

July 24, 2019
Mohnish Pabrai (Trades, Portfolio) believes that it's essential for every investor to have a set plan and structure to use when investing.

As part of his quest to streamline his investment process, he's developed an investing checklist. With around 100 different check points on it, Pabrai can reference his list whenever he finds an idea, and quickly establish if it is an idea worth following up on or not.

Pabrai has also developed his '10 Basic Commandments of Investment Management' to accomplish the same aim. Pabrai's ten commandments are based on his research of highly successful investors, notably Warren Buffett (Trades, Portfolio) and Charlie Munger (Trades, Portfolio). He's drawn from their experience and lessons as well as his own education to compile this short checklist for investing success.

Commandment One: Thou shall not skim off the top

Irrelevant for most individual investors, this commandment is relevant for professional investors who manage money for outside clients. Pabrai believes these managers should not deduct fees from their clients when they are not achieving results. This is something Munger and Buffett practiced when they were managing their investment partnerships.

Commandment Two: Thou shall not have an investing team

Buffett never had an investment team, and Pabrai believes other investors should shun one as well. You only need to find a few good ideas every year to become very wealthy, and you do not need an investment team to do this. If you stay with inside your circle of confidence and research just a few ideas a year, there is no need to outsource the work.

Commandment Three: Thou shall accept that thou shall be wrong at least 1/3 of the time

Investing is a game of probabilities and, unfortunately, we won't be right all the time.

Acknowledging we may have made the wrong investment decision, cutting losses and moving on, is critical if we want to be successful over the long term.

Commandment Four: Thou shall look for hidden P/E of 1 stocks

"P/E of 1 stocks" is a term Pabrai invented himself to define the sort of company's he's looking for. He's looking for super cheap companies, companies trading at a PE of around 1, which are extremely rare, but have limited downside potential and scope to become multi-baggers if the idea works out. You only need to find a few of these over your investing career to make a lot of money.

Commandment Five: Thou shall never use Excel

This is quite a simple on. If you can't figure out the company and the investment case in your head, then it's too hard. You shouldn't need a complex spreadsheet to try and determine value.

Commandment Six: Thou shall always have a rope to climb out of the deepest well

In the financial crisis, the value of funds under management at Pabrai Funds declined between 65% and 70%. Rather than jumping out of the market, Pabrai laid out all of his evaluation work for the companies he owned and calculated going out to 2011. He figured that all of the investments were worth significantly more than Mr. Market was willing to pay at the time. So he held on. This 'rope' helped Pabrai climb out of the well that was the 2008/2009 financial crisis.

Commandment Seven: Thou shall be singularly focused like Arjuna

There is an Indian epic about an archer named Arjuna, who had a singular focus on his targets. Pabrai believes investors should follow the archer's lead and focus on finding the best investments (P/E of 1 stocks we can understand) and ignore all other distractions.

Commandment Eight: Thou shall never short a stock

This one is self-explanatory. Shorting requires market timing, which is almost impossible, and the math is always against you. You never need to take a position, and you don't need to short a company if you don't like its prospects. You can watch from the sidelines.

Commandment Nine: Thou shall not be leveraged. Neither a lender nor a borrower be.

Buffett, quoting partner Munger, says there are three ways to go broke: "liquor, ladies, and leverage."

Commandment Ten: Thou shall be a shameless cloner

Nothing is stopping you copying the portfolios of famous and successful investors. As long as you understand the company, and why these investors decided to buy, cloning can help you uncover opportunities you might have otherwise overlooked.

Disclosure: The author owns no share mentioned.

About the author:

Rupert Hargreaves
Rupert is a committed value investor and regularly writes and invests following the principles set out by Benjamin Graham. He is the editor and co-owner of Hidden Value Stocks, a quarterly investment newsletter aimed at institutional investors.

Rupert holds qualifications from the Chartered Institute for Securities & Investment and the CFA Society of the UK. He covers everything value investing for ValueWalk and other sites on a freelance basis.

Visit Rupert Hargreaves's Website


Rating: 5.0/5 (5 votes)

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Fergus1
Fergus1 premium member - 4 weeks ago

Great !

asawhneyy
Asawhneyy - 4 weeks ago    Report SPAM

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