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Rupert Hargreaves
Rupert Hargreaves
Articles (978)  | Author's Website |

Mohnish Pabrai: Why Investors Should Operate Alone

Taking advice from analysts can lead you down a dangerous path

October 17, 2019

Why do Warren Buffett (Trades, Portfolio) and Charlie Munger (Trades, Portfolio) operate alone? That's something Mohnish Pabrai (Trades, Portfolio) discussed in a presentation to students of the Columbia Business School in October 2013.

Pabrai's presentation began with a letter from the Oracle of Omaha himself. The message seems to suggest that Pabrai had asked for a meeting, but Buffett declined.

"I just can't schedule a meeting," the letter said. "I've given a lot of thought to optimal use of my time, and I simply do best operating by myself."

Buffett finished his letter by saying the following, "Best of luck on reorganizing your life in a way that enables you to work on what you like best."

So why has Buffett been able to succeed working alone without any input from others?

Not enough time in the world

As Pabrai outlines in his presentation, even a 10-person investment team can only analyze a few hundred public companies every single year.

As there are more than 50,000 public companies in the world, it would be virtually impossible for anything but a huge team of 1,000 or more professionals to analyze all those different businesses accurately.

Even if you had the brainpower to analyze all of these opportunities, the actual investment manager would only be able to receive limited analysis from his analysts or partners.

This secondary data would not give him enough information to make informed investment decisions. The analysts would want to present their best case scenario rather than a balanced analysis of risk versus reward.

Pabrai summarizes, "There is no way for an investment manager to be on top of thousands of businesses no matter how large the team."

While we may not be managing as much money as Pabrai, Buffett or Munger, the takeaways from this presentation are just as relevant. Individual investors have limited resources and time, so it is important to concentrate our attention on the investments we best understand.

Be a cloner

Pabrai's first short cut to do this is to "Be A Cloner." He advocates using data analysis websites like GuruFocus and investment newsletters such as Graham & Doddsville as a starting point for ideas, copying well-known and successful investors who have already done all of the research and cherry-picked investment ideas.

Here's how Pabrai explained this process in a talk at with UC Davis' MBA Value Investing class in August 2012:

"If you set up an investment operation…like an operation I run…and instead of tearing your hair out…trying to find stocks to buy, what you should do is just look at what the great investors are buying.

You can then evaluate the ones that fall within your circle of competence and buy those. With a 120 IQ, you can set up an operation like this, just cloning the great investors. And I believe you will do quite well.

In fact, most of the picks that Pabrai funds has, have come from some other investor. I am a…shameless cloner. I have no problem…like Sam Walton had no problems taking ideas from other supermarkets… taking ideas from wherever I get them."

While this might seem like cheating, it does cut out all of the guesswork involved in finding and evaluating securities.

If you think about it, the data  of hedge fund positions compiled on Gurufocus is the work of thousands of analysts around the world, some of the best and smartest on Wall Street.

These ideas might not be traditional value investments (how can they be with so many people following?), but it is also highly unlikely that they will be risky mining stocks either.

To put it another way, these ideas might not give you the sort of returns Buffett achieved in the early part of his career, but they will steer you away from making the worst mistakes.

That's what really matters. After all, Buffett's first rule of investing is "don't lose money." Cloning other investors who've already learned the ropes will certainly swing the odds of meeting this target in your favor.

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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: 4.9/5 (10 votes)



Johnbarber premium member - 3 weeks ago

I like working in small groups where other members challenge your ideas. I believe this helps avoid mistakes. Research I have seen suggests creating a culture where it is okay to disagree can create a diversity of views and improve results. Dalio calls this radical transparency.

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