Mohnish PabraiSuperinvestorsThink DifferentlyWarren Buffett

Mohnish Pabrai Lecture at Columbia University-My Notes

Mohnish Pabrai is one of my favorite current value investors to follow. He has one of the best track records over the past 15 years. One of the reasons I like him is that he came to the hedge fund world from the business world. He never worked on Wall Street, and I don’t believe he has an MBA. He worked as an entrepreneur, starting his own company in his 20’s, and then selling it a few years later, pocketing around $1 million personally.

A couple months ago I watched this video of Pabrai giving a lecture at Columbia. I’ve talked about Pabrai’s ideas before on this blog, but I thought this lecture was by far the best I’ve seen regarding Pabrai’s background and how he got his start as a value investor. His comments on compounding are also very interesting…

Pabrai mentioned that in 1994 he began reading about Buffett, and became amazed at Buffett’s ability to compound capital. He did a study on Buffett’s performance beginning in the early 50’s (even before Buffett started his partnership when he was making his 50%+ annual returns).

Compounding-The “8th Wonder of the World”   

Buffett had incredible returns that absolutely stunned Pabrai:

Buffett Results:

  • 1950-1956: 43.0% annualized
  • 1957-1964: 27.7% annualized
  • 1965-1993: 29.1% annualized

These results would inspire a very green Pabrai to think that he could replicate these results. Pabrai set out to play what he called a “30 year game“. Specifically,  he decided he wanted to compound his $1 million at 26% per year for 30 years (he chose that number because that’s about what Buffett was doing and 26% per year doubles every 3 years).

The interesting thing is… he is actually replicating these results after 18 years! Take a look at how Pabrai breaks down various periods of his career thus far:

Pabrai Results:

  • 1995-1999: 43.4% annualized
  • 1999-2007: 37.2% annualized (he started Pabrai Funds in 1999 and this is before his fees)
  • 2007-2009: -41.7% annualized 
  • 2009-2013: 32.7% annualized

All together, since the game started, he’s made 25.7% per year over 18 years. So far, he’s on target, which is incredible to think since his initial goal was 26% per year, which many probably would have called naïve for a guy with no experience and no track record. 

One of the things I found interesting was how he noticed that mutual funds were primarily index hugging vehicles that didn’t provide much value. He noticed that Buffett invested very differently than the mutual funds. “I found that the entire fund industry worked a certain way, and that their results reflected the mediocre way in which they operated.

So he went from not having ever heard of Buffett in 1994 to deciding that he would spend the next 30 years of his life investing, to now having achieved an 18 year track record of nearly 26% per year… Incredible….

How Did Pabrai Achieve Incredible Investment Results?

Here is how Pabrai summarized his presentation prior to the Q&A:

  • “Take one idea and take it seriously”
  • Remember the power of compounding
  • Clone the best investors

The investing process is quite simple. The key is to keep practicing it and continue to learn. Make smart, easy-choice investments based on cheapness and quality, and keep the big picture in mind.

Also, remember that to make 26% per year, you have to do things differently. Pabrai said that to beat the market, and to compound at 26% per year, you have to:

  • Don’t try to beat the market. Think in terms of absolute targets.
  • Don’t buy anything that is not going to go up 2-3 times in the next 3 years or less.

These last two bullet points were perhaps my biggest takeaways from the lecture. I’ve written other posts regarding “thinking differently” (like Munger when he paraphrases an old 19th century mathematician: “Invert, Always Invert“).

Those two points are not what you normally hear from other investment professionals. But it is that type of thinking that has enabled Pabrai to make 25.7% gross annual returns.

Further Reading:

21 thoughts on “Mohnish Pabrai Lecture at Columbia University-My Notes

  1. excellent! i have read many articles about many value investors. but i still think schloss and graham are great investors because they make great returns only by limited resourses.

  2. I really favor a concentrated portfolio now. Knowing an idea really well helps me sleep well at night. I studied ALSK enough to feel comfortable with a large position, and that has paid off big time.

    1. Yeah concentration vs diversification is a very interesting topic to discuss. I’ve spent a lot of time thinking about it. I tend to stay much more diversified, as I prefer the portfolio margin of safety. But I want to maintain upside so I own a lot of very undervalued stocks, some with obvious problems. But that tends to work over time.

      But certainly, if you find a business that you know well that is undervalued, concentrating can pay off.

    2. Hi Jack (Or John),

      Can you please help expand the comment “I studied ALSK enough to feel comfortable with a large position”…

      What is ALSK? A book, an author?

      Thank you,

        1. Hi John,

          Thanks for the reply. Can you also point out how is the 25.7% calculated? Just the averaged annualized rate for 4 different year ranges is not enough data to calculate, correct?

          1. Hi Deshdaaz,

            Yeah I just reported what Pabrai said his own gross CAGR was. I didn’t calculate it myself. He mentioned that was his CAGR in one of the lectures.

          2. Funny, I did not see reply option for ur comment below. Anyhow what I am interested is that how the inflation factor is added to to the calculation. You cannot simply sum up your annualized gain/original investment numbers to come up with CAGR over a period of such long span. What are the assumptions used while coming up with that number….

          3. Hi Deshdaaz, I’m not sure what you mean by inflation factor. The CAGR is a very simple calculation that you could easily compute if you had Pabrai’s starting and ending balances and the timing of withdrawals and contributions.

            So there are no assumptions used. The 25.7% number is simply what Pabrai said his 18 year record is. I guess the only assumption is that Pabrai is telling the truth regarding the results of his personal account in the early years (which I’m sure he is).

            I’m not saying you’re doubting his numbers, but my general advice to those who try to go to great lengths to verify his record is this: Unless you’re trying to invest money in his fund, don’t worry about his specific results from his personal account. Assume he’s telling the truth (I’m sure he is), and remember that his results have been audited from 1999 on, and those results have been fantastic. Focus on the concepts that helped him achieve those results.

          4. Hi John,
            Sorry if I was unclear. I am no way doubting his numbers. I want to calculate for my own investments. So if u have CAGR for each year, is it simple average of those numbers?

          5. Gotcha… okay for your own account, if there are no contributions/withdrawals, the CAGR is simply ending balance divided by beginning balance, raised to 1/x where x is the number of years. Subtract 1 and you have your CAGR.

            And no, averaging each individual yearly return will not get you to your CAGR. That would be the average annual return. You need to compound it. The CAGR is the rate of return that your beginning balance would have to achieve to reach your ending balance in x amount of years.

          6. Hi John,

            Thanks for replies. How does it work with partially realized (and reinvested) gains. Say I started with stock purchase for 1000$….sold at 1500$ and bought again using all 1500$. Now Should my starting value be taken as 1K or 1.5K? I know that dividends needs to be added to the ending value but how about the partial gains by partial sales in between? Does that 500 in above example go to ending value or starting value?

  3. What are your thoughts on Pabrai’s cloning process? I found it interesting that he looks at 13Fs of other investors and sometime buys the things he understands. Ironically, I want to replicate Pabrai’s cloning strategy. You mentioned in one post that Pabrai’s style is unique as well. His arguments with Wal Mart and Burger King’s cloning process is strong as well.

    I’m willing to do cloning.. LOL

    1. Christmas,

      I think one could do extremely well replicating Mohnish’s strategy of studying 13-F’s and simply picking the ideas that are understandable. His idea generation strategy is quite simple, and it works for him. The key is to set up a process loop that is simple, repeatable, and scalable… and something you can consistently execute. The main thing is to have a conveyor belt that is constantly bringing you potential ideas, and then spend most of your time reading and evaluating the ideas the conveyor belt brings you.

  4. The question I have for you is “how does one target companies that are going to bring in 2-3x potential returns in the next 3 years or less?”

    My concern in trying to investment in companies that can only generate that is how much is that value is asset based versus growth. It would seem to me to get three times you have to (i) really understand the business maybe 0.5 – 1x is based on asset value and earnings power, but the remainder would be (ii) sustainable growth. Unless you become very opportunistic during down cycles and make bets on normalized earnings. One could argue you have a larger margin of safety, but I do not understand the valuation behind 2-3x return without become a growth investor.

    For example, my target is to be 10-15% as that seems to be achievable and can lead to nice compounding over 20-30 years. Though I have had a stellar few years that has exceeded my target and my expectation, I do not think having +30% returns annualized is sustainable. And targeting such high returns can lead to risk if one is paying for the growth. In my mind, turning rocks that are 30-40% over 2-3 year periods are great. Sometimes I find one that is 70-100% and I double check the math. I can only think of four investments in my lifetime that have generated 2-5x returns. All four were due to company hardships and understanding normalized earnings potential, which takes about 3 years to achieve. Therefore, I forgo year to year returns for absolute (which is the key to this game).

    Anyway, a bit longer comment than I anticipated, but I am curious on your thoughts of the 2-3x investment.

    1. It’s a good question… one that probably requires a full post. But basically, I try to hold off investing in situations where I only see 50% or so upside, because I view my upside in the same light that I view my margin of safety. I try to find situations where I can see value at least 2-3 times the current price in say 3-5 years (2-3 would be great, and often times the market agrees in this amount of time, but I returns allow 3-5 years, which still will yield anywhere from 15-44% annualized returns).

      And yes, typically these returns don’t come from cigar butts (although plenty of cigar butts can appreciate by this amount). Typically, these types of 2-3x returns come from a business with growing intrinsic value, bought at a discount to current value.

      We can discuss further… nothing wrong with cigar butts, or buying for 30-50% gains, but I find that that amount of margin is a little slim for my liking. It doesn’t take much to go wrong (either in your analysis or the business) for that gap to disappear.

  5. I can’t find the full-length Columbia lecture anywhere. The recording on Columbia’s site returns a 401 error. Too bad no one uploaded it to YouTube. Was it similar to Mohnish’s Boston College presentation?

  6. Hi John,
    I have recently found your blog and have read a lot of articles. In no time, thanks a lot for putting these articles. They have been of immense help. This article is a little surprising to me, given your key takeaways:

    – Don’t try to beat the market. Think in terms of absolute targets.
    – Don’t buy anything that is not going to go up 2-3 times in the next 3 years or less.

    The first one, makes sense as there is not much point in playing relative game in investment; especially when you results are absolute. The second, however, sounds absolute wrong way of investing to me. It sounds like timing to me, if not gambling. This is very much unlike Buffett or Munger. The whole thing they are looking is for great business, not that would increase 2-3 times in the next few years. The fundamental philosophy has been to be not anymore stupid than you have to be.

Leave a Reply

Your email address will not be published. Required fields are marked *