A couple weeks back I wrote some notes I took from a lecture that Mohnish Pabrai gave at Columbia University. I highly recommend checking out the video of that lecture. In my opinion, it was the best lecture that I’ve heard from Pabrai, and he’s had some very good ones.
This week I noticed a post on Value Walk linking to another lecture that Pabrai gave at the India School of Business. I listened to the three part lecture yesterday and today. To save time, it’s essentially the identical lecture that he gave at Columbia so you can skip directly to the Q&A (about 30 minutes into the video) if you already saw the video in my previous post. I think the Columbia one was better, mostly because the audio quality made it easier to hear him, but the actual lectures are basically identical.
Outstanding Long Term Results
I won’t rehash my notes from the first lecture… check out the previous post for more details. But one thing that’s worth mentioning again is that Pabrai has achieved a performance record of 25.7% annual returns since he started investing in 1995 (gross returns before fees to his investors).
Needless to say, these returns are phenomenal, and it’s worth listening to Pabrai’s ideas whenever he shares them…. especially since they are simple ideas…. Pabrai works alone. He sits quietly in a room reading and thinking. He gets the majority of his investment ideas from other great investors using mostly 13-f filings. He then researches the ideas from those filings that he understands and can reverse engineer the thesis.
The biggest takeaway I took from the main part of both lectures was how Pabrai described one of his mental approaches to investing. He said he was able to achieve exceptional returns in part due to the following points:
- 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.
I found this interesting because I think many of the great track records were established using these two ideas (especially the first one). I think relative outperformance is a byproduct of an investment process that focuses first on downside risk and asymmetric upside potential.
Liquid Markets Create Opportunities
The Q&A was worth listening to because Pabrai always gives interesting, thoughtful responses to questions. The only thing that I took away from this ISB lecture that Pabrai didn’t already discuss in the Columbia lecture was his response to a question I found interesting. He mentioned that without the auction market method of pricing that is the stock market, Buffett would not have been able to achieve his phenomenal results. This seems obvious, but it’s an interesting point to make… if investors had to invest using private markets (buying whole or fractional parts of businesses), they would be dealing with much more rational sellers.
So what Pabrai is saying is that the liquidity offered in the stock market actually creates more inefficiency. This runs counter to a lot of academic efficient market arguments, but it makes sense. It’s a lot easier to sell stocks than it is to sell whole businesses. This ease can tempt irrational owners to sell holdings at prices far below intrinsic value, thus providing the buyers of those holdings the opportunity to buy undervalued stocks.
Pabrai uses an argument that I heard Joel Greenblatt make numerous times…. take a look at the newspaper and pick any large cap stock and notice the variation between the 52 week high and low. Pabrai used General Motors as an example…. GM has a 52 week high of about $38 and a 52 week low of about $19, or a 50% difference between high and low prices. Needless to say, the intrinsic value of GM (i.e. the value a private owner would pay for the whole business) did not change anywhere near that amount in just 12 months.
This is a very simple way to illustrate how inefficient the stock market can be, and how opportunities abound even in the largest companies. This is fairly obvious, but it’s always interesting to consider.
Here is part 1 from the ISB lecture… part 2 and 3 can be found at the Value Walk link above.