I just came across an interview that the Motley Fool did with Mohnish Pabrai earlier this month. Pabrai is one of my favorite investors to learn from. He is very smart, but he uses simple strategies, simple logic, and common sense ideas, which are main objectives of mine here at Base Hit Investing.
Pabrai is well known for being the winning bidder for a charity auction where the winner got to have lunch with Warren Buffett. In this short interview with The Motley Fool, he was asked to describe something he learned from Buffett that might not be common knowledge in the public domain.
Pabrai answered the question by using an example. Pabrai said Buffett answers every question in a manner that turns the question into a mini learning lesson. This particular lesson was on patience. Pabrai asked Buffett about Rick Guerin, specifically “What ever happened to Rick Guerin”?
For those who don’t know, Guerin was a very successful investor who was friends with Buffett and Munger. He is not well known. If not for Buffett and his mention of Guerin in The Superinvestors of Graham and Doddsville, we might have never heard of him at all. But Guerin’s track record (in terms of absolute performance) was actually as good or better than any of the other investors Buffett mentioned (including Buffett himself). Guerin produced eye-popping gross annual returns of 32.9% per year.
So Buffett answered the question: “What happened to Rick?” by basically saying that Rick wanted to get rich too fast. Buffett and Munger always knew they were going to be rich-very rich… and because of this, they weren’t in a hurry. They knew as long as they were patient and didn’t make huge mistakes, they were going to be very rich over time. Why? Because they knew value investing had an inherent edge in the market. And because they understood that “even a slightly above average investor who spends less than he earns can’t help but become wealthy over time”.
So Pabrai said that the problem for Rick Guerin (according to Buffett) was that Rick wanted to get rich too quickly and used margin to excessively leverage his funds. He implied that Rick took significant personal hits in the 1973-1974 bear market because of his leveraged positions.
Now, when I heard this in the interview I went to the Superinvestor piece that Buffett gave in 1984 and looked up Guerin’s results. Sure enough, the ’73-’74 period was nasty for Guerin, going down around 62% cumulatively in those two years. But, it doesn’t look like that was the end for Rick. He made 31% in 1975 and 127% in 1976, followed by 4 more years of 25%+ returns.
So he did in fact take a large hit in ’73-74, but he made it back and then some. His returns were very volatile. He had 4 years of triple digit returns to go along with the nasty 62% drawdown. It looks to me like he took a value investing strategy and just levered it up to produce even better returns. It looks like it worked (overall) from 1965-1984.
But my question would be the same as Pabrai’s: What happened to him after the Graham and Doddsville track record? Did too much margin end up costing him even more severely? I’m not sure…
But the lesson that Pabrai took away from Buffett is this: Patience (and lack of debt) along with value investing will create huge wealth over time. Don’t be in a hurry to get rich. Don’t use margin, or at least use it sparingly.
As Buffett has said many times, there are only two rules of investing:
- Don’t Lose Money
- Don’t Forget Rule #1.
I hope for Rick Guerin’s sake that he continued to have much investing success even after the 1984 time period. If anyone has any thoughts or updates on Rick’s performance, feel free to share them. Below is the 5 minute interview with Pabrai.