I recently came across two videos with Mohnish Pabrai. Readers here know that Mohnish is one of my favorite investors to listen to. He is extremely generous with his time, and he has a genuinely interested attitude toward his audience. You can tell that he truly enjoys teaching others about his investment experiences.
Pabrai has given numerous lectures over the past year, and I wrote a summary of one that I thought was particularly interesting here.
In that post, I summarized Pabrai’s results, which I thought are good enough to repost here:
- 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
Basically, Pabrai is interested in playing a “30 year game” as he calls it, which he is now 18 or 19 years into. So far, so good: He’s averaged roughly 26% annually since he began his investment journey in the mid 90’s. Unsurprisingly, he was inspired by the results of Buffett up to that point:
- 1950-1956: 43.0% annualized
- 1957-1964: 27.7% annualized
- 1965-1993: 29.1% annualized
After seeing Buffett’s results, he began thinking the same thing that countless of other investors have thought: “maybe I too can achieve such investment success”. This statement could be thought of as unrealistic as it is naive, but incredibly, after nearly two thirds of his “30-year game”, Pabrai has indeed achieved a very similar result in terms of compounded annual returns.
Pabrai runs a concentrated portfolio. He only owns 7 stocks currently, and the majority of his assets are in Horsehead Holdings, General Motors Warrants, Bank of America, Chesapeake Energy, and Citigroup. He has mentioned at recent annual meetings that he is also willing to hold sizable cash positions temporarily while waiting for the right investment opportunity.
Probably the most important thing I’ve ever taken away from Pabrai’s lectures is the following advice that he often gives… He says that in order to significantly beat the market, or to achieve significant results of 20-30% annual returns, you have to do two things:
- Don’t try to beat the market (go for absolute returns as opposed to focusing on what the indices are doing)
- Don’t buy any stock unless you feel it has the potential to be worth 2-3x in 2-3 years
I agree with both of these points, and I also think Buffett used similar type logic in his early partnership days and even before that, when he averaged 50% per year for a few years. I once posted a blog where I made the comment that Buffett wasn’t trying to beat the Dow in the 1950’s, he was trying to make money. That’s it. He was looking for really, just blatantly obvious undervalued stocks. He didn’t care about the Dow. He did begin using it as a yard stick in the partnership days, but I don’t think he even cared about it then either. I think he was simply out to locate really mispriced undervalued businesses with the objective of making money.
I think there are subtle differences in the way you think about this that can mean big variations in long term results.
The second point is also an excellent one. I sometimes alter the 2-3 years to an indefinite time period, as I’m willing to own stocks for longer periods, but the concept is the same. You need to find huge gaps between price and value. I read write-ups all the time on Seeking Alpha and elsewhere where there is 24% upside, or 35% upside, or even 60% upside. Furthermore, these same write-ups often say things like “plus it has a margin of safety”. To me, if a stock has 35% upside, it doesn’t have much of a margin of safety. I equate the gap between price and value with the margin of safety. Of course, if that amount of upside is accurate, it’s not a bad result. But the problem is that if one thing goes wrong, then the upside disappears in a hurry, threatening your principal.
It’s hard to find 50 cent dollars, and that’s why Pabrai is extremely patient, waiting and waiting for the right opportunity. This unwillingness to invest in moderately undervalued ideas is one reason why he has been able to achieve such excellent long term results. His patience and his ability to wait for the right opportunity is likely one of the main competitive advantages he has as an investor.
Enjoy the videos…