Investment PhilosophyMohnish PabraiSuperinvestors

Mohnish Pabrai-Thoughts on Growth & Similarities to Buffett

I just read an article on Mohnish Pabrai by a magazine called Outlook India. Pabrai is one of my favorite investors to watch and learn from. He has a logical, simplistic way of explaining things, and he has built his entire investment business around what he calls “cloning”. He says that an investor would dramatically improve their results if they simply copied what Buffett does. Research papers have in fact backed this up as true; one paper calculated the returns of Buffett’s stock portfolio (just public equities, not including wholly owned businesses), and the results from 1976-2006 exceeded the S&P 500’s return by a stunning 10% per year. So there might be something to be said for Pabrai’s cloning ideas.

But Pabrai doesn’t copy Buffett’s every move, just his investment strategy. Pabrai has achieved outstanding results in his investment fund, averaging around 13% annual returns (net of fees) since 1999, far exceeding the S&P 500 market average. He had a bad 2008, which lowered his annual returns significantly (he averaged close to 30% net returns from 1999-2007). He runs very concentrated portfolios, investing in usually just 10 positions (each with a weighting of about 10%). Concentration can lead to huge returns over time, but they can be lumpy (volatile).

I just got done writing a few posts on the differences of growth vs value investing. Read them here and here… As I mention in those posts, my opinion is that both growth and valuation are important, and in fact, growth is a function of value. Something that is growing at 10% per year is not as valuable as something growing at 20% per year, all other things equal. So the two are not mutually exclusive. Pabrai briefly touches the importance and differences between growth and value in the article…

This was a quote that I found interesting from the article:

“Both of us would prefer something that can grow for a long time. You are always better off buying a business that has a lot of future growth in it because you can hold it for a long time. There are no taxes. He will always be willing to do opportunistic trades when he gets the chance. For example, Goldman Sachs came to him during the financial crisis. And he gave them money at 10% interest and any time they wanted to pay off the loan, they had to pay off another 10%. That was a short term trade for him in the sense that he knew that the moment Goldman got back to health they would want to pay that money back, and they did. It was the same with GE when he gave them money. So there are many investments Buffett makes that by their very nature might not last more than a year or two or three. There are plenty of other investments he makes that may last for 10 years or more.”

Read the rest of the article here. For other reading on Pabrai, check out:

  • My page “Other Greats” and scroll down to the Pabrai section
  • Pabrai’s book, The Dhando Investor. A great read that I strongly recommend.
  • Mohnish Pabrai 2012 Annual Meeting Notes: (UPDATE: This page has been removed at the request of Pabrai Funds)

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