Super-investor Mohnish Pabrai’s value investing principles

Mohnish Pabrai is the founder and CEO of the Pabrai Investment Funds, a family of hedge funds with over $700 million in assets under management.

Pabrai founded the Pabrai Investment Funds in 1999, which he said was inspired by billionaire Warren Buffett’s Buffett Partnerships. 

His investment philosophy and approach to business have been heavily inspired by Buffett. He has described himself as a “shameless copycat” of the investor and has even gone as far as spending more than $650,000 to have lunch with Buffett.

Like Buffett, Pabrai is a value investor who buys undervalued stocks and keeps them for a long time.

Through value investing in accordance with Buffett’s investment strategies, the Bombay-born businessman has amassed a personal net worth of Rs11,855,700,000 ($98,776,000).

However, unlike Buffett, Pabrai only owns four stocks: Micron Technology, Brookfield Corp, Brookfield Asset Management and Seritage Growth Properties. His portfolio also concentrates on India and other emerging markets.

While Pabrai largely follows Buffett’s investment strategies, he has made a name for himself in the value investment space, taking inspiration from various sources to find his own approach.

Here are five of Mohnish Pabrai’s top investment strategies:

• Minimise downside risk: Pabrai refers to this strategy as the “Yellowstone factor”, named after Yellowstone National Park in the US, where there is a slight but present chance that a supervolcano could erupt. Pabrai explains in his book, “Mosaic: Perspectives on Investing”, that Yellowstone shows how even the most seemingly resilient businesses are fragile by nature. Therefore, one needs to be aware of any factors which could result in a significant permanent loss of capital. 

• Shorting is not worth it: Pabrai, like many other value investors, prefers to play the “long game” when it comes to buying stocks. As Pabrai explains in his book, “why take a bet [short a stock] where the best return is 100%, and the downside is unlimited?”. He also believes that shorting forces one to keep up with every movement in the stock market, whereas long-term investors can simply invest their money and not worry about it for years.

• Retailers are not the solution: Unless a retailer manages to identify arbitrage, which rarely happens, retailers have very little chance of yielding success, explains Pabrai in his book. He puts it plainly, “retail innovation is a crap-shoot with extremely low probabilities of widespread success”. He explains that only a few entrepreneurs can identify the right gaps in the market and then execute a plan to fill that gap. “For every successful retailer, there are hundreds if not thousands of failed ventured and strategy initiatives,” he says. 

• Buy at points of maximum pessimism, and keep it small: Pabrai believes in buying stocks that are undervalued rather than investing in the most highly valued businesses (buying stocks that are at maximum points of optimism). Pabrai’s reasoning for this relates to what he refers to as “Pabrai’s Law of Large Numbers”. This law dictates that one should never invest in a business that generates more than $3 billion to $4 billion in annual cash flow and is considered a “blue-chip” (valuable and reliable), as these businesses are unlikely to endlessly grow cash flow. 

• Understand a company’s DNA: Pabrai believes that a company’s “DNA structure” is set in the first 90 days of its life, and understanding this structure will reveal how a company will respond to any given business challenge over time. For example, Pabrai explains that Microsoft’s DNA structure reveals that the company is not an innovator, but a cloner, whereas a company like Apple is an innovator. “Spend some time figuring out the genetic blueprint of a given business before making an investment. If it has great genes and you can buy it well below intrinsic value, back up the truck. Otherwise, just keep on driving,” he says. 

Mohnish Pabrai’s investment principles, according to ChatGPT

Daily Investor asked the chatbot ChatGPT about Pabrai’s approach to investing.

ChatGPT is a chatbot launched by OpenAI in November 2022, which is built on top of OpenAI’s GPT-3 family of large language models.

ChatGPT said that the following principles “have helped Pabrai build a successful investment track record over the years and are widely followed by value investors around the world”:

• Focus on simple and understandable businesses: Pabrai believes that investing in simple and understandable businesses is key to reducing investment risk.

• Look for companies with a durable competitive advantage: Pabrai looks for companies with a strong market position, brand, and customer base that can withstand competitive pressures.

• Invest in companies with strong management: Pabrai places a strong emphasis on the quality of management when selecting investments. He looks for leaders who have a track record of making good decisions and who are aligned with the interests of shareholders.

• Seek out companies trading at a discount to intrinsic value: Pabrai looks for undervalued companies and is willing to hold on to these investments for the long term in order to realize the full potential of their intrinsic value.

• Have a long-term investment horizon: Pabrai has a long-term investment horizon and is willing to hold on to investments for many years in order to reap the rewards of compounding.
  
• Keep a low-risk profile: Pabrai is known for keeping a low-risk profile by avoiding high debt levels, high beta stocks, and investments in highly volatile industries.