Value Investing Advice from Mohnish Pabrai

Sumzero, an online research platform for professional investors, recently conducted an interview with noted value investor and author Mohnish Pabrai, founder of Pabrai Investment Funds (a group of hedge funds modeled on Buffett’s original partnerships), which manages over $800 million.

Here are highlights of the interview:

  • Current state of value investing: According to Pabrai, the principles and approach of value investing will not change significantly. That said, he pointed out that markets will go through periods of euphoria and pessimism, adding that it is easier to find “widely mispriced securities” in pessimistic than in euphoric markets. This is true domestically as well as across global market, he said, making this an interesting time. Pabrai adds that, currently, he has no U.S. assets in his portfolio, which has never happened in the fund’s 19-year history.
  • Pabrai explained that the strategy was not a macro one—a  unilateral decision to step away from the U.S. markets. “My investments are always bottoms-up, one company at a time,” he explained. Instead, he said, the evolution was due to a diminished pool of public companies in the U.S. “that are being tracked by an increasing pool of high-IQ people with significant amounts of capital. The combination of the two is not great for investors. That’s the backdrop.”
  • In 2007, Pabrai spent $650,000 to win the annual charity lunch with Warren Buffett. He recounted the experience: “It was exceptional on many fronts,” adding that he was able to get a better grasp on those things most important to Buffett.
  • While at one time Pabrai used shares of Berkshire Hathaway in place of cash in his fund’s portfolio, he has since abandoned the practice. “One of the pitfalls of doing that,” he explained, “was that in the case of major market corrections, everything goes down, including Berkshire.” Cash, he said, offers “complete freedom and optionality to put it to work when opportunities show up.”
  • Pabrai discussed the rationale behind his “Dhando” investing framework (which includes a checklist of about 150 questions he addresses before investing in companies): “I think that the core of the Dhando framework is heads I win, tails I don’t lose much. You’re trying to place bets where the upside overwhelms the downside.” He added that, over time, he has paid increasingly more attention to the qualitative side of businesses, including the “quality of management, the durability of the moat, and those sorts of things.”
  • On industry fee structures, Pabrai contended, “To date, the only thing we’ve seen change in terms of fees or the reaction to fees is a change towards indexing,” adding that his first “commandment” of investing is, “thou shalt not skim off the top” while managing money for others. “Almost everyone violates that commandment,” says Pabrai.
  • Regarding biases that have negatively impacted his investment performance, Pabrai cited “preconceived perspectives” as a significant issue for investors, noting that how we perceive a company within the first few minutes of learning about it has a huge impact on our investment outcomes. And, if an investor spends time studying a company, he argues, they then encounter commitment bias. “One of the games our brains play is that we feel entitled” to make money on something if we’ve spent time on it, he said. “And that’s really not how investing works.”
  • Pabrai’s firm has no analysts, a practice Pabrai adopted from Buffett and Munger. Referring to Buffett, he asserts, “If he can manage hundreds of billions of dollars without having another human in the picture,” then most managers overseeing a fraction of that shouldn’t need a team either. Investing, Pabrai argues, isn’t a team sport, but rather “is about having convictions and acting on them.”
  • When asked how technological innovation has impacted his investment career, Pabrai said that he doesn’t use a lot of online tools. “I mostly rely on public disclosures that have been made by companies, and I take it from there, and run from there.”
  • Pabria said that the most important yet contrarian parts of his investment strategy include team size and fee structure. “Those are the two biggest areas where I think that I violate the canon,” he concludes, “and hopefully at some point both get fixed.”