Investing lessons from Mohnish Pabrai

In a decade of growth at all costs, it is rare to see a value investor holding the crowd's attention. But, when Mohnish Pabrai, the CEO of Pabrai Investment Funds and Dhandho Funds, decides to share his wisdom, people listen.

In December 2020, Pabrai held a more than an hour-long seminar with students of Peking University (Guanghua School of Management). While the entire session was a treat for every investor, the author of "The Dhandho Investor" was especially candid when asked about how he views present markets and the lessons he has learnt over his thirty years tenure in the market.

Here are some key highlights from the seminar.

Great businesses are not always great investments
When you have a veteran investor on the stage, it is natural that the crowd would want to know how to identify winners. However, Pabrai's answers did leave quite a few surprised.

When asked about what makes a business a good investment, Pabrai said, "It's not about the great business, it's about the great investment. A company can be really good but not a good investment, whereas a company can be not so good but can be a great investment. Usually, great companies with strong moats will not be good investments as everybody knows about them, and this is incorporated in their stock price."

You don't have to be right all the time; you have to be wrong less often
Investing often feels like there's no room for errors. But if you ask investors who have lived through their fair share of market volatility, they will have a different story to tell.

And so did Pabrai when asked about the secrets of successful investing. He said, "you can be wrong 40 per cent of the time in investing but still end up making money."

A good manager is always frugal; in his life and his investments
No matter how strong a business model is, without efficient management, it will fall apart. But the question is how to ascertain if the management is efficient enough.

Parbai says that apart from checking the management's historical performance, investors should also check if the management is inherently frugal.

Bet on the one at the helm when the company is small
There's a reason why investors are drawn to smaller companies despite the risk factor being much higher.

At the end of the day, it is all about growth. And smaller companies have more legroom for growth. So the question is how to minimise the risk or at least identify the least risky stock from a small-cap basket.

Pabrai believes that when it comes to smaller companies, management plays a far greater role. Big companies have had enough time to implement a tried and tested work culture. However, when it comes to smaller companies, the culture of the top brass is the culture of the entire company.

Not every small company will become big
Pabrai is revered for his ability to find businesses worth 40 cents a dollar, but with the potential to double or triple your money.

However, the biggest risk of this strategy is while your returns can skyrocket if you are right, the fall is equally steep if you are wrong.

When asked about the risks associated with investing in smaller companies, Pabrai replied, " one of the things about capitalism is that many small companies will never become big companies. They will always stay small. A very small number of companies have something unusual that will allow them to grow because capitalism is very brutal."

Suggested read: Eight golden investing lessons from Samir Arora