Mohnish Pabrai demystifies stock market investing

The man whose company handles funds to the tune of $464 mn spoke at length about his investment decisions in Mumbai

In a world where mathematical models dominate Dalal Street decisions, and investment management firms are buried under a sea of information and data from television screens and Bloomberg terminals, Mohnish Pabrai has a particularly minimalist approach to stock market investing.

Dalal Street LLC, where Pabrai is managing partner, has assets of $464 million, according to data filed with the United States Securities and Exchange Commission in 2014. He is also the author of the value investing tome -The Dhandho Investor.

There are a lot of factors in evaluating a business and not all are quantitative, he said at a value investing summit. His equivalent of the mathematical model is a four or five-sentence paragraph, summing  the reason a stock is attractive.

Asked about the effect of earnings multiples on his investment decisions, he said it didn’t make sense to get too hung up on numbers such as price-to-earnings (P/E) or price-to-book (P/B). These should be an aid to understand the business, not the be-all and end-all of your analysis. He suggested it might not make sense to buy above a certain P/E or sell below it, only on the basis of the numbers.

PABRAI’S ADVICE TO INVESTORS

• Don’t overcomplicate investment process
• Stick to your circle of competence
• Inactivity can be a boon
• There are benefits to a concentrated portfolio
• Don’t be afraid of mistakes

Pabrai rarely uses Excel in making investment decisions. If he finds himself reaching for it, he treats it as a red flag. Such businesses are probably a pass, he said.

Pabrai’s reluctance to deal with complicated businesses is also related to his principle of sticking to a circle of competence. It is not only he who has made money doing so, he explained, in an example of a friend who understood technology. He spotted an opportunity after the release of the first iPhone. He knew the move marked a paradigm shift in technology. The friend subsequently invested heavily in the company making the phone, and rode the wave as Apple grew to the behemoth it is today.

Pabrai, too, sticks to his circle of competence, which includes financials. Interestingly, he also believes in having a concentrated portfolio of stocks in businesses he understands; rather than a large number of stocks which might include businesses that he does not understand as well. His SEC filings show only eight securities in the entire portfolio. Instead of buying in and out of a large number of stocks, he believes in buying and sitting on good businesses that he understands, when these are available at a good price.

Pabrai gave the example of Fidelity Investments, which recently did a study of clients who had the best returns in their portfolio. The biggest gains belonged to portfolios which had no churn in their holdings. The inactivity, it was discovered, was because the owners had actually passed away.

The second biggest gains were from clients who literally forgot about their portfolio. They didn’t keep buying and exiting stocks either because they didn’t remember they had a portfolio. It is important to remember that constant activity need not be a good thing, and can be detrimental in the investing world, he said. He noted businesses take decades to undergo change. It does not happen at the pace that tickers flash across on your television screen.

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