Mohnish Pabrai on Buffett's Success, Mistakes and Company Research
- By Rupert Hargreaves
Mohnish Pabrai (Trades, Portfolio) is one of my favorite value investors.
His knowledge of the subject and understanding of what it takes to be a successful investor are unrivaled, and over the years he has given some extremely interesting interviews detailing his ideas on the topic of investing.
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I thought I'd share this lecture below, which Pabrai gave in 2016 at the University of California, Irvine. In the interview Pabrai discussed what makes Warren Buffett and Charlie Munger stand out and interestingly he also advocated index investing for the average investor. The logic behind this is that Buffett and Munger have put in a huge amount of work over the years to achieve their results. The ordinary weekend investor just cannot afford to put in the same amount of time.
Within the lecture Pabrai also discussed his greatest mistake and why Coca-Cola (KO) has become so successful over the years. Excerpts are below; the video of the full lecture is at the bottom of this page.
Mohnish Pabrai on Buffett's success, mistakes and company research
Peter Kaufman is the author of "Poor Charlie's Almanack"; I think it is one of my favorite books.
He is very close friends with Charlie Munger (Trades, Portfolio) and one time he told Charlie Munger that "you know you and Warren Buffett (Trades, Portfolio) have been very successful for three reasons. Do you know what those three reasons are?" Charlie replied, "No, Peter, why don't you enlighten me?"
Peter said, "The three reasons why you guys have been so successful is that, first, you are willing to be extremely patient; you guys are not in a hurry to do anything you are not ready to. The second is that you are willing to be very decisive, so when an opportunity presents itself, you don't hesitate to act."
Munger has referred to this as sort of like a man standing there with a spear waiting for a salmon to come by. He's got the spear ready, and he's perfectly happy waiting for hours. And a big juicy someone comes by, and he spears it.
So extreme patience coupled with extreme decisiveness, and the third trait is having no concerns about being different from the crowd. Doing whatever they feel makes sense regardless of the rest of the world. When he says being patient it's not about being in agony while being patient; it's being in bliss while being patient. It should be a natural trait for you to be thrilled to watch paint dry.
What has been the biggest mistake in your life?
There have been a lot of mistakes. Mistakes are part of the landscape. If I think about it regarding the percentage of net worth that got lost, I say probably the biggest mistake was in 2008 where we had an investment in a mortgage company, Delta Financial, that went bankrupt. We lost around 10% of what we manage. It's expensive, but you know you learn lessons from that.
In the late '90s, I had actually started a private company; it was called Digital Disruptor, and we did some partnerships with brick-and-mortar companies to bring out brick-and-mortar versions of these enterprises, and that didn't go anywhere. I lost around $2 million, which was around quite a bit of my net worth at the time. We had outside investors who lost $3 million.
These mistakes in the late '90s helped us in the Pabrai Funds because we were able to sidestep a lot of stuff just because of learning. So I think when there are mistakes if you just look at them carefully; they are blessings because they are going to help you get better.
Sir John Templeton used to say that you are going to be wrong in investing one out of three times. I think he's right. Sometimes you can be wrong, and you don't lose money. Sometimes you might even make money when you're mistaken. I think that's even a case with Warren and Charlie; if you look at their record, they have scores of errors in their record even considering how bright they are. What's happened to them is that they have been right on the large ones, but if you look at the sheer number of investments, there will be a significant number of investments that didn't go the way they wanted.
I think it's challenging in the investment business not to make mistakes, the key is to keep learning and getting better, and over time even with the one-third error rate, you will end up with probably a better than average record if you keep at it.
What would be the first features you would look at in a potential investment that is totally new to you?
First of all, I would say one of the things to consider for a new investor is indexing. One of the reasons I wanted to give this talk is to make it clear that it's not easy to be a weekend investor. If you look at what Warren and Charlie did before investing in Coke, reading a hundred years of annual reports, that's a huge amount of work.
So, for a large number of investors index investing will do quite well for them. There's nothing wrong with that.
I think it's a good idea to study a business for the sake of studying it. It's not a good idea to study a business just purely from the perspective of 'do I want to invest in this or not.' Humans have a commitment bias, so what happens is when we spend a lot of time on something we feel as if we should get some return for this time. So, it is a danger if you decide 'I want to research that company' and then decide if you want to invest not. As you go deeper into the business, you're spending more time, and then you're feeling like 'well if I don't do anything what's the point?'
So, I think maintaining objectivity is important and not being compelled to act.
Disclosure: The author owns no share mentioned.
This article first appeared on GuruFocus.
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