Thursday, April 26, 2007

Visit with Mohnish Pabrai

I just returned from a two day trip to L.A. where I had the great fortune to visit with Mohnish Pabrai, agruably one of the most successful investors today.

In 1999 Mohnish set up shop with $1 million. Today he manages $500 million and has an annualized rate of return of 29.1%. And just to be sure, this is after he takes his cut (as Mohnish eloquently says, "after my outrageous fees".)

I enjoyed the opportunity to hear Mohnish speak to a group of business school students at USC, chat with him privately, and have dinner with him. Most of what Mohnish had to say he gives to you in his newest book, The Dhandho! Investor, a must read for any true investor.

Nonetheless, it pays to listen very carefully to Mohnish as one will take home some pearls of wisdom.

On becoming a successful investor,

"All the great investors have given you their methods. Read everything Buffett has to say...he tells you how to succeed in investing. Joel Greenblatt, wrote the The Little Book that Beats the Market for his young daughters. In the book he tells you how beat the market. His website, http://www.magicformulainvesting.com/ screens for the best stocks. Find the best ones and you will beat the market. Patience is the key"

With regards to his investments,

"When I buy a stock, two things ALWAYS happen: immediately after I buy, the stock tanks and once I sell the stock, it really takes off"

If you're asking yourself how this is possible alongside with 29.1%, pay attention to this,

"When I invest in a business I have a very good idea about the intrinsic value of the business. I never have an exact figure, but I know the business well enough to arrive at a very comfortable range with a high degree of probability. If in invest in a business, I now wait three years before I sell if the price has gone down as long the present intrinsic value has not deteriorated.

This routine comes from Mohnish's investment in USAP, which I won't go into great detail here. Basicailly, he bought the stock, after which it proceeded to go down by two thirds. After a reassessment of the underlying economics of the business, Mohnish concluded that the intrinsic value has actually gone up. This continued to be the case over the next two years and the stock remained dormant. Sure enough, the market caught on and USAP climbed to a point where Mohnish had more than a 100% unrealized gain. Now, the security is up over 200% from his investment point and Mohnish has since exited with only a very minor position.

The takeaways you should have from this are simply:

1. Understand your investment well and make sure you have a thesis that clearly explains your reasoning for investment. This should be no more than 3-4 lines.

2. Approximately 80% of a stocks price movement occurs during 10% of time. Timing the market is a fools game. Exercise patience.

Dinner with Mohnish, was very entertaining to say the least. He's full of humor and witty wisdom...much like a guy in Omaha.

Mohnish was kind enough to keep a copy of my Letter to Potential Limited Partners regarding the formation of the Gad Investment Partnership. I only asked him to take look and he was very kind enough to do so. As we all know Mohnish eats his own cooking and invests all his money in the Pabrai Investment Funds. Nonetheless he was impressed with what he saw and I hope to someday catch up with his phenomenal pace.

On that note, I am happy to report that the formation of the Gad Investment Partnership is moving right along. I appreciate everyone's interest. I have been studying business, and specificially the workings of Graham and Buffett since I was 15. My setup will be very much like the original Buffett Partnerships of the 1950's and the Pabrai Fund in 1999.

Accredited investors should contact me directly regarding investment interest.

5 comments:

Abhijeet Shinde said...

Great post!.. very insightful. I recently bought 'Dhando'. Very eager to read it.

Shai Dardashti said...

Sham -

Awesome article.

- Shai

Dmitry said...

Thanks very much Sham !

Dmitry said...

Thanks Very Much Sham !

Harish Bihani said...

All the Best Sham!! I am sure you will do well.