Today, Monish Pabrai is co-director of the Pabrai Investment Funds (a family of hedge funds inspired by the Buffett Partnerships), which he founded in 1999. His oldest fund, Dhandho Funds, generated an annual return of 17.5% between 2000 and 2018. In other words, if you invested when it opened, you would have multiplied your contribution by 18.

Source: Value Walk
When he invests in a company, Mr. Pabrai aims for an annual return of 26%. The reason is simple: $1M invested at 26% per year is worth $1B after 30 years. In comparison, a return of 16% per year offers "only" $85M after 30 years for the same initial investment. Setting a return goal is one of the first things to do in our investment strategy. It helps select the type of business we are targeting in our research and analysis. With such an expectation of return, there is no need to linger on certain types of files with slim growth prospects, accompanied by unattractive valuations. Secondly, it allows us to set our entry prices. Indeed, if you consider that the theoretical value of a company is relatively close to its market value and that its annual growth is only 15%, then you would aim for a discount of at least 11% to position yourself as a buyer. While this is just a crude example, as valuation is a much more complex topic, it still gives us a better understanding of the importance of our return objectives in setting our entry prices.
 
His approach:
In the same vein as Warren Buffett and Charlie Munger, Mr. Pabrai presents himself as a "Value GARP" investor. This investment strategy focuses on acquiring great growth companies at reasonable prices (Growth At Reasonable Price). In other words, he always seeks to spend a maximum of €0.5 for something worth €1. This gap between price and real value is called the "margin of safety".
Intrinsic value = 1€.
Price = 0.50
Margin of safety = 50%.
 
Although this strategy is eminently popular, he admits to being heavily inspired by Warren Buffett.
"Everything in my life is cloned... I don't have any original ideas".
 
To build his strategy, Mr.Pabrai sought to understand how the best investors proceed and think. The goal was to copy their processes and methods. While this may seem simple on the surface, it is in fact extremely complex. Wanting to copy Buffett is common, achieving it is much rarer. But let's see what advice our W. Buffett 2.0 gives us:
 
1- He never takes the macroeconomy into account. He only focuses on the quality of companies. This choice is explained by his very long term investment horizon. He doesn't care about economic cycles and short-term variations.
 
2- He does not use Excel and complex ratios. When a good company is in front of us, it's obvious, he says. In other words, a company can be analyzed simply (growth, margins and ROE...)
 
3- When he looks at financial statements, Mr. Pabrai searches for a quick reason to say no. As soon as he finds a negative point in one company, he moves on to another. He proceeds by elimination, which allows him not to waste time in the analysis and not to expose himself to cognitive biases. Indeed, a mistake that many investors make is to underestimate a negative point under the pretext that the rest of the analysis is very good.
 
4- Mr.Pabrai is against diversification. He usually has between 0 and 3 lines in his portfolio and has a rule of never exceeding 10 lines. Very good opportunities are rare. If too many companies show up on his radar, it is because he is not demanding enough. This 4th rule requires patience and an extreme level of control. He may not buy or sell anything for a year if no opportunity arises.
 
5- Financial statements must be simple to understand, otherwise he will go directly to the analysis of another company
 
6- He never invests in IPOs. A company almost always goes public at the best time. Also, banks do everything to raise as much capital as possible during the IPO, so attractive valuations are extremely rare.
 
7- He never shorts a company. Why not? Because the maximum gain is capped at 100% and the maximum loss is unlimited.
 
8- He avoids investing in trendy companies. Exorbitant valuation ratios are rarely in line with his Value approach.
 
But investing like Mohnish Pabrai is not just about learning from the best, copying successful ones and following the tips listed above. It is above all a philosophy of life. A philosophy that he presents to us through his book "The Dhandho Investor". As we cannot summarize a book, which I strongly invite you to read, in a few lines, we will only stop at a few major points which are only an appetizer:
 
1/ See life as a game
 
2/ To have occupations so as not to be overactive in one's investments (W. Buffett spends his free time playing bridge, Mr. Pabrai reads as soon as he can...)
 
3/ Don't worry about what others think of you. Copycat or not, what really matters is to reach our goal, not the method to achieve it.
 
4/ Last but not least, we need to be extremely patient in order to meticulously follow the rules we have set for ourselves.
 
This is surely the most complex of the rules. Defining your investment strategy can take months... And once you have defined it, make sure you stick to it. Of course, over time, unforeseen events may force your strategy to change, but it's also important to take time (several months) to measure these changes.
 
"The golden rule: No rushing into decisions".