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".