Want to hear something crazy?! Last week I was blessed with the opportunity to learn from Mohnish Pabrai over a cup of coffee…Ok. Ok. I didn’t actually have coffee with Mohnish. However, I did drink a cup of coffee while watching a lecture he recently gave at Peking University. Although it was not a one-on-one meeting, it certainly could have been and I treated it as such. The wisdom of Mohnish easily translates into pages and pages of notes, which I want to share with others.
I have embedded the video lecture below and highly recommend you take some time to watch. While it saddens me that ‘pop stars’ and ‘crazy cat’ videos receive millions of views compared to the less than thirty thousand for Mohnish, it does inspire exclusivity. The less people with a desire to attain this wisdom, the less competition in the markets. With that being said, why do more people not want to access this information? To each his own.
For those not familiar with Mohnish’s story, he is a former information technology entrepreneur who, after selling his business, started an investment fund that has returned 25.7% annually since 1995. He practices value investing and is a disciple of Warren Buffett and Charlie Munger. Mohnish frequently communicates with his readers and fans at his blog: Chai with Pabrai.
Mohnish, as generously as I have ever witnessed, explains his investing mindset and process to the students at Peking. Maybe being a ‘Shameless Cloner,’ as Mohnish describes himself, brings with it a certain humility. I don’t know. However, the guy has a heart for sharing how he became so successful.
Mohnish states that he categorizes businesses into one of five categories, three of which I will discuss further:
- Businesses with Huge Tailwinds – Version 1
- Businesses with Huge Tailwinds – Version 2
- Market Confusion Between Risk & Uncertainty
- Bankruptcies & Reorganizations
- Upside without Downside
Businesses with Huge Tailwinds – Version 1
This first category of business is the ‘Buy and Hold Forever’ type of investments. These are businesses that have huge moats and require little to no debt. They have high returns on equity and most importantly, can be operated by idiots. Many dividend growth investors are familiar with these types of businesses. They include the likes of Johnson & Johnson, Disney, Coca-Cola, Sherwin Williams, Visa, and Moody’s, to name a few.
The challenge is that much of the investing community already recognizes these as great businesses. So Mohnish suggests that one way of finding undervalued gems is to think about similar or correlated companies. Coca-Cola is a wonderful business. So which bottlers around the world are undervalued? Moody’s provides a wonderful service. Are there similar companies globally that provide a wonderful service but their value has not yet been recognized at large?
Businesses with Huge Tailwinds – Version 2
The second category is the same as the first except these businesses require great management teams to run effectively. Examples are McDonald’s, Costco, and Amazon. I am sure you can name more but as investors, these types of companies are also ‘Buy and Hold Forever’ if great management teams are in place. If management turnover results in less competent leadership or current leadership begins to stray to less effective strategies, these companies can become mediocre rapidly.
Amazon is a prime example, no pun intended. I would argue that anyone investing in Amazon is making just as much of a bet on Jeff Bezos as they are the company. In reality, many investors view them as one in the same. Same thing with Apple a few years ago. Investors were not too sure about the innovative, cutting-edge future of Apple upon the death of Steve Jobs in 2011. The market reflected this uncertainty a year later with a near 40% drawdown. Since then, Apple seems to have shown more category one characteristics where investors believe more in the company that the mortality or effectiveness of Tim Cook. Is Amazon a younger Apple? Time will tell but in the meantime, investors must follow Bezos closely.
Market Confusion Between Risk & Uncertainty
Mohnish describes this category as those businesses that are being priced as if a certain future awaits when in reality, it is nothing more than present risk that cannot yet be quantified. These types of opportunities generally arise due to a negative earnings report, more pessimistic outlook, a temporary shift in the market, etc. Some recent examples include the oil major drawdowns in 2015 and 2016 when oil temporarily dropped below $30/bbl, the ongoing uncertainty around the healthcare sector, or more specifically, the uncertainty surrounding Target’s future growth. While I am not advocating that Target is a good investment at this time, those of us who were purchasing shares of Chevron and Royal Dutch Shell when they dipped down to $80 and $37, respectively, have seen substantial gains.
For those whose first introduction to Mohnish Pabrai is this article, I highly recommend researching and learning as much from him as possible. He is a wealth of knowledge and much of Mohnish’s success comes from the minds of Buffett & Munger. And while he is successful in all five categories, not just the three outlined, the attribute he exemplifies the most is patience.
If an investor possesses patience, it is then wise to stuff a portfolio with wonderful, idiot-proof businesses and hold for the long-term. Investors should make a list of assets with wonderful characteristics, write down target purchase prices, and “then wait for the world to come to you.”
~ Holden Alexander