Mohnish Pabrai's Presentation and Q&A at Indian School of Business on July 13, 2013
Aug 9, 2023
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Mohnish Pabrai, investor and founder of Pabrai Funds, discusses compounding, shameless cloning, General Motors, investing in Indian markets, and the power of micro over macro in an entertaining podcast at Indian School of Business.
Cash reserves, checklists, and realistic perception of risk are crucial for successful investing.
If investing in India, focus on businesses with significant growth potential and conduct thorough analysis.
Investing in low-cost index funds like ETFs can be a viable option for individuals without expertise or time for stock analysis.
Deep dives
Lessons from the 2007-2009 period
During this period, there were a few factors that contributed to the negative returns. One of the main factors was overconfidence, as the fund had experienced consistent positive returns for several years prior. This led to a sense of invulnerability and an overlooking of potential risks. Additionally, the housing bubble was not properly recognized, leading to investments that were dependent on a functioning financial system. When the financial system collapsed, these investments suffered significant losses. Another issue was being fully invested with no cash reserves, which impeded the ability to take advantage of undervalued opportunities during the downturn. These experiences highlighted the importance of holding cash, using checklists to avoid mistakes, and maintaining a realistic perception of risk.
Investing in India
Although the speaker has only listed two companies in India and does not actively invest or analyze the Indian market, he suggests that if he were to invest in India, he would focus on businesses with significant growth potential. He would take a venture capital or private equity approach, seeking opportunities in various sectors such as real estate and private investments. However, he notes that this approach would require more involvement and due diligence, including analyzing management capabilities and understanding specific market dynamics. Overall, the speaker emphasizes the importance of understanding the nature of investments and employing tailored strategies depending on the market and investment opportunities.
Fee Structure and Utilizing Index Funds
The speaker's fee structure is very different from the typical industry. It involves no management fees and a high watermark, where the first 6% of annual returns go to investors and anything above that is split with the speaker receiving one-fourth and investors receiving three-fourths. This fee structure aligns the speaker's interests with the investors and incentivizes performance. Additionally, the speaker suggests that for individuals who are not naturally skilled investors or do not have the time or expertise to analyze stocks, investing in low-cost index funds, such as exchange-traded funds (ETFs), is a viable option to capture market returns.
Focused on quality entrepreneurs
The speaker emphasizes the importance of focusing on the quality of entrepreneurs when investing. They mention that in the United States, the likelihood of losing money on investments due to fraud is close to zero, while in India, one cannot make the same statement. The speaker highlights the need to differentiate between high-quality and low-quality entrepreneurs and mentions their personal bias of preferring to analyze investments from a distance rather than engaging directly.
Investing approach and the importance of business analysis
The podcast episode discusses the investing approach of concentrating investments and shares the speaker's experience of investing a significant percentage of a fund in a single stock. The speaker emphasizes the need to analyze businesses thoroughly and make investment decisions based on the business fundamentals, rather than macroeconomic factors like interest rates or government policies. They emphasize the importance of focusing on the business itself, its cash flows, and its potential for long-term growth. The speaker also mentions the potential benefits of cloning successful investors and the simplicity of investing by focusing on a few basic assets or companies.
Mohnish Pabrai's Presentation and Q&A at Indian School of Business on July 13, 2013
(00:00:00) - Introduction (00:01:41) - Rajat Gupta (00:04:00) - Compounding: eighth wonder of the world (00:11:37) - Starting Pabrai Funds (00:19:42) - Shameless cloning (00:26:41) - General Motors (00:34:14) - Cloning Buffett's portfolio (00:39:11) - ROI model in philanthropy (00:42:30) - Ashok Kumar: Dakshana Scholar (00:45:48) - Zero fee structure (00:48:12) - 2009 financial crisis (00:54:11) - Investing in Indian markets (01:00:05) - Business with strong moat vs. Business that clones (01:04:48) - Micro trumps macro (01:09:17) - How to build a business (01:16:37) - The Dakshana Foundation (01:20:44) - Envy: The greatest human vice
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