Amazing Case Study of Mohnish Pabrai Investment Strategy
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Mohnish Pabrai grew up in Mumbai. He went to the USA to study computer engineering. After graduating, he started working in the research and development department at Tellabs.
Mohnish Pabrai embarked on his entrepreneurial journey in 1991, established a successful IT consulting and systems integration company, TransTech, Inc. He sold his company in 1999 and started Pabrai Investment Fund in the same year. In the beginning, the fund had USD 1 million as an asset under management (AUM) which reached USD 570 million in 20219. The fund outperformed S&P 500 by 1103 percent till 2013 by heavily investing in India and other developing nations since Pabrai feels there aren’t many mispriced or under-valued stocks in the US market.
As an investor, Pabrai is a follower of Warren Buffet’s theory of value investing. He once even spent USD 650,000 to have lunch with Buffet.
Milestone In Pabrai’s Success Path
Pabris is one of the world’s most successful value investor, follows Warren Buffets fundamentals of value investing.
Pabrai Investment currently manages half a billion dollars from investors. Pabrai has continuously outperformed the benchmark, earning profit for both himself and investors
With his current networth of more than USD 100 million, he gives back to the society through Dakshana Foundation, which he founded to help the poorest in India
Mohnish Pabrai Investment Strategy: Understanding ‘low risk, high uncertainty’ investing
In a book that he wrote called Dandho Investor, he explained that a combination of low risk, high uncertainty is unusual since the two parameters move in the opposite directions. High risk means higher chances of loss, while uncertainly refers to a wide range of possible outcomes. When the market is confused between Risk and Uncertainty, he pointed out those moments as profit opportunities.
Pabrai suggested that investors need to think like entrepreneurs who search for low-risk business opportunities with high return.
Invest in well-established businesses with a slow rate of change
According to him, investing in well-established businesses with a well-defined business model ensures long term return. These businesses are less risky than startups, but they can earn a decent profit even with a slight change in their business strategy. He quoted, “look for mundane products that everyone needs. Following this requirement alone eliminates 99 perrcent of possible investment alternatives.”
Pabrai prepared a checklist with seven questions, which will tell investors the merit of an investment, which are as follows.
Do I understand the business, and does it fall within the circle of competence?
Do I understand the intrinsic value of the business today? Am I convinced about the inherent value? What is the possibility of the value changing in the future?
Is the stock largely undervalued, and is the situation likely to continue for 2-3 years?
If I must invest in this business, will I put a large portion of my wealth into it?
What is the extent of a downside?
Does the business have a moat, which means its ability to withstand competition and make a substantial profit?
Is the company management honest and able?