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Investing Advice from Millionaire Mohnish Pabrai

Economy
Investing Advice from Millionaire Mohnish Pabrai

Investing in the stock market is mind boggling for many people. Understanding it seems like such a complicated process that we leave it to the serious investors to fathom.

However, did you know that the most successful stock investors live by the simplest philosophies. Warren Buffett is a known to keep his investment principles very basic, and it worked. Warren Buffett is one of the most successful investors and one of the richest men in the world.

Following his footsteps is Mohnish Pabrai, the principal of Pabrai Funds, who like Buffett, is keeping it very simple when it comes to investing. He likens it to the whole process of flipping a coin, “Heads, I win. Tails, I don’t lose too much.”

This tells you how seriously he takes Buffett’s principle in the diversification of investments. According to Warren Buffett, diversification is a protection against ignorance.

Being a Buffett disciple and following Buffett’s principles plus some of his own sets of simple principles seemed to work.

For those who do not know, Mohnish Pabrai is an Indian-American investor and philanthropist. He founded the Pabrai Investment Fund, whose inspiration is Buffet’s very own hedge funds. Pabrai has successfully managed over $500 million of assets and has consistently achieved above-average rates of return the latest and most popular of which is a growth of 1100%.

Pabrai’s claim to fame happened in June 2007 when he bid $650,100 for a charity lunch with Warren Buffett.

What made Pabrai become very popular, was when his investments made so much. Then the long-only equity fund he handled was able to make a cumulative 517% net to investors vs. 43% for the S&P 500 Index since inception in 2000. This means an outperformance of 1103 percent. The world was impressed and Pabrai became a star investor.

Learn some tips and lessons as he shares how he was able to do it.

Read Warren Buffett

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According to Pabrai, it all started for him by reading Warren Buffett’s annual letters to shareholders and other Buffett books (The Essays of Warren Buffett, Warren Buffett Speaks and Thoughts of Chairman Buffett) and biographies written by Lowenstein and Schroeder. Pabrai is a living proof that it pays to read.

Own It

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Following closely Buffett’s example of not looking at stocks as merely pieces of paper but internalize that you are real owners of those businesses. Surely no wise businessman will take his investments as a joke. Who wants a business that seems undervalued and questionable? He always weighs in both the downside risk and potential before making an investment.

Patience Is a Virtue

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Another investor Pabrai looks up to is Charlie Munger who is a big proponent of waiting. He believes that you are able to make money by buying or selling but in the waiting. And waiting is not the easiest thing to do so you require every ounce of an individual’s patience. Pabrai is all about bidding your time for an advantageous situation and then going all in for the kill. Yes, sometimes what you are waiting for is some kind of crisis to happen that will greatly affect the stock prices. However, then that’s looking at it negatively. To be positive about it is to think of reaping something out of the unfortunate situation that may present.

Learn from Mistakes

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Truth is it doesn’t always work for the best all the time. You gain some, you lose some. When you invest in stocks, you have to observe closely on how it does. Pabrai says that when a certain trade doesn’t work, you figure out right away what may have went wrong so you will not do the same mistakes again and again. It pays to be mindful of how other people do it, whether it be right or wrong, so you can learn from their failures and successes.

Checklist Investing

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Another guiding light in Pabrai’s way to success is Atul Gawande’s book The Checklist Manifesto. When analyzing how a trade went all wrong, he realized that there were obvious signs in the very first place. So he made a checklist which consists of around 98 questions that he examines before making a trade or investment. These questions range from leverage to debt covenants, moats, union and labor relations, management and ownership. Pabrai noted that since he incorporated the use of a checklist in investing, his error rate decreased very significantly.

Cloning

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Pabrai will be the first to tell you that none of his investment ideas are groundbreaking and original. After all investing is really not an originality contest. He picks on other people’s brains. The Buffet partnerships in the 1950’s was the model for the structure of his fund. Also, he gets investment ideas from fellow investors he deeply admires. He reads the SEC filings from Berkshire, Baupost, Greenlight, Longleaf, Pershing Square and Third Avenue among others

For example, he lifted the structure of his fund directly from the Buffett partnerships of the 1950’s. His primary source of investment ideas? The 13F SEC filings from other value managers he admires: Berkshire, Longleaf, Baupost, Greenlight, Pershing Square, Third Avenue, etc. Merely investing alongside Warren Buffet will keep you afloat.

Give Back

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Pabrai together with his wife started the Dakshana Foundation in 2005. It was the Pabrai’s aim to give back to society at least 2% of their income which is about $1 million a year. Their main focus was to use the money to help alleviate the poverty in their country in India. How they do this is through providing tutorial services to the poorest of poor students of India so that they will be able to pass the grueling entrance examinations of the most competitive institutions like the IIT Joint Entrance Examination and the All-India Engineering Entrance Examination, get good jobs and help their families. Again all of Pabrai’s charitable efforts were inspired by Warren Buffet who is a great philanthropist himself.

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