The Quest for 10-100 Baggers
Mohnish Pabrai delivered a lecture at Peking University (Guanghua School of Mgmt) October 14, 2016 where he addressed the students of Prof. Jiang Guohua’s Value Investing Course.
He spoke on “The Quest for 10-100 Baggers” and gave important pointers on what investors should look out for if they desire to snare 10 and 100 bagger stocks in their portfolios.
Compounding is the secret formula to finding 10-baggers and 100-baggers
Mohnish made it clear at the outset that the real secret to locating multibagger stocks is to find stocks that compound their earnings at a high rate and to hold those stocks for long periods of time.
Magic of 26% compounding rate
“26% is a special number for me,” Mohnish said.
He explained that the charm of 26% is that the principal amount becomes exactly double (100% gain) in just three years.
In ten years, the principal amount compounding at 26% becomes 10x i.e. it is a ten-bagger.
The same sum kept for 20 years becomes 100x i.e. it is a 100-bagger. In 30 years, the sum becomes an awesome 1000x!
So, if investors can find a stock which is growing its earnings at 26% CAGR, they will, without having to do anything else, have a 10-bagger in their hands at the end of 10 years and a 100-bagger at the end of 20 years, Mohnish explained.
Mohnish Pabrai compounded his wealth at 26%
Mohnish revealed that in the period from 1995 to 2014, his portfolio has compounded at the magical rate of 26%. Unfortunately, in the period after that it has lost some ground. Mohnish assured that he will make up for the deficiency in the near future.
Objective: Convert $1 Million into $1 Billion in 30 years
Mohnish emphasized that he started his investment journey with a clear objective. He had a capital of $1 Million and he decided to convert it into a 1000x fortune of $1 Billion by compounding his wealth at 26%.
130x gains in four years from Indian stocks
Mohnish made his debut 21 years ago as an investor by buying Indian stocks. He bought Satyam Computer, a brokerage (Kotak Mahindra) and two courier companies (Blue Dart & Skypak Couriers).
He got incredibly lucky because Satyam Computers gave him an incredible 130x gain in just four years.
Two other stocks (Kotak Mahindra and Blue Dart) went up 60x in 21 years while Skypak went bust.
Smart enough to buy but not smart enough to hold
Mohnish explained that while he had been smart enough to buy Kotak Mahindra and Blue Dart, he was not smart enough to hold on to them. He sold them off for a petty gain. If he had held on to the stock, he would have been sitting on 60x gains from each of them today, 21 years later.
Every stock I buy goes down after I buy it …. Every stock I sell surges after I sell it
Mohnish narrated specific instances of mistakes that he has committed in the course of his illustrious career.
He bought a massive 10% stake in a steel company for $7.50 each only to see it plunge to $1.50 each. Though sorely disappointed, Mohnish held on tight to the stock.
Thereafter, when the stock surged to $15 on the back of improved operating performance, Mohnish was overjoyed that he had made 2x his investment. He cashed out only to find that immediately after he sold the stock, it surged 200x from the bottom and 40x from the time that Mohnish had bought the stock.
“Every stock I buy goes down after I buy it …. Every stock I sell surges after I sell it” Mohnish said in a rueful tone.
Five Models for finding 100-bagger stocks
Mohnish explained that there are five types of companies which have the potential to give multibagger returns:
(i) Companies with a great business model which can run on auto-pilot: E.g. Coca-Cola, American Express;
(ii) Companies with a great business model but requiring smart managers: E.g. Amazon, Geico;
(iii) Companies with great uncertainty but with low risk (e.g. shipping or commodity companies at the bottom of the cycle);
(iv) Companies where value will be unearthed due to bankruptcy, mergers (special situations) and
(v) Companies going through a mega bubble such as the dotcom bubble.
No. 1 skill set for investors is “extreme patience”
Mohnish cited from his own example of prematurely selling off Kotak Mahindra and Blue Dart of how not having patience cost him 40x gains.
“You don’t make money when you buy or sell the stock, you make money by waiting,” Mohnish said, quoting the immortal words of Charlie Munger.
Be a “Shameless Cloner”
“The simplest way to find bargains is to be a cloner,” Mohnish said.
“I am what you would call a shameless cloner”, he added.
“Just figure out who the smart people are, look at what they are buying, reverse engineer them and buy the stock,” Mohnish explained.
Mohnish also revealed that Li Lu is one of the famous investors from whom he seeks stock ideas. Li Lu is the founder of Himalaya Capital and is highly renowned for his deep knowledge of the principles of value investing.
Potential 10-bagger and 100-bagger stocks in India
Presently, Mohnish Pabrai’s funds have investments in Rain Industries and Balaji Amines.
Pabrai Investment Fund 3 Ltd holds 162,54,715 shares and The Pabrai Investment Fund II, LP holds 127,58,000 shares. The collective investment of 290,12,715 shares is worth Rs. 146 crore at the CMP of Rs. 50.
I have conducted a detailed analysis of the stock in my piece of April 2015.
The Pabrai Investment Fund IV, LP holds 607,204 shares of Balaji Amines. The investment is worth Rs. 19.52 crore at the CMP of Rs. 321.
The stock was first recommended by Porinju Veliyath when it was at the throwaway price of Rs. 86. The stock is up a mind-boggling 300% since Porinju’s recommendation.
Balaji Amines also has the approval of Shyam Sekhar, the noted value investor, who holds a major stake in the Company.