I Never Worry About Macro Factors When Buying Stocks: Mohnish Pabrai

At the recent ICICI Value Summit, a young and bright-eyed student from Stanford asked Mohnish Pabrai (@23.00) what Mohnish’s views are about the Global economy given the crises in Russia, Iran sanctions, etc, etc. “Do you expect a choppy ride for investors in 2015” the student asked.

Mohnish’s answer was refreshing. He pointed out that whatever is going on today has happened at some time or the other in history. “The World always has issues … The best thing to do when you are investing is to focus on the micro and focus on a specific business. It is hard enough to just hone in on a particular business and try to extrapolate forward what happens to that business”.

“It will hurt investors more than it will help investors if they overdose on macro. Most of the macro things are very hard to predict and the best thing is to just not bother about predicting them” Mohnish added in his characteristic drawl.

This reminds me of the valuable advice given by Warren Buffett. When Buffett was asked how he processes all the “uncertainty”, he replied:

“The world’s always uncertain. The world was uncertain on December 6th, 1941, we just didn’t know it. The world was uncertain on October 18th, 1987, you know, we just didn’t know it. The world was uncertain on September 10th, 2001, we just didn’t know it. The world – there’s always uncertainty. Now the question is, what do you do with your money? And if you – the one thing is if you leave it in your pocket, it’ll become worth less – not worthless – worth less over time. That’s certain – that’s almost certain. You can put it in bonds and then you can get a certain 2 percent for 10 years and that’s almost certain to be less than the decline and the purchasing power. You can put it in farms and the farms will probably keep growing corn and soybeans and they’ll grow it whether, you know, whether Italy has trouble tomorrow or not. It’s very interesting to me, if you own a farm and somebody said, you know, Italy’s got problems. Do you sell your farm tomorrow?”

Warren added “If you own a good business locally in Omaha and somebody says Italy’s got problems tomorrow, do you sell your business? Do you sell your apartment house? No. But for some reason, people think if they own wonderful businesses indirectly through stocks, they’ve got to make a decision every five minutes. So I do not think if Ben Bernanke comes up and whispers to me that he’s going to do X, Y or Z tomorrow, I’m not going to change my view about what businesses I want to own. I want – I’m going to own those businesses for years just like I would own a farm or an apartment house and they’ll be all kinds of events and there’ll be all kinds of uncertainties and in the end, what will really count is how that business or farm or apartment house does over the years.”

Warren Buffett has given the same advice earlier. In a youtube interview (@6.50), Warren Buffett was asked what he thought about the interest rates. Warren said “I don’t think about the macro stuff. What you really want to do in investments is figure out what is important and knowable. If it is unimportant or unknowable, you forget about it. What you are talking about is important but is not knowable…. We don’t want to pass up the chance to do something intelligent because of some prediction about something that we are no good at anyway”.

In the same youtube interview, Warren Buffett offered priceless advice (@0.20) in the context of how focusing on making sure that we have bought a wonderful business is more important than worrying about macro factors. He pointed out that Coca-Cola made an IPO in 1919 when it issued shares at $ 40 each. A year later, the stock was quoting at $19. You might think that’s a disaster because the stock had lost 50% of its value in just one year. After that sugar prices increased and the bottlers were rebellious. Years later, you would have seen the Great Depression and World War II, there was sugar rationing, there were thermonuclear weapons and so on. You could always find a reason on why that was not the ideal moment to buy. But if you had gone ahead and bought that one share for $40 and reinvested the dividends, your investment in Coca-Cola would be worth $5 Million today.

“That factor so overrides anything else. If you’re right about the business, you’ll make a lot of money … the timing part of it is a very tricky thing. I don’t worry about any given event if I have a wonderful business … With a wonderful business, you can figure out what will happen, you cannot figure out when it will happen. You don’t want to focus too much on “when”, you want to focus on “what”. If you’re right about “what”, you don’t have to worry about “when” very much” Warren Buffett emphasized.