Mohnish Pabrai’s talk is embedded with the wisdom of what he learnt from Warren Buffett and Charlie Munger. The core points of his talk are as follows:
Understand the power of compounding:
The essence of the genius of Warren Buffett and Charlie Munger is that they are able to compound their wealth at high rates for long periods of time, Mohnish said.
“You don’t have to do extraordinary things to get extraordinary results. If you can compound your money at 26% annually, you double your money every three or four years and can become a very rich man very fast” Mohnish emphasized and added “If you start with a million dollars, it becomes a billion in 30 years”.
Understand the difference between ‘risk’ and ‘uncertainty’:
Mohnish advised investors to always keep the difference between ‘risk’ and ‘uncertainty’ in mind and look for situations where the uncertainty is high but the risk is low. Usually, the stock will be mis-priced and it will be a great opportunity to invest because the downside will also be low, he said.
Learn to think like a businessman:
Mohnish explained that a successful businessman always has this eye on three or four variables which would determine the way the business would turn out. “As an investor, you must pay attention to the same variables and figure out what the business will do in the future and from there you can extrapolate whether the business is under-priced or over-priced” he said.
Understand the thesis of the investment first:
“You must be able to explain the thesis of the investment in a few sentences” Mohnish said, underlining the need for investors to fully understand the stock before they put their money into it.
Develop patience and carefully think through your investment ideas:
Mohnish cited the example of Warren Buffett of how one should have a notional ‘punch card’ which allows only 20 investments to be made in a life-time. If you imagine that there is a limit on the number of stocks that you can buy, you will carefully think through your investment decisions and not act on an impulse, Mohnish said. Also, the most important attribute for a successful investor is patience, he added.
Stay within the circle of your competence:
Mohnish emphasized the importance of making investments only in areas that one is familiar with.
“Stay within your circle of competence. It’s not the size of the circle that matters but knowing its boundaries” Mohnish said, quoting Warren Buffett.
Mohnish cited an example from Charlie Munger to illustrate his point. If you were confined to investing in a small town and you bought a McDonald franchise, a Ford dealership, the best office building and the best residential office building, and you just sat on them, you would do very well in life, even though all your investments were concentrated in the small town.
Mohnish also cited the example of John Arrillage, the billionaire, who only bought real estate within a mile of the Stanford campus. “His circle of competence is this small”, Mohnish said, making a small circle with his hand. “But the man became a billionaire”.
Always think of yourself as the owner of the business:
Mohnish advocated that we should change our thinking about the way that we see stocks. Instead of regarding it as something that bounces a few percentage points up and down every day, we should regard ourselves as the owners of the business. “Are you comfortable buying the entire company if you had several millions of dollars?” Mohnish asked. If the answer is in the negative, then you must not invest even one dollar in the stock, he said.
Mohnish made several other great points in his talk such as that we must always keep a margin of safety when buying stocks. He also suggested that we must choose great businesses run by great managers, which are compounding at a great pace, even if it means paying a premium price, instead of obsessing over cheap stocks, which may or may not succeed in the long run. “The compounding machine stocks are the Holy Grail of investment” Mohnish said with a big smile on his face.