scorecardresearchFour investing principles by US investor Mohnish Pabrai

Four investing principles by US investor Mohnish Pabrai

Updated: 12 Jul 2022, 03:47 PM IST

Mohnish Pabrai is not much of a household name owing to his atypical investment approach. This successful fund manager calls the shots only if he is sure of having minimized his risks. His investment style may be best described as “boring” to contemporary investors who misconstrue that they can tame the market. They realize their folly only when their investments go awry. 

Mohnish Pabrai shares his investing styles that helped him rake millions in profits. 

Mohnish Pabrai shares his investing styles that helped him rake millions in profits. 

Everyone in India talks about investing but hardly more than a few are able to create wealth through proper investments. How to invest is equally important as where to invest, which is why you must align yourself to proper goal-based investing principles. 

Mohnish Pabrai, the man behind Pabrai Investment Funds and then went on to establish Dhandho Funds made more money by parking money in stocks of fundamentally good companies initially ignored by investors. His investing style revolves around consistent and detailed research of stocks to avoid getting into an unwanted financial crisis.

Pabrai is not much known in foreign investing circles unlike Warren Buffett and Peter Lynch but continues to enjoy respect among domestic investors. Many investors nowadays try to emulate his style hoping to achieve overnight success. The truth is that successful investors make stock market investments look easy, and just because they have succeeded, others continue to underestimate the struggles behind the success. Some interesting investment lessons that have kept both new and old investors hooked include:

Opt for low risk and high returns 

You must be ready to deal with uncertainty and minimise your risk profile while investing. Pabrai stressed how to ensure minimum losses in every sector he put his money in. Not all know how to make money from the stock market; the least one can do is not invest in stocks and shares involving a lot of risks. This way, you may not be earning much but will also be saved from losing too much money. Though one may cite this as a safe investment approach, looking at the same in hindsight underscores how the same is indeed a smart investment approach.

Pabrai who went on to lead “Dhandho Funds” later explains how the Gujarati word “Dhandho” translates to creating wealth. Explaining his investment style, Pabrai prefers parking his investors’ money in high-return business ventures sans the risk of going downhill. He focuses on businesses that will still earn him money even in the face of losses. “Buying low” is the mantra to ensure the much-desired margin of safety so that the fund house does not lose much even when the market is red.

Be patient with your investments 

Stick to your investments. Do not let recurring volatility deter you from your financial goals. Pabrai says, “The single biggest advantage a value investor has is not IQ. It’s patience and waiting. Waiting for the right pitch, and waiting for many years for the right pitch.”

News of stock market free falling is not new. Some market corrections may be due to the usual time and price corrections while others may have stemmed from unforeseen macroeconomic factors. The current geopolitical tension is an example of how investors panic and take out money from their equity fund investments once the market takes the bearish plunge. Pabrai simply advises not to worry about volatility in such a market. There have been numerous times when the market has fallen down by more than 10 per cent only to rise and better returns in the next cycle. You must learn to wait and let the storm tide over us till things get better and the market looks up for you to earn from your investments. 

Learn from your mistakes 

Everyone in the market makes mistakes. It is the learnings from the mistakes that will define your success in the long run. More important is to not repeat your mistakes and willingness to accept them whenever you are facing a downfall in the market. You may learn from your previous successes, but you will surely gain more learning from your mistakes. Prefer to learn from others’ failures though the impact will be more when you will learn from your own. 

The markets are bound to bob up and down. There is nothing that will ever keep the market in a straight line or continue pushing it forward for years together. In the stock markets, there are equal chances of you being right or going wrong, which explains how every wrong move will enlighten you to take the next move in the right direction. If there is anything that will help you succeed in the stock market, it is hoping to keep a positive attitude while learning from your mistakes.

Know your stocks well

In the stock market, it is not investing in stocks that will help you earn. It is parking money in business with high signs of growth that will ensure wealth creation. Pabrai emphasizes, “The only way one should buy stocks is if you understand the underlying business. You stay within the circle of competence. You buy businesses you understand.” Learning about the companies and their core businesses will lend you greater insight into the intrinsic value of these stocks. You will know if the stocks are overpriced or can be bought at current valuation levels, thus, helping you earn maximum profits. 

Some of the best investors can assess a company’s competitive advantages by just looking at its balance sheet. Though this may sound nothing short of obvious, many investors disregard the need to corroborate the company’s earnings with the industry and often mistake a firm for industry and buy stocks at inflated prices. This results in reduced profit margins or losses most of the time. 

Paying attention to the industry in which the company operates and competes is less important news than how it competes within the industry. 

Warren Buffett has often said that the investors should buy stocks when they are available cheaply
First Published: 12 Jul 2022, 03:47 PM IST